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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
/ / 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 Identification
incorporation or organization) No.)
815 PILOT ROAD, SUITE G
LAS VEGAS, NEVADA 89119
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER: (702) 896-7568
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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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 / /
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 23, 1999 based on the $49.625 per
share closing price for the Company's common stock on the Nasdaq National Market
was approximately $593,197,747.
The number of shares of the Registrant's Common Stock outstanding as of
September 23, 1999 was 11,953,607.
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 22, 1999 (to be filed)
are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1 Business...................................................................................... 1
2 Properties.................................................................................... 34
3 Legal Proceedings............................................................................. 35
4 Submission of Matters to a Vote of Securityholders............................................ 36
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters......................... 37
6 Selected Financial Data....................................................................... 37
7 Management's Discussion and Analysis of Financial Condition and Results of Operations......... 39
7a Quantitative and Qualitative Disclosures About Market Risk.................................... 48
8 Financial Statements and Supplementary Data................................................... 49
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 72
PART III
10 Directors and Executive Officers of the Registrant............................................ 72
11 Executive Compensation........................................................................ 72
12 Security Ownership of Certain Beneficial Owners and Management................................ 72
13 Certain Relationships and Related Transactions................................................ 72
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 73
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PART I
ITEM 1. BUSINESS
GENERAL
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company
that seeks to capitalize on its experience as an operator and developer of
gaming machines and casinos by developing gaming oriented businesses. The
Company was incorporated in 1993 under the laws of the state of Nevada. Anchor
has historically operated two casinos in Colorado, a slot machine route in
Nevada and has developed and distributed unique proprietary games. In June 1999,
Anchor completed the acquisition of 100% of the outstanding common stock of
Powerhouse Technologies, Inc. ("Powerhouse" and the "Powerhouse Acquisition")
pursuant to a merger agreement between Powerhouse and the Company. Powerhouse,
through its operating units, is one of the leading suppliers of system software,
equipment and related services for on-line lotteries, video lotteries, and
pari-mutuel systems throughout the world, and is a manufacturer and distributor
of gaming devices for casinos. In addition, Powerhouse owns and operates a
racetrack and gaming facility in New Mexico.
The Company develops and distributes unique proprietary games, manufactures
and distributes gaming devices to casinos, operates two casinos in Colorado and
one racetrack/casino in New Mexico, and operates gaming-machine routes in Nevada
and Montana. Through business units added in the Powerhouse Acquisition, the
Company supplies system software, equipment, and related services to on-line
lotteries, video lotteries, casinos, and pari-mutuel organizations throughout
the world. Presently, the Company's equipment and systems are in operation in
the United States, Canada, Australia, Europe, South America, South Africa, and
the Caribbean.
The Company operates through wholly owned subsidiaries; Anchor Coin,
Automated Wagering International, Inc., C.G. Investments, Inc, D D Stud, Inc.,
Nuevo Sol Turf Club, Inc., Raven's D&R Music, Inc., United Tote Company, United
Tote Canada, VLC, Inc., and VLC of Nevada, Inc. The Company also owns 80% of one
additional subsidiary, Colorado Grande Enterprises, Inc.
References in this Annual Report on Form 10-K to Anchor or the Company
include subsidiaries unless the context requires otherwise.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and other applicable securities laws. Such forward-looking
statements may be contained in the Company's business description and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, among other places. Although the company believes that the
expectations reflected in any of its forward-looking statements will prove to be
correct, actual results could differ materially from those projected or assumed
in any of the Company's forward-looking statements.
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, any statements of belief,
and any statements of assumptions underlying any of the foregoing. The Company's
future financial condition and results of operations, as well as any
forward-looking statements, are subject to change and to the inherent risks and
uncertainties that are summarized in this section and that are or have been
described in the Company's reports filed with the Securities and
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Exchange Commission. The Company undertakes no obligation to update any
forward-looking statement. Presently-known risk factors include, but are not
limited to, the items discussed below.
RISK FACTORS
GENERAL
- - The Company's business, if affected by factors beyond the Company's control,
including governmental regulation of gaming, wagering and lottery operations,
changes in licensing requirements, and the economic conditions of
jurisdictions served, could limit or eliminate the Company's ability to
produce revenue from gaming operations.
- - Possible jurisdictional voter or legislative action to disallow gaming in some
or all forms and/or lack of legislation permitting the expansion of gaming,
could limit the Company's ability to sustain current revenue levels and reduce
the revenue growth potential.
- - Pending legal items that the Company does not currently expect to have a
material adverse effect on the Company's financial position or results of
operations could be resolved in manners substantially different from
management's expectations, thereby having a material adverse effect.
- - Seasonal factors such as inclement weather could hamper the ability of the
Company's patrons to access its gaming facilities or gaming facilities where
the Company's gaming products are located, thereby having an adverse effect on
the Company's revenues and profits.
RISKS OF GAMING MACHINES AND SYSTEMS
- - Successful expansion of installed proprietary games, enhancements of existing
games, introduction of new games, and continued customer services may not
occur on schedule or may occur at costs in excess of historical or anticipated
levels, and could have an adverse effect on continuing revenues or
profitability of participation and lease arrangements.
- - The popularity of the games with gaming patrons and the ability of the games
to be successful and popular over the long-term (obsolescence) may affect the
Company's results of operations.
- - The Company may not be able to place new games with casinos on economic terms
acceptable to both the Company and the casinos which could limit the placement
of games.
- - Status of pending trademarks and patents, including approval by the United
States Patent and Trademark Office, is uncertain and may not result in any
intellectual property protection for the Company. As a result, competitors
could develop means to effectively compete with the intellectual property
developed by the Company.
- - Games and products without trademark or patent protection may be reproduced or
duplicated by competitors without violating any legal rights of the Company,
which could reduce the revenue generating abilities of the Company's own
games.
- - Machine-replacement demand in video lottery markets may not materialize,
limiting the Company's ability to sell such machines.
- - Proposals to disallow revenue-sharing arrangements between gaming machine
suppliers and casino operators in favor of machine-purchase arrangements could
cause the Company to change its proprietary games revenue generating model
from a recurring-revenue basis to a single-sale basis, reducing the revenues
and/or profitability of the operations.
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- - The ability of gaming jurisdictions to increase tax and license fees or
require pro-rata responsibility for gaming taxes on participation or similar
revenue sharing arrangements could increase costs and reduce margins.
- - Financing of sales of gaming machines may result in non-collection of the sale
price of the machines or the length of the repayment may exceed the useful
life of the equipment.
- - Proposals to allow Nevada-style gaming in California, if passed, could reduce
gaming revenues in Nevada that were realized from California customers and
consequently reduce revenues in the Company's proprietary games operations.
- - Competitor's ability to successfully design and market new game ideas or
increases in resistance to the Company's recurring revenue business model
could lead to reduced earnings from or removal of the Company's proprietary
games placed in casinos.
RISKS OF DEPENDENCE ON SUPPLIERS
- - Use of outside vendors, some of which are competitors of the Company, to
manufacture a significant portion of the Company's proprietary game machines
and parts may limit the Company's ability to develop machines at costs that
will result in acceptable operating margins.
- - Ability to obtain gaming machines and components, production parts, and
replacement parts on reasonable terms or on a timely basis may hinder the
Company's ability to introduce new gaming machines on schedule, resulting in
delayed revenue generating abilities of the games.
- - Vendors' continued support or modification of existing equipment necessary to
comply with licensing and regulatory requirements of various gaming
jurisdictions may be costly or unavailable, requiring the Company to remove
games from operation and reducing the ability of the Company to generate
continued revenue from such games or increasing the costs of operating the
games.
- - The Company relies on suppliers to provide products that comply with licensing
and regulatory requirements in both new and existing jurisdictions. Products
that do not comply with such requirements may delay introduction of new games
or modifications to existing games.
RISKS OF GAMING OPERATIONS
- - The Company may not be able to identify suitable casino projects in which to
invest, reducing the Company's ability to increase gaming operations revenue
through expansion.
- - Start-up and completion of competitor casino projects may occur more rapidly
than scheduled or contemplated and could accelerate the anticipated decline in
revenues and profitability of the Company's gaming operations as a result of
the increased competition.
- - Factors beyond the Company's control, including identifying suitable
investment partners (if appropriate), negotiating acceptable terms, securing
required state, foreign, and local licenses, permits, and approvals, securing
adequate financing on acceptable terms, identifying and securing suitable
locations (which management expects will be limited and in high demand), voter
and other political approvals, demographic trends, and consumers' gaming
preferences could limit the Company's ability to expand gaming operations
revenue.
- - Potential significant costs necessary to pursue and commence new gaming
opportunities may negatively affect the Company's historical operating margins
during the periods such costs are recorded.
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BLACK HAWK AND CRIPPLE CREEK PROPERTIES
- - Weather-related access to the properties may be impaired, resulting in a
reduced ability to generate operating revenue during severe weather.
- - Increased competition from new casino properties in the immediate vicinity may
result in competitive pressures on revenues and expenses in excess of those
anticipated.
- - Seasonal traffic congestion may reduce customer access to properties, reducing
the ability to generate operating revenues.
- - Concerns as to the availability of convenient parking in Black Hawk and, to a
lesser extent, Cripple Creek, may limit the potential for growth of total
gaming market customers.
- - Demand on Black Hawk's and, to a lesser extent, Cripple Creek's, municipal
systems, including water and sewage treatment facilities, may exceed capacity
for which the cost for upgrading may be borne in part by the gaming industry
and would increase operating costs of the Company's gaming properties in these
locations.
SUNLAND PARK PROPERTY
- - The New Mexico legislature could prohibit gaming at racetracks or indefinitely
postpone consideration of proposals to increase the allowable number of gaming
machines, permit the operation of table games or increase the allowable hours
of operation. Any of these actions could adversely affect the Company's gaming
operations or could limit potential growth of the operations at Sunland Park.
ENVIRONMENTAL CONSIDERATIONS
- - Location of the Colorado Central Station Casino in an area that has been
designated by the Environmental Protection Agency as a superfund site on the
National Priorities List, known as the Central City-Clear Creek Superfund
Site, as a result of contamination from historic mining activity in the area
may result in fines or clean-up costs incurred by the Colorado Central Station
Casino, reducing the profitability of the operations.
- - The flow of ground water on the site of the Colorado Central Station Casino
may require additional de-watering and/or water treatment costs to be incurred
by the casino.
RISKS OF ROUTE OPERATIONS
- - Possible proposals to prohibit, limit, or change where gaming devices are
placed in convenience, grocery and similar retail facilities as a result of
governmental or other agencies studying the effect of gaming in grocery and
convenience stores in Nevada could result in decreased revenues, increased
costs and limited ability to expand operations.
- - Costs to replace aging gaming equipment on the Montana routes could
significantly reduce the profitability of those operations.
RISKS OF LOTTERY OPERATIONS
- - Failure to achieve timely implementation and performance requirements under
Automated Wagering International, Inc.'s ("AWI") lottery contracts may result
in contractually assessable liquidated damages (the Company maintains errors
and omissions coverage under risk management policies, which would cover
certain but not all claims).
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- - Lottery contracts may be terminated for cause resulting in future decreases in
revenues.
- - Cancellation of a lottery contract if a state enacts a statute removing the
authority or ability of the state to conduct a lottery would result in future
decreases in revenues.
- - Termination of a contract without cause or for the convenience of the lottery,
typically with at least 12 months prior written notice, would result in future
decreases in revenues.
- - Lottery authorities may have a contractual option (under certain of AWI's
facility management contracts) to purchase AWI's lottery system during the
contract term at a predetermined price, which could substantially change the
anticipated profitability of a contract to AWI.
- - Lottery authorities may require AWI to install additional terminals and/or add
new lottery games, which may require significant unanticipated capital
expenditures by AWI.
- - Wagering level assumptions made when bidding services under long-term lottery
contracts may not be realized. If actual levels are less than assumed,
profitability of the contract may be adversely affected.
- - Retaining and gaining customers through the competitive bidding process could
result in a substantial decrease in the Company's anticipated profitability,
retention of contracts if competitors under-bid the Company, or ability to
increase lottery revenues through expansion.
- - Significant capital investment required to implement services under long-term
lottery contracts may require additional financing at rates exceeding the
current average rate of the Company, resulting in additional incremental
interest costs.
- - The ability to maintain or develop leading technology lottery equipment could
cost more than anticipated and as a result reduce profit margins.
RISKS OF PARI-MUTUEL SYSTEMS
- - The ability to retain or add customers at a pricing structure acceptable to
the Company could limit the growth of the pari-mutuel revenues and profits.
PURCHASE ACCOUNTING ISSUES
- - The Company is in the process of finalizing its evaluation of the fair values
of the assets and liabilities acquired in the Powerhouse Acquisition,
including the quality of accounts receivable, contingent liabilities relating
to litigation, liabilities for involuntary employee terminations, and certain
other assets and liabilities. Material adjustments to the balances recorded at
June 30, 1999 could occur in fiscal 2000.
DEPENDENCE ON PERSONNEL
- - The Company is dependent on the efforts and skills of Stanley E. Fulton, the
Company's Chairman of the Board, and other key officers and employees of
Anchor to continue the successful operation of the Company and the Company's
ability to grow.
- - Additional managers with gaming industry experience, as well as additional
skilled employees, which would be required to facilitate an expansion of
Anchor's business may not be available or may be available at substantially
increased costs, resulting in decreased profitability.
- - A shortage of skilled management personnel in the gaming industry may make it
difficult and expensive to attract and retain qualified managers and
employees.
- - Certain key employees perform their services under contracts that do not
contain covenants not to compete with the Company.
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- - Competition for employees in the Black Hawk market as additional operators
open or plan to open new facilities will likely increase the cost of retaining
qualified employees.
CONTINUING DIRECTOR PROVISION IN THE COMPANY'S RIGHTS PLAN
- - A Delaware Chancery Court's ruling that a rights agreement provision similar
to the Continuing Director requirement included in the Company's Rights Plan
is unenforceable under Delaware law, could affect the enforceability of a
similar provision under Nevada law.
GAMING REGULATIONS AND TAXES
- - The Company's operations are subject to extensive state and local regulations
in most jurisdictions as discussed in "Government Regulation". There can be no
assurances that the Company's required licenses or permits will be renewed in
the future or that any required filings will be approved to conduct business
in other gaming jurisdictions.
- - Regulatory changes or increases in applicable taxes, fees and laws in the
jurisdictions in which the Company operates could have a material adverse
effect on the Company.
- - Persons who acquire a beneficial ownership interest in the Company's Common
Stock exceeding designated percentages of issued and outstanding shares may be
subject to certain reporting and qualification procedures. The Company's
Articles of Incorporation provide for a mandatory repurchase of the Common
Stock of a stockholder who is found unsuitable by a gaming jurisdiction.
- - Changes in control of the Company and certain other corporate transactions
require the prior approval of certain gaming authorities which could adversely
affect the marketability of the Common Stock or prevent certain corporate
transactions, including mergers or other business combinations. See
"Government Regulation."
- - The majority of gaming jurisdictions require the testing and approval of
gaming machines manufactured or supplied by the Company. There can be no
assurances that new game submissions of the Company will be approved or that
games currently approved will continue to meet new standards imposed in
changes to any gaming laws and regulations. See "Government Regulation."
- - Certain games are sometimes manufactured pending regulatory approval,
subjecting the Company to the risk of either retrofitting or abandoning
inventory upon non-compliance with or modification of gaming laws and
regulations. See "Government Regulation." If games do not receive approval,
costs incurred in manufacture would result in additional expense.
CONTROL OF THE COMPANY
- - The officers and directors of the Company and members of their respective
families own beneficially approximately 43% of the outstanding Common Stock.
The ability to vote these shares gives management the ability to exert
substantial influence over any matter coming to a vote of stockholders of the
Company, including the election of directors and certain mergers, asset sales,
or other major corporate transactions affecting the Company.
- - All six of Mr. Stanley E. Fulton's children and a third party have granted him
irrevocable proxies expiring on December 31, 2000 to vote their shares of
Common Stock. As a result, Mr. Fulton will have voting control of more than
40% of the Common Stock outstanding. Such voting power, together with certain
anti-takeover provisions included in the Company's Articles of Incorporation
and Bylaws and a Shareholder Rights Plan could have the effect of delaying or
discouraging an unsolicited takeover of the Company.
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OPERATING SEGMENTS OF THE COMPANY
GENERAL
Financial information by segment including revenues, income (loss) from
operations and assets can be seen in Note 4 to the financial statements.
GAMING MACHINES AND SYSTEMS
GENERAL
The Gaming Machines and Systems segment encompasses the Company's
proprietary games operations and gaming machine and system sales. The
proprietary games operation focuses on the development of game software and
devices used to generate recurring revenue streams to Anchor through lease,
participation, royalty revenues or other similar arrangements. Through its
gaming machine and system sales operations acquired in the Powerhouse merger,
the Company also develops game software, and in addition, manufactures gaming
machines and generally sells the machines and related operating systems rather
than leasing or participating in the machines' revenues.
PROPRIETARY GAMES
GENERAL. Anchor develops proprietary games, which it markets to
unaffiliated casinos and uses in its own gaming operations. The Company's
strategy is to develop games that provide casinos with a higher win per machine
than their existing gaming devices generate on average, while generating
recurring streams of revenues to the Company from royalty, revenue
participation, fixed daily rental fee, or other similar agreements. Although the
Company initially developed proprietary games as a complement to its own gaming
machine operations, the Company has been actively marketing its proprietary
games to unaffiliated casinos since February 1993. The Company currently
provides proprietary games to virtually every major casino in the United States,
as well as to the two casinos it owns in Colorado. In September 1996, the
Company entered into a strategic alliance (the "Strategic Alliance") with
International Game Technology ("IGT"), the largest manufacturer of computerized
casino gaming products, to enhance the Company's ability to develop and
distribute proprietary games. Through the Strategic Alliance, the Company and
IGT have formed a joint venture (the "Anchor IGT JV") to develop, integrate, and
distribute proprietary game concepts, primarily on wide area progressive systems
("WAPs"), but also on a stand-alone basis, including conversion kits.
The Company, seeking to capitalize on its established sales and marketing
infrastructure, its base of existing casino customers, and its licenses in
virtually all major domestic gaming jurisdictions, has been actively developing
proprietary games, which can be classified as either a dedicated proprietary
game, a proprietary game on a WAP, or a converted proprietary game. The
Company's proprietary games are designed to increase gaming customer play levels
by either enticing the customer to play longer or to wager more coins per play.
The Company believes that an opportunity exists to further expand and develop
the market for proprietary games distributed under royalty, revenue
participation, fixed daily rental fee, or other similar arrangements.
DEDICATED PROPRIETARY GAMES. The Company has successfully developed or
acquired the rights to several dedicated or stand-alone (versus those on a WAP)
proprietary games that are currently installed and approved for use. All of the
machines are placed in casinos free of any initial charge, allowing the casino
to avoid up-front purchase costs and providing recurring revenues to Anchor
under royalty, revenue participation, fixed daily rental fee, or other similar
agreements. The machines utilize numerous unique concepts and designs in order
to increase overall gaming customer play levels; for example, the Company's most
popular dedicated proprietary game, Wheel of Gold-TM-, incorporates innovative
game features that contribute to higher play levels. Players on the Wheel of
Gold-TM- machine have the opportunity to activate on the same machine a three
dimensional "roulette" type wheel with significantly higher potential
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winnings, providing a secondary game event and additional excitement to the
customer through the Company's "game within a game" concept. Anchor's "game
within a game" concept provides the player an incentive to increase play through
the secondary game event, thereby maximizing customer-playing time.
WAP PROPRIETARY GAMES. A WAP is a system that electronically links
individual slot machines among multiple locations, allowing all the machines to
share a common jackpot. The WAP jackpot increases, or progresses, by a certain
percentage of each coin inserted into any one of the machines on the WAP
network, thereby allowing the jackpot to increase rapidly to a significant
amount. Management believes that the large jackpots offered by WAP machines
attract a distinct portion of a customer's gaming budget compared with non-WAP
machines. In order to capture this portion of a customer's gaming budget, the
Company entered into the Strategic Alliance, resulting in the Anchor IGT JV, for
the purpose of developing and installing WAP machines based on both existing
dedicated proprietary games and other game designs. The Company and IGT share in
the management of the Anchor IGT JV and generally share equally in its profits
and losses. The first WAP machine introduced by the Anchor IGT JV is the Wheel
of Fortune-TM-, a game that is very similar to the Company's Wheel of Gold-TM-.
CONVERSION OPPORTUNITY. The Company's first proprietary game was the video
poker game Double Down Stud-TM-, a software conversion kit that the Company
installs in existing third party casino gaming machines. The enhancement created
by the installation provides the Company a daily royalty for each converted
machine. Management believes that as casinos experience pressure to increase
"same store sales" they will seek to enhance the performance of their installed
base of machines by adding new features by means of conversion kits. The Company
continues to develop technology on its own and within the Anchor IGT JV to allow
older generation slot machines to utilize additional features such as the "game
within a game" concept.
DEVELOPMENT. Anchor is continually engaged in the development of new
proprietary games and in the improvement of existing games. After the Company
has identified the basic concept for a new game, it works to refine the new game
to maximize player appeal. The Company's efforts include computer simulated
studies of the game probabilities to determine the optimal pay schedules;
research of, and application for, any significant intellectual property rights
that can be claimed; design of packaging for the game; establishment of a
pricing strategy for the game; and application for the necessary regulatory
approvals. Anchor then solicits feedback from potential casino customers to
further refine the game. At the production stage, Anchor and the manufacturer
refine the technology and construction of the game. Prior to the release of any
new game, Anchor must receive necessary regulatory approvals. Anchor added a
research and development department and acquired an engineering group to enhance
its ability to develop new proprietary game concepts in fiscal 1998. As a result
of the Powerhouse Acquisition, Anchor currently employs more than 300 engineers,
many of whom are dedicated to the development of new game design and technology.
DISTRIBUTION. Anchor has an established sales organization with offices in
Nevada, Missouri, Mississippi, Louisiana, Indiana and New Jersey servicing an
established customer base of over 250 casinos at June 30, 1999. The Company
distributes its proprietary games primarily through a direct sales effort in
which sales representatives call on casinos and other potential customers.
Anchor also uses distributors in a limited number of jurisdictions.
ANCHOR-IGT STRATEGIC ALLIANCE. In September 1996, the Company entered into
the Strategic Alliance. The Company believes that the Strategic Alliance will
facilitate both the expansion of their proprietary games business and the
Company's ability to develop and distribute additional proprietary games on a
WAP. As part of the Strategic Alliance, Anchor and IGT have formed the Anchor
IGT JV.
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The Company and IGT share in management and generally share equally in the
profits and losses. IGT's WAP system is being used within the Anchor IGT JV for
a variety of the Company's dedicated proprietary game concepts including Wheel
of Gold-TM-. IGT's Wheel of Fortune-TM- game is also covered under the Strategic
Alliance. Property, including intellectual property, developed through the joint
venture is owned by the Anchor IGT JV. The joint venture agreement had an
initial duration of ten years, expiring September 2006. In 1999, the JV
agreement was extended by Anchor and IGT, and now terminates on December 15,
2015, unless the parties agree to a further extension. After the 2015
expiration, either party may terminate the joint venture upon at least one
year's prior notice. The Anchor IGT JV does not acquire any rights to the
individual intellectual property rights of Anchor and IGT that are developed
outside of the joint venture. In March 1999, Anchor granted IGT a non-exclusive
right under its recently issued secondary event patents. In exchange, IGT agreed
to not make or distribute gaming devices covered by the claims of the Anchor
patents other than on behalf of the Anchor IGT JV. In addition, IGT granted to
the Anchor IGT JV the exclusive rights to the stand-alone Barcrest line of
gaming machines and IGT agreed to develop a multi-line multi-coin video base
game with the Wheel of Fortune-TM- as a secondary event for the exclusive use of
the Anchor IGT JV. The Anchor IGT JV began distributing the multi-line,
multi-coin video Wheel of Fortune-TM- in September 1999. In the event that any
particular state jurisdiction prohibits the equal share of profits and losses,
management responsibility, or allocation of expenses in the Anchor IGT JV,
Anchor and IGT make alternative arrangements to satisfy such regulatory
requirements.
INTELLECTUAL PROPERTY RIGHTS. Anchor has secured and endeavors to secure,
to the extent possible, exclusive rights in its games, primarily through federal
and foreign intellectual property rights, such as patents and trademarks. The
United States Patent and Trademark Office has issued several patents to Anchor,
including:
- Five patents expiring between December, 2009 and October, 2015 covering
the Double Down Stud-TM- games in the United States.
- One patent expiring on March, 2012 covering innovations of the Silver
Strike-TM- game (but there is no independent protection of the game
itself).
- One patent which was issued in 1993, relating to a system it developed
that allows players of gaming devices to participate in a group game, such
as bingo, without leaving the gaming device they are playing.
- One patent expiring July, 2112 covering the Crazy Joker "traveling wild
card" concept.
- Two patents expiring between October and December 2015 covering Wheel of
Gold-TM- and additional payout indicators.
- One patent expiring June, 2016 covering the Wheel of Gold-TM- on a table
game.
- One patent expiring on October, 2011 related to the game Player's Choice
21.
To protect potential foreign sources of income, the Company has filed patent
applications and trademark applications in strategically selected foreign
countries.
COMPETITION. Intense competition characterizes the market for proprietary
games. Competitors in the game industry include manufacturers of gaming devices
and other companies marketing gaming products and conversion kits, both of which
compete directly with the Company for the limited gaming spaces available at
casinos. The popularity of any of the Company's games may decline over time as
consumer preferences change or as new, competing games are introduced. The
Company's competitors are engaged in intense efforts to produce proprietary
games that compete with those of the Company. As a result, Anchor must
continually adapt its products to consumer preferences in order to maximize the
economics of the game to the Company.
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Anchor's strategy of creating recurring revenues from its proprietary games
by placing the games in casinos under a royalty, revenue participation, fixed
daily rental fee, or similar agreements involves a departure from the
traditional practice of casinos purchasing gaming devices. To the extent that
casinos are reluctant to, or decide not to, enter into arrangements that
generate recurring revenues for suppliers of casino games, the market for
Anchor's proprietary games could be limited, or discontinued if casino operators
decide to reject Anchor's revenue sharing model. Competition within the market
for games that generate recurring revenues could intensify as other suppliers of
gaming devices enter this market or offer competitive products or terms.
SEASONALITY. The Company's proprietary games operations typically have
their highest levels of business during the summer tourist season when casinos
normally experience heavier tourist traffic. Proprietary games operations within
the Anchor IGT JV, as well as within Anchor's proprietary games operations
outside of the Anchor IGT JV, during the winter months could be significantly
affected by inclement weather, road conditions and casino patron traffic
patterns throughout the gaming jurisdictions in which proprietary games are
operated.
MACHINE AND SYSTEM SALES
GENERAL. The Company, through its newly-acquired VLC, Inc. and VLC of
Nevada, Inc. subsidiaries (collectively, "VLC"), develops, manufactures and
markets video gaming machines, central control systems and related services for
the gaming machine industry, including both video lottery and casino gaming
venues.
Video lottery gaming is the use of video gaming machines to provide low
stakes gaming entertainment to enhance revenue for states and other lottery
jurisdictions. The machines, offering games including poker, blackjack, bingo
and keno, as well as spinning reel games, are generally located in
age-restricted establishments. The video lottery gaming machine industry is
subject to governmental regulation and taxation and, depending on the
jurisdiction, may be monitored and controlled by a central computer system.
Video lottery gaming programs provide substantial incremental sources of revenue
to governmental jurisdictions without increasing general taxation. The video
lottery gaming market is different from the casino and traditional lottery
markets. Unlike video gaming machines designed for the casino market, most video
lottery gaming machines are located in places where gaming is not the principal
attraction (i.e., bars and restaurants). The stakes on video lottery gaming
machines typically range from $0.25 to $2.50 per play, and payoffs typically are
capped at $100 to $1,000. Currently, nine U. S. states (Delaware, Louisiana,
Montana, New Mexico, Oregon, South Dakota, Rhode Island, South Carolina and West
Virginia), five states in Australia, eight Canadian provinces, Iceland, Norway,
Sweden and South Africa have authorized various levels and forms of video
lottery gaming.
In addition to the video lottery market, VLC sells its video gaming machines
to land-based, riverboat and Native American casinos. The Company holds licenses
to sell gaming machines in numerous jurisdictions, including Nevada, Mississippi
and New Jersey, the three largest casino markets in the U. S., as well as in
most other major North American Gaming jurisdictions. The approval of gaming in
new land-based casino jurisdictions, riverboat gaming, Native American casino
gaming and networked video lottery systems has driven gaming equipment demand
growth during the 1990s. In the United States, casino video gaming is permitted
in Colorado, Illinois, Indiana, Iowa, Louisiana, Mississippi, Missouri, Montana,
Nevada, New Jersey and South Dakota, as well as on Native American lands in some
of those and in several additional states including Arizona, California,
Connecticut, Iowa, Michigan, Minnesota, New Mexico, North Dakota, Oregon and
Wisconsin. Outside the United States, Canada, Australia and France are the most
developed, but Asia, South Africa and South and Central America are all
expanding or exploring gaming operations. While most of the demand for casino
gaming machines relates to replacement sales, growth also stems from the
development of new casinos.
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MARKET OVERVIEW. The Company believes that replacement product demand for
gaming machines is anticipated to accelerate throughout 1999 and 2000. This
creates a potential opportunity for the Company to introduce new games and
capitalize on its superior machine performance and advanced technology. Future
replacement demand may accelerate as gaming equipment in markets opened in the
early 1990s gradually reaches replacement age. Research published by gaming
analysts estimates that over 120,000 machines will need to be replaced over the
next three years. This research also suggests that an additional 17,000 expected
gaming machine replacements from government-owned systems brings the total
gaming machine replacement demand to an estimated 137,000 units by 2001.
Victoria, Australia, authorized private sector placement of 5,000 terminals
when operations commenced in August 1992, raising the level of permissible
terminals to 27,000 by 1996. Additional growth is expected in South Africa. To
date, one province, Mpumalanga, has approved manufacturers and operators and has
begun to set licensing guidelines for locations. The province of Gauteng has
approved manufacturers of gaming machines. There can be no assurance, however,
as to any such growth prospects.
The Company believes casino gaming at pari-mutuel racetracks may expand as
more jurisdictions pass legislation allowing gaming. The Company plans to
leverage the relationships developed with the pari-mutuel racetracks through its
United Tote subsidiary to attempt to gain entrance into these markets.
VIDEO LOTTERY MARKETS. The following table, as of June 30, 1999, sets forth
certain information concerning the number of Company and non-Company video
lottery gaming machines in operation in the jurisdictions that currently have
video lottery operations:
<TABLE>
<CAPTION>
CENTRAL COMPANY SHARE
COMMENCEMENT OWNERSHIP CONTROL ------------------------
JURISDICTION(1) DATE STRUCTURE TERMINALS(2) SYSTEM TERMINALS PERCENT
- ------------------------------------- ----------------- -------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alberta, Canada...................... 1992 Government 5,991 GTECH 4,024 67.2%
Atlantic Canada(4)................... 1990 Private/Gvt 9,965 VLC 2,874 28.8%
Delaware(5).......................... 1995 Government 432 AWI 287 66.4%
Iceland.............................. 1991 Charitable 580 VLC 500 86.2%
Louisiana............................ 1992 Private 14,923 IGT 11,000 73.7%
Montana(6)........................... 1985 Private(11) 16,574 None 5,323 32.1%
Northern Territory................... 1996 Government 500 VLC 50 10.0%
Oregon(7)............................ 1992 Government 8,202 GTECH 3,530 43.0%
Quebec............................... 1994 Government 15,380 VLC 6,583 42.8%
Rhode Island(8)...................... 1992 Government 1,628 GTECH 223 13.7%
Saskatchewan......................... 1993 Government 3,343 GTECH 1,148 34.3%
South Australia...................... 1994 Private 11,055 VLC 928 8.4%
South Dakota(9)...................... 1989 Private 8,008 VLC 7,641 95.4%
Victoria, Australia(10).............. 1995 Private 13,700 VLC 1,396 10.2%
Victoria, Australia(10).............. 1995 Trust 13,600 Private 4,600 33.8%
West Virginia........................ 1997 Private/Gvt 3,049 Various 664 21.8%
------------ -----------
126,930 50,771 40.0%
</TABLE>
- ------------------------
(1) Excludes several other jurisdictions in which the Company currently does
not participate, including Manitoba, Sweden, Queensland and Tasmania even
though the Company is licensed in Tasmania.
(2) Estimated number in operation as of June 1999.
(3) Number of VLC gaming machines sold may vary from number in operation.
(4) Total number of gaming machines and number of VLC gaming machines based on
information provided by Atlantic Lotto. Atlantic Canada encompasses the
provinces of New Brunswick, Newfoundland, Nova Scotia and Prince Edward
Island. New Brunswick and Prince Edward Island have
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adopted a private ownership structure, while in the provinces of
Newfoundland and Nova Scotia, the gaming machines are owned by the
government or its appointed agent.
(5) Delaware operates both mechanical slots and video gaming machines.
Statistics represent only video gaming machines.
(6) Total number of video lottery gaming machines and number of VLC gaming
machines based on number of gaming machines licensed, according to the
Montana Gambling Control Division and VLC shipment reports.
(7) Total number of gaming machines and number of VLC gaming machines based on
contract with Oregon State Lottery.
(8) Video lottery operations are authorized at only two pari-mutuel facilities
to which the Company is one of five suppliers.
(9) Total number of gaming machines based on information provided by the South
Dakota Lottery. Number of VLC gaming machines based on VLC shipment
reports.
(10) Tattersall Sweep Consultation (the lottery) and TABCORP (the off-track
racing association) are the two approved operators in the state of
Victoria.
(11) Private includes coin operators and/or location owners.
GAMING MACHINES AND GAME SOFTWARE. The Company seeks to capture a
significant portion of the market for its VLC gaming machines by offering a
technologically advanced and reliable machine to the operator, and a fun, fast,
easy game to the player. The Company's current generation of VLC gaming machines
incorporates interactive touchscreen control technology on a multi-color video
display. Each VLC gaming machine is capable of storing over 100 different games
in memory, depending on the games' memory requirements. The VLC machine can
present up to twelve different games selected through a menu format, such as
poker, blackjack, bingo and keno and spinning reel games. The player can vary
the amount of each wager. The number of games that may be offered on a VLC
gaming machine, the specific games and the amount that a player can wager are
determined by the regulating authority in each jurisdiction.
The VLC gaming machines also incorporate a variety of menu-driven internal
accounting, security and diagnostic features, such as on screen accounting,
audit and game statistics. The VLC machines have redundant and self-correcting
memory and self-diagnostic circuitry designed for reliability in widely
dispersed locations. The VLC gaming machines are manufactured with a set of
custom components that can interface with various peripheral devices (such as
coin and bill acceptors, coin hoppers, printers and ticket dispensers) in a
modular design for ease of maintenance and flexibility of configuration.
The Company recently introduced its Coin-Free-TM- system into the casino
markets of Nevada, Mississippi and Iowa. Using printer technology and site
controller communications originally developed for video lottery markets, the
Coin-Free-TM- product eliminates the need for coin handling, hand-paid jackpots
and hopper fills. Using bill acceptors rather than coin, a Coin-Free-TM- gaming
machine pays out through printed vouchers. A bar code reader, linked to the
system's site controller, authenticates cash vouchers prior to payout. With no
coin to handle, machine down-time is significantly reduced compared with a
traditional coined machine. Casinos are using this as a means to bring back
penny and nickel slots. At June 30, 1999, in excess of 1,500 units were in place
and operating under the Coin-Free-TM- program.
In addition to Coin-Free-TM- products, the Company sells two lines of
traditional coined terminals: its Winning Touch-Registered Trademark- series and
the Winning Touch-Registered Trademark- Power Series-TM- with enhanced graphics,
improved sound capabilities and more efficient software design. In 1998 the
Company introduced a slant-top version of its machines to give customers a
greater choice for machine placement and location design.
The Company believes that innovative graphics and advanced technology, which
have been key contributors to VLC's success in the video lottery market, have
benefited the Company in the casino
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marketplace as well. The games, the players, and the operator's needs, including
enhanced reliability and revenue generation, are the same for both industries.
The knowledge and experience acquired through its video lottery operations
should enable VLC to further enhance the playability and appeal of its machines
in the casino markets.
MARKETING AND DISTRIBUTION. The Company must obtain a license and approval
of its VLC gaming machines before it can sell machines in either the casino or
video lottery markets. The marketing and distribution of VLC gaming machines is
controlled to some extent by the statutory and regulatory structure adopted in
each jurisdiction. The Company markets its VLC gaming machines both through a
direct sales force and distributors. Currently, the Company sells through
distributors in Louisiana, New Jersey, the Caribbean, South Australia, and a
number of Native American markets. In deciding whether to use a distributor in a
new jurisdiction, the Company considers a variety of factors, including existing
relationships with operators and location owners, the ability of a distributor
to service the market after the sale, the distributor's financial condition, any
regulatory constraints and the long-term economics to the Company of direct
sales as opposed to sales to distributors. The Company is currently evaluating
its use of distributors in certain geographic regions and may discontinue its
use of some distributors.
CENTRAL CONTROL SYSTEMS. The Company derives revenues from its central
control system software through the granting of licenses to use the software and
by providing installation and maintenance services with respect to the software.
Video lottery gaming machines can be operated either through a central control
system controlled by a governmental authority or on a stand-alone basis. In
every domestic video lottery gaming jurisdiction except Montana, the gaming
machines are connected to a central control system. The Company believes that
the greater control and monitoring ability offered through central control
systems will encourage new jurisdictions to adopt a video lottery program and
use such systems. Casinos also use similar technology for its monitoring ability
and the management of progressive systems. The Company's central control systems
are designed with features intended to appeal to the concerns of the operator,
including:
- SECURITY. To ensure security of communications, VLC's machines have
sophisticated features, including encryption, sequencing and timing of
data transmissions.
- CONTROL. Each gaming machine on the system must be enabled by a call from
the central site before it is capable of displaying a playable game and
can be disabled by the central control system at any time.
- COMPATIBILITY. The Company's central control system Advanced Gaming
System-TM- ("AGS") allows gaming machines made by other manufacturers to
run on the system.
- ECONOMY OF OPERATION. The Company's central control system can be operated
in a dial-up format, which is economical to install and operate compared
to an on-line lottery system (using dedicated lines). The system can also
run in a real-time environment (on-line) should a jurisdiction desire this
feature.
- REPORTS AND AUDITS. The central computer generates on-demand reports for
each gaming machine on the system and automatically audits the programming
of every machine on a periodic basis.
- ELECTRONIC FUNDS TRANSFER. The central control system is capable of
processing EFT functions, which translate to easier and quicker funds
collection.
- FLEXIBILITY. The system is designed to be flexible so as to meet the needs
of various sized markets, to accommodate regulatory changes and to adapt
to new game designs and features.
The Company's central control system software is marketed through the
Company's direct sales force. The marketing efforts for an initial video lottery
central control system typically begin when a legislative body is considering
the adoption of video lottery enabling legislation. Once enabling legislation
calling for a central control system is adopted, the selection of the central
control system is normally accomplished
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through a formal bid process that involves submittal of proposals followed by a
competitive evaluation period. The Company also retains persons who are
registered as lobbyists in a given jurisdiction.
The Company designed and installed software for the video lottery central
control systems in Delaware, New Mexico, South Dakota, Loto Quebec, the Atlantic
Lottery Commission's ("ALC," the regulatory body governing lotteries in eastern
Canada) multi-jurisdictional system now covering four provinces in eastern
Canada, Tattersall's and TABCORP in Victoria, Australia, Independent Gaming
Corporation in South Australia, the Northern Territory Racing & Gaming Authority
of Northern Territory, Australia, and the Icelandic Gaming Fund Raising in
Iceland. The Company's AGS system is state-of-the-art technology, utilizing an
IBM UNIX platform or DEC ALPHA platform as is the case with ALC, and offers
customers the opportunity to operate on-line lottery functions and video lottery
terminals from a single central system.
The AGS is modular in design and allows for the addition of in-venue
progressives. Future potential add-ons include player tracking, wide-area
progressives and downloadable software to gaming machines. The in-venue
progressives have successfully run in pilot in Delaware and it is in final
stages of approval in Australia; however, the Company can provide no assurance
that future add-ons will be successful.
COMPETITION. The Company competes with domestic and foreign manufacturers
of video gaming equipment and providers of traditional on-line lottery systems
and casino-based gaming machines and systems in the sale of its gaming machines
and central control system software. The Company faces competition from
companies marketing complete video lottery gaming machines and systems and from
companies marketing only video lottery gaming machines as well as increasing
competition in the casino gaming market. Among the Company's competitors are
IGT, Alliance Gaming, Atronic, Silicon Gaming, Spielo Gaming International, WMS
Industries, Casino Data Systems, Aristocrat and GTECH.
Significant factors which influence the purchase of gaming machines and
central control systems include overall entertainment factor, the earning power
of the product, price, reliability, technical capability, security, and the
experience, financial condition and reputation of the manufacturer and
distributor. In addition, gaming authorities may impose other qualifications and
requirements on the Company and its competitors in the supply of video gaming
products and services and may also consider the performance record and
reputation for integrity of the vendor. Video gaming customers look for a
variety of features in video gaming products. The technology in current machines
will develop and improve over time, forcing manufacturers to invest in ongoing
game development. VLC has developed a library of numerous game variations and
its gaming machines allow for swift reprogramming to provide the newest games to
patrons. In addition to offering expansive product lines, casinos require
customized services for specific requests, including video graphics, game
development and floor space design.
GAMING OPERATIONS
GENERAL
The Company operates casinos in Colorado and New Mexico. In November 1990,
the state of Colorado approved limited stakes gaming ($5.00 or less per wager)
in two historic gold mining areas, Black Hawk/Central City and Cripple Creek.
Because of the $5.00 maximum bet, Anchor's casinos in Colorado emphasize gaming
machine play. Anchor currently operates a casino in each of these markets, the
Colorado Central Station Casino in Black Hawk and the Colorado Grande Casino in
Cripple Creek. Black Hawk and Central City are contiguous and are located
approximately 40 miles from Denver and 10 miles from Interstate 70, the main
highway connecting Denver to many of Colorado's major ski resorts. Cripple Creek
is located approximately 45 miles from Colorado Springs and 75 miles from
Pueblo. Casinos located in the Black Hawk/Central City area serve primarily the
residents of Denver and Boulder, Colorado and surrounding communities, an area
with a total population in excess of 1.8 million. Approximately three million
people live within a 100-mile radius of the Black Hawk/Central City area.
Casinos located in
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Cripple Creek serve primarily the residents of Colorado Springs, Pueblo, and
surrounding communities. More than two million people live within a 100-mile
radius of Cripple Creek.
Anchor's acquisition of Powerhouse included a horse racing and casino
facility located in Sunland Park, New Mexico ("Sunland Park"), adjacent to El
Paso, Texas. In 1997, the New Mexico State Legislature voted to allow casino
gaming at pari-mutuel racetracks in New Mexico. The legislation permits
licensees to operate up to 300 gaming machines per pari-mutuel racetrack
facility for up to twelve hours per day. Two million residents live within a
100-mile radius of Sunland Park, which area includes the cities of El Paso,
Texas and Juarez, Mexico.
COLORADO CENTRAL STATION CASINO. On December 25, 1993, the Company opened
the Colorado Central Station Casino in Black Hawk at an initial cost of
approximately $25.0 million. The Colorado Central Station Casino is one of the
highest revenue producing and one of the most profitable casinos in the state.
The casino building has approximately 49,000 square feet of main facility area,
with 16,637 square feet of gaming space over three floors. The Colorado Central
Station Casino features approximately 750 gaming machines, 9 blackjack tables, 6
poker tables, and a food & beverage operation. The casino benefits from a
favorable location, as it is one of the first casinos encountered by customers
traveling from Denver to the Black Hawk/Central City area. In addition, the
Colorado Central Station Casino offers more than 600 parking spaces. The
Colorado Central Station Casino is also one of the closest casinos to Black
Hawk's 3,000 space public parking facility, located one and one-half miles from
the casino, and is the first stop from the parking facility on the parking lot
shuttle bus route. The Colorado Central Station Casino is situated on
approximately 1.8 acres of land on the south end of Black Hawk, near Main Street
and Colorado State Highway 119.
The Colorado Central Station Casino is fashioned in the style of a 19th
century mining town railroad station. According to information on file with the
Colorado Historic Preservation Office, the Colorado Central Station Casino
property is within the Black Hawk Registered Historic District and meets the
historical guidelines for use as a gaming establishment. The Colorado Central
Station Casino was constructed specifically for gaming activities, and as a
result offers an open, spacious gaming area, while using the maximum square
footage allowed under Colorado law, which limits the square footage of a casino
that may be used for gaming activities to 35% of the building and 50% of any one
floor. At June 30, 1999, the Colorado Central Station Casino employed
approximately 450 people and by law is allowed to be open seven days a week from
8:00 a.m. to 2:00 a.m. All gaming machines at the Colorado Central Station
Casino offer bill validators that accept $1, $5, $10, $20, $50, and $100 bills.
In addition, the Company has installed an automated player tracking system at
the casino that is tied into the Company's accounting system to provide detailed
management reports regarding gaming machine use. The system facilitates the
casino's Fast Track Slot Club, which is designed to attract and retain gaming
patrons by enabling the Company to identify, market to, and reward its loyal
customers.
COLORADO GRANDE CASINO. The Company operates (through an 80% owned
subsidiary) the Colorado Grande Casino in Cripple Creek, which is located
approximately 45 miles from Colorado Springs and 75 miles from Pueblo. The
Colorado Grande Casino, which opened October 11, 1991, is located at one of the
principal intersections in Cripple Creek and features more than 210 gaming
machines, 44 adjacent parking spaces, and a full service restaurant and bar. In
August 1995, the Company completed the installation of an automated player
tracking system and a player slot club, "Maggie's Slot Club." Maggie's Slot Club
and the player tracking system have enabled the casino to implement marketing
programs designed to attract and increase the number of loyal casino customers.
At June 30, 1999, the Colorado Grande Casino employed approximately 100 people
and by law is allowed to be open seven days a week from 8:00 a.m. to 2:00 a.m.
COLORADO COMPETITION. Intense competition characterizes the Black
Hawk/Central City and Cripple Creek, Colorado markets. Since limited stakes
gaming was instituted in Colorado in 1991, a number of Colorado casinos have
ceased operations and others have filed for protection under Chapter 11 of the
Bankruptcy Code. Others have closed temporarily or reduced the number of
employees, and many casinos may not be operating profitably. Several proposals
have been made to open new casinos or to expand existing casinos in Black Hawk,
some of which have been abandoned or modified.
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In June 1998, a joint venture between Black Hawk Gaming & Development
Company, Inc. and Jacobs Entertainment Ltd. commenced casino operations as "The
Lodge," which includes 800 slot machines, 20 table games, and 500 parking
spaces. In December 1998, Casino America and Nevada Gold & Casinos have
commenced casino operations, "The Isle of Capri," which includes 1,100 slot
machines, 24 table games, and 1,000 parking spaces. Riviera Holdings Corporation
has commenced construction of a casino, located next to Colorado Central
Station, scheduled to open in late 1999, which is expected to include 1,000 slot
machines, 14 table games, and a 500 space covered parking garage. Mardi Gras has
also commenced construction of a casino, located next to Colorado Central
Station, scheduled to open in late 1999 which is expected to include 600 slot
machines, 10-20 table games and 500 parking spaces. Fitzgeralds has also
announced an expected expansion of approximately 50% of their current gaming
area as well as a 70-80 room hotel. The Company is aware of other casino
projects in various stages of planning in the Black Hawk/Central City market.
Competition from these entrants to the market could have a material adverse
effect on the Company.
It appears that national, regional, state, and local competition for the
casino gaming market in general will remain extremely high during the
foreseeable future, as casino gaming activities expand in traditional gaming
states and in new jurisdictions. In addition, passage of the Indian Gaming
Regulatory Act in 1988 has led to rapid increases in Native American gaming
operations, and the Company's two casinos may compete for customers with casinos
located on Indian reservations in far southwestern Colorado. The Company expects
many competitors to enter new jurisdictions that authorize gaming, some of whom
may have greater financial and other resources than the Company. Such
proliferation of gaming activities could adversely affect the Company's
business. In particular, the legalization of casino gaming in or near any
metropolitan area, such as Denver, Colorado, from which the Company draws
customers would have a material adverse effect on the Company's business. The
Company believes, however, that proliferation of gaming activities into new
jurisdictions presents an opportunity for it to expand its gaming machines and
systems operations.
COLORADO SEASONALITY. In general, the highest levels of business activity
at the Company's Colorado casinos occurs during the tourist season from July to
October of each year. In addition, operations at the Colorado casinos during the
winter months could be significantly affected by weather and road conditions in
Colorado.
SUNLAND PARK. Sunland Park has operated as a racetrack since 1959. In the
1980s, the horse racing industry saw a sharp decline in wagers as other forms of
gaming gained popularity and acceptance, resulting in decreased purses offered
to horse-owners. To provide a new source of purse money to the racing industry,
in 1997 the New Mexico legislature legalized casino-style gaming at racetracks.
A 25% portion of each racetrack/casino's net win is directed toward the funding
for purses, which is expected to attract a broader field of entrants to the New
Mexico racetracks.
The Company's casino addition was completed in early 1999, and the Sunland
Park facility opened its casino, the first in New Mexico, on February 22, 1999.
Simultaneous with the casino addition, the racing facility was also renovated.
The facility includes a 10,000 square foot gaming area, 1-mile racetrack,
grandstand, bar, restaurants, stables, and office space on 152 acres of improved
land. Gaming is conducted 365 days per year, from noon to midnight, and is
legally permissible for up to twelve hours per day. Live horse racing is
conducted from November through April, and the non-live season features
simulcast racing from tracks throughout North America. The Company currently
operates 300 gaming machines, the maximum permitted by law, including a mix of
traditional reel and video terminals in denominations ranging from $0.25 to
$5.00. In June 1999, the Fiesta Club, a slot club designed to reward loyal
patrons, was established. Racing education classes are held regularly, to
encourage casino visitors' interest in racing.
The New Mexico legislature is currently considering proposals which range
from prohibiting gaming at racetracks, to increasing the allowable number of
gaming machines, and permitting the operation of table games as well as gaming
terminals, and increasing the hours of operation. The Company cannot predict
with any certainty the timing or outcome of these proposals.
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COMPETITION. Sunland Park does not have direct competition for horse racing
in the El Paso area, although there is an operating greyhound racing facility in
Juarez, Mexico, which also offers sports/race wagering on simulcast racing and
sporting events. Texas permits pari-mutuel wagering, and although there are no
pari-mutuel racetracks in direct competition within Sunland Park's geographic
area, other racetracks in the state have had some effect on the number and
quality of horses available to run at Sunland Park. A casino operates illegally
in El Paso, Texas in direct competition with Sunland Park. The States of New
Mexico and Texas also currently authorize limited forms of gambling, including a
state lottery, bingo, and Native American casinos, all of which compete for the
consumer's leisure dollar.
NEW MEXICO SEASONALITY. The Sunland Park facility operates year-round,
conducting live racing for fiscal 2000 from November through April, and
simulcast racing year-round. Wagering revenue generally increases by
approximately 20% during the live season, and costs increase proportionately or
greater. Because the casino has not yet operated during a full live racing
season, seasonal trends in gaming revenue are difficult to predict.
ROUTE OPERATIONS
GENERAL. The Company operates gaming machine routes in Nevada, and with the
acquisition of Powerhouse, routes in Montana as well. The Company's gaming
machine route operations involve the installation, operation, and service of
gaming machines (virtually all video poker machines) under space leases with
retail chains and under revenue participation agreements with local taverns and
retail stores, principally in the Las Vegas and southern Montana areas.
Management believes that the Company's route operation contracts provide the
Company with a long-term, stable revenue source.
NEVADA OPERATIONS. The Company is one of the largest gaming machine route
operators in Nevada with 882 gaming machines in 64 locations at June 30, 1999,
up from 842 gaming machines in 60 locations at June 30, 1998. Management
believes that its route has the highest revenue and profit per machine of any
route operation in the state of Nevada. In 1996, the Company extended its
exclusive space lease agreement with Smith's Food and Drug Centers, Inc.
("Smiths"), it's largest route customer, for an additional five years at current
rates through 2010. The agreement with Smiths provides for a fixed monthly
rental fee per store throughout the term of the agreement, and grants Anchor the
exclusive right to install gaming machines at all Smiths stores in Nevada,
including stores opened in the future. The Company has reviewed its contract
with Smiths and believes the contract would remain enforceable if Smiths were
acquired by another company. At June 30, 1999, 831 of the Company's 882 gaming
machines in Nevada were located in or near Las Vegas, which has been one of the
fastest growing cities in the United States in recent years.
The Company's agreements for its locations generally are in the form of
either written space lease agreements or revenue sharing contracts and generally
give Anchor the exclusive right to install gaming machines at such locations.
Two of the Company's gaming route agreements are space leases with major retail
chains that require payments of fixed monthly fees based on the amount of space
used or the number of gaming machines installed at each location. The remainder
of the Company's gaming route agreements are revenue participation arrangements,
which provide for the payment to the location owner of a percentage of revenues
generated by Anchor's machines at such location. A location owner is not
permitted to receive a percentage of revenues unless such owner is licensed by
the Nevada Gaming Commission. See "Government Regulation--Nevada Regulatory
Matters."
The Company recently received a termination letter from one of its major
retail chains, due to a change in ownership. As a result, the Company will end
its location agreement with four Albertson's stores in September 1999. The
Company is the participant in an injunctive relief filed in court which would
allow the Company to continue to operate the locations as contracted. The
Company believes that the loss of Albertson's stores, if it occurs, will not
have a material effect on the net financial results of the Company's Nevada
Route operations.
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The Company's space leases and revenue participation arrangements generally
require Anchor to pay all installation, maintenance, and insurance expenses
related to its operations at each location. Applicable taxes are paid by Anchor
under space leases and are generally shared on the same basis as revenues under
revenue participation arrangements. The leases generally provide that if Anchor
fails to pay the required rental or license fees or defaults in the performance
of any of its other obligations, the location operator can terminate the lease.
Anchor believes that it is not in default under any of its present space leases
or revenue participation arrangements. In the ordinary course of business,
Anchor has lease and other security deposits, prepaid rent, and advances held by
the owners of chain stores and other location operators.
The Company attempts to attract and retain gaming machine route patrons by
offering an attractive selection of gaming machines. Prior to installing
machines at a location, Anchor studies the market potential and customer base
and determines the appropriate machine mix for the location. Progressive
jackpots are also offered at most of the Company's locations. Virtually all of
the gaming machines operated by the Company's route operation are video poker
machines, because Anchor believes that interactive electronic games, such as
video poker, are more attractive to local patrons than simple, mechanical
reel-type slot machines.
In marketing its services to the owners of retail stores and taverns, the
Company also emphasizes quality service. The Company operates and services its
machines using its own employees, who routinely repair and maintain the
Company's gaming machines in order to improve reliability and in-service time.
Management believes that the Company's gaming machines and related equipment are
well maintained and in good working condition. In addition to physical service
of the gaming machines, employees of the Company remove coins and bills from the
machines, refill machines that have exhausted their supply of coins, and provide
payment of jackpots in excess of machine limits. Anchor also operates change
booths at most of its retail store locations.
MONTANA OPERATIONS. The Company's route operations also include video
lottery and amusement machines in business establishments located in three areas
in southern Montana. The Company's route agreements typically provide for
revenue sharing with the location owner based upon a percentage of the net
machine revenues. The agreements require the Company to install, maintain and
service machines installed at the location. In some instances, the Company
assists the location owner in obtaining financing relating to the location,
including providing a guaranty of such financing once obtained.
COMPETITION. Gaming machines and gaming of all types are available in
Nevada casinos and in restricted gaming locations similar to those in which the
Company operates gaming machines, and all of these gaming establishments compete
directly or indirectly with Anchor's Nevada route operations. In addition,
Anchor is subject to substantial competition for the operation of gaming
machines in approved locations from numerous small gaming machine route
operators and some large operators, located principally in Las Vegas and Reno,
Nevada, and their surrounding areas. The principal methods of competition for
gaming machine locations in Nevada are the lease, sublease, license, or revenue
sharing terms, the service provided by the route operator, the reputation of the
route operator, and the financial strength of the route operator. As existing
space lease and revenue participation arrangements expire, competition for
renewals can be expected to increase the amounts payable to location owners as
compared to amounts payable under existing agreements. Anchor's Nevada route is
the only route operation that features Double Down Stud-TM-, as the Company does
not offer the game to competing route operators. Providing a proprietary game in
its route operation is one of the ways Anchor differentiates itself from its
competitors.
The Company's Montana route operations compete directly with other machine
route businesses, including numerous small route operators and several route
operators similar in size to the Company's route operations, and with companies
selling video lottery gaming machines directly to location owners. The principal
factors of competition for Montana route operations are the reputation of the
route operator and the quality and earnings potential of the machines offered by
the route operator, the service provided by the route operator and the terms of
its agreement with the location owner.
18
<PAGE>
SEASONALITY. In general, the highest levels of business activity in the
Company's Nevada route operation occur during the summer periods, specifically
April through September.
LOTTERY SYSTEMS
GENERAL. Lottery systems and services are provided primarily to
governmental lottery authorities through the Company's subsidiary Automated
Wagering International, Inc. ("AWI"). AWI develops, manufactures, installs and
operates on-line computer-based systems, currently operating lottery systems for
seven state lotteries. A lottery system includes both the hardware and software
necessary to process lottery transactions. Hardware consists of terminals
located in retail outlets, a telecommunications network, and a central computer
system. Software components include communications applications, as well as the
software that operates the system and processes sales and validation of lottery
game tickets. In the United States, AWI's products and services are typically
marketed to lottery authorities through long-term contracts, awarded through a
competitive bidding process, whereby AWI maintains ownership of the lottery
system and operates it for the state in return for a percentage of lottery
ticket sales. Once a contract is awarded to a lottery vendor, that vendor is
typically the sole provider of on-line lottery services and operations to that
jurisdiction for a specified time period within a defined geographic area. In
foreign jurisdictions, lottery equipment and systems are usually sold, and
related software is licensed to lottery authorities. Internationally, AWI has
sold to and currently supports or maintains lottery systems for customers in
Canada, Chile, Norway and Vietnam. The Company was recently awarded contracts in
Switzerland, and the Leeward Islands.
Governments in approximately 80 countries have authorized lottery games,
such as lotto, numbers and keno as well as instant "scratch-off" games,
primarily as a means of generating non-tax revenues. In the United States,
lottery revenues are frequently designated for particular purposes, such as
education, economic development, conservation, transportation and aid to the
elderly. As revenues from lottery ticket sales have grown, many states have
become increasingly dependent on their lotteries as significant funding sources.
In fiscal 1970, only two states had authorized traditional lotteries, selling an
aggregate of $49.2 million in tickets. As of June 30, 1999, 38 jurisdictions in
the United States were operating lottery systems, with aggregate lottery sales
in excess of $35 billion.
There are many types of government-authorized lotteries. The Company
categorizes traditional (as opposed to video) lottery systems into two principal
groups: "on-line" and "off-line." An on-line lottery system is generally used to
conduct games such as lotto, sports pools, daily numbers and keno in which
lottery players may make their own selections. Off-line lotteries feature games
which are not computerized and typically feature instant ticket games in which
players remove coatings from pre-printed tickets ("scratchers"), which account
for substantially all of the off-line lottery sales in the United States.
Outside the United States, off-line lotteries may include traditional games
(numbers, lotto, etc.) which are offered through a manual, off-line system. Many
foreign countries have government-operated or privately licensed lotteries. Over
200 lotteries are operating worldwide. In many jurisdictions, different vendors
may be contracted to run on-line versus off-line lottery operations.
There are several advantages to on-line lotteries compared with off-line
lotteries. Most importantly, wagers can be accepted and processed by an on-line
lottery system until minutes before a drawing. When a large prize attracts
substantial wagering interest, the extended sales period available in on-line
lotteries increases the potential for higher lottery revenue. Unlike instant
games or scratchers, in which the number of winning tickets and amount of awards
must be determined in advance, on-line lotteries allow for the rollover of
lottery jackpots. In addition, on-line lottery systems provide greater
reliability and security than either off-line numbers games or scratchers, allow
a wider variety of games to be offered, and automate accounting and
administrative procedures which are otherwise performed manually. Instant ticket
game revenues have been growing at a faster rate than total domestic lottery
revenues because of relatively higher payout percentages and the increasing
automation of instant ticket validation and accounting systems. Such games
compete with the on-line games provided by the Company's systems.
19
<PAGE>
The international market, as well as a minority of United States
jurisdictions, includes lottery system and equipment sales in addition to the
provision of services under long-term contracts. The Company develops and
installs lottery systems and trains lottery personnel in the operation of the
system for a fixed or fixed plus percentage of handle fee. Other add-on
services, such as system enhancements, equipment maintenance and ticket stock
production, may be available under separate contracts.
LOTTERIES IN THE UNITED STATES. On-line lottery revenues fluctuate
depending on relative sizes of jackpots, the number of terminals on-line and the
volume of tickets sold in the states in which the Company operates. The table
below sets forth the lottery authorities in the United States with which AWI
presently has lottery contracts. All of AWI's current domestic lottery contracts
are facilities management contracts under which AWI installs, operates and
maintains a lottery network while retaining ownership or control of the lottery
terminal network. The facilities management contracts have initial terms of
approximately five to nine years, and generally contain one or more options
permitting the lottery authority to extend the initial contract term. Prior to
the expiration of the initial or extended term, a lottery authority is generally
required by law to commence a competitive bidding process for a new lottery
contract. The table also sets forth information regarding the term of each
contract and, as of June 30, 1999, the approximate number of retail terminals
installed in each jurisdiction.
<TABLE>
<CAPTION>
EXPIRATION LOTTERY ON-LINE
COMMENCEMENT DATE OF AUTHORITY TERMINALS
OF CURRENT CURRENT EXTENSION OPERATING AT
JURISDICTION CONTRACT CONTRACT(1) OPTIONS JUNE 30,1999
- ------------------------------------ -------------- ----------- ------------------------------- ---------------
<S> <C> <C> <C> <C>
Delaware............................ 10/1994 9/2002 -- 338
Florida(2).......................... 10/1999 12/2004 2 two-year 8,555
Indiana(3).......................... 8/1999 8/2006 3 one-year --
Maryland............................ 7/1996 7/2001 1 three-year plus 2 one-year 4,045
Minnesota........................... 8/1997 8/2002 5 one-year 1,962
Pennsylvania........................ 1/1999 12/2006 3 one-year 5,127
South Dakota(4)..................... 8/1999 8/2006 -- 359
</TABLE>
- ------------------------
(1) Expiration dates do not reflect the exercise of the lottery authorities'
extension options.
(2) In March 1999, the Department of Lottery of the State of Florida
renegotiated and signed an amended contract for on-line lottery system and
related services whereby the Company will design, install and operate a new
statewide on-line lottery system for five years and three months, with two,
two-year renewal options.
(3) In January 1999, the Company signed a contract with the Hoosier Lottery of
the State of Indiana to provide an on-line lottery system, terminals and
system operation for seven years with extension options for up to an
additional three years. Conversion to the new AWI system from the Lottery's
previous vendor occurred August 29, 1999.
(4) In November 1998, the Company was awarded a new contract, replacing the
contract which expired in May 1999, for both on-line and video gaming system
applications. Implementation began in August 1999, and completion is
scheduled for June 2000.
AWI installs and commences operations of a lottery network generally within
six to twelve months after being awarded a new lottery contract and, following
the start-up of the lottery network, is responsible for all aspects of the
network's operations. AWI operates lottery systems in each jurisdiction with two
or more central computer systems. In addition, AWI employs a dedicated work
force in each jurisdiction, consisting of a site manager, computer and hotline
operators, and customer service and terminal replacement and repair technicians.
The equipment used in any jurisdiction must comply with specifications
established by that jurisdiction, and new contracts typically require new
equipment of recent manufacture.
20
<PAGE>
The equipment and related implementation costs are depreciated over the term of
the related contract, including extensions upon their exercise by the lottery
authority.
In addition to significant capital requirements to manufacture and install
lottery systems, lottery contracts generally require the vendor to post a
substantial bond securing its performance. The terms of such bonds may require
significant collateral in the form of cash, cash equivalents or letters of
credit.
LOTTERY PRODUCTS AND SERVICES. In 1971, AWI designed and installed, for the
New Jersey State Lottery, the country's first on-line lottery system. Since that
time, AWI has developed and installed many system and service features which
have subsequently become common in the lottery industry, such as the internal
control system, down-line loading for terminals, the cathode ray tube terminal
operator display, microfiche data storage for lottery records, instant game
accounting and integrated computerized terminal maintenance control.
In September 1993, the Company introduced its
MasterLink-Registered Trademark- system and successfully implemented it on a
customer's system in January 1994. Since that time, the Company has implemented
ten enhanced versions. The MasterLink-Registered Trademark- system is designed
to manage an organization's on-line lottery system and in some jurisdictions its
video lottery program as well. A system may include teller-activated lottery
ticket terminals, video lottery gaming machines, player-activated sports betting
terminals, instant ticket vending machines and other electronic gaming-related
devices. The MasterLink-Registered Trademark- system allows an organization to
monitor the status and performance of the equipment within its jurisdiction,
conduct accounting of and billing on the revenue from the gaming machines, and
control the terminals' configuration and operations. The
MasterLink-Registered Trademark- system is intended to be a flexible, secure,
cost-effective means of providing these capabilities.
The lottery system marketed by AWI consists of the following principal
elements:
- TERMINALS. AWI designs and manufactures the terminals used in system
networks. The terminals are designed for maximum security, minimum
processing time and flexibility to allow for customization of application
functions to each lottery's specifications.
- SOFTWARE. AWI designs and provides all application software for its
lottery systems. AWI's software is designed to provide the following
network characteristics: rapid processing, storage and retrieval of
transaction data in high volumes; the ability to down-line load, i.e., to
reprogram the lottery terminals from the central computer installation via
the communications network to add new games with a high degree of security
and redundancy to guard against unauthorized access and tampering and to
ensure continued operations without data loss; and a comprehensive
management information and control system.
- CENTRAL COMPUTERS. Each of AWI's lottery systems contains one or more
central computer installations to which the lottery terminals are
connected. AWI's prior generation central control system is designed to
run on the Cyber 930, but the MasterLink-Registered Trademark- product is
designed to run on UNIX-based central computer systems such as IBM RS/6000
systems, instead of the proprietary Cyber-series computers. The
specifications for the configuration of AWI's central computer
installations are designed to provide continuous availability, high data
handling capability and maximum security.
- COMMUNICATIONS. AWI's lottery terminals are typically connected to central
computers by dedicated telephone lines owned or leased by the jurisdiction
in which the network is located in conjunction with proprietary network
communications controllers and are monitored by a proprietary network
management system. Due to the varying nature of telecommunications
services available in lottery jurisdictions, AWI has developed the
capability to interface with a wide range of communications networks. AWI
also has the expertise to provide and integrate alternate technologies,
such as microwave and radio transmission, integrated services digital
networking (ISDN) and data over voice.
21
<PAGE>
- GAME DESIGN. An important factor in maintaining and increasing public
interest in lottery games is innovation in game design. The principal
variables of game design include frequency of drawing, types of prizes,
cost per play and setting of appropriate odds. The Company's
MasterLink-Registered Trademark- system and Ovation-TM- line of terminals
are designed to efficiently permit the development and rapid deployment of
new games and targeted on-line game-related promotions. For example, in
1996 the Company introduced its keno module in Maryland, where keno
accounts for over 20% of total handle. The Company believes that these
capabilities will enhance the ability of the lottery authority to increase
on-line ticket sales, and result in more revenue for the Company. These
capabilities may also enhance the Company's success rate in competing for
domestic lottery contracts.
LOTTERY COMPETITION. Competition is intense in the traditional on-line
lottery business. It is not unusual in the United States for contract awards to
be challenged by unsuccessful vendors. Relatively few new or rebid on-line
contracts are awarded each year. Although price is a significant competitive
factor, other important competitive factors include the ability to optimize
lottery revenues through game design; customer marketing and support; the
dependability, security, technological sophistication and upgrade capability of
the network; and the experience and reputation of the vendor.
AWI's principal competitor in the on-line lottery business, GTECH, is
significantly larger, currently supplying lottery systems to 27 of the 38 United
States on-line lottery jurisdictions. GTECH also has a substantial international
presence. The market dominance of this competitor further enhances its
competitive position. Other competitors include International Lottery and
Totalizer Systems, Inc., Scientific Games, Inc., Autotote Corporation,
International des Jeux (Lotto France), EssNet/Alcatel and several other
companies. In jurisdictions with both on-line and video lottery gaming products,
the products may compete with each other for entertainment dollars spent on
wagering.
PARI-MUTUEL SYSTEMS
GENERAL. Pari-mutuel computerized wagering systems are provided to horse
and greyhound racetracks, off-track betting facilities and jai alai frontons
through the Company's United Tote Company and United Tote Canada subsidiaries
(collectively, "United Tote"). United Tote develops, manufactures, operates and
sells computerized pari-mutuel wagering systems commonly referred to as
"totalisators" for horse and greyhound racetracks, off-track wagering facilities
and jai alai frontons in North America, South America, Spain, the Caribbean and
the Philippines. A totalisator system supports pari-mutuel wagering by
controlling the acceptance of wagers, calculating odds and payout, cashing
winning tickets, and performing management, accounting and reporting functions.
Each system includes central processing computers, betting terminals,
proprietary software, tote boards and other displays and video equipment. The
products and services of United Tote are typically marketed to domestic
facilities under long-term service contracts, with compensation based on a
minimum fee plus a percentage of the wagering volume of the facility.
Internationally, the Company often sells hardware and a license to use the
proprietary software for the system's operation. United Tote also provides
wagering terminals for use in casino race- and sports-books. United Tote
provides pari-mutuel wagering services to over 120 of approximately 350
pari-mutuel facilities in North America. The installed base of terminals in use
was approximately 9,600 at June 30, 1999.
The market for pari-mutuel wagering systems in North America includes horse
and greyhound racetracks, a growing number of off-track betting (OTB)
facilities, and jai alai frontons. Pari-mutuel wagering is authorized in 43 U.
S. states, all provinces in Canada, and many foreign countries. While on-track
attendance and handle from pari-mutuel wagering at live events in the United
States has markedly decreased over the last decade, there has also been a
substantial increase in simulcast and off-track wagering handle during the same
period.
22
<PAGE>
PARI-MUTUEL PRODUCTS. In 1998, United Tote introduced its new Horizon NT
2000-TM- system, a high performance wagering system combining Microsoft's
Windows NT-Registered Trademark- operating system with proprietary system
software written in "C" language and utilizing Pentium II based hardware. It
features the dual-purpose VERSA-TM-, VERSA II-TM- and Color VERSA-TM- terminals,
which all can be used in either self-service or teller-operated mode, allowing
the racetrack to make full use of all terminals, even on slow race days. The
VERSA-TM- terminal thus allows for significant labor savings, flexibility and
versatility. The VERSA II-TM- and Color VERSA-TM- terminals feature an enhanced
display and a built in magnetic card reader. Other terminals in the Horizon
System family are the portable wireless ULTIMA-TM-; the cashless account-betting
PROFILE-TM-; the Tele-PROFILE-TM- for operator input telephone wagering and a
bill-accepting module to convert a VERSA-TM-, VERSA II-TM- or Color VERSA-TM-
into a full service, cash accepting, touch-screen, self-service terminal.
Approximately 8,000 VERSA-TM- terminals are presently in service at customer
locations. Those new model terminals have been produced since 1993 and are in
service at customer locations.
PARI-MUTUEL COMPETITION. United Tote's principal competitors are Autotote,
AmTote and, at some facilities, a limited number of other smaller, local and
regional companies. Competition outside of North America is more fragmented,
with competition provided by several international and regional companies. No
single company maintains a dominant market position internationally, although
certain companies possess regional strengths.
MANUFACTURING AND SUPPLIERS
The Company has contracted with several manufacturers to develop both
Anchor's existing and future product requirements. To date, the Company has
purchased substantially all of the gaming machines used in its Nevada route
operations from IGT. Silver Strike-TM- machines are currently manufactured by
either IGT or Sigma Game, Inc. Bally Gaming International manufactures the
primary components of Wheel of Gold-TM-, Wheel Poker-TM- and CashBall-TM-. Totem
Pole-TM- was originally manufactured for the Company by Universal Distributing
of Nevada, Inc. Since that time, the Company has also contracted with Bally
Gaming International, Inc. and IGT for the manufacture of Totem Pole-TM-.
SafeBuster-TM- machines are currently manufactured by Casino Data Systems. The
Company is expected to continue its reliance on third parties for the
manufacture of its proprietary games. An inability to obtain quality gaming
machines, production parts, and replacement parts on reasonable terms or on a
timely basis could have an adverse effect on Anchor. See "Risk Factors--Risks of
Dependence on Suppliers."
The Company's primary manufacturing facility for the on-line wagering,
gaming machines and systems, and pari-mutuel operating segments is located in
Bozeman, Montana. The manufacturing operations at this location consist
primarily of assembly and testing of its lottery system terminals, gaming system
machines and pari-mutuel systems machines. The Company purchases most of the
parts, components and subassemblies (some of which are designed by the Company)
from outside sources and then assembles them into finished products. The Company
generally uses standard parts and components that are available from multiple
sources. The Company contracts with third parties for the assembly of gaming
machines when conditions warrant or when contractually required, and has at
times contracted with outside sources for the manufacture of certain components.
The Company has historically experienced low turnover among its work force.
In February 1998, the Company's Powerhouse subsidiaries became ISO-9002
certified by AFAQ, an independent quality system certification organization.
Created by the International Organization for Standardization, ISO-9002
represents a series of standards specifying how quality systems should be
established and maintained. ISO certification is recognized around the world and
has become a requirement for businesses entering into foreign markets. In
February 1999, the subsidiaries received ISO certification for another year,
meeting all nineteen elements of the certification process. The facility's
ISO-9002 program extends into every phase of operations, ensuring senior-level
commitment to production, manufacturing, installation and service with a
framework for uncompromising, continuous improvement.
23
<PAGE>
SECURITY
Anchor's casino and gaming machine route operations generate, and require
the Company to maintain, a large supply of available cash. To mitigate the risks
of loss associated with maintaining such a supply, the Company employs physical
security measures and utilizes strict internal accounting and custodial controls
on receipts and disbursements. There can be no assurance, however, that the
Company's precautions, internal controls, and physical security will provide
security for its employees or prevent cash shortages resulting from employee
errors or from theft. In addition, the Company maintains insurance to mitigate
this risk.
EMPLOYEES
At June 30, 1999, Anchor employed approximately 2,800 persons, the
substantial majority of whom are non-management personnel. Approximately 1,800
of these personnel were added through the acquisition of Powerhouse. None of
Anchor's employees is covered by collective bargaining agreements, and Anchor
believes that it has satisfactory employee relations.
RESEARCH AND DEVELOPMENT
The future success of the Company depends to a large extent upon its ability
to design, manufacture and market technologically sophisticated products that
achieve high levels of player acceptance. The Company's business is
characterized by rapidly changing technology and frequent new product
introductions and enhancements. The Company expects research and development
expenditures to become increasingly significant, including the research and
development expenditures of the acquired Powerhouse subsidiaries.
GOVERNMENT REGULATION
OVERVIEW OF GAMING REGULATION
The manufacture and distribution of gaming machines, the development of game
software for gaming machines, and the operation of gaming facilities in casino
jurisdictions are subject to extensive federal, state, provincial and local
regulation. While the regulatory requirements vary from jurisdiction to
jurisdiction, virtually all jurisdictions require licenses, findings of
suitability and/or other required approvals with respect to the Company, its key
personnel and products (collectively, "authorizations"). Such authorizations
typically involve rigorous background investigations of officers, directors, and
key personnel and a comprehensive review of the Company's business transactions
and operations. Gaming devices and associated equipment must also be tested and
approved to ensure compliance with required standards of operation and play. The
gaming laws and regulations of substantially all jurisdictions require
beneficial owners of more than 5% of the Company's outstanding Common Stock to
file certain reports and may require them, at the discretion of the gaming
regulatory authorities, to file an application for a finding of suitability
depending on the amount of stock ownership and the person's ability to influence
or control the management of the Company.
Generally, gaming regulatory authorities have broad discretionary powers in
the grant of licenses and other authorizations. The actions of any licensing
authority may be considered by regulatory authorities in other jurisdictions.
Gaming regulatory authorities may bring an action to revoke, suspend, condition,
or restrict a license for any cause considered a violation of its laws or
regulations. Fines for violation of gaming laws or regulations may be levied
against the holder of a license and persons involved.
The regulation of state video lottery programs is similar to the regulatory
plan operating in casino jurisdictions. In general, licenses, product testing,
and findings of suitability are required of manufacturers, distributors, and
operators of video lottery terminals ("VLTs") by the state lottery or
governmental agency administering the video lottery program. There are presently
seven video lottery operations authorized
24
<PAGE>
under state law in the United States. The Company manufactures and markets VLTs
and central monitoring systems for government-sponsored gaming programs in the
United States and international jurisdictions. The VLTs offer electronic
versions of popular games such as poker, blackjack, keno, bingo and
video-simulated spinning reels. Video lottery or gaming is a form of low-stakes
entertainment offered in age-controlled environments. Generally, maximum wagers
per game in the United States are limited to $2 with maximum prize awards of
$1,000. Unlike traditional gaming machines, VLTs in the United States generally
do not directly dispense coins or tokens for prize amounts won. Players deposit
money into the VLT to play, which displays credits. These credits are used to
play each game and, correspondingly, credits are awarded for games won. Players
can "cash out" credits, which are issued on a printed ticket voucher from the
machine displaying the total number of credits and the dollar equivalent. The
ticket is redeemable for cash by a clerk or teller in the retail establishment.
VLTs are typically linked to a central computer for accounting and security
purposes and are monitored by state lotteries or other government agencies.
The Company was required to obtain prior approval in certain gaming
jurisdictions of the merger agreement between its merger subsidiary and
Powerhouse Technologies, and related financial transactions. In addition, the
Company was required to file applications on changes in officers and directors
and provide information on the Company's operations and organizational
structural either prior to or within a fixed period after the merger in numerous
gaming jurisdictions. Although the Company and its affiliated gaming
subsidiaries have received licenses to engage in gaming operations from the
regulatory jurisdictions listed in the following chart, no assurances can be
given that required licenses or permits will be renewed in the future or that
any additional, required filings will be approved.
CURRENT JURISDICTIONS IN WHICH THE COMPANY OR CERTAIN SUBSIDIARIES
ARE LICENSED TO CONDUCT BUSINESS
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL
- ----------------------------------------------------------------------------------------- ------------------------
PARI-MUTUEL CASINO OR VIDEO
VIDEO LOTTERY CASINO SUPPLIER RACING NATIVE AMERICAN GAMING SUPPLIER
- --------------- ----------------- --------------- ------------------------------------ ------------------------
<S> <C> <C> <C> <C>
Delaware Colorado Arizona Arizona (7 jurisdictions) AUSTRALIA
Louisiana Illinois Ak-Chin, AZ New South Wales
Montana Indiana Colorado Connecticut (2 jurisdictions) Northern Territory
Oregon Iowa Florida South Australia
Rhode Island Louisiana Idaho Iowa (3 jurisdictions) Tasmania
South Dakota Michigan Indiana Victoria
West Virginia Missouri Iowa Kansas (3 jurisdictions) Western Australia
Mississippi Sac & Fox, IA CANADA
Nevada Kansas Louisiana (3 jurisdictions) Alberta
New Jersey Kentucky New Brunswick
South Dakota Louisiana Michigan (8 jurisdictions) Newfoundland
Carenco, LA Nova Scotia
Maine Minnesota (7 jurisdictions) Ontario
CHARITABLE CASINO OPERATOR Montana Prince Edward Island
- --------------- ---------------- New Jersey Mississippi (1 jurisdiction) Quebec
Mississippi COLORADO New Mexico Saskatchewan
Colorado Central Ohio New Mexico (9 jurisdictions) SOUTH AFRICA
Station Casino Rhode Island Guateng
Colorado Grande Texas North Dakota (4 jurisdictions) Mpumalanga
Casino West Virginia
NEW MEXICO Wisconsin Oregon (7 jurisdictions)
Nuevo Sol Turf
APPLICATIONS Club d/b/a South Dakota (4 jurisdictions)
FILED & PENDING Sunland Park
- ---------------
Louisiana Racetrack & Wisconsin
Land Based Casino
</TABLE>
25
<PAGE>
LOTTERY OVERVIEW
There are currently thirty-eight lotteries operating in the United States
and District of Columbia. All the lotteries operate under legislative
authorization of each respective state and offer various forms of lotto and
instant scratch-off type games. The Company provides on-line lottery systems,
terminals, technical operations and marketing services to the following state
lotteries: Delaware; Florida; Indiana; Maryland; Minnesota; Pennsylvania; and
South Dakota. The Company also provides on-line lottery systems and services to
lotteries in Norway, Chile, Switzerland and Vietnam. Policy and management
decisions of lottery operations in the United States are generally governed by a
commission appointed by the governor or other official of each state with the
day-to-day operations of the lottery administered by a director appointed either
by the governor or lottery commission.
To ensure the integrity of their lottery operations, most United States
jurisdictions require detailed background disclosure and investigations of
vendors providing goods and services under a contract award for a major
procurement, which typically include: on-line lottery computer systems,
terminals, and services; instant ticket printing; ticket validation systems;
drawing equipment; and advertising services. Background investigations typically
are conducted on company subsidiaries, affiliates, officers, directors, and
stockholders who own 5% or more of the outstanding capital stock of the Company
for purposes of meeting suitability standards defined under statutes and
regulations of each jurisdiction. Additionally, vendors are required to meet
comprehensive standards as described in a lottery's request for proposals or
invitation for bid for the goods and services contracted. Failure on the part of
a vendor to meet the described suitability standards or provider requirements
could jeopardize the award of a lottery contract to the Company or provide
grounds for the termination of an existing lottery contract. Additionally, the
Company is subject to the imposition of liquidated damages by the lottery
regulators for central system and terminal downtime and has made payments to
certain state lotteries under the liquidated damages provisions of its contract.
The award of lottery contracts and ongoing operations of lotteries in
international jurisdictions are also often highly regulated, although the
operations typically vary from lotteries in the United States. In addition,
restrictions may be imposed on foreign corporations seeking to do business in
international jurisdictions.
The Company regularly engages public affairs advisors and lobbyists in
various United States jurisdictions to advise legislators and the public in
connection with lottery legislation, and to advise the Company in connection
with contract proposals.
In recent years, it has become increasingly common in the United States for
legislation to allow an unsuccessful lottery provider to appeal a decision to
award the lottery to another party. Appeals typically take the form of an
administrative hearing, or a judicial hearing or both. Once an appeal is filed,
it may be several years before the outcome of the appeal is finally known
assuming the appellant exercises all available avenues of appeal. This
introduces an element of unpredictability into the on-line lottery market that
may continue long after procurements have been awarded.
PARI-MUTUEL RACING REGULATION.
The Company's operations in the manufacturing, sale, and operation of live
and simulcast wagering systems for pari-mutuel wagering facilities in certain
jurisdictions is also subject to extensive state regulatory and licensing
requirements similar to the Company's on-line lottery and video gaming machine
subsidiaries.
The most extensive pari-mutuel regulation is of the Company's racetrack
operations in Sunland Park, New Mexico, which is the only venue at which the
Company both operates the track and manufactures and supplies the wagering
equipment. These operations are subject to the licensing and regulation of the
New Mexico Racing Commission ("NMRC") and other authorities. Licenses to conduct
live quarter horse and thoroughbred race meets and to participate in
simulcasting are approved annually by the NMRC based
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upon applications submitted by the racetrack. In the horse racing industry,
simulcasting involves sending audio and video signals of live races to off-track
facilities, including other racetracks, for the purpose of wagering. A
substantial change in the allocation of live racing days at Sunland Park
Racetrack or authorization to participate in simulcast wagering could adversely
impact our operations and earnings in future years.
Although the Company and its affiliated gaming subsidiaries have received
licenses to engage in pari-mutuel wagering operations from the regulatory
jurisdictions listed in the preceding chart, no assurances can be given that
required licenses or permits will be renewed in the future or that any
additional, required filings will be approved.
CASINO OPERATIONS
The Company's Colorado Grande Casino and the Colorado Central Station Casino
located and operating in Cripple Creek and Black Hawk, Colorado, respectively,
are subject to the licensing and regulatory control of the Colorado Limited
Gaming Control Commission (the "Colorado Commission") and the Colorado Division
of Gaming (the "Colorado Division"), (collectively the "Colorado Authorities").
Each casino in Colorado requires a retail gaming license, which must be renewed
annually.
The Company's Sunland Park Racetrack and Casino located and operating in
Sunland Park, New Mexico is subject to the licensing and regulatory control of
the New Mexico Racing Commission and New Mexico Gaming Control Board
(collectively the New Mexico authorities). The casino requires a current license
to conduct pari-mutuel wagering at the racetrack facility and a gaming
operator's license, both of which are renewable annually. The sale of alcoholic
beverages at the Company's casinos is subject to licensing, control, and
regulation by the applicable state and local authorities. All alcoholic beverage
licenses are revocable and are not transferable. Alcoholic beverages are not
permitted in the casino area of the Sunland Park facility.
The legislation and regulations governing the Colorado and New Mexico casino
operations mandate investigations for findings of suitability, registration and
other approvals which are similar to those required of other gaming
jurisdictions discussed above. These include, but are not limited to findings of
suitability for officers directors and key personnel; individuals accruing
beneficial stock ownership in the publicly traded shares of the Company;
approval of the placement and operation of gaming machines; and notification and
approval of any change in ownership or corporate officers and directors of the
Company or its subsidiaries.
Additionally, the casino operations are subject to extensive scrutiny and
regulation in certain areas of the operations for which procedures and plans
must be developed and approved by the Colorado and New Mexico authorities. These
include, but are not limited to: administrative, accounting, security, prize
payouts, age requirements for patrons; game placement, purchase of approved
gaming devices and associated equipment; business operations, licensing of all
casino employees; and internal controls. New Mexico is the first state to
mandate responsible gambling guidelines for the industry as part of their
licensing requirements. Applicants for a license must develop a Compulsive
Gambling Assistance Plan ("Plan") to assist in the prevention, education and
treatment of compulsive gambling for submission and state approval. The Plan
must include a detailed description of the program, its estimated costs for
administration, and educational training sessions for the licensee's employees
that address methods of recognizing compulsive gambling behavior, intervention
techniques and other subjects as determined by the Board. The New Mexico
authorities approved the Company's Plan in the granting of Sunland's gaming
operator's license. The Company has a Director of Responsible Gaming, who is
responsible for administering the responsible gaming program and Plan at Sunland
Park Casino and Racetrack as well as for other areas of the Company's operation.
The Colorado and New Mexico authorities have broad discretion to revoke,
suspend, not renew, condition, limit, or fine a licensee for failure to satisfy
the requirements for licensure or any violation of the
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state gaming statutes or regulations. The Company's licenses have been renewed
each year by the Colorado Authorities since they were initially received in 1991
for the Colorado Grande Casino and 1993 for the Colorado Central Station Casino.
Sunland Park Casino received its gaming operator's license in 1999 from the New
Mexico authorities and commenced operation this year. No assurances, however,
can be given that such required licenses, permits or approvals will be given or
renewed in the future, which would have a material adverse affect on the
Company's operations.
In addition to the annual license fees, the Company must pay gaming taxes on
a percentage of the net proceeds generated at its three casino locations. Casino
gaming operators in New Mexico are taxed at 25% of the net take, which is
defined under New Mexico law as the total amount wagered and other compensation
received for operating games less the total amount paid out in prizes and
amounts paid to purchase annuities for progressive jackpots. Gaming machines are
limited to 300 at each casino location. Effective July 1 of each year, the
Colorado Gaming Commission establishes the gross gaming revenue tax for the
following 12 months. This year, the Colorado Gaming Commission approved a
revised tax structure reducing the annual tax on adjusted gross proceeds
("AGP"), defined under Colorado law as the total amount wagered minus the total
amount paid out in prizes. Gaming taxes for the period of July 1, 1999 through
June 30, 2000 have been set at .25% of the first $2.0 million of AGP, 2% from
$2.0 million to $4.0 million of AGP, 4% from $4.0 million to $5.0 million of
AGP, 11% from $5.0 million to $10.0 million of AGP, 16% from $10 million to $15
million AGP and 20% of amounts in excess of $15.0 million of AGP. The tax rate
from October 1996 through June 1999 for casino operations was set by the
Colorado Gaming Commission at 2% of the first $2.0 million of AGP, 4% from $2.0
million to $4.0 million of AGP, 14% from $4.0 million to $5.0 million of AGP,
18% from $5.0 million to $10.0 million of AGP, and 20% of amounts in excess of
$10.0 million of AGP.
In 1999, the Colorado Commission also eliminated the annual $75 "device fee"
required for each gaming machine and gaming table collected by the State of
Colorado. The City of Cripple Creek currently imposes a two-tiered quarterly
device fee of $225 per device on the first 50 devices and $300 per device on
devices of 51 or more. Black Hawk's annual fee per device is $750.00. Black Hawk
and Cripple Creek also impose liquor licensing fees, restaurant fees, and
parking impact fees. Further, the Company has paid, and in the future may be
required to pay, local parking and other municipal "impact fees" based on the
square footage of its facilities. Under the Colorado Constitution, the
Commission is authorized to increase the gaming tax rate to as much as 40%.
There can be no assurance that the taxes or fees applicable to the Company's
casino operations will not be increased in the future, either by the electorate,
legislation, or action by the New Mexico or Colorado Gaming Authorities
resulting in an adverse effect on the Company's operations. Also, there can be
no assurances that future initiatives or other legislative changes imposing
additional restrictions or prohibitions on gaming in the two states will not be
introduced. If passed, such measures could cause a significant adverse affect on
the Company's operations in Colorado and New Mexico.
FEDERAL REGULATION AND RELATED DEVELOPMENTS
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver or receive gaming
machines, gaming machine devices and components across interstate lines unless
that person has first registered with the Attorney General of the United States.
The Company and those subsidiaries involved in gaming activities are registered
and must renew their registrations annually. In addition, various record keeping
and equipment identification requirements are imposed by the Federal Act.
Violation of the Federal Act may result in seizure or forfeiture of equipment,
as well as other penalties.
The U. S. Congress established the National Gambling Impact and Policy
Commission ("Commission") in 1996 to conduct a comprehensive legal and factual
study of the economic and social impact of gaming in the United States. On June
18, 1999, the Commission released its final report, which contained findings,
conclusions and recommendations for legislative and administrative actions sent
to the President,
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Congress and state governors. Although the report called for a moratorium or
pause in the expansion of gaming, the Commission reached the same conclusion as
a previous federal study over 20 years ago: that the regulation and taxation of
gaming is best left to the states and not the federal government. The report
recommended a ban on Internet gaming, collegiate sports wagering, and ATM's from
the immediate wagering areas in casinos and racetracks. It recommended the
establishment by state and tribal governments of a dedicated tax fund that would
be used to identify and treat problem and pathological gamblers, identified in
the report as between 1.0 and 1.5 percent of the population. The report was more
critical of certain forms of gaming including state lotteries and pari-mutuel
racing, and called for a halt in the expansion of convenience video gaming
outlets and casino-style gambling at racetracks. Certain of the recommendations,
if enacted into law, could adversely affect the gaming industry and have a
material adverse effect on the Company's business, financial condition or
results of operations.
NEVADA REGULATORY MATTERS.
The manufacturing and distribution of gaming devices and the ownership and
operation of gaming machine routes in Nevada are subject to (i) the Nevada
Gaming Control Act and the regulations promulgated thereunder (collectively, the
"Nevada Act") and (ii) various local regulations. Generally, gaming activities
may not be conducted in Nevada unless licenses are obtained from the Nevada
Gaming Commission (the "Nevada Commission") and appropriate county and city
licensing agencies. The Nevada Commission, the Nevada State Gaming Control Board
(the "Nevada Board"), and the various county and city licensing agencies are
collectively referred to as the "Nevada Gaming Authorities."
The laws, regulations, and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy that are concerned
with, among other things, (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping, and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and local
revenues through taxation and licensing fees. Changes in such laws, regulations,
and procedures could have an adverse effect on Anchor.
Anchor Gaming is registered by the Nevada Commission as a publicly traded
corporation ("Registered Corporation") and has been found suitable as the sole
shareholder of Anchor Coin and Powerhouse Technologies, Inc. Powerhouse
Technologies is registered by the Nevada Commission as an Intermediary Company
and has been found suitable as the sole shareholder of VLC of Nevada, Inc. and
VLC, Inc. (f/k/a Video Lottery Consultants, Inc.) Anchor Coin, a wholly-owned
subsidiary of Anchor Gaming, is licensed as a manufacturer, distributor, and
operator of a slot machine route by the Nevada Gaming Authorities. VLC of
Nevada, Inc., a wholly-owned subsidiary of Powerhouse Technologies, is licensed
as a manufacturer, distributor, and slot machine route operator in the State of
Nevada. VLC, Inc., a wholly-owned subsidiary of Powerhouse Technologies, is also
licensed by the Nevada Authorities as a manufacturer and distributor.
For purposes of this section regarding Nevada Regulatory matters, Powerhouse
Technologies is referred to as the "Intermediary Company". Anchor Coin, VLC,
Inc. and VLC of Nevada, Inc. are collectively referred to as ("Gaming
Subsidiaries"). Gaming licenses held by the Gaming Subsidiaries require the
periodic payment of fees and taxes and are not transferable. As a Registered
Corporation, the Company is required to periodically submit detailed financial
and operating reports to the Nevada Commission and furnish any other information
that the Nevada Commission may require. No person may become a stockholder of,
or receive any percentage of profits from the Intermediary Company or the
licensed Gaming Subsidiaries without first obtaining licenses and approvals from
the Nevada Gaming Authorities. The Company, Intermediary Company and Gaming
Subsidiaries have obtained the various registrations, approvals, permits,
findings of suitability and licenses from the Nevada Gaming Authorities
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required to engage in the manufacture and distribution of gaming devices and
operation of slot routes in Nevada.
All gaming devices and cashless wagering systems that are manufactured, sold
or distributed for use or play in Nevada, or for distribution outside of Nevada,
must be manufactured by licensed manufacturers and distributed or sold by
licensed distributors. All gaming devices manufactured for use or play in Nevada
must be approved by the Nevada Commission before distribution or exposure for
play. The approval process for gaming devices includes rigorous testing by the
Nevada Board, a field trial and a determination as to whether the gaming device
meets strict technical standards that are set forth in the regulations of the
Nevada Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada. License
fees and taxes, computed in various ways depending on the type of gaming or
activity involved, are payable to the State of Nevada and to the counties and
cities in which gaming operations are to be conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable monthly,
quarterly or annually and are based upon either: (i) a percentage of the gross
revenues received; or (ii) the number of gaming devices operated. Annual fees
are also payable to the State of Nevada for renewal of licenses as a
manufacturer, distributor and operator of a slot machine route.
Legislation amending the Gaming Control Act was passed in 1999 that requires
any person, including an operator of an inter-casino linked system, who is
authorized to receive a share of the revenue from any slot machine or gaming
device operated on the premises of a licensee, to remit and be liable to the
licensee for that person's proportionate share of the license fees and tax paid
by the licensee. The legislation did not increase the tax, which for
unrestricted locations ranges from 3.0% to 6.25% of gross revenues (the
difference between amounts wagered by casino patrons and payments made to casino
patrons). The legislation will have some impact on the company's operations in
those revenue participation arrangements where the associated costs of fees and
taxes have not been shared. Historically, however, the Company's gaming
subsidiary, Anchor Coin, has paid all taxes and fees under lease agreements with
retail chains in its slot route operations. In the operation of gaming machines
under a number of participation arrangements, taxes and fees are typically
shared on the same basis as revenues. Significant increases in the fixed fees or
taxes currently levied per machine or the tax currently levied on gross revenues
could have a material adverse effect on the Company.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company,
Intermediary Company or licensed Gaming Subsidiaries in order to determine
whether such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors, and certain key employees
of the licensed Gaming Subsidiaries must file applications with the Nevada
Gaming Authorities and are required to be licensed by the Nevada Gaming
Authorities. Officers, directors, and key employees of the Company and
Intermediary Company who are actively and directly involved in the gaming
activities of the licensed Gaming Subsidiaries may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing or a finding of suitability for any cause
they deem reasonable. A finding of suitability is comparable to licensing, and
both require submission of detailed personal and financial information followed
by a thorough investigation. The applicant for licensing or a finding of
suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities, and, in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key
employee unsuitable for licensing or to have a continuing relationship with the
Company, Intermediary Company or a licensed Gaming Subsidiary, the companies
involved would have to sever all relationships with such person. In addition,
the Nevada Commission may require the Company, Intermediary Company or licensed
Gaming Subsidiaries to terminate the employment of any person who refuses to
file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.
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The Company and licensed Gaming Subsidiaries are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities, and similar financing transactions
by Anchor Coin must be reported to or approved by, the Nevada Commission.
If it were determined that a licensed Gaming Subsidiary violated the Nevada
Act, the gaming licenses it holds could be limited, conditioned, suspended, or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Company, Intermediary Company, licensed Gaming Subsidiaries and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Commission.
Limitation, conditioning, or suspension of any gaming license or the appointment
of a supervisor could (and revocation of any gaming license would) materially
and adversely affect Anchor.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his or her suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
state of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of
the Company's voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of
the Company's voting securities apply to the Nevada Commission for a finding of
suitability within thirty days after the Chairman of the Nevada Board mails a
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, that acquires more than
10% but not more than 15% of the Company's voting securities, may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor will not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the board of directors of the Company, any change in the Company's
corporate charter or bylaws, management, policies, or operations of the Company
or any of its gaming affiliates, or any other action that the Nevada Commission
finds to be inconsistent with holding the Company's voting securities for
investment purposes only. Activities that are not deemed to be inconsistent with
holding voting securities for investment purposes only include (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies, or operations;
and (iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities that must be found suitable is a corporation, partnership, or trust,
it must submit detailed business and financial information including a list of
its beneficial owners. The applicant is required to pay all costs of
investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identity
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock of a Registered
Corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company,
Intermediary Company or licensed Gaming Subsidiaries, the Company does any of
the following: (i) pays that person any dividend or interest upon voting
securities of the Company; (ii) allows that person to exercise, directly or
indirectly, any voting right conferred through securities held by that person;
(iii) pays remuneration in any form to that person for services rendered or
otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable
person to relinquish his or her voting securities for cash at fair market value.
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The Nevada Commission may, in its discretion, require the holder of any debt
security of a Registered Corporation to file applications, be investigated, and
be found suitable to own the debt security of a Registered Corporation. If the
Nevada Commission determines that a person is unsuitable to own such security,
then pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission, it (i) pays to the unsuitable person any dividend, interest, or any
distribution whatsoever; (ii) recognizes any voting right by such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Company is required to maintain a current stock ledger in Nevada that
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the Company's stock certificates to bear a
legend indicating that such securities are subject to the Nevada Act. However,
to date, the Nevada Commission has not imposed such a requirement on the
Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire, or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby such person obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and the Nevada Commission
concerning a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors, and other persons having a material
relationship or involvement with the entity proposing to acquire control to be
investigated and licensed as part of the approval process of the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed
by management, repurchases of voting securities, and corporate defense tactics
affecting Nevada gaming licensees and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
board of directors in response to a tender offer made directly to the Registered
Corporation's stockholders for the purpose of acquiring control of the
Registered Corporation.
Any person who is licensed, required to be licensed, registered, required to
be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of the
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Licensees' participation in such foreign gaming. The revolving fund is subject
to increase or decrease in the discretion of the Nevada Commission. Thereafter,
Licensees are also required to comply with certain reporting requirements
imposed by the Nevada Act. Licensees are also subject to disciplinary action by
the Nevada Commission if they knowingly violate any laws of the foreign
jurisdiction pertaining to the foreign gaming operation, fail to conduct the
foreign gaming operation in accordance with the standards of honesty and
integrity required of Nevada gaming operations, engage in activities that are
harmful to the state of Nevada or its ability to collect gaming taxes and fees,
or employ a person in the foreign operation who has been denied a license or a
finding of suitability in Nevada on the ground of personal unsuitability.
NATIVE AMERICAN GAMING REGULATIONS
The Company through its various gaming subsidiaries manufactures and
supplies gaming equipment to several Native American tribes. Gaming on Native
American lands is extensively regulated under federal law, tribal-state compacts
and tribal law. The Indian Gaming Regulatory Act of 1988 ("IGRA") provides the
framework for federal and state control over all gaming on Native American
lands. IGRA regulates the conduct of gaming on Native American lands and the
terms and conditions of contracts with third parties for management of gaming
operations. IGRA established the National Indian Gaming Commission ("NIGC") to
operate as an independent agency, within the U. S. Department of the Interior,
to exercise primary federal regulatory responsibility over such gaming. The NIGC
is delegated authority to issue regulations governing tribal gaming activities,
approve tribal ordinances for regulating Class II and Class III gaming, approve
management agreements for gaming facilities, conduct investigations and monitor
tribal gaming generally.
The IGRA classifies games that may be conducted on Native American lands
into three categories. "Class I Gaming" includes social games solely for prizes
of minimal value, or traditional forms of Native American Gaming engaged in by
individuals as part of, or in connection with, tribal ceremonies or
celebrations. "Class II Gaming" includes bingo, pulltabs, lotto, punch boards,
tip jars, instant bingo, and other games similar to bingo, if those games are
played at the same location as bingo is played. "Class III Gaming" includes all
other commercial forms of gaming, such as table games, slots, video casino
games, and other commercial gaming (e.g., sports betting and pari-mutuel
wagering).
Class I Gaming on Native American lands is within the exclusive jurisdiction
of the Native American tribes and is not subject to the provisions of IGRA.
Class II Gaming is permitted on Native American lands if (a) the state in which
the Native American lands lie permits such gaming for any purpose by any person,
organization or entity; (b) the gaming is not otherwise specifically prohibited
on Native American lands by federal law; (c) the gaming is conducted in
accordance with a tribal ordinance or resolution which has been approved by the
NIGC; (d) a Native American tribe has sole proprietary interest and
responsibility for the conduct of gaming; (e) the primary management officials
and key employees are tribally licensed; and (f) several other requirements are
met. Class III Gaming is permitted on Native American lands if the conditions
applicable to Class II Gaming are met and, in addition, the gaming is conducted
in conformance with the terms of a written agreement between a tribal government
and the government of the state within whose boundaries the tribe's lands lie (a
"tribal-state compact").
The IGRA requires states to negotiate in good faith with Native American
tribes that seek to enter
into a tribal-state compact for the conduct of Class III Gaming. Such
tribal-state compact may include provisions for the allocation of criminal and
civil jurisdiction between the state and the Native American tribe necessary for
the enforcement of such laws and regulations, taxation by the Native American
tribe of such activity in amounts comparable to those amounts assessed by the
state for comparable activities, remedies for breach, standards for the
operation of such activity and maintenance of the gaming facility, including
licensing, and any other subjects that are directly related to the operation of
gaming activities. The terms of tribal-state compacts vary from state to state.
Compacts within one state tend to be substantially similar to each other.
Compacts usually specify the types of permitted games, entitle the states to
inspect casinos, require background investigations and licensing of casino
employees and vendors, and
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may require the tribe to pay a portion of the state's expenses for establishing
and maintaining regulatory agencies. The Company places machines only with
Native American tribes who have negotiated compacts with their respective states
and have received approval by the U. S. Department of the Interior.
OTHER JURISDICTIONS AND GOVERNMENT APPROVALS
Most of the other jurisdictions in which the Company and its subsidiaries
conduct business or intend to conduct business in the future require various
licenses, permits, findings of suitability or other approvals (collectively
"Government Approvals") in connection with the manufacture and/or distribution
of gaming devices or as a supplier of system, equipment, and services to the
lottery and racing industries. These jurisdictions exert substantial regulatory
controls over the Company typically involving restrictions similar in most
respects to those of Nevada. Obtaining required approvals and licenses can be
time consuming and costly and there can be no assurance of success.
Some jurisdictions allow the Company to operate under a temporary Government
Approval or on a transactional basis during a pending comprehensive background
investigation. While the Company has received Government Approvals in all of the
jurisdictions in which the Company's applications have been acted upon, there
can be no assurance that required Government approvals will be given or renewed
in the future. In addition, there can be no assurance that regulations adopted,
taxes imposed, or legislation limiting gaming by other states will permit
profitable operations by the Company.
ADDITIONAL FINANCIAL INFORMATION
Certain financial information for each of the Company's last three fiscal
years with respect to industry segments and foreign and domestic operations is
set forth in Note 4 of the Company's consolidated financial statements.
ITEM 2. PROPERTIES
The Company's principal properties consist of the following:
COLORADO CENTRAL STATION CASINO. The Colorado Central Station Casino, which
is owned by the Company and used in the gaming operations segment, is situated
on approximately 1.8 acres of land on the south end of Black Hawk, near Main
Street and Colorado State Highway 119. Black Hawk, Colorado is approximately 40
miles from Denver, Colorado. The Colorado Central Station has approximately 750
gaming machines, 15 table games, and a food and beverage operation. The Colorado
Central Station Casino building has approximately 49,000 square feet of floor
space, with 16,637 square feet of gaming area over three floors. The casino has
more than 600 parking spaces and is the first shuttle stop from Black Hawk's
3,000-space public facility.
COLORADO GRANDE CASINO. The Colorado Grande Casino, which is used in the
gaming operations segment, is located 45 miles from Colorado Springs and 75
miles from Pueblo, Colorado. The facility, which is leased, occupies 15,000
square feet of a commercial facility, of which 3,125 square feet are devoted to
gaming. The casino is located at one of the principal intersections in Cripple
Creek and has 44 adjacent parking spaces and a separate lot for employee
parking. The casino features more than 210 gaming machines, a full service
restaurant, and bar.
SUNLAND PARK RACETRACK AND CASINO. Sunland Park, New Mexico is adjacent to
El Paso, Texas, near Juarez, Mexico. The Sunland Park Racetrack and Casino,
which is owned by the Company and used in the gaming operations segment, is
located on 152 acres of improved land with gaming, office, stable, and other
building area of over 600,000 square feet. The facility features 300 gaming
machines on a 10,200 square foot gaming floor, a one- mile racetrack, and 80,000
square feet of grandstand area. The facility includes barns, track offices,
jockeys' quarters, and a full service restaurant and bar, as well as snack bars
and seasonally-operated restaurants.
34
<PAGE>
CORPORATE HEADQUARTERS. In October 1994, the Company consolidated its Las
Vegas offices, which were previously housed in several separate facilities, into
a new headquarters facility, also located in Las Vegas. Since that time it has
expanded to 17,000 square feet of office space and 30,000 square feet of
sub-assembly and warehouse space, all of which is leased. The facility is used
for executive offices as well as the Nevada Route operations, proprietary games
business and certain administrative and engineering functions.
BOZEMAN, MONTANA MANUFACTURING FACILITY. The Company's Bozeman, Montana
facility houses the Company's on-line wagering and gaming machines and systems
terminal manufacturing operations, as well as certain administrative and
engineering functions. The facility is owned by the Company, and includes nearly
80,000 square feet of manufacturing and office space. In addition, over 80,000
square feet of warehouse, manufacturing and office space is leased in Bozeman
and the surrounding area.
The Company has additional leases of various small facilities throughout the
jurisdictions in which it operates for sales and customer service functions. The
Company believes that the properties described above will be adequate for its
business needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
In February 1999, the Company and the Joint Venture, filed an action in U.
S. District Court, District of Nevada, 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 and seek unspecified damages. The lawsuits were consolidated in
Nevada, both in federal (U. S. District Court, District of Nevada) and state
court (Eighth Judicial District Court, Clark County, Nevada). 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.
In February of 1999, GTECH Corporation filed a complaint for declaratory
judgment, injunction, and violation of the Public Records Law against the State
of Florida, Department of Lottery and AWI in the Circuit Court, Second Judicial
Circuit, in Leon County, Florida. The complaint requests the Circuit Court to
declare the contract between AWI and the Florida Lottery void in the event the
First District Court of Appeal of Florida upholds the Florida Lottery's decision
to award the on-line lottery services contract to AWI. Subsequent to the
execution of the renegotiated contract between AWI and the Florida Lottery in
March 1999, GTECH Corporation amended the complaint. The Company believes this
action is entirely without merit and intends to vigorously defend this action.
35
<PAGE>
In March 1996, Ladbroke Holdings del Peru S.A. ("Ladbroke") filed an action
in the United States District Court, Eastern District of Michigan, against
United Tote Company and the Company. The complaint alleged, in part, that United
Tote had violated an agreement that it had entered with Ladbroke to "supply,
install, commission and operate" a number of wagering terminals and that United
Tote, without justification, notified Ladbroke that it was terminating the
agreement. Ladbroke alleged that United Tote and the Company's conduct
constituted a breach of contract, wrongful termination of contract, fraudulent
misrepresentation and tortious interference with contract/business relationship.
The complaint did not specify a damage figure but sought recovery of all
"actual, incidental and consequential damages." The Company and United Tote
filed a counterclaim against Ladbroke alleging claims for breach of certain of
Ladbroke's obligations under the contract and unjust enrichment. The
counterclaim alleged, in part, that Ladbroke failed to identify a sufficient
number of viable retailer locations, and failed to promote, design and market
the game so as to create sufficient demand. In August 1999, the Company and
United Tote settled all claims related to actions concerning Ladbroke. The
financial effect of the settlement is not materially adverse to the financial
position or the results of operations of the Company.
Although the Company is a party to various claims and legal actions arising
in the ordinary course of its business, in the opinion of management the
ultimate disposition of these other matters as they are currently understood
will not likely have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable
36
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the Nasdaq National
Market-Registered Trademark- and trades under the symbol "SLOT." The following
table sets forth the high and low closing prices per share of the Company's
Common Stock on the Nasdaq National Market for the described periods. The
Company has not declared any dividends from the time of the IPO until the
present.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------------
HIGH LOW
-------- ---
<S> <C> <C>
FISCAL 1999
First quarter......................... $ 74 1/4 $ 48
Second quarter........................ $ 59 7/8 $ 44 1/8
Third quarter......................... $ 60 1/4 $ 33 1/8
Fourth quarter........................ $ 51 7/1 $ 38 13/16
</TABLE>
<TABLE>
<CAPTION>
PRICE RANGE
-------------------------
HIGH LOW
-------- ---
<S> <C> <C>
FISCAL 1998
First quarter......................... $ 90 1/2 $ 47 1/4
Second quarter........................ $ 95 1/8 $ 43 1/2
Third quarter......................... $ 74 1/4 $ 55 3/16
Fourth quarter........................ $ 93 11/16 $ 76
</TABLE>
As of September 20, 1999, there were approximately 10,000 beneficial holders
of the Company's common stock.
The board of directors intends to retain any earnings of the Company to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock of Anchor in the foreseeable future. The Company
is a party to a revolving credit facility with a bank that restricts the payment
of dividends. Subject to contractual restrictions, any future determinations as
to the payment of dividends will be at the discretion of the board of directors
of the Company, and will depend on the Company's financial condition, results of
operations, capital requirements, and such other factors as the board of
directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial and operating information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere or incorporated by reference in this
37
<PAGE>
Annual Report on Form 10-K. The income statement and balance sheet data for each
of the five fiscal years ended June 30, 1999 are derived from the audited
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Proprietary games................................. $ 123,698 $ 113,677 $ 49,716 $ 21,457 $ 14,159
Gaming operations................................. 86,648 83,941 70,523 66,358 57,434
Route operations.................................. 38,585 34,314 33,510 28,651 25,818
---------- ---------- ---------- ---------- ---------
Total revenues.................................. 248,931 231,932 153,749 116,466 97,411
---------- ---------- ---------- ---------- ---------
Costs of revenues:
Proprietary games................................. 17,929 15,720 11,397 12,113 9,851
Gaming operations................................. 45,407 41,279 34,734 28,130 22,887
Route operations.................................. 25,013 21,442 19,905 17,158 15,659
---------- ---------- ---------- ---------- ---------
Total costs of revenues......................... 88,349 78,441 66,036 57,401 48,397
---------- ---------- ---------- ---------- ---------
Gross margin........................................ 160,582 153,491 87,713 59,065 49,014
Other costs:
Selling, general, and administrative.............. 40,667 32,677 21,581 21,074 20,949
Research and development.......................... 1,220 1,922 2,023
Acquired in-process research and development...... 17,500 -- -- -- --
Project cost write-downs.......................... -- -- 2,117 -- --
Depreciation and amortization..................... 17,380 12,661 8,798 4,110 3,215
---------- ---------- ---------- ---------- ---------
Total other costs............................... 76,767 47,260 34,519 25,184 24,164
---------- ---------- ---------- ---------- ---------
Income from operations.............................. 83,815 106,231 53,194 33,881 24,850
Interest income..................................... 3,850 2,989 3,793 2,028 1,105
Interest expense.................................... (113) (226) (288) (429) (732)
Other income (expense) (1).......................... (623) 446 (22) 43 244
---------- ---------- ---------- ---------- ---------
Income before provision for income taxes............ 86,929 109,440 56,677 35,523 25,467
Provision for income taxes.......................... 39,422 41,040 21,001 13,188 9,486
---------- ---------- ---------- ---------- ---------
Net income.......................................... $ 47,507 $ 68,400 $ 35,676 $ 22,335 $ 15,981
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Weighted average shares outstanding................. 12,164 12,751 13,321 11,820 11,252
Basic earnings per share............................ $ 3.91 $ 5.36 $ 2.68 $ 1.89 $ 1.42
Weighted average common and common equivalent shares
outstanding....................................... 12,428 13,161 13,542 12,038 11,447
Diluted earnings per share.......................... $ 3.82 $ 5.20 $ 2.63 $ 1.86 $ 1.40
OTHER DATA:
Capital expenditures................................ $ 13,845 $ 22,499 $ 38,108 $ 27,916 $ 7,834
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 32,835 $ 73,187 $ 66,427 $ 78,113 $ 26,132
Total assets........................................ 507,169 245,134 188,876 162,312 79,266
Long term notes payable............................. 212,805 -- 2,800 3,650 5,989
Stockholders' equity................................ 220,353 210,482 171,331 146,307 64,832
</TABLE>
- ------------------------
(1) Other income (expense) consists of minority interest in earnings of
consolidated subsidiary, and other income (expense).
38
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
In February 1994, Anchor completed its IPO of 3,162,500 shares of Common
Stock at a price of $12 per share. Simultaneously with the closing of the IPO,
Anchor became the holding company for its current subsidiaries, Anchor Coin,
Colorado Grande Enterprises, Inc., C.G. Investments, Inc., and D D Stud, Inc.,
each of which had been operated under different ownership structures controlled
primarily by Stanley E. Fulton, the Chairman of the Board. Also at the time of
the IPO, the Company acquired all of the beneficial ownership of Global Gaming
Products, L.L.C. and certain related assets from Global Distributors, Inc. (the
"Acquisition"), which were primarily involved in the distribution of the
proprietary game Silver Strike-TM-. Stanley E. Fulton also owned 50% of Global
Gaming Products, L.L.C. prior to the Acquisition. The financial position and
operating results of Colorado Grande Enterprises, Inc. are included in the
consolidated financial statements as an 80% consolidated subsidiary.
On April 23, 1996, the Company completed a secondary offering of 2.3 million
shares of Common Stock at a price of $37 per share. 1.55 million of these shares
were sold by the Company (the "Secondary Offering") and the remaining 750,000
shares were sold by selling stockholders. Net proceeds to the Company from the
Secondary Offering were $53.9 million. On October 17, 1997, the Company
completed an offering of 1.8 million shares of Common Stock at a price of $91
per share. All of these shares were sold by selling stockholders. The Company
did not receive any proceeds from the offering.
On June 29, 1999, the Company completed the Powerhouse Acquisition pursuant
to a merger agreement for approximately $220 million plus Powerhouse net debt of
$68 million. The Powerhouse Acquisition was funded through a combination of cash
and borrowing under a new $300 million revolving credit facility. Anchor,
through its acquisition of Powerhouse and its operating units, VLC, AWI and
United Tote, is now a supplier of system software, equipment and related
services for on-line lotteries, video lotteries, and pari-mutuel systems
throughout the world, and is a manufacturer and distributor of gaming devices
for casinos. The Powerhouse Acquisition was accounted for using the purchase
method of accounting. Because the closing of the Powerhouse Acquisition occurred
virtually concurrent with the end of the fiscal year of the Company, the
financial statements of the Company for the year ended June 30, 1999 do not
include any results of operations or cash flows for Powerhouse.
The following table sets forth the percentage of Anchor's total revenues
attributable to proprietary games operations, gaming operations and route
operations during the fiscal years ended June 30, 1999, 1998, and 1997. The
growth in proprietary games revenue as a percentage of total revenues is
attributable primarily to the commencement of the Strategic Alliance with IGT
during the second half of fiscal 1997.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
SOURCES OF REVENUES:
Proprietary games operations..................................... 49.7% 49.0% 32.4%
Gaming operations................................................ 34.8 36.2 45.8
Route operations................................................. 15.5 14.8 21.8
--------- --------- ---------
Total revenues................................................. 100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
ACQUISITION OF POWERHOUSE TECHNOLOGIES, INC.
As discussed in the notes to the consolidated financial statements, the
acquisition of Powerhouse Technologies, shown on a pro-forma basis, which may
not be indicative of future performance of the combined companies, would have
resulted in combined annual revenues of $465.9 million, and net income of $49.0
million for the year ended June 30, 1999.
39
<PAGE>
With the Powerhouse subsidiaries' addition, the Company's proprietary games
operations will be combined with Powerhouse' gaming machines and systems sales.
The gaming operations segment in the future will be comprised of a
racetrack/casino in New Mexico, the Company's existing Colorado casinos, route
operations in Montana acquired from Powerhouse and the existing Nevada route
operations.
The following unaudited financial information represents the financial
results of Powerhouse for the year ended June 30, 1999.
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1999
-------------
(IN
THOUSANDS)
<S> <C>
Revenues:
Lottery systems.............................................................. $ 101,569
Gaming machines & systems.................................................... 60,152
Gaming operations............................................................ 34,398
Pari-mutuel systems.......................................................... 20,875
-------------
$ 216,994
-------------
-------------
Cost of revenue:
Lottery systems.............................................................. $ 62,067
Gaming machines and systems.................................................. 34,609
Gaming operations............................................................ 25,726
Pari-mutuel systems.......................................................... 13,213
-------------
$ 135,615
-------------
-------------
</TABLE>
For the year ended June 30, 1999 Powerhouse incurred approximately $40
million in selling, general and administrative expense, $10 million in research
and development expense and $21 million in depreciation and amortization
expense. These financial results may not be indicative of the results that may
be obtained in the future.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
PROPRIETARY GAMES OPERATIONS
Revenues from proprietary games operations were $123.7 million for the
fiscal year ended June 30, 1999, an increase of $10.0 million or 8.8% from
$113.7 million for the fiscal year ended June 30, 1998. The increase is
primarily due to increased equity earnings in the Company's joint venture
alliance with IGT, which, for accounting purposes, is recorded net of expense.
At June 30, 1999 there were more than 6,400 games, primarily Wheel of
Fortune-TM-, operating within the joint venture, compared to more than 5,600
games at June 30, 1998. The increase in revenues is also due to increased
revenues from the Company's proprietary games CashBall-TM- and SafeBuster-TM-.
These increases were offset to some extent by decreased revenues generated from
the Wheel of Gold-TM-, Totem Pole-TM- and Clear Winner-TM- games as well as
decreased revenues from the sale of tokens for the proprietary game Silver
Strike-TM-.
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
40
<PAGE>
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 year ended June 30, 1999, the Company's installed base of
stand-alone proprietary games, without regard to its Joint Venture games or
Silver Strike-TM- product, decreased 4.7% from the year ended June 30, 1998. The
average net win per unit for the installed base of stand-alone proprietary games
also decreased during the same period. The Company 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 was signed into law before the May 31, 1999
legislative deadline. 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.
During fiscal year 1999, the Company received regulatory approval in Nevada
and several other jurisdictions, 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.
Also during fiscal year 1999, the Company received regulatory approvals for two
additional conversion titles, Pick 'N Pop-TM- and Pick 'N Kick-TM-. The Company
recently received Nevada regulatory approval for technology that enables 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 introduced this multi-coin feature on the conversion platform during its
September 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 2000.
Costs of proprietary games revenues were $17.9 million for the fiscal year
1999, an increase of $2.2 million or 14.0% from $15.7 million for the fiscal
year 1998. Proprietary games gross margin decreased slightly to 85.5% during
fiscal year 1999 from 86.2% during fiscal year 1998. The increase in the cost of
proprietary games revenues was due to primarily to increased machine parts used
in the Company's operations outside the joint venture, increased costs of
production and service payroll and shipping and handling. During fiscal year
1999, the Company engaged in extensive improvements and modifications to
existing proprietary games in order to maintain performance levels of the games.
The costs associated with the upgrades and regular maintenance of games in
operation are expensed as incurred. These increases were offset to some extent
by decreased costs and expenses relating to the sale of tokens for the
proprietary game Silver Strike-TM-.
41
<PAGE>
GAMING OPERATIONS
Total revenues from gaming operations were $86.6 million for fiscal year
1999, an increase of $2.7 million or 3.2% from $83.9 million for fiscal year
1998. This increase is primarily due to increased slot revenues at the Colorado
Central Station Casino and, to a lesser extent, increased slot revenues at the
Colorado Grande Casino. The year-over-year increase in revenues was realized
almost entirely during the first six months of fiscal year 1999 with the second
six months of fiscal year 1999 resulting in flat year-over-year comparisons. Two
casinos, both larger and containing more gaming devices, opened near the
Colorado Central Station as expected on June 24,1998 and December 29, 1998,
respectively. The Company is aware of other casino projects in various stages of
planning in the Black Hawk/Central City market. The Company cannot predict the
effect, if any, that the new or proposed casino openings will have on the
Company's Colorado casino operations. The Company expects that the increased
competition will have a continued negative effect on revenues as well as on
costs of gaming operations such as promotions and costs related to retaining and
recruiting employees. Historically, revenues and casino patronage in the
Colorado casino operations are highest in the summer months and those months
unaffected by inclement weather. The Company expects this seasonal trend to
continue.
Costs of gaming operations revenue were $45.4 million for fiscal year 1999,
an increase of $4.1 million or 9.9% from $41.3 million for fiscal year 1998.
Gaming operations gross margin decreased to 47.6% during fiscal year 1999 from
50.8% during fiscal year 1998. In order to sustain year-over-year revenue levels
despite increased competition, the Company incurred increased marketing and
personnel related costs. Although the Company can not predict the effect of the
new and proposed casino openings discussed above, management believes it is
likely to increase both promotion and payroll costs in future periods. The
Company expects to realize some decrease in costs of casino operations as a
result of decreased gaming tax rates enacted by the state of Colorado during
fiscal 1999.
ROUTE OPERATIONS
Revenues from route operations were $38.6 million for fiscal year 1999, an
increase of $4.3 million or 12.5% from $34.3 million for fiscal year 1998.
Machines on route increased 40 machines or 4.8% to 882 at June 30, 1999 from 842
machines at June 30, 1998. Average machines on route during fiscal 1999
increased 39 or 4.7% to 866 from 827 average machines in fiscal 1998. The
increase in route revenue was due to the increased number of machines on route
and increased performance of the machines on the route due to machine mix
enhancements. Increases in route revenue were realized from both participation
locations and space lease locations. The Company's primary base of route
operations is in southern Nevada where the population has experienced
significant growth. 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 revenues comparisons.
During fiscal year 1999, several publicized quality of life issues
surrounding route operations in Nevada were settled in a manner acceptable to
both Anchor and certain governmental entities. The slot route industry,
including 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.
The Company recently received a termination letter from one of its major
retail chains, due to a change in ownership. As a result, the Company will end
its location agreement with four Albertson's stores in September 1999. The
Company is the participant in an injunctive relief filed in court which would
allow the Company to continue to operate the locations as contracted. The
Company believes that the loss of Albertson's stores, if it occurs, will not
have a material effect on the net financial results of the Company's Nevada
Route operations.
42
<PAGE>
Costs of route revenue were $25.0 million for fiscal year 1999, an increase
of $3.6 million or 16.8% from $21.4 million for fiscal year 1998. Route
operations gross margin decreased to 35.2% during fiscal year 1999 compared to
37.5% during fiscal year 1998. The increase in route costs was primarily due to
increased participation costs and, to a lesser extent, increased space lease
costs, both related to increased locations and machines on route. Increased
participation costs are also a result of increased competition in the slot route
industry for locations.
OTHER COSTS
Selling, general and administrative ("SG&A") expenses were $40.7 million for
fiscal year 1999, an increase of $8.0 million or 24.5% from $32.7 million for
fiscal year 1998. SG&A expenses as a percentage of total revenue increased to
16.3% during fiscal year 1999 compared to 14.1% during fiscal year 1998. The
increase in SG&A expenses is primarily due to increased expenses in the
Company's proprietary games operations of approximately $7.2 million, including
increased selling compensation costs, valuation allowances, and tax and
licensing costs. Additional increases in costs and expenses were incurred for
advertising in the gaming operations and for administrative payroll at the
corporate level.
Research and development expenses were $1.2 million for fiscal year 1999, a
decrease of $700,000 or 36.8% from $1.9 million for fiscal year 1998. The
decrease is due to reduced expenses in fiscal year 1999 for development at the
corporate level, offset to some extent by increases in the proprietary games
operations. The decrease in corporate development resulted primarily from
reduced development costs related to the Canadian charity based casino
initiative that was cancelled by the Ontario provincial government on June 26,
1998. In addition to the research and developments expenses reflected on the
Company's financial statements, research and development costs related to the
Anchor IGT Joint Venture are accounted for on the books of the Joint Venture and
are not included in the amounts disclosed as research and development in the
Company's financial statements.
Acquired in-process research and development of $17.5 million in fiscal year
1999 was incurred in connection with the Powerhouse Acquisition. This
non-recurring expense represents the value of the research and development
projects that were in various stages of completion at the date of the
acquisition. There was no income tax benefit as a result of this expense,
thereby increasing the Company's effective tax rate for fiscal 1999;
Depreciation and amortization expense was $17.4 million for fiscal year
1999, an increase of $4.7 million or 37.0% from $12.7 million for fiscal year
1998. This increase is primarily due to increased depreciation and amortization
expense incurred in the Company's proprietary games operations and, to a lesser
extent, at the Company's Colorado Central Station Casino and in the Company's
route operations due to the use of shortened lives for all gaming machines.
Goodwill recorded as a result of the Powerhouse Acquisition is expected to add
approximately $2 million annually in amortization expense.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations was $83.8 million for fiscal year 1999, a decrease of $22.4
million or 21.1% from $106.2 million for fiscal year 1998. Excluding the $17.5
million charge for acquired in-process research and development, income from
operations for fiscal year 1999 would have been $101.3 million, a decrease of
only $4.9 million or 4.6% from fiscal year 1998. As a percentage of total
revenues, income from operations decreased to 33.7% during fiscal year 1999 from
45.8% during fiscal year 1998.
OTHER INCOME (EXPENSE). Interest income was $3.9 million for fiscal year
1999, an increase of $900,000 or 30.0% from $3.0 million for fiscal year ended
1998. The increase is due to increased short-term investments resulting from
higher average cash balances during the year. Other income decreased $1.1
million from fiscal year 1998. This was primarily due to reduced net gains on
asset disposals in fiscal year 1999 versus fiscal 1998.
43
<PAGE>
NET INCOME AND EARNINGS PER SHARE. As a result of the factors discussed
above, net income was $47.5 million for fiscal year 1999, a decrease of $20.9
million or 30.6% from $68.4 million for fiscal year 1998. Excluding the $17.5
million charge for acquired in-process research and development (which had no
associated income tax benefit), net income would have been $65.0 million for
fiscal year 1999, a decrease of only $3.4 million or 5.0% from fiscal year 1998.
Diluted earnings per share of $3.82 for fiscal year 1999 would have been
$5.23 exclusive of the $17.5 million charge for acquired in-process research and
development, an increase of $.03 per share from the $5.20 diluted earnings per
share for fiscal year 1998.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
PROPRIETARY GAMES OPERATIONS
Revenues from proprietary games operations were $113.7 million for fiscal
year 1998, an increase of $64.0 million or 128.7% from $49.7 million for fiscal
year 1997. The increase is primarily due to increased equity earnings in the
Company's joint venture alliance with IGT, which, for accounting purposes, is
recorded net of expense. At June 30, 1998 there were more than 5,600 games,
primarily Wheel of Fortune-TM-, operating within the joint venture, compared to
more than 2,000 games at June 30, 1997. This increase is also due to increased
revenues from the Company's proprietary games Wheel of Gold-TM-and Totem
Pole-TM-, and to a lesser extent increased revenues from the proprietary games
Rock'N'Reels-TM- and SafeBuster-TM-. These increases were offset to some extent
by decreased revenues generated from the sale of tokens for the proprietary game
Silver Strike-TM- and decreased revenues generated from the proprietary game
Clear Winner-TM-.
Costs of proprietary games revenues were $15.7 million for fiscal year 1998,
an increase of $4.3 million or 37.7% from $11.4 million for fiscal year 1997.
Proprietary games gross margin increased to 86.2% during fiscal year 1998 from
77.1% during fiscal year 1997. The increase in costs of proprietary games
revenue was due to increased machine parts, production and service payroll,
shipping and handling, and production supplies, resulting primarily from
increased machine conversions and maintenance. These increases were offset to
some extent by decreased costs relating to the sale of tokens for the
proprietary game Silver Strike-TM-. The increase in proprietary games gross
margin is primarily due to equity in the income of the joint venture with IGT,
which, for accounting purposes, is recorded net of expenses. Additionally,
revenues from the Company's proprietary games, such as Wheel of Gold-TM- and
Totem Pole-TM-, have greater gross margin percentages than the Company's Silver
Strike-TM- game, which previously accounted for a larger percentage of the
Company's proprietary games revenue.
GAMING OPERATIONS
Revenues from gaming operations were $83.9 million for fiscal year 1998, an
increase of $13.4 million or 19.0% from $70.5 million for fiscal year 1997. This
increase is primarily due to increased slot revenues at the Colorado Central
Station Casino and, to a lesser extent, increased slot revenues at the Colorado
Grande Casino. The Company's Colorado casino operations were the beneficiary of
mild weather during the six months ended June 30, 1998.
Costs of gaming operations revenue were $41.3 million for fiscal year 1998,
an increase of $6.6 million or 19.0% from $34.7 million for fiscal year 1997.
Gaming operations gross margin increased slightly to 50.8% during fiscal year
1998 from 50.7% during fiscal year 1997. The increase in costs of gaming
operations revenue was primarily due to increased gaming taxes and promotions,
and to a lesser extent direct payroll, at both of the Company's Colorado
casinos.
44
<PAGE>
ROUTE OPERATIONS
Revenues from route operations were $34.3 million for fiscal year 1998, an
increase of $800,000 or 2.4% from $33.5 million for fiscal year 1997. Machines
on route increased 41 machines or 5.1% to 842 machines at June 30, 1998 from 801
machines at June 30, 1997. Average machines on route during fiscal 1998
increased 57 average machines or 7.4% to 827 average machines from 770 average
machines during fiscal 1997. The increase in route revenue was due to the
increased number of machines on route offset somewhat by increased competition
due to expansion of grocery store chains and local casino operations.
Costs of route operations revenue were $21.4 million for fiscal 1998, an
increase of $1.5 million or 7.5% from $19.9 million for fiscal 1997. Route
operations gross margin decreased to 37.5% during fiscal year 1998 compared to
40.6% during fiscal year 1997. The increase in costs of route revenue was
primarily due to increased location costs and, to a lesser extent, increased
direct payroll costs, both related to increased machines on route.
OTHER COSTS
SG&A expenses were $32.7 million for fiscal year 1998, an increase of $11.1
million or 51.4% from $21.6 million for fiscal year 1997. SG&A expenses as a
percentage of total revenue of 14.1% during fiscal year 1998 were comparable to
14.0% during fiscal year 1997. The increase in SG&A expenses is primarily due to
increased expenses in the Company's proprietary games operations of
approximately $9.4 million, including increased payroll and compensation costs,
valuation allowances, as well as increased legal costs incurred at the holding
Company level.
Research & development expenses were $1.9 million for fiscal year 1998,
which is comparable to the $2.0 million for fiscal year 1997. The expenses were
characterized by increased development costs in fiscal year 1998 at the
corporate level primarily for the Canadian charity based casino initiative that
was cancelled by the Ontario provincial government on June 26, 1998, offset by
decreased expenses in the proprietary games operations.
Depreciation and amortization expense was $12.7 million for fiscal year
1998, an increase of $3.9 million or 43.9% from $8.8 million for fiscal year
1997. This increase is primarily due to increased depreciation and amortization
expense incurred in the Company's proprietary games operations and, to a lesser
extent, increased depreciation and amortization expense incurred at the
Company's Colorado Central Station Casino.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income
from operations was $106.2 million for fiscal year 1998, an increase of $53.0
million or 99.7% from $53.2 million for fiscal year 1997. As a percentage of
total revenues, income from operations increased to 45.8% during fiscal year
1998 from 34.6% during fiscal year 1997.
OTHER INCOME/EXPENSE. Interest income was $3.0 million for fiscal year
1998, a decrease of $800,000 or 21.2% from $3.8 million for fiscal year 1997.
The decrease is due to decreased short-term investments resulting from decreased
cash balances during the year. Other income increased $900,000 to $1.2 million
in fiscal year 1998 from $300,000 in fiscal year 1997 due primarily to gains on
disposal of assets.
NET INCOME. As a result of the factors discussed above, net income was
$68.4 million for fiscal year 1998, an increase of $32.7 million or 91.7% from
$35.7 million for fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. At June 30, 1999, the Company maintained $32.8 million in cash
and equivalents, $28.9 million in working capital, and $81.5 million available
under a revolving credit facility, compared with cash and equivalents at June
30, 1998 of $73.2 million, working capital of $54.4 million, and a $10.0 million
unsecured revolving bank line of credit. Pursuant to the acquisition of
Powerhouse Technologies, Inc., the
45
<PAGE>
Company borrowed $210 million on a new $300 million unsecured credit facility.
Amounts drawn on the credit facility bear interest at variable rates based on
LIBOR plus an applicable margin or prime rate plus an applicable margin, at the
Company's option. All borrowings under the credit facility are due on June 30,
2004. The Company has agreed to maintain certain financial and non-financial
covenants customary with
lending arrangements of this type. The Company has complied with the covenants
throughout the term of the credit facility.
Prior to obtaining financing for the Powerhouse Acquisition, Anchor's
principal sources of liquidity included cash flows from operations and the net
proceeds from a Secondary Offering in April 1996 and an IPO in February 1994.
Net proceeds to the Company from the Secondary Offering were $53.9 million, and
net proceeds from the IPO were $34.1 million. The Company believes that cash
provided by operations will remain as a significant source of cash flows, and
anticipates that both operations and draws on the Company's line of credit will
provide the capital needed for continued business growth.
During fiscal year 1999, operating activities provided $86.7 million in cash
flows on $47.5 million in net income, compared with $68.2 million in cash flows
on $68.4 million in net income during fiscal year 1998. Comparable operating
cash flows were attained in 1999, despite lower net income, because 1999
included non-cash expenses (including depreciation and amortization) of
approximately $43.1 million compared with non-cash expenses in 1998 of
approximately $14.0 million. The significant non-cash expenses in 1999 include
the write-off of $17.5 million of acquired in-process research and development
in connection with the acquisition of Powerhouse Technologies. The cash
associated with this expense was included in the cash paid for the acquisition
of Powerhouse.
CAPITAL EXPENDITURES. During fiscal 1999, the Company spent $13.8 million
on capital acquisitions in addition to the $71.7 million cash paid (net of cash
acquired) for Powerhouse Technologies. Capital expenditures were primarily
incurred for the purchase of gaming devices and equipment for use in the
Company's proprietary games operations. In fiscal year 1998, the Company spent
$22.5 million on capital expenditures, also primarily related to the purchase of
gaming devices and equipment for use in its proprietary games operations. During
the year ended June 30, 1999, Powerhouse spent approximately $51 million on
capital expenditures, consisting primarily of expenditures to implement and
upgrade on-line lottery equipment used in the provision of services under
long-term contracts. The Company selectively pursues opportunities to win
additional and retain existing on-line wagering contracts. If successful in
obtaining new state lottery contracts, and depending on the size of the
jurisdictions served, the Company may be required to secure additional funding
for the related capital expenditures.
The lottery systems segment operates in a capital-intensive industry, in
which wagering terminals, computer systems, and applications and communications
software must be installed throughout a jurisdiction, often beginning up to one
year before revenues are earned on the long-term contract. When a new
jurisdiction is added to the Company's customer base, capital required to obtain
and install hardware and software can be significant. Generally, initial
contract terms are from 5 to 9 years, often with 1 to 3 year extension options.
Upon expiration of a contract and its extensions, the jurisdiction typically
requires vendors to re-bid their services and replace existing equipment with
new terminals. An incumbent vendor may have some benefit due to the
communications infrastructure already in place, but most often, a significant
portion of the initial capital expenditures must be replaced upon the
re-awarding of a lottery contract.
STOCK REPURCHASE. During fiscal year 1999, $40.3 million was expended to
repurchase 810,300 shares of the Company's common stock pursuant to a
board-authorized stock repurchase plan. In April 1997, the board of directors
authorized a repurchase of up to 1,000,000 shares of Common Stock. The board of
directors authorized additional repurchases of up to 513,975 shares in December
1997 and 640,400 shares in October 1998. As of June 30, 1999, the Company had
repurchased 1,784,675 shares of Common Stock at a cost of $89.9 million. During
fiscal 1998, 638,375 shares were repurchased at a cost of $36.1 million, and
46
<PAGE>
336,000 shares were repurchased during fiscal 1997 at a cost of $13.5 million.
At June 30, 1999 there was a balance of 369,700 authorized shares remaining
under the repurchase program.
WORKING CAPITAL REQUIREMENTS. In addition to cash requirements needed for
the purchase and construction of capital equipment, working capital is necessary
to finance customer receivables and inventory levels. At June 30, 1999, notes
receivable from customers totaled $20.9 million, primarily resulting from gaming
machine sales. Because management expects the continued growth of the gaming
machines and systems segment, and intends to continue financing sales when
advantageous to the Company, notes receivable balances may increase. Financing
gaming machine sales over short periods is common in the gaming machine sales
industry, and most of the Company's customer notes range from one to two years,
with interest rates of up to 14%. Certain international and domestic receivables
have repayment periods of up to nine years.
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, along with various other date-related issues, 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. As a result of the Powerhouse Acquisition, the
Company has acquired many additional computer and other systems that require
review of their exposure to the Year 2000 Problem. The Company has integrated
the Powerhouse systems into their comprehensive plans to address the Year 2000
Problem.
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 has
identified and tested mission critical systems and is in the process of
modifying or replacing those systems that are not, in its opinion, able to
perform their essential functions after December 31, 1999 ("Year 2000
Compliant"). Based upon the comprehensive review, management believes that the
Company's critical internal systems are Year 2000 Compliant or will be Year 2000
Compliant by September 1999 and other systems will be compliant by November
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 engaged outside
consultants to assist and advise management in the review of its systems and
evaluation of its readiness to deal with Year 2000 problems.
The Company has evaluated its obligations for communication to its
customers. The Year 2000 readiness of its customers varies, and the Company is
encouraging its customers to evaluate and prepare their own systems. In many
cases, the Company is assisting customers by providing new or modified systems
to address the Year 2000 Problem. In contractual arrangements where the Company
provides systems and equipment to customers, the Company has scheduled
replacement or modification to all identified systems that are not Year 2000
Compliant before the end of 1999.
In addition, the Company has communicated 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. In some
instances, vendors have not responded to the Company's inquiries about Year 2000
readiness. In such instances where management has identified a material risk,
the Company has initiated further contact, developed contingency plans and made
arrangements to replace the vendor. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will
47
<PAGE>
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 June 30, 1999,
the Company has spent less than $200,000 and anticipates spending less than
$1,000,000 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 assurance that these estimates will be
achieved and actual results could differ from these plans.
The Company continues to attempt to identify and resolve all Year 2000
Problems that could materially and adversely affect its operations. Because many
systems that could be affected by Year 2000 Problems are complex and
interrelated, it is not possible to accurately predict all consequences of Year
2000 Problem-related failures, including the quantity, severity, duration or
financial consequences of such failures. Possible consequences that have been
identified by management include the following: operational inconveniences and
inefficiencies that will divert management's time and attention, and the
Company's financial and human resources from ordinary business activities;
routine business disputes and claims for pricing adjustments or penalties due to
Year 2000 Problems by customers that will be resolved in the ordinary course of
business; return of Company equipment and termination of revenue streams due to
perceived or actual equipment problems experienced by customers; and possible
serious business disputes alleging failure to comply with terms of contracts
resulting in litigation or termination of contracts.
The Company has developed a contingency plan to address what it believes to
be the most likely, reasonable, worst-case scenario. The Company's contingency
plan addresses mission critical systems, facilities and systems installed in
customer locations and how the Company plans to prepare and allocate human and
equipment resources to remedy possible failures. The Company believes that the
most likely reasonable worst-case scenario would entail power outages and
although the Company has power-generating equipment at its casino locations and
local lottery operational facilities an extended power outage could affect the
gaming operations and lottery operations. The inability to accurately predict
all possible effects of the Year 2000 issue prevent the Company's contingency
plan from covering all possible scenarios.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on its
floating rate debt. The principal balance of floating rate debt at June 30,
1999, was $210,000,000. The Company does not have any cash or cash equivalents
at June 30, 1999 that are subject to market risk based on changes in interest
rates. The Company does not currently hedge against any interest rate exposure.
The Company, as a result of the Powerhouse Acquisition, is exposed to the
risk of foreign currency exchange rate fluctuations. As of June 30, 1999, the
Company had accounts and notes receivable denominated in Canadian currency of
$2.3 million (4.5% of total receivables) and $900,000 (1.8% of total
receivables) denominated in Australian currency. All foreign receivables are
expected to be collected within 12 months. The Company does not currently hedge
against foreign currency exposures.
48
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C>
Independent Auditors' Report of Deloitte & Touche LLP................................................... 50
Consolidated Balance Sheets as of June 30, 1999 and 1998................................................ 51
Consolidated Statements of Income for Years Ended June 30, 1999, 1998, and 1997......................... 52
Consolidated Statements of Stockholders' Equity for Years Ended June 30, 1999, 1998, and 1997........... 53
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998, and 1997................. 54
Notes to Consolidated Financial Statements.............................................................. 56
</TABLE>
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Anchor Gaming and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Anchor
Gaming and Subsidiaries (the "Company") as of June 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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 consolidated financial statements present fairly, in
all material respects, the financial position of Anchor Gaming and Subsidiaries
at June 30, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles. Also, in our opinion,
the financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
August 4, 1999
50
<PAGE>
ANCHOR GAMING
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 32,835 $ 73,187
Accounts and notes receivable, net...................................................... 38,526 8,977
Inventory, net.......................................................................... 21,375 3,869
Other current assets.................................................................... 8,928 2,007
---------- ----------
Total current assets.................................................................. 101,664 88,040
Property and equipment, net............................................................... 188,048 94,791
Goodwill, net............................................................................. 117,436 2,264
Other intangible assets, net.............................................................. 34,520 1,270
Investments in unconsolidated affiliates.................................................. 29,053 32,639
Other long-term assets.................................................................... 36,448 26,130
---------- ----------
Total assets.......................................................................... $ 507,169 $ 245,134
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 21,073 $ 5,994
Current portion of long-term debt....................................................... 4,051 --
Income tax payable...................................................................... 5,146 12,469
Other current liabilities............................................................... 42,486 15,128
---------- ----------
Total current liabilities............................................................. 72,756 33,591
Long-term debt, net of current portion.................................................... 212,805 --
Minority interest in consolidated subsidiary.............................................. 1,255 1,061
---------- ----------
Total liabilities and minority interest in consolidated subsidiary.................... 286,816 34,652
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares issued and
outstanding at June 30, 1999 and 1998................................................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized, 13,841,750 issued and
11,866,307 outstanding at June 30, 1999, 13,758,375 issued and 12,593,232 outstanding
at June 30, 1998...................................................................... 138 138
Treasury stock at cost, 1,975,443 shares at June 30, 1999, 1,165,143 shares at June 30,
1998.................................................................................. (93,043) (52,732)
Additional paid-in capital.............................................................. 116,854 114,179
Retained earnings....................................................................... 196,404 148,897
---------- ----------
Total stockholders' equity............................................................ 220,353 210,482
---------- ----------
Total liabilities and stockholders' equity............................................ $ 507,169 $ 245,134
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
51
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Proprietary games.......................................................... $ 123,698 $ 113,677 $ 49,716
Gaming operations.......................................................... 86,648 83,941 70,523
Route...................................................................... 38,585 34,314 33,510
---------- ---------- ----------
Total revenues......................................................... 248,931 231,932 153,749
---------- ---------- ----------
Costs of revenues:
Proprietary games.......................................................... 17,929 15,720 11,397
Gaming operations.......................................................... 45,407 41,279 34,734
Route...................................................................... 25,013 21,442 19,905
---------- ---------- ----------
Total costs of revenues................................................ 88,349 78,441 66,036
---------- ---------- ----------
Gross margin................................................................. 160,582 153,491 87,713
---------- ---------- ----------
Other costs:
Selling, general and administrative........................................ 40,667 32,677 21,581
Research and development................................................... 1,220 1,922 2,023
Acquired in-process research and development............................... 17,500 -- --
Project cost write-downs................................................... -- -- 2,117
Depreciation and amortization.............................................. 17,380 12,661 8,798
---------- ---------- ----------
Total other costs...................................................... 76,767 47,260 34,519
---------- ---------- ----------
Income from operations....................................................... 83,815 106,231 53,194
---------- ---------- ----------
Other income (expense):
Interest income............................................................ 3,850 2,989 3,793
Interest expense........................................................... (113) (226) (288)
Other income............................................................... 47 1,157 289
Minority interest in earnings of consolidated subsidiary................... (670) (711) (311)
---------- ---------- ----------
Total other income..................................................... 3,114 3,209 3,483
---------- ---------- ----------
Income before provision for income taxes..................................... 86,929 109,440 56,677
Income tax provision......................................................... 39,422 41,040 21,001
---------- ---------- ----------
Net income................................................................... $ 47,507 $ 68,400 $ 35,676
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share..................................................... $ 3.91 $ 5.36 $ 2.68
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding.......................................... 12,164 12,751 13,321
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share................................................... $ 3.82 $ 5.20 $ 2.63
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and common equivalent shares outstanding............. 12,428 13,161 13,542
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
52
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
---------------------- --------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- --------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--July 1, 1996........................... 13,474 $ 135 (191) $ (3,096) $ 104,448 $ 44,821 $ 146,308
Stock issued for exercise of options.......... 105 1 1,284 1,285
Treasury shares purchased..................... (336) (13,473) (13,473)
Tax effects of stock option transactions...... 1,535 1,535
Net income.................................... 35,676 35,676
--------- ----- --------- ---------- ---------- ---------- ----------
Balance--June 30, 1997.......................... 13,579 136 (527) (16,569) 107,267 80,497 171,331
Stock issued for exercise of options.......... 179 2 2,558 2,660
Treasury shares purchased..................... (638) (36,163) (36,163)
Tax effects of stock option transactions...... 4,354 4,354
Net income.................................... 68,400 68,400
--------- ----- --------- ---------- ---------- ---------- ----------
Balance--June 30, 1998.......................... 13,758 138 (1,165) (52,732) 114,179 148,897 210,482
Stock issued for exercise of options.......... 84 1,770 1,770
Treasury shares purchased..................... (810) (40,311) (40,311)
Tax effects of stock option transactions...... 905 905
Net income.................................... 47,507 47,507
--------- ----- --------- ---------- ---------- ---------- ----------
Balance--June 30, 1999.......................... 13,842 $ 138 (1,975) $ (93,043) $ 116,854 $ 196,404 $ 220,353
--------- ----- --------- ---------- ---------- ---------- ----------
--------- ----- --------- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
53
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 47,507 $ 68,400 $ 35,676
---------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 17,369 12,833 8,955
Acquired in-process research and development................................ 17,500 -- --
Unconsolidated affiliates' distributions in excess of earnings (earnings in
excess of distributions).................................................. 3,586 (25,068) (7,571)
Other non-cash expenses, gains and losses, net.............................. 8,273 1,187 2,884
(Increase) decrease in assets:
Accounts receivable......................................................... 1,839 (3,305) (2,001)
Inventory................................................................... 1,238 (673) 1
Other assets................................................................ 1,603 (9,373) 1,784
Increase (decrease) in liabilities:........................................... --
Accounts payable............................................................ 1,836 3,331 (1,911)
Income tax payable.......................................................... (11,110) 14,684 2,956
Other liabilities........................................................... (2,986) 6,167 2,619
---------- --------- ---------
Total adjustments......................................................... 39,148 (217) 7,716
---------- --------- ---------
Net cash provided by operating activities....................................... 86,655 68,183 43,392
---------- --------- ---------
Cash flows from investing activities:
Expenditures for property and equipment....................................... (13,845) (22,499) (38,108)
Cash paid for acquisition of Powerhouse net of cash acquired.................. (71,674) -- --
Expenditures for intangible assets............................................ (112) (1,922) (489)
Issuance of notes receivable.................................................. (859) (2,040) (1,405)
Advances to joint venture..................................................... -- -- (3,100)
Principal reductions on notes receivable and other............................ 1,074 1,441 1,126
---------- --------- ---------
Net cash used in investing activities..................................... (85,416) (25,020) (41,976)
---------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt................................................... -- (2,800) (950)
Proceeds from sale of stock................................................... 1,770 2,560 1,322
Payments to acquire treasury stock............................................ (40,311) (36,163) (13,474)
Loan fees paid................................................................ (3,050) -- --
---------- --------- ---------
Net cash used in financing activities..................................... (41,591) (36,403) (13,102)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................ (40,352) 6,760 (11,686)
Cash and cash equivalents, beginning of year.................................... 73,187 66,427 78,113
---------- --------- ---------
Cash and cash equivalents, end of year.......................................... $ 32,835 $ 73,187 $ 66,427
---------- --------- ---------
---------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest...................................................... $ 55 $ 226 $ 258
---------- --------- ---------
---------- --------- ---------
Cash paid for income taxes.................................................. $ 50,532 $ 36,742 $ 18,045
---------- --------- ---------
---------- --------- ---------
(continued)
</TABLE>
54
<PAGE>
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental schedule of non-cash investing and financing transactions:
Acquisition of Powerhouse:
Fair value of assets and liabilities acquired:
Current assets, other than cash........................................... $ 56,541
Property and equipment.................................................... 103,927
Identifiable intangible assets............................................ 33,522
Goodwill.................................................................. 115,877
Other long-term assets.................................................... 4,750
Accounts payable.......................................................... (13,243)
Notes payable............................................................. (6,856)
Other liabilities......................................................... (24,164)
Acquired in-process research and development expensed......................... 17,500
----------
287,854
Debt incurred................................................................. (210,000)
Other liabilities incurred.................................................... (6,180)
----------
Cash paid, net of cash acquired............................................... $ 71,674
----------
----------
</TABLE>
See notes to consolidated financial statements.
55
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Anchor Gaming is a diversified gaming technology company serving states,
municipalities, and gaming programs around the world. Anchor Gaming develops and
distributes unique proprietary games, manufactures and distributes gaming
devices to casinos, operates two casinos in Colorado and one racetrack/casino in
New Mexico, and operates gaming-machine routes in Nevada and Montana. Through
its operating units AWI, VLC, and United Tote, Anchor Gaming supplies system
software, equipment, and related services to on-line lotteries, video lotteries,
casinos, and pari-mutuel organizations throughout the world. Presently, Anchor
Gaming's equipment and systems are in operation in the United States, Canada,
Australia, Europe, South America, South Africa, and the Caribbean.
The accompanying consolidated financial statements include the accounts of
Anchor Gaming and subsidiaries (collectively, "Anchor" or the "Company"). All
significant intercompany accounts and transactions have been eliminated. The
financial position and operating results of Colorado Grande Enterprises, Inc.
are included in the consolidated financial statements as an 80% consolidated
subsidiary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes highly liquid investments purchased with
maturities of three months or less at the date of acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, trade and
notes receivables, and trade payables approximates fair value because of the
short maturities of these instruments. The Company estimates fair value of its
long-term receivables and obligations based on quoted market prices or on the
current rates offered to the Company for instruments of the same remaining
maturities. The estimated fair values of the obligations closely approximated
the carrying values at June 30, 1999 and 1998.
INVESTMENTS IN DEBT SECURITIES
The Company's investment securities, along with certain cash and cash
equivalents that are not deemed securities under Statement of Financial
Accounting Standards ("SFAS") No. 115, are carried on the consolidated balance
sheets in the cash and cash equivalents category. Management determines the
appropriate classification of its investment securities at the time of purchase
as either held-to-maturity, trading, or available for sale and re-evaluates such
determination at each balance sheet date. The Company has no investment
securities as of June 30, 1999, and has classified its investment securities as
of June 30, 1998 as held-to-maturity. Held-to-maturity securities are required
to be carried at amortized cost. The securities classified as held-to-maturity
consist solely of amortized costs of debt securities issued by the U. S.
Treasury and other U. S. government agencies of $55.6 million at June 30, 1998.
All of the Company's investment securities mature in three months or less
from the date of purchase. The estimated fair value of the Company's portfolio
of investment securities at June 30, 1998 approximates amortized cost due to the
short-term nature of the portfolio.
ACCOUNTS RECEIVABLE
Accounts receivable result from the sale of products and services to gaming
properties and governments primarily in the United States. The Company performs
credit evaluations of its customers and does
56
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not generally require collateral except in the case of financed equipment sales.
If the Company finances equipment sales, it generally will require that the
equipment be pledged as collateral against the obligation of the customer.
Management reviews customer balances for potential credit losses and maintains
an allowance for amounts deemed uncollectible.
INVENTORY
The Company manufactures inventories of gaming, lottery and pari-mutuel
equipment for sale and lease. Additional inventories of silver and silver
tokens, parts for servicing of gaming machines and food and beverage items are
maintained. All inventories are stated at the lower of cost (first-in,
first-out) or market value. Cost includes materials, labor and allocated
indirect manufacturing overhead for manufactured inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Ordinary maintenance and repairs
are charged to expense as incurred. Equipment acquired under capital leases are
recorded at the lower of the present value of minimum lease payments at the
beginning of the lease term or the fair market value of the asset at the
inception of the lease. The Company manufactures equipment used in the provision
of services pursuant to long-term contracts.
Costs that materially increase the life or value of existing assets are
capitalized. Assets that have been placed in service are depreciated over their
estimated useful lives or the life of the related contract (including executed
contract extensions). Leasehold improvements and equipment purchased under
capital lease are depreciated or amortized over the shorter of the lease term or
the estimated useful lives of the assets on a straight-line basis. Property and
equipment is evaluated for recoverability under the requirements of SFAS No. 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" whenever impairment indicators are present.
GOODWILL AND INTANGIBLE ASSETS
Goodwill primarily includes the excess of purchase price over fair value of
net assets acquired in conjunction with the June 29, 1999 acquisition of
Powerhouse Technologies, Inc. ("Powerhouse" and the "Powerhouse
Acquisition")(see Note 3). Goodwill is amortized on a straight-line basis over
periods ranging from 3 to 40 years. Accumulated amortization was $1,352,000 and
$647,000 at June 30, 1999 and 1998, respectively.
Intangible assets include amounts paid to acquire leases for route locations
and casino property, amounts to acquire route participation agreements and costs
of patents issued. Intangible assets also include amounts for developed
technologies, customer base, assembled work force and covenants not-to-compete
recorded as a result of the Powerhouse Acquisition(see Note 3). Intangible
assets are amortized on a straight-line basis over estimated useful lives or the
lives of the leases or agreements, as applicable, ranging from 1 to 20 years.
Accumulated amortization was $1,800,000 and $1,459,000 at June 30, 1999 and
1998, respectively.
Goodwill and intangible assets are evaluated for recoverability under the
requirements of SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" whenever impairment indicators are
present.
57
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
In accordance with industry practice, the Company recognizes gaming revenues
as the net win from gaming operations, which is the difference between amounts
wagered by customers and payments to customers. Proprietary games revenue is
derived from royalty, revenue participation, or other similar short-term
recurring revenue arrangements. Revenues exclude the retail value of
complimentary food and beverage furnished gratuitously to customers.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to be consistent with the presentation used in the 1999 financial
statements.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in the financial statements include the
estimated depreciable lives of property and equipment and certain estimated
liabilities and valuation reserves. Actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee issued Statement of Position No. 98-5, "Reporting on the
Costs of Start-Up Activities". This standard provides guidance on the financial
reporting for start-up costs and organization costs. This standard requires
costs of start-up activities and organization costs to be expensed as incurred
and is effective for fiscal years beginning after December 15, 1998, although
earlier application is encouraged. The Company does not anticipate any
additional expense as a result of adoption of this statement during the quarter
ended September 30, 1999.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
was issued in June 1998. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, although earlier application is encouraged. This statement may not be
applied retroactively. The Company expects to adopt this statement effective
July 1, 2000, and does not expect the adoption to have a material effect on its
financial position or results of operations.
3. ACQUISITION OF POWERHOUSE
On June 29, 1999, the Company completed the acquisition of 100% of the
outstanding common stock of Powerhouse for approximately $220 million plus
Powerhouse net debt of $68 million pursuant to a merger agreement. The
Powerhouse Acquisition was funded through a combination of cash and borrowing
under a new $300 million revolving credit facility. Anchor, through its
acquisition of Powerhouse and its operating units, VLC, AWI and United Tote, is
now a supplier of system software, equipment and related
58
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF POWERHOUSE (CONTINUED)
services for on-line lotteries, video lotteries, and pari-mutuel systems
throughout the world, and is a manufacturer and distributor of gaming devices
for casinos.
The Powerhouse Acquisition was accounted for using the purchase method of
accounting. Under the purchase method of accounting, the results of operations
of any acquired company are to be included in the acquirer's financial
statements since the date of acquisition. The closing of the Powerhouse
Acquisition occurred virtually concurrent with the end of the fiscal year of the
Company and the financial statements of the Company for the year ended June 30,
1999 do not include any results of operations or cash flows for Powerhouse
because the amounts were not material.
The excess of the purchase price over the fair value of the net assets
acquired of approximately $116 million was recorded as goodwill and will be
amortized on a straight-line basis over periods between 30 and 40 years. The
Company is in the process of finalizing its evaluation of the fair values of the
assets and liabilities acquired including the quality of accounts receivable,
contingent liabilities relating to litigation, liabilities for involuntary
employee terminations, and certain other assets and liabilities. Material
adjustments to the balances recorded at June 30, 1999 could occur in fiscal
2000. In addition, identifiable intangible assets of approximately $33 million
were recorded and will be amortized on a straight-line basis over periods
ranging from 3 to 20 years. A $17.5 million charge to income for acquired
in-process research and development was recorded. The value assigned to acquired
in-process research and development was determined by identifying the various
in-process projects purchased, determining the stage of development of each
project at the acquisition date and valuing those projects using an income
approach. The income approach estimates future revenues net of operating
expenses for each project and applies certain other adjustments to arrive at
estimated after-tax cash flow from the project. The revenue and expense
estimates were based on a variety of aspects including revenue growth rates for
the applicable business segments, growth rates for the applicable market
segments, anticipated development and introduction timelines, product sales
cycles and estimated lives of products. The after-tax cash flows were then
discounted using a rate of 25%, which represents a premium to the Company's
weighted average cost of capital due to the risks associated with the fact that
the projects had not reached technological feasibility at the date of the
acquisition and successful completion of each project cannot be assured.
The accompanying balance sheet as of June 30, 1999 includes the balances of
Powerhouse. The following summarized unaudited pro forma financial information
assumes the acquisition occurred as of July 1, 1997. The pro forma data give
effect to actual operating results prior to the acquisition and adjustments to
interest expense, depreciation and amortization and income taxes. In addition,
adjustments have been made to exclude non-recurring charges related to the
merger. These pro forma amounts do not purport to be indicative of the results
that might have been obtained if the acquisition had occurred on July 1, 1997 or
that may be obtained in the future.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Revenues.............................................................. $ 465,925 $ 432,486
Income before extraordinary item...................................... 65,885 63,772
Net income............................................................ 65,650 63,772
Earnings per share from continuing operations:
Basic............................................................... $ 5.42 $ 5.00
Diluted............................................................. $ 5.30 $ 4.85
</TABLE>
59
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS SEGMENTS
The Company adopted Statement of Financial Accounting Standards Number 131
(SFAS No. 131), "Disclosures about Segments of an Enterprise and Related
Information" for the year ended June 30, 1999. SFAS No. 131 established
standards for the way public companies are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to stockholders. It also established standards for related disclosures
about products and services, geographic areas, and major customers.
During the three-year period ended June 30, 1999, the Company operated
primarily in three business segments: the development and distribution of
proprietary games; the operation of casino gaming establishments; and the
operation of slot machine routes. With the Powerhouse Acquisition, the Company
will operate in two additional segments, lottery systems and pari-mutuel
systems. Based on how the Company is managed, the Company will likely combine
the acquired gaming machines and systems sales operations with the current
proprietary games segment and will combine the acquired gaming operations with
the current gaming operations. Because the Powerhouse Acquisition occurred
virtually concurrent with the end of the Company's fiscal year, the assets of
the Powerhouse segments are included in the balance sheet at June 30, 1999,
although no operating results were realized from the acquired Powerhouse
segments because they were not material.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Proprietary games...................................... $ 124,179 $ 114,120 $ 50,075
Gaming operations...................................... 86,472 83,789 70,349
Route operations....................................... 39,620 35,234 34,444
Intercompany revenues.................................. (1,340) (1,211) (1,119)
---------- ---------- ----------
$ 248,931 $ 231,932 $ 153,749
---------- ---------- ----------
---------- ---------- ----------
Income (loss) from operations:
Proprietary games...................................... $ 67,955 $ 74,473 $ 26,299
Gaming operations...................................... 23,144 25,430 17,425
Route operations....................................... 8,303 8,514 9,818
General corporate expenses............................. (15,587) (2,186) (348)
---------- ---------- ----------
$ 83,815 $ 106,231 $ 53,194
---------- ---------- ----------
---------- ---------- ----------
Depreciation and amortization:
Proprietary games...................................... $ 12,406 $ 8,446 $ 5,227
Gaming operations...................................... 3,411 3,072 2,557
Route operations....................................... 1,305 940 808
Corporate.............................................. 258 203 206
---------- ---------- ----------
$ 17,380 $ 12,661 $ 8,798
---------- ---------- ----------
---------- ---------- ----------
Capital expenditures:
Proprietary games...................................... $ 8,641 $ 18,727 $ 29,582
Gaming operations...................................... 3,065 2,759 7,247
Route operations....................................... 1,998 900 1,185
Corporate.............................................. 141 113 94
---------- ---------- ----------
$ 13,845 $ 22,499 $ 38,108
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
60
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Identifiable assets:
Proprietary games/Gaming machines and systems.......... $ 142,736 $ 98,884 $ 41,184
Lottery systems........................................ 77,616 -- --
Gaming operations...................................... 75,038 50,770 47,829
Route operations....................................... 27,490 21,848 20,330
Pari-mutuel systems.................................... 23,601 -- --
Corporate.............................................. 44,811 73,632 79,533
Unallocated intangibles.................................. 115,877 -- --
---------- ---------- ----------
$ 507,169 $ 245,134 $ 188,876
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The revenues of the proprietary games segment are derived from revenue
sharing and short-term lease arrangements as well as a 50% interest in a joint
venture accounted for by the equity method. The remaining revenues of the
Company are derived almost exclusively from services provided to customers.
Revenues of the Company for the years ended June 30, 1999, 1998 and 1997 were
derived almost exclusively from domestic operations.
5. ACCOUNTS AND NOTES RECEIVABLE
The Company, through its acquisition of Powerhouse, finances sales of gaming
and pari-mutuel systems equipment to certain customers meeting minimum credit
standards. These installment notes bear interest at rates up to 18% and are to
be paid over periods ranging from one to nine years. Notes receivable also
include notes due from various slot route location owners with interest rates
ranging from 8% to 12% to be paid over periods ranging from 3 months to 20
years. Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, trade.............................................. $ 31,897 $ 10,302
Notes receivable........................................................ 20,948 2,571
--------- ---------
52,845 12,873
Less allowance for doubtful accounts.................................... (3,173) (1,661)
--------- ---------
49,672 11,212
Less current portion:
Accounts receivable................................................... 29,373 8,970
Notes receivable...................................................... 9,153 7
--------- ---------
Long-term notes receivable, net......................................... $ 11,146 $ 2,235
--------- ---------
--------- ---------
</TABLE>
Long-term notes receivable, net, are included in other long-term assets. At
June 30, 1999, approximately 20% of trade receivables were from various
governments or their designated agencies.
61
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVENTORY
Inventories, net of valuation reserves, consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Manufacturing
Raw materials.......................................................... $ 5,258 $ 1,067
Work-in-process........................................................ 1,795 --
Finished goods......................................................... 10,531 --
Other finished goods..................................................... 3,791 2,802
--------- ---------
$ 21,375 $ 3,869
--------- ---------
--------- ---------
</TABLE>
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30,
LIFE ----------------------
IN YEARS 1999 1998
------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and improvements................................. 15 $ 27,608 $ 17,576
Buildings and improvements............................ 15 - 40 30,267 13,327
Gaming equipment...................................... 3 - 7 92,181 80,362
On-line wagering equipment............................ 5 - 7 56,883 --
Furniture, fixtures and equipment..................... 3 - 7 16,670 6,905
Leasehold improvements................................ 4 - 31 1/2 8,087 6,282
---------- ----------
231,696 124,452
Less accumulated depreciation......................... 43,648 29,661
---------- ----------
Total............................................. $ 188,048 $ 94,791
---------- ----------
---------- ----------
</TABLE>
On November 11, 1996, the Company announced that it was re-evaluating the
scope and nature of its proposed addition of a new casino across the street from
the Colorado Central Station Casino. During the fourth quarter of the year ended
June 30, 1997, the Company determined that it was necessary to recognize a
write-down of costs associated with the new casino in the amount of $2,117,000.
The costs were specifically related to architectural fees, building design
costs, and deferred rent that were determined to have no future benefit.
8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has investments in unconsolidated affiliates that are 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 primarily 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 are included in revenue
from proprietary games operations.
62
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES (CONTINUED)
The Joint Venture operates on a September 30 year-end and began operations
during the quarter ended March 31, 1997. Summarized results of operations of the
Joint Venture for the years ended June 30, 1999 and 1998 and the period from
inception through June 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, INCEPTION
---------------------- THROUGH
1999 1998 JUNE 30, 1997
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................... $ 289,472 $ 212,237 $ 21,532
Expenses............................................... 143,535 99,572 12,465
Operating income....................................... 145,936 112,665 9,067
Net income............................................. 147,849 113,323 9,109
</TABLE>
Summarized balance sheet information of the Joint Venture is as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current assets......................................................... $ 92,035 $ 66,665
Property and other long-term assets, net............................... 98,410 84,282
Current liabilities.................................................... 24,339 16,640
Long-term debt and other liabilities................................... 106,419 67,519
Equity................................................................. 59,687 66,788
</TABLE>
The Joint Venture is subject to various risks and uncertainties including,
but not limited to, gaming regulatory requirements. The Company's Annual Report
on Form 10-K includes a comprehensive set of the Company's risk factors,
including those related to the Joint Venture. The Joint Venture's operations are
subject to the licensing and regulatory requirements of multiple jurisdictions
throughout the United States and internationally. The Company's, IGT's and the
Joint Venture's gaming licenses are subject to certain conditions and periodic
renewal. Management believes that the conditions will continue to be satisfied
and that subsequent license renewals will be granted.
9. OTHER CURRENT LIABILITIES
Other current liabilities consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Labor, compensation and benefits........................................ $ 11,160 $ 3,906
Commission and royalties................................................ 2,600 3,519
Merger related accruals................................................. 11,541 --
Other accrued expenses.................................................. 17,185 7,703
--------- ---------
$ 42,486 $ 15,128
--------- ---------
--------- ---------
</TABLE>
63
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT
Long-term debt, including capitalized lease obligations, consists of the
following at June 30, 1999:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
Variable rate revolving line of credit, effective rate of 8.25%, due June 30,
2004......................................................................... $ 210,000
8.25% note payable in annual installments including interest, through September
2001......................................................................... 3,931
4.95% to 10.4% various notes and capital lease obligations, due in monthly
installments of $4 to $40 including interest, maturing through February
2004......................................................................... 2,925
-------------
216,856
Less current portion........................................................... 4,051
-------------
Long-term debt, net of current portion......................................... $ 212,805
-------------
-------------
</TABLE>
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING JUNE 30, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
2000........................................................................... $ 4,051
2001........................................................................... 1,532
2002........................................................................... 10,565
2003........................................................................... 50,395
2004........................................................................... 150,313
-------------
$ 216,856
-------------
-------------
</TABLE>
In June 1999, the Company entered into a $300 million unsecured revolving
credit facility (the "Credit Facility") expiring June 30, 2004. At the option of
the Company, the Credit Facility bears interest at a base rate approximating
prime, plus an applicable margin or LIBOR plus an applicable margin. The base
rate applicable margin may fluctuate between 0% and .625% and the LIBOR
applicable margin may fluctuate between 1.125% and 1.875% depending on the
Company's consolidated leverage ratio as defined in the Credit Facility
agreement. The effective rate of 8.25% reflects initial borrowings on the line
of credit at the base rate. Subsequent to June 30, 1999, the Company converted
all of its base rate borrowings to LIBOR borrowings, at rates substantially
reduced from the 8.25% effective rate at June 30, 1999.
The Credit Facility contains a reducing feature whereby the total amount of
the available facility is reduced quarterly beginning September 30, 2000 by
$12.5 million per quarter until the total facility has been reduced to $150
million. Principal payments are required on each quarterly reducing date to the
extent that total indebtedness outstanding under the facility exceeds the
reduced amount of the available facility. The Company may use up to $20 million
of the facility for letters of credit of which $8.5 million was outstanding at
June 30, 1999. The Credit Facility carries customary restrictive covenants
including, but not limited to maintenance of leverage and fixed charge coverage
ratios, limitations on capital expenditures, mergers and acquisitions,
disposition of assets, distributions, additional debt and liens. Management of
the Company believes it is in compliance with these covenants as of June 30,
1999. Upon closing in June 1999, the Company used $210 million in proceeds from
the credit facility to fund the Powerhouse Acquisition.
64
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
A reconciliation of income and shares for basic and diluted earnings per
share (EPS) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- --------------------------------- ---------------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- ----------- --------- --------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income............. $ 47,507 12,164 $ 3.91 $ 68,400 12,751 $ 5.36 $ 35,676 13,321 $ 2.68
Effect of Dilutive
Securities:
Options................ -- 264 (.09) -- 410 (.16) -- 221 (.05)
--------- --------- ----- --------- --------- ----- --------- --------- -----
Diluted EPS:
Net Income............. $ 47,507 12,428 $ 3.82 $ 68,400 13,161 $ 5.20 $ 35,676 13,542 $ 2.63
--------- --------- ----- --------- --------- ----- --------- --------- -----
--------- --------- ----- --------- --------- ----- --------- --------- -----
</TABLE>
12. STOCK, OPTIONS AND WARRANTS
As of June 30, 1999, 1,185,000 shares of common stock were reserved for
issuance upon exercise of employee and director stock options under an employee
stock option plan (the "Plan"). Employee and director options to purchase
1,018,200 shares, at the fair market values at the grant dates have been granted
as of June 30, 1999 under the Plan. As of June 30, 1999, options to purchase
664,650 shares had been exercised. These options vest in varying increments over
varying periods. An additional 40,000 shares are reserved for issuance upon
exercise of vested options at the IPO price that were granted to a relative of
certain minority stockholders (none of which were exercised at June 30, 1999).
Options to purchase an additional 600,000 shares were granted at the fair market
value at the grant date to certain employees outside of the Plan. These non-plan
options vest in varying increments over periods from nine months to eight years.
Summarized information for all options is as follows for the years ended
June 30:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of the year....... 1,060,925 $ 30.30 1,133,025 $ 24.98 670,700 $ 17.79
Granted................................ 28,800 52.50 124,000 56.03 600,000 31.88
Exercised.............................. (83,375) 20.63 (178,800) 14.31 (105,425) 12.54
Canceled............................... (12,800) 46.17 (17,300) 31.57 (32,250) 44.44
---------- ------ ---------- ------ ---------- ------
Outstanding, end of the year............. 993,550 $ 31.55 1,060,925 $ 30.30 1,133,025 $ 24.98
---------- ------ ---------- ------ ---------- ------
---------- ------ ---------- ------ ---------- ------
Exercisable at end of the year........... 426,050 $ 24.33 271,675 $ 21.51 245,475 $ 16.11
---------- ------ ---------- ------ ---------- ------
---------- ------ ---------- ------ ---------- ------
Options available for grant.............. 166,800 82,800 189,500
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
65
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK, OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ----------------------------
WEIGHTED NUMBER WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
OUTSTANDING AT REMAINING EXERCISE AT EXERCISE
RANGE OF EXERCISE PRICES JUNE 30, 1999 CONTRACTUAL LIFE PRICE JUNE 30, 1999 PRICE
- ---------------------------------- -------------- ------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$12.00 - $13.50................... 77,950 4.6 $ 12.33 77,950 $ 12.33
14.75 - 21.75................... 211,800 6.0 21.69 186,800 21.69
31.88 - 46.88................... 569,300 7.7 32.09 156,800 32.64
52.50 - 72.88................... 134,500 8.6 55.57 4,500 52.50
------- --- ------ ------------- ------
993,550 7.3 $ 31.50 426,050 $ 24.33
------- --- ------ ------------- ------
------- --- ------ ------------- ------
</TABLE>
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01
par value per share (the "Preferred Stock"), in one or more series, and to
designate the rights, preferences, limitations, and restrictions of and upon
shares of each series, including voting, redemption, and conversion rights. The
board of directors of the Company also may designate dividend rights and
preferences in liquidation.
The board of directors of Anchor authorized the Company to enter into a
Stockholder Rights Plan (the "Rights Plan") providing that one right (a "Right")
will be attached to each share of Common Stock as of a record date to be
determined by the board of directors of Anchor (the "Record Date"). In
connection with the authorization of the Rights Plan, the board of directors of
the Company has authorized the designation of 50,000 shares of Preferred Stock
as Series A Junior Participating Preferred Stock with a par value of $20.00 per
share. Each Right under the Rights Plan will entitle the registered holder to
purchase from the Company a unit (a "Unit") consisting of one one-thousandth of
a share of Series A Junior Participating Preferred stock at a purchase price of
$400 per Unit, subject to adjustment. The Rights convert in certain
circumstances into a right to purchase common stock or securities of a successor
entity.
The Company has adopted the disclosures-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company applies APB Opinion No.
25 and related interpretations in accounting for its stock options. Under APB
No. 25, no compensation cost has been recognized in the financial statements for
the Stock Option Plan or other stock options granted. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Had compensation cost for the stock option grants been
determined based on the fair value at the date of grant for awards consistent
with the provision of SFAS No. 123, the Company's net income per common and
common equivalent share would have decreased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income-as reported....................................... $ 47,507 $ 68,400 $ 35,676
Net income-pro forma......................................... 46,411 66,947 34,940
Basic earnings per share-as reported......................... $ 3.91 $ 5.36 $ 2.68
Basic earnings per share-pro forma........................... 3.82 5.25 2.62
Diluted earnings per share-as reported....................... $ 3.82 $ 5.20 $ 2.63
Diluted earnings per share-pro forma......................... 3.73 5.09 2.58
</TABLE>
66
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK, OPTIONS AND WARRANTS (CONTINUED)
The fair value of each option granted in fiscal years 1999, 1998 and 1997
was estimated using the following assumptions for the Black-Scholes option
pricing model: (i) no dividends; (ii) expected volatility 60% for 1999 and 1998,
and 50% for 1997; (iii) risk free interest rates averaging 5.75% for 1999 and 6%
for 1998 and 1997; and (iv) an expected average life of 3.1 years for 1999, 4.6
years for 1998 and 3.6 years for 1997. The weighted average fair value of the
options granted in 1999, 1998 and 1997 were $22.93, $30.00 and $9.82,
respectively. Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to July 1, 1995, the resulting pro forma net income may
not be representative of that to be expected in future years.
13. RELATED PARTY TRANSACTIONS
During each of the years ended June 30, 1998 and 1997, notes payable to the
principal stockholder resulted in interest expense of $224,000. The $2,800,000
principal amount of the notes consisted of unsecured notes payable bearing
interest at 8% that were due July 1, 1998. The notes were paid in full during
the year ended June 30, 1998.
14. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable per tax return:
Federal.................................................... $ 39,847 $ 47,258 $ 20,066
State...................................................... 4,012 4,168 1,370
--------- --------- ---------
43,859 51,426 21,436
--------- --------- ---------
Deferred:
Federal.................................................... (3,870) (9,510) (399)
State...................................................... (567) (876) (36)
--------- --------- ---------
(4,437) (10,386) (435)
--------- --------- ---------
Total.................................................... $ 39,422 $ 41,040 $ 21,001
--------- --------- ---------
--------- --------- ---------
</TABLE>
The historical provision for income taxes differs from the amount of income
tax determined by applying the applicable U. S. statutory federal income tax
rate to pre-tax income from continuing operations as a result of the following
differences:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statutory U. S. tax rate................................ $ 30,425 35.0% $ 38,304 35.0% $ 19,837 35.0%
Increase in tax resulting from:
State income taxes, net of federal tax effect......... 2,240 2.6 2,140 2.0 867 1.5
Acquired in-process research & development not
deductible.......................................... 6,125 7.0
Other, net............................................ 632 .7 596 .5 297 .6
--------- --- --------- --- --------- ---
Actual provision for income taxes....................... $ 39,422 45.3% $ 41,040 37.5% $ 21,001 37.1%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
67
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
SFAS No. 109 "Accounting for Income Taxes" requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or income tax
returns. Deferred income taxes included in other current assets and other
long-term assets on the consolidated balance sheets reflect the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The tax items comprising the Company's net deferred tax asset as of June 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
CURRENT
Deferred tax assets:
Accrued reserves & allowances........................................ $ 4,040 $ --
Other................................................................ 399 --
---------- ---------
Total current asset................................................ 4,439 --
---------- ---------
LONG-TERM
Deferred tax assets:
Accrued reserves & allowances........................................ 19,508 1,048
Net operating loss carryforwards..................................... 14,961 --
Expenses not currently deductible.................................... -- 10,832
Other................................................................ 1,505 33
Deferred tax liabilities:
Difference between book and tax basis of property.................... (12,785) (1,283)
Difference between book and tax basis of purchase accounting......... (9,620) --
Other................................................................ (2,391) --
Valuation allowance.................................................... (1,641) --
---------- ---------
Total long-term asset, net......................................... 9,537 10,630
---------- ---------
Net deferred tax asset................................................. $ 13,976 $ 10,630
---------- ---------
---------- ---------
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the
existence of, or generation of, taxable income in the periods in which those
temporary differences and carryforwards are deductible. The utilization of
deferred tax assets may also be dependent upon the existence or generation of
taxable income in specific subsidiaries. Management considers the timing of the
reversal of deferred tax liabilities, taxes paid in carryback years, projected
future taxable income and other tax planning strategies in assessing whether
deferred tax assets will be realizable. Based upon these considerations,
management has established a valuation reserve for deferred tax assets for which
it is more likely than not that the Company will not realize the benefits of
these deductible differences and carryforwards.
68
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
NON-CANCELABLE OPERATING LEASES
The Company leases parking lot space, office space, casino space, and slot
route locations under non-cancelable operating leases. The original terms of the
leases range from 1 to 15 years with various renewal options from 1 to 15 years.
The casino space lease has contingent rentals based on gaming revenues of the
casino occupying the space. The lease provides for a monthly payment of the
greater of a base amount of $12,000 or 5% of adjusted gross gaming revenue, with
a payment ceiling of $400,000 per year. Contingent rentals paid above base
amounts were $256,000, $256,000 and $254,000 for the years ended June 30, 1999,
1998, and 1997, respectively. Operating lease rental expense was $12,833,000,
$11,878,000, and $10,940,000 for the fiscal years ended June 30, 1999, 1998, and
1997, respectively.
Future minimum rentals under non-cancelable operating leases at June 30,
1999 are:
<TABLE>
<CAPTION>
(IN
YEAR ENDING JUNE 30, THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
2000........................................................................... $ 17,618
2001........................................................................... 16,428
2002........................................................................... 15,370
2003........................................................................... 14,521
2004........................................................................... 14,154
Thereafter..................................................................... 72,806
-------------
$ 150,896
-------------
-------------
</TABLE>
Included in deposits at June 30, 1999 and 1998 is a space lease deposit of
$3,300,000, which is held by the lessor of several slot route locations pursuant
to an agreement that provides that the deposit, or any portion thereof, may, at
the option of the Company, be applied against rents owing during the last two
years of the lease agreement. Also included in deposits are payments totaling
$10,750,000 to this lessor to extend the lease term for these locations through
the year 2010. The lease extension payments are amortized to rent expense on a
straight-line basis over the remaining term of the lease. The Company's slot
route operations at locations leased from this lessor accounted for more than
10% of the Company's total revenues for the years ended June 30, 1998 and 1997.
GAMING REGULATIONS
The Company's route operations are subject to the licensing and regulatory
requirements of the Nevada State Gaming Control Board and the Nevada Gaming
Commission. The Company's casino operations are subject to the licensing and
regulatory requirements of the Colorado Limited Gaming Control Commission. The
Company's proprietary games operations are subject to the licensing and
regulatory requirements of multiple jurisdictions throughout the United States
and Canada including the Nevada and Colorado requirements. As a result of the
Powerhouse Acquisition the Company will also be subject to regulations of the
New Mexico Racing Commission and the New Mexico Gaming Control Board as well as
regulations governing lotteries and pari-mutuel systems. The Company's gaming
licenses are subject to certain conditions and periodic renewal. Management
believes that the conditions will continue to be satisfied and that subsequent
license renewals will be granted.
69
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL MATTERS
The Colorado Central Station Casino is located in an area that has been
designated by the Environmental Protection Agency ("EPA") as a superfund site on
the National Priorities List, known as the Central City-Clear Creek Superfund
Site (the "Site") as a result of contamination from historic mining activity in
the area. The EPA is entitled to proceed against owners and operators of
properties located within the Site for remediation and response costs associated
with their properties and with the entire Site. The Colorado Central Station
Casino is located within the drainage basin of North Clear Creek and is
therefore subjected to potentially contaminated surface and ground water from
upstream mining-related sources. Soil and ground water samples on the Site
indicate that several contaminants exist in concentrations exceeding drinking
water standards. Records relating to historical uses of the Site are uncertain
as to whether mining actually occurred below the Company's property. Records do
indicate that an ore loading dock for a railroad depot was once located on an
adjacent property, and railroad tracks were present on the Company's property.
The Company applied the guidance in Statement of Position 96-1 "Environmental
Remediation Liabilities" and determined that a liability has not been incurred
as the criteria of this standard have not been met.
The Colorado Central Station Casino was constructed with foundation drains
to intercept ground water and direct it to a sump, which is then piped to a
leach field on the property. During the year ended June 30, 1999, the Colorado
Central Station Casino ("CCSC") experienced a large increase in the flow of
ground water into its sump. The increase in water flow eventually overwhelmed
the capacity of the leach field and required the water to be pumped into North
Clear Creek. The Colorado State Health Department-Water Quality Control
Commission indicated that a permit for the discharge of the water into North
Clear Creek would be required and that treatment of the discharge, prior to
placing it in North Clear Creek, may also be required. The potential cost of
treating the increased water flows could approach one half million dollars
although there is recent evidence that the water flow may be lessening.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with six executives and
various other management personnel. The agreements vary in starting date and are
for periods ranging from two to five years. Agreements with aggregate annual
salaries of less than $5,000,000 are terminable at the Company's option with 90
days to one year severance pay.
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.
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
70
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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.
In March 1996, Ladbroke Holdings del Peru S.A. ("Ladbroke") filed an action
in the United States District Court, Eastern District of Michigan, against
United Tote Company and the Company. The complaint alleged, in part, that United
Tote had violated an agreement that it had entered with Ladbroke to "supply,
install, commission and operate" a number of wagering terminals and that United
Tote, without justification, notified Ladbroke that it was terminating the
agreement. Ladbroke alleged that United Tote and the Company's conduct
constituted a breach of contract, wrongful termination of contract, fraudulent
misrepresentation and tortious interference with contract/business relationship.
The complaint does not specify a damage figure but seeks recovery of all
"actual, incidental and consequential damages." The Company and United Tote
filed a counterclaim against Ladbroke alleging claims for breach of certain of
Ladbroke's obligations under the contract and unjust enrichment. The
counterclaim alleged, in part, that Ladbroke failed to identify a sufficient
number of viable retailer locations, and failed to promote, design and market
the game so as to create sufficient demand. In August 1999, the Company and
United Tote settled all claims related to actions concerning Ladbroke. The
financial effect of the settlement is not materially adverse to the financial
position or the results of operations of the Company.
In February of 1999, GTECH Corporation filed a complaint for declaratory
judgment, injunction, and violation of the Public Records Law against the State
of Florida, Department of Lottery and AWI in the Circuit Court, Second Judicial
Circuit, in Leon County, Florida. The complaint requests the Circuit Court to
declare the contract between AWI and the Florida Lottery void in the event the
First District Court of Appeal of Florida upholds the Florida Lottery's decision
to award the on-line lottery services contract to AWI. Subsequent to the
execution of the renegotiated contract between AWI and the Florida Lottery in
March 1999, GTECH Corporation amended the complaint. The Company believes this
action is entirely without merit and intends to vigorously defend this action.
PURCHASE COMMITMENTS
At June 30, 1999, the Company had entered into various purchase agreements
to purchase gaming equipment for approximately $11,126,000.
71
<PAGE>
SELECTED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
Revenues................................................ $ 64,603 $ 61,837 $ 59,820 $ 62,671 $ 248,931
Income From Operations.................................. 29,669 25,941 22,452 5,753 83,815
Net Income.............................................. 19,048 16,647 14,472 (2,660) 47,507
Basic Earnings Per Share................................ $ 1.52 $ 1.37 $ 1.20 $ (0.22) $ 3.91
Diluted Earnings Per Share.............................. $ 1.48 $ 1.34 $ 1.18 $ (0.22) $ 3.82
</TABLE>
<TABLE>
<CAPTION>
1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
Revenues................................................ $ 54,481 $ 53,509 $ 59,184 $ 64,758 $ 231,932
Income From Operations.................................. 26,050 24,476 27,069 28,636 106,231
Net Income.............................................. 16,742 16,007 17,170 18,481 68,400
Basic Earnings Per Share................................ $ 1.29 $ 1.24 $ 1.37 $ 1.47 $ 5.36
Diluted Earnings Per Share.............................. $ 1.25 $ 1.20 $ 1.33 $ 1.42 $ 5.20
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the Company's proxy statement for the
November 22, 1999 Annual Meeting of Stockholders under the caption
"Management-Directors and Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the Company's proxy statement for the
November 22, 1999 Annual Meeting of Stockholders under the caption "Executive
Compensation and Other Information", provided that the Performance Graph and the
Compensation Committee Report on Executive Compensation are expressly not
incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the Company's proxy statement for the
November 22, 1999 Annual Meeting of Stockholders under the caption "Security
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the Company's proxy statement for the
November 22, 1999 Annual Meeting of Stockholders under the caption "Executive
Compensation and Other Information-Compensation Committee Interlocks and Insider
Participation."
72
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following documents are filed as part of this Report:
Consolidated Balance Sheets as of June 30, 1999 and 1998
Consolidated Statements of Income for the fiscal years ended June 30,
1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the fiscal years ended June 30,
1999, 1998, and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) The following accountants' reports and financial schedules for fiscal
years ending June 30, 1999, 1998, and 1997 are submitted herewith:
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
inapplicable
(a)(3) Management Contract or Compensatory Plan
See Index to Exhibits. Each of the following Exhibits described on the
Index to Exhibits is a management contract or compensatory plan: Exhibits
10.10 through 10.28 and 10.31 through 10.34.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of the
fiscal year ended June 30, 1999
(c) Exhibits
See Index to Exhibits.
(d) Financial Statement Schedule filed in Part IV of this report is as
follows:
SCHEDULES:
II--Valuation and Qualifying Accounts-Years Ended June 30, 1999, 1998,
and 1997.
73
<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/ MICHAEL D. RUMBOLZ
-----------------------------------------
Michael D. Rumbolz
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ GEOFFREY A. SAGE
-----------------------------------------
Geoffrey A. Sage
CHIEF FINANCIAL OFFICER
Date: September 23, 1999
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ STUART D. BEATH
- ------------------------------ Director September 23, 1999
Stuart D. Beath
/s/ RICHARD R. BURT
- ------------------------------ Director September 23, 1999
Richard R. Burt
/s/ MICHAEL B. FULTON
- ------------------------------ Director September 23, 1999
Michael B. Fulton
/s/ STANLEY E. FULTON
- ------------------------------ Director September 23, 1999
Stanley E. Fulton
- ------------------------------ Director
Richard M. Haddrill
/s/ GLEN J. HETTINGER
- ------------------------------ Director September 23, 1999
Glen J. Hettinger
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ELIZABETH F. JONES
- ------------------------------ Director September 23, 1999
Elizabeth F. Jones
/s/ MICHAEL D. RUMBOLZ
- ------------------------------ Director September 23, 1999
Michael D. Rumbolz
</TABLE>
75
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
2.1 Reorganization Agreement (the "Reorganization Agreement") among Anchor Gaming, Anchor Coin, D D Stud,
Inc., C. G. Investments, Inc., Colorado Grande Enterprises, Inc., New AC, New DD, New CG, and certain
stockholders of such corporations. (Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-71870)).
2.2 Amendment No. 1 to the Reorganization Agreement, dated as of January 25, 1993. (Incorporated by
reference to Exhibit 2.2 to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
2.3 Purchase Agreement (Global Gaming Products, L.L.C.) between Stanley E. Fulton, William Randall Adams,
Global Products, Inc., Michael S. Stone, Thomas J. Matthews, James R. Purdy, and Anchor Gaming, dated as
of December 22, 1993. (Incorporated by reference to Exhibit 2.3 to the Company's Registration Statement
on Form S-1 (Registration No. 33-71870)).
2.4 Purchase Agreement (Global Gaming Distributors, Inc.) between Global Gaming Distributors, Michael S.
Stone, Thomas J. Matthews, James R. Purdy, and Anchor Gaming, dated as of December 22, 1993.
(Incorporated by reference to Exhibit 2.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-71870)).
2.5 Agreement and Plan of Merger dated as of March 9, 1999 among Anchor Gaming, Olive AP Acquisition
Corporation and Powerhouse Technologies, Inc. (Incorporated by reference to Exhibit 2.1 of the Company's
Current Report on Form 8-K dated March 12, 1999.)
2.6 Amendment No. 1 to Merger Agreement dated as of March 19, 1999 among Anchor Gaming, Olive AP Acquisition
Corporate and Powerhouse Technologies, Inc. (Incorporated by reference to Exhibit 2.2 of the Company's
Current Report on Form 8-K dated July 14, 1999.)
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))
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
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)).
9.10* Irrevocable Proxy of Michael B. Fulton in favor of Stanley E. Fulton dated January 19, 1999.
9.11* Irrevocable Proxy of Stanley M. Fulton in favor of Stanley E. Fulton dated January 19, 1999.
9.12* Irrevocable Proxy of Elizabeth F. Jones in favor of Stanley E. Fulton dated January 19, 1999.
9.13* Irrevocable Proxy of Lucinda F. Tischer in favor of Stanley E. Fulton dated January 19, 1999.
9.14* Irrevocable Proxy of Deborah J. Fulton in favor of Stanley E. Fulton dated January 19, 1999.
9.15* Irrevocable Proxy of Maryland Park Apartments, Inc. in favor of Stanley E. Fulton dated January 22,
1999.
9.16* Irrevocable Proxy of Virginia L. Fulton in favor of Stanley E. Fulton January 19, 1999.
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)).
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
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 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)).
10.15 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)).
10.16 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)).
10.17 Option Agreement between William Randall Adams and Anchor Gaming. (Incorporated by reference to Exhibit
10.21 to the Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.18 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)).
10.19 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)).
10.20 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)).
10.21 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)).
10.22 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)).
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- -----------
<C> <S>
10.23 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)).
10.24 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)).
10.25 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)).
10.26 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)).
10.27 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)).
10.28 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)).
10.29 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)).
10.30 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)).
10.31 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)).
10.32 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)).
10.33 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)).
10.34* Consulting Agreement by and between Anchor Gaming, a Nevada corporation and Richard M. Haddrill dated as
of April 13, 1999.
10.35* Loan Agreement, dated as of June 29, 1999 among Anchor Gaming as borrower, the lenders therein named,
and Bank of America National Trust and Savings Association as administrative agent.
10.36* Form of Stock Option Agreement.
21.1* List of Subsidiary Corporations.
27.1* Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith
79
<PAGE>
ANCHOR GAMING
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COST AND OTHER BALANCE AT
(IN THOUSANDS) OF YEAR EXPENSES ADJUSTMENTS(1) END OF YEAR
- ----------------------------------------------------------------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Year Ended June 30, 1997:
Allowance for doubtful accounts (accounts receivable).......... $ 279 $ 438 $ (51) $ 666
Allowance for doubtful accounts (notes receivable)............. 915 22(2) (15) 922
----------- ----- ------ -----------
$ 1,194 $ 460 $ (66) $ 1,588
----------- ----- ------ -----------
----------- ----- ------ -----------
Year Ended June 30, 1998:
Allowance for doubtful accounts (accounts receivable).......... $ 666 $ 812 $ (146) $ 1,332
Allowance for doubtful accounts (notes receivable)............. 922 33 (626) 329
----------- ----- ------ -----------
$ 1,588 $ 845 $ (772) $ 1,661
----------- ----- ------ -----------
----------- ----- ------ -----------
Year Ended June 30, 1999:
Allowance for doubtful accounts (accounts receivable).......... $ 1,332 423 $ 770 $ 2,525
Allowance for doubtful accounts (notes receivable)............. 329 25 294 648
Allowance for inventory valuation.............................. -- 500 3,900 4,400
----------- ----- ------ -----------
$ 1,661 $ 948 $ 4,964 $ 7,573
----------- ----- ------ -----------
----------- ----- ------ -----------
</TABLE>
- ------------------------
(1) Includes amounts deemed to be uncollectible, amounts recovered and amounts
added as a result of Powerhouse Acquisition that were not charged to expense
in consolidated statements
(2) Primarily charged to development costs included in selling, general, and
administrative expenses
80
<PAGE>
EXHIBIT 9.10
Irrevocable Proxy of Michael B. Fulton
<PAGE>
January 19, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including, without
limitation, any irrevocable proxy in favor of Stanley E. Fulton, to which
revocation Mr. Fulton does hereby consent) and irrevocably appoints Stanley E.
Fulton and his designees and each of them (the "PROXYHOLDER"), effective as of
the date of this letter as the proxy of the undersigned to attend any and all
meetings of stockholders of Anchor Gaming and any adjournments or postponements
of such meetings (collectively, a "MEETING"), to vote for and in the name,
place, and stead of the undersigned at any Meeting all shares of Common Stock,
par value $.01 per share (the "COMMON SHARES"), beneficially owned directly or
indirectly by the undersigned on the date of this letter and any other shares of
capital stock or other voting security of Anchor Gaming, a Nevada corporation
("ANCHOR GAMING"), hereafter beneficially owned, directly or indirectly, by the
undersigned (collectively, the "PROXY SHARES"), to execute written consents to
corporate action with respect to the Proxy Shares, and to represent and
otherwise act for the undersigned with the same force and effect as if the
undersigned were personally present at such Meeting or executing such consent
with respect to any matter. The undersigned agrees to inform the Proxyholder
promptly of any change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i) the
undersigned has all necessary power and authority to execute and deliver this
proxy; (ii) none of the Proxy Shares is subject to any voting trust or any other
agreement, arrangement, or understanding with respect to the voting of such
shares other than this proxy that is not effectively revoked by this proxy; and
(iii) the undersigned owns all of the Proxy Shares free and clear of any lien,
claim, charge, security interest, or other adverse claim whatsoever. The
undersigned and the Proxyholder agree that the undersigned may offer and sell
the Proxy Shares without restriction under this proxy, and that upon such sale
the sold Proxy Shares will be released from this proxy. The undersigned further
agrees that until such sale, the Proxy Shares will bear an appropriate legend
referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31, 2000.
The undersigned acknowledges that monetary damages would be an inadequate remedy
for a breach of the provisions of this proxy and that (in addition to any other
remedy available at law) the obligations of the undersigned and the rights of
the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution, and
to file this proxy and any substitution or revocation of this proxy with the
Secretary of Anchor Gaming. The undersigned and the Proxyholder further agree
that in the event of the death, or during the period of mental incapacity, of
the Proxyholder, Michael B. Fulton and Elizabeth F. Jones will, acting together,
in each instance by an instrument signed by each of such persons, be substituted
for the Proxyholder with the same authority as the Proxyholder.
/s/ MICHAEL B. FULTON
------------------------
Name: MICHAEL B. FULTON
<PAGE>
EXHIBIT 9.11
Irrevocable Proxy of Stanley M. Fulton
<PAGE>
January 19, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including, without
limitation, any irrevocable proxy in favor of Stanley E. Fulton, to which
revocation Mr. Fulton does hereby consent) and irrevocably appoints Stanley E.
Fulton and his designees and each of them (the "PROXYHOLDER"), effective as of
the date of this letter as the proxy of the undersigned to attend any and all
meetings of stockholders of Anchor Gaming and any adjournments or postponements
of such meetings (collectively, a "MEETING"), to vote for and in the name,
place, and stead of the undersigned at any Meeting all shares of Common Stock,
par value $.01 per share (the "COMMON SHARES"), beneficially owned directly or
indirectly by the undersigned on the date of this letter and any other shares of
capital stock or other voting security of Anchor Gaming, a Nevada corporation
("ANCHOR GAMING"), hereafter beneficially owned, directly or indirectly, by the
undersigned (collectively, the "PROXY SHARES"), to execute written consents to
corporate action with respect to the Proxy Shares, and to represent and
otherwise act for the undersigned with the same force and effect as if the
undersigned were personally present at such Meeting or executing such consent
with respect to any matter. The undersigned agrees to inform the Proxyholder
promptly of any change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i) the
undersigned has all necessary power and authority to execute and deliver this
proxy; (ii) none of the Proxy Shares is subject to any voting trust or any other
agreement, arrangement, or understanding with respect to the voting of such
shares other than this proxy that is not effectively revoked by this proxy; and
(iii) the undersigned owns all of the Proxy Shares free and clear of any lien,
claim, charge, security interest, or other adverse claim whatsoever. The
undersigned and the Proxyholder agree that the undersigned may offer and sell
the Proxy Shares without restriction under this proxy, and that upon such sale
the sold Proxy Shares will be released from this proxy. The undersigned further
agrees that until such sale, the Proxy Shares will bear an appropriate legend
referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31, 2000.
The undersigned acknowledges that monetary damages would be an inadequate remedy
for a breach of the provisions of this proxy and that (in addition to any other
remedy available at law) the obligations of the undersigned and the rights of
the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution, and
to file this proxy and any substitution or revocation of this proxy with the
Secretary of Anchor Gaming. The undersigned and the Proxyholder further agree
that in the event of the death, or during the period of mental incapacity, of
the Proxyholder, Michael B. Fulton and Elizabeth F. Jones will, acting together,
in each instance by an instrument signed by each of such persons, be substituted
for the Proxyholder with the same authority as the Proxyholder.
/S/ STANLEY M. FULTON
----------------------
Name: STANLEY M. FULTON
<PAGE>
EXHIBIT 9.12
Irrevocable Proxy of Elizabeth F. Jones
<PAGE>
January 19, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including,
without limitation, any irrevocable proxy in favor of Stanley E. Fulton, to
which revocation Mr. Fulton does hereby consent) and irrevocably appoints
Stanley E. Fulton and his designees and each of them (the "PROXYHOLDER"),
effective as of the date of this letter as the proxy of the undersigned to
attend any and all meetings of stockholders of Anchor Gaming and any
adjournments or postponements of such meetings (collectively, a "MEETING"),
to vote for and in the name, place, and stead of the undersigned at any
Meeting all shares of Common Stock, par value $.01 per share (the "COMMON
SHARES"), beneficially owned directly or indirectly by the undersigned on the
date of this letter and any other shares of capital stock or other voting
security of Anchor Gaming, a Nevada corporation ("ANCHOR GAMING"), hereafter
beneficially owned, directly or indirectly, by the undersigned (collectively,
the "PROXY SHARES"), to execute written consents to corporate action with
respect to the Proxy Shares, and to represent and otherwise act for the
undersigned with the same force and effect as if the undersigned were
personally present at such Meeting or executing such consent with respect to
any matter. The undersigned agrees to inform the Proxyholder promptly of any
change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i)
the undersigned has all necessary power and authority to execute and deliver
this proxy; (ii) none of the Proxy Shares is subject to any voting trust or
any other agreement, arrangement, or understanding with respect to the voting
of such shares other than this proxy that is not effectively revoked by this
proxy; and (iii) the undersigned owns all of the Proxy Shares free and clear
of any lien, claim, charge, security interest, or other adverse claim
whatsoever. The undersigned and the Proxyholder agree that the undersigned
may offer and sell the Proxy Shares without restriction under this proxy, and
that upon such sale the sold Proxy Shares will be released from this proxy.
The undersigned further agrees that until such sale, the Proxy Shares will
bear an appropriate legend referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31,
2000. The undersigned acknowledges that monetary damages would be an
inadequate remedy for a breach of the provisions of this proxy and that (in
addition to any other remedy available at law) the obligations of the
undersigned and the rights of the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution,
and to file this proxy and any substitution or revocation of this proxy with
the Secretary of Anchor Gaming. The undersigned and the Proxyholder further
agree that in the event of the death, or during the period of mental
incapacity, of the Proxyholder, Michael B. Fulton and Elizabeth F. Jones
will, acting together, in each instance by an instrument signed by each of
such persons, be substituted for the Proxyholder with the same authority as
the Proxyholder.
/s/ Elizabeth F. Jones
-------------------------
Name: Elizabeth F. Jones
-------------------------
<PAGE>
EXHIBIT 9.13
Irrevocable Proxy of Lucinda F. Tischer
<PAGE>
January 19, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including,
without limitation, any irrevocable proxy in favor of Stanley E. Fulton, to
which revocation Mr. Fulton does hereby consent) and irrevocably appoints
Stanley E. Fulton and his designees and each of them (the "PROXYHOLDER"),
effective as of the date of this letter as the proxy of the undersigned to
attend any and all meetings of stockholders of Anchor Gaming and any
adjournments or postponements of such meetings (collectively, a "MEETING"),
to vote for and in the name, place, and stead of the undersigned at any
Meeting all shares of Common Stock, par value $.01 per share (the "COMMON
SHARES"), beneficially owned directly or indirectly by the undersigned on the
date of this letter and any other shares of capital stock or other voting
security of Anchor Gaming, a Nevada corporation ("ANCHOR GAMING"), hereafter
beneficially owned, directly or indirectly, by the undersigned (collectively,
the "PROXY SHARES"), to execute written consents to corporate action with
respect to the Proxy Shares, and to represent and otherwise act for the
undersigned with the same force and effect as if the undersigned were
personally present at such Meeting or executing such consent with respect to
any matter. The undersigned agrees to inform the Proxyholder promptly of any
change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i)
the undersigned has all necessary power and authority to execute and deliver
this proxy; (ii) none of the Proxy Shares is subject to any voting trust or
any other agreement, arrangement, or understanding with respect to the voting
of such shares other than this proxy that is not effectively revoked by this
proxy; and (iii) the undersigned owns all of the Proxy Shares free and clear
of any lien, claim, charge, security interest, or other adverse claim
whatsoever. The undersigned and the Proxyholder agree that the undersigned
may offer and sell the Proxy Shares without restriction under this proxy, and
that upon such sale the sold Proxy Shares will be released from this proxy.
The undersigned further agrees that until such sale, the Proxy Shares will
bear an appropriate legend referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31,
2000. The undersigned acknowledges that monetary damages would be an
inadequate remedy for a breach of the provisions of this proxy and that (in
addition to any other remedy available at law) the obligations of the
undersigned and the rights of the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution,
and to file this proxy and any substitution or revocation of this proxy with
the Secretary of Anchor Gaming. The undersigned and the Proxyholder further
agree that in the event of the death, or during the period of mental
incapacity, of the Proxyholder, Michael B. Fulton and Elizabeth F. Jones
will, acting together, in each instance by an instrument signed by each of
such persons, be substituted for the Proxyholder with the same authority as
the Proxyholder.
/s/ Lucinda F. Tischer
-------------------------
Name: Lucinda F. Tischer
-------------------
<PAGE>
EXHIBIT 9.14
Irrevocable Proxy of Deborah J. Fulton
<PAGE>
January 19, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including,
without limitation, any irrevocable proxy in favor of Stanley E. Fulton, to
which revocation Mr. Fulton does hereby consent) and irrevocably appoints
Stanley E. Fulton and his designees and each of them (the "PROXYHOLDER"),
effective as of the date of this letter as the proxy of the undersigned to
attend any and all meetings of stockholders of Anchor Gaming and any
adjournments or postponements of such meetings (collectively, a "MEETING"),
to vote for and in the name, place, and stead of the undersigned at any
Meeting all shares of Common Stock, par value $.01 per share (the "COMMON
SHARES"), beneficially owned directly or indirectly by the undersigned on the
date of this letter and any other shares of capital stock or other voting
security of Anchor Gaming, a Nevada corporation ("ANCHOR GAMING"), hereafter
beneficially owned, directly or indirectly, by the undersigned (collectively,
the "PROXY SHARES"), to execute written consents to corporate action with
respect to the Proxy Shares, and to represent and otherwise act for the
undersigned with the same force and effect as if the undersigned were
personally present at such Meeting or executing such consent with respect to
any matter. The undersigned agrees to inform the Proxyholder promptly of any
change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i)
the undersigned has all necessary power and authority to execute and deliver
this proxy; (ii) none of the Proxy Shares is subject to any voting trust or
any other agreement, arrangement, or understanding with respect to the voting
of such shares other than this proxy that is not effectively revoked by this
proxy; and (iii) the undersigned owns all of the Proxy Shares free and clear
of any lien, claim, charge, security interest, or other adverse claim
whatsoever. The undersigned and the Proxyholder agree that the undersigned
may offer and sell the Proxy Shares without restriction under this proxy, and
that upon such sale the sold Proxy Shares will be released from this proxy.
The undersigned further agrees that until such sale, the Proxy Shares will
bear an appropriate legend referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31,
2000. The undersigned acknowledges that monetary damages would be an
inadequate remedy for a breach of the provisions of this proxy and that (in
addition to any other remedy available at law) the obligations of the
undersigned and the rights of the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution,
and to file this proxy and any substitution or revocation of this proxy with
the Secretary of Anchor Gaming. The undersigned and the Proxyholder further
agree that in the event of the death, or during the period of mental
incapacity, of the Proxyholder, Michael B. Fulton and Elizabeth F. Jones
will, acting together, in each instance by an instrument signed by each of
such persons, be substituted for the Proxyholder with the same authority as
the Proxyholder.
/s/ DEBORAH J. FULTON
------------------------------------
Name: DEBORAH J. FULTON
------------------------------
<PAGE>
EXHIBIT 9.15
Irrevocable Proxy of Maryland Park Apartments, Inc.
<PAGE>
January 21, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including, without
limitation, any irrevocable proxy in favor of Stanley E. Fulton, to which
revocation Mr. Fulton does hereby consent) and irrevocably appoints Stanley E.
Fulton and his designees and each of them (the "PROXYHOLDER"), effective as of
the date of this letter as the proxy of the undersigned to attend any and all
meetings of stockholders of Anchor Gaming and any adjournments or postponements
of such meetings (collectively, a "MEETING"), to vote for and in the name,
place, and stead of the undersigned at any Meeting all shares of Common Stock,
par value $.01 per share (the "COMMON SHARES"), beneficially owned directly or
indirectly by the undersigned on the date of this letter and any other shares of
capital stock or other voting security of Anchor Gaming, a Nevada corporation
("ANCHOR GAMING"), hereafter beneficially owned, directly or indirectly, by the
undersigned (collectively, the "PROXY SHARES"), to execute written consents to
corporate action with respect to the Proxy Shares, and to represent and
otherwise act for the undersigned with the same force and effect as if the
undersigned were personally present at such Meeting or executing such consent
with respect to any matter. The undersigned agrees to inform the Proxyholder
promptly of any change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i) the
undersigned has all necessary power and authority to execute and deliver this
proxy; (ii) none of the Proxy Shares is subject to any voting trust or any other
agreement, arrangement, or understanding with respect to the voting of such
shares other than this proxy that is not effectively revoked by this proxy; and
(iii) the undersigned owns all of the Proxy Shares free and clear of any lien,
claim, charge, security interest, or other adverse claim whatsoever. The
undersigned and the Proxyholder agree that the undersigned may offer and sell
the Proxy Shares without restriction under this proxy, and that upon such sale
the sold Proxy Shares will be released from this proxy. The undersigned further
agrees that until such sale, the Proxy Shares will bear an appropriate legend
referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31, 2000.
The undersigned acknowledges that monetary damages would be an inadequate remedy
for a breach of the provisions of this proxy and that (in addition to any other
remedy available at law) the obligations of the undersigned and the rights of
the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution, and
to file this proxy and any substitution or revocation of this proxy with the
Secretary of Anchor Gaming. The undersigned and the Proxyholder further agree
that in the event of the death, or during the period of mental incapacity, of
the Proxyholder, Michael B. Fulton and Elizabeth F. Jones will, acting together,
in each instance by an instrument signed by each of such persons, be substituted
for the Proxyholder with the same authority as the Proxyholder.
Maryland Park Apartments
/s/ MERLE S. ELLIOT, TREASURER
--------------------------------
Name: MERLE S. ELLIOT, TREASURER
--------------------------
<PAGE>
EXHIBIT 9.16
Irrevocable Proxy of Virginia L. Fulton
<PAGE>
January 19, 1999
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, NV 89119-3726
Re: Irrevocable Proxy for Stock of Anchor Gaming
Ladies and Gentlemen:
The proxy granted by this letter is being granted in connection with
the execution and delivery of similar proxies by other members of the Fulton
family and in reliance upon such action by such other members of the Fulton
family. The undersigned hereby revokes any previous proxies (including,
without limitation, any irrevocable proxy in favor of Stanley E. Fulton, to
which revocation Mr. Fulton does hereby consent) and irrevocably appoints
Stanley E. Fulton and his designees and each of them (the "PROXYHOLDER"),
effective as of the date of this letter as the proxy of the undersigned to
attend any and all meetings of stockholders of Anchor Gaming and any
adjournments or postponements of such meetings (collectively, a "MEETING"),
to vote for and in the name, place, and stead of the undersigned at any
Meeting all shares of Common Stock, par value $.01 per share (the "COMMON
SHARES"), beneficially owned directly or indirectly by the undersigned on the
date of this letter and any other shares of capital stock or other voting
security of Anchor Gaming, a Nevada corporation ("ANCHOR GAMING"), hereafter
beneficially owned, directly or indirectly, by the undersigned (collectively,
the "PROXY SHARES"), to execute written consents to corporate action with
respect to the Proxy Shares, and to represent and otherwise act for the
undersigned with the same force and effect as if the undersigned were
personally present at such Meeting or executing such consent with respect to
any matter. The undersigned agrees to inform the Proxyholder promptly of any
change in the number of Proxy Shares.
The undersigned represents and warrants to the Proxyholder that (i)
the undersigned has all necessary power and authority to execute and deliver
this proxy; (ii) none of the Proxy Shares is subject to any voting trust or
any other agreement, arrangement, or understanding with respect to the voting
of such shares other than this proxy that is not effectively revoked by this
proxy; and (iii) the undersigned owns all of the Proxy Shares free and clear
of any lien, claim, charge, security interest, or other adverse claim
whatsoever. The undersigned and the Proxyholder agree that the undersigned
may offer and sell the Proxy Shares without restriction under this proxy, and
that upon such sale the sold Proxy Shares will be released from this proxy.
The undersigned further agrees that until such sale, the Proxy Shares will
bear an appropriate legend referring to this proxy.
This proxy is coupled with an interest and is expressly made
irrevocable and will expire at 5:00 p.m., Las Vegas time, on December 31,
2000. The undersigned acknowledges that monetary damages would be an
inadequate remedy for a breach of the provisions of this proxy and that (in
addition to any other remedy available at law) the obligations of the
undersigned and the rights of the Proxyholder are specifically enforceable.
<PAGE>
The undersigned authorizes the Proxyholder to substitute any other
person or entity to act under this proxy, to revoke any such substitution, and
to file this proxy and any substitution or revocation of this proxy with the
Secretary of Anchor Gaming. The undersigned and the Proxyholder further agree
that in the event of the death or during the period of mental incapacity of the
Proxyholder, Virginia L. Fulton will be substituted for the Proxyholder with the
same authority as the Proxyholder.
/s/ Virginia L. Fulton
-------------------------
Virginia L. Fulton
<PAGE>
Exhibit 10.34
CONSULTING AGREEMENT
This CONSULTING AGREEMENT (this "AGREEMENT") is made as of April 13,
1999 (the "EFFECTIVE DATE") by and between Anchor Gaming, a Nevada
corporation (the "COMPANY"), and Richard M. Haddrill ("CONSULTANT").
BACKGROUND
The Company has entered into an Agreement and Plan of Merger, dated
as of March 9, 1999 (the "MERGER AGREEMENT"), with Powerhouse Technologies,
Inc., a Delaware corporation ("POWERHOUSE"), pursuant to which Anchor
Powerhouse Acquisition Corporation, a Delaware corporation, a wholly-owned
subsidiary of the Company will merge (the "MERGER") with and into Powerhouse.
Consultant serves as the President and Chief Executive Officer of
Powerhouse pursuant to an employment agreement with Powerhouse, dated as of
January 1, 1998, which by its terms is scheduled to expire on January 1, 2002
(the "EMPLOYMENT AGREEMENT") and as such has gained certain knowledge of the
business and affairs of Powerhouse and its policies, methods, personnel, and
plans for the future.
Effective as of the day and time of the Merger (the "EFFECTIVE
TIME"), the parties desire to terminate Consultant's position as President
and Chief Executive Officer of Powerhouse and enter into a consulting
relationship, under which Consultant would provide services to the Company in
accordance with the terms and conditions of this Agreement.
Each of Consultant and the Company agree that the terms, conditions,
and provisions of this Agreement are fair and reasonable and are necessary to
protect the legitimate business interests of each other.
THEREFORE, in consideration of the mutual promises and covenants set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are mutually acknowledged, the Company and Consultant
agree as follows:
1. STATUS OF EMPLOYMENT AGREEMENT. As of the Effective Time,
Consultant hereby terminates his employment pursuant to Section 8(d) of the
Employment Agreement as President and Chief Executive Officer of Powerhouse,
and the Company hereby acknowledges Powerhouse's acceptance of such
resignation under the Employment Agreement. The Company and Consultant hereby
agree that upon payment to the Consultant of the amounts set forth on
SCHEDULE 1 to this Agreement, the only terms of the existing Employment
Agreement that will remain to be performed by the Company are as listed on
SCHEDULE 1 to this Agreement. Consultant agrees that his obligations under
the Employment Agreement will survive the execution of this Agreement
pursuant to the terms of the Employment Agreement.
1
<PAGE>
2. CONSULTING SERVICES. Subject to the terms and conditions set
forth in this Agreement, the Company hereby agrees to engage Consultant as an
independent business consultant for the Term (as defined in Section 3). In
such position, Consultant shall perform such consulting service for the
Company diligently and to the reasonable satisfaction of the Company's Board
of Directors. During the first six month period after the Effective Time (the
"INITIAL PERIOD"), Consultant will devote his full professional time and
efforts to the business and operations of the Company. During the Initial
Period, Consultant shall maintain his residence within 50 miles of Las Vegas,
Nevada. Thereafter, and during the remaining Term (as defined in SECTION 3),
Consultant will be available to the Company to devote himself to the tasks
specified by the Board of Directors of the Company and the Chairman of the
Board and Chief Executive Officer of the Company as follows (a) for the
second six-month period following the Effective Time, for up to 24 hours per
month; (b) for the third six month period following the Effective Time, for
up to 16 hours per month; and (c) for the fourth six month period following
the Effective Time, for up to 8 hours per month. Consultant will report to
the Chief Executive Officer of the Company or the Chairman of the Board of
the Company. Consultant agrees to serve as a member of the Board of Directors
of the Company for two years from the Effective Time.
3. TERM AND TERMINATION. The term of Consultant's engagement under
this Agreement (the "TERM") will commence on the Effective Time and continue
until the second anniversary of the Effective Time. The Company may end the
Term earlier under the following circumstances:
(a) in the event of Consultant's death;
(b) if Consultant is totally disabled so that he has been
unable to perform his duties and responsibilities hereunder for a
period of 180 consecutive days;
(c) if the Company's Board of Directors terminates this
Agreement with "cause" (as defined below); or
(d) if Consultant materially breaches the terms of this
Agreement and such breach remains uncured after reasonable written
notice of and opportunity to cure such breach.
If the Company terminates this Agreement pursuant to this SECTION 3 prior to
the stated end of the Term, Consultant (or his representative in the event of
his death) will be entitled to receive payment of all compensation described
herein, except that amounts due under SECTION 4 will only be due through the
date of termination. The provisions of SECTIONS 6 and 7 hereof will survive
any termination in accordance with their terms. As used in this Agreement,
termination with "CAUSE" means any termination evidenced by a finding adopted
in good faith by the Board of Director of the Company that the Consultant (i)
willfully and continually failed to substantially perform his duties under
this Agreement (other than a failure resulting from the Consultant's
incapacity due to physical or mental illness) and such failure continues
after written notice to the Consultant
2
<PAGE>
providing a reasonable description of the basis for the determination that
the Consultant has failed to perform his duties, (ii) has been indicted for
or has entered into a plea bargain with respect to a criminal offense other
than misdemeanors not disclosable under the federal securities laws, (iii)
has breached this Agreement in any material respect and such breach is not
susceptible to remedy or cure or, is susceptible to remedy or cure and no
material damage to the Company has occurred, is not cured or remedied
reasonably promptly after written notice to the Consultant providing a
reasonable description of the breach, (iv) engaged in conduct to the material
detriment of the Company that is dishonest, fraudulent, unlawful or grossly
negligent or which is not in compliance with the Company's Code of Conduct or
similar applicable set of standards or conduct and business practices set
forth in writing and provided to the Consultant prior to such conduct, (v)
has been found by any regulatory authority, gaming commission, lottery agency
or similar authority in any jurisdiction in which the Company is conducting
business or intends to submit a proposal or conduct business unsuitable or
unfit to continue to perform his obligations to the Company under this
Agreement, and is the subject of a written notice received by the Company
from such authority of such a finding or (vi) has failed to file appropriate
applications with, provide requested information to, or otherwise fails to
cooperate with, any such authority. No act, nor failure to act, on the
Consultant's part, shall be considered "willful" for purposes of (i) above
unless he has acted or failed to act with an absence of good faith and
without a reasonable belief that his action or failure to act was in the best
interest of the Company.
4. COMPENSATION.
(a) During the Term, as compensation for the performance of
Consultant's services under this Agreement, the Company will pay
Consultant as follows:
(i) $150,000 per month during the Initial
Period; and
(ii) $23,000 per month for the remainder of the
Term.
(b) As consideration for the restrictions in
SECTION 6, the Company will pay Consultant
$450,000 in immediately available funds
within five (5) days after the Effective
Time.
(c) As compensation for the performance of
the Board of Director duties the same
compensation and benefits that it pays to
other members of its Board of Directors that
are not employees or officers of the
Company.
5. CONSULTANT BENEFITS; REIMBURSEMENT OF EXPENSES.
(a) The Company will pay Consultant at the Effective Time
$120,000 for relocation costs to the greater Las Vegas area.
(b) The Company will reimburse Consultant for his reasonable
travel and entertainment expenses as well as licensing costs incurred
in connection with his duties
3
<PAGE>
under this Agreement in accordance with the policies of the Company in
effect from time to time .
6. RESTRICTIVE COVENANT. In addition to any other covenants,
contracts, or agreements to which Consultant may be subject, during the Term
and for a period of two (2) years from the Effective Time (the "RESTRICTED
PERIOD"), Consultant will not without the written consent of the Chairman or
Chief Executive Officer of the Company, directly or indirectly, either as an
individual or as a consultant, partner, officer, director, over 5%
shareholder in any entity the securities of which are listed on a national
securities exchange or the NASDAQ National Market or investor, trustee,
agent, or advisor or in any other capacity whatsoever, of any Person (as
defined below):
(a) conduct or assist others in conducting any business that
is in competition with the business of the Company (the "COMPANY'S
BUSINESS") in any market area in the continental United States or
Europe;
(b) recruit, hire, assist others in recruiting or hiring,
discuss employment with, or refer to others for employment
(collectively referred to as "RECRUITING ACTIVITY") any individual who
is, or within the 6-month period immediately preceding the date of any
such Recruiting Activity was, at any time, an employee of or consultant
to the Company or its Affiliates (as defined below); or
(c) solicit any customer, supplier, client, distributor,
dealer or independent salesperson of the Company or any of its
Affiliates that has a relationship with the Company or its Affiliates
in the continental United States or Europe; or induce, attempt to
induce or assist any other Person in inducing or attempting to induce,
directly or indirectly, any such customer, dealer, distributor, or
independent salesperson to discontinue their relationship with the
Company or its Affiliates.
It is the desire and intent of the parties to this Agreement that
the provisions of this SECTION 6 be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction
in which enforcement is sought. Consultant agrees and warrants that the scope
of this covenant contained in this SECTION 6 is reasonable as to time, area,
and persons covered and is necessary to protect the legitimate business
interest of the Company. It is further agreed that such covenant will be
regarded as divisible and will be operative as to time, area, and persons to
the extent that it may be so operative, and if any part of it is declared
invalid, unenforceable, or void as to time, area, or persons covered, the
validity and enforceability of the remainder will not be affected.
The term "Affiliate" is used in this Agreement to indicate a
relationship with one or more Persons and when used shall mean (a) any
corporation or organization of which such Person is an officer, director, or
partner or is directly or indirectly the beneficial owner of five percent
(5%) or more of any class of equity securities or financial interest therein;
(b) any trust or other estate in which such Person has a beneficial interest
or as to which such Person serves as trustee or in any similar fiduciary
capacity; (c) any relative of such person being related to the person in
question
4
<PAGE>
within the second degree; (d) any director or officer of the Company or its
Affiliates; or (e) any Person that directly or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control
with, the Person specified. The term "Person" as used in this Agreement means
an individual, corporation, association, partnership, trust, or
unincorporated organization, or any governmental or regulatory body or other
entity.
7. CONFIDENTIALITY.
(a) Consultant acknowledges that the trade secrets, plans,
strategies, and technology and processes of the Company and its
Affiliates, as they may exist from time to time, and information
concerning the products, services, production, reconditioning,
development, technology, and all technical information, procurement and
sales activities and procedures, customer, supplier, or distributor
lists, promotion and pricing techniques, and credit and financial data
concerning customers, suppliers, and distributors of the Company are
valuable, special, and unique assets of the Company (collectively,
"CONFIDENTIAL INFORMATION"). In light of the competitive nature of the
industry in which the business of the Company is conducted, Consultant
agrees that all knowledge and information about the Confidential
Information known by Consultant will be considered Confidential
Information. In recognition of this, Consultant represents and agrees
that except as specifically authorized in writing by the Company, or as
may be necessary or appropriate to further the best interests of the
Company, Consultant will not, in whole or in part, (i) disclose any
Confidential Information to any Person, other than the Company, or (ii)
make use of any Confidential Information for his own purposes or for
the benefit of any other Person, other than the Company.
(b) Consultant acknowledges and agrees that all manuals,
drawings, blueprints, letters, notes, notebooks, reports, books,
procedures, forms, documents, records, or paper or copies thereof
pertaining to the operations or business of the Company or its
Affiliates made or received by Consultant or made known to him in nay
way in connection with his employment and any other Confidential
Information are and will be the exclusive property of the Company.
Consultant acknowledges that all such papers and records will at all
times be subject to the control of the Company, and Consultant agrees
to surrender the same upon request of the Company, and will surrender
such no later than any termination of his employment with the Company,
whether voluntary or involuntary. The Company may notify anyone
employing Consultant at any time of the provisions of this Agreement.
8. PROPRIETARY INFORMATION. Consultant agrees to promptly disclose
and deliver to the Company any and all improvements, inventions,
developments, discoveries, works of authorship, innovations, systems,
techniques, ideas, processes, programs, and other things which may be of
assistance to the Company or its Affiliates, whether patentable or
unpatentable, relating to or arising out of any development, service, or
product of, or pertaining in any manner to the business of, the Company or
its Affiliates or any of their customers, whether conceived, developed or
learned by Consultant, alone or with others, during or after normal business
hours, while employed by the Company (collectively referred to hereinafter as
"NEW DEVELOPMENTS").
5
<PAGE>
Consultant acknowledges and agrees that all New Developments shall be and
remain the exclusive property of the Company and that Consultant shall, upon
the request of the Company, and without further compensation, do all lawful
things requested by the Company to ensure the Company's ownership of the New
Developments, including, without limitation, the execution of all documents
requested by the Company to assign and transfer to the Company and its
assigns, all of Consultant's right, title, and interest therein, if any, and
to enable the Company to file and obtain patents, copyrights, and other
proprietary rights in the United States and foreign countries relating
thereto. Consultant hereby appoints the Company as his attorney-in-fact, with
full power of substitution, to execute and deliver such documents or patents
on behalf of Consultant.
9. INJUNCTIVE RELIEF. Each party acknowledges that a remedy at law
for any breach or attempted breach of this Agreement will be inadequate,
agrees that each party will be entitled to specific performance and
injunctive and other equitable relief in case of any breach or attempted
breach, and agrees not to use as a defense that any party has an adequate
remedy at law. This Agreement shall be enforceable in a court of equity, or
other tribunal with jurisdiction, by a decree of specific performance, and
appropriate injunctive relief may be applied for and granted in connection
herewith. Such remedy shall not be exclusive and shall be in addition to any
other remedies now or hereafter existing at law or in equity, by statute or
otherwise. No delay or omission in exercising any right or remedy set forth
in this Agreement shall operate as a waiver thereof or of any other right or
remedy and no single or partial exercise thereof shall preclude any other or
further exercise thereof or the exercise of any other right or remedy.
10. NOTICES. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission, or sent by certified,
registered, or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed, or sent by
facsimile transmission or, if mailed five (5) days after the date of deposit
in the United States mails, as follows:
(a) If to the Company:
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, Nevada 89119
Attention: Michael Rumbolz
Fax: (702) 896-6221
with a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Attention: Glen J. Hettinger
Fax: (214) 939-6100
6
<PAGE>
(b) If to Consultant:
Richard M. Haddrill
54 Muscogee Ave., N.W.
Atlanta, Georgia 30305
Fax: 404-816-4441
with a copy to:
Rogers & Hardin LLP
2700 International Tower
229 Peachtree Street
Atlanta, Georgia 30303
Attention: Edward J Hardin
Fax: 404-525-2224
Either party may by notice given in accordance with this SECTION 10 to the
other party designate another address or person for receipt of notices under
this Agreement. All notices will be deemed to be effective upon delivery to
any agent for personal delivery or upon mailing.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter of this
Agreement, and there are no prior written or prior or contemporaneous oral
understandings or agreements relative to this Agreement that are not fully
expressed in this Agreement.
12. WAIVERS AND AMENDMENTS. This Agreement may be amended,
superseded, cancelled, renewed, or extended, and the terms hereof may be
waived, only by a written instrument signed by the parties or, in the case of
a waiver, by the party waiving compliance. No delay or omission on the part
of either party in exercising any right, power, or privilege under this
Agreement shall operate as a waiver thereof. Nor shall any waiver on the part
of either party of any such right, power, or privilege, nor any single or
partial exercise of any such right, power, or privilege, preclude any further
exercise thereof or the exercise of any other such right, power, or
privilege. No waivers of or exceptions to any term, condition, or provision
of this Agreement, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition, or
provision. All remedies provided for in this Agreement will be cumulative and
in addition to and not in lieu of any other remedies available to either
party at law, in equity, or otherwise.
13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE SUBSTANTIVE LAWS, AND NOT THE CHOICE OF LAW
PROVISIONS, OF THE STATE OF NEVADA.
7
<PAGE>
14. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns and legal representatives. The Company may assign this Agreement in
connection with a reincorporation, merger, or consolidation involving the
Company or a sale of substantially all of the assets of the Company, to the
surviving entity or purchaser, as the case may be.
15. COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
16. HEADINGS. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
17. SEVERABILITY. The parties hereto expressly agree that it is not
the intention of any of them to violate any public policy, statutory or
common law rules, regulations, or decisions of any governmental or regulatory
body. If any provision of this Agreement is judicially or administratively
interpreted or construed as being in violation of any such provision, such
sections, sentences, words, clauses, or combinations thereof shall be
inoperative and the remainder of this Agreement shall remain binding upon the
parties hereto.
8
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have executed and
delivered this Agreement on the date first above written.
ANCHOR GAMING
By: /s/ MICHAEL D. RUMBOLZ
-------------------------------
Name: Michael D. Rumbolz
Title: President and CEO
/s/ RICHARD M. HADDRILL
------------------------------
Richard M. Haddrill
9
<PAGE>
Schedule 1
Attached to and made a part of the
Consulting Agreement dated April 13, 1999
Between
Richard M. Haddrill and Anchor Gaming
1. Salary, benefits and bonuses due from January 1, 1999 through
Effective Time, as determined by Compensation Committee of the Board of
Directors of Company, consistent with and pursuant to the Employment
Agreement and 1999 Company Compensation Plans.
2. Medical, dental and hospitalization insurance through December
31, 2002 as applicable to other executive officers.
3. Life Insurance:
- As provided to other officers
- $11,000 per year for split dollar life insurance for 1999, 2000,
2001, 2002
4. Two times salary and bonus as defined in paragraph 9(b) of the
Employment Agreement. This amount will be no less than $1,804,000, payable
within five days of the Effective Date.
5. All unvested restricted stock vests and is paid within five days
of the change of control.
10
<PAGE>
Exhibit 10.35
LOAN AGREEMENT
Dated as of June 29, 1999
among
ANCHOR GAMING,
as Borrower
The Lenders herein named
and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
as Administrative Agent
BANC OF AMERICA SECURITIES, LLC,
Lead Arranger and Sole Book Manager
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article 1 Page
<S> <C>
DEFINITIONS AND ACCOUNTING TERMS.....................................................................1
1.1 Defined Terms...................................................................................1
1.2 Use of Defined Terms...........................................................................22
1.3 Accounting Terms - Fiscal Periods..............................................................22
1.4 Rounding.......................................................................................22
1.5 Exhibits and Schedules.........................................................................23
1.6 Miscellaneous Terms............................................................................23
Article 2
LOANS AND LETTERS OF CREDIT.........................................................................24
2.1 Loans-General..................................................................................24
2.2 Base Rate Loans................................................................................25
2.3 Eurodollar Rate Loans..........................................................................25
2.4 Letters of Credit..............................................................................26
2.5 Swing Line.....................................................................................29
2.6 Voluntary Reduction of Commitment..............................................................30
2.7 Mandatory Reductions of Commitment.............................................................31
2.8 Optional Termination of Commitment.............................................................31
2.9 Administrative Agent's Right to Assume Funds Available for Advances............................32
2.10 Senior Indebtedness...........................................................................32
Article 3
PAYMENTS AND FEES...................................................................................33
3.1 Principal and Interest.........................................................................33
3.2 Lead Arranger's Fees...........................................................................34
3.3 Upfront Fees...................................................................................34
3.4 Commitment Fees................................................................................34
3.5 Letter of Credit Fees..........................................................................34
3.6 Administrative Fees...........................................................................35
3.7 Increased Commitment Costs.....................................................................35
3.8 Eurodollar Costs and Related Matters...........................................................35
3.9 Default Rate...................................................................................39
3.10 Computation of Interest and Fees..............................................................39
3.11 Non-Business Days.............................................................................39
3.12 Manner and Treatment of Payments..............................................................39
3.13 Funding Sources...............................................................................41
3.14 Failure to Charge Not Subsequent Waiver.......................................................41
3.15 Administrative Agent's Right to Assume Payments Will be Made by Borrower......................41
3.16 Fee Determination Detail......................................................................41
3.17 Survivability.................................................................................41
Article 4
REPRESENTATIONS AND WARRANTIES......................................................................42
4.1 Existence and Qualification; Power; Compliance With Laws.......................................42
4.2 Authority; Compliance With Other Agreements and Instruments and Government
Regulations................................................................................42
4.3 No Governmental Approvals Required.............................................................43
4.4 Subsidiaries...................................................................................43
4.5 Financial Statements...........................................................................44
</TABLE>
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<TABLE>
<S> <C>
4.6 No Other Liabilities; No Material Adverse Changes..............................................44
4.7 Title to Property..............................................................................44
4.8 Intangible Assets..............................................................................44
4.9 Public Utility Holding Company Act.............................................................45
4.10 Litigation....................................................................................45
4.11 Binding Obligations...........................................................................45
4.12 No Default....................................................................................45
4.13 ERISA.........................................................................................45
4.14 Regulations T, U and X; Investment Company Act................................................46
4.15 Disclosure....................................................................................46
4.16 Tax Liability.................................................................................46
4.17 Projections...................................................................................46
4.18 Hazardous Materials...........................................................................46
4.19 Year 2000 Preparedness........................................................................47
4.20 Consummation of Merger........................................................................47
Article 5
AFFIRMATIVE COVENANTS
(OTHER THAN INFORMATION AND
REPORTING REQUIREMENTS).............................................................................48
5.1 Payment of Taxes and Other Potential Liens.....................................................48
5.2 Preservation of Existence......................................................................48
5.3 Maintenance of Properties......................................................................48
5.4 Maintenance of Insurance.......................................................................48
5.5 Compliance With Laws...........................................................................49
5.6 Inspection Rights..............................................................................49
5.7 Keeping of Records and Books of Account........................................................49
5.8 Compliance With Agreements.....................................................................49
5.9 Use of Proceeds................................................................................49
5.10 New Subsidiaries..............................................................................49
5.11 Hazardous Materials Laws......................................................................49
5.12 Year 2000 Compliance..........................................................................50
Article 6
NEGATIVE COVENANTS..................................................................................51
6.1 Payment of Subordinated Obligations............................................................51
6.2 Disposition of Property........................................................................51
6.3 Mergers........................................................................................51
6.4 Hostile Acquisitions...........................................................................52
6.5 Distributions..................................................................................52
6.6 ERISA..........................................................................................52
6.7 Change in Nature of Business...................................................................52
6.8 Liens and Negative Pledges.....................................................................52
6.9 Indebtedness and Contingent Obligations........................................................53
6.10 Transactions with Affiliates..................................................................54
6.11 Fixed Charge Coverage Ratio...................................................................54
6.12 Leverage Ratio................................................................................54
6.13 Capital Expenditures..........................................................................54
6.14 Investments and Acquisitions..................................................................55
6.15 Subsidiary Indebtedness and Contingent Obligations............................................56
</TABLE>
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<TABLE>
<S> <C>
Article 7
INFORMATION AND REPORTING REQUIREMENTS..............................................................57
7.1 Financial and Business Information.............................................................57
7.2 Compliance Certificates........................................................................59
Article 8
CONDITIONS..........................................................................................60
8.1 Initial Advances on the Closing Date...........................................................60
8.2 Any Advance....................................................................................61
Article 9
EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT................................................63
9.1 Events of Default..............................................................................63
9.2 Remedies Upon Event of Default.................................................................65
Article 10
THE ADMINISTRATIVE AGENT............................................................................68
10.1 Appointment and Authorization.................................................................68
10.2 Administrative Agent and Affiliates...........................................................68
10.3 Proportionate Interest in any Collateral......................................................68
10.4 Lenders' Credit Decisions.....................................................................68
10.5 Action by Administrative Agent................................................................69
10.6 Liability of Administrative Agent.............................................................70
10.7 Indemnification...............................................................................71
10.8 Successor Administrative Agent................................................................71
10.9 No Obligations of Borrower....................................................................72
Article 11
MISCELLANEOUS.......................................................................................73
11.1 Cumulative Remedies; No Waiver................................................................73
11.2 Amendments; Consents..........................................................................73
11.3 Costs, Expenses and Taxes.....................................................................74
11.4 Nature of Lenders' Obligations................................................................75
11.5 Survival of Representations and Warranties....................................................75
11.6 Notices.......................................................................................75
11.7 Execution of Loan Documents...................................................................75
11.8 Binding Effect; Assignment....................................................................76
11.9 Right of Setoff...............................................................................79
11.10 Sharing of Setoffs...........................................................................79
11.11 Indemnity by Borrower........................................................................79
11.12 Nonliability of the Lenders..................................................................80
11.13 No Third Parties Benefitted..................................................................81
11.14 Confidentiality..............................................................................81
11.15 Further Assurances...........................................................................82
11.16 Integration..................................................................................82
11.17 Governing Law................................................................................82
11.18 Severability of Provisions...................................................................82
11.19 Headings.....................................................................................83
11.20 Time of the Essence..........................................................................83
11.21 Foreign Lenders and Participants.............................................................83
11.22 Hazardous Material Indemnity.................................................................83
11.23 Gaming Boards................................................................................84
11.24 Waiver of Right to Trial by Jury.............................................................84
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
11.25 Purported Oral Amendments....................................................................85
</TABLE>
EXHIBITS
A - Assignment Agreement
B - Compliance Certificate
C - Note
D - Pricing Certificate
E - Request for Letter of Credit
F - Request for Loan
G - Solvency Certificate
SCHEDULES
1.1 Lender Commitments
4.3 Governmental Approvals
4.4 Subsidiaries
4.7 Existing Liens, Negative Pledges and Rights of Others
4.8 Intangible Assets
4.10 Material Litigation
4.17 Projections
4.18 Environmental Matters
6.9 Existing Indebtedness and Guaranty Obligations
6.14 Existing Investments
-iv-
<PAGE>
LOAN AGREEMENT
Dated as of June 29, 1999
This Loan Agreement ("Agreement") is entered into by and among
Anchor Gaming, a Nevada corporation ("Borrower"), each lender whose name is set
forth on the signature pages of this Agreement and each lender which may
hereafter become a party to this Agreement pursuant to Section 11.8, The Bank of
Nova Scotia and Wells Fargo Bank, National Association, as Documentation Agents
and Bank of America National Trust and Savings Association, as Administrative
Agent. In consideration of the foregoing and of the mutual covenants and
agreements herein contained, Borrower, the Administrative Agent, the Issuing
Lender and the Lenders, covenant and agree as follows:
Article 1
DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINED TERMS. As used in this Agreement, the following terms shall
have the meanings set forth below:
"ACQUISITION" means any transaction, or any series of related
transactions, by which Borrower or its Subsidiaries directly or
indirectly (i) acquire any going business or all or substantially all
of the assets of any Person, or any division thereof, whether through
purchase of assets, merger or otherwise, or (ii) acquire (in one
transaction or as the most recent transaction in a series of related
transactions) control of at least a majority in ordinary voting power
of the securities of a corporation which have ordinary voting power for
the election of directors, or (iii) acquire control of a 50% or more
ownership interest in any partnership, joint venture, limited liability
company or any other Person.
"ADMINISTRATIVE AGENT" means Bank of America, when acting in
its capacity as the Administrative Agent under any of the Loan
Documents, or any successor Administrative Agent.
"ADMINISTRATIVE AGENT'S OFFICE" means the Administrative
Agent's address as set forth on the signature pages of this Agreement,
or such other address as the Administrative Agent hereafter may
designate by written notice to Borrower and the Lenders.
"ADVANCE" means any advance made or to be made by any Lender
to Borrower as provided in Article 2, and INCLUDES each Base Rate
Advance, Eurodollar Rate Advance and Swing Line Advance.
"AFFILIATE" means, as to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (and
the correlative terms, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or
cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership interests, by
contract or otherwise); PROVIDED that, in any event, any Person that
owns, directly or indirectly, 10% or more of the securities having
ordinary voting power for the election of directors or other governing
body of a corporation that has more than 100
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<PAGE>
record holders of such securities, or 10% or more of the
partnership or other ownership interests of any other Person that has
more than 100 record holders of such interests, will be presumed
(subject to rebuttal by a preponderance of the evidence) to control
such corporation, partnership or other Person.
"AGGREGATE EFFECTIVE AMOUNT" means, as of any date of
determination and with respect to all Letters of Credit then
outstanding, the SUM of (a) the aggregate undrawn amount of all such
Letters of Credit then outstanding PLUS (b) the aggregate amounts paid
by the Issuing Lender under such Letters of Credit not then reimbursed
to the Issuing Lender by Borrower pursuant to Section 2.4(d) and not
the subject of Advances made pursuant to Section 2.4(e).
"AGREEMENT" means this Loan Agreement, as it may from time to
time be supplemented, modified, amended, restated or extended.
"ASSIGNMENT AGREEMENT" means an Assignment Agreement
substantially in the form of Exhibit A.
"AVERAGE TOTAL FUNDED DEBT" means, as of the last day of each
Fiscal Quarter, the average principal amount of the Total Funded Debt
as of the last day of the three constituent calendar months in that
Fiscal Quarter.
"BANK OF AMERICA" means Bank of America National Trust and
Savings Association, its successors and assigns.
"BUSINESS DAY" means any Monday, Tuesday, Wednesday, Thursday
or Friday, OTHER THAN a day on which banks are authorized or required
to be closed in California, Nevada or New York.
"BASE RATE" means, as of any date of determination, the rate
per annum (rounded upwards, if necessary, to the next 1/100 of 1%)
equal to the HIGHER OF (a) the Reference Rate in effect on such date
and (b) the Federal Funds Rate in effect on such date plus 1/2 of 1%
(50 basis points).
"BASE RATE ADVANCE" means an Advance made hereunder and
specified to be a Base Rate Advance in accordance with Article 2.
"BASE RATE LOAN" means a Loan made hereunder and specified to
be a Base Rate Loan in accordance with Article 2.
-2-
<PAGE>
"BASE RATE MARGIN" means, for each Pricing Period, the
applicable percentage set forth below opposite the Leverage Ratio as of
the last day of the Fiscal Quarter ending immediately prior to the
beginning of that Pricing Period:
<TABLE>
<CAPTION>
LEVERAGE RATIO BASE RATE MARGIN
<S> <C>
Greater than or equal to 2.25:1.00 0.625%
Greater than or equal to 1.75:1.00
but less than 2.25:1.00 0.375%
Greater than or equal to 1.25:1.00
but less than 1.75:1.00 0.125%
Less than 1.25:1.00 0.000%
</TABLE>
"BORROWER" means Anchor Gaming, a Nevada corporation, its
successors and permitted assigns.
"CAPITAL EXPENDITURE" means any expenditure for or related to
fixed assets or purchased intangibles that is treated as a capital
expenditure under Generally Accepted Accounting Principles, INCLUDING
any amount which is required to be treated as an asset subject to a
Capital Lease Obligation.
"CAPITAL LEASE OBLIGATIONS" means all monetary obligations of
a Person under any leasing or similar arrangement which, in accordance
with Generally Accepted Accounting Principles, is classified as a
capital lease.
"CASH" means, when used in connection with any Person, all
monetary and non-monetary items owned by that Person that are treated
as cash in accordance with Generally Accepted Accounting Principles,
consistently applied.
"CASH EQUIVALENTS" means, when used in connection with any
Person, that Person's Investments in:
(a) Government Securities due within one year after
the date of the making of the Investment;
(b) readily marketable direct obligations of any
State of the United States of America or any political
subdivision of any such State or any public agency or
instrumentality thereof given on the date of such Investment a
credit rating of at least Aa by Moody's or AA by S&P in each
case due within one year from the making of the Investment;
(c) certificates of deposit issued by, bank deposits
in, eurodollar deposits through, bankers' acceptances of, and
repurchase agreements covering Government Securities executed
by any Lender or by any bank incorporated under the Laws of
the United States of America, any State thereof or the
District of Columbia and having on the date of such Investment
combined capital, surplus and undivided profits of at
-3-
<PAGE>
least $250,000,000, or total assets of at least
$5,000,000,000, in each case due within one year after the
date of the making of the Investment;
(d) certificates of deposit issued by, bank deposits
in, eurodollar deposits through, bankers' acceptances of, and
repurchase agreements covering Government Securities executed
by any branch or office located in the United States of
America of a bank incorporated under the Laws of any
jurisdiction outside the United States of America having on
the date of such Investment combined capital, surplus and
undivided profits of at least $500,000,000, or total assets of
at least $15,000,000,000, in each case due within one year
after the date of the making of the Investment;
(e) repurchase agreements covering Government
Securities executed by a broker or dealer registered under
Section 15(b) of the Securities Exchange Act of 1934, as
amended, having on the date of the Investment capital of at
least $50,000,000, due within 90 days after the date of the
making of the Investment; PROVIDED that the maker of the
Investment receives written confirmation of the transfer to it
of record ownership of the Government Securities on the books
of a "primary dealer" in such Government Securities or on the
books of such registered broker or dealer, as soon as
practicable after the making of the Investment;
(f) readily marketable commercial paper or other debt
securities issued by corporations doing business in and
incorporated under the Laws of the United States of America or
any State thereof or of any corporation that is the holding
company for a bank described in clause (c) or (d) above given
on the date of such Investment a credit rating of at least P-1
by Moody's or A-1 by S&P, in each case due within one year
after the date of the making of the Investment;
(g) "money market preferred stock" issued by a
corporation incorporated under the Laws of the United States
of America or any State thereof (i) given on the date of such
Investment a credit rating of at least Aa by Moody's and AA by
S&P, in each case having an investment period not exceeding 50
days or (ii) to the extent that investors therein have the
benefit of a standby letter of credit issued by a Lender or a
bank described in clauses (c) or (d) above;
(h) a readily redeemable "money market mutual fund"
sponsored by a bank described in clause (c) or (d) hereof, or
a registered broker or dealer described in clause (e) hereof,
that has and maintains an investment policy limiting its
investments primarily to instruments of the types described in
clauses (a) through (g) hereof and given on the date of such
Investment a credit rating of at least Aa by Moody's and AA by
S&P; and
(i) corporate notes or bonds having an original term
to maturity of not more than one year issued by a corporation
incorporated under the Laws of the United States of America or
any State thereof, or a participation interest therein;
PROVIDED that any commercial paper issued by such corporation
is given on the date of such Investment a credit rating of at
least Aa by Moody's and AA by S&P.
"CERTIFICATE OF A RESPONSIBLE OFFICIAL" means a certificate
signed by a Responsible Official of the Person providing the
certificate.
-4-
<PAGE>
"CHANGE IN CONTROL" means, subject to Section 2.8(b), (a) any
transaction or series of related transactions in which any Unrelated
Person or two or more Unrelated Persons acting in concert acquire
beneficial ownership (within the meaning of Rule 13d-3(a)(1) under the
Securities Exchange Act of 1934, as amended), directly or indirectly,
of 25% or more of the outstanding common stock of Borrower, (b) during
any period of 24 consecutive months, individuals who at the beginning
of such period constituted the board of directors of Borrower (together
with any new or replacement directors whose election by the board of
directors, or whose nomination for election, was approved by a vote of
at least a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for reelection was previously so approved) cease for any
reason to constitute a majority of the directors then in office, or (c)
more than three of the persons listed in a side letter delivered to the
Lenders on the Closing Date fail for any reason to be actively involved
in the management of Borrower in a senior executive capacity and are
not replaced with persons acceptable to Borrower's board of directors
within six months following their departure date.
"CLOSING DATE" means the time and Business Day on which the
conditions set forth in Section 8.1 are satisfied or waived.
"CODE" means the Internal Revenue Code of 1986, as amended or
replaced and as in effect from time to time.
"COMMITMENT" means, subject to any increase or decrease in the
amount thereof pursuant to Sections 2.6, 2.7 and 2.8, $300,000,000. As
of the Closing Date, the respective Pro Rata Shares of the Lenders with
respect to the Commitment are set forth in Schedule 1.1.
"COMMITMENT FEE RATE" means, for each Pricing Period, the
applicable percentage set forth below opposite the Leverage Ratio as of
the last day of the Fiscal Quarter ending immediately prior to the
beginning of that Pricing Period:
<TABLE>
<CAPTION>
LEVERAGE RATIO COMMITMENT FEE RATE
<S> <C>
Greater than or equal to 1.75:1.00 0.375%
Greater than or equal to 1.25:1.00
but less than 1.75:1.00 0.300%
Less than 1.25:1.00 0.250%.
</TABLE>
"COMPLIANCE CERTIFICATE" means a certificate substantially in
the form of Exhibit B, properly completed and signed by a Senior
Officer of Borrower.
"CONTINGENT OBLIGATION" means, as to any Person, any (a)
guarantee by that Person of Indebtedness of, or other obligation
performable by, any other Person or (b) assurance given by that Person
to an obligee of any other Person with respect to the performance of an
obligation by, or the financial condition of, such other Person,
whether direct, indirect or contingent, INCLUDING any purchase or
repurchase agreement covering such obligation or any collateral
security therefor, any agreement to provide funds (by means of loans,
capital contributions or otherwise) to such other Person, any agreement
to support the solvency or
-5-
<PAGE>
level of any balance sheet item of such other Person or any
"keep-well" or other arrangement of whatever nature given
for the purpose of assuring or holding harmless such obligee
against loss with respect to any obligation of such other Person;
PROVIDED, HOWEVER, that the term Contingent Obligation shall not
include endorsements of instruments for deposit or collection in the
ordinary course of business or guaranteed rentals payable in connection
with the placement of gaming machines by Borrower or its Subsidiaries
in the ordinary course of their respective businesses. The amount of
any Contingent Obligation shall be deemed to be an amount equal to the
stated or determinable amount of the related primary obligation (unless
the Contingent Obligation is limited by its terms to a lesser amount,
in which case to the extent of such amount) or, if not stated or
determinable, the maximum reasonably anticipated liability in respect
thereof as determined by the Person in good faith.
"CONTRACTUAL OBLIGATION" means, as to any Person, any
provision of any outstanding security issued by that Person or of any
material agreement, instrument or undertaking to which that Person is a
party or by which it or any of its Property is bound.
"CREDITORS" means, collectively, the Administrative Agent, the
Issuing Lender, the Swing Line Lender, each Lender and, where the
context requires, any one or more of them.
"DEBTOR RELIEF LAWS" means the Bankruptcy Code of the United
States of America, as amended from time to time, and all other
applicable liquidation, conservatorship, bankruptcy, moratorium,
rearrangement, receivership, insolvency, reorganization, or similar
debtor relief Laws from time to time in effect affecting the rights of
creditors generally.
"DEFAULT" means any event specified in Section 9.1 that, with
the giving of any applicable notice or passage of time specified in
Section 9.1, or both, would be an Event of Default.
"DEFAULT RATE" means the interest rate prescribed in
Section 3.9.
"DEPOSIT ACCOUNT" means a deposit account to be maintained by
Borrower with Bank of America, as from time to time designated by
Borrower by written notification to the Administrative Agent to which
Loans made hereunder will be credited pursuant to Section 2.1(c).
"DESIGNATED EURODOLLAR MARKET" means, with respect to any
Eurodollar Rate Loan, (a) the London Eurodollar Market, (b) if prime
banks in the London Eurodollar Market are at the relevant time not
accepting deposits of Dollars or if the Administrative Agent determines
in good faith that the London Eurodollar Market does not represent at
the relevant time the effective pricing to the Lenders for deposits of
Dollars in the London Eurodollar Market, the Cayman Islands Eurodollar
Market or (c) if prime banks in the Cayman Islands Eurodollar
Market are at the relevant time not accepting deposits of Dollars or
if the Administrative Agent determines in good faith that the
Cayman Islands Eurodollar Market does not represent at the
relevant time the effective pricing to the Lenders for deposits of
Dollars in the Cayman Islands Eurodollar Market, such other Eurodollar
Market as may from time to time be selected by the Administrative Agent
with the approval of Borrower and the Requisite Lenders. The
Administrative Agent will endeavor to provide prompt notice to Borrower
of any change in the location of the Designated Eurodollar Market.
-6-
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"DISPOSITION" means the voluntary sale, transfer or other
disposition (including any sale and leaseback), in one transaction or a
series of related transactions, of any asset of Borrower or any of its
Subsidiaries having a value in excess of $10,000,000 OTHER THAN the
voluntary sale, transfer or other disposition of (a) Cash, Cash
Equivalents, inventory or other assets sold, leased or otherwise
disposed of in the ordinary course of business of Borrower or any of
its Subsidiaries, (b) equipment sold or otherwise disposed of where
substantially similar equipment in replacement thereof has theretofore
been acquired, or thereafter within 90 days is acquired, by Borrower or
any of its Subsidiaries, or (c) Property to Borrower or any of its
Subsidiaries.
"DISTRIBUTION" means, with respect to any shares of capital
stock or any warrant or option to purchase an equity security or other
equity security issued by a Person, (a) the retirement, redemption,
purchase or other acquisition for Cash or for Property (other than
capital stock, or any warrants or options to purchase an equity
security or other security of such Person) by such Person of any such
security, (b) the declaration or (without duplication) payment by such
Person of any dividend in Cash or in Property (other than capital
stock, or any warrants or options to purchase an equity security or
other security of such Person) on or with respect to any such security,
(c) any Investment by such Person in the holder of 5% or more of any
such security if a purpose of such Investment is to avoid
characterization of the transaction as a Distribution and (d) any other
payment in Cash or Property (other than capital stock, or any warrants
or options to purchase an equity security or other security of such
Person) by such Person constituting a distribution under applicable
Laws with respect to such security.
"DOCUMENTATION AGENTS" means The Bank of Nova Scotia and Wells
Fargo Bank, National Association. The Documentation Agents shall have
no rights, duties or responsibilities under the Loan Documents beyond
those of a Lender.
"DOLLARS" or "$" means United States dollars.
"EBITDA" means, with respect to any fiscal period and with
respect to Borrower and its Subsidiaries, the SUM OF (a) Net Income
of Borrower and its Subsidiaries for that period, PLUS (b) any
extraordinary loss reflected in such Net Income, MINUS (c) any
extraordinary gain reflected in such Net Income, PLUS (d) Interest
Charges of Borrower and its Subsidiaries for that period to the
extent deducted in arriving at Net Income of Borrower and its
Subsidiaries for that period, PLUS (e) the aggregate amount of
federal, state and local taxes on or measured by income of Borrower
and its Subsidiaries for that period (whether or not payable during
that period) to the extent deducted in arriving at Net Income of
Borrower and its Subsidiaries for that period, PLUS (f)
depreciation, amortization and all other non-cash expenses for that
period, in each case as determined in accordance with Generally
Accepted Accounting Principles, PROVIDED that (i) for each Fiscal
Quarter containing any period prior to the Closing Date, EBITDA
shall be calculated with reference to the combined financial results
of Borrower and Powerhouse and their Subsidiaries, (ii) the Net
Income and other financial results of the IGT Joint Venture for any
Fiscal Quarter shall be included in EBITDA of Borrower and its
Subsidiaries for that Fiscal Quarter only to the extent that such
Net Income is actually received in Cash by Borrower and its other
Subsidiaries prior to the date which is thirty days following the
last day of such Fiscal Quarter, and (iii) EBITDA of Borrower and
its Subsidiaries for any fiscal period shall be adjusted to include,
on a pro forma basis, the financial results of any new Subsidiary
(or operating assets) acquired by Borrower and its
-7-
<PAGE>
Subsidiaries during that fiscal period for a consideration in excess of
$10,000,000 and to exclude, on a pro forma basis, the financial results
of any Subsidiary (or operating assets) sold, transferred or otherwise
disposed of by Borrower and its Subsidiaries for a consideration in
excess of $10,000,000, during that fiscal period.
"ELIGIBLE ASSIGNEE" means (a) with respect to any Lender,
another Lender (b) with respect to any Lender, any Affiliate of that
Lender which (A) has a net worth of $200,000,000 or more, (B) is
engaged in the business of lending money and extending credit under
credit facilities substantially similar to those extended under this
Agreement and (C) is operationally and procedurally able to meet the
obligations of a Lender hereunder to the same degree as a commercial
bank, (c) any commercial bank having a combined capital and surplus of
$100,000,000 or more, (d) any (i) savings bank, savings and loan
association or similar financial institution or (ii) insurance company
engaged in the business of writing insurance which, in either case (A)
has a net worth of $200,000,000 or more, (B) is engaged in the business
of lending money and extending credit under credit facilities
substantially similar to those extended under this Agreement and (C) is
operationally and procedurally able to meet the obligations of a Lender
hereunder to the same degree as a commercial bank and (e) any other
financial institution (INCLUDING a mutual fund or other fund) having
total assets of $250,000,000 or more which meets the requirements set
forth in subclauses (B) and (C) of clause (d) above; PROVIDED that each
Eligible Assignee must either (a) be organized under the Laws of the
United States of America, any State thereof or the District of Columbia
or (b) be organized under the Laws of the Cayman Islands or any country
which is a member of the Organization for Economic Cooperation and
Development, or a political subdivision of such a country, and (i) act
hereunder through a branch, agency or funding office located in the
United States of America and (ii) be exempt from withholding of tax on
interest and deliver the documents related thereto pursuant to Section
11.21, PROVIDED, further, no assignment shall be made to any Person if
such assignment would result in a violation of any Gaming Laws or
otherwise require the consent or approval of any Gaming Board.
"ERISA" means the Employee Retirement Income Security Act of
1974, and any regulations issued pursuant thereto, as amended or
replaced and as in effect from time to time.
"ERISA AFFILIATE" means, with respect to any Person, any other
Person (or any trade or business, whether or not incorporated) that is
under common control with that Person within the meaning of Section 414
of the Code.
"EURODOLLAR BUSINESS DAY" means any Business Day on which
dealings in Dollar deposits are conducted by and among banks in the
Designated Eurodollar Market.
"EURODOLLAR LENDING OFFICE" means, as to each Lender, its
office or branch so designated by written notice to Borrower and the
Administrative Agent as its Eurodollar Lending Office. If no Eurodollar
Lending Office is designated by a Lender, its Eurodollar Lending Office
shall be its office at its address for purposes of notices hereunder.
"EURODOLLAR MARGIN" means, for each Pricing Period, the
applicable percentage set forth below opposite the Leverage Ratio as of
the last day of the Fiscal Quarter ending immediately prior to the
beginning of that Pricing Period:
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<TABLE>
<CAPTION>
LEVERAGE RATIO EURODOLLAR MARGIN
<S> <C>
Greater than or equal to 2.25:1.00 1.875%
Greater than or equal to 1.75:1.00
but less than 2.25:1.00 1.625%
Greater than or equal to 1.25:1.00
but less than 1.75:1.00 1.375%
Less than 1.25:1.00 1.125%.
</TABLE>
"EURODOLLAR MARKET" means a regular established market located
outside the United States of America by and among banks for the
solicitation, offer and acceptance of Dollar deposits in such banks.
"EURODOLLAR OBLIGATIONS" means eurocurrency liabilities, as
defined in Regulation D or any comparable regulation of any
Governmental Agency having jurisdiction over any Lender.
"EURODOLLAR PERIOD" means, as to each Eurodollar Rate Loan,
the period commencing on the date specified by Borrower pursuant to
Section 2.1(b) and ending 1, 2, 3, 6 or 12 months (or, with the written
consent of all of the Lenders, any other period) thereafter, as
specified by Borrower in the applicable Request for Loan; PROVIDED
that:
(a) The first day of any Eurodollar Period shall be a
Eurodollar Business Day;
(b) Any Eurodollar Period that would otherwise end on
a day that is not a Eurodollar Business Day shall be extended
to the next succeeding Eurodollar Business Day unless such
Eurodollar Business Day falls in another calendar month, in
which case such Eurodollar Period shall end on the next
preceding Eurodollar Business Day;
(c) Borrower may not specify a Eurodollar Period that
extends beyond any Reduction Date unless the SUM of (i) the
aggregate principal amount of the Eurodollar Loans having a
Eurodollar Period ending after such Reduction Date PLUS (ii)
the aggregate maximum amount available for drawing under
Letters of Credit for which the expiry date is after such
Reduction Date, does not exceed the Commitment (after giving
effect to any reduction thereto scheduled to be made on that
Reduction Date pursuant to Section 2.7(b)); and
(d) No Eurodollar Period shall extend beyond the
Maturity Date.
"EURODOLLAR RATE" means, with respect to any Eurodollar Rate
Loan, the interest rate per annum (rounded upward, if necessary, to the
next 1/100 of 1%) at which deposits in Dollars are offered by Bank of
America to prime banks in the Designated Eurodollar Market at or about
11:00 a.m. local time in the Designated Eurodollar Market, two
Eurodollar Business Days before the first day of the applicable
Eurodollar Period in an aggregate amount
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approximately equal to the amount of the Advance made by Bank of
America with respect to such Eurodollar Rate Loan and for a period
of time comparable to the number of days in the applicable
Eurodollar Period.
"EURODOLLAR RATE ADVANCE" means an Advance made hereunder and
specified to be a Eurodollar Rate Advance in accordance with Article 2.
"EURODOLLAR RATE LOAN" means a Loan made hereunder and
specified to be a Eurodollar Rate Loan in accordance with Article 2.
"EVENT OF DEFAULT" shall have the meaning provided in Section
9.1.
"FEDERAL FUNDS RATE" means, as of any date of determination,
the rate set forth in the weekly statistical release designated as
H.15(519), or any successor publication, published by the Federal
Reserve Board (including any such successor, "H.15(519)") for such date
opposite the caption "Federal Funds (Effective)". If for any relevant
date such rate is not yet published in H.15(519), the rate for such
date will be the rate set forth in the daily statistical release
designated as the Composite 3:30 p.m. Quotations for U.S. Government
Securities, or any successor publication, published by the Federal
Reserve Bank of New York (including any such successor, the "Composite
3:30 p.m. Quotation") for such date under the caption "Federal Funds
Effective Rate". If on any relevant date the appropriate rate for such
date is not yet published in either H.15(519) or the Composite 3:30
p.m. Quotations, the rate for such date will be the arithmetic mean of
the rates for the last transaction in overnight Federal funds arranged
prior to 9:00 a.m. (New York City time) on that date by each of three
leading brokers of Federal funds transactions in New York City selected
by the Administrative Agent. For purposes of this Agreement, any change
in the Base Rate due to a change in the Federal Funds Rate shall be
effective as of the opening of business on the effective date of such
change.
"FISCAL QUARTER" means each fiscal quarter of Borrower
consisting of the three calendar month periods ending on each March 31,
June 30, September 30 and December 31.
"FISCAL YEAR" means the fiscal year of Borrower consisting of
the twelve month period ending on each June 30.
"FIXED CHARGE COVERAGE RATIO" means, as of the last day of
each Fiscal Quarter, the ratio of (a) EBITDA for the four Fiscal
Quarter period ending on such date to (b) Fixed Charges for the same
period.
"FIXED CHARGES" means, for any fiscal period, the SUM OF (a)
all Interest Charges of Borrower and its Subsidiaries paid in cash
during that fiscal period, PLUS (b) all payments of principal required
to be paid during that fiscal period by Borrower and its Subsidiaries
to lenders in connection with borrowed money or Capital Lease
Obligations, PLUS (c) all Maintenance Capital Expenditures incurred by
Borrower and its Subsidiaries during that fiscal period, plus (d) all
taxes paid in Cash by Borrower and its Subsidiaries during that fiscal
period, PLUS (e) all Distributions made by Borrower and its
Subsidiaries OTHER THAN (i) Distributions consisting of stock
redemptions permitted by Section 6.5(b) and (ii) Distributions
permitted by Section 6.5(a), PROVIDED that the Fixed Charges of
Borrower and its Subsidiaries for any fiscal period shall be adjusted
to include, on a pro forma basis, the
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<PAGE>
financial results of any new Subsidiary (or operating assets)
acquired by Borrower and its Subsidiaries during that fiscal period
for a consideration in excess of $10,000,000, and to exclude, on a
pro forma basis, the financial results of any Subsidiary (or
operating assets) sold, transferred or otherwise disposed of by
Borrower and its Subsidiaries for a consideration in excess of
$10,000,000 during that fiscal period.
"GAMING BOARD" means, collectively, (a) the Nevada Gaming
Commission, (b) the Nevada State Gaming Control Board, and (c) any
other Governmental Agency that holds regulatory, licensing or permit
authority over gambling, gaming, lottery or casino activities conducted
by Borrower or any Subsidiary of Borrower within its jurisdiction.
"GAMING LAWS" means all Laws pursuant to which any Gaming
Board possesses regulatory, licensing or permit authority over
gambling, gaming, lottery or casino activities conducted by Borrower
and its Subsidiaries within its jurisdiction.
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means, as of any
date of determination, accounting principles (a) set forth as generally
accepted in then currently effective Opinions of the Accounting
Principles Board of the American Institute of Certified Public
Accountants, (b) set forth as generally accepted in then currently
effective Statements of the Financial Accounting Standards Board or (c)
that are then approved by such other entity as may be approved by a
significant segment of the accounting profession in the United States
of America. The term "CONSISTENTLY APPLIED," as used in connection
therewith, means that the accounting principles applied are consistent
in all material respects with those applied at prior dates or for prior
periods.
"GOVERNMENT SECURITIES" means readily marketable (a) direct
full faith and credit obligations of the United States of America or
obligations guaranteed by the full faith and credit of the United
States of America and (b) obligations of an agency or instrumentality
of, or corporation owned, controlled or sponsored by, the United States
of America that are generally considered in the securities industry to
be implicit obligations of the United States of America.
"GOVERNMENTAL AGENCY" means (a) any international, foreign,
federal, state, county or municipal government, or political
subdivision thereof, (b) any governmental or quasi-governmental agency,
authority, board, bureau, commission, department, instrumentality or
public body or (c) any court or administrative tribunal of competent
jurisdiction.
"GUARANTORS" means, collectively, all Subsidiaries of
Borrower.
"GUARANTY" means the Guaranty of the Obligations executed by
certain Subsidiaries of Borrower on the Closing Date, as the same may
from time to time be further supplemented, modified, amended, extended
or supplanted.
"HAZARDOUS MATERIALS" means substances defined as "hazardous
substances" pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42 U.S.C. ss. 9601 et seq., or
as "hazardous", "toxic" or "pollutant" substances or as "solid waste"
pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. ss.
1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
ss. 6901, et seq., or as "friable asbestos"
-11-
<PAGE>
pursuant to the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et
seq., in each case as such Laws are amended from time to time.
"HAZARDOUS MATERIALS LAWS" means all Laws governing the
treatment, transportation or disposal of Hazardous Materials applicable
to any of the Real Property.
"IGT JOINT VENTURE" means the Nevada general partnership
formed pursuant to that certain Joint Venture Agreement, dated December
3, 1996, by and between IGT, a Nevada corporation, and Anchor Games
d/b/a Anchor Coin, a Nevada corporation, as the same may be amended
from time to time, pursuant to which Borrower and International Game
Technology develop, integrate, and distribute proprietary game
concepts, primarily on wide area progressive systems.
"INDEBTEDNESS" means, as to any Person (without duplication),
(a) indebtedness of such Person for borrowed money or for the deferred
purchase price of Property (excluding trade and other accounts payable
in the ordinary course of business in accordance with ordinary trade
terms), INCLUDING any Contingent Obligation for any such indebtedness,
(b) indebtedness of such Person of the nature described in clause (a)
that is non-recourse to the credit of such Person but is secured by
assets of such Person, not to exceed the value of such assets, (c)
Capital Lease Obligations of such Person, (d) indebtedness of such
Person arising under bankers' acceptance facilities or under facilities
for the discount of accounts receivable of such Person, (e) any direct
or contingent obligations of such Person under letters of credit issued
for the account of such Person, (f) any obligation with respect to any
synthetic lease, financing lease or similar arrangement, to the extent
that the same is secured by a Lien on any asset of such Person, and (g)
any net obligations of such Person under Swap Agreements.
"INTANGIBLE ASSETS" means assets that are considered
intangible assets under Generally Accepted Accounting Principles,
INCLUDING customer lists, goodwill, computer software, copyrights,
trade names, trademarks and patents.
"INTEREST CHARGES" means, for any Person, for any fiscal
period, the SUM OF (a) all interest, fees, charges and related
expenses paid or payable (without duplication) for that fiscal
period by that Person to a lender in connection with borrowed money
(INCLUDING any obligations for fees, charges and related expenses
payable to the issuer of any letter of credit) or the deferred
purchase price of assets that are considered "interest expense"
under Generally Accepted Accounting Principles, PLUS (b) the portion
of rent paid or payable (without duplication) for that fiscal period
by that Person under Capital Lease Obligations that should be
treated as interest in accordance with Financial Accounting
Standards Board Statement No. 13.
"INTEREST DIFFERENTIAL" means, with respect to any prepayment
of a Eurodollar Rate Loan on a day other than the last day of the
applicable Eurodollar Period and with respect to any failure to borrow
a Eurodollar Rate Loan on the date or in the amount specified in any
Request for Loan, (a) the Eurodollar Rate payable (or, with respect to
a failure to borrow, the Eurodollar Rate which would have been payable)
with respect to the Eurodollar Rate Loan MINUS (b) the Eurodollar Rate
on, or as near as practicable to, the date of the prepayment or failure
to borrow for a Eurodollar Rate Loan with a Eurodollar Period
commencing on such
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<PAGE>
date and ending on the last day of the Eurodollar Period of the
Eurodollar Rate Loan so prepaid or which would have been borrowed on
such date.
"INVESTMENT" means, when used in connection with any Person,
any investment by or of that Person, whether by means of purchase or
other acquisition of stock or other securities of any other Person or
by means of a loan, advance creating a debt, capital contribution,
guaranty or other debt or equity participation or interest in any other
Person, INCLUDING any partnership and joint venture interests of such
Person, but excluding any Acquisition. The amount of any Investment
shall be the amount actually invested (MINUS any return of capital with
respect to such Investment which has actually been received in Cash or
Cash Equivalents or has been converted into Cash or Cash Equivalents),
without adjustment for subsequent increases or decreases in the value
of such Investment.
"ISSUING LENDER" means Bank of America National Trust and
Savings Association.
"LAWS" means, collectively, all international, foreign,
federal, state and local statutes, treaties, rules, regulations,
ordinances, codes and administrative or judicial precedents.
"LEAD ARRANGER" means Banc of America Securities, LLC.
"LENDER" means each bank whose name is set forth in the
signature pages of this Agreement and each lender which may hereafter
become a party to this Agreement pursuant to Section 11.8.
"LETTER OF CREDIT FEE" means, for each Pricing Period, the per
annum rate which is equal to the Eurodollar Margin for that Pricing
Period.
"LETTER OF CREDIT" means any Letter of Credit issued by the
Issuing Lender under the Commitment pursuant to Section 2.4, either as
originally issued or as the same may be supplemented, modified,
amended, renewed, extended or supplanted.
"LEVERAGE RATIO" means, as of the last day of each Fiscal
Quarter, the ratio of (a) Average Total Funded Debt as of that date, to
(b) EBITDA for the four Fiscal Quarter period ending on that date,
PROVIDED that to the extent that any pro forma adjustment to EBITDA has
been made to reflect the financial results of any new Subsidiary (or
operating assets) acquired or sold, transferred or otherwise disposed
of by Borrower and its Subsidiaries during that fiscal period, then
Average Total Funded Debt shall be adjusted, on a pro forma basis, to
include (or exclude) any portion of Total Funded Debt which was
incurred in connection with the acquisition of the Subsidiary (or
operating assets) so acquired, sold, transferred or otherwise disposed
of.
"LICENSE REVOCATION" means the revocation, failure to renew or
suspension of, or the appointment of a receiver, supervisor or similar
official with respect to, any casino, gambling or gaming license issued
by any Gaming Board covering any casino or gaming facility of Borrower
or any of its Subsidiaries, and also means the termination of any
contract entered into by Borrower or any of its Subsidiaries concerning
the operation of lottery systems.
"LIEN" means any mortgage, deed of trust, pledge,
hypothecation, assignment for security, security interest, encumbrance,
lien or charge of any kind, whether voluntarily
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<PAGE>
incurred or arising by operation of Law or otherwise, affecting any
Property, INCLUDING any agreement to grant any of the foregoing, any
conditional sale or other title retention agreement, any lease in
the nature of a security interest, and/or the filing of or agreement
to give any financing statement (OTHER THAN a precautionary
financing statement with respect to a lease that is not in the
nature of a security interest) under the Uniform Commercial Code or
comparable Law of any jurisdiction with respect to any Property.
"LOAN" means the aggregate of the Advances made at any one
time by the Lenders pursuant to Article 2.
"LOAN DOCUMENTS" means, collectively, this Agreement, the
Notes, the Swing Line Documents, the Guaranty, each Request for Loan,
each Request for Letter of Credit, each Compliance Certificate, each
Pricing Certificate, each Swap Agreement entered into with any Lender
and any other agreements of any type or nature hereafter executed and
delivered by Borrower or any of its Subsidiaries to the Administrative
Agent or to any Lender in any way relating to or in furtherance of this
Agreement, in each case either as originally executed or as the same
may from time to time be supplemented, modified, amended, restated,
extended or supplanted.
"MAINTENANCE CAPITAL EXPENDITURE" means a Capital Expenditure
for the maintenance, repair, restoration or refurbishment of tangible
Property of Borrower or its Subsidiaries, but EXCLUDING any Capital
Expenditure which adds to or further improves any such Property. In any
event, replacement of lottery equipment in any jurisdiction if required
or requested by any Gaming Board in connection with the award by the
Gaming Boards of such jurisdiction of any extension, renewal or
replacement of a lottery contract will not constitute Maintenance
Capital Expenditures.
"MARGIN STOCK" means "margin stock" as such term is defined in
Regulation U.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or
events which (a) has or could reasonably be expected to have any
material adverse effect whatsoever upon the validity or
enforceability of any Loan Document, (b) is or could reasonably be
expected to be material and adverse to the business or condition
(financial or otherwise) or prospects of Borrower and its
Subsidiaries, taken as a whole and with a view to the totality of
circumstances then existing with respect to Borrower and its
Subsidiaries, or (c) materially impairs or could reasonably be
expected to materially impair the ability of Borrower or Guarantors
(taken as a whole) to perform the Obligations.
"MATURITY DATE" means June 30, 2004.
"MERGER" means the merger of Acquisition Corporation and
Powerhouse, with Powerhouse the survivor, pursuant to the Merger
Agreement, and the other transactions contemplated by the Merger
Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger
dated as of March 12, 1999 among Borrower, Acquisition Corporation and
Powerhouse, as amended or supplemented prior to the Closing Date.
"MOODY'S" means Moody's Investors Service, Inc.
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<PAGE>
"MULTIEMPLOYER PLAN" means any employee benefit plan of the
type described in Section 4001(a)(3) of ERISA to which Borrower or any
of its ERISA Affiliates contribute or are obligated to contribute.
"NEGATIVE PLEDGE" means a Contractual Obligation that contains
a covenant binding on Borrower or any of its Subsidiaries that
prohibits Liens on any of its or their Property, OTHER THAN (a) any
such covenant contained in a Contractual Obligation granting a Lien
permitted under Section 6.8 which affects only the Property that is the
subject of such permitted Lien and (b) any such covenant that does not
apply to Liens securing the Obligations or any indebtedness which is
used, directly or indirectly, to refinance the Obligations.
"NET INCOME" means, with respect to any fiscal period and with
respect to any Person, the consolidated net income of that Person from
continuing operations for that period, determined in accordance with
Generally Accepted Accounting Principles, consistently applied.
"NOTES" means each promissory note made by Borrower to a
Lender evidencing the Advances made by that Lender under its Pro Rata
Share, substantially in the form of Exhibit C, either as originally
executed or as the same may from time to time be supplemented,
modified, amended, renewed, extended or supplanted.
"OBLIGATIONS" means all present and future obligations of
every kind or nature of Borrower or the Guarantors at any time and from
time to time owed to the Administrative Agent, the Issuing Lender, the
Swing Line Lender or the Lenders or any one or more of them, under any
one or more of the Loan Documents, whether due or to become due,
matured or unmatured, liquidated or unliquidated, or contingent or
noncontingent, INCLUDING obligations of performance as well as
obligations of payment, and INCLUDING interest that accrues after the
commencement of any proceeding under any Debtor Relief Law by or
against Borrower or any Guarantor, whether or not allowed as a claim in
such proceeding.
"OPINIONS" means the favorable written legal opinions of
Hughes and Luce and Lionel, Sawyer & Collins, special Nevada local
counsel to Borrower and the Guarantors.
"OUTSTANDING OBLIGATIONS" means, as of each date of
determination, and giving effect to the making of any such credit
accommodations requested on that date, the SUM of (i) the aggregate
principal amount of the outstanding Loans, PLUS (ii) the Swing Line
Outstandings, PLUS (iii) the Aggregate Effective Amount of all Letters
of Credit.
"PARTY" means any Person other than the Administrative Agent,
the Issuing Lender, the Swing Line Lender and the Lenders, which now or
hereafter is a party to any of the Loan Documents.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereof established under ERISA.
"PENSION PLAN" means any "employee pension benefit plan" (as
such term is defined in Section 3(2) of ERISA), OTHER THAN a
Multiemployer Plan, which is subject to Title IV of
15
<PAGE>
ERISA and is maintained by Borrower or any of its Subsidiaries or to
which Borrower or any of its Subsidiaries contributes or has an
obligation to contribute.
"PERMITTED ENCUMBRANCES" means:
(a) inchoate Liens incident to construction on or
maintenance of real property; or Liens incident to
construction on or maintenance of real property now or
hereafter filed of record for which adequate reserves have
been set aside in accordance with Generally Accepted
Accounting Principles (or deposits made pursuant to applicable
Law) and which are being contested in good faith by
appropriate proceedings and have not proceeded to judgment,
PROVIDED that, by reason of nonpayment of the obligations
secured by such Liens, no such real property is subject to a
material risk of loss or forfeiture;
(b) Liens for taxes and assessments which are not yet
past due; or Liens for taxes and assessments for which
adequate reserves have been set aside in accordance with
Generally Accepted Accounting Principles and are being
contested in good faith by appropriate proceedings and have
not proceeded to judgment, PROVIDED that, by reason of
nonpayment of the obligations secured by such Liens, no
Property is subject to a material risk of loss or forfeiture;
(c) minor defects and irregularities in title to any
real property which in the aggregate do not materially impair
the fair market value or use of the real property for the
purposes for which it is or may reasonably be expected to be
held;
(d) easements, exceptions, reservations, or other
agreements for the purpose of pipelines, conduits, cables,
wire communication lines, power lines and substations,
streets, trails, walkways, drainage, irrigation, water, and
sewerage purposes, dikes, canals, ditches, the removal of oil,
gas, coal, or other minerals, and other like purposes
affecting real property, facilities, or equipment which in the
aggregate do not materially burden or impair the fair market
value or use of such real property for the purposes for which
it is or may reasonably be expected to be held;
(e) easements, exceptions, reservations, or other
agreements for the purpose of facilitating the joint or common
use of real property in or adjacent to a shopping center or
similar project affecting real property which in the aggregate
do not materially burden or impair the fair market value or
use of such real property for the purposes for which it is or
may reasonably be expected to be held;
(f) rights reserved to or vested in any Governmental
Agency to control or regulate, or obligations or duties to any
Governmental Agency with respect to, the use of any real
property;
(g) present or future zoning laws and ordinances or
other laws and ordinances restricting the occupancy, use, or
enjoyment of real property;
(h) statutory Liens, other than those described in
clauses (a) or (b) above, arising in the ordinary course of
business with respect to obligations which are not delinquent
or are being contested in good faith, PROVIDED that, if
delinquent, adequate
16
<PAGE>
reserves have been set aside in accordance with Generally
Accepted Accounting Principles with respect thereto and, by
reason of nonpayment, no real property is subject to a
material risk of loss or forfeiture;
(i) covenants, conditions, and restrictions affecting
the use of real property which in the aggregate do not
materially impair the fair market value or use of the real
property for the purposes for which it is or may reasonably be
expected to be held;
(j) rights of tenants under leases and rental
agreements covering real property entered into in the ordinary
course of business of the Person owning such real property;
(k) Liens consisting of pledges or deposits to secure
obligations under workers' compensation laws, mandatory
unemployment insurance or similar legislation, including Liens
of judgments thereunder which are not currently dischargeable;
(l) Liens consisting of pledges or deposits of
Property to secure performance in connection with operating
leases made in the ordinary course of business to which
Borrower or a Subsidiary of Borrower is a party as lessee,
PROVIDED the aggregate value of all such pledges and deposits
in connection with any such lease does not at any time exceed
20% of the annual fixed rentals payable under such lease; and
(m) Liens in favor of Governmental Agencies on the
assets of Borrower and its Subsidiaries imposed by applicable
Gaming Laws to the extent required in connection with the
operation of lotteries in various jurisdictions.
"PERMITTED RIGHT OF OTHERS" means a Right of Others consisting
of (a) an interest (other than a legal or equitable co-ownership
interest, an option or right to acquire a legal or equitable
co-ownership interest and any interest of a ground lessor under a
ground lease), that does not materially impair the value or use of
Property for the purposes for which it is or may reasonably be expected
to be held, (b) an option or right to acquire a Lien that would be a
Permitted Encumbrance, (c) the subordination of a lease or sublease in
favor of a financing entity, (d) a lease, rental or similar agreement
covering Property entered into in the ordinary course of business and
(e) a license, or similar right, of or to Intangible Assets granted in
the ordinary course of business.
"PERSON" means any individual or entity, INCLUDING a trustee,
corporation, limited liability company, general partnership, limited
partnership, joint stock company, trust, estate, unincorporated
organization, business association, firm, joint venture, Governmental
Agency, or other entity.
"POWERHOUSE" means Powerhouse Technologies, Inc., a Delaware
corporation.
"PRICING CERTIFICATE" means each Pricing Certificate,
substantially in the form of Exhibit D, which is hereafter signed by a
Senior Officer of Borrower and delivered to the Administrative Agent
and the Lenders pursuant to Section 7.1(c).
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"PRICING PERIOD" means (a) the period commencing on the date
hereof and ending on July 31, 1999, and (b) the subsequent consecutive
periods of three months each ending on the last day of each October,
January, April and July.
"PROJECTIONS" means the financial projections for Borrower and
its Subsidiaries attached hereto as Schedule 4.17 prepared on behalf of
Borrower and heretofore distributed to the Lenders.
"PROPERTY" means any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"PRO RATA SHARE" means, with respect to each Lender, the
percentage of the Commitment, the Loans, the Letters of Credit and the
Swing Line Advances held by that Lender (or by an SPC (as defined in
Section 11.8(g)) for which that Lender is the Granting Lender). As of
the date hereof, the Pro Rata Share of each Lender is set forth
opposite the name of that Lender on Schedule 1.1.
"QUARTERLY PAYMENT DATE" means the last day of each calendar
quarter following the date hereof.
"REAL PROPERTY" means, as of any date of determination, all
real Property then or theretofore owned, leased or occupied by Borrower
or any of its Subsidiaries.
"REDUCTION AMOUNT" means, as to each Reduction Date,
$12,500,000.
"REDUCTION DATE" means September 30, 2000 and each Quarterly
Payment Date thereafter.
"REFERENCE RATE" means the rate of interest publicly announced
from time to time by Bank of America in San Francisco, California, as
its "reference rate." It is a rate set by Bank of America based upon
various factors including Bank of America's costs and desired return,
general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at, above,
or below such announced rate. Any change in the Reference Rate
announced by Bank of America shall take effect at the opening of
business on the day specified in the public announcement of such
change.
"REGULATIONS D, T, U AND X" means Regulations D, T, U and X,
as at any time amended, of the Board of Governors of the Federal
Reserve System, or any other regulations in substance substituted
therefor.
"REQUEST FOR LETTER OF CREDIT" means a written request for a
Letter of Credit substantially in the form of Exhibit E, signed by a
Responsible Official of Borrower on its behalf (and by any Subsidiary
of Borrower which is designated by Borrower as the account party with
respect to the related Letter of Credit), and properly completed to
provide all information required to be included therein.
"REQUEST FOR LOAN" means a written request for a Loan
substantially in the form of Exhibit F, signed by a Responsible
Official of Borrower on its behalf, and properly completed to provide
all information required to be included therein.
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"REQUIREMENT OF LAW" means, as to any Person, the articles or
certificate of incorporation and by-laws or other organizational or
governing documents of such Person, and any Law, or judgment, award,
decree, writ or determination of a Governmental Agency, in each case
applicable to or binding upon such Person or any of its Property or to
which such Person or any of its Property is subject.
"REQUISITE LENDERS" means (a) as of any date of determination
if the Commitment is then in effect, Lenders having Pro Rata Shares
which are, in the aggregate, 51% or more of the Pro Rata Shares of the
Commitment then in effect and (b) as of any date of determination if
the Commitment has then been terminated and there are then any
Obligations outstanding, Lenders or other Creditors holding 51% or more
of the Outstanding Obligations.
"RESPONSIBLE OFFICIAL" means (a) when used with reference to a
Person other than an individual, any officer or manager of such Person,
general partner of such Person, officer of a corporate or limited
liability company general partner of such Person, officer of a
corporate or limited liability company general partner of a partnership
that is a general partner of such Person, or any other responsible
official thereof duly acting on behalf thereof, and (b) when used with
reference to a Person who is an individual, such Person. The Lenders
shall be entitled to conclusively rely upon any document or certificate
that is signed or executed by a Responsible Official of Borrower or any
of its Subsidiaries as having been authorized by all necessary
corporate, limited liability company, partnership and/or other action
on the part of Borrower or such Subsidiary.
"RIGHT OF OTHERS" means, as to any Property in which a Person
has an interest, any legal or equitable right, title or interest (other
than a Lien) held by any other Person in that Property, and any option
or right held by any other Person to acquire any such right, title or
interest in that Property, INCLUDING any option or right to acquire a
Lien; PROVIDED, however, that (a) any covenant restricting the use or
disposition of Property of such Person contained in any Contractual
Obligation of such Person and (b) any provision contained in a contract
creating a right of payment or performance in favor of a Person that
conditions, limits, restricts, diminishes, transfers or terminates such
right, shall not be deemed to constitute a Right of Others.
"SENIOR OFFICER" means the (a) chief executive officer or
manager, (b) president, (c) executive vice president, (d) senior vice
president, (e) chief financial officer, (f) treasurer, (g) assistant
treasurer, (h) secretary, or (i) assistant secretary of Borrower or any
of its Subsidiaries.
"SOLVENCY CERTIFICATE" means a Solvency Certificate,
substantially in the form of Exhibit G, signed by a Senior Officer of
Borrower certifying that, giving effect to the Merger, and to the
making of the initial Loans and the issuance of the initial Letters of
Credit, Borrower and each of the Guarantors (including Powerhouse and
its Subsidiaries) is solvent.
"SPECIAL EURODOLLAR CIRCUMSTANCE" means the application or
adoption after the date hereof of any Law or interpretation, or any
change therein or thereof, or any change in the interpretation or
administration thereof by any Governmental Agency, central bank or
comparable authority charged with the interpretation or administration
thereof, or compliance by any Lender or its Eurodollar Lending Office
with any request or directive (whether or not
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having the force of Law) of any such Governmental Agency, central
bank or comparable authority, or the existence or occurrence of
circumstances affecting the Designated Eurodollar Market generally
that are beyond the reasonable control of the Lenders.
"SUBORDINATED OBLIGATIONS" means unsecured Indebtedness of
Borrower (but not Indebtedness of any Subsidiary of Borrower), which:
(a) does not require amortization prior to the first
anniversary of the Maturity Date;
(b) is governed by agreements which contain
representations, warranties, covenants, defaults and other
provisions which are acceptable to the Requisite Lenders and
in any event less restrictive upon and onerous to, Borrower
and its Subsidiaries than the provisions of the Loan
Documents; and
(c) is subordinated in right of payment to the
Obligations pursuant to subordination provisions which are
acceptable to the Requisite Lenders in the exercise of their
sole discretion.
"SUBSIDIARY" means, as of any date of determination and with
respect to any Person, any corporation, limited liability company or
partnership (whether or not, in either case, characterized as such or
as a "joint venture"), whether now existing or hereafter organized or
acquired: (a) in the case of a corporation or limited liability
company, of which a majority of the securities having ordinary voting
power for the election of directors or other governing body (other than
securities having such power only by reason of the happening of a
contingency) are at the time beneficially owned by such Person and/or
one or more Subsidiaries of such Person, or (b) in the case of a
partnership, of which a majority of the partnership or other ownership
interests are at the time beneficially owned by such Person and/or one
or more of its Subsidiaries.
"SWAP AGREEMENT" means a written agreement between Borrower
and one or more financial institutions providing for "swap", "cap",
"collar" or other interest rate protection with respect to any
Indebtedness.
"SWING LINE" means the revolving line of credit established by
the Swing Line Lender in favor of Borrower pursuant to Section 2.5.
"SWING LINE LENDER" means Bank of America, acting through its
Nevada Commercial Banking Division.
"SWING LINE DOCUMENTS" means the promissory note and any other
documents executed by Borrower in favor of the Swing Line Lender in
connection with the Swing Line.
"SWING LINE LOANS" means loans made by the Swing Line Lender
to Borrower pursuant to Section 2.5.
"SWING LINE OUTSTANDINGS" means, as of any date of
determination, the aggregate principal Indebtedness of Borrower on all
Swing Line Loans then outstanding.
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"S&P" means Standard & Poor's Ratings Group (a division of
McGraw Hill, Inc.).
"TOTAL FUNDED DEBT" means, as of any date of determination,
the SUM (without duplication) of (a) the outstanding principal
Indebtedness of Borrower and its Subsidiaries for borrowed money
(INCLUDING debt securities issued by Borrower or any of its
Subsidiaries) on that date, PLUS (b) the aggregate amount of all
Capital Lease Obligations of Borrower and its Subsidiaries on that
date, PLUS (c) all obligations in respect of letters of credit or other
similar instruments for which Borrower or any of its Subsidiaries are
account parties or are otherwise obligated, PLUS (d) the aggregate
amount of all Contingent Obligations and other similar contingent
obligations of Borrower and its Subsidiaries with respect to any of the
foregoing, and PLUS (e) any obligations of Borrower or any of its
Subsidiaries to the extent that the same are secured by a Lien on any
of the assets of Borrower or its Subsidiaries, other than Permitted
Encumbrances.
"TO THE BEST KNOWLEDGE OF" means, when modifying a
representation, warranty or other statement of any Person, that the
fact or situation described therein is known by the Person (or, in the
case of a Person other than a natural Person, known by a Responsible
Official of that Person) making the representation, warranty or other
statement, or with the exercise of reasonable due diligence under the
circumstances (in accordance with the standard of what a reasonable
Person in similar circumstances would have done) would have been known
by the Person (or, in the case of a Person other than a natural Person,
would have been known by a Responsible Official of that Person).
"TRANSACTION NOTICE" has the meaning set forth in Section
2.8(a).
"TYPE", when used with respect to any Loan or Advance, means
the designation of whether such Loan or Advance is a Base Rate Loan or
Advance, or a Eurodollar Rate Loan or Advance.
"UNRELATED PERSON" means any Person OTHER THAN (i) an employee
stock ownership plan or other employee benefit plan covering the
employees of Borrower and its Subsidiaries or (ii) an Affiliate of any
Person or group of related Persons which as of the date of this
Agreement is the beneficial owner of 25% or more (in the aggregate) of
the outstanding common stock of Borrower.
"YEAR 2000 ISSUE" means failure of computer software, hardware
and firmware systems, and equipment containing embedded computer chips,
to properly receive, transmit, process, manipulate, store, retrieve,
re-transmit or in any other way utilize data and information due to the
occurrence of the year 2000 or the inclusion of dates on or after
January 1, 2000.
1.2 USE OF DEFINED TERMS. Any defined term used in the plural
shall refer to all members of the relevant class, and any defined term used in
the singular shall refer to any one or more of the members of the relevant
class.
1.3 ACCOUNTING TERMS - FISCAL PERIODS. All accounting terms
not specifically defined in this Agreement shall be construed in conformity
with, and all financial data required to be submitted by this Agreement shall be
prepared in conformity with, Generally Accepted Accounting Principles applied on
a consistent basis, EXCEPT as otherwise specifically prescribed herein.
In the
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event that Generally Accepted Accounting Principles or Borrower's Fiscal Year
or Fiscal Quarters change during the term of this Agreement such that the
covenants contained in Sections 6.11 through 6.12 would then be calculated
for different periods, in a different manner or with different components,
(a) Borrower and the Lenders agree to amend this Agreement in such respects
as are necessary to conform those covenants as criteria for evaluating
Borrower's financial condition to substantially the same criteria as were
effective prior to such change in Fiscal Year, Fiscal Quarters or in
Generally Accepted Accounting Principles and (b) Borrower shall be deemed to
be in compliance with the covenants contained in the aforesaid Sections if
and to the extent that Borrower would have been in compliance therewith for
the pre-existing fiscal periods and under Generally Accepted Accounting
Principles as in effect immediately prior to such change, but shall have the
obligation to deliver each of the materials described in Article 7 to the
Creditors, on the dates therein specified, with financial data presented for
its pre-existing fiscal periods and in a manner which conforms with Generally
Accepted Accounting Principles as in effect immediately prior to such change.
1.4 ROUNDING. Any financial ratios required to be maintained
by Borrower pursuant to this Agreement shall be calculated by dividing the
appropriate component by the other component, carrying the result to one place
more than the number of places by which such ratio is expressed in this
Agreement and rounding the result up or down to the nearest number (with a
round-up if there is no nearest number) to the number of places by which such
ratio is expressed in this Agreement.
1.5 EXHIBITS AND SCHEDULES. All Exhibits and Schedules to this
Agreement, either as originally existing or as the same may from time to time be
supplemented, modified or amended, are incorporated herein by this reference. A
matter disclosed on any Schedule shall be deemed disclosed on all Schedules.
1.6 MISCELLANEOUS TERMS. In the Loan Documents, the term "or"
is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory;
the term "may" is permissive. Masculine terms also apply to females; feminine
terms also apply to males. The term "including" is by way of example and not
limitation.
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Article 2
LOANS AND LETTERS OF CREDIT
2.1 LOANS-GENERAL.
(a) Subject to the terms and conditions set forth in
this Agreement, at any time and from time to time from the Closing Date
through the Business Day immediately prior to the Maturity Date, each
Lender shall, pro rata according to that Lender's Pro Rata Share of the
then applicable Commitment, make Advances to Borrower under the
Commitment in such amounts as Borrower may request that do not result
in the Outstanding Obligations being in excess of the then effective
Commitment. Subject to the limitations set forth herein, the Advances
by each Lender under its Pro Rata Share of the Commitment may be
prepaid without premium or penalty.
(b) Subject to the next sentence, each Loan shall be
made pursuant to a Request for Loan which shall specify the requested
(i) date of such Loan, (ii) type of Loan, (iii) amount of such Loan,
and (iv) in the case of a Eurodollar Rate Loan, the Eurodollar Period
for such Loan. Unless the Administrative Agent, in its sole and
absolute discretion, has notified Borrower to the contrary, a Loan may
be requested by telephone by a Responsible Official of Borrower, in
which case Borrower shall confirm such request by promptly delivering a
Request for Loan in person or by telecopier conforming to the preceding
sentence to the Administrative Agent. The Administrative Agent shall
incur no liability whatsoever hereunder in acting upon any telephonic
request purportedly made by a Responsible Official of Borrower, and
Borrower hereby agrees to indemnify each Creditor from any loss, cost,
expense or liability as a result of so acting.
(c) Promptly following receipt of a Request for Loan,
the Administrative Agent shall notify each Lender by telephone or
telecopier of the date and type of the Loan, any applicable Eurodollar
Period, and that Lender's Pro Rata Share of the Loan. Not later than
11:00 a.m., California local time, on the date specified for any Loan
(which must be a Business Day), each Lender shall make its Pro Rata
Share of the Loan in immediately available funds available to the
Administrative Agent at the Administrative Agent's Office. Upon
satisfaction or waiver of the applicable conditions set forth in
Article 8, all Advances shall be credited on that date in immediately
available funds to the Deposit Account for Borrower.
(d) Unless the Requisite Lenders otherwise consent,
each Loan shall be in an integral multiple of $500,000 which is not
less than $2,500,000.
(e) The Advances made by each Lender shall be
evidenced by that Lender's Note.
(f) A Request for Loan shall be irrevocable upon the
Administrative Agent's first notification thereof.
(g) If no Request for Loan (or telephonic request for
Loan referred to in the second sentence of Section 2.1(b), if
applicable) has been made within the requisite notice
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periods set forth in Section 2.2 or 2.3 prior to the end of the
Eurodollar Period for any Eurodollar Rate Loan, then on the last day
of such Eurodollar Period, such Eurodollar Rate Loan shall be
automatically converted into a Base Rate Loan in the same amount.
(h) If a Loan is to be made on the same date that
another Loan is due and payable, Borrower or the Lenders (as the case
may be) shall upon the request of the Administrative Agent make
available to the Administrative Agent the net amount of funds (giving
effect to both such Loans) and the effect for purposes of this
Agreement shall be the same as if separate transfers of funds had been
made with respect to each such Loan.
2.2 BASE RATE LOANS. Each request by Borrower for a Base Rate
Loan shall be made pursuant to a Request for Loan (or telephonic or other
request for loan referred to in the second sentence of Section 2.1(b), if
applicable) received by the Administrative Agent, at the Administrative Agent's
Office, not later than 9:00 a.m. California local time, on the date (which must
be a Business Day) of the requested Base Rate Loan. All Loans shall constitute
Base Rate Loans unless properly designated as Eurodollar Rate Loans pursuant to
Section 2.3.
2.3 EURODOLLAR RATE LOANS.
(a) Each request by Borrower for a Eurodollar Rate
Loan shall be made pursuant to a Request for Loan (or telephonic or
other request for Loan referred to in the second sentence of Section
2.1(b), if applicable) received by the Administrative Agent, at the
Administrative Agent's Office, not later than 9:00 a.m., California
local time, at least three Eurodollar Business Days before the first
day of the applicable Eurodollar Period.
(b) On the date which is two Eurodollar Business Days
before the first day of the applicable Eurodollar Period, the
Administrative Agent shall confirm its determination of the applicable
Eurodollar Rate (which determination shall be conclusive in the absence
of manifest error) and promptly shall give notice of the same to
Borrower and the Lenders by telephone or telecopier.
(c) Unless the Administrative Agent and the Requisite
Lenders otherwise consent, no more than ten Eurodollar Rate Loans shall
be outstanding at any one time.
(d) No Eurodollar Rate Loan may be requested during
the continuation of a Default or Event of Default.
(e) Nothing contained herein shall require any Lender
to fund any Eurodollar Rate Advance in the Designated Eurodollar
Market.
2.4 LETTERS OF CREDIT.
(a) Subject to the terms and conditions hereof, at
any time and from time to time from the Closing Date through the
Business Day immediately prior to the Maturity Date, the Issuing Lender
shall issue such Letters of Credit under the Commitment as Borrower may
request by a Request for Letter of Credit; PROVIDED that (i) giving
effect to all such Letters of Credit, the Outstanding Obligations do
not exceed the then applicable
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Commitment, and (ii) the Aggregate Effective Amount under all
outstanding Letters of Credit shall not exceed $20,000,000. Letters
of Credit may be issued for the account of Borrower or for the
account of any Subsidiary of Borrower which has entered into the
Guaranty (or a joinder thereto), and each such Subsidiary which is
hereafter designated by Borrower as an account party thereunder
agrees that it shall comply with the provisions of this Section as
if it were a party to this Agreement. Each Letter of Credit shall be
in a form acceptable to the Issuing Lender. Unless all the Lenders
otherwise consent, no Letter of Credit shall have a term which
exceeds one year or extends beyond the Maturity Date.
(b) Each Request for Letter of Credit shall be
submitted to the Issuing Lender, with a copy to the Administrative
Agent, at least five Business Days prior to the date upon which the
related Letter of Credit is proposed to be issued. The Administrative
Agent shall promptly notify the Issuing Lender whether such Request for
Letter of Credit, and the issuance of a Letter of Credit pursuant
thereto, conforms to the requirements of this Agreement. Upon issuance
of a Letter of Credit, the Issuing Lender shall promptly notify the
Administrative Agent, and the Administrative Agent shall promptly
notify the Lenders, of the amount and terms thereof.
(c) Upon the issuance of a Letter of Credit, each
Lender shall be deemed to have purchased at par a pro rata
participation in such Letter of Credit from the Issuing Lender in an
amount equal to that Lender's Pro Rata Share. Without limiting the
scope and nature of each Lender's participation in any Letter of
Credit, to the extent that the Issuing Lender has not been reimbursed
by Borrower for any payment required to be made by the Issuing Lender
under any Letter of Credit, each Lender shall, pro rata according to
its Pro Rata Share, pay the purchase price for such participation to
the Issuing Lender through the Administrative Agent promptly upon
demand therefor. The obligation of each Lender to so pay the
participation purchase price to the Issuing Lender shall be absolute
and unconditional and shall not be affected by the occurrence of an
Event of Default or any other occurrence or event. Any such payment of
the purchase price shall not relieve or otherwise impair the obligation
of Borrower to reimburse the Issuing Lender for the amount of any
payment made by the Issuing Lender under any Letter of Credit together
with interest as hereinafter provided.
(d) Borrower shall pay to the Issuing Lender through
the Administrative Agent an amount equal to any payment made by the
Issuing Lender with respect to each Letter of Credit upon demand made
by the Issuing Lender therefor, together with interest on such amount
from the date of any payment made by the Issuing Lender at the Default
Rate (unless Borrower has made arrangements for the making of a Loan in
the amount of such payment on the date thereof or had otherwise
arranged for the timely reimbursement of such payment). The
principal amount of any such payment shall be used to reimburse the
Issuing Lender for the payment made by it under the Letter of Credit
and, to the extent that the Lenders have not reimbursed the Issuing
Lender pursuant to Section 2.4(c), the interest amount of any such
payment shall be for the account of the Issuing Lender. Each Lender
that has paid the participation purchase price to the Issuing Lender
pursuant to Section 2.4(c) shall thereupon acquire a pro rata
participation, to the extent of such payment, in the claim of the
Issuing Lender against Borrower for reimbursement of principal and
interest under this Section 2.4(d) and shall share, in accordance with
that pro rata participation, in any principal
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payment made by Borrower with respect to such claim and in any
interest payment made by Borrower (but only with respect to periods
subsequent to the date such Lender paid the participation purchase
price to the Issuing Lender) with respect to such claim.
(e) Subject to Article 8, Borrower may request,
pursuant to a Request for Loan, that Advances be made pursuant to
Section 2.1(a) to provide funds for the payment required by Section
2.4(d). The proceeds of such Advances shall be paid directly to the
Issuing Lender to reimburse it for the payment made by it under the
Letter of Credit.
(f) If Borrower fails to make the payment required by
Section 2.4(d) on a timely basis then, in lieu of the payment of the
participation purchase price to the Issuing Lender under Section
2.4(c), the Issuing Lender may (but is not required to), without notice
to or the consent of Borrower, instruct the Administrative Agent to
cause Advances to be made by the Lenders under their Pro Rata Shares of
the Commitment in an aggregate amount equal to the amount paid by the
Issuing Lender with respect to that Letter of Credit and, for this
purpose, the conditions precedent set forth in Article 8 shall not
apply. The proceeds of such Advances shall be paid directly to the
Issuing Lender to reimburse it for the payment made by it under the
Letter of Credit.
(g) The issuance of any supplement, modification,
amendment, renewal, or extension to or of any Letter of Credit shall be
treated in all respects the same as the issuance of a new Letter of
Credit, PROVIDED that no new issuance fees shall be assessed except to
the extent that the tenor or amount of the related Letter of Credit are
thereby increased.
(h) The obligation of Borrower to pay to the Issuing
Lender the amount of any payment made by the Issuing Lender under any
Letter of Credit shall be absolute, unconditional, and irrevocable,
subject only to performance by the Issuing Lender of its obligations to
Borrower under Uniform Commercial Code Section 5109. Without limiting
the foregoing, the obligations of Borrower to the Issuing Lender shall
not be affected by any of the following circumstances:
(i) any lack of validity or enforceability of
the Letter of Credit, this Agreement, or any other agreement
or instrument relating thereto;
(ii) any amendment or waiver of or any consent
to departure from the Letter of Credit, this Agreement, or
any other agreement or instrument relating thereto, with the
consent of Borrower;
(iii) the existence of any claim, setoff,
defense, or other rights which Borrower may have at any time
against the Issuing Lender, the Administrative Agent or any
Lender, any beneficiary of the Letter of Credit (or any
persons or entities for whom any such beneficiary may be
acting) or any other Person, whether in connection with the
Letter of Credit, this Agreement, or any other agreement or
instrument relating thereto, or any unrelated transactions;
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(iv) any demand, statement, or any other
document presented under the Letter of Credit proving to be
forged, fraudulent, invalid, or insufficient in any respect
or any statement therein being untrue or inaccurate in any
respect whatsoever so long as any such document appeared to
comply with the terms of the Letter of Credit;
(v) payment by the Issuing Lender in good
faith under the Letter of Credit against presentation of a
draft or any accompanying document which does not strictly
comply with the terms of the Letter of Credit;
(vi) the existence, character, quality,
quantity, condition, packing, value or delivery of any
Property purported to be represented by documents presented
in connection with any Letter of Credit or any difference
between any such Property and the character, quality,
quantity, condition, or value of such Property as described
in such documents;
(vii) the time, place, manner, order or
contents of shipments or deliveries of Property as described
in documents presented in connection with any Letter of
Credit or the existence, nature and extent of any insurance
relative thereto;
(viii) the solvency or financial
responsibility of any party issuing any documents in
connection with a Letter of Credit;
(ix) any failure or delay in notice of
shipments or arrival of any Property;
(x) any error in the transmission of any
message relating to a Letter of Credit not caused by the
Issuing Lender, or any delay or interruption in any such
message;
(xi) any error, neglect or default of any
correspondent of the Issuing Lender in connection with a
Letter of Credit;
(xii) any consequence arising from acts of
God, war, insurrection, civil unrest, disturbances, labor
disputes, emergency conditions or other causes beyond the
control of the Issuing Lender;
(xiii) so long as the Issuing Lender in good
faith determines that the contract or document appears to
comply with the terms of the Letter of Credit, the form,
accuracy, genuineness or legal effect of any contract or
document referred to in any document submitted to the
Issuing Lender in connection with a Letter of Credit; and
(xiv) where the Issuing Lender has acted in
good faith and observed general banking usage, any other
circumstances whatsoever.
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(i) The Issuing Lender shall be entitled to
the protection accorded to the Administrative Agent pursuant
to Article 10, MUTATIS MUTANDIS.
(j) The Uniform Customs and Practice for
Documentary Credits, as published in its most current
version by the International Chamber of Commerce, shall be
deemed a part of this Section and shall apply to all Letters
of Credit to the extent not inconsistent with applicable Law.
2.5 SWING LINE. (a) Subject to the terms and conditions set
forth herein, from the Closing Date through the day prior to the Maturity
Date the Swing Line Lender shall make Swing Line Loans to Borrower in such
amounts as Borrower may request which do not result in the Outstanding
Obligations being in excess of the then effective Commitment, PROVIDED that
(i) after giving effect to each Swing Line Loan, the Swing Line Outstandings
shall not exceed $5,000,000 and (ii) without the consent of all of the
Lenders, no Swing Line Loan may be made during the continuation of an Event
of Default. Borrower may borrow, repay and reborrow under this Section.
Unless notified to the contrary by the Swing Line Lender, borrowings under
the Swing Line may be made in amounts which are integral multiples of
$100,000 upon telephonic request by a Responsible Official of Borrower made
to the Administrative Agent not later than 1:00 p.m., California local time,
on the Business Day of the requested borrowing (which telephonic request
shall be promptly confirmed in writing by telecopier), PROVIDED that if the
requested Swing Line Loan is to be credited to an account which is not with
the Swing Line Lender, the request must be submitted by 11:30 a.m.,
California local time. Promptly after receipt of such a request for
borrowing, the Administrative Agent shall provide telephonic verification to
the Swing Line Lender that, after giving effect to such request, the
Outstanding Obligations will not exceed the Commitment. Unless notified to
the contrary by the Swing Line Lender, each repayment of a Swing Line Loan
shall be in an amount which is an integral multiple of $100,000. If Borrower
instructs the Swing Line Lender to debit its demand deposit account at the
Swing Line Lender in the amount of any payment with respect to a Swing Line
Loan, or the Swing Line Lender otherwise receives repayment, after 3:00 p.m.,
California local time, on a Business Day, such payment shall be deemed
received on the next Business Day. The Swing Line Lender shall promptly
notify the Administrative Agent of the Swing Loan Outstandings each time
there is a change therein under the Swing Line.
(b) Swing Line Loans shall bear interest at a fluctuating
rate per annum equal to the Base Rate PLUS the Base Rate Margin (unless the
Default Rate is then applicable under Section 3.9). Interest shall be payable
on such dates, not more frequent than monthly, as may be specified by the
Swing Line Lender and in any event on the Maturity Date. The Swing Line
Lender shall be responsible for invoicing Borrower for such interest.
Interest payable on Swing Line Loans is solely for the account of the Swing
Line Lender (subject to clause (d) below).
(c) The Swing Line Loans shall be payable within five
Business Days after demand made by the Swing Line Lender and in any event on
the Maturity Date or any earlier date when all other Obligations are due.
(d) Upon the making of a Swing Line Loan in accordance with
Section 2.5(a), each Lender shall be deemed to have purchased from the Swing
Line Lender a participation therein in an amount equal to that Lender's Pro
Rata Share TIMES the amount of the Swing Line Loan. Upon demand made by the
Swing Line Lender through the Administrative Agent, each Lender shall,
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according to its Pro Rata Share, promptly provide to the Swing Line Lender
its purchase price therefor in an amount equal to its participation therein.
The obligation of each Lender to so provide its purchase price to the Swing
Line Lender shall be absolute and unconditional (subject only to the making
of a demand upon that Lender by the Swing Line Lender) and shall not be
affected by the occurrence of a Default or Event of Default; PROVIDED that no
Lender shall be obligated to purchase its Pro Rata Share of (i) Swing Line
Loans to the extent that Swing Line Outstandings are in excess of $5,000,000
or to the extent that the SUM of the Indebtedness evidenced by the Notes PLUS
the Aggregate Effective Amount of all outstanding Letters of Credit PLUS the
Swing Line Outstandings exceeds the Commitment (as in effect on the date of
the making of the related Swing Line Loan) and (ii) any Swing Line Loan made
(absent the consent of all of the Lenders) during the continuation of an
Event of Default. Each Lender that has provided the purchase price due for
its participation in Swing Line Loans to the Swing Line Lender shall
thereupon acquire a pro rata participation, to the extent of such payment, in
the claim of the Swing Line Lender against Borrower for principal and
interest and shall share, in accordance with that pro rata participation, in
any principal payment made by Borrower with respect to such claim and in any
interest payment made by Borrower (but only with respect to periods
subsequent to the date such Lender paid the Swing Line Lender its purchase
price) with respect to such claim.
(e) Upon any demand for payment of the Swing Line
Outstandings by the Swing Line Lender (unless Borrower has made other
arrangements acceptable to the Swing Line Lender to reduce the Swing Line
Outstandings to $0), Borrower shall request a Loan pursuant to Section 2.1(a)
sufficient to repay all Swing Line Outstandings (and, for this purpose,
Section 2.1(d) shall not apply). In each case, the Administrative Agent shall
automatically provide the respective Advances made by each Lender to the
Swing Line Lender (which the Swing Line Lender shall then apply to the Swing
Line Outstandings). In the event that Borrower fails to request a Loan within
the time specified by Section 2.2 on any such date, the Administrative Agent
may, but is not required to, without notice to or the consent of Borrower,
cause Advances to be made by the Lenders under the Commitment in amounts
which are sufficient to reduce the Swing Line Outstandings as required above.
The conditions precedent set forth in Article 8 shall not apply to Advances
to be made by the Lenders pursuant to the three preceding sentences. The
proceeds of such Advances shall be paid directly to the Swing Line Lender for
application to the Swing Line Outstandings.
2.6 VOLUNTARY REDUCTION OF COMMITMENT. Borrower shall have
the right, at any time and from time to time, without penalty or charge,
effective following at least three Business Days' prior written notice by a
Responsible Official of Borrower to the Administrative Agent, voluntarily to
reduce, permanently and irrevocably, in aggregate principal amounts in an
integral multiple of $1,000,000 but not less than $5,000,000, or to
terminate, all or a portion of the then undisbursed portion of the
Commitment; PROVIDED that the Commitment may not be so reduced below an
amount equal to the SUM OF (i) the aggregate principal amount outstanding
under the Notes, PLUS (ii) the Aggregate Effective Amount of all outstanding
Letters of Credit PLUS (c) the Swing Line Outstandings, in each case as of
the effective date of the reduction in the Commitment. The voluntary
reduction of the Commitment by Borrower under this Section shall have no
effect upon the requirement of mandatory reductions thereof in accordance
with Section 2.7. The Administrative Agent shall promptly notify the Lenders
of any reduction or termination of the Commitment under this Section.
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2.7 MANDATORY REDUCTIONS OF COMMITMENT. The Commitment
shall be automatically and permanently reduced (a) on the date of each
Disposition made pursuant to Section 6.2(c) by the amount by which the
proceeds of such Disposition, when aggregated with all other Dispositions
theretofore made by Borrower and its Subsidiaries during such Fiscal Year,
exceed $25,000,000 until the Commitment has been reduced to $200,000,000, and
(b) on each Reduction Date by the Reduction Amount until the Commitment has
been reduced to $150,000,000.
2.8 OPTIONAL TERMINATION OF COMMITMENT.
(a) In the event that any transaction is proposed or other
circumstances are contemplated which shall result in a Change in
Control, Borrower may elect, in its sole discretion, to notify the
Administrative Agent in advance of the proposed transaction (a
"Transaction Notice") not more than 180 days nor less than 60 days
prior to the consummation of the proposed transaction of in
accordance with the provisions of this clause (a). Each Transaction
Notice shall be in writing and shall set forth, in detail reasonably
satisfactory to the Administrative Agent, the nature of the proposed
transaction, in any event describing any Person or Persons who will
directly or indirectly acquire any interest in Borrower as a result
thereof and any affect upon the membership of the board of directors
of Borrower or its senior management. Promptly following its receipt
of any Transaction Notice satisfying the requirements of this clause
(a), the Administrative Agent shall distribute a copy thereof to
each of the Lenders.
(b) If Borrower delivers a Transaction Notice and, during the
sixty day period immediately following the delivery of the Transaction
Notice to the Lenders by the Administrative Agent, the Requisite
Lenders do not object in writing to the proposed transaction (which the
Requisite Lenders may do in their sole discretion), then Borrower may
proceed with the proposed transaction (or allow the contemplated
circumstances to occur) to the extent conforming to the Transaction
Notice in all material respects, and the transaction shall not
constitute a Change in Control (any failure of the Requisite Lenders to
so respond during the prescribed period constituting a waiver of any
such objections). In the event that the Requisite Lenders object in
writing to the proposed transaction during the prescribed period, then
Borrower shall not consummate the proposed transaction (or any similar
transaction constituting a Change in Control), unless and until the
Obligations have been repaid and the Commitment is terminated or the
Requisite Lenders otherwise consent.
(c) If Borrower does not deliver a Transaction Notice in
respect of any transaction or circumstances resulting in a Change in
Control, then the Requisite Lenders may in their sole and absolute
discretion elect, during the sixty day period immediately subsequent to
the LATER OF (i) such occurrence or (ii) the EARLIER of (y) receipt of
written notice to the Administrative Agent of the Change in Control
from Borrower, or (z) if no such notice has been received by the
Administrative Agent, the date upon which the Administrative Agent has
actual knowledge thereof, to terminate the Commitment, in which case
the Commitment shall be terminated effective on the date which is
thirty days subsequent to written notice thereof from the
Administrative Agent to Borrower.
2.9 ADMINISTRATIVE AGENT'S RIGHT TO ASSUME FUNDS AVAILABLE FOR
ADVANCES. Unless the Administrative Agent shall have been notified by any Lender
no later than 10:00 a.m. on the
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Business Day of the proposed funding by the Administrative Agent of any Loan
that such Lender does not intend to make available to the Administrative
Agent such Lender's portion of the total amount of such Loan, the
Administrative Agent may assume that such Lender has made such amount
available to the Administrative Agent on the date of the Loan and the
Administrative Agent may, in reliance upon such assumption, make available to
Borrower the corresponding amount. If the Administrative Agent has made funds
available to Borrower based on such assumption and such corresponding amount
is not in fact made available to the Administrative Agent by such Lender, the
Administrative Agent shall be entitled to recover such corresponding amount
on demand from such Lender. If such Lender does not pay such corresponding
amount forthwith upon the Administrative Agent's demand therefor, the
Administrative Agent promptly shall notify Borrower who shall pay such
corresponding amount to the Administrative Agent. The Administrative Agent
also shall be entitled to recover from such Lender interest on such
corresponding amount in respect of each day from the date such corresponding
amount was made available by the Administrative Agent to Borrower to the date
such corresponding amount is recovered by the Administrative Agent, at a rate
per annum equal to the daily Federal Funds Rate. Nothing herein shall be
deemed to relieve any Lender from its obligation to fulfill its share of the
Commitment.
2.10 SENIOR INDEBTEDNESS. The Obligations shall be and
hereby are designated by Borrower as "Senior Indebtedness" and "Designated
Senior Indebtedness" with respect to all Indebtedness and other obligations
of Borrower and its Subsidiaries (to the effect that the Obligations shall be
afforded all rights afforded to the most senior class of creditors
thereunder) which are subordinated in any manner or to any extent to any
other Indebtedness and other obligations of Borrower or its Subsidiaries.
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Article 3
PAYMENTS AND FEES
3.1 PRINCIPAL AND INTEREST.
(a) Interest shall be payable on the outstanding
daily unpaid principal amount of each Advance from the date thereof
until payment in full is made and shall accrue and be payable at the
rates set forth or provided for herein before and after any Default or
Event of Default, before and after maturity, before and after judgment,
and before and after the commencement of any proceeding under any
Debtor Relief Law, with interest on overdue interest at the Default
Rate to the fullest extent permitted by applicable Laws.
(b) Interest accrued on each Base Rate Loan on the
first Business Day of each calendar quarter shall be due and payable on
that day. EXCEPT as otherwise provided in Section 3.9, the unpaid
principal amount of any Base Rate Loan shall bear interest at a
fluctuating rate per annum equal to the Base Rate PLUS the applicable
Base Rate Margin. Each change in the interest rate under this Section
3.1(b) due to a change in the Base Rate shall take effect
simultaneously with the corresponding change in the Base Rate.
(c) Interest accrued on each Eurodollar Rate Loan
which is for a term of three months or less shall be due and payable on
the last day of the related Eurodollar Period. Interest accrued on each
other Eurodollar Rate Loan shall be due and payable on the date which
is three months after the date such Eurodollar Rate Loan was made (and,
in the event that all of the Lenders have approved a Eurodollar Period
of longer than six months, every three months thereafter through the
last day of the Eurodollar Period) and on the last day of the related
Eurodollar Period. EXCEPT as otherwise provided in Section 3.9, the
unpaid principal amount of any Eurodollar Rate Loan shall bear interest
at a rate per annum equal to the Eurodollar Rate for that Eurodollar
Rate Loan PLUS the applicable Eurodollar Margin.
(d) If not sooner paid, the principal Indebtedness
evidenced by the Notes shall be payable as follows, and without set
off, counterclaim or reduction of any kind:
(i) the amount, if any, by which the
Outstanding Obligations at any time exceed the then applicable
Commitment (as reduced from time to time pursuant to Sections
2.6, 2.7 or 2.8), shall be payable immediately; and
(ii) the principal Indebtedness evidenced by
the Notes shall in any event be payable on the Maturity Date.
(e) The Notes may, at any time and from time to time,
voluntarily be paid or prepaid in whole or in part without premium or
penalty, EXCEPT that with respect to any voluntary prepayment under
this Section (i) any partial prepayment shall be not less than
$2,500,000, or in integral multiples of $500,000 which are in excess of
$2,500,000, (ii) the Administrative Agent shall have received written
notice of any prepayment by 9:00 a.m., California local time, on the
Business Day prior to the date of prepayment (which must be a Business
Day) in the case of a Base Rate Loan, and, in the case of a Eurodollar
Rate Loan,
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three Business Days before the date of prepayment, which notice
shall identify the date and amount of the prepayment and the Loan(s)
being prepaid, (iii) each prepayment of principal on
any Eurodollar Rate Loan shall be accompanied by payment of interest
accrued to the date of payment on the amount of principal
paid and (iv) any payment or prepayment of all or any part of
any Eurodollar Rate Loan on a day other than the last day of
the applicable Eurodollar Period shall be subject to Section
3.8(e). Promptly following receipt of a notice of prepayment under
clause (ii) above, the Administrative Agent shall notify each Lender by
telephone or telecopier (and if by telephone, promptly confirmed by
telecopier) of the date and amount thereof.
(f) Each payment of principal by Borrower hereunder
shall be applied ratably to the Advances made to Borrower which are
then due and payable, PROVIDED that if the Obligations are then
accelerated or have deemed to have been accelerated, each payment of
principal hereunder shall be applied ratably to the outstanding
Advances.
3.2 LEAD ARRANGER'S FEES. On the date hereof, Borrower shall
pay to Lead Arranger through the Administrative Agent certain fees in the amount
heretofore agreed upon by letter agreement between Borrower and the Lead
Arranger. These fees are for the services of the Lead Arranger in arranging the
credit facilities under this Agreement and are fully earned when paid and are
nonrefundable.
3.3 UPFRONT FEES. On the date hereof, Borrower shall pay to
the Administrative Agent, for the account of each Lender, upfront fees in an
amount equal to (a) that Lender's allocated Pro Rata Share of the Commitment
TIMES (b) a fee percentage based upon the amount of the offered commitment of
that Lender to the credit facilities described herein, as set forth in a letter
agreement of even date herewith among Borrower, the Lead Arranger and Bank of
America. Such upfront fees are for the credit facilities committed by each
Lender under this Agreement and are fully earned when paid. The upfront fees
paid to each Lender are solely for its own account and are nonrefundable.
3.4 COMMITMENT FEES. From the date hereof, Borrower shall pay
to the Administrative Agent, for the ratable accounts of the Lenders pro rata
according to their Pro Rata Share, a commitment fee equal to the Commitment Fee
Rate in effect from time to time TIMES the average daily amount by which the
Commitment exceeds the SUM OF (a) the aggregate principal amount outstanding
under the Notes (BUT NOT the Swing Line Outstandings except to the extent a
Lender has provided the purchase price due for its participation in Swing Line
Loans to the Swing Line Lender in Cash) PLUS (b) the Aggregate Effective Amount
under all outstanding Letters of Credit. The commitment fee shall be pay able
quarterly in arrears on each Quarterly Payment Date, on the Maturity Date and
upon the date of any partial reduction or termination of the Commitment pursuant
to Sections 2.6, 2.7 or 2.8.
3.5 LETTER OF CREDIT FEES. Concurrently with the issuance of
each Letter of Credit, Borrower shall pay a letter of credit issuance
fee to the Issuing Bank, for the sole account of the Issuing Bank, in
an amount set forth in a letter agreement between Borrower and the
Issuing Bank. Each letter of credit issuance fee is nonrefundable. On
each Quarterly Payment Date and on the Maturity Date, Borrower shall also pay to
the Administrative Agent in arrears, for the ratable account of the Lenders in
accordance with their Pro Rata Share, letter of credit fees in an amount equal
to the Letter of Credit Fee per annum TIMES the average
daily Aggregate Effective Amount of all Letters of
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Credit for the period from the Closing Date or the most recent Quarterly
Payment Date. All letter of credit fees shall also be non-refundable.
3.6 ADMINISTRATIVE FEES. On the date hereof and annually
thereafter, Borrower shall pay to the Administrative Agent an administrative fee
in such amounts as heretofore agreed upon by letter agreement between Borrower
and Bank of America and the Lead Arranger. The administrative fee is for the
services to be performed by the Administrative Agent in acting as Administrative
Agent and is fully earned on the date paid. The administrative fee paid to the
Administrative Agent is solely for its own account and is nonrefundable.
3.7 INCREASED COMMITMENT COSTS. If any Lender shall determine
in good faith that the introduction after the date hereof of any applicable law,
rule, regulation or guideline regarding capital adequacy, or any change therein
or any change in the interpretation or administration thereof by any central
bank or other Governmental Agency charged with the interpretation or
administration thereof, or compliance by such Lender (or its Eurodollar Lending
Office) or any corporation controlling the Lender, with any request, guideline
or directive regarding capital adequacy (whether or not having the force of Law)
of any such central bank or other authority, affects or would affect the amount
of capital required or expected to be maintained by such Lender or any
corporation controlling such Lender and (taking into consideration such Lender's
or such corporation's policies with respect to capital adequacy and such
Lender's desired return on capital) determines in good faith that the amount of
such capital is increased, or the rate of return on capital is reduced, as a
consequence of its obligations under this Agreement, then, within ten Business
Days after demand of such Lender, Borrower shall pay to such Lender, from time
to time as specified in good faith by such Lender, additional amounts sufficient
to compensate such Lender in light of such circumstances, to the extent
reasonably allocable to such obligations under this Agreement, PROVIDED that
Borrower shall not be obligated to pay any such amount which arose prior to the
date which is ninety days preceding the date of such demand or is attributable
to periods prior to the date which is ninety days preceding the date of such
demand. Each Lender's determination of such amounts shall be conclusive in the
absence of manifest error. Any request for compensation by a Lender under this
Section shall set forth the basis upon which it has been determined that such an
amount is due from Borrower, a calculation of the amount due, and a
certification that the corresponding costs or diminished rate of return on
capital have been incurred or sustained by the Lender.
3.8 EURODOLLAR COSTS AND RELATED MATTERS.
(a) In the event that any Governmental Agency imposes
on any Lender any reserve or comparable requirement (INCLUDING any
emergency, supplemental or other reserve) with respect to the
Eurodollar Obligations of that Lender, Borrower shall pay that Lender
within five Business Days after demand all amounts necessary to
compensate such Lender (determined as though such Lender's Eurodollar
Lending Office had funded 100% of its Eurodollar Rate Advance in the
Designated Eurodollar Market) in respect of the imposition of such
reserve requirements. The Lender's determination of such amount
shall be conclusive in the absence of manifest error.
(b) If, after the date hereof, the existence or
occurrence of any Special Eurodollar Circumstance:
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(1) shall subject any Lender or its Eurodollar
Lending Office to any tax, duty or other charge or cost with
respect to any Eurodollar Rate Advance, any of its Notes
evidencing Eurodollar Rate Advances or its obligation to make
Eurodollar Rate Advances, or shall change the basis of
taxation of payments to any Lender attributable to the
principal of or interest on any Eurodollar Rate Advance or any
other amounts due under this Agreement in respect of any
Eurodollar Rate Advance, any of its Notes evidencing
Eurodollar Rate Advances or its obligation to make Eurodollar
Rate Advances, EXCLUDING (i) taxes imposed on or measured in
whole or in part by its overall net income, gross income or
gross receipts, (ii) franchise taxes imposed by (A) any
jurisdiction (or political subdivision thereof) in which it is
organized or maintains its principal office or Eurodollar
Lending Office or (B) any jurisdiction (or political
subdivision thereof) in which it is "doing business," and
(iii) any withholding taxes or other taxes based on gross
income imposed by the United States of America for any period
with respect to which it has failed to provide Borrower with
the appropriate form or forms required by Section 11.21, to
the extent such forms are then required by applicable Laws;
(2) shall impose, modify or deem applicable any
reserve not applicable or deemed applicable on the date hereof
(INCLUDING any reserve imposed by the Board of Governors of
the Federal Reserve System, special deposit, capital or
similar require ments against assets of, deposits with or for
the account of, or credit extended by, any Lender or its
Eurodollar Lending Office); or
(3) shall impose on any Lender or its Eurodollar
Lending Office or the Designated Eurodollar Market any other
condition affecting any Eurodollar Rate Advance, any of its
Notes evidencing Eurodollar Rate Advances, its obligation to
make Eurodollar Rate Advances or this Agreement, or shall
otherwise affect any of the same;
and the result of any of the foregoing, as determined in good faith by
such Lender, increases the cost to such Lender or its Eurodollar
Lending Office of making or maintaining any Eurodollar Rate Advance or
in respect of any Eurodollar Rate Advance, any of its Notes evidencing
Eurodollar Rate Advances or its obligation to make Eurodollar Rate
Advances or reduces the amount of any sum received or receivable by
such Lender or its Eurodollar Lending Office with respect to any
Eurodollar Rate Advance, any of its Notes evidencing Eurodollar Rate
Advances or its obligation to make Eurodollar Rate Advances (assuming
such Lender's Eurodollar Lending Office had funded 100% of its
Eurodollar Rate Advance in the Designated Eurodollar Market), then,
within five Business Days after demand by such Lender (with a copy to
the Administrative Agent), Borrower shall pay to such Lender such
additional amount or amounts as will compensate such Lender for such
increased cost or reduction (determined as though such Lender's
Eurodollar Lending Office had funded 100% of its Eurodollar
Rate Advance in the Designated Eurodollar Market). A statement of any
Lender claiming compensation under this subsection and setting forth in
reasonable detail the additional amount or amounts to be paid to it
hereunder shall be conclusive in the absence of manifest error.
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(c) If, after the date hereof, the existence or
occurrence of any Special Eurodollar Circumstance shall, in the good
faith opinion of any Lender, make it unlawful or impossible for such
Lender or its Eurodollar Lending Office to make, maintain or fund its
portion of any Eurodollar Rate Advance or materially restrict the
authority of such Lender to purchase or sell, or to take deposits of,
Dollars in the Designated Eurodollar Market, or to determine or charge
interest rates based upon the Eurodollar Rate, and such Lender shall so
notify the Administrative Agent, then such Lender's obligation to make
Eurodollar Rate Advances shall be suspended for the duration of such
illegality or impossibility and the Administrative Agent forthwith
shall give notice thereof to the other Lenders and Borrower. Upon
receipt of such notice, the outstanding principal amount of such
Lender's Eurodollar Rate Advances, together with accrued interest
thereon, automatically shall be converted to Base Rate Advances on
either (1) the last day of the Eurodollar Period(s) applicable to such
Eurodollar Rate Advances if such Lender may lawfully continue to
maintain and fund such Eurodollar Rate Advances to such day(s) or (2)
immediately if such Lender may not lawfully continue to fund and
maintain such Eurodollar Rate Advances to such day(s), PROVIDED that in
such event the conversion shall not be subject to payment of a
prepayment fee under clause (e) of this Section. Each Lender agrees to
endeavor promptly to notify Borrower of any event of which it has
actual knowledge, occurring after the date hereof, which will cause
that Lender to notify the Administrative Agent under this Section, and
agrees to designate a different Eurodollar Lending Office if such
designation will avoid the need for such notice and will not, in the
good faith judgment of such Lender, otherwise be materially
disadvantageous to such Lender. In the event that any Lender is unable,
for the reasons set forth above, to make, maintain or fund its portion
of any Eurodollar Rate Loan or Advance, such Lender shall fund such
amount as a Base Rate Advance for the same period of time, and such
amount shall be treated in all respects as a Base Rate Advance. Any
Lender whose obligation to make Eurodollar Rate Advances has been
suspended under this Section shall promptly notify the Administrative
Agent and Borrower of the cessation of the Special Eurodollar
Circumstance which gave rise to such suspension.
(d) If, with respect to any proposed Eurodollar Rate
Loan:
(1) the Administrative Agent reasonably determines
that, by reason of circumstances affecting the Designated
Eurodollar Market generally that are beyond the reasonable
control of the Lenders, deposits in Dollars (in the applicable
amounts) are not being offered to any Lender in the Designated
Eurodollar Market for the applicable Eurodollar Period; or
(2) the Requisite Lenders advise the Administrative
Agent that the Eurodollar Rate as determined by the
Administrative Agent (i) does not represent the effective
pricing to such Lenders for deposits in Dollars in the
Designated Eurodollar Market in the relevant amount for the
applicable Eurodollar Period, or (ii) will not adequately and
fairly reflect the cost to such Lenders of making the
applicable Euro dollar Rate Advances;
then the Administrative Agent forthwith shall give notice thereof to
Borrower and the Lenders, whereupon until the Administrative Agent
notifies Borrower that the circumstances
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giving rise to such suspension no longer exist, the obligation of the
Lenders to make any future Eurodollar Rate Advances shall be suspended.
(e) Upon payment or prepayment of any Eurodollar Rate
Advance (OTHER THAN as the result of a conversion required under clause
(c) of this Section) on a day other than the last day in the applicable
Eurodollar Period (whether voluntarily, involuntarily, by reason of
acceleration, or otherwise), or upon the failure of Borrower (for a
reason other than the failure of a Lender to make an Advance) to borrow
on the date or in the amount specified for a Eurodollar Rate Advance in
any Request for Loan, or upon the failure of Borrower to prepay a
Eurodollar Rate Loan or Advance on the date specified in a notice of
prepayment delivered to the Administrative Agent pursuant to Section
3.1(e), Borrower shall pay to the appropriate Lender within ten
Business Days after demand a prepayment fee, failure to borrow fee or
failure to prepay fee, as the case may be (determined as though 100% of
that Lender's Eurodollar Rate Advance had been funded in the Designated
Eurodollar Market), equal to the SUM OF:
(1) the principal amount of the Eurodollar Rate
Advance prepaid or not borrowed or prepaid, as the case may
be, TIMES [the number of days from and including the date of
prepayment or failure to borrow or prepay, as applicable, to
but excluding the last day in the applicable Eurodollar
Period], DIVIDED BY 360, TIMES the applicable Interest
Differential (PROVIDED that the product of the foregoing
formula must be a positive number); PLUS
(2) all out-of-pocket expenses incurred by the Lender
reasonably attributable to such payment, prepayment or failure
to borrow.
Each Lender's determination of the amount of any prepayment fee,
failure to borrow fee or failure to prepay fee payable under this
Section shall be conclusive in the absence of manifest error.
(f) Each Lender agrees to endeavor promptly to notify
Borrower of any event of which it has actual knowledge, occurring after
the date hereof, which will entitle such Lender to compensation
pursuant to clause (a) or clause (b) of this Section, and agrees to
designate a different Eurodollar Lending Office if such designation
will avoid the need for or reduce the amount of such compensation and
will not, in the good faith judgment of such Lender, otherwise be
materially disadvantageous to such Lender. Any request for compensation
by a Lender under this Section shall set forth the basis upon which it
has been determined that such an amount is due from Borrower, a
calculation of the amount due, and a certification that the
corresponding costs have been incurred by the Lender.
(g) If any Lender claims compensation or is excused
from making or continuing Eurodollar Rate Loans or Advances under this
Section, Borrower may at any time, upon at least four (4) Eurodollar
Business Days' prior notice to the Administrative Agent and such Lender
and upon payment in full of the amounts provided for in this Section
through the date of such payment PLUS any prepayment fee (subject to
clause (c) of this Section) required by clause (e) of this Section, pay
in full the affected Eurodollar Rate Advances of such Lender or request
that such Eurodollar Rate Advances be converted to Base Rate Advances.
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3.9 DEFAULT RATE. If any installment of principal or interest
or any fee or cost or other amount payable under any Loan Document to the
Administrative Agent or any Lender is not paid when due, or at the option of the
Requisite Lenders upon the occurrence and during the continuance of any Event of
Default, the outstanding Loans, and any such delinquent fees, costs or other
amounts, shall thereafter bear interest at a rate which is 2% per annum in
excess of the otherwise applicable rate, and the outstanding Letters of Credit
shall thereafter accrue fees at a rate which is 2% per annum in excess of the
otherwise applicable fees, in each case to the fullest extent permitted by
applicable Laws. Accrued and unpaid interest on past due amounts (INCLUDING
interest on past due interest) shall be compounded monthly, on the last day of
each calendar month, to the fullest extent permitted by applicable Laws.
3.10 COMPUTATION OF INTEREST AND FEES. Computation of interest
on Base Rate Loans shall be calculated on the basis of a year of 365 or 366
days, as the case may be, and the actual number of days elapsed; computation of
interest on Eurodollar Rate Loans and all fees under this Agreement shall be
calculated on the basis of a year of 360 days and the actual number of days
elapsed. Borrower acknowledges that such latter calculation method will result
in a higher yield to the Lenders than a method based on a year of 365 or 366
days. Interest shall accrue on each Loan for the day on which the Loan is made;
interest shall not accrue on a Loan, or any portion thereof, for the day on
which the Loan or such portion is paid. Any Loan that is repaid on the same day
on which it is made shall bear interest for one day. Notwithstanding anything in
this Agreement to the contrary, interest in excess of the maximum amount
permitted by applicable Laws shall not accrue or be payable hereunder or under
the Notes, and any amount paid as interest hereunder or under the Notes which
would otherwise be in excess of such maximum permitted amount shall instead be
treated as a payment of principal.
3.11 NON-BUSINESS DAYS. If any payment to be made by Borrower
or any other Party under any Loan Document shall come due on a day other than a
Business Day, payment shall instead be considered due on the next succeeding
Business Day and the extension of time shall be reflected in computing interest
and fees.
3.12 MANNER AND TREATMENT OF PAYMENTS.
(a) Each payment hereunder (EXCEPT payments pursuant
to Sections 3.7, 3.8, 11.3, 11.11 and 11.22) or on the Notes or under
any other Loan Document shall be made to the Administrative Agent, at
the Administrative Agent's Office, for the account of each of the
Lenders or the Administrative Agent, as the case may be, in immediately
available funds (by wire transfer, debit of an account with the
Administrative Agent or by other means acceptable to the Administrative
Agent) not later than 11:00 a.m. (OTHER than payments with respect to
Swing Line Loans, which must be paid directly to the Swing Line Lender
and received by 3:00 p.m.), California local time, on the day of
payment (which must be a Business Day). All payments received after
such time, on any Business Day, shall be deemed received on the next
succeeding Business Day. The amount of all payments received by the
Administrative Agent for the account of each Lender shall be
immediately paid by the Administrative Agent to the applicable Lender
in immediately available funds and, if such payment was received by the
Administrative Agent by 11:00 a.m., California local time, on a
Business Day and not so made available to the account of a Lender on
that Business Day, the Administrative Agent shall reimburse that Lender
for the cost to such Lender of funding the
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amount of such payment at the Federal Funds Rate. All payments shall
be made in lawful money of the United States of America.
(b) Each payment or prepayment on account of any Loan
shall be applied pro rata according to the outstanding Advances made by
each Lender comprising such Loan.
(c) Each Lender shall use its best efforts to keep a
record (which may be in tangible or electronic or other intangible
form) of Advances made by it and payments received by it with respect
to each of its Notes and, subject to Section 10.6(g), such record
shall, as against Borrower, be presumptive evidence of the amounts
owing. Notwithstanding the foregoing sentence, the failure by any
Lender to keep such a record shall not affect Borrower's obligation to
pay the Obligations.
(d) Each payment of any amount payable by Borrower or
any other Party under this Agreement or any other Loan Document shall
be made free and clear of, and without reduction by reason of, any
taxes, assessments or other charges imposed by any Governmental Agency,
central bank or comparable authority, EXCLUDING (i) taxes imposed on or
measured in whole or in part by overall net income, gross income or
gross receipts, (ii) franchise taxes imposed on any Lender by (A) any
jurisdiction (or political subdivision thereof) in which it is
organized or maintains its principal office or Eurodollar Lending
Office or (B) any jurisdiction (or political subdivision thereof) in
which it is "doing business", (iii) any withholding taxes or other
taxes based on gross income imposed by the United States of America
that are not attributable to any change in any Law or the
interpretation or administration of any Law by any Governmental Agency
and (iv) any withholding tax or other taxes based on gross income
imposed by the United States of America for any period with respect to
which it has failed to provide Borrower with the appropriate form or
forms required by Section 11.21, to the extent such forms are then
available under applicable Laws (all such non-excluded taxes,
assessments or other charges being hereinafter referred to as "Taxes").
To the extent that Borrower or any other Party is obligated by
applicable Laws to make any deduction or withholding on account of
Taxes from any amount payable to any Lender under this Agreement, they
shall (i) make such deduction or withholding and pay the same to the
relevant Governmental Agency and (ii) pay such additional amount to
that Lender as is necessary to result in that Lender's receiving a net
after-Tax amount equal to the amount to which that Lender would have
been entitled under this Agreement absent such deduction or
withholding. If and when receipt of such payment results in an excess
payment or credit to that Lender on account of such Taxes, that Lender
shall promptly refund such excess to Borrower or the relevant Party.
3.13 FUNDING SOURCES. Nothing in this Agreement shall be
deemed to obligate any Lender to obtain the funds for any Loan or Advance in any
particular place or manner or to constitute a representation by any Lender that
it has obtained or will obtain the funds for any Loan or Advance in any
particular place or manner.
3.14 FAILURE TO CHARGE NOT SUBSEQUENT WAIVER. Any decision by
the Administrative Agent or any Lender not to require payment of any interest
(INCLUDING interest at the Default Rate), fee, cost or other amount payable
under any Loan Document, or to calculate any amount payable by a particular
method, on any occasion shall in no way limit or be deemed a waiver of the
Administrative
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Agent's or such Lender's right to require full payment of any interest
(INCLUDING interest at the Default Rate), fee, cost or other amount payable
under any Loan Document, or to calculate an amount payable by another method
that is not inconsistent with this Agreement, on any other or subsequent
occasion.
3.15 ADMINISTRATIVE AGENT'S RIGHT TO ASSUME PAYMENTS WILL BE
MADE BY BORROWER. Unless the Administrative Agent shall have been notified by
Borrower prior to the date on which any payment to be made by Borrower hereunder
is due that Borrower do not intend to remit such payment, the Administrative
Agent may, in its discretion, assume that Borrower has remitted such payment
when so due and the Administrative Agent may, in its discretion and in reliance
upon such assumption, make available to each Lender on such payment date an
amount equal to such Lender's share of such assumed payment. If Borrower has not
in fact remitted such payment to the Administrative Agent, each Lender shall
forthwith on demand repay to the Administrative Agent the amount of such assumed
payment made available to such Lender, together with interest thereon in respect
of each day from and including the date such amount was made available by the
Administrative Agent to such Lender to the date such amount is repaid to the
Administrative Agent at the Federal Funds Rate.
3.16 FEE DETERMINATION DETAIL. The Administrative Agent and
any Lender shall provide reasonable detail to Borrower regarding the manner in
which the amount of any payment to the Creditors, or that Lender, under Article
3 has been determined, concurrently with demand for such payment.
3.17 SURVIVABILITY. All of Borrower's obligations under
Sections 3.7 and 3.8 shall survive for ninety days following the date on which
the Commitment is terminated, all Obligations hereunder are fully paid and all
Letters of Credit have expired.
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Article 4
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to the Lenders that:
4.1 EXISTENCE AND QUALIFICATION; POWER; COMPLIANCE WITH LAWS.
Borrower is a corporation duly formed, validly existing and in good standing
under the Laws of Nevada. Each of the Guarantors is a corporation duly formed,
validly existing and in good standing under the Laws of its state of formation.
Borrower and each of the Guarantors are duly qualified or registered to transact
business and are in good standing in each other jurisdiction in which the
conduct of their business or the ownership or leasing of their Properties makes
such qualification or registration necessary, EXCEPT where the failure so to
qualify or register and to be in good standing would not constitute a Material
Adverse Effect. Borrower and each Guarantor have all requisite corporate or
other organizational power and authority to conduct their business, to own and
lease their Properties and to execute and deliver each Loan Document to which
each is a Party and to perform the Obligations. All outstanding shares of the
capital stock of Borrower are duly authorized, validly issued, fully paid and
non-assessable, and no holder thereof has any enforceable right of rescission
under any applicable state or federal securities Laws. Borrower is in compliance
with all Requirements of Law applicable to its business as at present conducted,
has obtained all authorizations, consents, approvals, orders, licenses and
permits from, and has accomplished all filings, registrations and qualifications
with, or obtained exemptions from any of the foregoing from, any Governmental
Agency that are necessary for the transaction of its business as at present
conducted, EXCEPT where the failure so to comply, file, register, qualify or
obtain exemptions does not constitute a Material Adverse Effect.
4.2 AUTHORITY; COMPLIANCE WITH OTHER AGREEMENTS AND
INSTRUMENTS AND GOVERNMENT REGULATIONS. The execution, delivery and performance
by Borrower and each Guarantor of the Loan Documents to which it is a Party, and
the execution, delivery and performance by Borrower and its Subsidiaries of the
Merger Agreement, have been duly authorized by all necessary corporate or other
organizational action, and do not and will not:
(a) Require any consent or approval not heretofore
obtained of any member, partner, director, stockholder, security holder
or creditor of such Party;
(b) Violate or conflict with any provision of such
Party's charter, articles of incorporation, operating agreement or
bylaws, as applicable;
(c) Result in or require the creation or imposition
of any Lien or Right of Others upon or with respect to any Property now
owned or leased or hereafter acquired by such Party;
(d) Violate any Requirement of Law applicable to such
Party, subject to obtaining the authorizations from, or filings with,
the Governmental Agencies described in Schedule 4.3;
(e) Result in a breach of or constitute a default
under, or cause or permit the acceleration of any obligation owed
under, any indenture or loan or credit agreement or
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any other Contractual Obligation to which such Party is a party
or by which such Party or any of its Property is bound or affected;
and neither Borrower nor any Guarantor is in violation of, or default under, any
Requirement of Law or Contractual Obligation, or any indenture, loan or credit
agreement described in Section 4.2(e), in any respect that constitutes a
Material Adverse Effect.
4.3 NO GOVERNMENTAL APPROVALS REQUIRED. EXCEPT as set forth in
Schedule 4.3 or previously obtained or made, no authorization, consent,
approval, order, license or permit from, or filing, registration or
qualification with, any Governmental Agency is or will be required to authorize
or permit under applicable Laws the execution, delivery and performance by
Borrower and its Subsidiaries of the Loan Documents to which it is a Party or
the consummation of the transactions contemplated by the Merger Agreement.
EXCEPT as set forth in Schedule 4.3, all authorizations from, or filings with,
any Governmental Agency described in Schedule 4.3 will be accomplished as of the
Closing Date.
4.4 SUBSIDIARIES.
(a) Schedule 4.4 hereto correctly sets forth the
names, form of legal entity, number of shares of capital stock issued
and outstanding, number of shares owned by Borrower or a Subsidiary of
Borrower (specifying such owner) and jurisdictions of organization of
all Subsidiaries of Borrower. Except as described in Schedule 4.4 (and
Investments and Acquisitions made after the date hereof and permitted
hereby), Borrower does not own any capital stock, equity interest or
debt security which is convertible, or exchangeable, for capital stock
or equity interests in any Person. Unless otherwise indicated in
Schedule 4.4, all of the outstanding shares of capital stock, or all of
the units of equity interest, as the case may be, of each Subsidiary
are owned of record and beneficially by Borrower, there are no
outstanding options, warrants or other rights to purchase capital stock
of any such Subsidiary, and all such shares or equity interests so
owned are duly authorized, validly issued, fully paid and non-asses
sable, and were issued in compliance with all applicable state and
federal securities and other Laws, and are free and clear of all Liens
and Rights of Others, EXCEPT for Permitted Encum brances and Permitted
Rights of Others.
(b) Each Subsidiary of Borrower is a business entity
duly formed, validly existing and in good standing under the Laws of
its jurisdiction of organization, is duly qualified to do business as a
foreign organization and is in good standing as such in each
jurisdiction in which the conduct of its business or the ownership or
leasing of its Properties makes such qualification necessary (EXCEPT
where the failure to be so duly qualified and in good standing does not
constitute a Material Adverse Effect), and has all requisite power and
authority to conduct its business and to own and lease its Properties.
(c) Each Subsidiary of Borrower is in compliance with
all Requirements of Law applicable to its business and has obtained all
authorizations, consents, approvals, orders, licenses, and permits
from, and each such Subsidiary has accomplished all filings,
registrations, and qualifications with, or obtained exemptions from any
of the foregoing from, any Governmental Agency that are necessary for
the transaction of its business, EXCEPT where the failure to be in such
compliance, obtain such authorizations, consents, approvals, orders,
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licenses, and permits, accomplish such filings, registrations, and
qualifications, or obtain such exemptions, does not constitute a
Material Adverse Effect.
4.5 FINANCIAL STATEMENTS. Borrower has furnished to the
Lenders (a) the audited consolidated and consolidating financial statements of
Borrower and its Subsidiaries for the Fiscal Year ended June 30, 1998 (b) the
unaudited consolidated and consolidating financial statements of each of
Borrower and its Subsidiaries for the Fiscal Quarter ended March 31, 1999, (c)
the audited financial statements of Powerhouse and its Subsidiaries for the
fiscal year ended December 31, 1998, and (d) the unaudited consolidated
financial statements of Powerhouse and its Subsidiaries for the fiscal quarter
ended March 31, 1999. The financial statements described above fairly present in
all material respects the financial condition, results of operations and changes
in financial position of Borrower and its Subsidiaries or of Powerhouse and its
Subsidiaries, as the case may be, as of such dates and for such periods in
conformity with Generally Accepted Accounting Principles, consistently applied.
No representation is made as to the consistency of the manner of preparation of
the financial statements of Borrower and its Subsidiaries with those of
Powerhouse and it Subsidiaries.
4.6 NO OTHER LIABILITIES; NO MATERIAL ADVERSE CHANGES. As of
the Closing Date, Borrower and its Subsidiaries do not have any material
liability or material contingent liability required under Generally Accepted
Accounting Principles to be reflected or disclosed and not reflected or
disclosed in the financial statements described in Section 4.5(b), other than
liabilities and contingent liabilities arising in the ordinary course of
business since the date of such financial statements. As of the Closing Date, no
circumstance or event has occurred that constitutes a Material Adverse Effect as
to Borrower and its Subsidiaries since June 30, 1998. As of the Closing Date, no
circumstance or event has occurred with respect to Powerhouse and its
Subsidiaries, taken as a whole, which is materially adverse to their business,
assets, liabilities (actual or contingent), operations, condition (financial or
otherwise) or prospects since June 30, 1998. As of any date subsequent to the
Closing Date, no circumstance or event has occurred that constitutes a Material
Adverse Effect since the Closing Date.
4.7 TITLE TO PROPERTY. Borrower and its Subsidiaries have
valid title to the Property reflected in the financial statements described in
Section 4.5(b), other than immaterial items of Property and Property
subsequently sold or disposed of in the ordinary course of business, free and
clear of all Liens and Rights of Others, OTHER THAN Permitted Encumbrances,
Permitted Rights of Others and Liens or Rights of Others described in Schedule
4.7 or permitted by Section 6.8.
4.8 INTANGIBLE ASSETS. Borrower and its Subsidiaries own, or
possess the right to use to the extent necessary in their businesses, all
material trademarks, trade names, copyrights, patents, patent rights, computer
software, licenses and other Intangible Assets that are used in the conduct of
their businesses, and no such Intangible Asset, to the actual best knowledge of
Borrower, conflicts with the valid trademark, trade name, copyright, patent,
patent right or Intangible Asset of any other Person to the extent that such
conflict constitutes a Material Adverse Effect. Schedule 4.8 sets forth all
material patents, trademarks, trade names, trade styles and copyrights owned by
Borrower and its Subsidiaries.
4.9 PUBLIC UTILITY HOLDING COMPANY ACT. Neither Borrower nor
any of its Subsidiaries is a "holding company", or a "subsidiary company" of a
"holding company", or an "affil-
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iate" of a "holding company" or of a "subsidiary company" of a
"holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
4.10 LITIGATION. EXCEPT for (a) any matter fully covered as to
subject matter and amount (subject to applicable deductibles and retentions) by
insurance as to which the insurance carrier has been notified and has not
asserted lack of subject matter coverage or reserved its right to do so, (b) any
matter, or series of related matters, involving a claim against Borrower or any
of its Subsidiaries of less than $10,000,000, (c) matters of an administrative
nature not involving a claim or charge against Borrower or any of its
Subsidiaries and (d) matters set forth in Schedule 4.10, there are no actions,
suits, proceedings or investigations pending as to which Borrower or any of its
Subsidiaries have been served or have received notice or, to the best knowledge
of Borrower, threatened against or affecting Borrower or any of its Subsidiaries
or any Property of any of them before any Governmental Agency which may
reasonably be expected to have a Material Adverse Effect.
4.11 BINDING OBLIGATIONS. Each of the Loan Documents to which
Borrower or any of its Subsidiaries is a Party will, when executed and delivered
by such Party, constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms, EXCEPT as
enforcement may be limited by Debtor Relief Laws, Gaming Laws or equitable
principles relating to the granting of specific performance and other equitable
remedies as a matter of judicial discretion.
4.12 NO DEFAULT. No event has occurred and is continuing that
is a Default or Event of Default.
4.13 ERISA.
(a) With respect to each Pension Plan:
(i) such Pension Plan complies in all
material respects with ERISA and any other applicable Laws to the
extent that noncompliance could reasonably be expected to have a
Material Adverse Effect;
(ii) such Pension Plan has not incurred
any "accumulated funding deficiency" (as defined in Section 302 of
ERISA) that could reasonably be expected to have a Material Adverse
Effect;
(iii) no "reportable event" (as defined
in Section 4043 of ERISA) has occurred that could reasonably be
expected to have a Material Adverse Effect; and
(iv) neither Borrower nor any of its
Subsidiaries has engaged in any non-exempt "prohibited transaction"
(as defined in Section 4975 of the Code) that could reasonably be
expected to have a Material Adverse Effect.
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(b) Neither Borrower nor any of its Subsidiaries has
incurred or expects to incur any withdrawal liability to any
Multiemployer Plan that could reasonably be expected to have a Material
Adverse Effect.
4.14 REGULATIONS T, U AND X; INVESTMENT COMPANY ACT. No part
of the proceeds of any Loan hereunder will be used to purchase or carry, or to
extend credit to others for the purpose of purchasing or carrying, any Margin
Stock in violation of Regulations T, U and X. Neither Borrower nor any of its
Subsidiaries is or is required to be registered as an "investment company" under
the Investment Company Act of 1940.
4.15 DISCLOSURE. Taken as a whole, the written statements made
by Senior Officers of Borrower and the Guarantors to the Administrative Agent
and to the Lenders in connection with this Agreement, and in connection with the
Loans, do not contain as of the date thereof, any untrue statement of a material
fact or omitted a material fact necessary to make the statement made not
misleading in light of all the circumstances existing at the date the statement
was made.
4.16 TAX LIABILITY. Borrower and its Subsidiaries have filed
all tax returns which are required to be filed, and have paid, or made provision
for the payment of, all taxes with respect to the periods, Property or
transactions covered by said returns, or pursuant to any assessment received by
Borrower or its Subsidiaries, EXCEPT (a) such taxes, if any, as are being
contested in good faith by appropriate proceedings and as to which adequate
reserves have been established and maintained and (b) immaterial taxes so long
as no material Property of Borrower or any of its Subsidiaries is in jeopardy of
being seized, levied upon or forfeited.
4.17 PROJECTIONS. As of the Closing Date, to the best
knowledge of Borrower, the assumptions set forth in the Projections are
reasonable and consistent with each other and with all facts known to Borrower
and its Subsidiaries, and the Projections are reasonably based on such
assumptions. Nothing in this Section shall be construed as a representation or
covenant that the Projections in fact will be achieved. The Creditors
acknowledge that the Projections are forward-looking statements and that actual
financial results for Borrower and its Subsidiaries could differ materially from
those set forth in the Projections.
4.18 HAZARDOUS MATERIALS. Except as described in Schedule
4.18, (a) neither Borrower nor any of its Subsidiaries at any time has disposed
of, discharged, released or threatened the release of any Hazardous Materials
on, from or under the Real Property in violation of any Hazardous Materials Law
that would individually or in the aggregate constitute a Material Adverse
Effect, (b) to the actual best knowledge of Borrower, no condition exists that
violates any Hazardous Material Law affecting any Real Property except for such
violations that would not individually or in the aggregate have a Material
Adverse Effect, (c) no Real Property or any portion thereof is or has been
utilized by Borrower or any of its Subsidiaries as a site for the manufacture of
any Hazardous Materials and (d) to the extent that any Hazardous Materials are
used, generated or stored by Borrower or any of its Subsidiaries on any Real
Property, or transported to or from such Real Property by Borrower or any of its
Subsidiaries, such use, generation, storage and transportation are in compliance
in all material respects with all Hazardous Materials Laws.
4.19 YEAR 2000 PREPAREDNESS. Borrower and its Subsidiaries
have reviewed the effect of the Year 2000 Issue on the computer software,
hardware and firmware systems and
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equipment containing embedded microchips owned or operated by or for Borrower
and its Subsidiaries (including without limitation Powerhouse and its
Subsidiaries) and their key customers and vendors. The costs to Borrower and
its Subsidiaries of any reprogramming required as a result of the Year 2000
Issue to permit the proper functioning of such systems and equipment and the
proper processing of data, and the testing of such reprogramming, and of
required systems changes are not reasonably expected to result in a Default
or Event of Default or to have a Material Adverse Effect.
4.20 CONSUMMATION OF MERGER. Concurrently with the Closing
Date, the Merger has been consummated pursuant to the Merger Agreement and in
material compliance with all Laws.
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Article 5
AFFIRMATIVE COVENANTS
(OTHER THAN INFORMATION AND
REPORTING REQUIREMENTS)
So long as any Advance remains unpaid, or any Letter of
Credit remains outstanding or any other Obligation remains unpaid, or any
portion of the Commitment remains in force, Borrower shall, and shall cause
each of its Subsidiaries to, unless the Administrative Agent (with the
written approval of the Requisite Lenders) otherwise consents:
5.1 PAYMENT OF TAXES AND OTHER POTENTIAL LIENS. Pay and
discharge promptly all taxes, assessments and governmental charges or levies
imposed upon any of them, upon their respective Property or any part thereof
and upon their respective income or profits or any part thereof, EXCEPT that
Borrower and its Subsidiaries shall not be required to pay or cause to be
paid (a) any tax, assessment, charge or levy that is not yet past due, or is
being contested in good faith by appropriate proceedings so long as the
relevant entity has established and maintains adequate reserves for the
payment of the same or (b) any immaterial tax so long as no material Property
of Borrower or any of its Subsidiaries is in jeopardy of being seized, levied
upon or forfeited.
5.2 PRESERVATION OF EXISTENCE. Except for transactions
permitted by Sections 6.2 and 6.3, preserve and maintain their respective
existences in the jurisdiction of their formation and all material
authorizations, rights, franchises, privileges, consents, approvals, orders,
licenses, permits, or registrations from any Governmental Agency that are
necessary for the transaction of their respective business EXCEPT where the
failure to so preserve and maintain the existence of any Subsidiary of
Borrower and such authorizations, rights, franchises, privileges, consents,
approvals, orders, licenses, permits, or registrations would not constitute a
Material Adverse Effect; and qualify and remain qualified to transact
business in each jurisdiction in which such qualification is necessary in
view of their respective business or the ownership or leasing of their
respective Properties EXCEPT where the failure to so qualify or remain
qualified would not constitute a Material Adverse Effect.
5.3 MAINTENANCE OF PROPERTIES. Maintain, preserve and
protect all of their respective Properties in good order and condition,
subject to wear and tear in the ordinary course of business, and not permit
any waste of their respective Properties, EXCEPT that neither (a) the failure
to maintain, preserve and protect a particular item of Property that is not
of significant value, either intrinsically or to the operations of Borrower
and its Subsidiaries, taken as a whole, nor (b) any Disposition permitted by
Section 6.2, shall constitute a violation of this covenant.
5.4 MAINTENANCE OF INSURANCE. Maintain liability, casualty
and other insurance (subject to customary deductibles and retentions) with
responsible insurance companies in such amounts and against such risks as is
carried by responsible companies engaged in similar businesses and owning
similar assets in the general areas in which Borrower and its Subsidiaries
operate, and in any event coverages which are not materially less than those
maintained as of the Closing Date.
5.5 COMPLIANCE WITH LAWS. Comply, within the time period,
if any, given for such compliance by the relevant Governmental Agency with
enforcement authority, with all Requirements of Law noncompliance with which
constitutes a Material Adverse Effect, EXCEPT that Borrower and its
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Subsidiaries need not comply with a Requirement of Law then being contested
by any of them in good faith by appropriate proceedings.
5.6 INSPECTION RIGHTS. Upon reasonable notice, at any time
during regular business hours and as often as reasonably requested (but not
so as to materially interfere with the business of Borrower or any of its
Subsidiaries) permit the Administrative Agent or any Lender, or any
authorized employee, agent or representative thereof, to examine, audit and
make copies and abstracts from the records and books of account of, and to
visit and inspect the Properties of, Borrower and its Subsidiaries and to
discuss the affairs, finances and accounts of Borrower and its Subsidiaries
with any of their officers, managers, key employees or accountants and, upon
request, furnish promptly to the Administrative Agent or any Lender true
copies of all financial information made available to the board of directors
or audit committee of the board of directors of Borrower.
5.7 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate
records and books of account reflecting all financial transactions in
conformity with Generally Accepted Accounting Principles, consistently
applied, and in material conformity with all applicable requirements of any
Governmental Agency having regulatory jurisdiction over Borrower or any of
its Subsidiaries.
5.8 COMPLIANCE WITH AGREEMENTS. Promptly and fully comply
with all Contractual Obligations under all material agreements, indentures,
leases and/or instruments to which any one or more of them is a party,
whether such material agreements, indentures, leases or instruments are with
a Lender or another Person, EXCEPT for any such Contractual Obligations (a)
the performance of which would cause a Default or (b) then being contested by
any of them in good faith by appropriate proceedings or if the failure to
comply with such agreements, indentures, leases or instruments does not
constitute a Material Adverse Effect.
5.9 USE OF PROCEEDS. Use the proceeds of Loans (a) on the
Closing Date, to refinance the outstanding Loans under the existing credit
facility provided by various lenders with Lehman Commercial Paper Inc. as
Administrative Agent in favor of Powerhouse, to finance the cash merger
consideration payable to shareholders of Powerhouse pursuant to the Merger
Agreement in an amount not to exceed $290,000,000, and to finance fees and
expenses associated with the Powerhouse Acquisition in an aggregate amount
not to exceed $10,000,000, (b) to finance expenses associated with the other
transactions contemplated herein, and (c) for other general corporate
purposes of the Borrower and its Subsidiaries including the Acquisitions and
Investments permitted or described herein.
5.10 NEW SUBSIDIARIES. Cause each Person which hereafter
becomes a Subsidiary of Borrower to execute and deliver, concurrently with
its formation or acquisition, a joinder to the Guaranty, substantially in the
form attached thereto, to the Administrative Agent.
5.11 HAZARDOUS MATERIALS LAWS. Keep and maintain all Real
Property and each portion thereof in compliance in all material respects with
all applicable Hazardous Materials Laws and promptly notify the
Administrative Agent in writing (attaching a copy of any pertinent written
material) of (a) any and all material enforcement, cleanup, removal or other
governmental or regulatory actions instituted, completed or threatened in
writing by a Governmental Agency pursuant to any applicable Hazardous
Materials Laws, (b) any and all material claims made or threatened in writing
by any Person against Borrower or its Subsidiaries relating to damage,
contribution, cost
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recovery, compensation, loss or injury resulting from any Hazardous Materials
and (c) discovery by any Senior Officer of Borrower of any material
occurrence or condition on Property adjoining or in the vicinity of such Real
Property that could reasonably be expected to cause such Real Property or any
part thereof to be subject to any restrictions on the ownership, occupancy,
transferability or use of such Real Property under any applicable Hazardous
Materials Laws.
5.12 YEAR 2000 COMPLIANCE. Promptly and well in advance of
December 31, 1999, make all required systems changes in computer software,
hardware and firmware systems and equipment containing embedded microchips
owned or operated by or for Borrower and its Subsidiaries (and assure that
key customers and vendors have made any such required systems changes)
required as a result of the Year 2000 Issue to permit the proper functioning
of such computer systems and other equipment, except to the extent that the
failure to take any such action could not reasonably be expected to result in
a Default or Event of Default or to have a Material Adverse Effect. At the
request of any Lender, Borrower shall provide, and shall cause its
Subsidiaries to provide, to such Lender reasonable information with respect
to its compliance with this Section.
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Article 6
NEGATIVE COVENANTS
So long as any Advance remains unpaid, or any Letter of
Credit remains outstanding or any other Obligation remains unpaid, or any
portion of the Commitment remains in force, Borrower shall not, and shall not
permit any of its Subsidiaries to, unless the Administrative Agent (with the
written approval of the Requisite Lenders or, if required by Section 11.2, of
all of the Lenders) otherwise consents:
6.1 PAYMENT OF SUBORDINATED OBLIGATIONS. Prepay any
principal (INCLUDING sinking fund payments) or any other amount (OTHER THAN
scheduled interest payments) with respect to any Subordinated Obligation, or
purchase or redeem (or offer to purchase or redeem) any Subordinated
Obligation, or deposit any monies, securities or other Property with any
trustee or other Person to provide assurance that the principal or any
portion thereof of any Subordinated Obligation will be paid when due or
otherwise to provide for the defeasance of any Subordinated Obligation
PROVIDED THAT so long as no Default or Event of Default then exists or would
result therefrom, Borrower may make payments of scheduled interest on any
Subordinated Obligation.
6.2 DISPOSITION OF PROPERTY. Make any Disposition of its
Property, whether now owned or hereafter acquired, OTHER THAN Dispositions of
the types described below made when no Default or Event of Default exists or
would result therefrom:
(a) obsolete or worn-out Property, tools or equipment no longer
used or useful in its business or Real Property no longer used
or useful in its business;
(b) any inventory or other Property sold or disposed of in the
ordinary course of business;
(c) other Dispositions of Property made during any Fiscal Year of
Property having a fair market value which is not in excess of
10% of the consolidated total assets of Borrower and its
Subsidiaries (determined in accordance with Generally Accepted
Accounting Principles) as of the last day of the immediately
preceding Fiscal Year, PROVIDED that (i) giving pro forma
effect to such Disposition (as if the Disposition had occurred
on the last day of the then most recently ended fiscal
period), Borrower shall be in compliance with Sections 6.11
and 6.12 and (ii) Borrower shall be in compliance with Section
2.7(a).
6.3 MERGERS. Merge or consolidate with or into any Person,
EXCEPT (a) the Merger and mergers and consolidations of a Subsidiary of
Borrower into Borrower or another Subsidiary of Borrower, (b) mergers and
consolidations with a Person to effect a mere change in the State or form of
organization of Borrower, (c) mergers with any Person which if acquired by
Borrower or its other Subsidiaries pursuant to Investments permitted hereby,
would be Subsidiaries, and (d) transactions permitted by Section 2.8,
PROVIDED that the financial condition of Borrower and its Subsidiaries are
not adversely affected thereby and Borrower and its Subsidiaries execute such
amendments to the Loan Documents as may be requested by the Administrative
Agent to reflect such change.
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6.4 HOSTILE ACQUISITIONS. Directly or indirectly use the
proceeds of any Loan in connection with the acquisition of part or all of a
voting interest of five percent or more in any corporation or other business
entity if such acquisition is opposed by the board of directors or management
of such corporation or business entity.
6.5 DISTRIBUTIONS. Make any Distribution, whether from
capital, income or otherwise, and whether in Cash or other Property, EXCEPT:
(a) Distributions by a Subsidiary of Borrower to
Borrower or Subsidiary of Borrower;
(b) Distributions consisting of stock redemptions or
dividends made when no Default or Event of Default exists or would
be caused by the making of such Distribution on a PRO FORMA basis in
an aggregate amount not to exceed (a) during any Fiscal Year, 50% of
Net Income for the prior Fiscal Year, PLUS (b) an additional amount
(which may be expended during any one or more Fiscal Years without
regard to the limitation set forth in (a)) which does not exceed
$35,000,000 during the term of this Agreement.
6.6 ERISA. (a) At any time, permit any Pension Plan to (i)
engage in any non-exempt "prohibited transaction" (as defined in Section 4975
of the Code), (ii) fail to comply with ERISA or any other applicable Laws,
(iii) incur any material "accumulated funding deficiency" (as defined in
Section 302 of ERISA), or (iv) terminate in any manner, which, with respect
to each event listed above, could reasonably be expected to result in a
Material Adverse Effect, or (b) withdraw, completely or partially, from any
Multiemployer Plan if to do so could reasonably be expected to result in a
Material Adverse Effect.
6.7 CHANGE IN NATURE OF BUSINESS. Make any material change
in the nature of the business of Borrower and its Subsidiaries,
taken as a whole.
6.8 LIENS AND NEGATIVE PLEDGES. Create, incur, assume or
suffer to exist any Lien or Negative Pledge of any nature upon or with
respect to any of its Properties, or engage in any sale and leaseback
transaction with respect to any of its Properties, whether now owned or
hereafter acquired, EXCEPT:
(a) Permitted Encumbrances;
(b) Liens and Negative Pledges under the Loan
Documents;
(c) Liens and Negative Pledges existing on the
Closing Date and disclosed in Schedule 4.7 and any renewals/extensions
or amendments thereof, PROVIDED that the obligations secured or
benefitted thereby are not increased;
(d) Liens on Property acquired by Borrower or any of
its Subsidiaries following the Closing Date (but not the assets of
Powerhouse or its Subsidiaries) that are in existence at the time of
such acquisition and are not created in contemplation of such
acquisition;
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(e) Liens securing Indebtedness permitted by Section
6.9(d) on and limited to the capital assets acquired, constructed or
financed with the proceeds of such Indebtedness or with the proceeds of
any Indebtedness directly or indirectly refinanced by such
Indebtedness, and related Negative Pledges with respect to such assets,
PROVIDED that the scope of such Liens and Negative Pledges are not
increased and the obligations secured or benefitted thereby are not
increased;
(f) any Negative Pledge created by an agreement or
instrument entered into by Borrower or a Subsidiary of Borrower in the
ordinary course of its business which consists of a restriction on the
assignability, transfer or hypothecation of such agreement or
instrument;
(g) Liens required to be created and maintained in
connection with the operation of lotteries in various jurisdictions,
whether created by operation of applicable Gaming Laws or imposed by
contract with the relevant Gaming Board;
(h) Liens on Property having an aggregate value not
in excess of $40,000,000 securing Indebtedness of the type described in
Section 6.9(j);
(i) judgment Liens securing judgments which do not
result in any Default or Event of Default;
(j) any extension, renewal or replacement of the
foregoing provided that the scope of the Property so encumbered and the
related obligations are not increased.
6.9 INDEBTEDNESS AND CONTINGENT OBLIGATIONS. Create, incur or
assume any Indebtedness or Contingent Obligation EXCEPT:
(a) Indebtedness and Contingent Obligations existing
on the Closing Date and disclosed in Schedule 6.9, and refinancings,
renewals, extensions or amendments thereto by the same obligors that do
not increase the amount thereof;
(b) Indebtedness and Contingent Obligations under
the Loan Documents;
(c) Indebtedness and Contingent Obligations owed to
Borrower or a Subsidiary by Borrower or a Subsidiary of Borrower;
(d) Indebtedness consisting of Capital Lease
Obligations, or otherwise incurred to finance the purchase or
construction of capital assets (which shall be deemed to exist if the
Indebtedness is incurred at or within 90 days before or after the
purchase or construction of the capital asset), or to refinance any
such Indebtedness, PROVIDED that the aggregate principal amount of such
Indebtedness outstanding at any time does not exceed $15,000,000;
(e) Indebtedness consisting of one or more Swap
Agreements entered into in the ordinary course of business with respect
to outstanding Indebtedness; PROVIDED,
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that the aggregate notional amount of Indebtedness covered by all Swap
Agreements shall not exceed the amount of the Commitment;
(f) Subordinated Obligations incurred when no Default
or Event of Default exists;
(g) Contingent Obligations in support of the
obligations of Borrower or a Subsidiary of Borrower;
(h) Indebtedness owing by Persons, or secured by
Property, acquired by Borrower or any of its Subsidiaries following the
Closing Date that is in existence at the time of such acquisition and
is not created in contemplation of such acquisition;
(i) certificates of deposit, bonds and other surety
obligations required to be maintained in connection with the operation
of lotteries in accordance with applicable Gaming Laws; and
(j) other Indebtedness in an aggregate principal
amount not to exceed $20,000,000 at any time.
6.10 TRANSACTIONS WITH AFFILIATES. Enter into any
transaction of any kind with any Affiliate of Borrower OTHER THAN (a) salary,
bonus, employee stock option and other compensation arrangements with
directors, officers or managers in the ordinary course of business, (b)
transactions that are fully disclosed to the board of directors of Borrower
and expressly authorized by a resolution of the board of directors of
Borrower which is approved by a majority of the directors not having an
interest in the transaction, (c) transactions between or among Borrower and
its Subsidiaries, (d) transactions entered into when no Default or Event of
Default has occurred and remains continuing and which are disclosed to the
Administrative Agent in writing and in advance in an aggregate amount not to
exceed $5,000,000 in any Fiscal Year, and (e) transactions on overall terms
at least as favorable to Borrower or its Subsidiaries as would be the case in
an arm's-length transaction between unrelated parties of equal bargaining
power.
6.11 FIXED CHARGE COVERAGE RATIO. Permit the Fixed Charge
Coverage Ratio, as of the last day of any Fiscal Quarter, to be less than
1.50:1.00.
6.12 LEVERAGE RATIO. Permit the Leverage Ratio, as of the last
day of any Fiscal Quarter, to be greater than 2.50:1.00.
6.13 CAPITAL EXPENDITURES. Make, or become legally obligated
to make, any Capital Expenditure except:
(a) Maintenance Capital Expenditures; and
(b) other Capital Expenditures in an annual amount
not to exceed $150,000,000.
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6.14 INVESTMENTS AND ACQUISITIONS. Make any Acquisition or
enter into any agreement to make any Acquisition, or suffer to exist any
Investment, OTHER THAN:
(a) Investments in existence on the Closing Date and
disclosed on Schedule 6.14;
(b) Investments consisting of Cash Equivalents;
(c) Investments consisting of advances to officers,
managers, directors and employees of Borrower and the Subsidiaries for
travel, entertainment, relocation and analogous ordinary business
purposes;
(d) Investments in Subsidiaries of Borrower;
PROVIDED, HOWEVER, that Investments by Borrower and its Subsidiaries
made after the Closing Date in Colorado Grande Enterprises, Inc. shall
not exceed $5,000,000 in aggregate per Fiscal Year;
(e) Investments consisting of or evidencing the
extension of credit to customers or suppliers of Borrower and its
Subsidiaries in the ordinary course of business and any Investments
received in satisfaction or partial satisfaction thereof;
(f) Investments received in connection with the
settlement of a bona fide dispute with another Person;
(g) Investments representing all or a portion of the
sales price of Property sold or services provided to another Person in
the ordinary course of business;
(h) Investments consisting of Contingent Obligations
permitted by Section 6.9, and to the extent that no Default or Event of
Default has occurred and remains continuing, payments thereunder;
(i) Investments made following the Closing Date in
the IGT Joint Venture in an aggregate amount not to exceed $25,000,000;
(j) Investments in Swap Agreements with respect to
the Obligations and other floating rate Indebtedness of Borrower and
its Subsidiaries; and
(k) Acquisitions made when no Default or Event or
Default exists of Persons engaged primarily in the same or similar
lines of business as Borrower and its existing Subsidiaries (and
existing Investments of such Persons whether or not primarily related
to such business) or of assets used in such businesses, PROVIDED that
(i) the consideration paid (net of Cash and Cash Equivalents acquired)
by Borrower and its Subsidiaries for such Acquisitions consists solely
of the capital stock of Borrower or Cash and other Property having an
aggregate value not in excess of $150,000,000 during any Fiscal Year;
and (ii) giving pro forma effect to the making of such Acquisition as
of the last day of the then most recently ended Fiscal Quarter,
Borrower is in pro forma compliance with Sections 6.11 and 6.12.
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6.15 SUBSIDIARY INDEBTEDNESS AND CONTINGENT OBLIGATIONS.
Permit any Subsidiary to create, incur, assume or suffer to exist any
Indebtedness or Contingent Obligation (even if Borrower would be permitted to
incur the same under Section 6.9), EXCEPT:
(a) the Guaranty;
(b) Indebtedness owed to Borrower or another
Subsidiary of Borrower;
(c) Capital Leases and purchase money obligations
permitted by Section 6.9 in respect of Property owned and used
by that Subsidiary;
(d) Indebtedness and other obligations permitted by
Section 6.9(h);
(e) other unsecured Indebtedness incurred in the
ordinary course of business in an aggregate principal amount
not in excess of $20,000,000;
(f) Indebtedness and Contingent Obligations existing
on the Closing Date and disclosed in Schedule 6.9, and
refinancings, renewals, extensions or amendments thereto by
the same obligors that do not increase the amount thereof; and
(g) certificates of deposit, bonds and other surety
obligations required to be maintained in connection with the
operation of lotteries in accordance with applicable Gaming
Laws.
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Article 7
INFORMATION AND REPORTING REQUIREMENTS
7.1 FINANCIAL AND BUSINESS INFORMATION. So long as any
Advance remains unpaid, or any Letter of Credit remains outstanding or any
other Obligation remains unpaid, or any portion of the Commitment remains in
force, Borrower, unless the Administrative Agent (with the written approval
of the Requisite Lenders) otherwise consents, at Borrower's sole expense,
deliver to the Administrative Agent for distribution by it to the Lenders, a
sufficient number of copies for all of the Lenders of the following:
(a) As soon as practicable, and in any event within
45 days after the end of each Fiscal Quarter (OTHER THAN the fourth
Fiscal Quarter in any Fiscal Year), the consolidated and consolidating
balance sheet of Borrower and its Subsidiaries as at the end of such
Fiscal Quarter and the consolidated and consolidating statement of
operations for such Fiscal Quarter, and its statement of cash flows for
the portion of the Fiscal Year ended with such Fiscal Quarter, all in
reasonable detail, and with comparisons to the combined results of
operations, on a pro forma basis for the same Fiscal Quarter in the
prior year. Such financial statements shall be certified by a Senior
Officer of Borrower as fairly presenting the financial condition,
results of operations and cash flows of Borrower and its Subsidiaries
in accordance with Generally Accepted Accounting Principles (OTHER THAN
footnote disclosures), consistently applied, as at such date and for
such periods, subject only to normal year-end accruals and audit
adjustments;
(b) As soon as practicable, and in any event within
105 days after the end of each Fiscal Year, (i) the consolidated and
consolidating balance sheet of Borrower and its Subsidiaries as at the
end of such Fiscal Year and the consolidated and consolidating
statements of operations, shareholders' equity and cash flows, in each
case of Borrower and its Subsidiaries for such Fiscal Year, in each
case as at the end of and for the Fiscal Year, all in reasonable
detail. Such financial statements shall be prepared in accordance with
Generally Accepted Accounting Principles, consistently applied, and
such consolidated balance sheet and consolidated statements shall be
accompanied by a report of one of the six largest public accounting
firms in the United States of America or other independent public
accountants of recognized standing selected by Borrower and reasonably
satisfactory to the Requisite Lenders, which report shall be prepared
in accordance with generally accepted auditing standards as at such
date, and shall not be subject to any qualifications or exceptions as
to the scope of the audit nor to any other qualification or exception
determined by the Requisite Lenders in their good faith business
judgment to be adverse to the interests of the Lenders. Such
accountants' report shall be accompanied by a certificate stating that,
in making the examination pursuant to generally accepted auditing
standards necessary for the certification of such financial statements
and such report, such accountants have obtained no knowledge of any
Default or, if, in the opinion of such accountants, any such Default
shall exist, stating the nature and status of such Default, and stating
that such accountants have reviewed Borrower's financial calculations
as at the end of such Fiscal Year (which shall accompany such
certificate) under Sections 6.11 and 6.12, have read such Sections
(including the definitions of all defined terms used therein) and
that nothing has come to the attention of
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such accountants in the course of such examination that would cause
them to believe that the same were not calculated by Borrower in the
manner prescribed by this Agreement;
(c) As soon as practicable, and in any event prior to
the last Business Day of each January, April, July and October, a
completed Pricing Certificate setting forth the Leverage Ratio as of
the last day of the then most recently ended Fiscal Quarter;
(d) As soon as practicable, and in any event within
45 days after the commencement of each Fiscal Year, a budget and
projection by Fiscal Quarter for that Fiscal Year and by Fiscal Year
for the next two succeeding Fiscal Years, INCLUDING for the first such
Fiscal Year, projected consolidated balance sheets, statements of
operations and statements of cash flow and, for the second and third
such Fiscal Years, projected consolidated condensed balance sheets and
statements of operations and cash flows, of Borrower and its
Subsidiaries, all in reasonable detail;
(e) Promptly after request by the Administrative
Agent or any Lender, copies of any detailed audit reports, management
letters or recommendations submitted to the board of directors (or the
audit committee of the board of directors) of Borrower by independent
accountants in connection with the accounts or books of Borrower or any
of its Subsidiaries, or any audit of any of them;
(f) Promptly after the same are available, copies of
each annual report, proxy or financial statement or other report or
communication sent to the stockholders of Borrower, and copies of all
annual, regular, periodic and special reports and registration
statements which Borrower may file or be required to file with the
Securities and Exchange Commission under Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, and not otherwise required
to be delivered to the Lenders pursuant to other provisions of this
Section;
(g) Promptly after request by the Administrative
Agent or any Lender, copies of the Nevada "Regulation 6.090 Report" and
"6-A Report";
(h) Promptly after request by the Administrative
Agent or any Lender, copies of any other report or other document that
was filed by Borrower or any of its Subsidiaries with any Governmental
Agency (other than routine applications and reports filed by Borrower
and its Subsidiaries with any Gaming Board);
(i) As soon as practicable, and in any event within
ten Business Days after a Senior Officer of Borrower becomes aware of
the occurrence of any material (i) "report able event" (as such term is
defined in Section 4043 of ERISA) or (ii) "prohibited transaction" (as
such term is defined in Section 406 of ERISA or Section 4975 of the
Code) in connection with any Pension Plan or any trust created
thereunder, telephonic notice specifying the nature thereof, and, no
more than five Business Days after such telephonic notice, written
notice again specifying the nature thereof and specifying what action
Borrower or any of its Subsidiaries is taking or proposes to take with
respect thereto, and, when known, any action taken by the Internal
Revenue Service with respect thereto;
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(j) As soon as practicable, and in any event within
two Business Days after a Senior Officer of Borrower becomes aware of
the existence of any condition or event which constitutes a Default or
Event of Default, telephonic notice specifying the nature and period of
existence thereof, and, no more than two Business Days after such
telephonic notice, written notice again specifying the nature and
period of existence thereof and specifying what action Borrower or its
Subsidiaries are taking or propose to take with respect thereto;
(k) Promptly upon a Senior Officer of Borrower
becoming aware that (i) any Person has commenced a legal proceeding
with respect to a claim against Borrower or any of its Subsidiaries
that is $10,000,000 or more in excess of the amount thereof that is
fully covered by insurance, (ii) any creditor or lessor under a written
credit agreement or material lease has asserted a default thereunder on
the part of Borrower or any of its Subsidiaries, (iii) any Person has
commenced a legal proceeding with respect to a claim against Borrower
or any of its Subsidiaries under a contract that is not a credit
agreement or material lease in excess of $10,000,000 or which otherwise
may reasonably be expected to result in a Material Adverse Effect, (iv)
any labor union has notified Borrower of its intent to strike Borrower
or any of its Subsidiaries on a date certain and such strike would
involve more than 100 employees of Borrower or its Subsidiaries, (v)
any Gaming Board has indicated its intent to consider or act upon a
License Revocation or a fine or penalty of $1,000,000 or more with
respect to Borrower or any of its Subsidiaries, or (vi) any
Governmental Agency has notified Borrower of the commencement of any
material action, suit, proceeding or investigation against Borrower or
any of its Subsidiaries by such Governmental Agency, including any
action, suit, proceeding or investigation relating to any Hazardous
Materials Laws, a written notice describing the pertinent facts
relating thereto and what action Borrower or its Subsidiaries are
taking or propose to take with respect thereto;
(l) Promptly and in any event within five Business
Days following the occurrence of any Change in Control, notice thereof;
and
(m) Such other data and information as from time to
time may be reasonably requested by the Administrative Agent, any
Lender (through the Administrative Agent) or the Requisite Lenders.
7.2 COMPLIANCE CERTIFICATES. So long as any Advance remains
unpaid, or any Letter of Credit remains outstanding or any other Obligation
remains unpaid or unperformed, or any portion of the Commitment remains
outstanding, Borrower shall, at its sole expense, deliver to the Administrative
Agent for distribution by it to the Lenders concurrently with the financial
statements required pursuant to Sections 7.1(a) and 7.1(b), Compliance
Certificates signed by a Senior Officer of Borrower.
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Article 8
CONDITIONS
8.1 INITIAL ADVANCES ON THE CLOSING DATE. The obligation of
each Lender to make the initial Advance to be made by it on the Closing Date, is
subject to the following conditions precedent, each of which shall be satisfied
prior to the making of the initial Advances (unless all of the Lenders, in their
sole and absolute discretion, shall agree otherwise):
(a) The Administrative Agent shall have received all
of the following, each of which shall be originals unless otherwise
specified, each properly executed by a Responsible Official of each
party thereto, each dated as of the Closing Date and each in form and
substance reasonably satisfactory to the Administrative Agent and its
legal counsel:
(1) executed counterparts of this Agreement,
sufficient in number for distribution to the Administrative
Agent, the Lenders and Borrower;
(2) a Note executed by Borrower in favor of each
Lender, each in a principal amount equal to that Lender's Pro
Rata Share;
(3) with respect to Borrower and each Guarantor, such
documentation as the Administrative Agent may reasonably
require to establish the due organization, valid existence and
good standing of Borrower and the Guarantors, its
qualification to engage in business in each material
jurisdiction in which it is engaged in business or required to
be so qualified, its authority to execute, deliver and perform
any Loan Documents to which it is a Party, the identity,
authority and capacity of each Responsible Official thereof
authorized to act on its behalf, INCLUDING (if applicable)
certified copies of articles of incorporation or organization
and amendments thereto, bylaws or operating agreements and
amendments thereto, certificates of good standing and/or
qualification to engage in business, tax clearance
certificates, certificates of corporate or other
organizational resolutions, incumbency certificates,
Certificates of Responsible Officials, and the like;
(4) the Swing Line Documents;
(5) the Guaranty executed by each Guarantor;
(6) a certificate of insurance issued by Borrower's
insurance carrier or agent with respect to the insurance
required to be maintained pursuant to Section 5.4;
(7) the Opinions;
(8) a Request for Loan in compliance with Article 2
(or in the appropriate case, a Request for Letter of Credit in
compliance with Article 2);
(9) the fee letter described in Sections 3.2, 3.3 and
3.5;
(10) such assurances as the Administrative Agent
deems appropriate that the relevant Gaming Boards have
approved the transactions contemplated by the
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Loan Documents to the extent that such approval is required by
applicable Gaming Laws;
(11) a Certificate signed by a Senior Officer of
Borrower certifying that the attached copy of the Merger
Agreement is true, correct and complete;
(12) a Certificate signed by a Senior Officer of
Borrower certifying that the conditions specified in Sections
8.1(e) and 8.1(f) have been satisfied and setting forth the
Leverage Ratio as of March 31, 1999 (on a pro forma basis
giving effect to the Merger);
(13) the Solvency Certificate; and
(14) such other assurances, certificates, documents,
consents or opinions as the Administrative Agent reasonably
may require.
(b) The upfront fees payable on the Closing Date
pursuant to Section 3.3 shall have been paid.
(c) The agency fees payable on the Closing Date
pursuant to Section 3.6 shall have been paid.
(d) The reasonable costs and expenses of the
Administrative Agent in connection with the preparation of
the Loan Documents payable pursuant to Section 11.3, and
invoiced to Borrower prior to the Closing Date, shall have
been paid.
(e) The representations and warranties of Borrower
contained in Article 4 shall be true and correct.
(f) Borrower and all other Parties shall be in
compliance with all the terms and provisions of the Loan
Documents, and giving effect to the initial Advance, no
Default or Event of Default shall have occurred and be
continuing.
(g) The Merger shall have occurred, or shall
substantially concurrently occur, pursuant to the Merger
Agreement and in compliance with all applicable Laws, and
all required approvals therefor, including any required
Hart-Scott-Rodino Act approvals shall have been obtained.
(h) All legal matters relating to the Loan
Documents shall be satisfactory to Sheppard, Mullin,
Richter & Hampton, LLP, special counsel to the
Administrative Agent.
8.2 ANY ADVANCE. The obligation of each Lender to make any
Advance, and the obligation of the Issuing Lender to issue a Letter of Credit,
is subject to the following conditions precedent (unless the Requisite Lenders,
in their sole and absolute discretion, shall agree otherwise):
(a) EXCEPT (i) for representations and warranties
which expressly speak as of a particular date or are no longer true and
correct as a result of a change which is permitted by this Agreement or
(ii) as disclosed by Borrower and approved in writing by the Requisite
Lenders, the representations and warranties contained in Article 4
(OTHER THAN
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Sections 4.4(a), 4.6 (first sentence), 4.10, 4.17 and 4.18 (but only if
Borrower and its Subsidiaries are diligently engaged in measures that
will result in compliance with all Hazardous Materials Laws) shall be
true and correct on and as of the date of the Advance as though made on
that date;
(b) other than matters described in Schedule 4.10 or
not required as of the Closing Date to be therein described, there
shall not be then pending or threatened any action, suit, proceeding or
investigation against or affecting Borrower or any of its Subsidiaries
or any Property of any of them before any Governmental Agency that
constitutes a Material Adverse Effect;
(c) the Administrative Agent shall have timely
received a Request for Loan in compliance with Article 2 (or telephonic
or other request for Loan referred to in the second sentence of Section
2.1(b), if applicable) or the Issuing Lender shall have received a
Request for Letter of Credit, as the case may be, in compliance with
Article 2; and
(d) the Administrative Agent shall have received, in
form and substance satisfactory to the Administrative Agent, such other
assurances, certificates, documents or consents related to the
foregoing as the Administrative Agent or Requisite Lenders reasonably
may require.
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Article 9
EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT
9.1 EVENTS OF DEFAULT. The existence or occurrence of any one
or more of the following events, whatever the reason therefor and under any
circumstances whatsoever, shall constitute an Event of Default:
(a) Borrower fails to pay any principal on any of
the Notes, or any portion thereof, on the date when due; or
(b) Borrower fails to pay any interest on any of the
Notes, or any fees under Sections 3.4, 3.5 or 3.6, or any portion
thereof, within two Business Days after the date when due; or fails to
pay any other fee or amount payable to the Lenders under any Loan
Document, or any portion thereof, within five Business Days after
demand therefor; or
(c) Borrower fails to comply with any of the
covenants contained in Article 6, OTHER THAN the covenants contained in
Sections 6.6, 6.7, or 6.10; or
(d) Borrower fails to comply with Section 7.1(j) in
any respect that is materially adverse to the interests of the Lenders;
or
(e) Borrower, any of its Subsidiaries or any other
Party fails to perform or observe any other covenant or agreement (not
specified in clause (a), (b), (c), or (d) above) contained in any Loan
Document on its part to be performed or observed within twenty five
Business Days after the giving of notice by the Administrative Agent on
behalf of the Requisite Lenders of such Default; or
(f) Any representation or warranty of Borrower or any
of its Subsidiaries or any other Party made in any Loan Document, or in
any certificate or other writing delivered by Borrower or such
Subsidiary or Party pursuant to any Loan Document, proves to have been
incorrect when made or reaffirmed in any respect that is materially
adverse to the interests of the Lenders; or
(g) Borrower or any of its Subsidiaries (i) fails to
pay the principal, or any principal installment, of any present or
future Indebtedness of $10,000,000 or more, or any guaranty of present
or future Indebtedness of $10,000,000 or more, on its part to be paid,
when due (or within any stated grace period), whether at the stated
maturity, upon acceleration, by reason of required prepayment or
otherwise or (ii) fails to perform or observe any other term, covenant
or agreement on its part to be performed or observed, or suffers any
event of default to occur, in connection with any present or future
Indebtedness of $10,000,000 or more, or of any guaranty of present or
future Indebtedness of $10,000,000 or more, if as a result of such
failure or sufferance any holder or holders thereof (or an agent or
trustee on its or their behalf) has the right to declare such
Indebtedness due before the date on which it otherwise would
become due or the right to require Borrower or any of its Subsidiaries
to redeem or purchase, or offer to redeem or purchase, all or any
portion of such Indebtedness; or
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(h) Any event occurs which gives the holder or
holders of any Subordinated Obligation (or an agent or trustee on its
or their behalf) the right to declare such Subordinated Obligation due
before the date on which it otherwise would become due, or the right to
require the issuer thereof to redeem or purchase, or offer to redeem or
purchase, all or any portion of any Subordinated Obligation; or the
trustee for, or any holder of, a Subordinated Obligation breaches any
subordination provision applicable to such Subordinated Obligation; or
(i) Any Loan Document, at any time after its
execution and delivery and for any reason OTHER THAN the agreement or
action (or omission to act) of the Administrative Agent or any of the
Lenders or satisfaction in full of all the Obligations ceases to be in
full force and effect or is declared by a court of competent
jurisdiction to be null and void, invalid or unenforceable in any
respect which, in any such event in the reasonable opinion of the Requi
site Lenders, is materially adverse to the interests of the Lenders; or
any Party thereto denies in writing that it has any or further
liability or obligation under any Loan Document, or purports to revoke,
terminate or rescind same; or
(j) A final judgment against Borrower or any of its
Subsidiaries is entered for the payment of money in excess of
$5,000,000 and, absent procurement of a stay of execution, such
judgment remains unsatisfied for thirty calendar days after the date of
entry of judgment, or in any event later than five days prior to the
date of any proposed sale thereunder; or any writ or warrant of
attachment or execution or similar process is issued or levied against
all or any material part of the Property of any such Person and is not
released, vacated or fully bonded within thirty calendar days after its
issue or levy; or
(k) Borrower or any of its Subsidiaries institutes or
consents to the institution of any proceeding under a Debtor Relief Law
relating to it or to all or any material part of its Property, or is
unable or admits in writing its inability to pay its debts as they
mature, or makes an assignment for the benefit of creditors; or applies
for or consents to the appointment of any receiver, trustee, custodian,
conservator, liquidator, rehabilitator or similar officer for it or for
all or any material part of its Property; or any receiver, trustee,
custodian, conservator, liquidator, rehabilitator or similar officer is
appointed without the application or consent of that Person and the
appointment continues undischarged or unstayed for ninety calendar
days; or any proceeding under a Debtor Relief Law relating to any such
Person or to all or any part of its Property is instituted without the
consent of that Person and continues undismissed or unstayed for ninety
calendar days; or
(l) The occurrence of an Event of Default (as such
term is or may hereafter be specifically defined in any other Loan
Document) under any other Loan Document; or
(m) A final judgment is entered by a court of
competent jurisdiction that any Subordinated Obligation is not
subordinated in accordance with its terms to the Obligations; or
(n) Any Pension Plan maintained by Borrower or any of
its Subsidiaries is determined to have a material "accumulated funding
deficiency" as that term is defined in
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Section 302 of ERISA and the result is a Material Adverse Effect or
Borrower or any of its ERISA Affiliates incurs any withdrawal liability
in respect of any Multiemployer Plan which is in an amount in excess of
$5,000,000 which withdrawal liability is not paid or otherwise
satisfied within thirty days; or
(o) The occurrence of a License Revocation that
continues for three consecutive calendar days.
9.2 REMEDIES UPON EVENT OF DEFAULT. Without limiting any other
rights or remedies of the Creditors provided for elsewhere in this Agreement, or
the other Loan Documents, or by applicable Law, or in equity, or otherwise:
(a) Upon the occurrence of any Event of Default OTHER THAN an
Event of Default described in Section 9.1(k):
(1) the Commitment to make Advances, the obligation
of the Issuing Lender to issue Letters of Credit, the
obligation of the Swing Line Lender to make Swing Line Loans
and all other obligations of the Creditors and all rights of
Borrower and any other Parties under the Loan Documents shall
be suspended without notice to or demand upon Borrower which
are expressly waived by Borrower, EXCEPT that all of the
Lenders or the Requisite Lenders (as the case may be, in
accordance with Section 11.2) may waive an Event of Default
or, without waiving, determine, upon terms and conditions
satisfactory to the Lenders or Requisite Lenders, as the case
may be, to reinstate the Commitment and such other obligations
and rights and make further Advances, and cause the Issuing
Lender to issue further Letters of Credit which waiver or
determination shall apply equally to, and shall be binding
upon, all the Lenders;
(2) the Issuing Lender may, with the approval of the
Administrative Agent on behalf of the Requisite Lenders,
demand immediate payment by Borrower of an amount equal to the
aggregate amount of all outstanding Letters of Credit to be
held by the Issuing Lender in an interest-bearing cash
collateral account as collateral hereunder; and
(3) the Requisite Lenders may request the
Administrative Agent to, and the Administrative Agent
thereupon shall, terminate the Commitment and/or declare all
or any part of the unpaid principal of all Notes, all interest
accrued and unpaid thereon and all other amounts payable under
the Loan Documents to be forthwith due and payable, whereupon
the same shall become and be forthwith due and payable,
without protest, presentment, notice of dishonor, demand or
further notice of any kind, all of which are expressly waived
by Borrower.
(b) Upon the occurrence of any Event of Default described in
Section 9.1(k):
(1) the Commitment to make Advances, the obligation
of the Issuing Lender to issue Letters of Credit, the
obligation of the Swing Line Lender to make
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Swing Line Loans and all other obligations of the Creditors
and all rights of Borrower and any other Parties under the
Loan Documents shall terminate without notice to or demand
upon Borrower, which are expressly waived by Borrower, EXCEPT
that all of the Lenders may waive the Event of Default or,
without waiving, determine, upon terms and conditions
satisfactory to all the Lenders, to reinstate the Commitment
and such other obligations and rights and make further
Advances and to cause the Issuing Lender to issue further
Letters of Credit, which determination shall apply equally to,
and shall be binding upon, all the Lenders;
(2) an amount equal to the aggregate amount of all
outstanding Letters of Credit shall be immediately due and
payable to the Issuing Lender without notice to or demand upon
Borrower, which are expressly waived by Borrower, to be held
by the Issuing Lender in an interest-bearing cash collateral
account as collateral hereunder; and
(3) the unpaid principal of all Notes, all interest
accrued and unpaid thereon and all other amounts payable under
the Loan Documents shall be forthwith due and payable, without
protest, presentment, notice of dishonor, demand or further
notice of any kind, all of which are expressly waived by
Borrower.
(c) Upon the occurrence, and during the continuance, of any
Event of Default, the Creditors, or any of them, without notice to
(EXCEPT as expressly provided for in any Loan Document) or demand
upon Borrower, which are expressly waived by Borrower (EXCEPT as to
notices expressly provided for in any Loan Document), may proceed
(but only with the consent of the Requisite Lenders) to protect,
exercise and enforce their rights and remedies under the Loan
Documents against Borrower and any other Party and such other rights
and remedies as are provided by Law or equity.
(d) The order and manner in which the Creditors' rights and
remedies are to be exercised shall be determined by the Requisite
Lenders in their sole discretion, and all pay ments received by the
Creditors, or any of them, shall be applied first to the costs and
expenses (including reasonable attorneys' fees and disbursements and
the reasonably allocated costs of attorneys employed by any of the
Creditors) of the Creditors, and thereafter paid pro rata to the
Lenders in the same proportions that the aggregate Obligations owed
to each Lender under the Loan Documents bear to the aggregate
Obligations owed under the Loan Documents to all the Lenders,
without priority or preference among the Lenders. Regardless of how
each Lender may treat payments for the purpose of its own
accounting, for the purpose of computing the Obligations hereunder
and under the Notes, payments shall be applied FIRST, to the costs
and expenses of the Creditors, as set forth above, SECOND, to the
payment of accrued and unpaid interest due under any Loan Documents
to and including the date of such application (ratably,and without
duplication, according to the accrued and unpaid interest due under
each of the Loan Documents), and THIRD, to the payment of all other
amounts (including principal and fees) then owing to the Creditors
under the Loan Documents. No application of payments will cure any
Event of Default, or prevent acceleration, or continued
acceleration, of amounts payable under the Loan Documents, or
prevent the exercise, or continued exercise, of rights or remedies
of the Lenders hereunder or thereunder or at Law or in equity.
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Article 10
THE ADMINISTRATIVE AGENT
10.1 APPOINTMENT AND AUTHORIZATION. Subject to Section
10.8, each Lender hereby irrevocably appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to
exercise such powers under the Loan Documents as are delegated to the
Administrative Agent by the terms thereof or are reasonably incidental, as
determined by the Administrative Agent, thereto. This appointment and
authorization is intended solely for the purpose of facilitating the
servicing of the Loans and does not constitute appointment of the
Administrative Agent as trustee for any Lender or as representative of any
Lender for any other purpose and, EXCEPT as specifically set forth in the
Loan Documents to the contrary, the Administrative Agent shall take such
action and exercise such powers only in an administrative and ministerial
capacity.
10.2 ADMINISTRATIVE AGENT AND AFFILIATES. Bank of America
(and each successor Administrative Agent) has the same rights and powers
under the Loan Documents as any other Lender and may exercise the same as
though it were not the Administrative Agent, and the term "Lender" or
"Lenders" includes Bank of America in its individual capacity. Bank of
America (and each successor Administrative Agent) and its Affiliates may
accept deposits from, lend money to and generally engage in any kind of
banking, trust or other business with Borrower, any Subsidiary thereof, or
any Affiliate of Borrower or any Subsidiary thereof, as if it were not the
Administrative Agent and without any duty to account therefor to the Lenders.
Bank of America (and each successor Administrative Agent) need not account to
any other Lender for any monies received by it for reimbursement of its costs
and expenses as Administrative Agent hereunder, or for any monies received by
it in its capacity as a Lender hereunder. The Administrative Agent shall not
be deemed to hold a fiduciary or other special relation ship with any Lender
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or otherwise exist against the
Administrative Agent.
10.3 PROPORTIONATE INTEREST IN ANY COLLATERAL. The
Administrative Agent, on behalf of all the Lenders, shall hold in accordance
with the Loan Documents all items of any collateral or interests therein
received or held by the Administrative Agent. Subject to the Administrative
Agent's and the Lenders' rights to reimbursement for their costs and expenses
hereunder (INCLUDING reasonable attorneys' fees and disbursements and other
professional services and the reasonably allocated costs of attorneys
employed by the Administrative Agent or a Lender) and subject to the
application of payments in accordance with Section 9.2(d), each Lender shall
have an interest in the Lenders' interest in any collateral or interests
therein in the same proportions that the aggregate Obligations owed such
Lender under the Loan Documents bear to the aggregate Obligations owed under
the Loan Documents to all the Lenders, without priority or preference among
the Lenders, EXCEPT that Obligations owed to any Lender under a Swap
Agreement shall be secured on a PARI PASSU basis with all other Obligations
up to an amount equal to the Administrative Agent's then customary credit
risk factor for Swap Agreements times the notional amount of Indebtedness
covered by such Swap Agreement and shall be secured on a subordinate basis as
to amounts in excess of such amount.
10.4 LENDERS' CREDIT DECISIONS. Each Lender agrees that it
has independently and without reliance upon the Administrative Agent, any other
Creditor or the directors, officers, agents, employees or attorneys thereof,
and instead in reliance upon information supplied to it by or on behalf
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of Borrower and its Subsidiaries and upon such other information as it has
deemed appropriate, made its own independent credit analysis and decision to
enter into this Agreement. Each Lender also agrees that it shall,
independently and without reliance upon the Administrative Agent, any other
Creditor or the directors, officers, agents, employees or attorneys thereof,
continue to make its own independent credit analyses and decisions in acting
or not acting under the Loan Documents.
10.5 ACTION BY ADMINISTRATIVE AGENT.
(a) Absent actual knowledge of the Administrative
Agent of the existence of a Default, the Administrative Agent may
assume that no Default has occurred and is continuing, unless the
Administrative Agent has received notice from Borrower stating the
nature of the Default or has received notice from a Lender stating the
nature of the Default and that such Lender considers the Default to
have occurred and to be continuing.
(b) The Administrative Agent has only those
obligations under the Loan Documents as are expressly set forth
therein.
(c) EXCEPT for any obligation expressly set forth in
the Loan Documents and as long as the Administrative Agent may assume
that no Event of Default has occurred and is continuing, the
Administrative Agent may, but shall not be required to, exercise its
discretion to act or not act, EXCEPT that the Administrative Agent
shall be required to act or not act upon the instructions of the
Requisite Lenders (or of all the Lenders, to the extent required by
Section 11.2) and those instructions shall be binding upon the
Administrative Agent and all the Lenders, PROVIDED that the
Administrative Agent shall not be required to act or not act if to do
so would be contrary to any Loan Document or to applicable Law or could
result, in the judgment of the Administrative Agent, in a material risk
of liability to the Administrative Agent.
(d) If the Administrative Agent has received a notice
specified in clause (a), the Administrative Agent shall immediately
give notice thereof to the Lenders and shall act or not act upon the
instructions of the Requisite Lenders (or of all the Lenders, to the
extent required by Section 11.2), PROVIDED that the Administrative
Agent shall not be required to act or not act if to do so would be
contrary to any Loan Document or to applicable Law or could result, in
the judgment of the Administrative Agent, in a material risk of
liability to the Administrative Agent, and EXCEPT that if the Requisite
Lenders (or all the Lenders, if required under Section 11.2) fail, for
five Business Days after the receipt of notice from the Administrative
Agent, to instruct the Administrative Agent, then the Administrative
Agent, in its sole discretion, may act or not act as it deems advisable
for the protection of the interests of the Lenders.
(e) The Administrative Agent shall have no liability
to any Lender for acting, or not acting, as instructed by the Requisite
Lenders (or all the Lenders, if required under Section 11.2),
notwithstanding any other provision hereof.
10.6 LIABILITY OF ADMINISTRATIVE AGENT. Neither the
Administrative Agent nor any of its directors, officers, agents, employees or
attorneys shall be liable for any action taken or not taken by them under or in
connection with the Loan Documents, EXCEPT for their own gross negligence or
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willful misconduct. Without limitation on the foregoing, the Administrative
Agent and its directors, officers, agents, employees and attorneys:
(a) May treat the payee of any Note as the holder
thereof until the Administrative Agent receives notice of the
assignment or transfer thereof, in form satisfactory to the
Administrative Agent, signed by the payee, and may treat each Lender as
the owner of that Lender's interest in the Obligations for all purposes
of this Agreement until the Administrative Agent receives notice of the
assignment or transfer thereof, in form satisfactory to the
Administrative Agent, signed by that Lender;
(b) May consult with legal counsel (INCLUDING
in-house legal counsel), accountants (INCLUDING in-house accountants)
and other professionals or experts selected by it, or with legal
counsel, accountants or other professionals or experts for Borrower
and/or its Subsidiaries or the Lenders, and shall not be liable for any
action taken or not taken by it in good faith in accordance with any
advice of such legal counsel, accountants or other professionals or
experts;
(c) Shall not be responsible to any Lender for any
statement, warranty or representation made in any of the Loan Documents
or in any notice, certificate, report, request or other statement
(written or oral) given or made in connection with any of the Loan
Documents;
(d) Shall have no duty to ask or inquire as to the
performance or observance by Borrower or its Subsidiaries of any of the
terms, conditions or covenants of any of the Loan Documents or to
inspect any collateral or the Property, books or records of Borrower or
its Subsidiaries;
(e) Will not be responsible to any Lender for the due
execution, legality, validity, enforceability, genuineness,
effectiveness, sufficiency or value of any Loan Document, any other
instrument or writing furnished pursuant thereto or in connection
therewith, or any collateral;
(f) Will not incur any liability by acting or not
acting in reliance upon any Loan Document, notice, consent,
certificate, statement, request or other instrument or writing believed
in good faith by it to be genuine and signed or sent by the proper
party or parties; and
(g) Will not incur any liability for any arithmetical
error in computing any amount paid or payable by the Borrower or any
Subsidiary or Affiliate thereof or paid or payable to or received or
receivable from any Lender under any Loan Document, INCLUDING,
principal, interest, commitment fees, Advances and other amounts;
PROVIDED that, promptly upon discovery of such an error in computation,
the Administrative Agent, the Lenders and (to the extent applicable)
Borrower and/or its Subsidiaries or Affiliates shall make such
adjustments as are necessary to correct such error and to restore the
parties to the position that they would have occupied had the error not
occurred.
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10.7 INDEMNIFICATION. Each Lender shall, ratably in
accordance with its Pro Rata Share (if the Commitment is then in effect) or
in accordance with its proportion of the aggregate Indebtedness then
evidenced by the Notes (if the Commitment has then been terminated),
indemnify and hold the Administrative Agent and its directors, officers,
agents, employees and attorneys harmless against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever (INCLUDING,
without limitation, attorneys' fees and disbursements and allocated costs of
attorneys employed by the Administrative Agent) that may be imposed on,
incurred by or asserted against it or them in such capacity in any way
relating to or arising out of the Loan Documents (other than losses incurred
by reason of the failure of Borrower to pay the Indebtedness represented by
the Notes) or any action taken or not taken by it as Administrative Agent
thereunder, EXCEPT such as result from its own gross negligence or willful
misconduct. Without limitation on the foregoing, each Lender shall reimburse
the Administrative Agent upon demand for that Lender's Pro Rata Share of any
out-of-pocket cost or expense incurred by the Administrative Agent in
connection with the negotiation, preparation, execution, delivery, amendment,
waiver, restructuring, reorganization (INCLUDING a bankruptcy
reorganization), enforcement or attempted enforcement of the Loan Documents,
to the extent that Borrower or any other Party is required by Section 11.3 to
pay that cost or expense but fails to do so upon demand. Nothing in this
Section shall entitle the Administrative Agent to recover any amount from the
Lenders if and to the extent that such amount has theretofore been recovered
from Borrower or any other Party. To the extent that the Administrative Agent
is later reimbursed such cost or expense by Borrower or any other Party, it
shall return the amounts paid to it by the Lenders in respect of such cost or
expense.
10.8 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative
Agent may, and at the request of the Requisite Lenders shall, resign as
Administrative Agent upon thirty days' notice to the Lenders and Borrower. If
the Administrative Agent shall resign as Administrative Agent under this
Agreement, the Requisite Lenders shall appoint from among the Lenders a
successor Administrative Agent for the Lenders, which successor
Administrative Agent shall be approved by Borrower (and such approval shall
not be unreasonably withheld or delayed). If no successor Administrative
Agent is appointed prior to the effective date of the resignation of the
Administrative Agent, the Administrative Agent may appoint, after consulting
with the Lenders and the Borrower, a successor Administrative Agent from
among the Lenders. Upon the acceptance of its appointment as successor
Administrative Agent hereunder, such successor Administrative Agent shall
succeed to all the rights, powers and duties of the retiring Administrative
Agent and the term "Administrative Agent" shall mean such successor
Administrative Agent and the retiring Administrative Agent's appointment,
powers and duties as Administrative Agent shall be terminated. After any
retiring Administrative Agent's resignation hereunder as Administrative
Agent, the provisions of this Article 10, and Sections 11.3, 11.11 and 11.22,
shall inure to its benefit as to any actions taken or omitted to be taken by
it while it was Administrative Agent under this Agreement. If (a) the
Administrative Agent has not been paid its agency fees under Section 3.6 or
has not been reimbursed for any expense reimbursable to it under Section
11.3, in either case for a period of at least one year and (b) no successor
Administrative Agent has accepted appointment as Administrative Agent by the
date which is thirty days following a retiring Administrative Agent's notice
of resignation, the retiring Administrative Agent's resignation shall
nevertheless thereupon become effective and the Lenders shall perform all of the
duties of the Administrative Agent hereunder until such time, if any, as the
Requisite Lenders appoint a successor Administrative Agent as provided for
above.
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10.9 NO OBLIGATIONS OF BORROWER. Nothing contained in this
Article 10 shall be deemed to impose upon Borrower any obligation in respect
of the due and punctual performance by the Administrative Agent of its
obligations to the Lenders under any provision of this Agreement, and
Borrower shall have no liability to the Administrative Agent or any of the
Lenders in respect of any failure by the Administrative Agent or any Lender
to perform any of its obligations to the Creditors under this Agreement.
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Article 11
MISCELLANEOUS
11.1 CUMULATIVE REMEDIES; NO WAIVER. The rights, powers,
privileges and remedies of the Creditors provided herein or in any Note or other
Loan Document are cumulative and not exclusive of any right, power, privilege or
remedy provided by Law or equity. No failure or delay on the part of the
Administrative Agent or any Lender in exercising any right, power, privilege or
remedy may be, or may be deemed to be, a waiver thereof; nor may any single or
partial exercise of any right, power, privilege or remedy preclude any other or
further exercise of the same or any other right, power, privilege or remedy. The
terms and conditions of Article 8 hereof are inserted for the sole benefit of
the Creditors; the same may be waived in whole or in part, with or without terms
or conditions, in respect of any Loan or Letter of Credit without prejudicing
the Administrative Agent's or the Lenders' rights to assert them in whole or in
part in respect of any other Loan.
11.2 AMENDMENTS; CONSENTS. Each amendment, modification,
supplement, extension, termination, waiver, approval and consent under this
Agreement and the other Loan Documents shall be subject to the terms of all
applicable Laws, including Gaming Laws. No amendment, modification, supplement,
extension, termination (except as permitted by Section 2.6) or waiver of any
provision of this Agreement or any other Loan Document, no approval or consent
thereunder, and no consent to any departure by the Borrower or any other Party
therefrom, may in any event be effective unless in writing signed by the
Administrative Agent with the approval of Requisite Lenders (and, in the case of
any amendment, modification or supplement of or to any Loan Document to which
any of the Borrower or any of its Subsidiaries is a Party, signed by each such
Party, and, in the case of any amendment, modification or supplement to Article
10, signed by the Administrative Agent), and then only in the specific instance
and for the specific purpose given; and, without the approval in writing of all
the Lenders, no amendment, modification, supplement, termination, waiver or
consent may be effective:
(a) To amend or modify the principal of, or the
amount of principal, principal prepayments on, any Note, or the amount
of the Commitment or the Pro Rata Share of any Lender or reduce the
rate of interest or the amount of any commitment fee payable to any
Lender, or any other fee or amount payable to any Lender under the Loan
Documents or to waive an Event of Default consisting of the failure of
Borrower to pay when due principal, interest or any commitment fee;
(b) To postpone any date fixed for any payment of
principal of, prepayment of principal of or any installment of interest
on, any Note or any installment of any commitment fee, or to extend the
term of the Commitment;
(c) To release from the Guaranty any Subsidiaries
having aggregate total assets in excess of $1,000,000 except to the
extent that such Subsidiaries are the subject of any Disposition
permitted hereby;
(d) To amend the provisions of the definitions of
"REDUCTION AMOUNT", "REDUCTION DATE", REQUISITE LENDERS" or "MATURITY
DATE";
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(e) To amend or waive Article 8, Section 6.4 or this Section;
or
(f) To amend any provision of this Agreement that expressly
requires the consent or approval of all the Lenders.
Any amendment, modification, supplement, termination, waiver or consent pursuant
to this Section shall apply equally to, and shall be binding upon, all the
Lenders and the Administrative Agent.
11.3 COSTS, EXPENSES AND TAXES. Borrower shall pay within five
Business Days after demand, accompanied by an invoice therefor, the reasonable
costs and expenses of the Administrative Agent in connection with the
negotiation, preparation, syndication, execution and delivery of the Loan
Documents and any amendment thereto or waiver thereof. Borrower shall also pay
on demand, accompanied by an invoice therefor, the reasonable costs and expenses
of the Creditors after any Event of Default in connection with the amendment,
restructuring, reorganization (INCLUDING a bankruptcy reorganization) and
enforcement or attempted enforcement of the Loan Documents, and any matter
related thereto. The foregoing costs and expenses shall include filing fees,
recording fees, title insurance fees, appraisal fees, search fees, and other
out-of-pocket expenses and the reasonable fees and out-of-pocket expenses of any
legal counsel (INCLUDING reasonably allocated costs of legal counsel employed by
the Administrative Agent or any Lender), independent public accountants and
other outside experts retained by the Administrative Agent or any Lender,
whether or not such costs and expenses are incurred or suffered by the
Administrative Agent or any Lender in connection with or during the course of
any bankruptcy or insolvency proceedings of Borrower or any Subsidiary thereof.
Such costs and expenses shall also include, in the case of any amendment or
waiver of any Loan Document requested by Borrower, the administrative costs of
the Administrative Agent reasonably attributable thereto. Borrower shall pay any
and all documentary and other taxes, EXCLUDING (i) taxes imposed on or measured
in whole or in part by overall net income, gross income or gross receipts and
franchise taxes imposed on any Lender by (A) any jurisdiction (or political
subdivision thereof) in which it is organized or maintains its principal office
or Eurodollar Lending Office or (B) any jurisdiction (or political subdivision
thereof) in which it is "doing business", (ii) any withholding taxes or other
taxes based on gross income imposed by the United States of America that are not
attributable to any change in any Law or the interpretation or administration of
any Law by any Governmental Agency and (iii) any withholding tax or other taxes
based on gross income imposed by the United States of America for any period
with respect to which it has failed to provide Borrower with the appropriate
form or forms required by Section 11.21, to the extent such forms are then
required by applicable Laws, and all costs, expenses, fees and charges payable
or determined to be payable in connection with the filing or recording of this
Agreement, any other Loan Document or any other instrument or writing to be
delivered hereunder or thereunder, or in connection with any transaction
pursuant hereto or thereto, and shall reimburse, hold harmless and indemnify on
the terms set forth in 11.11 the Creditors from and against any and all loss,
liability or legal or other expense with respect to or resulting from any delay
in paying or failure to pay any such tax, cost, expense, fee or charge or that
any of them may suffer or incur by reason of the failure of any Party to perform
any of its Obligations. Any amount payable to the Administrative Agent or any
Lender under this Section shall bear interest from the second Business Day
following the date of demand for payment at the Default Rate.
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11.4 NATURE OF LENDERS' OBLIGATIONS. The obligations of the
Lenders hereunder are several and not joint or joint and several. Nothing
contained in this Agreement or any other Loan Document and no action taken by
the Creditors or any of them pursuant hereto or thereto may, or may be deemed
to, make the Lenders a partnership, an association, a joint venture or other
entity, either among themselves or with the Borrower or any Affiliate of
Borrower. Each Lender's obligation to make any Advance pursuant hereto is
several and not joint or joint and several, and in the case of the initial
Advance only is conditioned upon the performance by all other Lenders of their
obligations to make initial Advances. A default by any Lender will not increase
the Pro Rata Share of any other Lender. Any Lender not in default may, if it
desires, assume in such proportion as the nondefaulting Lenders agree the
obligations of any Lender in default, but is not obligated to do so. The
Administrative Agent agrees that it will use its best efforts either to induce
the other Lenders to assume the obligations of a Lender in default or to obtain
another Lender, reasonably satisfactory to Borrower, to replace such a Lender in
default.
11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein or in any other Loan Document,
or in any certificate or other writing delivered by or on behalf of any one or
more of the Parties to any Loan Document, will survive the making of the Loans
hereunder and the execution and delivery of the Notes, and have been or will be
relied upon by the Administrative Agent and each Lender, notwithstanding any
investigation made by the Administrative Agent or any Lender or on their behalf.
11.6 NOTICES. EXCEPT as otherwise expressly provided in the
Loan Documents, all notices, requests, demands, directions and other
communications provided for hereunder or under any other Loan Document must be
in writing and must be mailed, telegraphed, telecopied, dispatched by commercial
courier or delivered to the appropriate party at the address set forth on the
signature pages of this Agreement or other applicable Loan Document or, as to
any party to any Loan Document, at any other address as may be designated by it
in a written notice sent to all other parties to such Loan Document in
accordance with this Section. EXCEPT as otherwise expressly provided in any Loan
Document, if any notice, request, demand, direction or other communication
required or permitted by any Loan Document is given by mail it will be effective
on the earlier of receipt or the fourth Business Day after deposit in the United
States mail with first class or airmail postage prepaid; if given by telegraph
or cable, when delivered to the telegraph company with charges prepaid; if given
by telecopier, when sent; if dispatched by commercial courier, on the scheduled
delivery date; or if given by personal delivery, when delivered.
11.7 EXECUTION OF LOAN DOCUMENTS. Unless the Administrative
Agent otherwise specifies with respect to any Loan Document, (a) this Agreement
and any other Loan Document may be executed in any number of counterparts and
any party hereto or thereto may execute any counterpart, each of which when
executed and delivered will be deemed to be an original and all of which
counterparts of this Agreement or any other Loan Document, as the case may be,
when taken together will be deemed to be but one and the same instrument and (b)
execution of any such counterpart may be evidenced by a telecopier transmission
of the signature of such party followed by prompt transmission of an original
signature. The execution of this Agreement or any other Loan Document by any
party hereto or thereto will not become effective until counterparts hereof or
thereof, as the case may be, have been executed by all the parties hereto or
thereto.
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11.8 BINDING EFFECT; ASSIGNMENT.
(a) This Agreement and the other Loan Documents to
which Borrower are a Party will be binding upon and inure to the
benefit of Borrower, the Creditors, and their respective successors and
assigns, EXCEPT that Borrower may not assign its rights hereunder or
thereunder or any interest herein or therein without the prior written
consent of all the Lenders except pursuant to a transaction which is
permitted by Section 2.8. Each Lender represents that it is not
acquiring its Note with a view to the distribution thereof within the
meaning of the Securities Act of 1933, as amended (subject to any
requirement that disposition of such Note must be within the control of
such Lender). Any Lender may at any time pledge its Note or any other
instrument evidencing its rights as a Lender under this Agreement to a
Federal Reserve Bank, but no such pledge shall release that Lender from
its obligations hereunder or grant to such Federal Reserve Bank the
rights of a Lender hereunder absent foreclosure of such pledge.
(b) From time to time, each Lender may assign to one
or more Eligible Assignees all or any portion of its Pro Rata Share,
PROVIDED that (i) such Eligible Assignee, if not then a Lender or an
Affiliate of the assigning Lender, shall be approved by each of the
Administrative Agent and (if no Default has occurred and no Event of
Default then exists) Borrower (none of which approvals shall be
unreasonably withheld or delayed), (ii) such assignment shall be
evidenced by an Assignment Agreement, a copy of which shall be
furnished to the Administrative Agent as hereinbelow provided, (iii)
EXCEPT in the case of an assignment to an Affiliate of the assigning
Lender, to another Lender or of the entire remaining Commitment of the
assigning Lender, the assignment shall not assign a Pro Rata Share that
is less than $5,000,000, (iv) the effective date of any such assignment
shall be as specified in the Assignment Agreement, but not earlier than
the date which is five Business Days after the date the Administrative
Agent has received the Assignment Agreement, and (v) shall be of a
constant and non-varying percentage of the Pro Rata Share of the
assigning Lender. Upon the effective date of such Assignment Agreement,
the Eligible Assignee named therein shall be a Lender for all purposes
of this Agreement, with the Pro Rata Share set forth therein and, to
the extent of such Pro Rata Share, the assigning Lender shall be
released from its further obligations under this Agreement. Borrower
agree that they shall execute and deliver (against delivery by the
assigning Lender to Borrower of its Note) to such assignee Lender, a
Note evidencing that assignee Lender's Pro Rata Share, and to the
assigning Lender, a Note evidencing the remaining balance Pro Rata
Share retained by the assigning Lender.
(c) By executing and delivering a Assignment
Agreement, the Eligible Assignee thereunder acknowledges and agrees
that: (i) other than the representation and warranty that it is the
legal and beneficial owner of the Pro Rata Share being assigned
thereby free and clear of any adverse claim, the assigning Lender
has made no representation or warranty and assumes no responsibility
with respect to any statements, warranties or representations made
in or in connection with this Agreement or the execution, legality,
validity, enforceability, genuineness or sufficiency of this
Agreement or any other Loan Document; (ii) the assigning Lender has
made no representation or warranty and assumes no responsibility
with respect to the financial condition of Borrower or its
Subsidiaries or the performance by Borrower and its Subsidiaries of
the Obligations; (iii) it has received a copy of this Agreement,
together with
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copies of the most recent financial statements delivered pursuant to
Section 7.1 and such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into
such Assignment Agreement; (iv) it will, independently and without
reliance upon the Administrative Agent or any Lender and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking
action under this Agreement; (v) it appoints and authorizes the
Administrative Agent to take such action and to exercise such powers
under this Agreement as are delegated to the Administrative Agent by
this Agreement; and (vi) it will perform in accordance with their terms
all of the obligations which by the terms of this Agreement are
required to be performed by it as a Lender.
(d) The Administrative Agent shall maintain at the
Administrative Agent's Office a copy of each Assignment Agreement
delivered to it and a register (the "Register") of the names and
address of each of the Lenders and the Pro Rata Share held by each
Lender, giv ing effect to each Assignment Agreement. The Register shall
be available during normal business hours for inspection upon
reasonable prior notice to the Administrative Agent. After receipt of a
completed Assignment Agreement executed by any Lender and an Eligible
Assignee, and receipt of an assignment fee of $3,500 from such Lender
or Eligible Assignee (which fee shall not be required to be paid in the
event that the Eligible Assignee is a Subsidiary of a Lender), the
Administrative Agent shall, promptly following the effective date
thereof, provide to Borrower and the Lenders a revised Schedule 1.1
giving effect thereto. Borrower and the Creditors shall deem and treat
the Persons listed as Lenders in the Register as the holders and owners
of the Pro Rata Share listed therein for all purposes hereof, and no
assignment or transfer of any such Pro Rata Share shall be effective,
in each case unless and until a Assignment Agreement effecting the
assignment or transfer thereof shall have been accepted by the
Administrative Agent and recorded in the Register as provided above.
Prior to such recordation, all amounts owed with respect to the
applicable Pro Rata Share shall be owed to the Lender listed in the
Register as the owner thereof, and any request, authority or consent of
any Person who, at the time of making such request or giving such
authority or consent, is listed in the Register as a Lender shall be
conclusive and binding on any subsequent holder, assignee or transferee
of the corresponding Pro Rata Share.
(e) Each Lender may from time to time grant
participations to one or more banks or other financial institutions
(INCLUDING another Lender) in a portion of its Pro Rata Share;
PROVIDED, HOWEVER, that (i) such Lender's obligations under this
Agreement shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, (iii) the participating banks or other financial
institutions shall not be a Lender hereunder for any purpose EXCEPT, if
the participation agreement so provides, for the purposes of Sections
3.7, 3.8, 11.11 and 11.22 but only to the extent that the cost of such
benefits to Borrower does not exceed the cost which Borrower would have
incurred in respect of such Lender absent the participation, (iv)
Borrower and the other Creditors shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Agreement, (v) the participation interest shall
be expressed as a percentage of the granting Lender's Pro Rata Share as
it then exists and shall not restrict an increase in the Commitment, or
in the granting Lender's Pro Rata Share, so long as the amount
of the participation interest is not affected thereby, and (vi) the
consent
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of the holder of such participation interest shall not be
required for amendments or waivers of provisions of the Loan Documents
OTHER THAN those which (A) extend any Reduction Date, the Maturity Date
or any other date upon which any payment of money is due to the
Lenders, (B) reduce the rate of interest on the Notes, any fee or any
other monetary amount payable to the Lenders, (C) reduce the amount of
any installment of principal due under the Notes, (D) release the
Guaranty (except as permitted without the consent of all of the
Lenders), or (E) change the definition of "Requisite Lenders".
(f) Notwithstanding anything to the contrary
contained herein, any Lender (a "Granting Lender") may grant to a
special purpose funding vehicle (an "SPC") of such Granting Lender,
identified as such in writing from time to time by the Granting Lender
to the Administrative Agent and Borrower, the option to provide all or
any part of any Loan or Advance that such Granting Lender would
otherwise be obligated to make pursuant to Sections 2.1, 2.2, 2.3 or
2.5, provided that (i) nothing herein shall constitute a commitment to
make any Loan by any SPC, (ii) if an SPC elects not to exercise such
option or otherwise fails to provide all or any part of such Loan, the
Granting Lender shall be obligated to make such Loan pursuant to the
terms hereof, (iii) the rights of any such SPC shall be derivative of
the rights of the Granting Lender, and each SPC shall be subject to all
of the restrictions upon the Granting Lender herein contained, and (iv)
no assignment shall be made to any Person if such assignment would
result in a violation of any Gaming Laws or otherwise require the
consent or approval of any Gaming Board. Each SPC shall be conclusively
presumed to have made arrangements with its Granting Lender for the
exercise of voting and other rights hereunder in a manner which is
acceptable to the SPC, and the other Creditors, Borrower and each other
Party shall be entitled to rely upon and deal solely with the Granting
Lender with respect to Loans and Advances made by or through its SPC.
The making of a Loan by an SPC hereunder shall utilize the Commitment
of the Granting Lender to the same extent, and as if, such Loan were
made by the Granting Lender. Each party hereto hereby agrees that no
SPC shall be liable for any indemnity or similar payment obligation
under this Agreement (all liability for which shall remain with the
related Granting Lender). In furtherance of the foregoing, each party
hereto hereby agrees (which agreement shall survive the termination of
this Agreement) that, prior to the date that is one year and one day
after the payment in full of all outstanding senior indebtedness of any
SPC, it will not institute against, or join any other person in
instituting against, such SPC any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings or similar
proceedings under the laws of the United States or any State thereof,
PROVIDED THAT the Granting Lender for each SPC hereby agrees to
indemnify, save, and hold harmless each other party hereto for any
loss, cost, damage and expense arising out of their inability to
institute any such proceeding against its SPC. In addition,
notwithstanding anything to the contrary contained in this Section
11.8, any SPC may (i) with notice to, but without the prior written
consent of, the Borrower or the Administrative Agent and without paying
any processing fee therefor, assign all or a portion of its interests
in any Loans to its Granting Lender or to any financial institutions
providing
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liquidity and/or credit facilities to or for theaccount of such SPC to
fund the Loans made by such SPC or to support the securities (if any)
issued by such SPC to fund such Loans (but nothing contained herein
shall be construed in derogation of the obligation of the Granting
Lender to make Loans hereunder), PROVIDED THAT neither the consent of
the SPC or of any such assignee shall be required for amendments or
waivers of provisions of the Loan Documents except for those amendments
or waivers for which the consent of participants is required under
Section 11.8(e)(vi), and (ii) disclose on a confidential basis (in the
same manner described in Section 11.14) any non-public information
relating to its Loans to any rating agency, commercial paper dealer or
provider of a surety, guarantee or credit or liquidity enhancement to
such SPC.
11.9 RIGHT OF SETOFF. If an Event of Default has occurred and
is continuing, the Administrative Agent or any Lender (but in each case only
with the consent of the Requisite Lenders) may exercise its rights under Article
9 of the Uniform Commercial Code and other applicable Laws and, to the extent
permitted by applicable Laws, apply any funds in any deposit account maintained
with it by Borrower and any of its Property in its possession against the
Obligations.
11.10 SHARING OF SETOFFS. Each Lender severally agrees that if
it, through the exercise of any right of setoff, banker's lien or counterclaim
against Borrower or otherwise, receives payment of the Obligations held by it
that is ratably more than any other Lender, through any means, receives in
payment of the Obligations held by that Lender, then, subject to applicable
Laws: (a) the Lender exercising the right of setoff, banker's lien or
counterclaim or otherwise receiving such payment shall purchase, and shall be
deemed to have simultaneously purchased, from the other Lender a participation
in the Obligations held by the other Lender and shall pay to the other Lender a
purchase price in an amount so that the share of the Obligations held by each
Lender after the exercise of the right of setoff, banker's lien or counterclaim
or receipt of payment shall be in the same proportion that existed prior to the
exercise of the right of setoff, banker's lien or counterclaim or receipt of
payment; and (b) such other adjustments and purchases of participations shall be
made from time to time as shall be equitable to ensure that all of the Lenders
share any payment obtained in respect of the Obligations ratably in accordance
with each Lender's share of the Obligations immediately prior to, and without
taking into account, the payment; PROVIDED that, if all or any portion of a
disproportionate payment obtained as a result of the exercise of the right of
setoff, banker's lien, counterclaim or otherwise is thereafter recovered from
the purchasing Lender by Borrower or any Person claiming through or succeeding
to the rights of Borrower, the purchase of a participation shall be rescinded
and the purchase price thereof shall be restored to the extent of the recovery,
but without interest. Each Lender that purchases a participation in the
Obligations pursuant to this Section shall from and after the purchase have the
right to give all notices, requests, demands, directions and other
communications under this Agreement with respect to the portion of the
Obligations purchased to the same extent as though the purchasing Lender were
the original owner of the Obligations purchased. Borrower expressly consents to
the foregoing arrangements and agrees that any Lender holding a participation in
an Obligation so purchased may exercise any and all rights of setoff, banker's
lien or counterclaim with respect to the participation as fully as if the Lender
were the original owner of the Obligation purchased.
11.11 INDEMNITY BY BORROWER. Borrower jointly and severally
agrees to indemnify, save and hold harmless the Administrative Agent, the Lead
Arranger and each Lender and their directors, officers, agents, attorneys and
employees (collectively the "INDEMNITEES") from and against:
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(a) any and all claims, demands, actions or causes of action (EXCEPT a claim,
demand, action, or cause of action for any amount excluded from the definition
of "Taxes" in Section 3.12(d)) if the claim, demand, action or cause of action
arises out of or relates to any act or omission (or alleged act or omission) of
Borrower, its Subsidiaries or any of their officers, directors or stockholders
relating to the Commitment, the use or contemplated use of proceeds of any Loan,
the Merger, or the relationship of Borrower and the Indemnitees under this
Agreement; (b) any administrative or investigative proceeding by any
Governmental Agency arising out of or related to a claim, demand, action or
cause of action described in clause (a) above; and (c) any and all liabilities,
losses, costs or expenses (INCLUDING reasonable attorneys' fees and the
reasonably allocated costs of attorneys employed by any Indemnitee and
disbursements of such attorneys and other professional services) that any
Indemnitee suffers or incurs as a result of the assertion of any foregoing
claim, demand, action or cause of action; PROVIDED that no Indemnitee shall be
entitled to indemnification under this Section for any loss caused by its own
gross negligence or willful misconduct or for any loss asserted against it by
another Indemnitee. If any claim, demand, action or cause of action is asserted
against any Indemnitee, such Indemnitee shall promptly notify Borrower, but the
failure to so promptly notify Borrower shall not affect their obligations under
this Section unless such failure materially prejudices Borrower's right to
participate in the contest of such claim, demand, action or cause of action, as
hereinafter provided. Such Indemnitee may (and shall, if requested by Borrower
in writing) contest the validity, applicability and amount of such claim,
demand, action or cause of action and shall permit Borrower to participate in
such contest. Any Indemnitee that proposes to settle or compromise any claim or
proceeding for which Borrower may be liable for payment of indemnity hereunder
shall give Borrower written notice of the terms of such proposed settlement or
compromise reasonably in advance of settling or compromising such claim or
proceeding and shall obtain Borrower's prior consent (which shall not be
unreasonably withheld or delayed). In connection with any claim, demand, action
or cause of action covered by this Section against more than one Indemnitee, all
such Indemnitees shall be represented by the same legal counsel (which may be a
law firm engaged by the Indemnitees or attorneys employed by an Indemnitee or a
combination of the foregoing) selected by the Indemnitees and reasonably
acceptable to Borrower; PROVIDED, that if such legal counsel determines in good
faith that representing all such Indemnitees would or could result in a conflict
of interest under Laws or ethical principles applicable to such legal counsel or
that a defense or counterclaim is available to an Indemnitee that is not
available to all such Indemnitees, then to the extent reasonably necessary to
avoid such a conflict of interest or to permit unqualified assertion of such a
defense or counterclaim, each Indemnitee shall be entitled to separate
representation by legal counsel selected by that Indemnitee and reasonably
acceptable to Borrower, with all such legal counsel using reasonable efforts to
avoid unnecessary duplication of effort by counsel for all Indemnitees; and
FURTHER PROVIDED that the Administrative Agent (as an Indemnitee) shall at all
times be entitled to representation by separate legal counsel (which may be a
law firm or attorneys employed by the Administrative Agent or a combination of
the foregoing). The obligations of Borrower to the Indemnitees under this
Section shall survive the expiration or termination of this Agreement, the
repayment of all Loans, the expiration or termination of all Letters of Credit
and the payment and performance of all other Obligations owed to the Lenders.
11.12 NONLIABILITY OF THE LENDERS. Borrower acknowledges and agrees
that:
(a) Any inspections of any Property of Borrower and
its Subsidiaries made by or through the Creditors are for purposes of
administration of the Loans and Letters
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of Credit only and Borrower and its Affiliates are not entitled to rely
upon the same (whether or not such inspections are at the expense of
Borrower or its Subsidiaries);
(b) By accepting or approving anything required to be
observed, performed, fulfilled or given to the Creditors pursuant to
the Loan Documents, neither the Administrative Agent nor the Lenders
shall be deemed to have warranted or represented the sufficiency,
legality, effectiveness or legal effect of the same, or of any term,
provision or condition thereof, and such acceptance or approval thereof
shall not constitute a warranty or representation to anyone with
respect thereto by the Creditors;
(c) The relationship between Borrower and the
Creditors is, and shall at all times remain, solely that of borrowers
and lenders; neither the Administrative Agent nor the Lenders shall
under any circumstance be construed to be partners or joint venturers
of Borrower or its Affiliates; neither the Administrative Agent nor the
Lenders shall under any circumstance be deemed to be in a relationship
of confidence or trust or a fiduciary or other "special" relationship
with Borrower or its Affiliates, or to owe any fiduciary duty to
Borrower or its Affiliates; neither the Administrative Agent nor the
Lenders undertake or assume any responsibility or duty to Borrower or
its Affiliates to select, review, inspect, supervise, pass judgment
upon or inform Borrower or its Affiliates of any matter in connection
with their Property or the operations of Borrower or its Affiliates;
Borrower and its Affiliates shall rely entirely upon their own judgment
with respect to such matters; and any review, inspection, supervision,
exercise of judgment or supply of information undertaken or assumed by
the Creditors in connection with such matters is solely for the
protection of the Creditors and neither Borrower nor any other Person
is entitled to rely thereon; and
(d) The Creditors shall not be responsible or liable
to any Person for any loss, damage, liability or claim of any kind
relating to injury or death to Persons or damage to Property caused by
the actions, inaction or negligence of Borrower and/or its Affiliates
and Borrower hereby indemnify and hold the Creditors harmless on the
terms set forth in Section 11.11 from any such loss, damage, liability
or claim.
11.13 NO THIRD PARTIES BENEFITTED. This Agreement is made for
the purpose of defining and setting forth certain obligations, rights and duties
of Borrower and the Creditors in connection with the Loans, and is made for the
sole benefit of Borrower, the Creditors, and the Creditors' successors and
assigns. EXCEPT as provided in Sections 11.8 and 11.11, no other Person shall
have any rights of any nature hereunder or by reason hereof.
11.14 CONFIDENTIALITY. Each Lender agrees to hold any
confidential information that it may receive from Borrower pursuant to this
Agreement in confidence, EXCEPT for disclosure: (a) to other Lenders and
Affiliates of such Lender, provided that each such Affiliate receiving such
information shall be bound by the provisions of this Section 11.14 as if it
were a Lender hereunder, and shall execute in favor of Borrower such
documentation with respect thereto as Borrower shall request in writing; (b)
to legal counsel and accountants for Borrower or any Lender; (c) to other
professional advisors to Borrower or any Lender, provided that the recipient
has accepted such information subject to a confidentiality agreement
substantially similar to this Section; (d) to regulatory officials having
jurisdiction over that Lender; (e) to any Gaming Board having regulatory
jurisdiction over Borrower or its Subsidiaries, provided that each Lender
agrees to use its best efforts
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to notify Borrower of any such disclosure unless prohibited by applicable
Laws; (f) as required by Law or legal process or in connection with any legal
proceeding to which that Lender and Borrower or any of its Subsidiaries are
adverse parties; and (g) to another financial institution in connection with
a disposition or proposed dis position to that financial institution of all
or part of that Lender's interests hereunder or a participation interest in
its Note, provided that the recipient has accepted such information subject
to a confidentiality agreement substantially similar to this Section. For
purposes of the foregoing, "confidential information" shall mean any
information respecting Borrower or its Subsidiaries reasonably considered by
Borrower to be confidential, OTHER THAN (i) information previously filed with
any Governmental Agency and available to the public, (ii) information
previously published in any public medium from a source other than, directly
or indirectly, that Lender, and (iii) information previously disclosed by
Borrower or its Subsidiaries to any Person not associated with Borrower
without a confidentiality agreement or obligation substantially similar to
this Section. Nothing in this Section shall be construed to create or give
rise to any fiduciary duty on the part of the Creditors to Borrower or any
other Party.
11.15 FURTHER ASSURANCES. Borrower and its Subsidiaries shall,
at their expense and without expense to the Lenders or the Administrative Agent,
do, execute and deliver such further acts and documents as the Requisite Lenders
or the Administrative Agent from time to time reasonably require for the
assuring and confirming unto the Lenders or the Administrative Agent of the
rights hereby created or intended now or hereafter so to be, or for carrying out
the intention or facilitating the performance of the terms of any Loan Document.
11.16 INTEGRATION. This Agreement, together with the other
Loan Documents and the letter agreements referred to in Sections 3.2, 3.3, 3.5
and 3.6, comprises the complete and integrated agreement of the parties on the
subject matter hereof and supersedes all prior agreements, written or oral, on
the subject matter hereof. In the event of any conflict between the provisions
of this Agreement and those of any other Loan Document, the provisions of this
Agreement shall control and govern; PROVIDED that the inclusion of supplemental
rights or remedies in favor of the Creditors in any other Loan Document shall
not be deemed a conflict with this Agreement. Each Loan Document was drafted
with the joint participation of the respective parties thereto and shall be
construed neither against nor in favor of any party, but rather in accordance
with the fair meaning thereof.
11.17 GOVERNING LAW. EXCEPT to the extent otherwise provided
therein, each Loan Document shall be governed by, and construed and enforced in
accordance with, the local Laws of Nevada.
11.18 SEVERABILITY OF PROVISIONS. Any provision in any Loan
Document that is held to be inoperative, unenforceable or invalid as to any
party or in any jurisdiction shall, as to that party or jurisdiction, be
inoperative, unenforceable or invalid without affecting the remaining provisions
or the operation, enforceability or validity of that provision as to any other
party or in any other jurisdiction, and to this end the provisions of all Loan
Documents are declared to be severable.
11.19 HEADINGS. Article and Section headings in this Agreement
and the other Loan Documents are included for convenience of reference only and
are not part of this Agreement or the other Loan Documents for any other
purpose.
11.20 TIME OF THE ESSENCE. Time is of the essence of the
Loan Documents.
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11.21 FOREIGN LENDERS AND PARTICIPANTS. Each Lender that is
incorporated or otherwise organized under the Laws of a jurisdiction other
than the United States of America or any State thereof or the District of
Columbia shall deliver to Borrower (with a copy to the Administrative Agent),
within twenty days after the Closing Date (or after accepting an assignment
or receiving a participation interest herein pursuant to Section 11.8, if
applicable) two duly completed copies, signed by a Responsible Official, of
either Form 1001 (relating to such Lender and entitling it to a complete
exemption from withholding on all payments to be made to such Lender by
Borrower pursuant to this Agreement) or Form 4224 (relating to all payments
to be made to such Lender by Borrower pursuant to this Agreement) of the
United States Internal Revenue Service or such other evidence (INCLUDING, if
reasonably necessary, Form W-9) satisfactory to Borrower and the
Administrative Agent that no withholding under the federal income tax laws is
required with respect to such Lender. Thereafter and from time to time, each
such Lender shall upon request by Borrower (a) promptly submit to Borrower
(with a copy to the Administrative Agent), such additional duly completed and
signed copies of one of such forms (or such successor forms as shall be
adopted from time to time by the relevant United States taxing authorities)
as may then be available under then current United States laws and
regulations to avoid, or such evidence as is satisfactory to Borrower and the
Administrative Agent of any available exemption from, United States
withholding taxes in respect of all payments to be made to such Lender by
Borrower pursuant to this Agreement and (b) take such steps as shall not be
materially disadvan tageous to it, in the reasonable judgment of such Lender,
and as may be reasonably necessary (including the re-designation of its
Eurodollar Lending Office, if any) to avoid any requirement of applicable
Laws that Borrower make any deduction or withholding for taxes from amounts
payable to such Lender. In the event that Borrower or the Administrative
Agent become aware that a participation has been granted pursuant to Section
11.8(e) to a financial institution that is incorporated or otherwise
organized under the Laws of a jurisdiction other than the United States of
America, any State thereof or the District of Columbia, then, upon request
made by Borrower or the Administrative Agent to the Lender which granted such
participation, such Lender shall cause such participant financial institution
to deliver the same documents and information to Borrower and the
Administrative Agent as would be required under this Section if such
financial institution were a Lender.
11.22 HAZARDOUS MATERIAL INDEMNITY. Borrower hereby agrees
to indemnify, hold harmless and defend (by counsel reasonably satisfactory to
the Administrative Agent) the Administrative Agent and each of the Lenders
(and any successor to a Lender) and their respective directors, officers,
employees and agents from and against any and all claims, losses, damages,
liabilities, fines, penalties, charges, administrative and judicial
proceedings and orders, judgments, remedial action requirements, enforcement
actions of any kind, and all costs and expenses incurred in connection
therewith (INCLUDING reasonable attorneys' fees and the reasonably allocated
costs of attorneys employed by the Administrative Agent or any Lender, and
expenses to the extent that the defense of any such action has not been
assumed by Borrower), arising directly or indirectly out of (i) the presence
on, in, under or about any Real Property of any Hazardous Materials, or any
releases or discharges of any Hazardous Materials on, under or from any Real
Property and (ii) any activity carried on or undertaken on or off any Real
Property by Borrower its Subsidiaries or any of their predecessors in title,
whether prior to or during the term of this Agreement, and whether by
Borrower, its Subsidiaries or any predecessor in title or any employees,
agents, contractors or subcontractors of Borrower, its Subsidiaries or any
predecessor in title, or any third persons at any time occupying or present
on any Real Property (OTHER THAN a Lender or a representative of a Lender),
in connection with the handling, treatment, removal, storage,
decontamination, clean-up, transport or disposal of any
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Hazardous Materials at any time located or present on, in, under or about any
Real Property. The foregoing indemnity shall further apply to any residual
contamination on, in, under or about any Real Property, or affecting any
natural resources, and to any contamination of any Property or natural
resources arising in connection with the generation, use, handling, storage,
transport or disposal of any such Hazardous Materials, and irrespective of
whether any of such activities were or will be undertaken in accordance with
applicable Laws, but the foregoing indemnity shall not apply to Hazardous
Materials on any Real Property, the presence of which is caused by the
Creditors. Borrower hereby acknowledges and agrees that, notwithstanding any
other provision of this Agreement or any of the other Loan Documents to the
contrary, the obligations of Borrower under this Section (and under Sections
4.18 and 5.11) shall be unlimited corporate obligations of Borrower and shall
NOT be secured by any deed of trust or mortgage on any Real Property. Any
obligation or liability of Borrower to any Indemnitee under this Section
shall survive the expiration or termination of this Agreement, the repayment
of all Loans, the expiration or termination of all Letters of Credit and the
payment and performance of all other Obligations owed to the Lenders.
11.23 GAMING BOARDS. The Administrative Agent and each of
the Lenders agree to cooperate with all Gaming Boards in connection with the
administration of their regulatory jurisdiction over Borrower and its
Subsidiaries, INCLUDING the provision of such documents or other information
as may be requested by any such Gaming Board relating to Borrower or any of
its Subsidiaries or to the Loan Documents.
11.24 WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY TO THIS
AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY
WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTY
HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS
RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY
AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS
AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
11.25 PURPORTED ORAL AMENDMENTS. BORROWER EXPRESSLY
ACKNOWLEDGES THAT THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY ONLY BE
AMENDED OR MODIFIED, OR THE PROVISIONS HEREOF OR THEREOF WAIVED OR
SUPPLEMENTED, BY AN INSTRUMENT IN WRITING THAT COMPLIES WITH SECTION 11.2.
BORROWER AGREES THAT IT WILL NOT RELY ON ANY COURSE OF DEALING, COURSE OF
PERFORMANCE, OR ORAL OR WRITTEN STATEMENTS BY ANY REPRESENTATIVE OF THE
ADMINISTRATIVE AGENT OR ANY BANK THAT DOES NOT COMPLY WITH SECTION 11.2 TO
EFFECT AN AMENDMENT, MODIFICATION, WAIVER OR SUPPLEMENT TO THIS AGREEMENT OR
THE OTHER LOAN DOCUMENTS.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
ANCHOR GAMING, a Nevada corporation
By: Michael Rumbolz, Chief Executive Officer
-----------------------------------------
Address for Notices:
Anchor Gaming
815 Pilot Road, Suite G
Las Vegas, Nevada 89119
Attn: Chief Executive Officer
Telecopier: (702) 896-6221
Telephone: (702) 896-7568
S - 1 [ANCHOR GAMING]
[LOAN AGREEMENT SIGNATURE PAGE]
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent
By: JANICE HAMMOND, VICE PRESIDENT
-----------------------------------------
Address:
Bank of America National Trust and Savings Association
Agency Management Services
555 South Flower Street, 11th Floor
Los Angeles, California 90017
Attn: Janice Hammond, Vice President
Telecopier: (213) 228-2299
Telephone: (213) 228-9861
S - 2 [ANCHOR GAMING]
[LOAN AGREEMENT SIGNATURE PAGE]
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Lender
By: WILLIAM S. NEWBY, MANAGING DIRECTOR
---------------------------------------
By: JON VARNELL, MANAGING DIRECTOR
---------------------------------------
Address:
Bank of America National Trust and Savings Association
555 South Flower Street, #3283
Los Angeles, California 90071
Attn: Jon Varnell, Managing Director
Telecopier: (213) 228-2641
Telephone: (213) 228-6181
With a copy to:
Bank of America National Trust and Savings Association
555 South Flower Street (LA-5777)
Los Angeles, California 90071
Attn: William S. Newby, Managing Director
Telecopier: (213) 228-3145
Telephone: (213) 228-2438
S - 3 [ANCHOR GAMING]
[LOAN AGREEMENT SIGNATURE PAGE]
<PAGE>
THE BANK OF NOVA SCOTIA, as a Documentation Agent and
as a Lender
By: ALAN PENDERGAST, RELATIONSHIP MANAGER
-------------------------------------
Address for notices:
The Bank of Nova Scotia
580 California Street, Suite 2100
San Francisco, California 94104
Attn.: Alan Pendergast, Relationship Manager
Facsimile: (415) 397-0791
Telephone: (415) 616-4155
S - 4 [ANCHOR GAMING]
[LOAN AGREEMENT SIGNATURE PAGE]
<PAGE>
WELLS FARGO BANK, NATIONAL ASSOCIATION, as a
Documentation Agent and as a Lender
By: E. PHILLIP POTAMITIS, ASSISTANT VICE PRESIDENT
----------------------------------------------
Address for notices:
Wells Fargo Bank, National Association
201 Third Street
San Francisco, California 94103
Attn.: Oscar Enriquez
Facsimile: (415) 512-9408
Telephone: (415) 477-5425
S - 5 [ANCHOR GAMING]
[LOAN AGREEMENT SIGNATURE PAGE]
<PAGE>
BANKERS TRUST COMPANY, as a Lender
By: STEVEN P. LAPHAM, PRINCIPAL
Address for notices:
Bankers Trust Company
130 Liberty Street, Mail Stop 2252
New York, New York 10006
Attn.:
---------------------------
Facsimile: (212)
---------------
Telephone: (212)
---------------
S - 6
<PAGE>
U. S. BANK NATIONAL ASSOCIATION, as a Lender
By: KENT MORISHIGE, ASSISTANT VICE PRESIDENT
Address for notices:
U. S. Bank National Association
2300 West Sahara, Suite 120
Las Vegas, Nevada 89102
Attn.: Kent Morishige, Assistant Vice President
Facsimile: (702) 386-3916
Telephone: (702) 386-0530
Address for eurodollar notices:
U. S. Bank National Association
980 9th Street, Suite 1100
Sacramento, California 95814
Attn.:
------------------------
Facsimile: (916)
------------
Telephone: (916)
------------
S - 7
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LASALLE BANK NATIONAL ASSOCIATION, as a Lender
By: BERNARDO LACAYO, COMMERCIAL LOAN OFFICER
Address for notices:
LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Attn.: Patricia Wright, Commercial Associate
Facsimile: (312) 904-6225
Telephone: (312) 904-7748
S - 8
<PAGE>
PNC BANK, NATIONAL ASSOCIATION, as a Lender
By: Gary W. Wessels, Vice President
Address for notices:
PNC Bank, National Association
Two Tower Center Boulevard, 16th Floor
East Brunswick, New Jersey 08816
Attn.: Gary W. Wessels, Vice President
Facsimile: (732) 220-3270
Telephone: (732) 220-4553
S - 9
<PAGE>
KEYBANK NATIONAL ASSOCIATION, as a Lender
By: THOMAS A. CRANDELL, VICE PRESIDENT
Address for notices:
KeyBank National Association
700 Fifth Avenue, 46th Floor
Seattle, Washington 98104
Attn:
-------------------------
Facsimile: (206)
-------------
Telephone: (206)
-------------
S - 10
<PAGE>
FIRST SECURITY BANK, N.A., as a Lender
By: DAVID P. WILLIAMS, VICE PRESIDENT
Address for notices:
First Security Bank, N.A.
Corporate Banking Division
15 East 100 South - 2nd Floor
Salt Lake City, Utah 84111
Attn.: David P. Williams, Vice President
Facsimile: (801) 246-5532
Telephone: (801) 246-5540
S - 11
<PAGE>
FIRST HAWAIIAN BANK, as a Lender
By: DONALD C. YOUNG, VICE PRESIDENT
Address for notices:
First Hawaiian Bank
999 Bishop Street, 11th Floor
Honolulu, Hawaii 96813
Attn.: Brenda Deakins, Operations Officer
Facsimile: (808) 525-6372
Telephone: (808) 525-8100
S - 12
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FLEET BANK N.A., as a Lender
By: JOHN T. HARRISON, SENIOR VICE PRESIDENT
Address for notices:
Fleet Bank N.A.
3670 Route 9 South
Freehold, New Jersey 07728
Attn.: John F. Cullinan, Senior Vice President
Facsimile: (732) 780-0754
Telephone: (732) 294-4306
S - 13
<PAGE>
COMERICA WEST INCORPORATED, as a Lender
By: Eoin P. Collins, Account Officer
Address for notices:
Comerica West Incorporated
3980 Howard Hughes Parkway, Suite 350
Las Vegas, Nevada 89109
Attn.: Regina C. McGuire,
Corporate Relationship Admin.
Facsimile: (702) 791-2371
Telephone: (702) 791-4804
S - 14
<PAGE>
EXHIBIT 10.36
Anchor Gaming
Anchor Gaming 1995 Stock Option Plan
STOCK OPTION AGREEMENT
THIS AGREEMENT, dated as of _____, 1999, is by and between Anchor Gaming
("ANCHOR GAMING"), a Nevada corporation, and the person named on the
signature page to this Agreement (the "PARTICIPANT").
RECITALS
WHEREAS Anchor Gaming has adopted the Anchor Gaming 1995 Stock Option Plan
(the "PLAN") to enable employees of Anchor Gaming and its majority-owned
subsidiaries to acquire shares of Common Stock, $.01 par value, of Anchor
Gaming ("COMMON STOCK") in accordance with the provisions of the Plan.
WHEREAS The Board of Directors (the "BOARD") has selected Participant to
participate in the Plan and has determined to grant Participant the right and
option to purchase shares of Common Stock in accordance with the terms and
conditions of this Agreement, provided that if any change is made in the
shares of Common Stock (including, but not limited to, changes by stock
dividend, stock split, merger or consolidation, but not including the
issuance of additional shares for consideration), the Board of Directors or
the Committee appointed to administer the Plan (the "COMMITTEE"), will make
such adjustments in the number and kind of shares (which may consist of
shares of a surviving corporation to a merger) that may thereafter be
optioned and sold under the Plan and the number and kind of shares (which may
consist of shares of a surviving corporation to a merger) and purchase price
per share of shares subject to outstanding Stock Option Agreements under the
Plan as the Board of Directors or the Committee determines are equitable to
preserve the respective rights of the Participants under the Plan.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises
and other terms and conditions set forth in this Agreement, Anchor Gaming and
Participant agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms have the
meanings indicated:
(a) "COMPANY" means Anchor Gaming and its majority-owned
subsidiaries.
(b) "CONFIDENTIAL INFORMATION" means all written,
machine-reproducible, oral and visual data, information, and
material, including, but not limited to, business, financial,
and technical information; and computer programs, documents,
and records (including those that Participant develops in the
scope of his or
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her employment) that (i) the Company or any of its
customers or suppliers treats as proprietary or
confidential through markings or otherwise, (ii) relates to
the Company or any of its customers or suppliers or any of
their business activities, products, or services (including
software programs and techniques) and is competitively
sensitive or not generally known in the relevant trade or
industry, or (iii) derives independent economic value from
not being generally known to, and is not readily
ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use.
Confidential Information does not include any information
or material that is approved by Anchor Gaming for
unrestricted public disclosure.
(c) "EXPIRATION DATE" means the date and time as of which the
Option expires, which is the earlier of (i) the close of
business on the date one year after the entire Option has
Vested or (ii) the date and time as of which all rights to
exercise the Option are terminated under SECTION 2(d).
(d) "MARKET VALUE" of a share of Purchased Stock on a given date
means (i) if the Purchased Stock is Publicly Traded, the
closing sale price for Purchased Stock, as determined in good
faith by the Board of Directors, on such date or, if no
closing sale price is available for such date, on the most
recent prior date for which a closing sale price is available
or, if no closing sale price is available, the closing bid
price, as so determined, on such date or, if no closing bid
price is available for such date, the closing bid price on the
most recent prior date for which a closing bid price is
available, or (ii) if the Purchased Stock is not Publicly
Traded, its fair market value, as determined in good faith by
the Board of Directors, as of such date.
(e) "NET INVESTMENT PROCEEDS," with respect to any share of
Purchased Stock sold or otherwise transferred by Participant
or Participant's successor in interest, means the greater of
the value of the gross proceeds received for such share or the
Market Value of such share on the date of sale or transfer
less, in either case, (i) the exercise price of the Option for
such share, (ii) any reasonable and customary commission
actually paid for the sale or transfer, and (iii) the verified
amount of any income taxes paid or payable on the sale or
transfer.
(f) "OPTION" means the right and option to purchase shares of
Common Stock evidenced by this Agreement.
(g) "PUBLICLY TRADED" means Common Stock has been listed on a
registered national securities exchange or approved for
quotation in the Nasdaq(R) National Market ("NASDAQ") or
another national securities exchange of automated quotation
service.
(h) "PURCHASED STOCK" means any security purchased upon the
exercise of this Option, together with any successor security,
property or cash issued or
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distributed by Anchor Gaming or any successor entity,
whether by way of merger, consolidation, share exchange,
reorganization, liquidation, recapitalization, or otherwise.
(i) "TERMINATION FOR SUBSTANTIAL MISCONDUCT" means termination of
employment for commission of a felony by the Participant;
actions involving moral turpitude, theft, or dishonesty by the
Participant in a material matter; breach of any obligation
under this Agreement or any other agreement or obligation of
the Participant to the Company; or failure by Participant to
carry out the directions, instructions, policies, rules,
regulations, or decisions of the Board or the executive
officers of the Company including, without limitation, those
relating to business ethics and the ethical conduct of the
business of the Company.
(j) "TRANSFER" or "TRANSFER" or derivations thereof includes any
sale, assignment, gift, pledge, encumbrance, hypothecation,
mortgage, exchange, or any other disposition or any interest
in this Agreement, the Option, or securities issued on
exercise of this Option.
(k) "VESTING," or "VESTING" or derivations thereof with respect to
any Option issued under this Agreement, means receiving the
right to exercise the Option.
(l) "VESTING PERIOD" means the period of time commencing on the
date of this Agreement and ending on the date on which the
entire Option has Vested.
2. GRANT OF OPTION; PURCHASE OF STOCK.
(a) Subject to the terms, conditions, and restrictions set forth
in the Plan and in this Agreement, Anchor Gaming hereby grants
to Participant, and Participant hereby accepts from Anchor
Gaming, the option to purchase from Anchor Gaming the number
of shares of Common Stock specified on ATTACHMENT A to this
Agreement, at the purchase price so specified, which option
will Vest in Participant in accordance with the Vesting
Schedule set forth on ATTACHMENT A to this Agreement. The
Option shall continue to Vest only for as long as Participant
is an employee of Company, unless the Board or the Committee,
in its sole discretion, agrees in writing otherwise.
Participant will have the right to exercise the Option and
purchase Common Stock after the Option Vests as provided in
SECTION 2(d).
(b) The purchase price of shares as to which the Option is
exercised must be paid to Anchor Gaming at the time of the
exercise either in cash or in such other consideration as the
Board or the Committee may approve or a combination of cash
and such other consideration having a total fair market value,
as determined by the Board or the Committee, equal to the
purchase price.
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(c) The Board or the Committee may elect to assist Participant in
satisfying an obligation to pay or withhold taxes required as
a result of the exercise of this Option by accepting shares of
Purchased Stock at Market Value to satisfy the tax obligation.
The shares of Purchased Stock accepted may be either shares
withheld upon the exercise of this Option or other shares
already owned by Participant. In determining whether to
approve acceptance of Purchased Stock to satisfy such a tax
obligation, the Board or the Committee may consider whether
the shares proposed to be delivered are subject to any holding
period or other restrictions on transfer and may waive or
arrange for the waiver of any such restrictions.
(d) The Option is only exercisable as to Vested Options. Once
Vested, (i) if the Participant ceases to be an employee of the
Company for any reason whatsoever, voluntary or involuntary,
other than death, the Option may be exercised only until 5:00
p.m. Las Vegas time on the business day immediately preceding
the first anniversary of such cessation the date of cessation
of employment and in any case no later than the Expiration
Date, and (ii) if the Participant ceases to be an Employee
because of death of the Participant, the Option may be
exercised by the Participant's estate only for two years after
the Participant's death and in any case no later than the
Expiration Date.
3. RESTRICTIONS ON TRANSFER. The Option may not be sold or otherwise
transferred and is exercisable only by Participant during Participant's
lifetime unless the transfer is by will or the laws of descent and
distribution upon Participant's death. Anchor Gaming is not obligated
to recognize any purported sale or other transfer of the Option or any
Purchased Stock in violation of this SECTION 3 and, unless it elects to
do otherwise, may treat any such purported sale or transfer as null,
void, and of no effect.
4. RIGHTS TO BUY BACK PURCHASED STOCK AND TO REQUIRE PAYBACK OF CERTAIN
PROFITS.
(a) If the Board discovers that Participant has engaged in any
conduct prohibited by SECTION 5 or if Participant ceases to be
employed by the Company and the Board, in its sole discretion,
determines that Participant's cessation of employment resulted
from a Termination for Substantial Misconduct or would have
resulted from a Termination for Substantial Misconduct had the
relevant facts been known at the time of Participant's
cessation of employment, Anchor Gaming will have (i) the right
for 180 days after the Board discovers the relevant facts to
cancel any unexercised Option, whether or not Vested, and to
buy back from Participant any shares of Purchased Stock then
owned by Participant, at a purchase price equal to the price
per share paid by Participant for the shares, and (ii) the
right to require Participant to pay back to Anchor Gaming in
cash the Net Investment
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Proceeds with respect to any shares of Purchased Stock sold or
otherwise transferred by Participant.
(b) Whenever Anchor Gaming has a right to buy back shares of
Purchased Stock or to require Participant to pay back to
Anchor Gaming Participant's Net Investment Proceeds with
respect to any shares of Purchased Stock under this SECTION 4,
Anchor Gaming may exercise its right by notifying Participant
or the subsequent holder of Anchor Gaming's election to
exercise its right within the designated exercise period. In
the case of a buyback under SECTION 4(a), the giving of such
notice will give rise to an obligation on the part of
Participant or the subsequent holder to tender to Anchor
Gaming, within 10 days, any previously issued certificate
representing shares of Purchased Stock to be bought back, duly
endorsed in blank or having a duly executed stock power
attached in proper form for transfer free and clear of any
claim by any other person or entity. If any such certificate
is not tendered within 10 days, Anchor Gaming may cancel any
outstanding certificate representing shares to be bought back.
Anchor Gaming is required to tender the purchase price for
shares to be bought back under this SECTION 4 within 20 days
of giving notice of its election to exercise its right to buy
back shares. If the person from whom the shares are to be
bought back has not complied with an obligation to return a
certificate representing shares to be bought back, however,
Anchor Gaming is not required to tender the purchase price
until 20 days after the certificate is duly returned or 20
days after it cancels the certificate, whichever occurs first.
5. COMPETITION AND NON-DISCLOSURE. Participant acknowledges that: (i)
in the course and as a result of employment with the Company,
Participant will obtain special training and knowledge and will come
in contact with the Company's current and potential customers, which
training, knowledge, and contacts would provide invaluable benefits
to competitors of the Company; (ii) the Company is continuously
developing or receiving Confidential Information, and that during
Participant's employment he or she will receive Confidential
Information from the Company, its customers and suppliers and
special training related to the Company's business methodologies;
and (iii) Participant's employment by Company creates a relationship
of trust that extends to all Confidential Information that becomes
known to Participant. Accordingly, and as a material inducement to
Anchor Gaming to grant this Option to Participant and other good and
valuable consideration, Participant agrees that Anchor Gaming will
be entitled to terminate all rights to exercise the Option and to
exercise the rights specified in SECTION 4 if Participant does any of
the following without the prior written consent of the Company:
(a) while employed by the Company or within one year thereafter:
(i) competes with, or engages in any business that is
competitive with, the Company within 250 miles of any
location at which the Company
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has done business during the employment of the
Participant with the Company;
(ii) solicits or performs services, as an employee,
independent contractor, or otherwise, for any person
or entity (including any affiliates or subsidiaries
of that person or entity) that is or was a customer
or prospect of the Company during the two years
before Participant's employment with the Company
ended if Participant solicited business from or
performed services for that customer or prospect
while employed by Company; or
(iii) recruits, hires, or assist, directly or indirectly,
anyone to recruit or hire anyone who was an employee
of the Company, or of any of its customers for whom
Participant performed services of from whom
Participant solicited business, within the six months
before Participant's employment with the Company
ended; or
(b) discloses or uses any Confidential Information, except in
connection with the good faith performance of Participant's
duties as an employee; or fails to take reasonable precautions
against the unauthorized disclosure or use of Confidential
Information; fails, upon Anchor Gaming' request, to execute
and comply with a third party's agreement to protect its
confidential and proprietary information; solicits or induces
the unauthorized disclosure or use of Confidential
Information; or fails to return on Anchor Gaming's request any
and all Confidential Information in the Participant's care,
custody, or control.
If any court of competent jurisdiction finds any provision of this
SECTION 5 to be unreasonable as to substantive scope, duration or
geographic scope, then the Participant expressly agrees that, at
Anchor's sole discretion, and in addition to any other remedies at law
or equity that may be available to Anchor Gaming: (i) such provision
will be considered to be amended to provide the broadest scope of
protection to the Company that such court would find reasonable and
enforceable or (ii) Anchor Gaming may require that this Agreement be
rescinded.
6. COMPLIANCE WITH SECURITIES LAWS. Participant hereby agrees that,
upon demand by Anchor Gaming, any person exercising this Option, at
the time of such exercise, will deliver to Anchor Gaming a written
representation to the effect that the shares of Purchased Stock
being acquired are being acquired for investment and not with a view
to any resale or distribution thereof. Participant further agrees
that neither Participant nor any successor in interest of
Participant will sell or otherwise transfer the Option or any shares
of Purchased Stock in any way that might result in a violation of
any federal or state securities laws or regulations. Participant
further acknowledges and agrees that Anchor Gaming may require
Participant or any subsequent holder of the Option or of any shares
of Purchased Stock to provide Anchor Gaming, prior to any sale or
other transfer, with such other representations,
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commitments, and opinions regarding compliance with applicable
securities laws and regulations as Anchor Gaming may deem necessary
or advisable.
7. STOCK CERTIFICATES; RIGHTS AS SHAREHOLDER. All certificates
representing shares of Purchased Stock will bear such legends as the
Board determines are necessary or appropriate. Whether or not
certificates representing shares of Purchased Stock have been issued or
delivered, Participant will have all the rights of a shareholder of
Purchased Stock, including voting, dividend and distribution rights,
with respect to shares of Purchased Stock owned by Participant.
Participant will not have any rights as a shareholder with respect to
any shares of Common Stock subject to the Option before the date of
issuance to Participant of shares upon exercise of the Option.
8. INCOME TAX WITHHOLDING. Participant shall, upon request by the Company,
reimburse the Company for, or the Company may withhold from sums or
property otherwise due or payable to Participant, any amounts the
Company is required to remit to applicable taxing authorities as income
tax withholding with respect to the Option or any Purchased Stock. If
shares of Purchased Stock are withheld for such purpose, they will be
withheld at Market Value. If Participant fails to reimburse the Company
for any such amount when requested, the Company has the right to
recover that amount by selling or canceling sufficient shares of any
Purchased Stock held by Participant.
9. COMPLIANCE WITH PLAN. Participant acknowledges receipt of a copy of the
Plan and further acknowledges that this Agreement is entered into, and
the Option is granted, pursuant to the Plan. If the provisions of the
Plan are inconsistent with the provisions of this Agreement, the
provisions of the Plan supersede the provisions of this Agreement.
10. NOTICES. Any notice to Anchor Gaming or the Company that is required
or permitted by this Agreement shall be addressed to the attention
of the Secretary of Anchor Gaming at its principal office. Any
notice to Participant that is required or permitted by this
Agreement shall be addressed to Participant at the most recent
address for Participant reflected in the appropriate records of the
Company. Either party may at any time change its address for
notification purposes by giving the other written notice of the new
address and the date upon which it will become effective. Whenever
this Agreement requires or permits any notice from one party to
another, the notice must be in writing to be effective and, if
mailed, shall be deemed to have been given on the third business day
after the same is enclosed in an envelope, addressed to the party to
be notified at the appropriate address, property stamped, sealed,
and deposited in the United States mail, and, if mailed to the
Company, by certified mail, return receipt requested.
11. REMEDIES. Anchor Gaming is entitled, in addition to any other remedies
it may have at law or in equity, to temporary and permanent injunctive
and other equitable relief to enforce the provisions of this Agreement.
Any action to enforce the
-7-
<PAGE>
provisions of, or relating to, this Agreement may be brought in the
state or federal courts having jurisdiction in the State of Nevada. By
signing this Agreement, Participant consents to the personal
jurisdiction of such courts in any such action.
12. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, personal
representatives, successors, and assigns. However, Participant does not
have the power or right to assign this Agreement without the prior
written consent of Anchor Gaming.
13. ATTORNEYS' FEES. If any legal proceeding is brought to enforce or
interpret the terms of this Agreement, the prevailing party will be
entitled to reasonable attorneys' fees, costs, and necessary
disbursements in addition to any other relief to which that party may
be entitled.
14. SEVERABILITY. If any provision of this Agreement is held invalid or
unenforceable for any reason, the validity and enforceability of all
other provisions of this Agreement will not be affected.
15. HEADINGS. The section headings used herein are for reference and
convenience only and do not affect the interpretation of this
Agreement.
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEVADA, WITHOUT REGARD TO THE
CHOICE OF LAW RULES IN SUCH LAW OR ANY OTHER PRINCIPLE THAT COULD
REQUIRE THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
17. ENTIRE AGREEMENT. This Agreement, together with the Plan and any
procedure adopted by the Board or the Committee under the Plan,
constitutes the entire agreement between the parties with respect to
its subject matter and may be waived or modified only in writing.
-8-
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, Participant and a
duly-authorized representative of Anchor Gaming have executed this Agreement as
of the date first above written.
PARTICIPANT ANCHOR GAMING
By:
- ------------------------------ ------------------------------
Signature Title:
- ------------------------------
Printed Name
CONSENT OF SPOUSE
As the spouse of Participant, I consent to be bound by this Stock Option
Agreement and agree that this consent will be binding on my interest under this
Agreement and on my heirs, legatees, and assigns.
---------------------------------
Signature
---------------------------------
Printed Name
-9-
<PAGE>
ATTACHMENT A
TO
STOCK OPTION AGREEMENT
FOR
---------------
1. Purchase Price: $______per Share.
2. Expiration Date: _______, ______, unless earlier terminated under terms
of the Agreement.
3. Vesting Schedule:
VESTING DATES Number of
------------- Options Vesting
---------------
Total
-10-
<PAGE>
EXHIBIT 21.1
List of Subsidiary Corporations
Anchor Coin
Anchor Gaming Canada, Inc.
C.G. Investments, Inc.
Colorado Grande Enterprises, Inc. (1)
DD Stud, Inc.
Green Mountain Entertainment, Inc.
Powerhouse Technologies, Inc.
Automated Wagering International, Inc. (2)
Raven's D&R Music, Inc. (2)
United Wagering Systems, Inc. (2)
VLC, Inc. (2)
VLC of Nevada, Inc. (2)
VLT Company, Inc. (2)
Neuvo Sol Turf Club, Inc. (3)
United Tote Company (3)
United Tote Canada, Inc. (3)
Dynatote of Pennsylvania, Inc. (4)
(1) Colorado Grande Enterprises, Inc. is 80% controlled by Anchor Gaming.
Approximately 50% of this subsidiary is held through C.G. Investments,
Inc. and the remaining 30% is held by Anchor Gaming.
(2) A 100% subsidiary of Powerhouse Technologies, Inc.
(3) A 100% subsidiary of United Wagering Systems, Inc.
(4) A 100% subsidiary of United Tote Company
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE ANCHOR
GAMING CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 AND 1998 AND THE ANCHOR
GAMING CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 1999, 1998
AND 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000914923
<NAME> ANCHOR GAMING
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 32,835
<SECURITIES> 0
<RECEIVABLES> 38,526
<ALLOWANCES> 0
<INVENTORY> 21,375
<CURRENT-ASSETS> 101,664
<PP&E> 188,048
<DEPRECIATION> 0
<TOTAL-ASSETS> 507,169
<CURRENT-LIABILITIES> 72,756
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> 220,215
<TOTAL-LIABILITY-AND-EQUITY> 507,169
<SALES> 0
<TOTAL-REVENUES> 248,931
<CGS> 0
<TOTAL-COSTS> 88,349
<OTHER-EXPENSES> 76,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113
<INCOME-PRETAX> 86,929
<INCOME-TAX> 39,422
<INCOME-CONTINUING> 47,507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,507
<EPS-BASIC> 3.91
<EPS-DILUTED> 3.82
</TABLE>
