<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 000-23124
ANCHOR GAMING
(Exact name of registrant as specified in its charter)
Nevada 88-0304253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
815 PILOT ROAD, SUITE G
LAS VEGAS, NEVADA
89119
(Address of principal executive offices)
(Zip Code)
(702) 896-7568
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ----
Shares outstanding of each of the registrant's classes of common stock as of
May 12, 2000:
Class Outstanding as of May 12, 2000
----- ------------------------------
Common stock, $.01 par value 11,504,207
<PAGE>
ANCHOR GAMING
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
Part I. Financial Information
<S> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets at
March 31, 2000 and June 30, 1999 (unaudited) 2
Consolidated Condensed Statements of
Income for the three months ended
March 31, 2000 and 1999 (unaudited) 3
Consolidated Condensed Statements of
Income for the nine months ended
March 31, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Cash
Flows for the nine months ended
March 31, 2000 and 1999 (unaudited) 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 30
Item 6. Exhibits 31
Signatures 32
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ANCHOR GAMING
CONSOLIDATED CONDENSED March 31, June 30,
BALANCE SHEETS (Unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 33,157 $ 32,835
Accounts and notes receivable, net 44,070 38,526
Inventory, net 23,626 21,375
Other current assets 16,096 8,928
---------------- ----------------
Total current assets 116,949 101,664
Property and equipment, net 193,646 188,048
Goodwill, net 118,043 117,436
Other intangible assets, net 43,673 34,520
Investments in unconsolidated affiliates 59,635 29,053
Other long-term assets 20,526 36,448
---------------- ----------------
Total assets $ 552,472 $ 507,169
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,819 $ 21,073
Current portion of long-term debt 1,647 4,051
Income tax payable 7,435 5,146
Other current liabilities 31,843 42,486
---------------- ----------------
Total current liabilities 68,744 72,756
Long-term debt, net of current portion 228,922 212,805
Minority interest in consolidated subsidiary 1,322 1,255
---------------- ----------------
Total liabilities and minority interest in consolidated subsidiary 298,988 286,816
---------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, 0 shares
issued and outstanding at March 31, 2000 and June 30, 1999 - -
Common stock, $.01 par value, 50,000,000 shares authorized,
14,028,350 issued and 11,538,707 outstanding at March 31, 2000,
13,841,750 issued and 11,866,307 outstanding at June 30, 1999 140 138
Treasury stock at cost, 2,489,643 shares at March 31, 2000
and 1,975,443 at June 30, 1999 (113,865) (93,043)
Additional paid-in capital 123,730 116,854
Retained earnings 243,479 196,404
---------------- ----------------
Total stockholders' equity 253,484 220,353
---------------- ----------------
Total liabilities and stockholders' equity $ 552,472 $ 507,169
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
ANCHOR GAMING Three months ended March 31,
----------------------------------------
CONSOLIDATED CONDENSED
STATEMENTS OF INCOME (Unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
<S> <C> <C>
Gaming operations $ 48,787 $ 30,726
Gaming machines and systems 41,547 29,094
Lottery systems 30,607 -
Pari-mutuel systems 4,520 -
---------------- ----------------
Total revenues 125,461 59,820
---------------- ----------------
Costs of revenues:
Gaming operations 33,018 17,555
Gaming machines and systems 7,665 7,899
Lottery systems 17,175 -
Pari-mutuel systems 3,140 -
---------------- ----------------
Total costs of revenues 60,998 25,454
---------------- ----------------
Gross margin 64,463 34,366
---------------- ----------------
Other costs:
Selling, general and administrative 16,769 6,248
Research and development 4,125 1,141
Depreciation and amortization 12,829 4,526
---------------- ----------------
Total other costs 33,723 11,915
---------------- ----------------
Income from operations 30,740 22,451
---------------- ----------------
Other income (expense):
Interest income 521 918
Interest expense (4,348) -
Other income 53 53
Minority interest in earnings of consolidated subsidiary (111) (174)
---------------- ----------------
Total other income (expense) (3,885) 797
---------------- ----------------
Income before provision for income taxes 26,855 23,248
Income tax provision 10,842 8,776
================ ================
Net income $ 16,013 $ 14,472
================ ================
Basic earnings per share $ 1.35 $ 1.20
================ ================
Weighted average shares outstanding 11,894 12,063
================ ================
Diluted earnings per share $ 1.33 $ 1.18
================ ================
Weighted average common and common equivalent
shares outstanding 12,038 12,304
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
ANCHOR GAMING Nine months ended March 31,
----------------------------------------
CONSOLIDATED CONDENSED
STATEMENTS OF INCOME (Unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
<S> <C> <C>
Gaming operations $ 142,354 $ 93,156
Gaming machines and systems 132,473 93,104
Lottery systems 93,684 -
Pari-mutuel systems 14,645 -
---------------- ----------------
Total revenues 383,156 186,260
---------------- ----------------
Costs of revenues:
Gaming operations 91,714 52,382
Gaming machines and systems 36,257 25,034
Lottery systems 53,983 -
Pari-mutuel systems 9,697 -
---------------- ----------------
Total costs of revenues 191,651 77,416
---------------- ----------------
Gross margin 191,505 108,844
---------------- ----------------
Other costs:
Selling, general and administrative 52,597 17,990
Research and development 12,703 193
Depreciation and amortization 37,057 12,598
---------------- ----------------
Total other costs 102,357 30,781
---------------- ----------------
Income from operations 89,148 78,063
---------------- ----------------
Other income (expense):
Interest income 1,533 2,829
Interest expense (12,163) -
Other income 260 236
Minority interest in earnings of consolidated subsidiary (445) (538)
---------------- ----------------
Total other income (expense) (10,815) 2,527
---------------- ----------------
Income before provision for income taxes 78,333 80,590
Income tax provision 31,258 30,423
---------------- ----------------
Net income $ 47,075 $ 50,167
================ ================
Basic earnings per share $ 3.94 $ 4.09
================ ================
Weighted average shares outstanding 11,940 12,254
================ ================
Diluted earnings per share $ 3.88 $ 4.00
================ ================
Weighted average common and common equivalent
shares outstanding 12,140 12,537
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
ANCHOR GAMING
CONSOLIDATED CONDENSED Nine months ended March 31,
----------------------------------------
STATEMENTS OF CASH FLOWS (Unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities $ 82,366 $ 61,507
---------------- ----------------
Cash flows from investing activities:
Expenditures for property and equipment (42,404) (12,021)
Expenditures for intangible assets and other assets (12,283) (72)
Proceeds from sales of assets 359 -
Issuance of notes receivable (196) (859)
Principal reductions on notes receivable 843 161
Advances to joint venture (22,000) -
Change in restricted cash deposits (1,695) -
Other investing activities related to the Powerhouse acquisition (2,706) -
---------------- ----------------
Net cash used in investing activities (80,082) (12,791)
---------------- ----------------
Cash flows from financing activities:
Proceeds from borrowing 48,500 -
Repayment of long-term debt (34,797) -
Proceeds from sale of stock 5,156 284
Payments to acquire treasury stock (20,821) (32,853)
---------------- ----------------
Net cash used in financing activities (1,962) (32,569)
---------------- ----------------
Net increase in cash and cash equivalents 322 16,147
Cash and cash equivalents, beginning of period 32,835 73,187
================ ================
Cash and cash equivalents, end of period $ 33,157 $ 89,334
================ ================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,849 $ -
================ ================
Cash paid for income taxes $ 20,143 $ 42,431
================ ================
</TABLE>
The accompanying notes are an integral part of
these consolidated condensed financial statements.
-5-
<PAGE>
ANCHOR GAMING
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated condensed financial statements include the accounts of
Anchor Gaming and its subsidiaries (the "Company" or "Anchor"), Anchor Coin,
C.G. Investments, Inc. ("CGI"), Colorado Grande Enterprises, Inc. ("Colorado
Grande"), DD Stud, Inc. ("DD Stud"), Automated Wagering International, Inc.
("AWI"), Nuevo Sol Turf Club, Inc., Raven's D&R Music, Inc., United Tote
Company, United Tote Canada, VLC, Inc., VLC of Nevada, Inc., Anchor Native
American Gaming, Inc., ("ANAG"), Anchor Pala Development LLC ("APD"), and Anchor
Pala Management LLC ("APM") (collectively the "Subsidiaries"). Through its
subsidiaries, the Company conducts gaming operations in Nevada, New Mexico,
Montana and Colorado, and supplies system software, equipment and related
services to on-line lotteries, video lotteries, casinos and pari-mutuel
organizations throughout the world. All significant intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to present
fairly the results of its operations and cash flows for the three-month and
nine-month periods ended March 31, 2000 and 1999 and its financial position at
March 31, 2000. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the fiscal year
ended June 30, 1999. The operating results for the three months and nine months
and cash flows for the nine months ended March 31, 2000 are not necessarily
indicative of the results that will be achieved in future periods.
INVESTMENTS IN UNCONSOLIDATED AFFILIATE
The Company has a 50% interest in a joint venture (the "Joint Venture")
with International Game Technology ("IGT") accounted for as an investment in an
unconsolidated affiliate under the equity method of accounting. Under the equity
method, original investments are recorded at cost and adjusted by the Company's
share of earnings, losses and distributions of the affiliate. The primary
business of the Joint Venture is to distribute gaming machines on wide-area
progressive systems. The Company's share of net earnings from the Joint Venture
and related activities are included in gaming machines and systems revenue. The
Joint Venture operates on a September 30 year-end. Included in the March 31,
2000 accounts receivable and accounts payable balances, are $11.5 million and
$11.9 million, respectively, related to the Company's Joint Venture operations.
Summarized results of operations for the Joint Venture are as follows:
-6-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ------------------------------
(IN THOUSANDS) MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
- ---------------------------------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 90,412 $ 70,269 $244,242 $215,809
Expenses 41,912 35,137 116,269 107,407
Operating income 48,500 35,132 127,973 108,402
Net income 49,561 35,633 131,021 109,773
</TABLE>
REVENUE RECOGNITION
The Company recognizes gaming revenues as the net win from gaming
operations, which is the difference between amounts wagered by customers and
amounts paid to customers. Gaming operations revenues exclude the retail value
of complimentary food and beverage furnished gratuitously to gaming customers.
Proprietary games revenue, included in gaming machines and systems revenue, is
derived primarily from royalty, revenue participation or other similar
short-term recurring revenue arrangements, as well as equity in the earnings of
the Company's Joint Venture with IGT, which, for accounting purposes, is
recorded net of expense. Revenues from the sale of lottery, gaming and
pari-mutuel system equipment and related parts are recognized upon delivery to
the customer. Lottery and pari-mutuel systems contract service revenues are
recognized as the services are performed and primarily relate to revenues from
long-term contracts, which require installation and operation of lottery and
pari-mutuel wagering networks. Revenues under these contracts are generally
based on a percentage of sales volume, which may fluctuate over the lives of the
contracts. Revenues from sales of lottery systems and video gaming central site
systems (including customized software and equipment) is recognized using the
percentage-of-completion method of accounting for long-term construction type
contracts where costs to complete can reasonably be estimated. Prior to revenue
recognition on system sales, costs incurred are applied against progress
billings and recorded as a net other current asset or liability as appropriate.
EARNINGS PER SHARE
A reconciliation of income and shares for basic and diluted earnings
per share (EPS) is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------------------------------- --------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------ ----------- ------------ ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Basic EPS:
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 16,013 11,894 $ 1.35 $ 14,472 12,063 $ 1.20
Effect of Dilutive Securities:
Options 144 (0.02) 241 (0.02)
------------ ----------- ------------ ---------- ------------ -----------
Diluted EPS:
Net Income $ 16,013 12,038 $ 1.33 $ 14,472 12,304 $ 1.18
------------ ----------- ------------ ---------- ------------ -----------
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ---------- ------------ ---------- --------- -----------
Basic EPS:
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 47,075 11,940 $ 3.94 $ 50,167 12,254 $ 4.09
Effect of Dilutive Securities:
Options 200 (0.06) 283 (0.09)
---------- ---------- ----------- ---------- --------- ----------
Diluted EPS:
Net Income $ 47,075 12,140 $ 3.88 $ 50,167 12,537 $ 4.00
========== ========== =========== ========== ========= ==========
</TABLE>
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates in the financial statements include the
estimated depreciable lives of property and equipment and certain estimated
liabilities and valuation reserves. Actual results could differ materially from
those estimates.
RECLASSIFICATIONS
Certain amounts in the consolidated condensed financial statements for
the three and nine months ended March 31, 1999 have been reclassified to be
consistent with the presentation used for the three and nine months ended March
31, 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, although
earlier application is encouraged. This statement may not be applied
retroactively. In fiscal 2000, the Company entered into an interest rate swap
agreement for a notional amount of $100 million. The interest rate swap
agreement will have to be accounted for under the provisions of SFAS No. 133
effective July 1, 2000. Management does not expect the adoption of this standard
to have a material effect on its financial position or results of operations.
2. ACQUISITION OF POWERHOUSE
On June 29, 1999, the Company completed the acquisition of 100% of the
outstanding common stock of Powerhouse Technologies, Inc. ("Powerhouse" and the
"Powerhouse Acquisition") for approximately $220 million plus Powerhouse net
debt of $68 million pursuant to a merger agreement. The Powerhouse Acquisition
was funded through a combination of cash and borrowing under a $300 million
reducing revolving credit facility.
-8-
<PAGE>
The Powerhouse Acquisition was accounted for using the purchase method
of accounting. Under the purchase method of accounting, the results of
operations of any acquired company are included in the acquirer's financial
statements from the date of acquisition. Accordingly, the results of operations
and cash flows for the three and nine months ended March 31, 1999 do not include
any results of operations or cash flows of Powerhouse. The following summarized
unaudited pro forma financial information assumes the Powerhouse Acquisition
occurred as of July 1, 1998. The pro forma data give effect to actual operating
results prior to the acquisition and adjustments to interest expense, interest
income, depreciation and amortization and income taxes. These pro forma amounts
do not purport to be indicative of the results that might have been obtained if
the Powerhouse Acquisition had occurred on July 1, 1998 or that may be obtained
in the future.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31, 1999 MARCH 31, 1999
- ------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Revenues $ 115,160 $ 343,987
Costs of revenues 59,897 174,518
--------------- --------------
Gross margin 55,263 169,469
Other costs:
Selling, general and administrative 16,083 47,154
Research and development 3,537 7,576
Depreciation and amortization 10,505 30,611
--------------- ---------------
Income from operations 25,138 84,128
--------------- ---------------
Net income $ 13,625 $ 45,459
=============== ===============
Earnings per share:
Basic $ 1.13 $ 3.71
Diluted $ 1.11 $ 3.63
</TABLE>
The Company is continuing its efforts to finalize its evaluation of the
fair values of the assets and liabilities acquired in the Powerhouse
Acquisition. During the nine months ended March 31, 2000, the Company made
adjustments to the fair values of pre-acquisition contingent liabilities for
litigation and other items, liabilities for employee terminations, accrued
liabilities for costs to exit activities, and certain other assets and
liabilities of approximately $3.7 million. Additional adjustments to the fair
values of assets and liabilities acquired, similar in nature to those recorded
during the nine months ended March 31, 2000, could occur in the fourth quarter
of fiscal 2000.
3. BUSINESS SEGMENTS
The Company operates primarily in four business segments as follows:
gaming operations, which includes the operation of two casinos in Colorado, slot
routes in Nevada and Montana, and a racetrack/casino in New Mexico; gaming
machines and systems, which includes the design, development, and distribution
of proprietary gaming machines and the design, manufacture, and sale of video
gaming machines and central control systems; lottery systems, which includes the
design, manufacture, sale, installation, and operation of on-line lottery
systems; and pari-mutuel systems, which includes the design, manufacture, sale,
installation, and operation of computerized pari-mutuel wagering systems
primarily for horse and dog racing tracks. The Company had no lottery or
pari-mutuel systems revenues prior to the Powerhouse Acquisition. Revenues and
income (loss) for these segments are as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(IN THOUSANDS) 2000 1999 2000 1999
- ---------------------------------------------- ----------------- ----------------- ---------------- ------------------
Revenues:
<S> <C> <C> <C> <C>
Gaming operations $ 48,787 $ 30,726 $ 142,354 $ 93,156
Gaming machines and systems 41,547 29,094 132,473 93,104
Lottery systems 30,607 - 93,684 -
Pari-mutuel systems 4,520 - 14,645 -
--------------- ---------------- ---------------- -------------------
$ 125,461 $ 59,820 $ 383,156 $ 186,260
=============== ================ ================ ===================
Income (loss) from operations:
Gaming operations $ 7,694 $ 7,559 $ 25,789 $ 24,825
Gaming machines and systems 22,444 16,134 61,607 54,449
Lottery systems 5,123 - 14,791 -
Pari-mutuel systems (462) - (421) -
General corporate expenses (4,059) (1,242) (12,618) (1,211)
--------------- ---------------- ---------------- -------------------
$ 30,740 $ 22,451 $ 89,148 $ 78,063
=============== ================ ================ ===================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
(IN THOUSANDS) 2000 1999
- ---------------------------------------------- ------------------- -------------------
<S> <C> <C>
Identifiable segment assets:
Gaming operations $ 120,361 $ 102,528
Gaming machines and systems 160,213 142,736
Lottery systems 106,108 77,616
Pari-mutuel systems 21,629 23,601
Corporate 26,926 44,811
Unallocated intangibles 117,235 115,877
------------------ -------------------
$ 552,472 $ 507,169
================== ===================
</TABLE>
4. INVENTORY
All inventories are stated at the lower of cost (first-in, first-out)
or market. Inventories, net of valuation reserves, are as follows:
MARCH 31, JUNE 30,
(IN THOUSANDS) 2000 1999
- ---------------------------------------------------------------------
Manufacturing:
Raw materials $ 5,484 $ 5,258
Work-in-process 278 1,795
Finished goods 12,862 10,531
Other finished goods 5,002 3,791
---------------- ---------------
$ 23,626 $ 21,375
================ ===============
-10-
<PAGE>
5. PROPERTY & EQUIPMENT
(IN THOUSANDS)
Property and equipment of $193,646 and $188,048 at March 31,
2000 and June 30, 1999 are net of accumulated depreciation of $73,162 and
$43,468, respectively.
6. GOODWILL & OTHER INTANGIBLE ASSETS
(IN THOUSANDS)
Goodwill of $118,043 and $117,346 at March 31, 2000 and June 30, 1999
are net of accumulated amortization of $4,258 and $1,352, respectively. Other
intangible assets of $43,673 and $34,520 at March 31, 2000 and June 30, 1999 are
net of accumulated amortization of $3,205 and $1,800, respectively.
7. OTHER CURRENT LIABILITIES
Other current liabilities are as follows:
MARCH 31, JUNE 30,
(IN THOUSANDS) 2000 1999
-----------------------------------------------------------------------
Labor, compensation and benefits $ 10,808 $ 11,160
Employee commissions and royalties 3,287 2,600
Merger related accruals - 11,541
Accrued taxes and licenses 4,658 2,874
Other accrued expenses 13,090 14,311
------------ -------------
$ 31,843 $ 42,486
============ =============
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
In February 1999, the Company and the Joint Venture filed an action in
U.S. District Court, District of Nevada against Acres Gaming, Inc. ("Acres").
The complaint alleges infringement of the Company's secondary-event patents as
well as various contract breaches by Acres. In April 1999, Acres responded to
the Company's lawsuit by filing an answer and counterclaim against the Company
and the Joint Venture. Additionally, in April 1999, Acres filed an action in
Oregon State Circuit Court against the Company and the Joint Venture alleging
wrongful use of Acres' intellectual property and breach of fiduciary duties. The
Company believes Acres' counterclaim and state circuit court lawsuit are without
merit and intends to vigorously contest the claims. The Oregon State Circuit
Court action has been moved to the U.S. District Court, District of Oregon, and
has been stayed pending the outcome of the Nevada actions.
Several securities class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. The
lawsuits have been brought on behalf of
-11-
<PAGE>
certain purchasers of the stock of the Company and allege violations of state
and/or federal securities laws arising out of alleged misstatements and
omissions to state material facts about the Company over various periods of time
covered by the suits. The lawsuits were consolidated in Nevada, both in federal
and state court. The consolidated federal action, captioned IN RE ANCHOR GAMING
SECURITIES LITIGATION, Civil Action No. CV-S-97-01751-PMP (RJJ), was dismissed
on January 6, 1999 with the court entering a judgment in favor of Anchor Gaming.
The consolidated state action, captioned RYAN, ET AL. V. ANCHOR GAMING, ET AL.,
Civil No. A383456, has been stayed by order of the court. Certain other actions
have been transferred and/or dismissed. The Company believes that the claims are
without merit, and the Company intends to vigorously contest the lawsuits. The
Company cannot presently state the nature of further proceedings, if any, in the
state or federal actions.
In February of 1999, GTECH Corporation filed a complaint for
declaratory judgment, injunction, and violation of the Public Records Law
against the State of Florida, Department of Lottery and AWI in the Circuit
Court, Second Judicial Circuit, in Leon County, Florida. The complaint requests
the Circuit Court to declare the contract between AWI and the Florida Lottery
void in the event the First District Court of Appeal of Florida upholds the
Florida Lottery's decision to award the on-line lottery services contract to
AWI. Subsequent to the execution of the renegotiated contract between AWI and
the Florida Lottery in March 1999, GTECH Corporation amended the complaint.
On January 28, 2000 the Circuit Court of Leon County granted GTECH
Corporation's cross motion for summary judgment on Count II of the complaint
filed by GTECH in March 1999. Count II of GTECH's complaint challenges the
validity of the amended contract entered into on March 9, 1999 between the State
of Florida, the Department of Lottery, and AWI, on the grounds that, among other
things, the amended contract is materially different from the proposal which AWI
submitted. The ruling declares null and void the amended contract between the
Florida Lottery and AWI effective February 2, 2000. The Florida Lottery filed an
appeal on February 2, 2000 and as a result, an automatic stay of the prior order
took place. The Lottery and AWI filed an appeal on March 27, 2000. On April 5,
2000, GTECH filed a motion to strike these appeals. On April 26, 2000, the Court
of Appeals granted GTECH's motion to strike in part. AWI has until May 16, 2000,
to file an amended appeal. AWI continues to provide its on-line gaming services
and products to the Lottery under the terms of the amended contract. Anchor
Gaming will vigorously defend and protect its rights under this lottery
agreement. There can be no assurance, however, that Anchor's AWI subsidiary will
be successful in its efforts or that the ultimate results of this litigation
will be favorable to Anchor Gaming.
On February 17, 2000, the Company filed a complaint in U.S. District
Court, District of Nevada against former officers of Powerhouse Technologies,
Inc. and other parties. The complaint questions certain specified accounting
practices that were used prior to the acquisition.
The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation will
have a material adverse effect on the consolidated financial statements of the
Company.
FUNDING COMMITMENTS
In September 1999, the Company announced the signing of a development
and management agreement with the Pala Band of Mission Indians ("the Tribe") to
develop and assist
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<PAGE>
in obtaining financing for the construction of a casino and entertainment
facility near San Diego, California. The agreements have been submitted to
the National Indian Gaming Commission for approval. The development is
subject to the receipt of various regulatory and licensing approvals.
The Tribe will finance the project with a $100 million credit
facility, which will include an Anchor guaranty relative to both the
completion of the project and the repayment of the bank debt. At a minimum,
the guaranty is expected to be in place for the period ending with the later
of two years from the closing of the loan or one year following the
commencement of gaming, after which it may be removed if certain financial
and non-financial measures are met. The Company will render management
services for the facility for seven years, subject to National Indian Gaming
Commission approval, after the completion of construction. Also under the
terms of the agreements, the Company has committed to advance, on behalf of
the Tribe, funds to facilitate activities related to the development of the
project. The advances will be reimbursed to the Company, plus interest, upon
the Tribe securing the permanent financing for the project. As of March 31,
2000, the Company has advanced $2.8 million on behalf of the Tribe, which is
included in accounts and notes receivable, net on the Company's balance
sheet. The aforementioned agreements are all subject to the receipt of
various regulatory and licensing approvals.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21e OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
OTHER APPLICABLE SECURITIES LAWS. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACT ARE "FORWARD-LOOKING STATEMENTS" FOR PURPOSES OF THESE
PROVISIONS, INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES, OR OTHER FINANCIAL
ITEMS; ANY STATEMENTS OF THE PLANS, STRATEGIES, AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATION; ANY STATEMENTS CONCERNING PROPOSED NEW PRODUCTS, SERVICES, OR
DEVELOPMENTS; ANY STATEMENTS REGARDING FUTURE ECONOMIC CONDITIONS OR
PERFORMANCE; STATEMENTS OF BELIEF; AND ANY STATEMENT OF ASSUMPTIONS UNDERLYING
ANY OF THE FOREGOING. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO INHERENT
RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY THE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES
THAT THE EXPECTATIONS REFLECTED IN ANY OF ITS FORWARD-LOOKING STATEMENTS WILL
PROVE TO BE CORRECT, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
OR ASSUMED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THESE RISKS AND
UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, FACTORS DESCRIBED FROM TIME TO
TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
INCLUDING ANCHOR'S FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999 AND ITS FORMS 10-Q
FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1999. THESE REPORTS
MAY BE OBTAINED FREE OF CHARGE AT THE WEBSITE OF THE SECURITIES AND EXCHANGE
COMMISSION AT http://www.sec.gov. ANCHOR GAMING ENCOURAGES THE REVIEW OF SUCH
REPORTS.
OVERVIEW
On June 29, 1999, the Company completed the acquisition of 100% of the
outstanding common stock of Powerhouse for approximately $220 million plus
Powerhouse net debt of $68 million pursuant to a merger agreement. The
Powerhouse Acquisition was funded through a combination of cash and borrowing
under a $300 million reducing revolving credit facility. Anchor now operates in
the following business segments:
GAMING OPERATIONS, which includes the operations of two casinos in
Colorado, slot routes in Nevada and Montana, and a racetrack/casino in
New Mexico.
GAMING MACHINES AND SYSTEMS, which includes the design, development,
and distribution of proprietary gaming machines and the design,
manufacture, and sale of video gaming machines and central control
systems.
LOTTERY SYSTEMS, which includes the design, manufacture, sale,
installation, and operation of on-line lottery systems.
PARI-MUTUEL SYSTEMS, which includes the design, manufacture, sale,
installation and operation of computerized pari-mutuel wagering systems
primarily for horse and dog racing tracks.
The Powerhouse Acquisition was accounted for using the purchase method
of accounting. As a result, the historical operating results and cash flows of
the Company for the three and nine months ended March 31, 1999 do not include
any operating results or cash flows for the operations acquired in the
Powerhouse Acquisition. The following table sets forth pro forma revenues and
costs of revenues by business segment for the three and nine months ended March
31, 1999 as if
-14-
<PAGE>
the Powerhouse Acquisition occurred on July 1, 1998. These pro forma amounts do
not purport to be indicative of the results that might have been obtained if the
Powerhouse Acquisition had occurred on July 1, 1998 or that may be obtained in
the future.
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED PRO FORMA NINE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1999
----------------------------------------------------------------------------
COSTS OF
(IN THOUSANDS) REVENUES REVENUES REVENUES COSTS OF REVENUES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gaming operations $ 39,757 $ 24,641 $ 113,606 $ 68,433
Gaming machines and systems 44,879 16,136 139,649 51,317
Lottery systems 26,038 16,123 75,910 45,081
Pari-mutuel systems 4,486 2,997 14,822 9,687
----------------- ----------------- ----------------- -------------------
Total $ 115,160 $ 59,897 $ 343,987 $ 174,518
================= ================== ================= ===================
</TABLE>
The following table sets forth the percentage of Anchor's total
historical and pro forma revenues attributable to each of its operating segments
during the three and nine months ended March 31, 2000 and 1999. The table also
presents the gross margin of each of its operating segments for the same
periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- --------------------------------
2000 1999(a) 1999(b) 2000 1999(a) 1999(b)
<S> <C> <C> <C> <C> <C> <C>
SOURCES OF REVENUES:
Gaming operations 38.9% 51.4% 34.5% 37.2% 50.0% 33.0%
Gaming machines and systems 33.1 48.6 39.0 34.6 50.0 40.6
Lottery systems 24.4 - 22.6 24.5 - 22.1
Pari-mutuel systems 3.6 - 3.9 3.7 - 4.3
------- --------- ---------- ---------- --------- ---------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ========= ========== ========== ========= =========
GROSS MARGIN:
Gaming operations 32.3% 42.9% 38.0% 35.6% 43.8% 39.8%
Gaming machines and systems 81.6 72.9 64.0 72.6 73.1 63.3
Lottery systems 43.9 - 38.1 42.4 - 40.6
Pari-mutuel systems 30.5 - 33.2 33.8 - 34.6
Total consolidated gross margin 51.4% 57.4% 48.0% 50.0% 58.4% 49.3%
</TABLE>
- -----------------------------
(a) Historical
(b) Pro forma, presented as if the Powerhouse Acquisition occurred on July 1,
1998
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
GAMING OPERATIONS
Total revenues from gaming operations were $48.8 million for the
quarter ended March 31, 2000, an increase of $18.1 million or 59% from the
historical quarter ended March 31, 1999. The gaming operations acquired in the
Powerhouse Acquisition accounted for the majority of the increase in historical
revenues by contributing approximately $17.4 million to revenue for the quarter
ended March 31, 2000. On a pro forma basis, revenues from gaming operations for
the quarter ended March 31, 2000 increased $9.0 million or 23% from pro forma
revenues for the
-15-
<PAGE>
quarter ended March 31, 1999. This increase is primarily due to
increased revenues at the Sunland Park racetrack/casino acquired in the
Powerhouse Acquisition, which commenced casino operations in February 1999.
Two casinos opened near the Colorado Central Station during 1998,
another in February 2000, and another in March 2000. The Company is also aware
of other casino projects in various stages of planning in the Black Hawk/Central
City market. The Company cannot predict the effect, if any, that the proposed
casino openings will have on the Company's Colorado casino operations. The
Company expects that the increased competition from new and proposed casino
operations will have a continued negative effect on revenues as well as on the
costs of gaming operations, such as marketing and promotions and costs related
to retaining and recruiting employees. Historically, revenues and casino
patronage in the Colorado casino operations are highest in the summer months and
those months unaffected by inclement weather. The Company expects this seasonal
trend to continue.
During the fourth quarter of fiscal 1999, the Company received a
termination letter from Albertson's, one of its Nevada slot route customers, due
to a change in ownership effective August 31, 1999. The Company filed for an
injunctive relief requesting to continue to operate in the locations with
certain contract modifications. The 59 machines in the four Albertson's
locations were in operation by the Company through December 31, 1999. During
January 2000, the Company settled a lawsuit with the four Albertson's locations
and as a result, effective February 1, 2000 no longer has gaming operations in
these locations. The Company believes that the loss of the four locations will
not have a material effect on the net financial results of the Company's Nevada
route operations.
Costs of gaming operations were $33.0 million for the quarter ended
March 31, 2000, an increase of $15.5 million or 88% from the historical quarter
ended March 31, 1999. The gaming operations acquired in the Powerhouse
Acquisition contributed approximately $12.3 million to costs of gaming
operations during the March 2000 quarter. The remaining increase is due
primarily to increased costs at the Colorado Central Station casino resulting
from increased competition, and to a lesser extent, increased costs in the
Nevada route as a result of increased revenues. On a pro forma basis, costs of
gaming operations increased $8.4 million or 34% during the quarter ended March
31, 2000 versus pro forma costs for the quarter ended March 31, 1999. This
increase is due primarily to the commencement of casino operations at the
Sunland Park racetrack/casino in February 1999. Gaming operations gross margin
decreased to 32% during the quarter ended March 31, 2000 from 38% during the pro
forma quarter ended March 31, 1999. This is due primarily to the commencement of
casino operations at the Sunland Park racetrack/casino and the growth in Nevada
route costs, both of which have lower margins than the Colorado casino
operations that historically accounted for a greater percentage of gaming
operations revenue. In addition, the decrease in gross margin is also the result
of decreased margins at the Colorado Central Station Casino resulting from
increased competition.
GAMING MACHINES AND SYSTEMS
Revenues from gaming machines and systems were $41.5 million for the
quarter ended March 31, 2000, an increase of $12.5 million or 43% from the
historical quarter ended March 31, 1999. The gaming machines and systems
operations acquired in the Powerhouse Acquisition accounted for approximately
$6.9 million of revenue during the quarter ended March 31, 2000. The remaining
increase was a result of increased equity earnings in the Company's Joint
Venture
-16-
<PAGE>
alliance with IGT, which, for accounting purposes, are recorded net of expense,
offset by net decreases in revenues from the Company's stand-alone proprietary
games. At March 31, 2000 there were more than 10,000 games, primarily Wheel of
Fortune, operating within the Joint Venture, compared to more than 6,200 games
at March 31, 1999.
On a pro forma basis, revenues from gaming machines and systems for the
quarter ended March 31, 2000 decreased $3.3 million or 7% from the pro forma
revenues for the quarter ended March 31, 1999. This decrease is primarily a
result of decreased machine sales in business operations acquired from
Powerhouse, offset to some extent by the increase in revenues from joint venture
activity as discussed above. The decrease in machine sales in the acquired
operations results both from large, non-recurring domestic and international
machine sales in the third quarter of fiscal 1999, and to a lesser extent, a
decline in casino-market machine sales, as the Company lessens its focus on
sales to the casino gaming market. The decrease in machine sales is offset
somewhat by increases in central system parts and service revenues.
During the quarter ended March 31, 2000, the Company's installed base
of stand-alone proprietary games, without regard to its Joint Venture games or
Silver Strike product, decreased 15% from the quarter ended March 31, 1999. The
average net win per unit for the installed base of stand-alone proprietary games
also decreased during the same period.
The Company expects the trend of decreased year over year proprietary
games revenue comparisons for stand-alone proprietary games to continue. The
decline is attributable to the reduction of the installed base, resulting from
the maturation of the stand-alone products and the effect of the Video Wheel of
Fortune, primarily on the Wheel of Gold, as well as competition from gaming
products introduced by competitors. The Company expects the trend of increased
year over year revenue comparisons for the Joint Venture to continue due to the
popularity of the new Video Wheel of Fortune game, which was introduced during
the quarter ended September 30, 1999.
The gaming machines and systems operations are also influenced by
seasonal fluctuations as a result of weather and casino patron traffic patterns.
The Company expects that these seasonal trends will continue in both the Joint
Venture operations and the proprietary games operations outside of the Joint
Venture. In addition, changes in interest rates could have an effect on the
earnings of the Joint Venture. Since jackpot expense is a function of the
present value of future jackpot payments, future changes in the interest rate
environment will affect the profitability of the Joint Venture. Specifically,
decreases in interest rates will increase the jackpot expense of the Joint
Venture while future increases in interest rates will decrease the jackpot
expense of the Joint Venture.
Nevada gaming regulators have considered a proposed regulation that
would prevent any slot machine from having cartoon characters, comic book
characters or themes based on materials intended, marketed or used primarily by
minors. During January 2000, Nevada gaming regulators approved amendments to the
regulations prohibiting gaming device themes primarily intended or marketed for
use by minors. The regulation will not affect any current licensed gaming
machines. The Company cannot predict the effect, if any, the amendments will
have on any of its future gaming machines.
During fiscal year 1999, a bill sponsored by the Nevada Resort
Association was signed into law. The bill made provisions for increased
regulatory review of wide area progressives, addressed
-17-
<PAGE>
market accessibility to games and required manufacturers and casino operators to
pay their proportionate share of state gaming taxes on games placed in casinos
on a revenue participation basis. This legislation has resulted in increased
gaming tax expense associated with Nevada revenues in the Joint Venture, which
as a result decreased the Company's earnings from the Joint Venture and, to a
lesser extent, has increased gaming tax expense in the Company's stand-alone
proprietary games operations outside of the Joint Venture.
The Company has developed and has begun introducing conversion games to
its casino customers. The Company, as well as Barcrest, an IGT subsidiary,
continue to develop games to be introduced under what the Company calls the
conversion opportunity. The conversion opportunity is an Anchor Gaming operation
that will be accounted for within the Joint Venture whereby Anchor will upgrade
existing, casino-owned IGT gaming machines in exchange for a fixed portion of
the future incremental revenue stream generated by the conversion. This upgrade
will generally take the form of placing a secondary bonusing type of event on or
in the existing base unit. As of March 31, 2000 the Company has received
regulatory approval in Nevada and several other jurisdictions for several
different conversion games and has placed some of the games in casinos on a
limited basis. The Company has also received regulatory approval in Nevada and
several other jurisdictions that enabled the base slot machines to accept up to
45 coins per wager. This will provide the player with a multi-line, multi-coin
spinning reel slot machine experience. The Company introduced this multi-coin
feature on the conversion platform during the quarter ended September 30, 1999
and has also placed some of the games in casinos on a limited basis. The Company
cannot predict the level of success, if any, the conversion opportunity will
provide. The Company does not expect significant revenue contributions from the
conversion opportunity in fiscal 2000.
Costs of gaming machines and systems were $7.7 million for the quarter
ended March 31, 2000, a decrease of $0.2 million or 3% from the historical
quarter ended March 31, 1999. The gaming machines and systems operations
acquired from Powerhouse accounted for an increase in historical costs by
contributing approximately $2.7 million to costs of gaming machines and systems
during the 1999 quarter. The decrease is due primarily to a lower level of write
downs related to gaming machines within the Company's stand-alone proprietary
games operations, and to a lesser extent, decreases in royalty expenses as a
result of decreased revenues from the Company's stand-alone games. On a pro
forma basis, costs of gaming machines and systems decreased $8.5 million or 53%
due to the decreased historical proprietary games costs and due to reductions in
costs related to decreased revenues from the operations acquired from
Powerhouse. Gaming machines and systems gross margin on a pro forma basis
increased to 82% during the quarter ended March 31, 2000 from 64% during the pro
forma quarter ended March 31, 1999. This is due primarily to the increase in
equity earnings and the decrease in machine sales in business operations
acquired from Powerhouse, which have achieved lower margins historically when
compared to the margins achieved in the proprietary games operations.
LOTTERY SYSTEMS
Revenues from lottery systems were $30.6 million for the quarter ended
March 31, 2000, an increase of $4.6 million or 18% on a pro forma basis from the
pro forma revenues for the quarter ended March 31, 1999. Prior to the Powerhouse
acquisition, the Company had no lottery systems operations. The increase in pro
forma revenues is due to increases in system and license revenues from foreign
lottery jurisdictions during the quarter ended March 31, 2000, as well as
domestic lottery revenue increases. During the quarter ended March 31, 2000, the
Company continued work
-18-
<PAGE>
on its Switzerland and Leeward Islands contract implementations, and began the
installation of a lottery system in Shanghai, China. Domestically, increased
revenues resulted from the commencement of operations under the Company's
on-line lottery contract with the Hoosier Lottery in Indiana and strong results
in Florida. The resulting year over year increase in revenue was partially
offset by the loss of the Montana Lottery, which provided revenue during the
March 1999 quarter.
As is normal for businesses that involve sales of large system
contracts, the consummation of sales and their timing are inherently uncertain.
As a result, the Company could experience uneven revenues from period to period
and may not consummate anticipated sales in any future period.
Costs of lottery systems were $17.2 million during the quarter ended
March 31, 2000, an increase of $1.1 million or 7% on a pro forma basis from the
pro forma costs for the quarter ended March 31, 1999, due primarily to the
increase in revenues. The gross margin on a pro forma basis increased to 44% in
the 2000 quarter versus 38% in the pro forma 1999 quarter. The increase in gross
margins is primarily attributable to higher margins on domestic contracts,
mostly Florida and Pennsylvania.
On January 28, 2000 the Circuit Court of Leon County granted GTECH
Corporation's cross motion for summary judgment on Count II of a complaint filed
by GTECH in March 1999. Count II of GTECH's complaint challenges the validity of
the amended contract entered into on March 9, 1999 between the State of Florida,
the Department of Lottery, and Anchor Gaming's subsidiary, Automated Wagering
International, Inc. (AWI), on the grounds that, among other things, the amended
contract is materially different from the proposal which AWI submitted. The
ruling declares null and void the amended contract between the Florida Lottery
and AWI effective February 2, 2000. The Florida Lottery filed an appeal on
February 2, 2000 and as a result an automatic stay of the prior order took
place. The Lottery and AWI filed an appeal on March 27, 2000. On April 5, 2000,
GTECH filed a motion to strike these appeals. On April 26, 2000, the Court of
Appeals granted GTECH's motion to strike in part. AWI has until May 16, 2000, to
file an amended appeal. AWI continues to provide its on-line gaming services and
products to the Lottery under the terms of the amended contract. Anchor Gaming
will vigorously defend and protect its rights under this lottery agreement.
There can be no assurance, however, that Anchor's AWI subsidiary will be
successful in its efforts or that the ultimate results of this litigation will
be favorable to Anchor Gaming.
PARI-MUTUEL SYSTEMS
Revenues from pari-mutuel systems were $4.5 million for the quarter
ended March 31, 2000, consistent with pro forma revenues for the quarter ended
March 31, 1999. Prior to the Powerhouse acquisition, the Company had no
pari-mutuel operations. Costs of pari-mutuel systems were $3.1 million for the
quarter ended March 31, 2000, which represents a 5% increase in costs on a pro
forma basis from the March 1999 quarter.
OTHER COSTS
Selling, general and administrative ("SG&A") expenses were $16.8
million for quarter ended March 31, 2000, an increase of $10.5 million or 168%
from the historical quarter ended March 31, 1999. SG&A expenses as a percentage
of total revenue increased to 13% during the
-19-
<PAGE>
March 2000 quarter compared to 10% during the historical March 1999 quarter.
During the quarter ended March 31, 2000, businesses acquired from Powerhouse
contributed $9.6 million of SG&A expenses. On a pro forma basis, SG&A expenses
for the quarter ended March 31, 2000 increased $0.7 million or 4% over the pro
forma quarter ended March 31, 1999, due primarily to the commencement of casino
operations at Sunland Park.
Research and development ("R&D") expenses were $4.1 million for the
quarter ended March 31, 2000, an increase of $3.0 million from the historical
quarter ended March 31, 1999. During the quarter ended March 31, 2000,
businesses acquired from Powerhouse contributed $3.5 million in R&D expenses. On
a pro forma basis, R&D expenses for the quarter ended March 31, 2000 increased
$0.6 million or 17% from the pro forma quarter ended March 31, 1999, resulting
from increased R&D expenses in the acquired gaming machines and systems
operations from Powerhouse. In addition to the R&D expenses reflected on the
Company's financial statements, R&D costs related to the Joint Venture are
accounted for on the books of the Joint Venture and are not included in the
amounts disclosed as R&D in the Company's financial statements.
Depreciation and amortization expense was $12.8 million for the quarter
ended March 31, 2000, an increase of $8.3 million or 184% from the historical
quarter ended March 31, 1999. During the quarter ended March 31, 2000,
businesses acquired from Powerhouse contributed $7.5 million in depreciation and
amortization expense, accounting for the majority of the historical increase. On
a pro forma basis, depreciation and amortization for the quarter ended March 31,
2000 increased $2.3 million or 22% from the pro forma quarter ended March 31,
1999 due primarily to increased depreciation and amortization expense incurred
in the gaming operations, and machines and systems operations, and to a lesser
extent, the lottery systems operations acquired from Powerhouse.
INCOME FROM OPERATIONS. As a result of the factors discussed above,
income from operations was $30.7 million for the quarter ended March 31, 2000,
an increase of $8.3 million or 37% on a historical basis and $5.6 million or 22%
on a pro forma basis from the quarter ended March 31, 1999. As a percentage of
total revenues, income from operations increased to 25% during the quarter ended
March 31, 2000 from 22% pro forma for the quarter ended March 31, 1999.
OTHER INCOME (EXPENSE). Interest income was $0.5 million for the
quarter ended March 31, 2000 versus $0.9 million for the historical quarter
ended March 31, 1999. The reduction is due to decreased cash balances for
investment as a result of cash spending for the Powerhouse acquisition. Interest
expense of $4.3 million for the quarter ended March 31, 2000 is the result of
borrowings associated with the Powerhouse acquisition. There was no historical
interest expense incurred in the quarter ended March 31, 1999.
NET INCOME AND EARNINGS PER SHARE. As a result of the factors discussed
above, net income was $16.0 million for the quarter ended March 31, 2000, an
increase of $1.5 million or 11% from the historical quarter ended March 31,
1999. On a pro forma basis, net income for the quarter ended March 31, 2000
increased $2.4 million or 18% from the pro forma quarter ended March 31, 1999.
Diluted earnings per share of $1.33 for the quarter ended March 31, 2000
increased $0.22 or 20% from the pro forma quarter ended March 31, 1999.
-20-
<PAGE>
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
GAMING OPERATIONS
Total revenues from gaming operations were $142.4 million for the nine
months ended March 31, 2000, an increase of $49.2 million or 53% from the
historical nine months ended March 31, 1999. The gaming operations acquired in
the Powerhouse Acquisition accounted for the majority of the increase in
historical costs by contributing approximately $47.5 million to revenue for the
nine months ended March 31, 2000. On a pro forma basis, revenues from gaming
operations for the nine months ended March 31, 2000 increased $28.7 million or
25% from pro forma revenues for the nine months ended March 31, 1999. This
increase is primarily due to slot operations at the Sunland Park
racetrack/casino acquired in the Powerhouse acquisition, which commenced casino
operations in February 1999.
Two casinos opened near the Colorado Central Station during 1998,
another in February 2000, and another in March 2000. The Company is also aware
of other casino projects in various stages of planning in the Black Hawk/Central
City market. The Company cannot predict the effect, if any, that the proposed
casino openings will have on the Company's Colorado casino operations. The
Company expects that the increased competition from new and proposed casino
operations will have a continued negative effect on revenues as well as on the
costs of gaming operations, such as marketing and promotions and costs related
to retaining and recruiting employees. Historically, revenues and casino
patronage in the Colorado casino operations are highest in the summer months and
those months unaffected by inclement weather. The Company expects this seasonal
trend to continue.
During the fourth quarter of fiscal 1999, the Company received a
termination letter from Albertson's, one of its Nevada slot route customers, due
to a change in ownership effective August 31, 1999. The Company filed for an
injunctive relief requesting to continue to operate in the locations with
certain contract modifications. The 59 machines in the four Albertson's
locations were in operation by the Company through December 31, 1999. During
January 2000, the Company settled a lawsuit with the four Albertson's locations
and as a result, effective February 1, 2000 will no longer have gaming
operations in these locations. The Company believes that the loss of the four
locations will not have a material effect on the net financial results of the
Company's Nevada route operations.
Costs of gaming operations were $91.7 million for the nine months ended
March 31, 2000, an increase of $39.3 million or 75% from the historical nine
months ended March 31, 1999. The gaming operations acquired in the Powerhouse
Acquisition contributed approximately $33.2 million to costs of gaming
operations during the March 2000 nine months. The remaining increase is due
primarily to increased costs at the Colorado Central Station casino resulting
from increased competition, and to a lesser extent, increased costs in the
Nevada route as a result of increased revenues. On a pro forma basis, costs of
gaming operations increased $23.3 million or 34% during the nine months ended
March 31, 2000 versus pro forma costs for the nine months ended March 31, 1999.
This increase is due primarily to the commencement of casino operations at the
Sunland Park racetrack/casino in February 1999. Gaming operations gross margin
decreased to 36% during the nine months ended March 31, 2000 from 40% during the
pro forma nine months ended March 31, 1999. This is due primarily to the
commencement of casino operations at Sunland Park racetrack/casino and the
growth in Nevada route costs, both of which have lower margins than the Colorado
casino operations that historically accounted for a greater
-21-
<PAGE>
percentage of gaming operations revenue. In addition, the decrease in gross
margin is also the result of decreased margins at the Colorado Central Station
Casino resulting from increased competition.
GAMING MACHINES AND SYSTEMS
Revenues from gaming machines and systems were $132.5 million for the
nine months ended March 31, 2000, an increase of $39.4 million or 42% from the
historical nine months ended March 31, 1999. The gaming machines and systems
operations acquired in the Powerhouse Acquisition accounted for approximately
$32.8 million of revenue during the nine months ended March 31, 2000. The
remaining increase was a result of increased equity earnings in the Company's
Joint Venture alliance with IGT, which, for accounting purposes, are recorded
net of expense, offset by net decreases in revenues from the Company's
stand-alone proprietary games. At March 31, 2000 there were more than 10,000
games, primarily Wheel of Fortune, operating within the Joint Venture, compared
to more than 6,200 games at March 31, 1999.
On a pro forma basis, revenues from gaming machines and systems for the
nine months ended March 31, 2000 decreased $7.2 million or 5% from the pro forma
revenues for the nine months ended March 31, 1999. This decrease is primarily a
result of decreased machine sales in business operations acquired from
Powerhouse, offset to some extent by the increase in revenues from joint venture
activity as discussed above. The decrease in machine sales in the acquired
operations results both from large, non-recurring domestic and international
machine sales during the nine months ended March 31, 1999, and to a lesser
extent, a decline in casino-market machine sales, as the Company lessens its
focus on sales to the casino gaming market. The decrease in machine sales is
offset somewhat by increases in central system parts and service revenues.
During the nine months ended March 31, 2000, the Company's installed
base of stand-alone proprietary games, without regard to its Joint Venture games
or Silver Strike product, decreased 13% from the nine months ended March 31,
1999. The average net win per unit for the installed base of stand-alone
proprietary games also decreased during the same period.
The Company expects the trend of decreased year over year proprietary
games revenue comparisons for stand-alone proprietary games to continue. The
decline is attributable to the reduction of the installed base, resulting from
the maturation of the stand-alone products and the effect of the Video Wheel of
Fortune, primarily on the Wheel of Gold, as well as competition by gaming
products introduced by competitors. The Company expects the trend of increased
year over year revenue comparisons for the Joint Venture to continue due to the
popularity of the new Video Wheel of Fortune game, which was introduced during
the quarter ended September 30, 1999.
The gaming machine and systems operations are also influenced by
seasonal fluctuations as a result of weather and casino patron traffic patterns.
The Company expects that these seasonal trends will continue in both the Joint
Venture operations and the proprietary games operations outside of the Joint
Venture. In addition, changes in interest rates could have an effect on the
earnings of the Joint Venture. Since jackpot expense is a function of the
present value of future jackpot payments, future changes in the interest rate
environment will affect the profitability of the Joint Venture. Specifically,
decreases in interest rates will increase the current period's jackpot expense
of the Joint Venture while future increases in interest rates will decrease the
current period's jackpot expense of the Joint Venture.
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<PAGE>
Nevada gaming regulators have considered a proposed regulation that
would prevent any slot machine from having cartoon characters, comic book
characters or themes based on materials intended, marketed or used primarily by
minors. During January 2000, Nevada gaming regulators approved amendments to the
regulations prohibiting gaming device themes primarily intended or marketed for
use by minors. The regulation will not affect any current licensed gaming
machines. The Company cannot predict the effect, if any, the amendments will
have on any of its future gaming machines.
During fiscal year 1999, a bill sponsored by the Nevada Resort
Association was signed into law. The bill made provisions for increased
regulatory review of wide area progressives, addressed market accessibility to
games and required manufacturers and casino operators to pay their proportionate
share of state gaming taxes on games placed in casinos on a revenue
participation basis. This legislation has resulted in increased gaming tax
expense associated with Nevada revenues in the Joint Venture, which as a result
decreased the Company's earnings from the Joint Venture and, to a lesser extent,
has increased gaming tax expense in the Company's stand-alone proprietary games
operations outside of the Joint Venture.
The Company has developed and has begun introducing conversion games to
its casino customers. The Company, as well as Barcrest, an IGT subsidiary,
continue to develop games to be introduced under what the Company calls the
conversion opportunity. The conversion opportunity is an Anchor Gaming operation
that will be accounted for within the Joint Venture whereby Anchor will upgrade
existing, casino-owned IGT gaming machines in exchange for a fixed portion of
the future incremental revenue stream generated by the conversion. This upgrade
will generally take the form of placing a secondary bonusing type of event on or
in the existing base unit. As of March 31, 2000 the Company has received
regulatory approval in Nevada and several other jurisdictions for several
different conversion games and has placed some of the games in casinos on a
limited basis. The Company has also received regulatory approval in Nevada and
several other jurisdictions that enables the base slot machines to accept up to
45 coins per wager. This will provide the player with a multi-line, multi-coin
spinning reel slot machine experience. The Company introduced this multi-coin
feature on the conversion platform during the quarter ended September 30, 1999
and has also placed some of the games in casinos on a limited basis. The Company
cannot predict the level of success, if any, the conversion opportunity will
provide. The Company does not expect significant revenue contributions from the
conversion opportunity in fiscal 2000.
Costs of gaming machines and systems were $36.3 million for the nine
months ended March 31, 2000, an increase of $11.2 million or 45% from the
historical nine months ended March 31, 1999. The gaming machines and systems
operations acquired from Powerhouse accounted for the majority of the increase
in historical costs by contributing approximately $15.3 million to costs of
gaming machines and systems during the 2000 nine months. The remaining decrease
is due primarily to a lower level of write downs related to gaming machines
within the Company's stand-alone proprietary games operations, and to a lesser
extent, decreases in royalty expenses as a result of decreased revenues from the
Company's stand-alone games. On a pro forma basis, costs of gaming machines and
systems decreased $15.1 million or 29% due to the decreased historical
proprietary games costs and due to decreases in costs related to decreased
revenues from the operations acquired from Powerhouse. Gaming machines and
systems gross margin on a pro forma basis increased to 73% during the nine
months ended March 31, 2000 from 63% during the pro forma nine months ended
March 31, 1999. This is due primarily to the increase in equity
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<PAGE>
earnings and the decrease in machine sales in business operations acquired from
Powerhouse, which have achieved lower margins historically when compared to the
margins achieved in the proprietary games operations.
LOTTERY SYSTEMS
Revenues from lottery systems were $93.7 million for the nine months
ended March 31, 2000, an increase of $17.8 million or 23% on a pro forma basis
from the pro forma revenues for the nine months ended March 31, 1999. Prior to
the Powerhouse acquisition, the Company had no lottery operations. The increase
is due to increases in system and license revenues from foreign lottery
jurisdictions during the nine months ended March 31, 2000 as well as domestic
lottery revenue increases. During the nine months ended March 31, 2000, the
Company continued work on its Switzerland and Leeward Islands contract
implementations, and began the installation of a lottery system in Shanghai,
China. Domestically, increased revenues resulted from the commencement of
operations under the Company's on-line lottery contract with the Hoosier Lottery
in Indiana and strong results in Florida. The resulting increase in revenue was
partially offset by the loss of the Montana Lottery, which provided revenue
during the nine months ended March 1999.
As is normal for businesses that involve sales of large system
contracts, the consummation of sales and their timing are inherently uncertain.
As a result, the Company could experience uneven revenues from period to period
and may not consummate anticipated sales in any future period.
Costs of lottery systems were $54.0 million during the nine months
ended March 31, 2000, an increase of $8.9 million or 20% on a pro forma basis
from the pro forma costs for the nine months ended March 31, 1999, due primarily
to increased revenues. The gross margin on a pro forma basis increased to 42% in
the March 2000 nine months versus 41% in the pro forma 1999 nine months
primarily due to increased system sales in the nine months ended March 31, 2000
quarter which provided higher margins.
PARI-MUTUEL SYSTEMS
Revenues from pari-mutuel systems were $14.6 million for the nine
months ended March 31, 2000, a decrease of $0.2 million or 1% on a pro forma
basis from the pro forma revenues for the nine months ended March 31, 1999.
Prior to the Powerhouse acquisition, the Company had no pari-mutuel operations.
Costs of pari-mutuel systems were $9.7 million for the nine months ended March
31, 2000, which represents a slight increase in costs on a pro forma basis from
the nine months ended March 31, 1999.
OTHER COSTS
Selling, general and administrative ("SG&A") expenses were $52.6
million for nine months ended March 31, 2000, an increase of $34.6 million or
192% from the historical nine months ended March 31, 1999. SG&A expenses as a
percentage of total revenue increased to 14% during the nine months ended March
31, 2000 compared to 10% during the historical nine months ended March 31, 1999.
During the nine months ended March 31, 2000, businesses acquired from Powerhouse
contributed $31.4 million of SG&A expenses. The remaining increase is due
primarily to additional payroll and promotional costs at the Company's Colorado
Central Station
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<PAGE>
Casino. On a pro forma basis, SG&A expenses for the nine months ended March 31,
2000 increased $5.4 million or 12% over the pro forma nine months ended March
31, 1999, due primarily to the historical increase noted above, as well as the
commencement of casino operations at Sunland Park and to a lesser extent,
increased labor costs and professional fees in the lottery systems operations.
Research and development ("R&D") expenses were $12.7 million for the
nine months ended March 31, 2000, an increase of $12.5 million from the
historical nine months ended March 31, 1999. During the nine months ended March
31, 2000, businesses acquired from Powerhouse contributed $10.5 million of R&D
expenses. The remaining increase resulted primarily from a one-time settlement
received from the Ontario provincial government in the prior year, which was
included in total R&D expense for the nine months ended March 31, 1999. The
Province of Ontario has mandated that the terms of the settlement be held in
confidence. To a lesser extent, the increase was due to higher R&D expenses in
our proprietary games operations. On a pro forma basis, R&D expenses for the
nine months ended March 31, 2000 increased $5.1 million or 68% from the pro
forma nine months ended March 31, 1999, resulting from increased R&D expenses of
the acquired operations within the gaming machines and systems operations, as
well as the historical increase noted above. In addition to the R&D expenses
reflected on the Company's financial statements, R&D costs related to the Joint
Venture are accounted for on the books of the Joint Venture and are not included
in the amounts disclosed as R&D in the Company's financial statements.
Depreciation and amortization expense was $37.1 million for the nine
months ended March 31, 2000, an increase of $24.5 million or 194% from the
historical nine months ended March 31, 1999. During the nine months ended March
31, 2000, businesses acquired from Powerhouse contributed $21.7 million in
depreciation and amortization expense. The remaining historical increase
resulted from increased depreciation expense incurred in the proprietary games
operations. On a pro forma basis, depreciation and amortization for the nine
months ended March 31, 2000 increased $6.4 million or 21% from the pro forma
nine months ended March 31, 1999 due primarily to increased depreciation and
amortization expense incurred in the gaming operations and machines and systems
operations, and to a lesser extent, the lottery systems operations acquired from
Powerhouse.
INCOME FROM OPERATIONS. As a result of the factors discussed above,
income from operations was $89.1 million for the nine months ended March 31,
2000, an increase of $11.1 million or 14% on a historical basis and a $5.0
million increase or 6% on a pro forma basis from the nine months ended March
31, 1999. As a percentage of total revenues, income from operations decreased
to 23% during the nine months ended March 31, 2000 from 42% historical and
24% pro forma for the nine months ended March 31, 1999.
OTHER INCOME (EXPENSE). Interest income was $1.5 million for the nine
months ended March 31, 2000 versus $2.8 million for the historical nine months
ended March 31, 1999. The reduction is due to decreased cash balances for
investment as a result of cash spending for the Powerhouse acquisition. Interest
expense of $12.2 million for the nine months ended March 31, 2000 is the result
of borrowings associated with the Powerhouse Acquisition. There was no
historical interest expense incurred in the nine months ended March 31, 1999.
NET INCOME AND EARNINGS PER SHARE. As a result of the factors discussed
above, net income was $47.1 million for nine months ended March 31, 2000, a
decrease of $3.1 million or 6% from
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<PAGE>
the historical nine months ended March 31, 1999. On a pro forma basis, net
income for the nine months ended March 31, 2000 increased $1.6 million or 4%
from the pro forma nine months ended March 31, 1999. Diluted earnings per share
of $3.88 for the nine months ended March 31, 2000 increased $0.25 or 7% from the
pro forma nine months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. At March 31, 2000, the Company maintained $33.2 million in
cash and equivalents, $48.2 million in working capital, and $66.0 million
available under a reducing revolving credit facility, compared with cash and
cash equivalents at June 30, 1999 of $32.8 million and working capital of $28.9
million.
During the nine months ended March 31, 2000, operating activities
provided $82.4 million in cash flows on $47.l million in net income, compared
with $61.5 million in cash flows on $50.2 million in net income during the
historical nine months ended March 31, 1999.
In June 1999, the Company borrowed $210 million on a $300 million
unsecured credit facility to complete the Powerhouse Acquisition. The Company
has agreed to maintain certain financial and non-financial covenants customary
with lending arrangements of this type. The Company has complied with the
covenants throughout the term of the credit facility.
Prior to obtaining financing for the Powerhouse Acquisition, Anchor's
principal sources of liquidity included cash flows from operations and the net
proceeds from a secondary offering in April 1996 of $53.9 million and its
initial public offering in February 1994 of $34.1 million.
In September 1999, the Company announced the signing of a development
and management agreement with the Pala Band of Mission Indians ("the Tribe") to
develop and assist in obtaining financing for the construction of a casino and
entertainment facility near San Diego, California. The agreements have been
submitted to the National Indian Gaming Commission for approval. The development
is subject to the receipt of various regulatory and licensing approvals.
The Tribe will finance the project with a $100 million credit
facility, which will include an Anchor guaranty relative to both the
completion of the project and the repayment of the bank debt. At a minimum,
the guaranty is expected to be in place for the period ending with the later
of two years from the closing of the loan or one year following the
commencement of gaming, after which it may be removed if certain financial
and non-financial measures are met. The Company will render management
services for the facility for seven years, subject to National Indian Gaming
Commission approval, after the completion of construction. Also under the
terms of the agreements, the Company has committed to advance on behalf of
the Tribe funds to facilitate activities related to the development of the
project. The advances will be reimbursed to the Company, plus interest, upon
the Tribe securing the permanent financing for the project. As of March 31,
2000, the Company has advanced $2.8 million on behalf of the Tribe, which is
included in accounts and notes receivable, net on the Company's balance
sheet. The aforementioned agreements are all subject to the receipt of
various regulatory and licensing approvals.
In October 1999, the Company made a $22 million equity contribution
to the Joint Venture with IGT to fund certain contractual expenditures. The
contribution was funded through additional borrowings on the Company's credit
facility.
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<PAGE>
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). EBITDA for the nine months ended March 31, 2000 was $126.0 million, an
increase of $11.4 million or 10% from $114.7 million from the pro forma nine
months ended March 31, 1999.
EBITDA should not be construed as a substitute for operating income or
a better indicator of liquidity than cash flow from operating, investing and
financing activities, which are determined in accordance with generally accepted
accounting principles, and is included herein to provide additional information
with respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. Although EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs,
management believes that EBITDA is a useful tool for measuring the ability of
the Company to service its debt. The Company's definition of EBITDA may not be
the same as that of similarly captioned measures used by other companies.
CAPITAL EXPENDITURES. During the nine months ended March 31, 2000, the
Company spent $42.4 million on capital expenditures in addition to $12.3 million
on intangible and other assets. Capital expenditures were primarily incurred for
the manufacture of lottery systems and equipment for the Florida, Indiana,
Pennsylvania and West Virginia lottery contracts and to a lesser extent, the
purchase of gaming devices and equipment for use in its proprietary games
operations. Intangible expenditures were incurred primarily for lottery contract
implementations. In the historical nine months ended March 31, 1999, the Company
spent $12.0 million on capital expenditures, primarily related to the purchase
of gaming devices and equipment for use in its proprietary games operations.
The Company selectively pursues opportunities to win additional and
retain existing on-line wagering contracts. If successful in obtaining new
domestic and/or international lottery contracts, and depending on the size of
the jurisdictions served, the Company may be required to secure additional
funding for the related capital expenditures. The lottery systems segment
operates in a capital-intensive industry, in which wagering terminals, computer
systems, and applications and communications software must be installed
throughout a jurisdiction, often beginning up to one year before revenues are
earned on the long-term contract. When a new jurisdiction is added to the
Company's customer base, capital required to obtain and install hardware and
software can be significant. Generally, initial contract terms are from 5 to 7
years, often with 1 to 3 year extension options. Upon expiration of a contract
and its extensions, the jurisdiction typically requires vendors to re-bid their
services and replace existing equipment with new equipment. An incumbent vendor
may have some benefit due to the communications infrastructure already in place,
but most often, a significant portion of the initial capital investment must be
replaced upon the re-awarding of a lottery contract.
STOCK REPURCHASE. During the quarter ended March 31, 2000, the
Company repurchased 454,500 shares at a cost of $17.5 million. During the
quarter ended December 31, 1999, the Company repurchased 59,700 shares of its
common stock at a cost of $3.4 million. The Company did not repurchase any of
its common stock during the quarter ended September 30, 1999. In April 1997,
the board of directors authorized a repurchase of up to 1,000,000 shares of
common stock. The board of directors authorized additional repurchases of up
to 513,975 shares in December 1997, 640,400 shares in October 1998 and on
March 16, 2000, an additional one million shares were authorized for
repurchase. As of March 31, 2000, the Company had repurchased 2.3 million
shares of common stock under stock repurchase plans at a cost of $112.2
million.
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<PAGE>
At March 31, 2000 there was a balance of 855,500 authorized shares remaining
under the repurchase program.
WORKING CAPITAL REQUIREMENTS. In addition to cash requirements needed
for the purchase and construction of capital equipment and the implementation of
long-term lottery contracts, working capital is necessary to finance customer
receivables and inventory levels. At March 31, 2000, notes receivable from
customers relating to product sales within the gaming machines and systems
segment totaled $11.1 million. Management intends to continue financing sales
when advantageous to the Company, which may result in increased receivable
balances. Financing gaming machine sales over short periods is common in the
gaming machine sales industry, and most of the Company's customer notes range
from one to two years, with interest rates of up to 14%. Certain international
and domestic receivables have repayment periods of up to nine years.
The Company continually seeks opportunities to expand its gaming
oriented businesses in new and existing gaming jurisdictions and is currently
pursuing additional opportunities in Native American gaming in California. If
successful in pursuing another opportunity in any gaming oriented business and
depending on the amount of funding required, the Company may be required to
obtain additional financing and/or restructure its current financing.
YEAR 2000
The Company has conducted a comprehensive review of its computer and
other systems deemed to be date sensitive (as well as those of its
unconsolidated affiliates) to assess its exposure to the Year 2000 Problem.
Management believes that the Company's critical systems were Year 2000 compliant
as of March 31, 2000.
The Company believes that no material adverse impact has occurred on
its production capabilities, processes or other operational departments reliant
on computer systems resulting from the Year 2000 issues. The Company also
believes that there is no material impact from the Year 2000 issues on its
consolidated financial position, results of operations or cash flows. However,
certain ongoing risks exist relative to the non-compliance of third parties with
operational significance to the Company. Accordingly, there can be no assurance
that the Company will not be adversely impacted in the future by Year 2000
issues.
To date, the Company has incurred approximately $0.5 million of costs
directly associated with the Year 2000 readiness. The future costs associated
with Year 2000 compliance are not anticipated to be material to the Company's
consolidated financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
on its floating rate debt. To reduce such risks, the Company selectively uses
financial instruments for its floating rate debt. In fiscal 2000, the Company
entered into an interest rate swap agreement for a notional amount of $100
million. The agreement calls for the Company to swap its variable LIBOR rate
(6.04% at March 31, 2000) for a fixed LIBOR rate of 5.93%. The variable LIBOR
rate readjusts each quarter, and the agreement is cancelable by the bank
after one year. The swap agreement terminates in October 2003. The fair value
of the swap asset at March 31, 2000 is approximately
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<PAGE>
$0.1 million based on the present value of future cash inflows expected based
on the LIBOR rate at March 31, 2000.
The Company does not have any cash or cash equivalents at March 31,
2000 that are subject to market risk based upon changes in interest rates. The
Company is exposed to the risk of foreign currency exchange rate fluctuations.
As of March 31, 2000, the Company had accounts and notes receivable of $1.6
million denominated in Canadian currency and $0.2 million denominated in
Australian currency. All foreign receivables are expected to be collected within
12 months. The Company does not currently hedge against foreign currency risk.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999, the Company and the Joint Venture filed an action in
U. S. District Court, District of Nevada against Acres Gaming, Inc. ("Acres").
The complaint alleges infringement of the Company's secondary event patents as
well as various contract breaches by Acres. In April 1999, Acres responded to
the Company's lawsuit by filing an answer and counterclaim against the Company
and the Joint Venture. Additionally, in April 1999, Acres filed an action in
Oregon state circuit court against the Company and the Joint Venture alleging
wrongful use of Acres' intellectual property and breach of fiduciary duties. The
Company believes Acres' counterclaim and state circuit court lawsuit are without
merit and intends to vigorously contest the claims. The Oregon state circuit
court action has been moved to the U.S. District Court, District of Oregon, and
has been stayed pending the outcome of the Nevada actions.
Several securities class action lawsuits have been filed against the
Company and certain of its current and former officers and directors. The
lawsuits have been brought on behalf of certain purchasers of the stock of the
Company and allege violations of state and/or federal securities laws arising
out of alleged misstatements and omissions to state material facts about the
Company over various periods of time covered by the suits. The lawsuits were
consolidated in Nevada, both in federal and state court. The consolidated
federal action, captioned IN RE ANCHOR GAMING SECURITIES LITIGATION, Civil
Action No. CV-S-97-01751-PMP (RJJ), was dismissed on January 6, 1999 with the
court entering a judgement in favor of Anchor Gaming. The consolidated state
action, captioned RYAN, ET AL. V. ANCHOR GAMING, ET AL., Civil No. A383456, has
been stayed by order of the court. Certain other actions have been transferred
and/or dismissed. The Company believes that the claims are without merit, and
the Company intends to vigorously contest the lawsuits. The Company cannot
presently state the nature of further proceedings, if any, in the state or
federal actions.
In February of 1999, GTECH Corporation filed a complaint for
declaratory judgment, injunction, and violation of the Public Records Law
against the State of Florida, Department of Lottery and AWI in the Circuit
Court, Second Judicial Circuit, in Leon County, Florida. The complaint requests
the Circuit Court to declare the contract between AWI and the Florida Lottery
void in the event the First District Court of Appeal of Florida upholds the
Florida Lottery's decision to award the on-line lottery services contract to
AWI. Subsequent to the execution of the renegotiated contract between AWI and
the Florida Lottery in March 1999, GTECH Corporation amended the complaint.
On January 28, 2000 the Circuit Court of Leon County granted GTECH
Corporation's cross motion for summary judgment on Count II of the complaint
filed by GTECH in March 1999. Count II of GTECH's complaint challenges the
validity of the amended contract entered into on March 9, 1999 between the State
of Florida, the Department of Lottery, and AWI, on the grounds that, among other
things, the amended contract is materially different from the proposal which AWI
submitted. The ruling declares null and void the amended contract between the
Florida Lottery and AWI effective February 2, 2000. The Florida Lottery filed an
appeal on February 2, 2000 and as a result an automatic stay of the prior order
took place. The Lottery and AWI filed an appeal on March 27, 2000. On April 5,
2000, GTECH filed a motion to strike these appeals. On April 26, 2000, the Court
of Appeals granted GTECH's motion to strike in part. AWI has until May 16,
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<PAGE>
2000, to file an amended appeal. AWI continues to provide its on-line gaming
services and products to the Lottery under the terms of the amended contract.
Anchor Gaming will vigorously defend and protect its rights under this lottery
agreement. There can be no assurance, however, that Anchor's AWI subsidiary will
be successful in its efforts or that the ultimate results of this litigation
will be favorable to Anchor Gaming.
On February 17, 2000, the Company filed a complaint in U.S. District
Court, District of Nevada against former officers of Powerhouse Technologies,
Inc. and other parties. The complaint questions certain specified accounting
practices that were used prior to the acquisition.
The Company is party to several routine lawsuits arising from normal
operations. Management does not believe that the outcome of such litigation will
have a material adverse effect on the consolidated financial statements of the
Company.
ITEM 6. EXHIBITS
(a) Exhibits
27. Financial Data Schedule (For SEC Use Only)
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
ANCHOR GAMING
(Registrant)
Date May 15, 2000 /s/ Thomas J. Matthews
------------ ------------------------
Thomas J. Matthews
Chief Executive Officer and
President
Date May 15, 2000 /s/ Geoffrey A. Sage
------------ ------------------------
Geoffrey A. Sage
Chief Financial Officer and
Treasurer
-32-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANCHOR
GAMING BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 33,157
<SECURITIES> 0
<RECEIVABLES> 44,070
<ALLOWANCES> 0
<INVENTORY> 23,626
<CURRENT-ASSETS> 116,949
<PP&E> 193,646
<DEPRECIATION> 0
<TOTAL-ASSETS> 552,472
<CURRENT-LIABILITIES> 68,744
<BONDS> 228,922
0
0
<COMMON> 140
<OTHER-SE> 253,344
<TOTAL-LIABILITY-AND-EQUITY> 552,472
<SALES> 0
<TOTAL-REVENUES> 125,461
<CGS> 0
<TOTAL-COSTS> 60,998
<OTHER-EXPENSES> 33,723
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,348
<INCOME-PRETAX> 26,855
<INCOME-TAX> 10,842
<INCOME-CONTINUING> 16,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,013
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.33
</TABLE>
