<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 000-23124
ANCHOR GAMING
(Exact name of registrant as specified in its charter)
NEVADA 88-0304253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
815 PILOT ROAD, SUITE G
LAS VEGAS, NEVADA
89119
(Address of principal executive offices)
(Zip Code)
(702) 896-7568
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Shares outstanding of each of the registrant's classes of common stock as of
November 12, 1999:
Class Outstanding as of November 12, 1999
----- -----------------------------------
Common stock, $.01 par value 11,993,607
<PAGE>
ANCHOR GAMING
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Part I. Financial Information
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets at
September 30, 1999 and June 30, 1999 (unaudited) 2
Consolidated Condensed Statements of
Income for the three months ended
September 30, 1999 and 1998 (unaudited) 3
Consolidated Condensed Statements of Cash
Flows for the three months ended
September 30, 1999 and 1998 (unaudited) 4
Notes to Consolidated Condensed Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits 22
Signatures 23
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANCHOR GAMING
CONSOLIDATED CONDENSED SEPTEMBER 30, JUNE 30,
BALANCE SHEETS (UNAUDITED) 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,902 $ 32,835
Accounts and notes receivable, net 39,638 38,526
Inventory, net 22,687 21,375
Other current assets 13,578 8,928
-------- ----------
Total current assets 102,805 101,664
Property and equipment, net 191,684 188,048
Goodwill, net 118,830 117,436
Other intangible assets, net 38,238 34,520
Investments in unconsolidated affiliates 26,681 29,053
Other long-term assets 25,845 36,448
-------- --------
Total assets $504,083 $507,169
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,883 $ 21,073
Current portion of long-term debt 2,335 4,051
Income tax payable 3,619 5,146
Other current liabilities 34,047 42,486
-------- --------
Total current liabilities 50,884 72,756
Long-term debt, net of current portion 212,665 212,805
Minority interest in consolidated subsidiary 1,324 1,255
-------- --------
Total liabilities and minority interest in consolidated subsidiary 264,873 286,816
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares
issued and outstanding at September 30, 1999 and June 30, 1999 - -
Common stock, $.01 par value, 50,000,000 shares authorized,
13,929,050 issued and 11,953,607 outstanding at September 30, 1999,
13,841,750 issued and 11,866,307 outstanding at June 30, 1999 139 138
Treasury stock at cost, 1,975,443 shares at September 30, 1999
and June 30, 1999 (93,043) (93,043)
Additional paid-in capital 119,936 116,854
Retained earnings 212,178 196,404
-------- --------
Total stockholders' equity 239,210 220,353
-------- --------
Total liabilities and stockholders' equity $504,083 $507,169
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
-2-
<PAGE>
<TABLE>
<CAPTION>
ANCHOR GAMING THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
CONSOLIDATED CONDENSED
STATEMENTS OF INCOME (UNAUDITED) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues:
Gaming operations $ 47,368 $ 31,532
Gaming machines and systems 46,935 33,071
Lottery systems 27,270 -
Pari-mutuel systems 5,428 -
--------- ---------
Total revenues 127,001 64,603
--------- ---------
Costs of revenues:
Gaming operations 29,184 17,215
Gaming machines and systems 14,506 6,894
Lottery systems 15,277 -
Pari-mutuel systems 3,399 -
--------- ---------
Total costs of revenues 62,366 24,109
--------- ---------
Gross margin 64,635 40,494
--------- ---------
Other costs:
Selling, general and administrative 19,572 5,914
Research and development 3,972 1,020
Depreciation and amortization 11,736 3,891
--------- ---------
Total other costs 35,280 10,825
--------- ---------
Income from operations 29,355 29,669
--------- ---------
Other income (expense):
Interest income 518 1,065
Interest expense (3,681) -
Other income 164 84
Minority interest in earnings of consolidated subsidiary (208) (219)
--------- ---------
Total other income (3,207) 930
--------- ---------
Income before provision for income taxes 26,148 30,599
Income tax provision 10,374 11,551
--------- ---------
Net income $ 15,774 $ 19,048
========= =========
Basic earnings per share $ 1.32 $ 1.52
========= =========
Weighted average shares outstanding 11,934 12,533
========= =========
Diluted earnings per share $ 1.30 $ 1.48
========= =========
Weighted average common and common equivalent
shares outstanding 12,149 12,874
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
-3-
<PAGE>
<TABLE>
<CAPTION>
ANCHOR GAMING THREE MONTHS ENDED SEPTEMBER 30,
CONSOLIDATED CONDENSED ----------------------------------------
STATEMENTS OF CASH FLOWS (UNAUDITED) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities $ 14,663 $ 23,924
---------------- ----------------
Cash flows from investing activities:
Expenditures for property and equipment (15,346) (5,719)
Expenditures for intangible assets (6,698) -
Issuance of notes receivable - (842)
Principal reductions on notes receivable and other cash receipts 817 40
---------------- ----------------
Net cash used in investing activities (21,227) (6,521)
---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowing 5,000 -
Repayment of long-term debt (6,855) -
Proceeds from sale of stock 2,486 124
Payments to acquire treasury stock - (10,103)
---------------- ----------------
Net cash provided by (used in) financing activities 631 (9,979)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (5,933) 7,424
Cash and cash equivalents, beginning of period 32,835 73,187
================ ================
Cash and cash equivalents, end of period $ 26,902 $ 80,611
================ ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3,249 $ -
================ ================
Cash paid for income taxes $ 8,690 $ 14,911
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements
-4-
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of
Anchor Gaming and its subsidiaries (the "Company" or "Anchor"), Anchor Coin,
C.G. Investments, Inc. ("CGI"), Colorado Grande Enterprises, Inc. ("Colorado
Grande") D D Stud, Inc. ("DD Stud"), Automated Wagering International, Inc.
("AWI"), Nuevo Sol Turf Club, Inc., Raven's D&R music, Inc., United Tote
Company, United Tote Canada, VLC, Inc., and VLC of Nevada, Inc. (collectively
the "Subsidiaries"). Through its Subsidiaries, the Company conducts gaming
operations in Nevada, New Mexico, Montana and Colorado, and supplies system
software, equipment and related services to on-line lotteries, video
lotteries, casinos and pari-mutuel organizations throughout the world. All
significant intercompany accounts and transactions have been eliminated.
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to present
fairly the results of its operations and cash flows for the three-month
periods ended September 30, 1999 and 1998 and its financial position at
September 30, 1999. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the fiscal
year ended June 30, 1999. The operating results and cash flows for the three
months ended September 30, 1999 are not necessarily indicative of the results
that will be achieved in future periods.
INVESTMENTS IN UNCONSOLIDATED AFFILIATE
The Company has a 50% interest in a joint venture (the "Joint Venture")
with International Game Technology ("IGT") accounted for as an investment in
an unconsolidated affiliate 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 the affiliate. The primary business
of the Joint Venture is to distribute gaming machines on wide-area
progressive systems. The Company's share of net earnings from the Joint
Venture and related activities are included in gaming machines and systems
revenue. The Joint Venture operates on a September 30 year-end. Summarized
results of operations for the Joint Venture are as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
(IN THOUSANDS) 1999 1998
- --------------------------------------- -------------- -------------
<S> <C> <C>
Revenues $ 77,777 $ 73,790
Expenses 38,485 36,450
Operating income 39,292 37,340
Net income 39,847 37,740
</TABLE>
-5-
<PAGE>
REVENUE RECOGNITION
The Company recognizes gaming revenues as the net win from gaming
operations, which is the difference between amounts wagered by customers and
payment to customers. Gaming operations revenues exclude the retail value of
complimentary food and beverage furnished gratuitously to gaming customers.
Proprietary games revenue, included in gaming machines and systems revenue, is
derived primarily from royalty, revenue participation or other similar
short-term recurring revenue arrangements. Revenues from the sale of lottery,
gaming and pari-mutuel system equipment and related parts are recognized upon
delivery to the customer. Lottery and pari-mutuel systems contract service
revenues are recognized as the services are performed and primarily relate to
revenues from long-term contracts, which require installation and operation of
lottery and pari-mutuel wagering networks. Revenues under these contracts are
generally based on a percentage of sales volume, which may fluctuate over the
lives of the contracts. Revenue from sales of lottery systems and video gaming
central site systems (including customized software and equipment) is recognized
using the percentage-of-completion method of accounting for long-term
construction type contracts where costs to complete can reasonably be estimated.
Prior to revenue recognition on system sales, costs incurred are applied against
progress billings and recorded as a net other current asset or liability as
appropriate.
EARNINGS PER SHARE
A reconciliation of income and shares for basic and diluted earnings per
share (EPS) is as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
-------------------------------------- --------------------------------------
September 30, 1999 September 30, 1998
-------------------------------------- --------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------ -------- ----------- ---------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net Income $ 15,774 11,934 $ 1.32 $ 19,048 12,533 $ 1.52
Effect of Dilutive Securities:
Options 215 (0.02) 341 (0.04)
-------- ------ ------ -------- ------ ------
Diluted EPS:
Net Income $ 15,774 12,149 $ 1.30 $ 19,048 12,874 $ 1.48
======== ====== ====== ======== ====== ======
</TABLE>
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 materially from
those estimates.
-6-
<PAGE>
RECLASSIFICATIONS
Certain amounts in the consolidated condensed financial statements for the
three months ended September 30, 1998 have been reclassified to be consistent
with the presentation used for the three months ended September 30, 1999.
2. ACQUISITION OF POWERHOUSE
On June 29, 1999, the Company completed the acquisition of 100% of the
outstanding common stock of Powerhouse Technologies, Inc. ("Powerhouse" and the
"Powerhouse Acquisition") 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 $300 million
revolving credit facility.
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 included in the acquirer's financial
statements from the date of acquisition. Accordingly, the results of operations
and cash flows for the three months ended September 30, 1998 do not include any
results of operations or cash flows of Powerhouse. The following summarized
unaudited pro forma financial information assumes the Powerhouse Acquisition
occurred as of July 1, 1998. The pro forma data give effect to actual operating
results prior to the acquisition and adjustments to interest expense, interest
income, depreciation and amortization and income taxes. These pro forma amounts
do not purport to be indicative of the results that might have been obtained if
the Powerhouse Acquisition had occurred on July 1, 1998 or that may be obtained
in the future.
<TABLE>
<CAPTION>
Pro Forma
Three Months Ended
(IN THOUSANDS) September 30, 1998
-------------------------------------------------------------------
<S> <C>
Revenues $ 112,376
Costs of revenues 52,601
Gross margin 59,775
Other costs:
Selling, general and administrative 15,392
Research and development 3,504
Depreciation and amortization 9,801
Income from operations 31,078
Net income 16,816
Earnings per share:
Basic $ 1.34
Diluted $ 1.31
</TABLE>
The Company is continuing its efforts to finalize its evaluation
of the fair values of the assets and liabilities acquired in the Powerhouse
Acquisition. During the quarter ended September 30, 1999, the Company made
adjustments to the fair values of pre-acquisition contingent liabilities for
litigation and other items, liabilities for employee terminations, accrued
liabilities for costs to exit activities, and
-7-
<PAGE>
certain other assets and liabilities of approximately $2.6 million.
Additional adjustments to the fair values of assets and liabilities acquired,
similar in nature to those recorded during the quarter ended September 30,
1999, could occur throughout the remainder of fiscal 2000.
3. BUSINESS SEGMENTS
The Company operates primarily in four business segments as follows:
gaming operations, which includes the operations of two casinos in Colorado,
slot routes in Nevada and Montana, and a racetrack/casino in New Mexico;
gaming machines and systems, which includes the design, development, and
distribution of proprietary gaming machines and the design, manufacture, and
sale of video gaming machines and central control systems; lottery systems,
which includes the design, manufacture, sale, installation, and operation of
on-line lottery systems; and pari-mutuel systems, which includes the design,
manufacture, sale, and operation of computerized pari-mutuel wagering systems
primarily for dog and horse racing tracks. Revenues and income (loss) for
these segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Gaming operations $ 48,653 $ 32,474
Gaming machines and systems 47,125 33,176
Lottery systems 27,270 -
Pari-mutuel systems 5,494 -
Intercompany revenues and retail value of complimentary
food and beverage provided to customers (1,541) (1,047)
-------- --------
$127,001 $ 64,603
======== ========
Income (loss) from operations:
Gaming operations $ 9,113 $ 8,933
Gaming machines and systems 19,749 21,478
Lottery systems 3,907 -
Pari-mutuel systems 301 -
General corporate expenses (3,715) (742)
-------- --------
$ 29,355 $ 29,669
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
(IN THOUSANDS) 1999 1999
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Identifiable segment assets:
Gaming operations $105,868 $102,528
Gaming machines and systems 137,440 142,736
Lottery systems 90,026 77,616
Pari-mutuel systems 22,627 23,601
Corporate 30,676 44,811
Unallocated intangibles 117,446 115,877
-------- --------
$504,083 $507,169
======== ========
</TABLE>
-8-
<PAGE>
4. INVENTORY
Inventories, net of valuation reserves, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
(IN THOUSANDS) 1999 1999
- --------------------------------------------------------------------------
<S> <C> <C>
Manufacturing:
Raw materials $ 5,397 $ 5,258
Work-in-process 1,595 1,795
Finished goods 11,549 10,531
Other finished goods 4,146 3,791
------- -------
$22,687 $21,375
======= =======
</TABLE>
5. OTHER CURRENT LIABILITIES
Other current liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
(IN THOUSANDS) 1999 1999
- --------------------------------------------------------------------------
<S> <C> <C>
Labor, compensation and benefits $12,118 $11,160
Commission and royalties 2,249 2,600
Merger related accruals - 11,541
Other accrued expenses 19,680 17,185
------- -------
$34,047 $42,486
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
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 secondary
event patents as well as various contract breaches by Acres. In April 1999,
Acres responded to the Company's lawsuit 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. The Oregon state circuit court action has been moved to
the U.S. District Court, District of Oregon, and has been stayed pending the
outcome of the Nevada actions.
-9-
<PAGE>
Several securities class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. 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 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.
The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation
will have a material adverse effect on the consolidated financial statements
of the Company.
FUNDING COMMITMENTS
In September 1999, the Company announced the signing of a development
and management agreement with the Pala Band of Mission Indians to develop and
assist in obtaining financing for the construction of an casino and
entertainment facility near San Diego, California, pending the approval of a
proposed amendment to the California Constitution expected in March 2000 and the
receipt of various other regulatory and licensing approvals. Under the terms of
the agreement the Company has committed to provide up to $30 million in
financing for the project and would render management services for the facility
for seven years after the completion of construction. The agreement is subject
to regulatory approval.
7. SUBSEQUENT EVENTS
In October 1999, the Company made a $22 million equity contribution to
the Joint Venture with IGT to fund certain contractual expenditures. The
contribution was funded through additional borrowings on the Company's credit
facility.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q 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. ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACT ARE "FORWARD-LOOKING STATEMENTS" FOR PURPOSES
OF THESE PROVISIONS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES, OR
OTHER FINANCIAL ITEMS; ANY STATEMENTS OF THE PLANS, STRATEGIES, AND
OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATION; ANY STATEMENTS CONCERNING
PROPOSED NEW PRODUCTS, SERVICES, OR DEVELOPMENTS; ANY STATEMENTS REGARDING
FUTURE ECONOMIC CONDITIONS OR PERFORMANCE; STATEMENTS OF BELIEF; AND ANY
STATEMENT OF ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO INHERENT RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE
FORWARD-LOOKING STATEMENTS. 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 THE COMPANY'S FORWARD-LOOKING STATEMENTS. THESE RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO FACTORS DESCRIBED FROM TIME TO
TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING ANCHOR'S FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999.
THESE REPORTS MAY BE OBTAINED FREE OF CHARGE AT THE WEBSITE OF THE SECURITIES
AND EXCHANGE COMMISSION AT http://www.sec.gov. Anchor Gaming urges the review
of such reports.
OVERVIEW
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 now operates in the following business segments:
GAMING OPERATIONS, which includes the operations of two casinos in
Colorado, slot routes in Nevada and Montana, and a racetrack/casino in
New Mexico.
GAMING MACHINES AND SYSTEMS, which includes the design, development,
and distribution of proprietary gaming machines and the design,
manufacture, and sale of video gaming machines and central control
systems.
LOTTERY SYSTEMS, which includes the design, manufacture, sale,
installation, and operation of on-line lottery systems.
-11-
<PAGE>
PARI-MUTUEL SYSTEMS, which includes the design, manufacture, sale,
and operation of computerized pari-mutuel wagering systems primarily
for dog and horse racing tracks.
The Powerhouse Acquisition was accounted for using the purchase
method of accounting. As a result, the historical operating results and cash
flows of the Company for the three months ended September 30, 1998 do not
include any operating results or cash flows for the operations acquired in
the Powerhouse Acquisition. The following table sets forth pro forma revenues
and costs of revenues by business segment for the three months ended
September 30, 1998 as if the Powerhouse Acquisition occurred on July 1, 1998.
These pro forma amounts do not purport to be indicative of the results that
might have been obtained if the Powerhouse Acquisition had occurred on July
1, 1998 or that may be obtained in the future.
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED
SEPTEMBER 30, 1998
-----------------------------------
(IN THOUSANDS) REVENUES COSTS OF REVENUES
- ------------------------------------------------------------------------------
<S> <C> <C>
Gaming operations $ 37,179 $21,679
Gaming machines and systems 43,919 12,930
Lottery systems 25,628 14,569
Pari-mutuel systems 5,650 3,423
-------- -------
Total $112,376 $52,601
======== =======
</TABLE>
The following table sets forth the percentage of Anchor's total
historical revenues attributable to it each of its operating segments during the
three months ended September 30, 1999 and 1998 and its pro forma revenues for
the three months ended September 30, 1998. The table also presents the gross
margin of each of its operating segments for the same periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 1998(a) 1998(b)
-------- ------- -------
<S> <C> <C> <C>
SOURCES OF REVENUES:
Gaming operations 37.3% 48.8% 33.1%
Gaming machines and systems 37.0 51.2 39.1
Lottery systems 21.5 - 22.8
Pari-mutuel systems 4.2 - 5.0
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
===== ===== =====
GROSS MARGIN:
Gaming operations 38.4% 45.4% 41.7%
Gaming machines and systems 69.1 79.2 70.6
Lottery systems 44.0 - 43.2
Pari-mutuel systems 37.4 - 39.4
----- ----- -----
Total gross margin 50.9% 62.7% 53.2%
===== ===== =====
</TABLE>
(a) Historical
(b) Pro forma, presented as if the Powerhouse Acquisition occurred on July 1,
1998
-12-
<PAGE>
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998
GAMING OPERATIONS
Total revenues from gaming operations were $47.4 million for the
quarter ended September 30, 1999, an increase of $15.9 million or 50.5% from
historical quarter ended September 30, 1998. The gaming operations acquired
in the Powerhouse Acquisition contributed approximately $15.2 million to
revenue for the quarter ended September 30, 1999. The remaining increase was
a result of increased route revenues in Nevada offset somewhat by decreases
in slot revenues at the Company's Colorado Central Station Casino. The
decreased slot revenues at the Colorado Central Station Casino are the result
of additional competition from new casinos that have opened near the Colorado
Central Station Casino in the past 15 months. On a pro forma basis, revenues
from gaming operations for the quarter ended September 30, 1999 increased
$10.2 million or 27.4% from pro forma revenues for the quarter ended
September 30, 1998. This increase is primarily due to slot operations at the
Sunland Park racetrack/casino acquired in the Powerhouse Acquisition. Sunland
Park did not commence casino operations until February 1999. Consequently,
there was no revenue from slot operations at Sunland Park during the pro
forma quarter ended September 30, 1998.
Two casinos opened near the Colorado Central Station during 1998,
and 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 proposed casino openings will have on the
Company's Colorado casino operations. The Company expects that the increased
competition from new and proposed casino operations 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.
During late fiscal 1999, the Company received a termination letter
from Albertson's, one of its major Nevada slot route retail chains, due to a
change in ownership that would be effective August 31, 1999. The Company
filed an injunctive relief in court which requested that the Company be
allowed to continue to operate the locations with certain contract
modifications. The 59 machines operated in the four Albertson's locations
were in operation through September 30, 1999. The Company believes that the
loss of the four Albertson's stores, if it occurs, will not have a material
effect on the net financial results of the Company's Nevada route operations.
Costs of gaming operations were $29.2 million for the quarter ended
September 30, 1999, an increase of $12.0 million or 69.8% from the historical
quarter ended September 30, 1998. The gaming operations acquired in the
Powerhouse Acquisition contributed approximately $10.9 million to costs of
gaming operations during the September 1999 quarter. The remaining increase
is due primarily to increased costs in the Nevada route as a result of
increased revenues, and to a lesser extent, increased costs at the Colorado
Central Station casino resulting from increased competition. On a pro forma
basis, costs of gaming operations increased $7.5 million or 34.6% during the
quarter ended September 30, 1999 versus pro forma costs for the quarter
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ended September 30, 1998. This increase is due primarily to the commencement
of casino operations at the Sunland Park racetrack/casino in February 1999
that were not in operation during the quarter ended September 30, 1998.
Gaming operations gross margin decreased to 38.4% during the quarter ended
September 30, 1999 from 41.7% during the pro forma quarter ended September
30, 1998. This is due primarily to the growth in Nevada route revenues and
the commencement of casino operations at the Sunland Park racetrack/casino,
both of which have lower margins than the Colorado casino operations that
historically accounted for a greater percentage of gaming operations revenue.
To a lesser extent, the decrease in gross margin is also the result of
decreased margins at the Colorado Central Station Casino resulting from
increased competition.
GAMING MACHINES AND SYSTEMS
Revenues from gaming machines and systems were $46.9 million for the
quarter ended September 30, 1999, an increase of $13.8 million or 41.7% from
the historical quarter ended September 30, 1998. The gaming machines and
systems operations acquired in the Powerhouse Acquisition accounted for
approximately $14.4 million of revenue during the quarter ended September 30,
1999. Without the effect of the Powerhouse Acquisition, gaming machines and
systems revenues would have decreased approximately $600,000. Increased
equity earnings in the Company's joint venture alliance with IGT, which, for
accounting purposes, are recorded net of expense, were more than offset by
net decreases in revenues from the Company's stand-alone proprietary games.
At September 30, 1999 there were more than 6,900 games, primarily Wheel of
Fortune-TM-, operating within the Joint Venture, compared to more than 6,000
games at September 30, 1998.
On a pro forma basis, revenues from gaming machines and systems for
the quarter ended September 30, 1999 increased $3.0 million or 6.8% from the
pro forma revenues for the quarter ended September 30, 1998. This increase is
primarily a result of increased central systems sales in business operations
acquired from Powerhouse, offset to some extent by the $600,000 decrease in
revenues from proprietary games operations as discussed above.
The Company does not expect the trend of decreased year over year
proprietary games revenue comparisons for stand-alone proprietary games to
continue. The Company expects the trend of increased year over year revenue
comparisons for the Joint Venture to continue due to the popularity of the
new video Wheel of Fortune game introduced during the quarter ended September
30, 1999. The proprietary games operations are also influenced by seasonal
fluctuations as a result of weather and casino patron traffic patterns. The
Company expects that these seasonal trends will continue in both the Joint
Venture operations and the proprietary games operations outside of the Joint
Venture. In addition, changes in interest rates could have an effect on the
earnings of the Joint Venture. Since jackpot expense is a function of the
present value of future jackpot payments, future changes in the interest rate
environment will affect the profitability of the Joint Venture. Specifically,
decreases in interest rates will increase the then current period's jackpot
expense of the Joint Venture while future increases in interest rates will
decrease the then current period's jackpot expense of the Joint Venture.
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During the quarter ended September 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 10.0% from the quarter ended September
30, 1998. The average net win per unit for the installed base of stand-alone
proprietary games also decreased during the same period. Compared to the quarter
ended June 30, 1999, both the installed base of stand-alone games and the
average net win per unit for the games during the quarter ended September 30,
1999 experienced slight increases. While the Company anticipates the trend in
declining year over year comparisons in its stand-alone proprietary games
business will not continue beyond the current quarter, the Company cannot
predict with any certainty the extent of any trend reversals in the future.
Nevada gaming regulators are considering the proposal of a new state
regulation that would prevent any slot machine from having cartoon characters,
comic book characters or themes based on materials intended, marketed or used
primarily by people younger than 21. The Company cannot predict the affect, if
any, the proposal would have on any of its current or future gaming machines.
During fiscal year 1999, a bill sponsored by the Nevada Resort
Association was signed into law. The bill made provisions for increased
regulatory review of wide area progressives, addressed market accessibility to
games and will require manufacturers and casino operators to pay their
proportionate share of state gaming taxes. 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.
The Company has developed and has begun introducing conversion games to
its casino customers. The Company, as well as Barcrest, an IGT subsidiary,
continue to develop games to be introduced under what the Company calls 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 fixed 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. As of September 30, 1999 the Company has received
regulatory approval in Nevada and several other jurisdictions for several
different conversion games and has placed some of the games in casinos on a
limited basis. 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 the quarter ended September 30, 1999. 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 gaming machines and systems were $14.5 million for the quarter
ended September 30, 1999, an increase of $7.6 million or 110.1% from the
historical quarter ended September 30, 1998. The gaming machines and systems
operations acquired from Powerhouse accounted for the majority of the increase
in historical costs by contributing approximately $6.9 million to costs of
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gaming machines and systems during the 1999 quarter. The remaining increase of
$700,000 is due primarily to increases in machine costs in the proprietary games
operations as the Company continues to improve and modify existing games to
maintain performance. These increases are offset to some extent by decreases in
royalty expenses as a result of decreased revenues from the Company's
proprietary games operations outside the Joint Venture. On a pro forma basis,
costs of gaming machines and systems increased $1.6 million or 12.4% due to the
increased historical proprietary games costs and due to increases in costs
related to increased revenues from the operations acquired from Powerhouse.
Gaming machines and systems gross margin on a pro forma basis decreased slightly
to 69.1% during the quarter ended September 30, 1999 from 70.6% during the pro
forma quarter ended September 30, 1998.
LOTTERY SYSTEMS
Revenues from lottery systems were $27.3 million for the quarter ended
September 30, 1999, an increase of $1.7 million or 6.6% on a pro forma basis
from the pro forma revenues for the quarter ended September 30, 1998. Prior to
the Powerhouse Acquisition, the Company had no lottery operations. The increase
is primarily due to substantially higher year-over-year developed system license
sales to foreign lottery jurisdictions during the quarter ended September 30,
1999. During the quarter ended September 30, 1999, the Company commenced
operations under its on-line lottery contract with the Hoosier Lottery in
Indiana. The resulting year-over-year increase in revenue was partially offset
by the loss of the Montana Lottery, which provided revenue during the September
1998 quarter. Overall, the Company experienced net decreases in domestic on-line
lottery service revenues resulting from decreased ticket sales. Ticket sales in
the prior year were higher due to large jackpots in two states during the
quarter ended September 30, 1998.
Costs of lottery systems were $15.3 million during the quarter ended
September 30, 1999, an increase of $700,000 or 4.8% on a pro forma basis from
the pro forma costs for the quarter ended September 30, 1998. The gross margin
on a pro forma basis increased to 44.0% in the 1999 quarter versus 43.2% in the
pro forma 1998 quarter. Gross margins relating to the increased system sales in
the 1999 quarter are much higher than normal since there is little cost
associated with sales of developed system licenses to foreign lottery
jurisdictions.
PARI-MUTUEL SYSTEMS
Revenues from pari-mutuel systems were $5.4 million for the quarter
ended September 30, 1999, a decrease of $300,000 or 5.3% on a pro forma basis
from the pro forma revenues for the quarter ended September 30, 1998. Costs of
pari-mutuel systems were $3.4 million for the quarter ended September 30, 1999,
which represents no increase in costs on a pro forma basis from the September
1998 quarter.
OTHER COSTS
Selling, general and administrative ("SG&A") expenses were $19.6
million for quarter ended September 30, 1999, an increase of $13.7 million or
232.2% from the historical quarter ended September 30, 1998. SG&A expenses as a
percentage of total revenue increased to 15.4% during the September 1999 quarter
compared to 9.2% during the historical September 1998 quarter.
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During the quarter ended September 30, 1999, businesses acquired from
Powerhouse contributed $12.0 million of SG&A expenses, the remaining
historical increase of $1.7 million is the result of additional payroll,
promotional, and facility costs at the Company's Colorado Central Station
Casino, increased legal and bad debt costs in the Company's proprietary games
operations, and increased licensing and payroll expenses at the corporate
level. On a pro forma basis, SG&A expenses for the quarter ended September
30, 1999 increased $4.2 million or 27.3% over the pro forma quarter ended
September 30, 1998. On a pro forma basis, SG&A expenses increased as a result
of the historical increase of $1.7 million described above, in addition to
increased expenses resulting from the casino operations commencement at
Sunland Park of approximately $1.1 million and increased labor and trade show
expenses in the lottery systems operations of approximately $1.7 million.
Research and development ("R&D") expenses were $4.0 million for the
quarter ended September 30, 1999, an increase of $3.0 million or 300.0% from the
historical quarter ended September 30, 1998. During the quarter ended September
30, 1999, businesses acquired from Powerhouse accounted for the entire increase
in R&D expenses by contributing $3.1 million of R&D expenses. On a pro forma
basis, R&D expenses for the quarter ended September 30, 1999 increased $500,000
or 14.3% from the pro forma quarter ended September 30, 1998 resulting from
increased R&D expenses in the gaming machines and systems operations acquired
from Powerhouse, offset to some extent by decreases in R&D expenses in the
lottery systems operations acquired from Powerhouse. In addition to the R&D
expenses reflected on the Company's financial statements, R&D costs related to
the Joint Venture are accounted for on the books of the Joint Venture and are
not included in the amounts disclosed as R&D in the Company's financial
statements.
Depreciation and amortization expense was $11.7 million for the quarter
ended September 30, 1999, an increase of $7.8 million or 200.0% from the
historical quarter ended September 30, 1998. During the quarter ended September
30, 1999, businesses acquired from Powerhouse contributed $6.7 million in
depreciation and amortization expense, including approximately $1.0 million in
amortization of goodwill associated with the Powerhouse Acquisition. The
remaining historical increase resulted from increased depreciation expense in
the proprietary games operations due to the use of shortened lives for gaming
machines. On a pro forma basis, depreciation and amortization for the quarter
ended September 30, 1999 increased $1.9 or 19.4% from the pro forma quarter
ended September 30, 1998 due to the use of shortened lives in the proprietary
games operations as well as in the gaming operations and gaming machine and
systems operations acquired from Powerhouse.
INCOME FROM OPERATIONS. As a result of the factors discussed above,
income from operations was $29.4 million for the quarter ended September 30,
1999, a decrease of $300,000 or 1.0% on a historical basis and $1.7 million or
5.5% on a pro forma basis from the quarter ended September 30, 1998. As a
percentage of total revenues, income from operations decreased to 23.1% during
the quarter ended September 30, 1999 from 45.9% historical and 27.7% pro forma
for the quarter ended September 30, 1998.
OTHER INCOME (EXPENSE). Interest income was $500,000 for the quarter
ended September 30, 1999 versus $1.1 million for the historical quarter ended
September 30, 1998. The reduction is
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due to decreased cash balances for investment as a result of cash spending
for the Powerhouse Acquisition. Interest expense of $3.7 million for the
quarter ended September 30, 1999 is the result of borrowings associated with
the Powerhouse Acquisition. There was no historical interest expense incurred
in the quarter ended September 30, 1998.
NET INCOME AND EARNINGS PER SHARE. As a result of the factors discussed
above, net income was $15.8 million for quarter ended September 30, 1999, a
decrease of $3.2 million or 16.8% from the historical quarter ended September
30, 1998. On a pro forma basis, net income for the quarter ended September 30,
1999 decreased $1.0 million or 6.0% from the pro forma quarter ended
September 30, 1998. Diluted earnings per share of $1.30 for the quarter ended
September 30, 1999 decreased only $.01 or 0.6% from the pro forma quarter ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. At September 30, 1999, the Company maintained $26.9 million
in cash and equivalents, $51.9 million in working capital, and $81.5 million
available under a revolving credit facility, compared with cash and equivalents
at June 30, 1999 of $32.8 million and working capital of $28.9 million.
The Company borrowed $210 million on a $300 million unsecured credit
facility to complete the Powerhouse Acquisition. 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 of $53.9 million and its
initial public offering in February 1994 of $34.1 million.
In September 1999, the Company announced the signing of a development
and management agreement with the Pala Band of Mission Indians to develop and
assist in obtaining financing for the construction of an casino and
entertainment facility near San Diego, California, pending the approval of a
proposed amendment to the California Constitution expected in March 2000 and the
receipt of various other regulatory and licensing approvals. Under the terms of
the agreement the Company has committed up to $30 million in financing for the
project and would render management services for the facility for seven years
after the completion of construction.
During the quarter ended September 30, 1999, operating activities
provided $14.7 million in cash flows on $15.8 million in net income, compared
with $23.9 million in cash flows on $19.0 million in net income during the
historical quarter ended September 30, 1998.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). EBITDA for the quarter ended September 30, 1999 was $41.0, an increase
of $7.6 million or 22.8% from $33.4 million for the historical quarter ended
September 30, 1998. This increase was primarily a result of increased
depreciation and amortization expense and interest expense incurred as a result
of the Powerhouse Acquisition. On a pro forma basis, EBITDA increased $100,000
or 0.2% from $40.9 million for the pro forma quarter ended September 30, 1998.
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CAPITAL EXPENDITURES. During the quarter ended September 30, 1999, the
Company spent $15.3 million on capital acquisitions in addition to $6.7 million
on intangible assets. Capital expenditures were primarily incurred for the
manufacture of lottery systems and equipment for the Indiana and Florida lottery
contracts and intangible expenditures were incurred primarily for lottery
contract implementations. In the historical quarter ended September 30, 1998,
the Company spent $5.7 million on capital expenditures, primarily related to the
purchase of gaming devices and equipment for use in its proprietary games
operations.
The Company selectively pursues opportunities to win additional and
retain existing on-line wagering contracts. If successful in obtaining new
domestic and/or international 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 the quarter ended September 30, 1999, the
Company did not repurchase any of its common stock. 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 September 30, 1999, the
Company had repurchased 1,784,675 shares of Common Stock at a cost of $89.9
million. At September 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 and the implementation of
long-term lottery contracts, working capital is necessary to finance customer
receivables and inventory levels. At September 30, 1999, notes receivable from
customers relating to product sales totaled $15.3 million. 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 and is currently
pursuing additional opportunities in Native American gaming in California.. If
successful in pursuing another opportunity in any gaming
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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 and other systems are Year 2000 Compliant or
will be Year 2000 Compliant before December 31, 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 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.
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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 September 30,
1999, the Company has spent less than $300,000 and anticipates spending less
than $750,000 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 communication system down-time and although the Company has
power-generating equipment at its two Colorado 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999, the Company and the Joint Venture filed an action in
U. S. District Court, District of Nevada against Acres Gaming, Inc. ("Acres").
The complaint alleges infringement of the Company's secondary event patents as
well as various contract breaches by Acres. In April 1999, Acres responded to
the Company's lawsuit 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. The Oregon state circuit
court action has been moved to the U.S. District Court, District of Oregon, and
has been stayed pending the outcome of the Nevada actions.
Several securities class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. 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.
The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation will
have a material adverse effect on the consolidated financial statements of the
Company.
ITEM 6. (d) EXHIBITS
See index to exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
ANCHOR GAMING
(Registrant)
Date November 12, 1999 /s/Michael D. Rumbolz
----------------- ---------------------
Michael D. Rumbolz
Chief Executive Officer and
President
Date November 12, 1999 /s/Geoffrey A. Sage
----------------- ---------------------
Geoffrey A. Sage
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBITS
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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 Corporation 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 Michael B. Fulton in favor of Stanley E. Fulton
dated January 19, 1999. (Incorporated by reference to exhibit 9.10 to
the Company's June 30, 1999 Annual Report on Form 10-K (File No.
0-23124)).
9.2 Irrevocable Proxy of Stanley M. Fulton in favor of Stanley E. Fulton
dated January 19, 1999. (Incorporated by reference to exhibit 9.11 to
the Company's June 30, 1999 Annual Report on Form 10-K (File No.
0-23124)).
9.3 Irrevocable Proxy of Elizabeth F. Jones in favor of Stanley E. Fulton
dated January 19, 1999. (Incorporated by reference to exhibit 9.12 to
the Company's June 30, 1999 Annual Report on Form 10-K (File No.
0-23124)).
<PAGE>
9.4 Irrevocable Proxy of Lucinda F. Tischer in favor of Stanley E. Fulton
dated January 19, 1999. (Incorporated by reference to exhibit 9.13 to
the Company's June 30, 1999 Annual Report on Form 10-K (File No.
0-23124)).
9.5 Irrevocable Proxy of Deborah J. Fulton in favor of Stanley E. Fulton
dated January 19, 1999. (Incorporated by reference to exhibit 9.14 to
the Company's June 30, 1999 Annual Report on Form 10-K (File No.
0-23124)).
9.6 Irrevocable Proxy of Maryland Park Apartments, Inc. in favor of Stanley
E. Fulton dated January 22, 1999. (Incorporated by reference to exhibit
9.15 to the Company's June 30, 1999 Annual Report on Form 10-K (File
No. 0-23124)).
9.7 Irrevocable Proxy of Virginia L. Fulton in favor of Stanley E. Fulton
dated January 19, 1999. (Incorporated by reference to exhibit 9.16 to
the Company's June 30, 1999 Annual Report on Form 10-K (File No.
0-23124)).
10.1 Settlement Agreement between Anchor Gaming, Stanley E. Fulton, and
Michael B. Fulton, dated as of December 22, 1993. (Incorporated by
reference to Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (Registration No. 33-71870)).
10.2 Commercial Note of Pelican Gaming, Inc. to Anchor Coin dated March 15,
1995. (Incorporated by reference to Exhibit 10.1 to the Company's March
31, 1994 Quarterly Report on Form 10-Q (File No. 0-23124)).
10.3 Promissory Notes of Anchor Coin, D D Stud, Inc., and C. G. Investments,
Inc. to Stanley E. Fulton. (Incorporated by reference to Exhibit 10.4
to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.4 Loan Agreement of Pelican Gaming, Inc. to Anchor Coin dated as of March
15, 1994. (Incorporated by reference to Exhibit 10.2 to the Company's
March 31, 1994 Quarterly Report on Form 10-Q (File No. 0-23124)).
10.5 Promissory Note of Colorado Grande Enterprises, Inc. to C.G.
Investments, Inc. (Incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.6 Promissory Notes of Anchor Coin to Michael B. Fulton, Stanley M.
Fulton, Elizabeth Fulton Jones, Lucinda Fulton Tischer, Virginia L.
Fulton, and Deborah J. Fulton. (Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1 (Registration
No. 33-71870)).
10.7 Promissory Note of Anchor Coin to Elizabeth Fulton and related Stock
Option Agreement. (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.8 Loan Agreement between Bank of America Nevada and Anchor Coin, dated as
of June 13, 1994. (Incorporated by reference to Exhibit 10.6 to the
Company's June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.9 Lease and Sublease Agreement between Smith's Food & Drug Centers, Inc.
and Anchor Coin, dated July 28, 1993. (Confidential Treatment for a
portion of this document was requested and granted pursuant to Rule 406
under the Securities Act). (Incorporated by reference to Exhibit 10.10
to the Company's Registration Statement on Form S-1 (Registration No.
33-71870)).
10.10 Employment Agreement between Anchor Gaming and Stanley E. Fulton.
(Incorporated by reference to Exhibit 10.10 to the Company's June 30,
1994 Annual Report on Form 10-K (File No. 0-23124)).
<PAGE>
10.11 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)).
10.12 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)).
10.13 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)).
10.14 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)).
10.15 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)).
10.16 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)).
10.17 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)).
10.18 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)).
10.19 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)).
10.20 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)).
10.21 Form of Indemnification Agreement between the Company and Officers and
Directors. (Incorporated by reference to Exhibit 10.28 to the Company's
June 30, 1994 Annual Report on Form 10-K (File No. 0-23124)).
10.22 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)).
10.23 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)).
10.24 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)).
10.25 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)).
<PAGE>
10.26 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)).
10.27 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)).
10.28 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)).
10.29 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)).
10.30 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)).
10.31 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)).
10.32 Consulting Agreement by and between Anchor Gaming, a Nevada Corporation
and Richard M. Haddrill dated as of April 13, 1999. (Incorporated by
reference to Exhibit 10.34 to the Company's June 30, 1999 Annual Report
on Form 10-K (File No. 0-21324)).
10.33 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. (Incorporated by
reference to Exhibit 10.35 to the Company's June 30, 1999 Annual Report
on Form 10-K (File No. 0-21324)).
10.34 Form of Stock Option Agreement (Incorporated by reference to Exhibit
10.36 to the Company's June 30, 1999 Annual Report on Form 10-K (File
No. 0-21324)).
27.1* Financial Data Schedule.
- -----------
* Filed herewith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 26,902
<SECURITIES> 0
<RECEIVABLES> 39,638
<ALLOWANCES> 0
<INVENTORY> 22,687
<CURRENT-ASSETS> 102,805
<PP&E> 191,684
<DEPRECIATION> 0
<TOTAL-ASSETS> 504,083
<CURRENT-LIABILITIES> 50,884
<BONDS> 212,665
0
0
<COMMON> 139
<OTHER-SE> 239,071
<TOTAL-LIABILITY-AND-EQUITY> 504,083
<SALES> 0
<TOTAL-REVENUES> 127,001
<CGS> 0
<TOTAL-COSTS> 62,366
<OTHER-EXPENSES> 35,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,681
<INCOME-PRETAX> 26,148
<INCOME-TAX> 10,374
<INCOME-CONTINUING> 15,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,774
<EPS-BASIC> 1.32<F1>
<EPS-DILUTED> 1.30<F1>
<FN>
<F1>EPS not in thousands.
<F1>EPS not in thousands.
</FN>
</TABLE>
