<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
July 14, 1999 (June 29, 1999)
ANCHOR GAMING
(Exact name of Registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
000-23124 88-0304253
(Commission File Number) (I.R.S. Employer Identification No.)
815 Pilot Road
Suite G
Las Vegas, Nevada
89119
(Address of principal executive offices)
Registrant's telephone number: (702) 896-7568
-------
===============================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets
On June 29, 1999, Anchor Gaming ("Anchor" or the "Company")
completed the acquisition of 100% of the outstanding common stock of
Powerhouse Technologies, Inc. ("Powerhouse"). The acquisition was consummated
pursuant to the terms of a merger agreement (the "Agreement") dated as of
March 9, 1999 and as amended on March 19, 1999, among the Company, Anchor
Powerhouse Acquisition Corporation (formerly known as Olive AP Acquisition
Corporation), a wholly-owned subsidiary of the Company formed solely for the
purpose of the acquisition, and Powerhouse. The Agreement was adopted by the
Powerhouse stockholders on June 7, 1999. Powerhouse, through its operating
units, VLC, AWI and United Tote, 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. As a result of
the merger, Powerhouse is now a wholly-owned subsidiary of the Company, which
will continue to operate in its present principle lines of business.
Pursuant to the terms of the Agreement, the Company acquired 100% of
the common stock of Powerhouse for $19.50 per share totaling approximately
$221 million and Powerhouse net debt of approximately $68 million. The
Company funded the acquisition and the repayment of Powerhouse' debt through
a combination of cash and borrowings under a new $300 million revolving credit
facility (the "Credit Facility").
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired
The following historical audited consolidated financial
statements of Powerhouse and notes thereto are included
herein at pages 4-23.
Independent Auditors' Report
Statements of Earnings for the years ended
December 31, 1998, 1997 and 1996
Balance Sheets as of December 31, 1998 and 1997
Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following historical unaudited consolidated financial
statements of Powerhouse and notes thereto are included
herein at pages 24-32.
Statements of Earnings for the three months ended
March 31, 1999 and 1998 (unaudited)
Balance Sheets as of March 31, 1999 and December 31,
1998 (unaudited)
Statements of Stockholders' Equity for the three
months ended March 31, 1999 and 1998 (unaudited)
Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements
(unaudited)
-2-
<PAGE>
(b) Pro forma financial information
Pro Forma Consolidated Balance Sheet as of March 31, 1999
Pro Forma Consolidated Income Statements for the nine months
ended March 31, 1999 and the year ended June 30, 1998.
(c) Exhibits
2.1 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.)
2.2 Amendment No. 1 to Merger Agreement dated as of March
19, 1999 among Anchor Gaming, Olive AP Acquisition
Corporation and Powerhouse Technologies, Inc.
23.1 Consent of KPMG, LLP, dated July 13, 1999.
-3-
<PAGE>
(KPMG LLP logo)
P. O. Box 7108
Billings, MT 59103
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Powerhouse Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Powerhouse Technologies, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Powerhouse Technologies, Inc. and subsidiaries as of December 31, 1998 and
1997 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/S/ KPMG LLP
Billings, Montana
February 19, 1999
-4-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands except for share data)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Lottery systems $103,581 94,771 88,843
Gaming machines and systems 53,215 57,626 43,632
Pari-mutuel systems 20,028 20,177 20,499
Gaming operations 24,327 24,361 23,707
-------- ------- -------
Total revenues 201,151 196,935 176,681
COSTS OF REVENUES:
Lottery systems 62,281 62,558 59,333
Gaming machines and systems 30,054 31,766 21,084
Pari-mutuel systems 12,879 12,784 12,545
Gaming operations 20,019 19,873 19,386
-------- ------- -------
125,233 126,981 112,348
-------- ------- -------
Gross Profit 75,918 69,954 64,333
OTHER OPERATING EXPENSES:
Selling, general and administrative 36,635 31,655 28,697
Research and development 10,011 9,788 7,969
Depreciation and amortization 19,701 21,995 23,822
Other charges --- --- 34,135
-------- ------- -------
66,347 63,438 94,623
-------- ------- -------
Earnings (loss) from operations 9,571 6,516 (30,290)
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest and other income 1,454 1,021 1,060
Interest expense (3,044) (3,890) (3,754)
-------- ------- -------
(1,590) (2,869) (2,694)
-------- ------- -------
Earnings (loss) before income taxes and extraordinary items 7,981 3,647 (32,984)
Income tax (expense) benefit (3,405) 1,135 8,753
-------- ------- -------
Net earnings (loss) from continuing operations 4,576 4,782 (24,231)
Reversal of loss on discontinuance of pari-mutuel systems, net --- --- 5,482
-------- ------- -------
Net earnings (loss) before extraordinary items 4,576 4,782 (18,749)
Extraordinary gain, net --- 13,269 4,014
-------- ------- -------
Net earnings (loss) $ 4,576 18,051 (14,735)
======== ======= =======
EARNINGS (LOSS) PER SHARE DATA:
Basic:
Continuing operations $0.43 0.46 (2.28)
Net earnings (loss) $0.43 1.75 (1.39)
===== ==== =====
Diluted:
Continuing operations $0.42 0.46 (2.28)
Net earnings (loss) $0.42 1.72 (1.39)
===== ==== =====
Weighted average shares:
Basic 10,580 10,329 10,635
Potential Common Stock(1) 323 160 ---
------ -------- ------
Diluted 10,903 10,489 10,635
====== ====== ======
</TABLE>
(1) Excluded if antidilutive
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share data)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,371 13,772
Restricted cash and deposits 1,992 1,423
Accounts receivable, net 21,786 25,839
Current installments of notes receivable, net 6,179 3,192
Inventories 18,630 15,942
Prepaid expenses 1,574 1,037
Deferred income taxes 9,549 11,444
-------- -------
Total current assets 76,081 72,649
-------- -------
Property and equipment, net 76,355 63,160
Restricted cash deposits 376 2,408
Notes receivable, excluding current installments 10,049 2,547
Goodwill, net 8,495 9,314
Intangible and other assets, net 17,119 11,319
-------- -------
$188,475 161,397
======== =======
LIABILITIES
Current liabilities:
Current installments of long-term debt $ 4,445 4,381
Accounts payable 12,611 9,513
Accrued expenses 17,848 21,705
-------- -------
Total current liabilities 34,904 35,599
-------- -------
Long-term debt, excluding current installments 51,765 31,446
Deferred income taxes 13,828 12,206
-------- -------
Total liabilities 100,497 79,251
-------- -------
Commitments and contingencies (Note 15)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000 shares; no
shares issued --- ---
Common stock, $.01 par value. Authorized 25,000,000 shares 106 105
Paid-in capital 91,304 89,451
Deferred restricted stock compensation (815) (217)
Accumulated deficit (2,617) (7,193)
-------- -------
Total stockholders' equity 87,978 82,146
-------- -------
$188,475 161,397
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except for share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Series A Deferred
Preferred Common restricted Total
Stock Stock Paid-in stock compen- Accumulated stockholders'
par value par value capital sation deficit equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995 $19 107 97,284 (453) (10,509) 86,448
Net loss --- --- --- --- (14,735) (14,735)
Amortization of deferred restricted
stock compensation --- --- 133 36 --- 169
Stock issued under stock purchase
plan --- 1 348 --- --- 349
----- ---- ------ ------ ------- ------
December 31, 1996 19 108 97,765 (417) (25,244) 72,231
Net earnings --- --- --- --- 18,051 18,051
Stock options exercised and shares
issued under stock purchase plan --- 2 762 --- --- 764
Shares redeemed pursuant to
EDS settlement (19) (5) (9,076) --- --- (9,100)
Amortization of deferred restricted
stock compensation --- --- --- 200 --- 200
----- ---- ------ ------ ------- ------
December 31, 1997 --- 105 89,451 (217) (7,193) 82,146
Net earnings --- --- --- --- 4,576 4,576
Restricted stock issued --- 1 1,062 (1,063) --- ---
Amortization of deferred restricted
stock compensation --- --- --- 465 465
Proceeds from sale of common stock,
net --- 2 2,078 --- --- 2,080
Stock options exercised and shares
issued under stock purchase
plan --- 1 1,135 --- --- 1,136
Stock redemptions --- (3) (2,422) --- --- (2,425)
----- ---- ------ ------ ------- ------
December 31, 1998 $ --- 106 91,304 (815) (2,617) 87,978
===== ==== ====== ====== ======= ======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Share Amounts 1998 1997 1996
---------- ---------------------------- ------------------------------
Common Series A Common Series A Common
Balance Stock Preferred Stock Stock Preferred Stock Stock
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning of year 10,477,952 1,912,728 10,829,184 1,912,728 10,682,109
Restricted stock issued 108,000 --- --- --- 30,000
Sale of common stock 220,204 --- --- ---
Stock options exercised and
shares issued 127,161 --- 194,222 117,075
Stock redemptions (285,000) (1,912,728) (545,454) --- ---
---------- ---------- ---------- --------- ----------
End of year 10,648,317 --- 10,477,952 1,912,728 10,829,184
========== ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 4,576 18,051 (14,735)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating
activities:
Reversal of provision for loss on sale of
pari-mutuel systems operations --- --- (5,482)
Depreciation and amortization 19,701 21,995 23,822
Other charges --- --- 34,135
Extraordinary gain, net --- (13,269) (4,014)
Other, net 60 337 79
Changes in operating assets and liabilities:
Sales of receivables --- --- 1,467
Receivables, net (6,118) (7,191) 1,942
Inventories (2,110) 5,709 (3,489)
Prepaid expenses (80) (10) 235
Accounts payable 3,099 2,867 2,006
Accrued expenses (3,392) 6,649 (10,854)
Income taxes 3,517 806 (6,411)
------- ------- -------
Net cash provided by operating activities 19,253 35,944 18,701
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on property and equipment (28,456) (6,977) (25,522)
Expenditures on intangible and other assets (6,485) (1,974) (10,037)
Proceeds from sales of equipment 395 117 109
Change in restricted cash deposits 1,463 (70) 700
------- ------- -------
Net cash used in investing activities (33,083) (8,904) (34,750)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable --- (7,650) (600)
Proceeds from issuance of long-term debt 50,000 643 4,365
Payments of loan origination fees (2,041) --- ---
Repayments of long-term debt (32,321) (11,220) (13,079)
Amounts payable to EDS --- --- 27,343
Redemption of common stock (2,425) --- ---
Proceeds from sale of common stock 2,080 --- ---
Common stock sold under employee benefit plans 1,136 637 349
------- ------- -------
Net cash provided by (used in) financing activities 16,429 (17,590) 18,378
------- ------- -------
Net increase in cash and cash equivalents 2,599 9,450 2,329
Cash and cash equivalents, beginning of year 13,772 4,322 1,993
------- ------- -------
Cash and cash equivalents, end of year $16,371 13,772 4,322
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
-8-
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation. The consolidated financial statements include
the accounts of Powerhouse Technologies, Inc. and subsidiaries (the "Company").
Prior to January 1, 1998 the Company was known as Video Lottery Technologies,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
Revenue recognition. Revenue from the sale of lottery, gaming and
pari-mutuel system equipment and related parts is recognized upon delivery to
the customer. 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 accrued liability or other current asset as
appropriate.
Lottery and pari-mutuel systems contract services 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.
Gaming operations revenue consists of route and racetrack operations.
Route operations revenue consists primarily of gaming machine wagers, net
of payouts and state gaming taxes, generated under revenue sharing agreements
with route customers. Route operations revenue is recorded weekly as the
revenues are earned.
Revenue from racetrack operations primarily represents commissions on
wagers placed on live and simulcast pari-mutuel racing at the Company's
racetrack in Sunland Park, New Mexico, and is recorded on the day of each race.
Cash and cash equivalents. Cash deposits and all highly liquid debt
instruments with maturity dates of three months or less when purchased are
considered cash equivalents in the statements of cash flows.
Restricted cash and deposits. Cash deposits expected to be refunded or
released within one year are classified as restricted short-term deposits. The
deposits are for bonds, required by customers, for proposals and performance
under long-term contracts and for prize purses at the Company's horse racing
facility.
Inventories. The Company manufactures inventories for sale and lease.
Inventories are carried at the lower of cost or market value. Cost is determined
using the first-in, first-out method and includes materials, labor and allocated
indirect manufacturing overhead.
Property and equipment. Property and equipment is stated at cost. Equipment
acquired under capital leases is 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.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets or the life
of the related contract (including executed contract extensions) as follows:
<TABLE>
<CAPTION>
Item Estimated life
---- --------------
<S> <C>
Lottery and pari-mutuel systems equipment 3 - 9 years
Gaming equipment 3 - 7 years
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 10 years
Furniture and fixtures 5 - 10 years
</TABLE>
-9-
<PAGE>
Equipment purchased under capital leases is depreciated on a straight-line
basis over the shorter of the lease term or estimated useful life of the asset.
Goodwill, intangible and other assets. Goodwill, which represents the
excess of purchase price over fair value of net assets acquired, is being
amortized on a straight-line basis through 2009. Accumulated amortization was
$4.6 million at December 31, 1998 and $3.8 million at December 31, 1997.
Intangible and other assets are stated at cost net of accumulated
amortization. Intangible and other assets are amortized over their respective
economic useful lives of up to ten years. Accumulated amortization of intangible
and other assets was approximately $8.9 million at December 31, 1998 and $6.9
million at December 31, 1997.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review for
recoverability, the Company estimates the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of these
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, the asset is considered "impaired" and an
impairment loss is recognized.
Foreign currency transactions and remeasurements. Gains and losses from
foreign currency transactions and remeasurements are included in results of
operations.
Interest rate hedging. The Company uses interest rate swaps to manage
exposure to interest rate fluctuations on its variable rate debt. Premiums paid
on interest rate hedges are deferred and amortized to interest expense over the
term of the hedge contract.
Income taxes. Deferred tax assets and liabilities are generally determined
based on the difference between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. The current and
noncurrent portions of these deferred tax assets and liabilities are classified
in the balance sheet based on the respective classification of the assets and
liabilities which give rise to such deferred income taxes.
Earnings per share. In the fourth quarter 1997, the Company adopted the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share ("EPS")", issued in February
1997. Under SFAS 128 basic EPS includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings of an entity. The Company has a
complex capital structure as defined under SFAS 128. Diluted weighted average
common shares includes potential common stock of approximately 323,000 and
160,000 shares for the years ended December 31, 1998 and 1997. The Company had
losses from continuing operations in 1996. Accordingly, potential common stock
has been excluded from weighted average share computations for that year because
inclusion would have been anti-dilutive.
Fair value of financial instruments. The carrying value of financial
instruments, consisting primarily of cash, accounts receivable and accounts
payable, approximates fair value due to the liquid nature of the instruments.
(See Notes 5 and 11 for fair value estimates of notes receivable and long-term
debt.)
Stock based compensation plans. Stock-based compensation is recognized
using the intrinsic value method. For disclosure purposes (see Note 13), pro
forma earnings and earnings per share data are provided as if the fair value
method had been applied.
Reclassifications. Certain reclassifications have been made to the 1997 and
1996 amounts to conform to the 1998 presentation. The Company reorganized its
reportable segments in 1998 to reflect changes in the management organization
and how the related financial information is used internally to monitor and
evaluate segment performance and resource allocation. The gaming operations
reporting segment was created and includes operating and financial position
information from the Company's
-10-
<PAGE>
Montana route operations and the Company's racetrack operations in Sunland Park,
New Mexico. Previously, the route operations were included with the gaming
machines and systems segment and racetrack operations were included in
pari-mutuel systems segment data.
Accounting pronouncements not yet adopted. In April 1998, the American
Institute of Certified Public Accountants' Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-up Activities," which requires that start-up costs and organization costs
be expensed as incurred under certain circumstances. This statement is effective
for fiscal years beginning after December 15, 1998, with early application
permitted. The Company will adopt SOP 98-5 beginning January 1, 1999.
Accordingly, certain start-up costs incurred prior to January 1, 1999 will then
be charged to expense as a cumulative effect of a change in accounting principle
(net of tax effects), and subsequently such start-up costs will be expensed as
incurred. At December 31, 1998, the Company had capitalized $0.4 million related
to the start-up of its Sunland Park Casino. Upon adoption of this statement,
approximately $0.2 million, net of related tax effects, will be charged to
expense.
The FASB, in June 1998, issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which 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,
1999, although earlier application is encouraged. The statement may not be
applied retroactively. The Company expects to adopt this statement effective
January 1, 1999, and does not expect adoption to have a material effect on
either its financial position or results of operations.
Management estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Information. In June 1997, the FASB issued Statement of Financial
Accounting Standards Number 131 (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes 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 establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company adopted SFAS No. 131 for the year ended December 31, 1997. The
adoption did not affect the Company's historical presentation of segment data;
however, in 1998, the operating segments were reorganized to reflect management
and other organizational changes within the Company. The reorganization included
combining the route operations and racetrack operations into the gaming
operations segment. Prior to the reorganization, the route and racetrack
operations were included in the gaming machines and systems and pari-mutuel
systems segments, respectively. The Company's casino operation in Sunland Park,
New Mexico will be included in the gaming operations segment upon start-up in
1999.
(2) BUSINESS SEGMENTS
The Company operates principally in four business segments: the sale,
design, manufacture, installation and operation of on-line lottery systems; the
design, manufacture, sale and leasing of video gaming machines and central
control systems and related services; gaming operations and the design,
manufacture, sale and operation of computerized pari-mutuel wagering systems for
dog and horse racing tracks.
-11-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Revenues:
Lottery systems $103,581 94,771 88,843
Gaming machines and systems 53,593 58,286 44,722
Pari-mutuel systems 20,258 20,194 20,499
Gaming operations 24,327 24,361 23,707
Less intercompany revenues (608) (677) (1,090)
-------- ------- -------
Total revenues $201,151 196,935 176,681
======== ======= =======
Operating profit (loss):
Lottery systems $15,340 4,896 (29,449)
Gaming machines and systems 3,145 9,111 7,954
Pari-mutuel systems 194 463 (1,975)
Gaming operations (686) (338) (541)
General corporate expenses (8,829) (7,866) (6,826)
Intercompany profit 407 250 547
-------- ------- -------
Total operating profit (loss) $ 9,571 6,516 (30,290)
======== ======= =======
Operating profit (loss) before "other charges":
Lottery systems $ 15,340 4,896 1,623
Gaming machines and systems 3,145 9,111 7,954
Pari-mutuel systems 194 463 1,088
Gaming operations (686) (338) (541)
General corporate expenses (8,829) (7,866) (6,826)
Intercompany profit 407 250 547
-------- ------- -------
Total operating profit before "other charges" $ 9,571 6,516 3,845
======== ======= =======
Capital expenditures:
Lottery systems $17,253 1,043 16,271
Gaming machines and systems 1,496 825 4,724
Pari-mutuel systems 3,720 4,084 3,149
Gaming operations 4,609 669 1,391
Corporate 1,416 548 403
Less intercompany step-up in basis (38) (192) (416)
-------- ------- -------
Total capital expenditures $ 28,456 6,977 25,522
======== ======= =======
Depreciation and amortization:
Lottery systems $ 10,290 12,509 14,248
Gaming machines and systems 2,657 3,328 3,851
Pari-mutuel systems 4,332 3,869 3,922
Gaming operations 2,032 2,159 2,221
Corporate 834 563 501
Less depreciation on intercompany step-up basis (444) (433) (921)
-------- ------- -------
Total depreciation and amortization $ 19,701 21,995 23,822
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Identifiable assets:
Lottery systems $ 58,030 46,380 62,350
Gaming machines and systems 52,107 49,935 38,417
Pari-mutuel systems 22,357 21,527 19,982
Gaming operations 29,106 28,401 29,949
Corporate 27,937 16,621 19,067
Less intercompany step-up in basis (1,062) (1,467) (1,722)
-------- ------- -------
Total identifiable assets $188,475 161,397 168,043
======== ======= =======
</TABLE>
-12-
<PAGE>
Operating profit (loss) before "other charges" excludes special and other
charges discussed in Note 14.
A summary of revenues and related direct costs of revenues follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Revenues:
Services $139,559 128,136 126,543
Tangible products 53,186 57,752 39,438
Lease 8,406 11,047 10,700
-------- ------- -------
$201,151 196,935 176,681
======== ======= =======
Costs of revenues:
Services $90,298 89,430 86,864
Tangible products 34,411 37,551 25,484
Lease 524 --- ---
-------- ------- -------
$125,233 126,981 112,348
======== ======= =======
Gross profit:
Services $41,713 38,706 39,679
Tangible products 26,323 20,201 13,954
Lease 7,882 11,047 10,700
-------- ------- -------
$75,918 69,954 64,333
======= ======= =======
</TABLE>
Gross profit for each segment is herein defined as revenues for that
segment less the corresponding costs and expenses (excluding depreciation and
amortization expense and any special or other charges).
(3) REVENUE CONCENTRATION
The Company derives its revenues from equipment and system sales and
services to customers primarily in jurisdictions that have enacted governmental
legislation and/or regulatory controls over various types of gaming and wagering
activities. The Company recorded revenues from customers or distributors within
a specific gaming or wagering jurisdiction, subject to governmental legislation,
which accounted for more than 10% of the Company's consolidated revenues as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Florida $29,273 31,528 30,203
Pennsylvania 22,639 23,042 23,164
Montana 23,449 23,434 22,458
======= ====== ======
</TABLE>
Revenues from the lottery and pari-mutuel systems segments of the company
are primarily derived from contracts with terms up to ten years with varying
options for extensions and renewals.
Montana revenue includes total revenues from route operations of
approximately $17.4 million in 1998, $17.7 million in 1997, and $16.5 million in
1996.
Export Sales. The Company had total export sales from the United States of
approximately $22.9 million, $37.0 million and $28.6 million during the years
ended December 31, 1998, 1997 and 1996, respectively.
-13-
<PAGE>
(4) NOTES AND ACCOUNTS RECEIVABLE
A summary of receivables follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Trade $22,647 26,946
Notes receivable 16,403 5,964
------- ------
39,050 32,910
Less allowance for doubtful accounts (1,036) (1,332)
------- ------
$38,014 31,578
======= ======
</TABLE>
The Company finances sales of gaming and pari-mutuel systems equipment
to certain customers meeting minimum credit standards. Installment notes bear
interest at rates up to 18% and mature from one to nine years. The Company
estimates the fair value of gross notes receivable at December 31, 1998 to
approximate carrying value of the associated notes receivable. This estimate
is based on current discount rates for instruments of similar credit quality
available in the secondary market.
At December 31, 1998, approximately 14% of the Company's receivables were
from various governments or their designated agencies.
Amounts charged to expense for estimated bad debts were approximately $0.3
million, $0.1 million and $0.2 million in the years ended December 31, 1998,
1997 and 1996, respectively. The Company wrote off previously reserved doubtful
accounts of approximately $0.5 million, $0.1 million and $2.1 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
(5) INVENTORIES
A summary of inventories, net of valuation reserves, follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(000s) (000s)
<S> <C> <C>
Manufacturing:
Raw materials $ 6,497 6,703
Work-in-process 1,166 662
Finished goods 9,604 7,427
Customer service and other 1,363 1,150
------- ------
$18,630 15,942
======= ======
</TABLE>
The Company had reserves for inventories of approximately $4.0 million and
$8.2 million at December 31, 1998 and 1997, respectively, primarily related to
finished goods. The Company charged to expense approximately $0.3 million, $.1
million and $18.0 million in the years ended December 31, 1998, 1997 and 1996,
respectively, for reserves and impairments of inventories. Of these charges,
$18.0 million in the year ended December 31, 1996 related to the termination of
three on-line lottery projects for which inventory was specifically procured.
Inventory reserves were reduced by $4.5 million, $6.1 million and $9.0
million in the years ended December 31, 1998, 1997 and 1996, respectively, as
the applicable inventories were sold or otherwise disposed of. At December 31,
1998 and 1997, respectively, inventories included approximately 700 and 600
finished video gaming machines located in various casino gaming locations, under
trial arrangements with customers.
-14-
<PAGE>
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Lottery and pari-mutuel equipment systems $125,623 107,729
Land, buildings and improvements 19,085 14,669
Machinery and equipment 12,464 6,906
Gaming equipment 18,831 20,267
Furniture and fixtures 2,736 2,503
-------- -------
Total 178,739 152,074
-------- -------
Less accumulated depreciation (102,384) (88,914)
-------- --------
$ 76,355 63,160
======== =======
</TABLE>
In 1997 the Company transferred to inventory, gaming equipment with a net
book value of approximately $2.2 million, due to the expiration of lease
agreements. In 1996, the Company transferred on-line lottery equipment with a
net book value of approximately $2.4 million to inventories in conjunction with
the termination of an on-line lottery contract. Other additions to gaming
equipment and on-line lottery equipment in the three-years ended December 31,
1998, are included in the Consolidated Statements of Cash Flows as expenditures
on property and equipment.
Gaming equipment at December 31, 1998 and 1997 includes video gaming
machines with an aggregate cost of approximately $10.9 million and $13.4
million, respectively, and a carrying value of approximately $5.4 million and
$7.8 million, respectively, which are under lease or revenue sharing agreements
with customers. For the years ended December 31, 1998, 1997 and 1996,
depreciation expense on this equipment was approximately $1.7 million, $2.3
million and $2.8 million, respectively. Two lease agreements provide rent
payments to the Company based on a percentage of net gaming receipts. One of the
two agreements is on a month-to-month basis and the other is for a five-year
period ending in December 2000 with provisions for three one-year extensions.
Another agreement is a master lease whereby terminal lease terms are for one
year, with four consecutive automatic one-year renewals with decreasing lease
payments, with an option by the lessee to terminate the lease at the end of each
such year. Future lease receipts, by the Company, under the contractual lease
agreements, assuming renewals, based on the terminals delivered through December
31, 1998, are approximately as follows:
<TABLE>
<CAPTION>
Year ending December 31, (000s)
<S> <C>
1999 $3,400
2000 2,713
2001 386
------
$6,499
======
</TABLE>
(7) INTANGIBLE AND OTHER ASSETS
A summary of intangible and other assets, net of amortization, follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Software development costs $ 7,606 8,849
Deferred costs 9,513 2,470
------- ------
$17,119 11,319
======= ======
</TABLE>
The Company capitalized approximately $1.0 million and $4.1 million of
software development costs in the years ended December 31, 1997 and 1996,
respectively. No costs were capitalized in 1998. The costs are primarily related
to the development of the MasterLink(TM) system.
-15-
<PAGE>
Deferred costs include the costs of implementing and installing lottery and
pari-mutuel systems used to provide services under long-term contracts. These
costs are amortized over the lives of the related contracts.
Total amortization expense of intangible and other assets (including
Goodwill) was approximately $2.8 million, $3.7 million and $4.2 million in 1998,
1997 and 1996, respectively. Amortization of software development costs,
included in total amortization expense, was approximately $1.2 million, $1.5
million and $1.3 million in 1998, 1997 and 1996, respectively.
(8) LEASE OBLIGATIONS
The Company has noncancelable operating leases for office space, equipment
and vehicles which expire at various dates over the next eleven years. Future
minimum lease payments under noncancelable operating leases as of December 31,
1998, are approximately as follows:
<TABLE>
<CAPTION>
Year ending December 31, (000s)
------------------------
<S> <C>
1999 $4,625
2000 3,770
2001 3,020
2002 2,368
2003 2,009
Thereafter 8,567
</TABLE>
In 1998, 1997 and 1996, rental expense was approximately $5.0 million, $4.7
million and $0.8 million, respectively.
(9) ACCRUED EXPENSES
A summary of accrued expenses follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Labor and benefits $ 8,191 5,911
Deferred revenue and estimated costs to complete
long-term contract obligations 880 4,835
Other, combined 8,777 10,959
------- ------
$17,848 21,705
======= ======
</TABLE>
Contracts involving a substantial construction component are recorded as
long-term contracts, and associated revenues are recognized on either the
percentage of completion or completed contract method. Included within Accrued
Expenses in the Company's consolidated balance sheets are the following balances
related to such contracts in process:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts $2,124 ---
Billings in excess of costs and estimated earnings
on uncompleted contracts (2,162) (2,936)
------ ------
$ (38) (2,936)
====== ======
</TABLE>
-16-
<PAGE>
(10) LONG-TERM DEBT
A summary of long-term debt, including capitalized lease obligations,
follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Variable rate term loan (8.04% at December 31, 1998), quarterly
payments of $62,500 through 2004, remaining balance due
December 2004 $24,938 ---
Variable rate term loan (7.54% at December 31, 1998), quarterly
payments increasing from $625,000 to $3,125,000 through
September 2003 24,375 ---
Notes payable paid in October 1998 --- 30,303
8.25% note payable in monthly installments including interest,
through September 2001 4,240 4,940
4.95% to 10.4% various notes and capital lease obligations, due
in monthly installments of $4,189 to $40,448 including
interest maturing through February 2004 2,657 584
------- ------
56,210 35,827
Less current installments 4,445 4,381
------- ------
Long-term debt, excluding current installments $51,765 31,446
======= ======
</TABLE>
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31, (000s)
<S> <C>
1999 $ 4,445
2000 5,661
2001 5,743
2002 6,568
2003 10,033
Thereafter 23,760
-------
$56,210
=======
</TABLE>
Cash paid for interest (including capitalized interest) was approximately
$4.6 million, $2.0 million and $2.6 million for the years ended December 31,
1998, 1997 and 1996, respectively. In 1998 the Company capitalized interest of
$0.5 million during construction of capital assets.
Based on interest rates currently available to the Company for borrowings
with similar terms and maturities, the fair value of long-term debt at December
31, 1998 approximates carrying value.
In October 1998, the Company completed negotiations for a $100.0 million
credit facility. The credit facility replaced an existing credit facility and,
among other things, provides for two $25.0 million term loans maturing in five
and six years, respectively, and a revolving line of credit for $50.0 million
expiring September 30, 2003. The credit facility is secured by stock of certain
subsidiaries, inventories, receivables, equipment, intellectual and other
property of the Company. At the Company's option, the credit facility bears
interest at a Base Rate approximating prime or LIBOR plus an applicable margin
percentage. The margin percentage above the LIBOR rate may fluctuate between
1.75% and 2.75% depending on the Company's consolidated leverage ratio as
defined in the credit facility agreements (collectively referred to as the
"Credit Agreement"). The Company may utilize up to $15.0 million of the $50.0
million revolving line of credit to collateralize its bonding program.
Contractual obligations at December 31, 1998 required approximately $8.5 million
in outstanding letters of credit. The Company purchased a 30-month interest rate
swap which caps the base rate interest rate on one of the $25 million
-17-
<PAGE>
term loans at 8.5%. Such cap expires 2001. The credit facility carries customary
restrictive covenants including but not limited to minimum leverage and cash
flow ratios, limitations on domestic and foreign capital investments,
restrictions on change in control, restrictions on payments of dividends,
maintenance of minimum consolidated net worth, limitations on additional debt,
liens and asset dispositions. Upon closing, in October, the Company advanced on
the two $25.0 million term loans. The proceeds were used to pay off existing
debt of approximately $27.9 million and provide capital for existing
commitments. At December 31, 1998 the Company had $42.5 million available under
the revolving line of credit.
(11) INCOME TAXES
Income tax expense (benefit) from operations consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Current:
Federal $ --- 343 (3,533)
State 14 1,281 70
Foreign (126) (14) ---
------ ----- ------
(112) 1,610 (3,463)
------ ----- ------
Deferred:
Federal 2,762 5,348 (3,614)
State 671 555 (1,602)
Foreign 84 33 (74)
------ ----- ------
3,517 5,936 (5,290)
------ ----- ------
3,405 7,546 (8,753)
Less tax expense on extraordinary items --- 8,681 ---
------ ----- ------
$3,405 (1,135) (8,753)
====== ===== ======
</TABLE>
The provision for income tax expense (benefit) differs from the amount
which would be provided by applying the Federal statutory income tax rate of 35%
to income or loss from continuing operations before extraordinary items and
before income taxes as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(000s) (000s) (000s)
<S> <C> <C> <C>
Computed expected tax expense (benefit) $2,793 1,276 (8,403)
Extraordinary gain --- 7,683 (1,345)
State taxes, net of Federal impact 445 1,193 (996)
Change in valuation reserve (229) (3,000) 1,582
Non-deductible expenses 343 281 219
Goodwill amortization 288 287 287
Other, net (235) (174) (97)
------ ----- ------
$3,405 7,546 (8,753)
====== ===== ======
</TABLE>
-18-
<PAGE>
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
(000s) (000s)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 407 507
Inventory reserves 1,585 3,237
Net operating loss carryforward and tax credits 9,174 7,867
Other 279 ---
Accrued liabilities 1,730 3,688
------- ------
Deferred tax assets 13,175 15,299
Less valuation reserve (3,626) (3,855)
------- ------
Net deferred tax assets 9,549 11,444
------- ------
Deferred tax liabilities:
Property and equipment, principally depreciation (8,376) (9,367)
Deferred costs (5,271) (3,202)
Lease obligations --- 128
Other (181) 235
------- -------
Net deferred tax liabilities (13,828) (12,206)
------- -------
Net deferred income tax asset (liability) $(4,279 (762)
======= =======
</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. Management considers the
scheduled reversal of deferred tax liabilities, taxes paid in carryback years,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods the net deferred tax assets are
deductible, at December 31, 1998, management has a valuation reserve established
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.
This valuation reserve is evaluated and adjusted as facts and circumstances
affecting the Company's tax situation evolve and the likelihood of recovery of
deferred tax assets changes. During the fourth quarter of 1997 the valuation
reserve was adjusted as a result of the Company's 1997 cumulative earnings
substantiating that it is more likely than not that a portion of the deductible
differences will be realized.
The Tax Reform Act of 1986 expanded the corporate alternative minimum tax
(AMT). Under the Act, the Company's tax liability is the greater of its regular
tax or the AMT. The Company is subject to the AMT primarily due to depreciation
limitations for AMT purposes. The AMT that is actually paid will potentially be
allowed as a credit against regular tax in the future to the extent future
regular tax expense exceeds AMT. At December 31, 1998, the Company had
approximately $1.1 million of estimated AMT credit carryforwards. In addition,
at December 31, 1998, the Company had approximately $13.5 million of net
operating loss carryforwards primarily for Federal regular income tax purposes
which expire in 2011.
Net cash received from prior period refunds was approximately $0.2 million
in 1998, $1.9 million in 1997 and $2.4 million in 1996.
(12) EXTRAORDINARY ITEMS
In 1994, Electronic Data Systems Corporation ("EDS") purchased 545,454
shares of the Company's Common Stock and 1,912,728 shares of the Company's
Series A Junior Preferred Stock ("Series A Preferred Stock"). Additionally, the
Company entered into an agreement with EDS which, among other things, called for
EDS to provide to the Company enhanced computing, communications, system and
engineering and field maintenance services under the lottery systems contracts.
In 1996, the Company withheld certain payments to EDS due to EDS performance
issues and related on-line lottery customer disputes. In mid-1996 the contract
with EDS was terminated and EDS filed a complaint against the Company seeking
payment of outstanding fees. On January 30, 1997, the Company and EDS settled
-19-
<PAGE>
all claims against each other. The settlement resulted in a net of taxes
extraordinary gain on debt extinguishment of approximately $13.3 million ($1.29
and $1.26 per basic and diluted share, respectively) for the Company. The terms
of the settlement included the redemption by the Company of all of the Common
and Series A Preferred Stock owned by EDS, the transfer to the Company of
certain assets used in the provision of EDS services to on-line lottery
customers and the extinguishment of approximately $38.0 million of outstanding
fees in exchange for a note payable with a present value of $26.1 million. The
note was paid in October 1998. The transition of the EDS services and related
employees to the Company was completed in 1997.
The Company paid or accrued approximately $81.6 million to EDS for costs
and expenses in 1996. Of those costs and expenses approximately $5.1 million
were capitalized primarily in conjunction with software development and deferred
start-up costs in 1996.
In 1994, the Company completed the purchase of all of the outstanding stock
of United Wagering Systems, Inc. ("UWS"). During 1995, the Company did not pay
principal and interest obligations under the terms of the promissory notes to
the sellers because of disputes related to the acquisition. In March 1996, the
Company effected a settlement agreement resulting in a net of taxes
extraordinary gain of $4.0 million ($.37 per basic and diluted share) gain on
debt extinguishment.
In the fourth quarter 1995, the Company made a decision to sell UWS,
exclusive of the racetrack in Sunland Park, New Mexico. The Company entered into
a non-binding letter of intent in the fourth quarter 1995 for the sale of this
segment; however, this transaction was abandoned because final terms could not
be negotiated. The Company continued to review other potential opportunities for
the sale of this operation through the second quarter 1996; however, due to
operational improvements and industry and market conditions, the Company decided
to no longer actively pursue the disposal of the wagering systems segment.
Accordingly, the results of operations of the wagering systems segment have been
reclassified to continuing operations. The estimated provision for loss on
disposal of approximately $5.5 million ($.52 per basic and diluted share),
recorded in 1995, was reversed in the third quarter of 1996.
(13) BENEFIT PLANS
The Company's 1994 Stock Incentive Plan (the "Plan") provides for the
granting of options, stock appreciation rights, restricted stock, performance
units and performance shares to employees, consultants and advisors of the
Company and the granting of options to non-employee directors of the Company
(collectively or individually, "Awards). The total number of shares authorized
for issuance under the Plan to 1,500,000. At December 31, 1998, the remaining
number of shares available for issuance under the Plan was approximately
163,000.
Options granted under the Plan are designated as either incentive stock
options or as non-incentive stock options. The term of an option may not exceed
10 years from the date the option is granted or 15 years in the case of certain
non-incentive stock options.
In February 1993, the Board of Directors adopted a Non-Employee Stock
Option Plan whereby non-employee directors of the Company elected or appointed
after January 1, 1993 shall receive a one-time grant of options to acquire
20,000 shares of Common Stock. The exercise, pricing, vesting, duration and all
other terms and conditions applicable to each option granted under the
Non-Employee Stock Option Plan shall be in accordance with the provisions of the
1992 Stock Incentive Plan.
All options currently outstanding are 100% exercisable no later than 4
years after grant date.
-20-
<PAGE>
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Year ended December 31, 1996
Outstanding, beginning of year 919,782 11.45
Granted 352,500 4.78
Exercised --- ---
Cancelled (348,693) 11.74
---------
Outstanding, end of year 923,589 8.76
=========
Exercisable, end of year 547,749 9.67
=========
Year ended December 31, 1997
Granted 232,000 5.58
Exercised (26,698) 7.23
Cancelled (126,208) 8.95
---------
Outstanding, end of year 1,002,683 8.04
=========
Exercisable, end of year 644,011 8.96
=========
Year ended December 31, 1998
Granted 286,000 11.65
Exercised (29,165) 5.40
Cancelled (44,854) 10.62
---------
Outstanding, end of year 1,214,664 8.86
=========
Exercisable, end of year 828,645 8.73
=========
</TABLE>
Information regarding options outstanding and exercisable at December 31,
1998, follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of ----------------------------------------------- -------------------------
Exercise Weighted Average Weighted Average Weighted Average
Price Shares Exercise Price Remain Life (Yrs) Shares Exercise Price
-------- ------ ---------------- ----------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$3.00 - 5.00 268,301 $4.09 8.0 210,291 $4.17
$5.00 - 10.00 444,168 7.69 6.7 347,159 8.05
$10.00 - 15.00 460,195 12.10 7.5 229,195 12.60
$15.00 - 28.00 42,000 16.23 5.5 42,000 16.23
--------- -------
1,214,664 7.2 828,645
========= === =======
</TABLE>
A stock purchase plan was established in 1991, which is available to all
permanent full-time employees. The Stock Purchase Plan provides for the purchase
of the Company's Common Stock through payroll deductions of up to 3% of an
employee's current compensation. In addition, the Company may make cash
contributions to each employee's stock purchase account in an amount up to 50%
of each payroll deduction credited to the account. In 1997, an additional
500,000 shares were authorized by a vote of stockholders bringing the total
number of shares authorized for issuance under the Stock Purchase Plan to
700,000. Under the Stock Purchase Plan, the Company will offer to sell shares of
its Common Stock at the end of each one year period (the "Purchase Period"),
which begins January 1 and ends December 31 of each year. Shares will be
purchased at the lesser of 85% of the fair market value of the Company's Common
Stock on the first or last day of the Purchase Period. There were 97,997 shares
at $9.99 per share purchased in January of 1999 for the 1998 Purchase Period;
132,524 shares at $3.35 per share purchased in January of 1998 for the 1997
Purchase Period; and 117,075 shares at $2.98 per share purchased in January of
1997 for the 1996 Purchase Period. Under the Stock Purchase Plan, the Company
contributed approximately $322,000, $149,000 and $117,000 for 1998, 1997 and
1996, respectively. Remaining authorized shares available for issuance under the
plan were approximately 172,000 at December 31, 1998.
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock option and employee stock purchase
benefit plans. Accordingly, no compensation cost has been recognized in the
Company's consolidated statement of operations for options granted and shares
purchased under the plans. Had compensation cost for the options granted and the
shares of Common Stock issued under the Company's employee stock purchase plan
been determined based on the
-21-
<PAGE>
fair value at the grant dates for awards under the plans consistent with the
method of Financial Accounting Standards Board Statement 123, the Company's net
earnings (loss) and per share amounts would have been as reflected in the
pro-forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
(000s) (000s) (000s)
<S> <C> <C> <C>
Net earnings (loss) $3,060 17,637 (15,352)
------ ------ -------
------ ------ -------
Net earnings (loss) per share:
Basic $0.29 1.71 (1.44)
------ ------ -------
------ ------ -------
Diluted $0.28 1.68 (1.44)
------ ------ -------
------ ------ -------
</TABLE>
The fair value of the options granted and shares issued under the Company's
employee stock purchase plans in the three years ending December 31, 1998 was
estimated using the Black-Scholes model with the following assumptions: dividend
yield of 0%; expected life of 4 years for 1998, 5 years for 1997 and 1996, and a
risk-free interest rate of 5.25% for 1998 and 6% for 1997 and 1996. The
volatility factors used for the pro-forma amounts are 206% for 1998, 129% for
1997 and 57% for 1996.
Employees aged 21 and above are eligible to participate in the Company's
401(K) employee savings plan the first of the month after hire (or after one day
of service). Employer contributions are discretionary under the plan. Employer
contributions under the plan were approximately $783,000 in 1998, $607,000 in
1997and $237,000 in 1996.
(14) OTHER CHARGES
In 1996 the Company recorded approximately $34.1 million of special charges
for restructuring costs and asset impairments, consisting of $31.0 million
related to the on-line lottery segment and approximately $3.1 million related to
the wagering systems segment as discussed in Note 12.
(15) COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain of its executive
officers that provide for lump sum severance payments and accelerated vesting of
options and restricted stock upon termination of employment under certain
circumstances or a change in control, as defined.
The Company is obligated to provide services and/or equipment under certain
of its contracts. In addition, the various state on-line lottery and video
gaming contracts contain provisions under which the Company may be subject to
monetary penalties for central computer downtime, terminal failures, delays in
servicing inoperable terminals within specified time periods and ticket stock
shortages among other things. The Company accrues any net losses in fulfilling
the terms of these contracts when the loss is probable and can be reasonably
estimated (see Note 14).
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At December 31, 1998, the Company had collateral in
support of the various bonds outstanding consisting of $1.2 million of
restricted deposits and $7.5 million of irrevocable standby letters of credit.
Should the Company fail to meet contractually specified obligations during the
contract term, the lottery authority may assess damages and exercise its right
to collect on the applicable bond. The Company has had disputes with customers
over implementation schedules, deliverables and other issues. The Company works
with these customers to resolve these differences; however, should the Company
be unable to resolve any disputes in a mutually satisfactory manner, the Company
may suffer negative consequences in its relationships with these and other
customers and its pursuit of future business. The ultimate cost to the Company
of such damages (if any) would be net of its claims under risk management
policies in effect as appropriate.
-22-
<PAGE>
The recovery of a significant amount of the Company's investment in the
racetrack operations in Sunland Park, New Mexico is largely contingent upon the
success of gaming at the racetrack. The Company's investment in the racetrack
operations is approximately $23.4 million and current plans call for
approximately $3 million to $4 million of additional expenditures for facility
enhancements, gaming machines and related equipment.
A significant percentage of the Company's consolidated revenues are derived
from sales to customers in jurisdictions that have enacted legislation
permitting various types of gaming. Such enacted legislation may change due to
political and economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
International sales denominated in foreign currencies accounted for
approximately $9.2 million or 4.3% of the Company's consolidated revenues in
1998, $20.3 million or 10% of consolidated revenues in 1997 and $16.6 million or
9% of consolidated revenues in 1996. Management can give no assurances that
changes in currency and exchange rates will not materially affect the Company's
revenues, costs, cash flows and business practices and plans. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
delays in receiving payments on accounts receivable balances, reimbursement
approvals (both governmental and private), difficulties in managing
international operations, potentially adverse tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws and regulations. In addition, the Company's foreign operations
would be affected by general economic conditions in the international markets in
which the Company does business, such as a prolonged economic downturn in Europe
or the Asian-Pacific region. There can be no assurances that such factors will
not have a material adverse effect on the Company's future international
revenues and, consequently, on the Company's business, financial condition,
results of operations or cash flows. The Company has not historically attempted
to hedge the risks of fluctuating exchange rates given the currencies involved
and the terms of payment granted to its customers.
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. The case is in discovery and the
Company intends to continue to vigorously defend the action. The Company cannot
reasonably predict the ultimate outcome of this litigation.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other matters
will not have a material adverse effect on its consolidated financial position
or results of operations.
-23-
<PAGE>
<TABLE>
<CAPTION>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(in thousands except for per share data)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Lottery systems $26,038 29,264
Gaming machines and systems 15,785 9,924
Gaming operations 9,031 6,848
Pari-mutuel systems 4,486 4,194
------- ------
Total revenues 55,340 50,230
------- ------
COSTS OF REVENUES:
Lottery systems 16,123 19,107
Gaming machines and systems 8,237 4,798
Gaming operations 7,087 5,853
Pari-mutuel systems 2,997 2,894
------- ------
Total costs of revenues 34,444 32,652
------- ------
Gross profit 20,896 17,578
OTHER OPERATING EXPENSES:
Selling, general and administrative 9,835 8,526
Research and development 2,396 2,565
Depreciation and amortization 5,242 4,820
Other charges 1,328 ---
------- ------
Earnings from operations 2,095 1,667
------- ------
OTHER INCOME (EXPENSE):
Interest and other income 527 368
Interest expense (1,017) (790)
------- ------
Other expense, net (490) (422)
------- ------
Earnings before income taxes and accounting change 1,605 1,245
Income tax expense (994) (632)
------- ------
Earnings before cumulative effect of accounting change 611 613
Cumulative effect of change in accounting principle,
net (235) ---
------- ------
Net earnings $ 376 613
------- ------
------- ------
SHARE INFORMATION, BASIC AND DILUTED:
Earnings before accounting change $ 0.06 0.06
Effect of accounting change (0.02) ---
------ ----
Net earnings $ 0.04 0.06
------- ------
------- ------
Weighted average shares:
Basic 10,550 10,467
Potential common stock (excluded if antidilutive) 544 405
------ ------
Diluted 11,094 10,872
------- ------
------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
-24-
<PAGE>
<TABLE>
<CAPTION>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(in thousands except for share data)
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,434 16,371
Restricted short-term deposits 169 1,992
Accounts receivable, net 25,215 21,786
Current installments of notes receivable, net 6,836 6,179
Inventories 19,602 18,630
Prepaid expenses 3,455 1,574
Deferred income taxes 9,597 9,549
-------- -------
Total current assets 72,308 76,081
Property and equipment, net 87,923 76,355
Restricted cash deposits 285 376
Notes receivable, excluding current installments 9,482 10,049
Goodwill, net 8,291 8,495
Intangible and other assets, net 19,636 17,119
-------- -------
$197,925 188,475
-------- -------
-------- -------
LIABILITIES
Current liabilities:
Current installments of long-term debt $ 5,530 4,445
Accounts payable 10,321 12,611
Accrued expenses 19,466 17,848
-------- -------
Total current liabilities 35,317 34,904
Long-term debt, excluding current installments 59,500 51,765
Deferred income taxes 14,618 13,828
-------- -------
Total liabilities 109,435 100,497
-------- -------
Commitments and contingencies (see note 7)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued --- ---
Common stock, $.01 par value. Authorized 25,000,000
shares 107 106
Paid-in capital 91,357 91,304
Deferred restricted stock compensation (733) (815)
Accumulated deficit (2,241) (2,617)
-------- -------
Total stockholders' equity 88,490 87,978
-------- -------
$197,925 188,475
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
-25-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except for share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Restricted Total
Common Common Stock Accumu- Stock-holders'
Stock Stock Paid-in Compen- lated Equity
Issued par value Capital sation Deficit
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 10,648,317 $106 91,304 (815) (2,617) 87,978
Net earnings --- --- --- --- 376 376
Shares
issued to directors 4,461 --- 62 --- --- 62
Amortization of
deferred
restricted stock
compensation --- --- --- 82 --- 82
Stock options
exercised and shares
issued under
employee stock
purchase plan 59,412 1 574 --- --- 575
Stock redemptions (45,000) --- (583) --- --- (583)
---------- ---- ------ ---- ------ ------
March 31, 1999 10,667,190 $107 91,357 (733) (2,241) 88,490
---------- ---- ------ ---- ------ ------
---------- ---- ------ ---- ------ ------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 376 613
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,242 4,820
Cumulative effect of accounting change, net 235 ---
Other, net 228 135
Changes in operating assets and liabilities:
Receivables, net (3,519) 4,672
Inventories (793) (3,276)
Prepaid expenses (1,864) (219)
Accounts payable (2,290) (2,434)
Accrued expenses 1,700 (2,065)
Income taxes 899 624
------- ------
Net cash provided by operating activities 214 2,870
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on property and equipment (16,143) (2,493)
Expenditures on intangible and other
noncurrent assets (3,720) (115)
Proceeds from sales of equipment 78 97
Change in restricted cash deposits 1,914 241
------- ------
Net cash used in investing activities (17,871) (2,270)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 10,000 ---
Repayments of long-term debt (1,180) (2,489)
Payments of loan fees (92) ---
Proceeds from issuance of common stock 575 2,080
Redemption of common stock (583) ---
------- ------
Net cash provided by (used in) financing activities 8,720 (409)
------- ------
Net increase (decrease) in cash and cash equivalents (8,937) 191
Cash and cash equivalents, beginning of period 16,371 13,772
------- ------
Cash and cash equivalents, end of period $ 7,434 13,963
------- ------
------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Presentation
The consolidated financial statements include the accounts of
Powerhouse Technologies, Inc. and its subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have
been eliminated.
The Company has four business segments:
- Lottery systems includes the design, manufacture, sale,
installation and operation of on-line lottery systems. Revenues
are derived from the Company's AWI subsidiary.
- Gaming machines and systems includes the design, manufacture,
sale and leasing of video gaming machines and central control
systems and provision of related services. Revenues are generated
by the Company's VLC and VLC of Nevada subsidiaries.
- Gaming operations includes operating a casino, gaming machine
routes and racetrack. Revenues are generated at the Company's
Sunland Park Racetrack & Casino and through its Montana route
operations.
- Pari-mutuel systems includes the design, manufacture, sale and
operation of computerized pari-mutuel wagering systems used at
racetracks. Revenues are provided by the Company's United Tote
subsidiary.
The consolidated balance sheet as of March 31, 1999 and the
consolidated statements of earnings and cash flows for the three-month
periods ended March 31, 1999 and 1998 and the consolidated statement of
stockholders' equity for the three-month period ended March 31, 1999 have
been prepared by the Company, without audit. These financial statements
should be read in conjunction with the consolidated financial statements
and notes contained in the Company's 1998 Annual Report on Form 10-K. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows as of and for the periods indicated have been
made.
b. Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. Accounting pronouncements not yet adopted
Statement of Financial Accounting Standards No. 133 ("Statement 133"),
issued June 1998, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for
hedging activities. Statement 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 1999. Initial
application of it must be as of the beginning of an entity's fiscal
quarter. The Company expects to adopt this statement January 1, 2000; the
adoption is not expected to have a significant effect on the Company's
financial position, results of operation or cash flows.
2. OTHER CHARGES
The statement of earnings for the quarter ended March 31, 1999 includes
$1.3 million ($1.1 million or $0.10 per diluted share after tax) of charges
relating to the Company's proposed merger with Anchor
-28-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gaming and the startup of the Company's casino at its Sunland Park facility.
Costs related to the proposed merger consist primarily of professional fees,
while those associated with the casino startup include pre-opening costs from
January 1, 1999 through February 21, 1999. Approximately $0.9 million of the
other charges relate to the Company's proposed merger with Anchor Gaming, while
$0.2 million represent Sunland Park casino startup costs.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Pursuant to the required adoption of Statement of Position 98-5 (SOP 98-5),
the Company changed its method of accounting for startup costs. The change
required that startup costs be expensed as incurred rather than capitalized and
amortized to expense. This change resulted in the write-off of casino
pre-opening costs capitalized through December 31, 1998. The cumulative effect
of the write-off totals $235,000 or $0.02 per diluted share (after tax), and is
reflected in the accompanying statement of earnings. As discussed in Note 2,
costs incurred during 1999 were expensed as incurred. The adoption of SOP 98-5
would not have had a significant effect on net earnings or earnings per share
for the three months ended March 31, 1998; as such, pro forma results are not
presented.
4. INVENTORIES
A summary of inventory follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(000s) (000s)
<S> <C> <C>
Manufacturing:
Raw materials $ 6,802 6,497
Work-in-process 1,551 1,166
Finished goods 9,589 9,604
Customer service and other 1,660 1,363
------- ------
$19,602 18,630
------- ------
------- ------
</TABLE>
5. STOCKHOLDERS' EQUITY
During the quarter, the Company purchased 45,000 shares of its outstanding
stock pursuant to a stock buyback authorized by the Company's Board of Directors
in 1998; such shares were cancelled.
6. SEGMENT DATA
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
(000s) (000s)
<S> <C> <C>
Segment revenues:
Lottery systems $26,038 29,264
Gaming machines and systems 15,855 10,041
Gaming operations 9,031 6,848
Pari-mutuel systems 4,591 4,316
------- ------
Total revenues 55,515 50,469
Less intercompany (175) (239)
------- ------
Consolidated revenues $55,340 50,230
------- ------
------- ------
</TABLE>
-29-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
(000s) (000s)
<S> <C> <C>
Earnings from operations before other charges:
Lottery systems $ 3,579 3,211
Gaming machines and systems 2,320 914
Gaming operations 392 (90)
Pari-mutuel systems (394) (372)
------- ------
Reportable segments' earnings from
operations before other charges 5,897 3,663
Corporate expenses (2,474) (1,996)
------- ------
Consolidated earnings from operations
before other charges $ 3,423 1,667
------- ------
------- ------
Earnings from operations including other charges:
Lottery systems 3,579 3,211
Gaming machines and systems 2,320 914
Gaming operations (42) (90)
Pari-mutuel systems (394) (372)
------- ------
Reportable segments' earnings from
operations including other charges 5,463 3,663
Corporate expenses (3,368) (1,996)
------- ------
Consolidated earnings from operations
including other charges $ 2,095 1,667
------- ------
------- ------
March 31, December 31,
1999 1998
---- ----
(000s) (000s)
Segment assets:
Lottery systems $ 72,158 57,880
Gaming machines and systems 53,872 52,107
Gaming operations 30,779 28,194
Pari-mutuel systems 22,430 22,357
-------- -------
Reportable segments' assets 179,239 160,538
Corporate assets 18,686 27,937
-------- -------
Consolidated assets $197,925 188,475
------- ------
------- ------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain of its executive
officers that provide for lump sum severance payments and accelerated vesting of
options and restricted stock upon termination of employment under certain
circumstances or a change in control, as defined. The Company's proposed merger
constitutes a change in control as defined in certain of the employment
agreements as well as in certain stock incentive and incentive compensation
arrangements.
The Company is obligated to provide services and/or equipment under certain
of its contracts. In addition, the various state on-line lottery and video
gaming contracts contain provisions under which the Company may be subject to
monetary penalties for central computer downtime, terminal failures, delays in
servicing inoperable terminals within specified time periods and ticket stock
shortages among other things. The Company accrues any net losses in fulfilling
the terms of these contracts when the loss is probable and can be reasonably
estimated.
-30-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At March 31, 1999, the Company had collateral in
support of the various bonds outstanding consisting of $7.5 million of
irrevocable standby letters of credit. Should the Company fail to meet
contractually specified obligations during the contract term, the lottery
authority may assess damages and exercise its right to collect on the applicable
bond. An additional $1.0 million in letters of credit is outstanding related to
supplier and rental contracts entered into in the ordinary course of business.
The Company has had disputes with customers over implementation schedules,
deliverables and other issues. The Company works with these customers to resolve
these differences; however, should the Company be unable to resolve any disputes
in a mutually satisfactory manner, the Company may suffer negative consequences
in its relationships with these and other customers and its pursuit of future
business. The ultimate cost to the Company of such damages (if any) would be net
of its claims under risk management policies in effect as appropriate.
A significant percentage of the Company's consolidated revenues are derived
from sales to customers in jurisdictions that have enacted legislation
permitting various types of gaming. Such enacted legislation may change due to
political and economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
International sales denominated in foreign currencies accounted for
approximately $9.2 million or 4.3% of the Company's consolidated revenues in
1998. Management can give no assurances that changes in currency and exchange
rates will not materially affect the Company's revenues, costs, cash flows and
business practices and plans. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, delays in receiving
payments on accounts receivable balances, reimbursement approvals (both
governmental and private), difficulties in managing international operations,
potentially adverse tax consequences, restrictions on repatriation of earnings
and the burdens of complying with a wide variety of foreign laws and
regulations. In addition, the Company's foreign operations would be affected by
general economic conditions in the international markets in which the Company
does business, such as a prolonged economic downturn in Europe or the
Asian-Pacific region. There can be no assurances that such factors will not have
a material adverse effect on the Company's future international revenues and,
consequently, on the Company's business, financial condition, results of
operations and cash flows. The Company has not historically attempted to hedge
the risks of fluctuating exchange rates given the currencies involved and the
terms of payment granted to its customers.
The Year 2000 issue is pervasive and complex. Virtually every information
technology ("IT") system, including the Company's internal systems, systems
delivered to customers, and suppliers' systems, as well as non-IT systems will
be affected in some way by the rollover of the two-digit year value to "00".
Non-IT systems include manufacturing systems and physical facilities including,
but not limited to, security systems and utilities. The result could create
errors in information or system failures. Recognizing this uncertainty,
management has and is continuing to actively analyze, assess and plan for
various Year 2000 issues. Management has appointed a task force that reports
periodically to the Company's CEO and Board of Directors, and has also engaged
outside consultants to assist and advise management in this assessment process.
The Company's Year 2000 team has completed an inventory of all of its
computer systems and technology that may be impacted by Year 2000 issues. The
programming and testing of mission critical systems, including those systems
delivered to customers or used in the provision of services to customers, is
complete and contingency plans have been developed. In calendar year 1999, the
Company plans to replace or upgrade the remaining systems that are identified as
non-Year-2000 compliant at an incremental cost of approximately $0.5 million.
Non-IT system issues are more difficult to identify and resolve. The Company is
actively identifying non-IT Year 2000 issues concerning its products and
services, as well as its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Although management believes that its
efforts will be successful and the costs will be immaterial to its consolidated
financial position and results of operations, it
-31-
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
also recognizes that any failure or delay could cause a disruption in its
business and may have a significant financial impact.
The Company has evaluated its strategy and legal obligations for any
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 resolve Year 2000 issues.
The Company is also assessing the Year 2000 readiness of its key suppliers.
The Company's direction in this effort is to ensure the adequacy of resources
and supplies to minimize any potential business interruptions. Management
expects to complete this part of its Year 2000 readiness plan in the second
quarter of 1999. As part of the Company's contingency plans, management will, as
considered necessary, begin to identify and communicate with alternative
suppliers to ensure the continuation of its critical business operations.
The Company believes that because of modifications already made and current
plans for additional modifications of existing computer systems, updates by
vendors and conversion to new software, the Year 2000 issue will not pose
significant operations problems for the Company. However, if such modifications
and conversions are not completed properly or in a timely manner, or third party
software and systems relied on by the Company fail, the Year 2000 issue could
have a material impact on the business and operations of the Company. The costs
of modifications and conversions are not anticipated to be material, and will
principally represent a re-deployment of existing or otherwise planned
resources. No assurance can be given that the Company will successfully avoid
any problems associated with the Year 2000 issue.
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. The case is in discovery and the
Company intends to continue to vigorously defend the action. The Company cannot
reasonably predict the ultimate outcome of this litigation.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other matters
will not have a material adverse effect on its consolidated financial position
or results of operations or liquidity.
-32-
<PAGE>
ANCHOR GAMING
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying pro forma consolidated condensed financial
statements present pro forma information for the Company and Powerhouse
giving effect to the acquisition of Powerhouse (the "Powerhouse Acquisition")
using the purchase method of accounting. The pro forma consolidated condensed
financial statements of the Company are based on the historical financial
statements of the Company and Powerhouse as of and for the periods described
below.
The accompanying pro forma consolidated condensed balance sheet as
of March 31, 1999 has been presented as if the Powerhouse Acquisition
occurred on March 31, 1999. The accompanying pro forma consolidated condensed
income statements for the nine months ended March 31, 1999 and the year ended
June 30, 1998 are presented as if the Powerhouse Acquisition occurred on July
1, 1998 and July 1, 1997, respectively.
Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the transaction. The pro forma
adjustments are based on currently available information and upon certain
assumptions that management of the Company believes are reasonable under the
circumstances. These assumptions are subject to change pending final
determination of fair value of the assets and liabilities acquired, actual
interest rates incurred on the Credit Facility, estimated lives of assets and
actual transaction costs incurred. Changes to the adjustments presented in
the pro forma financial statements are expected as the results of operations
of Powerhouse subsequent to March 31, 1999 will affect the allocation of the
purchase price.
Anchor's historical balance sheet as of March 31, 1999 and income
statement for the nine months ended March 31, 1999 are unaudited and the
historical income statement for the year ended June 30, 1998 is audited. The
historical balance sheet for Powerhouse as of March 31, 1999 is unaudited.
The historical income statement for the nine months ended March 31, 1999 and
year ended June 30, 1998 for Powerhouse is derived from both audited and
unaudited results of Powerhouse. Certain items in the historical financial
statements have been reclassified to conform to the presentation used in the
pro forma financial statements. The historical income statement of Powerhouse
for the nine months ended March 31, 1999 does not include $1.3 million of
non-recurring charges primarily related to the merger transaction.
The accompanying pro forma consolidated condensed financial
statements are provided for information purposes only and are not necessarily
indicative of the results that will be achieved for future periods. The
accompanying pro forma consolidated condensed financial statements do no
purport to represent what the Company's results of operations would actually
have been if the Powerhouse Acquisition in fact had occurred as of the dates
described above. The accompanying pro forma consolidated condensed financial
statements and the related notes thereto should be read in conjunction with
the both the Company's consolidated financial statements as filed with the
Securities and Exchange Commission including the Company's Form 10-K for the
year ended June 30, 1998 and the Company's Form 10-Q for the period ended
March 31, 1999 and with Powerhouse's consolidated financial statements as
filed with the Securities and Exchange Commission including Powerhouse's Form
10-K for the year ended December 31, 1998 and Powerhouse's Form 10-Q for the
period ended March 31, 1999.
This current report on Form 8-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. 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: risks of proprietary games
such as pressure from competitors; changes in economic conditions;
obsolescence; declining popularity of existing games; failure of new game
ideas or concepts to become popular; duplication by third parties and changes
in interest rates as they relate to the wide-area progressive machine
operations within the Company's joint venture with International Game
Technology; competition from other route and casino operators; competition
from other technology providers with new proprietary technology; dependence
on suppliers; changes in gaming regulations and taxes; changes in
international currency and exchange rates; dependence upon key personnel; and
other 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, 1998, Powerhouse's Form 10-K for the year ended December
31, 1998, and the Forms 10-Q for both companies for the past three fiscal
quarters.
-33-
<PAGE>
ANCHOR GAMING
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
MARCH 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Anchor Powerhouse Pro Forma Anchor
Historical Historical Adjustments Pro Forma
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,334 $ 7,434 $ 220,000 (a) $ 31,040
(220,698) (b)
(65,030) (c)
Accounts and notes receivable, net 7,900 32,051 39,951
Inventory 2,794 19,602 22,396
Prepaid expenses 2,007 3,455 (400) (b) 5,062
Deferred income taxes - 9,597 9,597
Other current assets 249 169 418
----------------------------------------------------- -----------------
Total current assets 102,284 72,308 (66,128) 108,464
Property and equipment, net 89,914 87,923 10,055 (b) 187,892
Goodwill, net 1,735 8,291 (8,291) (b) 115,721
113,986 (b)
Investments in unconsolidated affiliates 26,883 - 26,883
Intangible and other long-term assets, net 33,230 29,403 33,490 (b) 76,491
(18,032) (b)
(1,600) (b)
----------------------------------------------------- -----------------
Total assets $ 254,046 $ 197,925 $ 63,480 $ 515,451
===================================================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,634 $ 10,321 $ 14,955
Current portion of long-term debt - 5,530 (5,530) (c) -
Other current liabilities 19,658 19,466 9,500 (b) 48,624
----------------------------------------------------- -----------------
Total current liabilities 24,292 35,317 3,970 63,579
Long-term debt, net of current portion - 59,500 220,000 (a) 220,000
(59,500) (c)
Other long-term liabilities - 14,618 5,000 (b) 19,618
Minority interest 1,250 - 1,250
----------------------------------------------------- -----------------
Total liabilities 25,542 109,435 169,470 304,447
----------------------------------------------------- -----------------
Stockholders' equity:
Preferred stock - -
Common stock 138 107 (107) (b) 138
Additional paid-in capital 114,887 91,357 (91,357) (b) 114,887
Treasury stock at cost (85,585) - (85,585)
Retained earnings (accumulated deficit) 199,064 (2,974) 2,974 (b) 181,564
(17,500) (b)
----------------------------------------------------- -----------------
Total stockholders' equity 228,504 88,490 (105,990) 211,004
----------------------------------------------------- -----------------
Total liabilities and stockholders' equity $ 254,046 $ 197,925 $ 63,480 $ 515,451
===================================================== =================
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements
-34-
<PAGE>
ANCHOR GAMING
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
NINE MONTHS ENDED MARCH 31, 1999
(in thousands except per share data)
<TABLE>
<CAPTION>
Anchor Powerhouse Pro Forma Anchor
Historical Historical Adjustments Pro Forma
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
On-line wagering $ - $ 90,732 $ 90,732
Proprietary games 93,104 - 93,104
Gaming operations 65,248 7,542 72,790
Machines & systems - 46,546 46,546
Routes 27,908 12,907 40,815
----------------------------------------------------- ---------------
Total revenues 186,260 157,727 - 343,987
----------------------------------------------------- ---------------
Cost of revenues:
On-line wagering - 54,768 54,768
Proprietary games 13,344 - 13,344
Gaming operations 34,023 6,631 40,654
Machines & systems - 26,283 26,283
Routes 18,359 9,420 27,779
----------------------------------------------------- ---------------
Total cost of revenues 65,726 97,102 - 162,828
----------------------------------------------------- ---------------
Gross margin 120,534 60,625 - 181,159
----------------------------------------------------- ---------------
Other costs and expenses:
Selling, general and administrative 27,066 29,164 56,230
Research and development 2,808 7,383 10,191
Depreciation and amortization 12,598 15,276 3,219 (f) 31,093
----------------------------------------------------- ---------------
Total other costs and expenses 42,472 51,823 3,219 97,514
----------------------------------------------------- ---------------
Income from operations 78,062 8,802 (3,219) 83,645
----------------------------------------------------- ---------------
Other income (expense):
Interest expense - (2,508) 2,508 (d) (11,550)
(11,550) (e)
Other income 2,528 1,374 3,902
----------------------------------------------------- ---------------
Total other income (expense) 2,528 (1,134) (9,042) (7,648)
----------------------------------------------------- ---------------
Income before provision for income taxes 80,590 7,668 (12,261) 75,997
Income tax provision 30,423 3,066 (2,900) (g) 30,589
----------------------------------------------------- ---------------
Income from continuing operations $ 50,167 $ 4,602 $ (9,361) $ 45,408
===================================================== ===============
Basic earnings per share $ 4.09 $ 3.71
================== ===============
Weighted average shares outstanding 12,254 12,254
================== ===============
Diluted earnings per share $ 4.00 $ 3.62
================== ===============
Weighted average common and
common equivalent shares outstanding 12,537 12,537
================== ===============
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements
-35-
<PAGE>
ANCHOR GAMING
PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED JUNE 30, 1998
(in thousands except per share data)
<TABLE>
<CAPTION>
Anchor Powerhouse Pro Forma Anchor
Historical Historical Adjustments Pro Forma
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
On-line wagering $ - $ 118,744 $ 118,744
Proprietary games 113,677 - 113,677
Gaming operations 83,941 6,924 90,865
Machines & systems - 57,230 57,230
Routes 34,314 17,656 51,970
----------------------------------------------------- --------------
Total revenues 231,932 200,554 - 432,486
----------------------------------------------------- --------------
Cost of revenues:
On-line wagering - 75,843 75,843
Proprietary games 13,475 - 13,475
Gaming operations 36,905 7,553 44,458
Machines & systems - 33,484 33,484
Routes 21,442 12,905 34,347
----------------------------------------------------- --------------
Total cost of revenues 71,822 129,785 - 201,607
----------------------------------------------------- --------------
Gross margin 160,110 70,769 - 230,879
----------------------------------------------------- --------------
Other costs and expenses:
Selling, general and administrative 39,296 33,721 73,017
Research and development 1,922 9,969 11,891
Depreciation and amortization 12,661 19,821 4,292 (f) 36,774
----------------------------------------------------- --------------
Total other costs and expenses 53,879 63,511 4,292 121,682
----------------------------------------------------- --------------
Income from operations 106,231 7,258 (4,292) 109,197
----------------------------------------------------- --------------
Other income (expense):
Interest expense (226) (3,433) 3,433 (d) (15,626)
(15,400) (e)
Other income 3,435 1,238 4,673
----------------------------------------------------- --------------
Total other income (expense) 3,209 (2,195) (11,967) (10,953)
----------------------------------------------------- --------------
Income before provision for income taxes 109,440 5,063 (16,259) 98,244
Income tax provision (benefit) 41,040 (848) (3,649) (g) 36,543
----------------------------------------------------- --------------
Income from continuing operations $ 68,400 $ 5,911 $ (12,610) $ 61,701
===================================================== ==============
Basic earnings per share $ 5.36 $ 4.84
================== ===============
Weighted average shares outstanding 12,751 12,751
================== ===============
Diluted earnings per share $ 5.20 $ 4.69
================== ===============
Weighted average common and
common equivalent shares outstanding 13,161 13,161
================== ===============
</TABLE>
See accompanying notes to pro forma consolidated condensed financial statements
-36-
<PAGE>
ANCHOR GAMING
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands)
The pro forma adjustments contained in the accompanying pro forma
consolidated condensed financial statements reflect the following adjustments:
(a) The proceeds from borrowings under the Credit Facility to fund the
Powerhouse Acquisition.
(b) The purchase price payment to Powerhouse shareholders for all shares of
Powerhouse common stock outstanding ($220,698) plus estimated costs of
the transaction ($9,500); the elimination of Powerhouse equity
($88,490); the adjustment of the net book value of Powerhouse property
and equipment to fair value (estimated at $10,055); the adjustment of
the deferred tax liability related to changes in the fair value of
assets (estimated at $5,000); the write off of Powerhouse prepaid loan
fees (estimated at $400 current and $1,600 long-term); the reduction in
book value of Powerhouse intangible assets (estimated at $18,032); the
elimination of Powerhouse goodwill ($8,291); recording expenses for
acquired in-process research and development (estimated at $17,500);
the recording of fair value of acquired identifiable intangible assets
including developed technology, assembled workforce, customer base and
covenants not-to-compete (estimated at $33,490); and the recording of
transaction goodwill ($113,986) as the difference between the purchase
price and the estimated fair value of the assets acquired.
The write off of in-process research and development is not reflected
in the pro forma income statements presented as it is a non-recurring
charge.
(c) The retirement of indebtedness of Powerhouse.
(d) The elimination of Powerhouse historical interest expense.
(e) Interest expense on $220,000 in borrowings on the Bank Credit Facility
at an estimated effective interest rate of 7%.
(f) The additional depreciation and amortization expense as a result of
changes in the book value of assets as follows:
<TABLE>
<CAPTION>
Incremental Expense
-------------------------------
Net Estimated Nine Months
Increase in Life in Ended Year Ended
Book Value Years March 31, 1999 June 30, 1998
----------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Goodwill $105,695 30 - 40 $ 1,692 $2,256
Buildings and improvements 4,275 7 - 40 128 171
Identifiable intangibles 15,458 3 - 20 1,399 1,865
------- ------
$ 3,219 $4,292
======= ======
</TABLE>
(g) The adjustment to the provision (benefit) for income taxes in order to
result in a combined federal and state tax rate of 40.25% for the nine
months ended March 31, 1999 and 40.25% less a $3,000 tax benefit
recognized by Powerhouse for the year ended June 30, 1998.
-37-
<PAGE>
SIGNATURE
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 hereunto duly authorized.
ANCHOR GAMING
(Registrant)
Date: July 14, 1999 /s/ GEOFFREY A. SAGE
------------------------ -------------------------
Geoffrey A. Sage
Chief Financial Officer
-38-
<PAGE>
AMENDMENT NO. 1 TO MERGER AGREEMENT
This AMENDMENT NO. 1 TO MERGER AGREEMENT (the "AMENDMENT") is dated as
of March 19, 1999, and it serves as an amendment to the Agreement and Plan of
Merger ("MERGER AGREEMENT"), dated as of March 9, 1999, among ANCHOR GAMING,
a Nevada corporation ("PARENT"), OLIVE AP ACQUISITION CORPORATION, a Delaware
corporation and a direct wholly-owned subsidiary of Parent ("MERGER SUB"),
and POWERHOUSE TECHNOLOGIES, INC., a Delaware corporation (the "COMPANY").
Capitalized terms not defined herein shall have the meaning given to them in
the Merger Agreement.
WHEREAS, the parties hereto wish to amend certain provisions of the
Merger Agreement.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements set forth in this Amendment and
the Merger Agreement, the parties hereto agree as follows:
1. "Olive AP Acquisition Corporation" is deleted wherever it appears in
the Agreement and replaced with "Anchor Powerhouse Acquisition Corporation,"
which is the new name of the Merger Sub. In SECTION 6.3(c) of the Merger
Agreement, the reference made to the "Nevada Secretary of State" with respect
to delivery of evidence of the existence and good standing of the Merger Sub
is deleted and replaced with "Delaware Secretary of State."
2. SECTION 5.2 of the Merger Agreement is deleted in its entirety and
replaced with the following:
SECTION 5.2 PROXY STATEMENT. Promptly after the execution of this
Agreement, the Company and Parent will cooperate with each other and use
all reasonable efforts to prepare, and the Company will file with the
SEC, as soon as is reasonably practicable, a proxy statement, together
with a form of proxy, with respect to the Special Meeting (as defined in
SECTION 5.3). For the purposes of this Agreement, the term "Proxy
Statement" means such proxy filed in final form with the SEC at the time
it initially is mailed to the stockholders of the Company and all
amendments or supplements thereto, if any, similarly filed and mailed.
The Company will use all reasonable efforts to have the Proxy Statement
cleared by the SEC as promptly as practicable after filing and, as
promptly as practicable after the Proxy Statement has been so cleared,
will mail the Proxy Statement to the stockholders of the Company as of
the record date for the Special Meeting. The Company represents that
none of the information provided or to be provided by it, and Parent and
Merger Sub represent that none of the information provided or to be
provided by them, for use in the Proxy Statement will, on the date the
Proxy Statement is first mailed to the stockholders of the Company and
on the date of the Special Meeting, be false or misleading with respect
to any material fact or omit to state any material fact required to be
stated therein or necessary in
<PAGE>
order to make the statements therein, in light of the circumstances
under which they are made, not misleading, and Parent, the Company, and
Merger Sub each agrees to correct any information provided by it for use
in the Proxy Statement that has become false or misleading in any
material respect and file such amendments and supplements as are
necessary. The Company agrees that the Proxy Statement will comply as
to form in all material respects with all applicable requirements of
federal securities laws and applicable state laws.
3. SECTION 5.1 of the Merger Agreement is amended by adding a new
Section 5.1(c):
(c) Notwithstanding anything to the contrary contained in SECTION
5.1(b), it is understood and agreed that to become effective, the
restrictions contained in SECTION 5.1(b)(i) through (viii) and (xiv) may
require the approval of various gaming or other regulatory agencies and will
require the approval of the Nevada Gaming Commission as to those subsidiaries
of the Company that are Nevada gaming licensees and that such restrictions
will be effective only to the extent permitted pursuant to the rules and
regulations of such gaming or other regulatory authorities, it being the
intent of the parties that such restrictions be effective to the maximum
extent allowable by applicable law.
4. SECTION 1.7 of the Merger Agreement is deleted in its entirety and
replaced with the following:
SECTION 1.7 OFFICERS. The following officers of the Company will
be the initial officers of the Surviving Corporation and will hold office
until the earlier of their death, resignation or removal:
Michael D. Rumbolz President and Secretary
5. References to "SECTION 6.2(g)" made in SECTION 6.2(h) of the Merger
Agreement are deleted and replaced with "SECTION 6.2(h)."
6. Except as set forth in this Amendment, the Agreement is not modified
in any respect.
7. COUNTERPARTS. This Amendment 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
ANCHOR GAMING
/s/ Stanley E. Fulton
--------------------------------------
Name: Stanley E. Fulton
Office: Chairman of the Board
ANCHOR POWERHOUSE ACQUISITION CORPORATION
/s/ Michael D. Rumbolz
--------------------------------------
Name: Michael D. Rumbolz
Office: President and Chief Executive Officer
POWERHOUSE TECHNOLOGIES, INC.
/s/ Richard M. Haddrill
--------------------------------------
Name: Richard M. Haddrill
Office: President and Chief Executive Officer
<PAGE>
[KPMG LOGO]
P.O. Box 7108
Billings, MT 59103
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Anchor Gaming:
We consent to the incorporation by reference in the registration statement
(No. 333-53257) on Form S-8 of Anchor Gaming and to the inclusion of our
report dated February 19, 1999, with respect to the consolidated balance
sheets of Powerhouse Technologies, Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the Form 8-K of
Anchor Gaming dated June 29, 1999.
/s/ KPMG, LLP
Billings, Montana
July 13, 1999
