ITEM 1. BUSINESS.
GENERAL
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company that seeks to capitalize on its experience as an operator and developer of gaming machines and casinos by developing gaming oriented businesses. Anchor develops and distributes unique proprietary games, operates two casinos in Colorado, and operates a gaming machine route in Nevada. Anchor operates through wholly owned subsidiaries, Anchor Coin, C.G. Investments, Inc, and D D Stud, Inc. and one 80% subsidiary, Colorado Grande Enterprises, Inc. References in this Annual Report on Form 10-K to Anchor or the Company include subsidiaries unless the context requires otherwise.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and other applicable securities laws. 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 may be contained in the Company's business description and in Management's Discussion and Analysis of Financial Condition and Results of Operations, among other places. Although the Company believes that the expectations reflected in any of its forward-looking statements will prove to be correct, actual results could differ materially from those projected or assumed in the Company's forward-looking statements. The Company's future financial condition and results, as well as any forward-looking statements, are subject to the inherent risks and uncertainties that are described from time to time in the Company's reports filed with the Securities and Exchange Commission. See "Risk Factors" in addition to the other information in this Annual Report. The Company undertakes no obligation to update any forward-looking statement.
PROPRIETARY GAMES
GENERAL. Anchor develops proprietary games, which it markets to unaffiliated casinos and uses in its own gaming operations. The Company's strategy is to develop games that provide casinos with a higher win per machine than their existing gaming devices while generating recurring revenues to the Company from royalty, revenue participation, fixed daily rental fee, or other similar agreements. Although the Company initially developed proprietary games as a complement to its own gaming machine operations, since February 1993 the Company has been actively marketing its proprietary games to unaffiliated casinos. The Company currently provides proprietary games to virtually every major casino in the United States, as well as to the two casinos it owns in Colorado. In September 1996, the Company entered into a strategic alliance (the "Strategic Alliance") with International Game Technology ("IGT"), the largest manufacturer of computerized gaming casino products, to enhance the Company's ability to develop and distribute proprietary games. Through the Strategic Alliance, the Company and IGT have formed a joint venture (the "Anchor IGT JV") to develop, integrate, and distribute proprietary game concepts, primarily on wide area progressive systems ("WAPs").
The Company, seeking to capitalize on its established sales and marketing infrastructure, its base of existing casino customers, and its licenses in virtually all major domestic gaming jurisdictions, has been actively developing proprietary games, which can be classified as either a dedicated proprietary game, a proprietary game on a WAP, or a converted proprietary game. The Company's proprietary games are designed to increase gaming customer play levels by either enticing the customer to play longer or to wager
more coins per play. The Company believes that an opportunity exists to further expand and develop the market for proprietary games distributed on a royalty, revenue participation, fixed daily rental fee, or other similar basis.
DEDICATED PROPRIETARY GAMES. The Company has successfully developed or acquired the rights to ten proprietary games that are currently installed and approved for use in unaffiliated casinos. Anchor's dedicated proprietary games include Double Down Stud, Silver Strike, Clear Winner, Wheel of Gold, Totem Pole, Rock'N'Reels, CashBall, Wheel Poker, Crazy Joker Poker, and SafeBuster. All of the machines are placed in casinos free of any initial charge allowing the casino to avoid up-front purchase costs and providing recurring revenues to Anchor under royalty, revenue participation, fixed daily rental fee, or other similar agreements. The machines utilize numerous unique concepts and designs in order to increase overall gaming customer play levels. For example, the Company's two most popular dedicated proprietary games, Totem Pole and Wheel of Gold, each incorporate innovative game features that contribute to higher play levels. Totem Pole comprises three games in one slot machine creating a unique visual presentation in the casino environment. Greater play levels are realized on Totem Pole because the player must insert the maximum number of coins to activate all three games and benefit from the addition of a "wild" symbol. Players on the Wheel of Gold machine have the opportunity to activate on the same machine a three dimensional "roulette" type wheel with significantly higher potential winnings, providing a secondary game event and additional excitement to the customer through the Company's "game within a game" concept. Anchor's "game within a game" concept provides the player an incentive to increase play through the secondary game event, thereby maximizing customer playing time.
WAP PROPRIETARY GAMES. A WAP is a system that electronically links individual slot machines among multiple locations, allowing all the machines to share a common jackpot. The WAP jackpot increases, or progresses, by a certain percentage of each coin inserted into any one of the machines on the WAP network, thereby allowing the jackpot to increase rapidly to a significant amount. Management believes that the large jackpots offered by WAP machines attract a distinct portion of a customer's gaming budget as compared to a non-progressive slot machine. In order to capture this portion of a customer's gaming budget, the Company entered into the Strategic Alliance resulting in the Anchor IGT JV for the purpose of developing and installing WAP machines based on both existing dedicated proprietary games and other game designs. The Company and IGT share in the management of the Anchor IGT JV and share equally in its profits and losses. The first WAP machine introduced by the Anchor IGT JV is the Wheel of Fortune, a game that is very similar to the Company's Wheel of Gold. Additionally, the Anchor IGT JV has introduced Wheel of Gold, Totem Pole, and Pinball Mania on a WAP.
CONVERSION OPPORTUNITY. The Company's first proprietary game was the video poker game Double Down Stud, a software conversion kit that the Company installs in existing third party casino gaming machines. The enhancement created by the installation provides the Company a daily royalty for each converted machine. Management believes that as casinos experience pressure to increase "same store sales" they will seek to enhance the performance of their installed base of machines by adding new features by means of conversion kits. The Company is currently developing technology to allow older generation slot machines to utilize additional features such as the "game within a game" concept.
The following is a description of proprietary games that the Company is currently distributing.
The Company derives recurring revenues on these machines in various forms, including daily or similar royalties, revenue participation, fixed daily rental fees, or other similar agreements with casinos, and, in the case of Silver Strike, by selling the souvenir tokens to casinos.
DEVELOPMENT. Anchor is continually engaged in the development of new proprietary games and in the improvement of existing games. After the Company has identified the basic concept for a new game, it works to refine the new game to maximize player appeal. The Company's efforts include computer simulated studies of the game probabilities to determine the optimal pay schedules; research of, and application for, any significant intellectual property rights that can be claimed; design of packaging for the game; establishment of a pricing strategy for the game; and application for the necessary regulatory approvals. Anchor then solicits feedback from potential casino customers to further refine the game. At the production stage, Anchor and the manufacturer refine the technology and construction of the game. Prior to the release of any new game, Anchor must receive necessary regulatory approvals. During the year ended June 30, 1998, Anchor added a Research and Development Department and acquired an Engineering Group to enhance its ability to develop new proprietary game concepts.
DISTRIBUTION. Anchor has an established sales organization with offices in Nevada, Missouri, Mississippi, Louisiana, Indiana and New Jersey servicing an established customer base of over 250 casinos at June 30, 1998. The Company distributes its proprietary games primarily through a direct sales effort in which sales representatives call on casinos and other potential customers. Anchor also uses distributors in a limited number of jurisdictions.
ANCHOR IGT STRATEGIC ALLIANCE. In September 1996, the Company entered into the Strategic Alliance. The Company believes that the Strategic Alliance will facilitate both the expansion of their proprietary games business and the Company's ability to develop and distribute additional proprietary games on a WAP.
As part of the Strategic Alliance, Anchor and IGT have formed the Anchor IGT JV. The Company and IGT share in the management and share equally in its profits and losses. IGT's WAP system is being used within the Anchor IGT JV for a variety of the Company's dedicated proprietary game concepts including Wheel of Gold, Totem Pole, and CashBall. IGT's Wheel of Fortune game is also covered under the Strategic Alliance. Property, including intellectual property, developed through the joint venture is owned by the Anchor IGT JV. The joint venture agreement has an initial duration of ten years and terminates unless the parties thereto agree to an extension. After the initial ten year term, either party may terminate the joint venture upon at least one year's prior notice. The Anchor IGT JV does not acquire any rights to the intellectual property rights of each of Anchor and IGT that are developed outside of the joint venture. In the event that any particular state jurisdiction prohibits the equal share of profits and losses, management responsibility, or allocation of expenses in the Anchor IGT JV, alternative arrangements are made to satisfy regulatory requirements.
INTELLECTUAL PROPERTY RIGHTS. Anchor has secured and endeavors to secure, to the extent possible, exclusive rights in its games, primarily through federal and foreign intellectual property rights, such as patents and trademarks. The United States Patent and Trademark Office has issued several patents to Anchor, including (1) four patents which expire on March 31, 2009 covering the Double Down Stud games in the United States; (2) one patent which expires on March 14, 2012 covering innovations of the Silver Strike game (but there is no independent protection of the game itself); (3) one patent which was issued in 1993, relating to a system it developed that allows players of gaming devices to participate in a group game, such as bingo, without leaving the gaming device they are playing; (4) one patent which expires July 11, 2112 covering the Crazy Joker "traveling wild card" concept; and (5) one patent which expires on October 18, 2011 related to the game Player's Choice 21. In order to protect potential foreign sources of income, the Company has filed patent applications and trademark applications in strategically selected foreign countries. There can be no assurance that any of the pending U.S. or foreign patent or trademark applications will issue as patents or trademark registrations, respectively, or that any of these rights will not be infringed by others or that already issued patents or trademark registrations will not be invalidated or canceled. None of the foregoing measures provides assurance that Anchor's proprietary games or the concepts incorporated in the games could not be successfully duplicated by third parties. Third parties
could infringe on Anchor's rights, or Anchor's proprietary games could be successfully duplicated without infringing on Anchor's legal rights. Many elements incorporated in Anchor's proprietary games are in the public domain or otherwise not susceptible to legal protection, and the steps taken by Anchor will not, in and of themselves, preclude competition with Anchor's proprietary games.
Clear Winner-Registered Trademark-, Colorado Central Station Casino-Registered Trademark-, Colorado Grande-Registered Trademark-, Double Down Stud-Registered Trademark-, Fast Track Express-Registered Trademark-, Silver Strike-Registered Trademark-, and Spin for Cash-Registered Trademark- are registered trademarks, and Anchor Coin-TM-, Anchor Games-TM-, Anchor Gaming-TM-, Bang For A Buck-TM-, Big Bucks Bingo-TM-, Big Slot-TM-, CashBall-TM-, Casino Bowling-TM-, Crazy Joker-TM-, Fast Cash Giveaway-TM-, Keno Bucks-TM-, Maggie's Slot Club-TM-, Players Choice 21-TM-, Push Your Luck-TM-, Race to Riches-TM-, Rock'N'Reels-TM-, Spin, Rattle and Roll-TM-, Spin The Wheel-TM-, Tic-Tac-Disco-TM-, Totem Pole-TM-, Wheel & Deal-TM-, Wheel Poker-TM-, Wheel of Gold-TM- and Wheel Winner-TM- are trademarks of Anchor Gaming. IGT-TM-, Wheel of Fortune-TM- and SafeBuster-TM- are trademarks of their respective owners. There can be no assurance that any pending trademark or patent applications will be issued, that the Company's applications will not be opposed by a third party, or that Anchor will not face third parties' claims to prior use of one or more of these marks or patents.
CASINOS
GENERAL. In November 1990, the state of Colorado approved limited stakes gaming ($5.00 or less per wager) in two historic gold mining areas, Black Hawk/Central City and Cripple Creek. Because of the $5.00 maximum bet, Anchor's casinos in Colorado emphasize gaming machine play. Anchor currently operates a casino in each of these markets, the Colorado Central Station Casino in Black Hawk and the Colorado Grande Casino in Cripple Creek. Black Hawk and Central City are contiguous and are located approximately 40 miles from Denver and 10 miles from Interstate 70, the main highway connecting Denver to many of Colorado's major ski resorts. Cripple Creek is located approximately 45 miles from Colorado Springs and 75 miles from Pueblo. Casinos located in the Black Hawk/Central City area serve primarily the residents of Denver and Boulder, Colorado and surrounding communities, an area with a total population in excess of 1.8 million. Approximately three million people live within a 100-mile radius of the Black Hawk/Central City area. Casinos located in Cripple Creek serve primarily the residents of Colorado Springs, Pueblo, and surrounding communities. More than two million people live within a 100-mile radius of Cripple Creek.
COLORADO CENTRAL STATION CASINO. On December 25, 1993, the Company opened the Colorado Central Station Casino in Black Hawk at an initial cost of approximately $25.0 million. The Colorado Central Station Casino is one of the highest revenue producing and one of the most profitable casinos in the state. After completion of a 2,750 square foot expansion in 1996, the casino building has approximately 49,000 square feet of main facility area, with 16,637 square feet of gaming space over three floors. The Colorado Central Station Casino features more than 700 gaming machines, ten blackjack tables, nine poker tables, and a food court restaurant area. The casino benefits from a favorable location, as it is the first casino encountered by customers traveling from Denver to the Black Hawk/Central City area. In addition, the Colorado Central Station Casino offers more than 600 parking spaces. The Colorado Central Station Casino is also the closest casino to Black Hawk's 3,000 space public parking facility, located one and one-half miles from the casino, and is the first stop from the parking facility on the parking lot shuttle bus route. The Colorado Central Station Casino is situated on approximately 1.8 acres of land on the south end of Black Hawk, near Main Street and Colorado State Highway 119.
The Colorado Central Station Casino is fashioned in the style of a 19th century mining town railroad station. According to information on file with the Colorado Historic Preservation Office, the Colorado Central Station Casino property is within the Black Hawk Registered Historic District and meets the historical guidelines for use as a gaming establishment. The Colorado Central Station Casino was constructed specifically for gaming activities, and as a result offers an open, spacious gaming area, while using the maximum square footage allowed under Colorado law, which limits the square footage of a casino that may be used for gaming activities to 35% of the building and 50% of any one floor. At June 30,
1998, the Colorado Central Station Casino employed approximately 425 people and by law is allowed to be open seven days a week from 8:00 a.m. to 2:00 a.m. All gaming machines at the Colorado Central Station Casino offer bill validators that accept $1, $5, $10, $20, $50, and $100 bills. In addition, the Company has installed an automated player tracking system at the casino that is tied into the Company's accounting system to provide detailed management reports regarding gaming machine use. The system facilitates the casino's Fast Track Slot Club, which is designed to attract and retain gaming patrons by enabling the Company to identify, market to, and reward its loyal customers.
COLORADO GRANDE CASINO. The Company operates (through an 80% owned subsidiary) the Colorado Grande Casino in Cripple Creek, which is located approximately 45 miles from Colorado Springs and 75 miles from Pueblo. The Colorado Grande Casino, which opened October 11, 1991, is located at one of the principal intersections in Cripple Creek and features more than 210 gaming machines, 44 adjacent parking spaces, and a full service restaurant and bar. In August 1995, the Company completed the installation of an automated player tracking system and a player slot club, "Maggie's Slot Club." Maggie's Slot Club and the player tracking system have enabled the casino to implement marketing programs designed to attract and increase the number of loyal casino customers. At June 30, 1998, the Colorado Grande Casino employed approximately 98 people and by law is allowed to be open seven days a week from 8:00 a.m. to 2:00 a.m.
ROUTE OPERATIONS
Anchor is one of the largest gaming machine route operators in Nevada with 842 gaming machines in 60 locations at June 30, 1998, up from 801 gaming machines in 58 locations at June 30, 1997. The Company's gaming machine route operations in Nevada involve the installation, operation, and service of gaming machines (virtually all video poker machines) under space leases with retail chains and under revenue participation agreements with local taverns and retail stores, principally in the Las Vegas area. Management believes that the Company's route operation contracts provide the Company with a long-term, stable revenue source and that its route has the highest revenue and profit per machine of any route operation in the state of Nevada. In 1996, the Company extended its exclusive space lease agreement with Smith's Food and Drug Centers, Inc. ("Smiths"), it's largest route customer, for an additional five years at current rates through 2010. At June 30, 1998, 753 of the Company's 842 gaming machines in Nevada were located in or near Las Vegas, which has been one of the fastest growing cities in the United States in recent years.
Anchor's agreements for its locations generally are in the form of either written space lease agreements or revenue sharing contracts and generally give Anchor the exclusive right to install gaming machines at such locations. Two of the Company's gaming route agreements are space leases with major retail chains that require payments of fixed monthly fees based on the amount of space used or the number of gaming machines installed at each location. The remainder of the Company's gaming route agreements are revenue participation arrangements, which provide for the payment to the location owner of a percentage of revenues generated by Anchor's machines at such location. A location owner is not permitted to receive a percentage of revenues unless such owner is licensed by the Nevada Gaming Commission. See "Regulation--Nevada."
Anchor's space lease agreement with its largest gaming machine route customer, Smiths, runs through the year 2010 at current rates. The agreement with Smiths provides for a fixed monthly rental fee per store throughout the term of the agreement and grants Anchor the exclusive right to install gaming machines at all Smiths stores in Nevada, including stores opened in the future.
Anchor's space leases and revenue participation arrangements generally require Anchor to pay all installation, maintenance, and insurance expenses related to its operations at each location. Applicable taxes are paid by Anchor under space leases and are generally shared on the same basis as revenues under revenue participation arrangements. The leases generally provide that if Anchor fails to pay the required rental or license fees or defaults in the performance of any of its other obligations, the location operator
can terminate the lease. Anchor believes that it is not in default under any of its present space leases or revenue participation arrangements. Generally, in the ordinary course of business, Anchor has lease and other security deposits, prepaid rent, and advances held by the owners of chain stores and other location operators.
Anchor attempts to attract and retain gaming machine route patrons by offering an attractive selection of gaming machines. Prior to installing machines at a location, Anchor studies the market potential and customer base and determines the appropriate machine mix for the location. Progressive jackpots are also offered at most of the Company's locations. Virtually all of the gaming machines operated by the Company's route operation are video poker machines because Anchor believes that interactive electronic games, such as video poker, are more attractive to its gaming machine route patrons than simple, mechanical reel-type slot machines.
In marketing its services to the owners of retail stores and taverns, the Company also emphasizes quality service. The Company operates and services its machines using its own employees, who routinely repair and maintain the Company's gaming machines in order to improve reliability and in-service time. Management believes that the Company's gaming machines and related equipment are well maintained and in good working condition. In addition to physical service of the gaming machines, employees of the Company remove coins and bills from the machines, refill machines that have exhausted their supply of coins, and provide payment of jackpots in excess of machine limits. Anchor also operates change booths at certain of its retail store locations.
SUPPLIERS
Anchor has contracted with several manufacturers to develop both Anchor's existing and future product requirements. To date, the Company has purchased substantially all of the gaming machines used in its route operations from IGT. Silver Strike machines are currently manufactured by either IGT or Sigma Game, Inc. The primary components of Wheel of Gold, Wheel Poker and CashBall are manufactured by Bally Gaming International, Inc. Totem Pole was originally manufactured for the Company by Universal Distributing of Nevada, Inc. Since that time, the Company has also contracted with Bally Gaming International, Inc. and IGT for the manufacture of Totem Pole. Crazy Joker Poker machines are currently manufactured by Williams Gaming and SafeBuster machines are currently manufactured by Casino Data Systems. The Company is expected to continue its reliance on third parties for the manufacture of its proprietary games. An inability to obtain quality gaming machines, production parts, and replacement parts on reasonable terms or on a timely basis could have an adverse effect on Anchor. See "Risk Factors--Risks of Dependence on Suppliers."
COMPETITION
Anchor is subject to intense competition in all of its markets, and management believes that national, regional, state, and local competition in the gaming industry in general will be extremely high during the foreseeable future, as gaming activities continue to expand in both traditional and new gaming jurisdictions. In addition, many of the Company's competitors have greater financial resources than the Company. See "Risk Factors--Competition."
PROPRIETARY GAMES. Intense competition characterizes the market for proprietary games. Management believes that the primary bases for competition in the casino game market are price and potential profit to gaming location operators that install the games. The perceived popularity of games with casino patrons as well as the economics of the game are, management believes, factors considered by potential casino customers. The popularity of any of the Company's games may decline over time as consumer preferences change or as new, competing games are introduced. As a result, Anchor must continually adapt its products to consumer preferences to maximize the economics of the game to the Company. There can be no assurance, however, that Anchor will continue to be successful in developing and
marketing its products. If the Company fails to develop games that achieve market acceptance or if existing games become obsolete due to the introduction of popular games by Anchor's competitors the effects on Anchor could be material and adverse. Competitors in the game industry include manufacturers of gaming devices and other companies marketing gaming products and conversion kits that compete directly with the Company for the limited gaming spaces available at casinos.
Anchor's strategy of creating recurring revenues from its proprietary games by placing the games in casinos under a royalty, revenue participation, fixed daily rental fee, or similar agreements involves a departure from the traditional practice of casinos purchasing gaming devices. To the extent that casinos are reluctant to, or decide not to, enter into arrangements that generate recurring revenues for suppliers of casino games, the market for Anchor's proprietary games could be limited, or discontinued if casino operators decide to reject Anchor's revenue sharing model. Competition within the market for games that generate recurring revenues could intensify as other suppliers of gaming devices enter this market or offer competitive products or terms.
CASINOS. Intense competition also characterizes the Black Hawk/Central City and Cripple Creek markets. Since limited stakes gaming was instituted in Colorado in 1991, a number of Colorado casinos have ceased operations and others have filed for protection under Chapter 11 of the Bankruptcy Code. Others have closed temporarily or reduced the number of employees, and many casinos may not be operating profitably. Several proposals have been made to open new casinos or to expand existing casinos in Black Hawk, some of which have been abandoned or modified.
In June 1998, a joint venture between Black Hawk Gaming & Development Company, Inc. and Jacobs Entertainment Ltd. commenced casino operations, "The Lodge," which includes 800 slot machines, 20 table games, and 500 parking spaces. Two casinos are being developed in Black Hawk located across the intersection from the Company's Colorado Central Station Casino. Casino America and Nevada Gold & Casinos have commenced construction of a casino scheduled to open in late 1998 or early 1999, which is expected to include 1,100 slot machines, 24 table games, and a 1,000 car parking garage. Riviera Holdings Corporation has also commenced construction of a casino scheduled to open in late 1999, which is expected to include 1,000 slot machines, 14 table games, and a 500 space covered parking garage. Black Hawk Brewery has commenced construction of a casino, located next to Colorado Central Station, scheduled to open in late 1999 which is expected to include 600 slot machines, 10-20 table games and 500 parking spaces. Fitzgeralds has also announced an expected expansion of approximately 50% of their current gaming area as well as a 70-80 room hotel. Potential projects include the Hyatt, which would include 800-1,000 slot machines and the Dakota Works project, which would include approximately 1,000 slot machines. Competition from these entrants to the market could have a material adverse effect on the Company.
It appears that national, regional, state, and local competition for the casino gaming market in general will remain extremely high during the foreseeable future, as casino gaming activities expand in traditional gaming states and in new jurisdictions. In addition, passage of the Indian Gaming Regulatory Act in 1988 has led to rapid increases in Native American gaming operations, and the Company's two casinos may compete for customers with casinos located on Indian reservations in far southwestern Colorado. The Company expects many competitors to enter new jurisdictions that authorize gaming, some of whom may have greater financial and other resources than the Company. Such proliferation of gaming activities could adversely affect the Company's business. In particular, the legalization of casino gaming in or near any metropolitan area, such as Denver, Colorado, from which the Company draws customers would have a material adverse effect on the Company's business. The Company believes, however, that proliferation of gaming activities into new jurisdictions presents an opportunity for it to expand its proprietary games operations.
Colorado law requires an amendment to the State Constitution followed by local voter approval for any expansion of limited stakes gaming. State and local public initiatives regarding limited gaming in
Colorado are being actively pursued by many persons. Several cities within Colorado have active citizens' lobbies that were able to place limited gaming initiatives on the November 1994 and November 1996 statewide ballot. Although these initiatives failed by substantial margins, new initiatives could be introduced on future statewide ballots to allow expansion of gaming in Colorado. Future initiatives, if passed, could significantly increase the competition for gaming customers, thereby adversely affecting Anchor's current casino operations in Colorado. In addition, Anchor's casinos in Colorado compete with casinos in other parts of the United States, as legalized gambling continues to proliferate.
ROUTE OPERATIONS. Gaming machines and gaming of all types are available in Nevada casinos and in restricted gaming locations similar to those in which the Company operates gaming machines, and all of these gaming establishments compete directly or indirectly with Anchor's route operations. In addition, Anchor is subject to substantial competition for the operation of gaming machines in approved locations from numerous small gaming machine route operators and some large operators, located principally in Las Vegas and Reno, Nevada, and their surrounding areas. The principal methods of competition for gaming machine locations are the lease, sublease, license, or revenue sharing terms, the service provided by the route operator, the reputation of the route operator, and the financial strength of the route operator. As existing space lease and revenue participation arrangements expire, competition for renewals can be expected to increase the amounts payable to location owners as compared to amounts payable under existing agreements. Anchor's route is the only route operation that features Double Down Stud, as the Company does not offer the game to competing route operators. Providing a proprietary game in its route operation is one of the ways Anchor differentiates itself from its competitors.
SECURITY
Anchor's casino and gaming machine route operations generate, and require the Company to maintain, a large supply of available cash. In order to mitigate the risks of loss associated with maintaining such a supply, the Company employs physical security measures and utilizes strict internal accounting and custodial controls on receipts and disbursements. There can be no assurance, however, that the Company's precautions, internal controls, and physical security will provide security for its employees or prevent cash shortages resulting from employee errors or from theft. In addition, the Company maintains insurance to mitigate this risk.
EMPLOYEES
At June 30, 1998, Anchor employed approximately 920 persons, the substantial majority of whom are non-management personnel. Of this total, approximately 520 people worked at the Colorado Central Station Casino and the Colorado Grande Casino. The balance of the Company's non-management employees are involved in route and proprietary games operations. None of Anchor's employees are covered by collective bargaining agreements, and Anchor believes that it has satisfactory employee relations.
SEASONALITY
The Company's proprietary games operations typically have their highest levels of business during the summer tourist season when its casino customers experience heavier tourist traffic. Proprietary games operations within the Anchor IGT JV, as well as within Anchor's proprietary games operations outside of the Anchor IGT JV, during the winter months could be significantly affected by inclement weather, road conditions and casino patron traffic patterns throughout the gaming jurisdictions in which proprietary games are operated. In general, the highest levels of business activity at its Colorado casinos occurs during the tourist season from July to October of each year. In addition, operations at the Colorado casinos during the winter months could be significantly affected by weather and road conditions in Colorado. In general, the highest levels of business activity in its Nevada Route operation occurs during the summer periods, specifically April through September.
REGULATION
NEVADA. The manufacturing and distribution of gaming devices and the ownership and operation of gaming machine routes in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act") and (ii) various local regulations. Generally, gaming activities may not be conducted in Nevada unless licenses are obtained from the Nevada Gaming Commission (the "Nevada Commission") and appropriate county and city licensing agencies. The Nevada Commission, the Nevada State Gaming Control Board (the "Nevada Board"), and the various county and city licensing agencies are collectively referred to as the "Nevada Gaming Authorities."
The laws, regulations, and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned with, among other things, (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping, and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) providing a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations, and procedures could have an adverse effect on Anchor.
Anchor Coin, which is the Company's subsidiary engaged in the distribution of gaming devices and route operations, is licensed by the Nevada Gaming Authorities. Anchor Coin is also licensed as a manufacturer to enable it to develop its proprietary games. Anchor Coin's gaming licenses require the periodic payment of fees and taxes and are not transferable. Anchor is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and, as such, is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information that the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, Anchor Coin without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and Anchor Coin have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits, and licenses required in order to engage in gaming activities in Nevada.
Anchor Coin's operator's license enables it to operate gaming machines on premises owned by others. At locations with 15 or fewer gaming machines, the operation is considered to be a "restricted" gaming location. At locations with more than 15 gaming machines, the operation is considered to be a "non- restricted" gaming location. The non-restricted regulatory requirements are reduced to some extent because no more than 35 gaming machines, and no table games, are operated at this location. Slot machines operated at restricted and non-restricted locations are subject to various fixed fees and per-machine taxes levied on a quarterly and annual basis by the Nevada Gaming Authorities. Non-restricted locations are subject to a tax on their gross revenues (the difference between amounts wagered by casino patrons and payments to casino patrons) that ranges from 3.0% to 6.25%. In its space lease agreements with retail chains, Anchor has agreed to pay all taxes and fees relating to the operation of gaming machines, and in its participation arrangements, taxes and fees are typically shared on the same basis as revenues. Significant increases in the fixed fees or taxes currently levied per machine or the tax currently levied on gross revenues could have a material adverse effect on the Company.
The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or Anchor Coin in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors, and certain key employees of Anchor Coin must file applications with the Nevada Gaming Authorities and are required to be licensed by the Nevada Gaming Authorities. Officers, directors, and key employees of the Company who are actively and directly involved in the gaming activities of Anchor Coin may be required to
be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing or a finding of suitability for any cause they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities, and, in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director, or key employee unsuitable for licensing or to have a continuing relationship with the Company or Anchor Coin, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or Anchor Coin to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada.
The Company and Anchor Coin are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities, and similar financing transactions by Anchor Coin must be reported to or approved by, the Nevada Commission.
If it were determined that the Nevada Act was violated by Anchor Coin, the gaming licenses it holds could be limited, conditioned, suspended, or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, Anchor Coin, the Company, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's nonrestricted locations, and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's gaming property) could be forfeited to the state of Nevada. Limitation, conditioning, or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially and adversely affect Anchor.
Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his or her suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails a written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, that acquires more than 10% but not more than 15% of the Company's voting securities, may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor will not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter or bylaws, management, policies, or operations of the Company or any of its gaming affiliates, or any other action that the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its management, policies, or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities that must be found suitable is a corporation, partnership, or trust, it must submit detailed business and financial information including a list of its beneficial owners. The applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identity the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or Anchor Coin, the Company (i) pays that person any dividend or interest upon voting securities of the Company; (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pays remuneration in any form to that person for services rendered or otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities for cash at fair market value. Additionally, the Clark County, Nevada Liquor and Gaming Licensing Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license.
The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated, and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada that may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that such securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire, or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby such person obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and the Nevada Commission concerning a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors, and other persons
having a material relationship or involvement with the entity proposing to acquire control to be investigated and licensed as part of the approval process of the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities, and corporate defense tactics affecting Nevada gaming licensees and Registered Corporations that are affiliated with those operations may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's board of directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purpose of acquiring control of the Registered Corporation.
Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Board of the Licensees' participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are also required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the state of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or a finding of suitability in Nevada on the ground of personal unsuitability.
The placement and number of gaming machines that may be operated in various locations are subject to limitation and control by local city and county laws and ordinances. Acting through their zoning powers and their powers to regulate gaming, local government entities determine the number of gaming machines that may be operated at non-casino locations and the types of locations where gaming operations may be conducted. Accordingly, changes in such local zoning laws and ordinances could have a material adverse effect on Anchor.
COLORADO. The ownership and operation of gaming facilities in Colorado are subject to extensive state and local regulation. No gaming may be conducted in Colorado unless licenses are obtained from the Colorado Limited Gaming Control Commission (the "Colorado Commission"). In addition, the State of Colorado created the Division of Gaming (the "Colorado Division") within its Department of Revenue to license, implement, regulate, and supervise the conduct of limited stakes gaming. The Director (the "Colorado Director") of the Colorado Division, under the supervision of the Colorado Commission, has been granted broad powers to ensure compliance with the law and regulations. The Colorado Commission, the Colorado Division, the Colorado Director, and city authorities in Black Hawk, Central City, and Cripple Creek that have responsibility for regulation of gaming are collectively referred to as the "Colorado Gaming Authorities."
The laws, regulations, and supervisory procedures of the Colorado Gaming Authorities seek to maintain public confidence and trust that licensed limited gaming is conducted honestly and competitively, that the rights of the creditors of licensees are protected, and that gaming is free from criminal and corruptive elements. It is the stated policy of the Colorado Gaming Authorities that public confidence and trust can be maintained only by strict regulation of all persons, locations, practices, associations, and
activities related to the operation of licensed gaming establishments and the manufacture or distribution of gaming devices and equipment.
The Colorado Commission is empowered to issue five types of gaming related licenses. Anchor's casinos in Colorado each require a retail gaming license, which must be renewed each year, and the Colorado Division has broad discretion to revoke, suspend, condition, limit, or restrict a licensee at any time. No person or entity can have an ownership interest in more than three retail gaming licenses. The Colorado Grande Casino and the Colorado Central Station Casino have each obtained the required retail gaming licenses.
In addition to retail gaming licenses for its casinos, all of Anchor's casino employees involved in gaming activities must apply for and receive a support gaming license prior to commencing employment. "Key" employees, which are defined as any executive, employee, or agent of a licensee having the power to exercise a significant influence over decisions concerning any part of the operations of any licensee, must obtain key licenses. At least one key license holder must be on the premises of each casino at all times. Anchor pays the cost of obtaining and maintaining key licenses. All licenses are revocable, nontransferable, and valid only for the particular location initially authorized, except that support and key employee licenses move with the approved individual and are not location specific.
Any person or group of related persons that acquires beneficial ownership of between 5.0% and 9.99% of the outstanding Common Stock must report the acquisition to the Colorado Commission within ten days of acquiring such interest and may be required to provide additional information to the Colorado Commission and be found suitable. Any person or group of related persons that acquires beneficial ownership of 10% (or, with respect to institutional investors, 15%) or more of the outstanding Common Stock must apply to the Colorado Commission within 45 days after acquiring such interest and submit to investigation for suitability by the Colorado Commission. Certain qualifying institutional investors, at the Colorado Commission's discretion, may acquire up to 15% ownership before a finding of suitability is required if such investors provide certain information to the Colorado Commission regarding investment intent and other matters. In order to be found suitable, a stockholder must be a person of good moral character, honesty, integrity, and, in general terms, must be free from previous criminal or unsavory convictions or similar acts. The Colorado Commission may require substantial information in connection with a suitability investigation, including personal background and financial information, source of funding information, and a sworn statement that such person or entity is not holding the Common Stock for any other party, and also may require fingerprints. Until a finding of suitability occurs for a stockholder who is undergoing a suitability investigation, Anchor cannot pay any dividends to such stockholder nor may the stockholder exercise any voting rights with respect to the Common Stock. A stockholder that is found to be unsuitable must transfer its Common Stock to a suitable person within 60 days after the finding of unsuitability. Otherwise, Anchor may offer such person the lesser of the cash equivalent of such person's investment in the Common Stock or the current market price of the Common Stock as of the date of the finding of unsuitability, and the stockholder will be required to sell his or her Common Stock to Anchor. Anchor's Articles of Incorporation include a statement that all transfers of voting securities are subject to the regulations of the Colorado Commission and each other regulatory body to which the Company's activities are subject and detail the possibility of a repurchase if a stockholder is found unsuitable.
The Colorado Commission has adopted comprehensive rules and regulations that require Anchor to maintain adequate books and records and prescribe minimum operating, security, and payoff procedures. Regulated operating procedures include hours of operation and rules of play. Rules regarding gaming, cheating, and fraudulent practices have also been adopted, which Anchor is obligated to police and enforce. Upon request, Anchor must submit copies of all written gaming contracts and summaries of all oral gaming contracts to which it is a party or intends to become a party. Anchor and its subsidiaries must also promptly inform the Colorado Commission of any change in their officers or directors and any such new officer or director will be subject to possible investigation prior to approval. Further, if any casino
employee possessing a support license changes employment, is terminated, or resigns, Anchor must notify the Colorado Director.
Anchor may not make a public offering of its securities without notifying the Colorado Commission. The notification must occur within 10 business days after the initial filing of a registration statement with the Securities and Exchange Commission or, if the offering will not be registered with the Securities and Exchange Commission, 10 days prior to the public use or distribution of any offering document. The notification procedures apply to any offering by Anchor where the proceeds will be used or intended for use (i) in constructing gaming facilities; (ii) in financing the operation of gaming facilities by any licensee; (iii) in acquiring any direct or indirect interest in Colorado gaming facilities; or (iv) in retiring or extending obligations incurred for any of the above purposes. The notification must disclose, among other things, a description of the securities to be offered, the proposed terms of the offering, its anticipated gross and net proceeds, and the use of the proceeds.
Colorado law requires statewide voter approval of an amendment to the State Constitution for any expansion of limited gaming into additional locations, increase in limitations on the $5 wager, or the addition of games other than blackjack, poker and slot machines. If a statewide vote is successful, the law requires, in addition, voter approval from the locality in question. In 1994, Colorado voters defeated by a margin of 93% to 7% a proposal to permit gaming in Manitou Springs (located near Colorado Springs and Cripple Creek) and slot machines in airports. On November 5, 1996, Colorado voters defeated by a margin of 69% to 31% a proposal to allow gaming in the community of Trinidad, located on the New Mexico border. Recently, the state legislature passed, but the Governor vetoed, a bill that would have permitted video lottery terminals at dog and horse racetracks under certain terms and conditions. Several cities within Colorado have active citizens' lobbies that were able to place gaming initiatives on recent statewide ballots. Although these initiatives have failed, new initiatives could be introduced on future statewide ballots to allow expansion of gaming in Colorado or prohibit gaming in the particular markets in Colorado where the Company operates. Future initiatives, if passed, could significantly increase the competition for gaming customers, thereby adversely affecting the Company's operations in Colorado. Additionally, there can be no assurance that future legislation will not be enacted that would impose additional restrictions or prohibitions on, or assess additional fees with respect to, the Company's business.
The sale of alcoholic beverages at Anchor's casinos is subject to licensing, control, and regulation by the applicable state and local authorities. All alcoholic beverage licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend, or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect on Anchor.
The State of Colorado has enacted an annual tax on adjusted gross proceeds, as defined under Colorado law ("AGP") (gross gaming revenue being defined generally as the total amount wagered minus the total amount paid out in prizes) of 2% of the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million of AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0 million to $10.0 million of AGP, and 20% of amounts in excess of $10.0 million of AGP.
During the first year of gaming, casinos operated under a three-tiered tax system in which they paid 4% on the first $440,000 of AGP, 8% from $440,000 to $1.2 million of AGP, and 15% above $1.2 million of AGP. During the second gaming year, October 1, 1992 to September 30, 1993, casinos paid 2% on the first $1.0 million of AGP and 20% on any amount above $1.0 million of AGP. In the third year, October 1, 1993 to September 30, 1994, casinos paid 2% on the first $1.0 million of AGP, 8% from $1.0 million to $2.0 million of AGP, 15% from $2.0 million to $3.0 million of AGP, and 18% above $3.0 million of AGP. During the fourth and fifth years, October 1, 1994 through September 30, 1996, casinos paid 2% on the first $2.0 million of AGP, 8% from $2.0 million to $4.0 million of AGP, 15% from $4.0 million to $5.0 million of AGP, and 18% above $5.0 million of AGP. During the sixth year, October 1, 1996 through September 30, 1997, casinos paid 2% on the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million of AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0 million to $10.0 million of AGP, and
20% of amounts in excess of $10.0 million of AGP. During September 1997, the Commission decided to adjust the gaming tax year for several reasons including that it should coincide with Colorado's fiscal year, July 1 through June 30. Consequently, during the abbreviated seventh year of gaming, October 1, 1997 through June 30, 1998, casinos paid 2% of the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million, 14% from $4.0 million to $5.0 million, 18% from $5.0 million to $10.0 million, and 20% of amounts in excess of $10.0 million of AGP. Pursuant to the timing adjustment from October 1 to July 1, gaming taxes for the eighth year of gaming, July 1, 1998 through June 30, 1999, have been established at 2% of the first $2.0 million of AGP, 4% from $2.0 million to $4.0 million of AGP, 14% from $4.0 million to $5.0 million of AGP, 18% from $5.0 million to $10.0 million of AGP, and 20% of amounts in excess of $10.0 million of AGP. Effective July 1 of each year, the Colorado Gaming Commission establishes the gross gaming revenue tax for the following 12 months. Under the Colorado Constitution, the Commission is authorized to increase the gaming tax rate to as much as 40%. There can be no assurance that the taxes or fees applicable to the Company will not be increased in the future, either by the Colorado electorate, legislation, or action by the Colorado Commission resulting in an adverse effect on the Company's operations.
In addition, a "device fee" is required for each gaming device (i.e., each gaming machine and each gaming table). The State of Colorado currently imposes an annual fee of $75 per device (reduced from $100 effective October 1, 1994). Cripple Creek currently imposes a two-tiered quarterly device fee of $225 per device on the first 50 devices and $300 per device on devices of 51 or more. Black Hawk's annual fee per device is $750.00. Black Hawk and Cripple Creek also impose liquor licensing fees, restaurant fees, and parking impact fees. Further, Anchor has paid, and in the future may be required to pay, local parking and other municipal "impact fees" based on the square footage of its facilities. Significant increases in the applicable taxes or fees, or the imposition of new taxes or fees could have a material adverse effect on Anchor, and it is not unreasonable to expect that such taxes or fees could be increased or new taxes or fees imposed.
PROPRIETARY GAMES APPROVAL
Anchor is licensed in several gaming jurisdictions as a distributor and/or manufacturer of gaming machines. These jurisdictions exert substantial regulatory controls over the Company and may impose restrictions on ownership of the Company's securities and require findings of suitability of individuals associated with the Company. Each of the Company's games must be approved and licensed in each jurisdiction in which it is played. Obtaining required approvals and licenses can be time consuming and costly and there can be no assurance of success. In addition, there can be no assurance that regulations adopted or taxes imposed by other states will permit profitable operations by the Company.
OTHER JURISDICTIONS
The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it unlawful, in general, for a person to manufacture, deliver, or receive gaming machines, gaming machine type devices, and components across state lines or to operate gaming machines unless that person has first registered with the Attorney General of the United States. The Federal Act does not apply to the Company's proprietary table games but does apply to the Company's proprietary gaming machines. Anchor has registered under the Federal Act and must renew its registration annually. In addition, various record keeping and equipment identification requirements are imposed by the Federal Act. Violation of the Federal Act may result in seizure and forfeiture of the equipment, as well as other penalties. Any expansion of Anchor's gaming activities in Nevada and Colorado may require, and any expansion into other jurisdictions would require, additional approvals, licenses, and permits from various gaming authorities.
In August 1996, the United States Congress passed legislation creating the National Gambling Impact and Policy Commission to conduct a comprehensive study of all matters relating to the economic and social impact of gaming in the United States. The legislation provides that, not later than two years after
the enactment of such legislation, the commission must issue a report to the President and to Congress containing its findings and conclusions, together with recommendations for legislation and administrative actions. Any such recommendations, if enacted into law, could adversely impact the gaming industry and have a material adverse effect on the Company's business or results of operations. The Company is unable to predict whether this study will result in legislation that would impose regulations on gaming industry operators, including the Company, or whether such legislation, if any, would have a material adverse effect on the Company. Additionally, from time to time, certain federal legislators have proposed the imposition of a federal tax on gaming revenues. Any such tax could have a material adverse effect on the Company's financial condition or results of operations.
RISK FACTORS
This Annual Report on Form 10-K contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and other applicable securities laws. 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 may be contained in the Company's business description and in Management's Discussion and Analysis of Financial Condition and Results of Operations, among other places. Although the company believes that the expectations reflected in any of its forward-looking statements will prove to be correct, actual results could differ materially from those projected or assumed in the Company's forward-looking statements. The Company's future financial condition and results, as well as any forward-looking statements, are subject to the inherent risks and uncertainties that are summarized in this section and that are described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statement.
RISKS OF PROPRIETARY GAMES.
The Company places its proprietary games in casinos at no initial cost under short-term arrangements, making these games susceptible to replacement due to pressure from competitors, changes in economic conditions, obsolescence, and declining popularity. Anchor intends to maintain and expand the number of installed proprietary games through enhancement of existing games, introduction of new games, and customer service, but there can be no assurance that these efforts will be successful.
Introduction of new proprietary games involves significant risks, including variations in the Company's ability to place games with casinos, the economic terms on which casinos will accept the machines, the popularity of the games with gaming patrons, and the ability of its games to be successful and popular over the long-term. If the Company is not successful in introducing new games, the effects on Anchor could be material and adverse.
Anchor has filed trademark and patent applications to protect its intellectual property rights in certain of its trademarks and innovations on certain of its proprietary games, respectively. At this time, however, the United States Patent and Trademark Office has not acted upon all of these applications. There can be no assurance that the pending patent or trademark applications will actually issue as patents or trademark registrations or that any of these rights will not be infringed by others. Certain of the Company's game concepts, including Silver Strike, Totem Pole, and Clear Winner, among others, do not have independent protection of the game itself, and it is possible that competitors could produce a similar game without violating any legal rights of the Company. Anchor intends to promote aggressively its trademarks to build goodwill and customer loyalty. In addition, Anchor intends to improve and add innovations to certain of its games, which may be subject to legal protection. There can be no assurance, however, that the Company
will be successful in these efforts, that innovations will be subject to legal protection, or that the innovations will give a competitive advantage to the Company.
Anchor also derives revenues from the sale of souvenir tokens that are paid out by Silver Strike machines. The primary raw material for the tokens is silver, the price of which is subject to wide fluctuations. As silver prices rise, the Company may be unable to pass price increases through to its casino customers.
COMPETITION
Proprietary Games. Intense competition characterizes the market for proprietary games. Competitors in the game industry include manufacturers of gaming devices and other companies marketing gaming products and conversion kits, which compete directly with the Company for the limited gaming spaces available at casinos. The popularity of any of the Company's games may decline over time as consumer preferences change or as new, competing games are introduced. The Company's competitors are engaged in intense efforts to produce proprietary games that compete with those of the Company. As a result, Anchor must continually adapt its products to consumer preferences in order to maximize the economics of the game to the Company. There can be no assurance, however, that Anchor will continue to be successful in developing and marketing its products. If the Company fails to develop games that achieve market acceptance or if existing games become obsolete due to the introduction of popular games by Anchor's competitors the effects on Anchor could be material and adverse.
Anchor's strategy of creating recurring revenues from its proprietary games by placing the games in casinos under a royalty, revenue participation, fixed daily rental fee, or similar agreements involves a departure from the traditional practice of casinos purchasing gaming devices. To the extent that casinos are reluctant to, or decide not to, enter into arrangements that generate recurring revenues for suppliers of casino games, the market for Anchor's proprietary games could be limited, or discontinued if casino operators decide to reject Anchor's revenue sharing model. Competition within the market for games that generate recurring revenues could intensify as other suppliers of gaming devices enter this market or offer competitive products or terms.
Colorado Casinos. Intense competition also characterizes the Black Hawk/Central City and Cripple Creek markets. Since limited stakes gaming was instituted in Colorado in 1991, a number of Colorado casinos have ceased operations and others have filed for protection under Chapter 11 of the Bankruptcy Code. Others have closed temporarily or reduced the number of employees, and many casinos may not be operating profitably. Several proposals have been made to open new casinos or to expand existing casinos in Black Hawk, some of which have been abandoned or modified.
In June 1998, a joint venture between Black Hawk Gaming & Development Company, Inc. and Jacobs Entertainment Ltd. commenced casino operations, "The Lodge," which includes 800 slot machines, 20 table games, and 500 parking spaces. Two casinos are being developed in Black Hawk located across the intersection from the Company's Colorado Central Station Casino. Casino America and Nevada Gold & Casinos have commenced construction of a casino scheduled to open in early 1999, which is expected to include 1,100 slot machines, 24 table games, and a 1,000 car parking garage. Riviera Holdings Corporation has also commenced construction of a casino scheduled to open in late 1999, which is expected to include 1,000 slot machines, 14 table games, and a 500 space covered parking garage. Black Hawk Brewery has commenced construction of a casino, located next to Colorado Central Station, scheduled to open in late 1999 which is expected to include 600 slot machines, 10-20 table games and 500 parking spaces. Fitzgeralds has also announced an expected expansion of approximately 50% of their current gaming area as well as a 70-80 room hotel. Potential projects include the Hyatt, which would include approximately 800-1,000 slot machines and the Dakota Works project, which would include approximately 1,000 slot machines. Competition from these entrants to the market could have a material adverse effect on the Company.
It appears that national, regional, state, and local competition for the casino gaming market in general will remain extremely high during the foreseeable future, as casino gaming activities expand in traditional gaming states and in new jurisdictions. In addition, passage of the Indian Gaming Regulatory Act in 1988 has led to rapid increases in Native American gaming operations, and the Company's two casinos may compete for customers with casinos located on Indian reservations in southwestern Colorado. The Company expects many competitors to enter new jurisdictions that authorize gaming, some of which may have greater financial and other resources than the Company. Such proliferation of gaming activities could adversely affect the Company's business. In particular, the legalization of casino gaming in or near any metropolitan area, such as Denver, Colorado, from which the Company draws customers would have a material adverse effect on the Company's business. The Company believes, however, that proliferation of gaming activities into new jurisdictions presents an opportunity for it to expand its proprietary games operations.
Route Operations. Gaming machines and gaming of all types are available in Nevada casinos and in restricted gaming locations similar to those in which the Company operates gaming machines, and all of these gaming establishments compete directly or indirectly with Anchor's route operations. In addition, Anchor is subject to substantial competition for the operation of gaming machines in approved locations from numerous small gaming machine route operators and some large operators, located principally in Las Vegas and Reno, Nevada, and their surrounding areas. The principal methods of competition for gaming machine locations are the lease, sublease, license, or revenue sharing terms, the service provided by the route operator, the reputation of the route operator, and the financial strength of the route operator. As existing space lease and revenue participation arrangements expire, competition for renewals can be expected to increase the amounts payable to location owners as compared to amounts payable under existing agreements.
RISKS OF PURSUING NEW CASINO GAMING OPPORTUNITIES
The Company is actively seeking to expand its casino operations into jurisdictions that have legalized or are expected to legalize gaming in the future. There can be no assurance, however, that the Company will be able to identify suitable casino projects in which to invest or will be able to complete any such project as scheduled or contemplated. The Company's ability to complete and operate new casino projects will be dependent on a number of factors, many of which are beyond Anchor's control, including identifying suitable investment partners (if appropriate), negotiating acceptable terms, securing required state, foreign, and local licenses, permits, and approvals, securing adequate financing on acceptable terms, identifying and securing suitable locations (which management expects will be limited and in high demand), voter and other political approvals, demographic trends, and consumers' gaming preferences. As a result, there can be no assurance that the Company will be able to develop new or expand its current casino operations. In addition, the Company may incur costs in connection with pursuing new gaming opportunities that it cannot recover and may be required to expense certain of these costs, which may negatively affect the Company's reported operating performance for the periods during which such costs are expensed.
RISKS OF DEPENDENCE ON SUPPLIERS
The Company utilizes outside vendors, some of which are competitors of the Company, to manufacture a significant portion of its proprietary game machines and parts. An inability to obtain gaming machines and components, production parts, and replacement parts on reasonable terms or on a timely basis could have an adverse effect on Anchor. Additionally, vendors may refuse to support or modify existing equipment to comply with licensing and regulatory requirements of various gaming jurisdictions. An inability to comply with licensing and regulatory requirements could result in the Company being prohibited from expanding into new gaming jurisdictions and possibly being required to remove installed games from existing jurisdictions, both of which could have a material adverse effect on the Company.
GAMING REGULATIONS AND TAXES
The Company's operations are subject to extensive state and local regulation and taxation in Nevada, Colorado, and other jurisdictions in which Anchor operates, and any future activities in additional jurisdictions will be similarly regulated and taxed. State and local authorities require various licenses, permits, and approvals to be held by the Company, and these authorities may, among other things, revoke the license of any entity licensed as a gaming corporation, the registration of any entity registered as a holding company of a gaming corporation, or the license of any individual licensed as an officer, director, control person, employee, or stockholder of a licensed or registered entity. Regulatory changes or increases in applicable taxes or fees in Nevada or Colorado or the laws of other jurisdictions in which the Company operates could have a material adverse effect on the Company. There can be no assurance that regulations adopted or taxes imposed by Nevada, Colorado, or other jurisdictions will not have a material adverse effect on the Company. See "Regulation."
Gaming licenses and related approvals are deemed to be privileges under the laws of Nevada, Colorado, and the other jurisdictions in which the Company operates. The gaming laws and regulations of the states in which the Company operates grant substantial discretion to gaming regulatory authorities to monitor and control the activities and operations of all lines of business in which the Company operates. Accordingly, the gaming authorities have power to require that the Company comply with new and discretionary directives of these gaming authorities with respect to the operation and performance of its proprietary games and the operations of its routes and casinos. In such highly regulated environments, there is a constant risk that consumer pressures, political considerations, or changes in regulatory personnel or approach could have a material adverse effect on the Company and its operations.
Colorado law requires statewide voter approval of an amendment to the State Constitution for any expansion of limited gaming into additional locations and, depending on the authorization approved by the statewide vote, requires, in addition, voter approval from the locality in question. In 1994, Colorado voters defeated by a margin of 93% to 7% a proposal to permit gaming in Manitou Springs (located near Colorado Springs and Cripple Creek) and slot machines in airports. On November 5, 1996, Colorado voters defeated by a margin of 69% to 31% a proposal to allow gaming in the community of Trinidad, located on the New Mexico border. Recently, the state legislature passed, but the Governor vetoed, a bill that would have permitted video lottery terminals at dog and horse racetracks under certain terms and conditions. Several cities within Colorado have active citizens' lobbies that were able to place gaming initiatives on recent statewide ballots. Although these initiatives have failed, new initiatives could be introduced on future statewide ballots to allow expansion of gaming in Colorado or prohibit gaming in the particular markets in Colorado where the Company operates. Future initiatives, if passed, could significantly increase the competition for gaming customers, thereby adversely affecting the Company's operations in Colorado. Additionally, there can be no assurance that future legislation will not be enacted that would impose additional restrictions or prohibitions on, or assess additional fees with respect to, the Company's business.
Each of the Company's proprietary games must be approved and licensed in each jurisdiction in which it is placed. The Company must still obtain approvals for certain of its games in certain gaming jurisdictions before it can fill all of its orders to place machines. Obtaining required licenses can be time consuming and costly and there can be no assurance that any game will be successfully licensed in any jurisdiction.
Any beneficial holder of the Common Stock may be subject to investigation by gaming authorities in Nevada, Colorado, and other jurisdictions in which Anchor does business if such authorities have reason to believe that such ownership may be inconsistent with a state's gaming policies. Persons who acquire beneficial ownership of more than certain designated percentages of the Common Stock may be subject to certain reporting and qualification procedures. The Company's Articles of Incorporation provide that all transfers of voting securities are subject to the regulations of each regulatory body to which the Company's
activities are subject and provide for a mandatory repurchase of Common Stock if a stockholder is found unsuitable. In addition, changes in control of the Company and certain other corporate transactions may not be effected without the prior approval of gaming authorities in Nevada, Colorado, and other jurisdictions in which the Company does business. Such provisions could adversely affect the marketability of the Common Stock or prevent certain corporate transactions, including mergers or other business combinations. See "Regulation."
In August 1996, the United States Congress passed legislation creating the National Gambling Impact and Policy Commission to conduct a comprehensive study of all matters relating to the economic and social impact of gaming in the United States. The legislation provides that, not later than two years after the enactment of such legislation, the commission must issue a report to the President and to Congress containing its findings and conclusions, together with recommendations for legislation and administrative actions. Any such recommendations, if enacted into law, could adversely impact the gaming industry and have a material adverse effect on the Company's business or results of operations. The Company is unable to predict whether this study will result in legislation that would impose additional regulations on gaming industry operators, including the Company, or whether such legislation, if any, would have a material adverse effect on the Company. Additionally, from time to time, certain federal legislators have proposed the imposition of a federal tax on gaming revenues. Any such tax could have a material adverse effect on the Company's financial condition or results of operations.
ACCESS TO BLACK HAWK AND CRIPPLE CREEK
The cities of Black Hawk and Cripple Creek are located in the Colorado Rockies and each is serviced by winding mountain roads that require extremely cautious driving, especially in bad weather. These roads also have tunnels that are subject to closure. Congestion on the roads leading into Black Hawk and Cripple Creek is not uncommon during the peak summer season, holidays, and other times of the year, and such congestion may discourage potential customers from traveling to the Company's casinos. In addition, concerns about the overall availability of convenient parking in Black Hawk and, to a lesser extent, Cripple Creek may discourage some potential customers. Further, Black Hawk and, to a lesser extent, Cripple Creek have experienced unanticipated demands for their municipal systems, including water and sewage treatment facilities. Increased levels of activity in the area may exacerbate old or pose new municipal and environmental problems, the costs of which could be imposed on the gaming industry and in part by the Company.
ENVIRONMENTAL CONSIDERATIONS
The Colorado Central Station Casino is located in an area that has been designated by the Environmental Protection Agency (the "EPA") as a superfund site on the National Priorities List, known as the Central City-Clear Creek Superfund Site (the "Site"), as a result of contamination from historic mining activity in the area. The EPA is entitled to proceed against owners and operators of properties located within the Site for remediation and response costs associated with their properties and with the entire Site. The Colorado Central Station Casino is located within the drainage basin of North Clear Creek and is therefore subject to potentially contaminated surface and ground water from upstream mining-related sources. Soil and ground water samples on the Site indicate that several contaminants exist in concentrations exceeding drinking water standards. Records relating to historical uses of the Site are uncertain as to whether mining actually occurred below the Company's property. Records do indicate, however, that an ore loading dock for a railroad depot was once located on adjacent property, and railroad tracks were present on the Company's property. Management is not aware of any environmental issues associated with these activities.
RISKS OF NEVADA ROUTE OPERATIONS
In 1998, the Mayor of Las Vegas formed a committee to study the effect of gaming in grocery and convenience stores in Las Vegas. In connection with the study, certain proposals to prohibit, limit, or change gaming devices in convenience, grocery and similar retail facilities may be made. Other government officials, as well as other individuals, may from time to time suggest proposals to prohibit, limit, or change gaming devices in convenience, grocery and similar retail facilities throughout Nevada, The broad adoption of any such proposal could have a material adverse effect on the Company's Nevada route operations.
DEPENDENCE ON PERSONNEL
The success of Anchor is largely dependent on the efforts and skills of Stanley E. Fulton, its Chairman of the Board, and other key officers and employees of Anchor. The loss of Mr. Fulton's or such other key officers' or employees' services could have a material adverse effect on Anchor. The expansion of Anchor's businesses may require additional managers with gaming industry experience, as well as additional skilled employees. A shortage of skilled management personnel exists in the gaming industry, which may make it more difficult and expensive to attract and retain qualified managers and employees. In addition, some of the Company's key employees perform their services under contracts that do not contain covenants not to compete with the Company, and it is therefore possible that competitors could attempt to hire certain of the Company's key employees. Competition for employees in the Black Hawk market could intensify as additional operators open or plan to open new facilities. This competition could cause increases in the cost of retaining employees or could cause employees to become scarce, both of which could have a material adverse effect on the Company.
CONTROL OF THE COMPANY
In October 1997, Anchor Gaming completed an offering (the "Offering") of 1,800,000 shares of common stock, of Anchor (the "Common Stock") offered by certain selling stockholders, including Stanley E. Fulton, Chairman and Chief Executive Officer of the Company (657,700 shares), and Elizabeth Fulton and the six Fulton children (1,142,300 shares). Upon completion of the Offering, the officers and directors of the Company and members of their respective families own beneficially approximately 40.5% of the outstanding Common Stock. The ability to vote these shares gives such persons the ability to exert substantial influence over any matter coming to a vote of stockholders of the Company, including the election of directors and certain mergers, asset sales, or other major corporate transactions affecting the Company. All six of Mr. Fulton's children and a third party have granted him an irrevocable proxy expiring on December 31, 1998 to vote their shares of Common Stock. As a result, Mr. Fulton will have voting control of more than 40% of the Common Stock outstanding. Such voting power, together with certain anti-takeover provisions included in the Company's Articles of Incorporation and Bylaws and a Shareholder Rights Plan could have the effect of delaying or discouraging an unsolicited takeover of the Company.
INVENTORY SUBJECT TO GAMING APPROVAL
At any point, the Company may be in the process of developing proprietary games that have not yet received regulatory approvals. Anticipating demand for its games after receipt of regulatory approval, the Company may begin to manufacture games pending regulatory approval, and may develop a substantial inventory of games that are not approved for use under the gaming laws and regulations to which the Company is subject. To the extent that the Company does not receive approval of games in its inventory, or if games in its inventory require modification before they can be placed in service, the Company could be materially and adversely affected.
CONTINUING DIRECTOR PROVISION IN THE COMPANY'S RIGHTS PLAN
The Delaware Chancery Court has recently ruled that a rights agreement provision similar to the Continuing Director requirement included the Company's Rights Plan is unenforceable under Delaware law. The Company is not a Delaware corporation and Delaware law does not govern the Company's Rights Plan. Nevada courts have not ruled on the enforceability of a similar provision under Nevada law; there can be no assurance that a Nevada court would enforce the Company's Continuing Director provisions.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's principal properties consist of (i) the Colorado Central Station Casino in Black Hawk, Colorado, (ii) the Colorado Grande Casino in Cripple Creek, Colorado, and (iii) the corporate headquarters in Las Vegas, Nevada.
The Colorado Central Station Casino is situated on approximately 1.8 acres of land on the south end of Black Hawk, near Main Street and Colorado State Highway 119. Black Hawk, Colorado is approximately 40 miles from Denver, Colorado. The Colorado Central Station has more than 700 gaming machines, 19 table games, and food-court restaurant area. The Colorado Central Station Casino building has approximately 49,000 square feet of floor space, with 16,637 square feet of gaming area over three floors. The casino has more than 600 parking spaces and is the first shuttle stop from Black Hawk's 3,000-space public facility.
The Colorado Grande Casino is located 45 miles from Colorado Springs and 75 miles from Pueblo, Colorado. The facility, which is leased, occupies 15,000 square feet of a commercial facility, of which 3,125 square feet are devoted to gaming. The casino is located at one of the principal intersections in Cripple Creek and has 44 adjacent parking spaces and a separate lot for employee parking. The casino features more than 210 gaming machines, a full service restaurant, and bar.
In October 1994, the Company consolidated its Las Vegas offices into a new headquarters facility, also located in Las Vegas. Since that time it has expanded to 17,000 square feet of office space and 30,000 square feet of sub-assembly and warehouse space, all of which is leased.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Several securities class action lawsuits have been filed against the Company and certain of its current and former officers and directors. The lawsuits were filed in various jurisdictions following the Company's announcement in early December 1997 that the Company's results for the December quarter might not meet analysts' expectations. The lawsuits have been brought on behalf of certain purchasers of the stock of the Company and allege violations of state and/or federal securities laws arising out of alleged misstatements and omissions to state material facts about the Company over various periods of time covered by the lawsuits. The lawsuits have all been consolidated in Nevada, both in federal and state court. The consolidated federal action is captioned In re Anchor Gaming Securities Litigation, Civil Action No. CV-S-97-01751-PMP (RJJ), and the consolidated state action is captioned Ryan, et al. v. Anchor Gaming, et al., Civil No. A383456. 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the Nasdaq National Market-Registered Trademark- and trades under the symbol "SLOT." The following table sets forth the high and low closing prices per share of the Company's Common Stock on the Nasdaq National Market for the described periods. The Company has not declared any dividends from the time of the IPO until the present.
As of September 11, 1998, there were approximately 10,000 beneficial holders of the Company's common stock.
The board of directors intends to retain any earnings of the Company to support operations and to finance expansion and does not intend to pay cash dividends on the Common Stock of Anchor in the foreseeable future. The Company is a party to a revolving credit facility with a bank that prohibits the payment of dividends. Subject to contractual restrictions, any future determinations as to the payment of dividends will be at the discretion of the board of directors of the Company, and will depend on the Company's financial condition, results of operations, capital requirements, and such other factors as the board of directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial and operating information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere or incorporated by reference in this Annual Report on Form 10-K. The income statement and balance sheet data for each of the five fiscal years ended June 30, 1998 are derived from the audited consolidated financial statements of the Company.
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(1) Reflects six months of operations at the Company's Colorado Central Station Casino in Black Hawk, Colorado, which opened December 25, 1993, and five months of proprietary games operations acquired in conjunction with the Company's initial public offering in February 1994 (the "IPO").
(2) Other income (expense) consists of minority interest in earnings of consolidated subsidiary, and other income (expense).
(3) A pro forma provision for federal income taxes (assuming a 34% effective tax rate through fiscal 1994) has been calculated for all periods prior to the IPO as if the principal subsidiaries of the Company had not elected to be treated as S corporations during those periods.
(4) Weighted average shares outstanding and weighted average common and common equivalent shares outstanding are presented as if the reorganization completed in conjunction with the Company's IPO took place July 1, 1993.
(5) Because the principal subsidiaries of the Company elected to be treated as S corporations prior to the Company's IPO, a substantial portion of the Company's net income prior to the IPO was distributed to its stockholders. Subsequent to the Company's IPO, earnings have been retained to support operations and to finance expansion.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
In February 1994, Anchor completed its IPO of 3,162,500 shares of Common Stock at a price of $12 per share. Simultaneously with the closing of the IPO, Anchor became the holding company for its current subsidiaries, Anchor Coin, Colorado Grande Enterprises, Inc., C.G. Investments, Inc., and D D Stud, Inc., each of which had been operated under different ownership structures controlled primarily by Stanley E. Fulton, the Chairman of the Board, Chief Executive Officer, and acting Chief Financial Officer of Anchor. Also at the time of the IPO, the Company acquired all of the beneficial ownership of Global Gaming Products, L.L.C. and certain related assets from Global Distributors, Inc. (the "Acquisition"), which were primarily involved in the distribution of the proprietary game Silver Strike. Stanley E. Fulton also owned 50% of Global Gaming Products, L.L.C. prior to the Acquisition. The financial position and operating results of Colorado Grande Enterprises, Inc. are included in the consolidated financial statements as an 80% consolidated subsidiary.
On April 23, 1996, the Company completed a secondary offering of 2.3 million shares of Common Stock at a price of $37 per share. 1.55 million of these shares were sold by the Company (the "Secondary Offering") and the remaining 750,000 shares were sold by selling stockholders. Net proceeds to the Company from the Secondary Offering were $53.9 million. On October 17, 1997, the Company completed an offering of 1.8 million shares of Common Stock at a price of $91 per share. All of these shares were sold by selling stockholders. The Company did not receive any proceeds from the offering.
The following table sets forth the percentage of Anchor's total revenues attributable to proprietary games operations, casino operations, route operations, and other during the fiscal years ended June 30, 1998, 1997, and 1996. The growth in proprietary games revenue as a percentage of total revenues is attributable primarily to the commencement of the Strategic Alliance with IGT during the second half of fiscal 1997, and to a lesser extent, the Company's introduction of the new proprietary game Wheel of Gold, which began generating revenue in the third quarter of fiscal 1996.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Total revenues were $231.9 million for the fiscal year ended June 30, 1998, an increase of $78.2 million or 50.9% from $153.7 million for the fiscal year ended June 30, 1997.
Revenues from proprietary games operations were $113.7 million for the fiscal year ended June 30, 1998, an increase of $64.0 million or 128.7% from $49.7 million for the fiscal year ended June 30, 1997. The increase is primarily due to increased equity earnings in the Company's joint venture alliance with IGT, which, for accounting purposes, is recorded net of expense. At June 30, 1998 there were more than 5,600 games, primarily Wheel of Fortune, operating within the joint venture, compared to more than 2,000 games at June 30, 1997. This increase is also due to increased revenues from the Company's proprietary games Wheel of Gold and Totem Pole, and to a lesser extent increased revenues from the proprietary games Rock'N'Reels and SafeBuster. These increases were offset to some extent by decreased revenues
generated from the sale of tokens for the proprietary game Silver Strike and decreased revenues generated from the proprietary game Clear Winner. The Company expects the trend of reduced year-to-year Silver Strike and Clear Winner revenue comparisons to continue due to the market maturity of these proprietary games. After completing a full year of operations within the joint venture alliance with IGT, we now recognize that these operations are influenced by seasonal fluctuations as a result of weather and casino patron traffic patterns. We expect that these seasonal trends will continue in both our joint venture operations and our proprietary games operations outside of the joint venture.
Revenues from casino operations were $82.1 million for the fiscal year ended June 30, 1998, an increase of $12.9 million or 18.7% from $69.2 million for the fiscal year ended June 30, 1997. This increase is primarily due to increased slot revenues at the Colorado Central Station Casino and, to a lesser extent, increased slot revenues at the Colorado Grande Casino. The Company's Colorado casino operations were the beneficiary of mild weather during the six months ended June 30, 1998. The competitive landscape has begun to change recently in the Black Hawk market. On June 24, 1998 a competitor opened a new casino, as expected, near the Colorado Central Station Casino. The Company expects the opening of another new casino by a competitor, also near the Colorado Central Station Casino, during December 1998. The Company is aware of other casino projects in various stages of planning in the Black Hawk market. The Company cannot predict the effect, if any, that the new or proposed casino openings will have on the Company's Colorado casino operations. Historically, revenues and casino patronage in the Colorado casino operations are highest in the summer months and those months unaffected by inclement weather. We expect this trend to continue.
Revenues from route operations were $34.3 million for the fiscal year ended June 30, 1998, an increase of $804,000 or 2.4% from $33.5 million for the fiscal year ended June 30, 1997. Machines on route increased 41 machines or 5.1% to 842 machines at June 30, 1998 from 801 machines at June 30, 1997. Average machines on route during fiscal 1998 increased 57 average machines or 7.4% to 827 average machines from 770 average machines during fiscal 1997. The increase in route revenue was due to the increased number of machines on route offset somewhat by increased competition due to expansion of grocery store chains and local casino operations. As a result of the increased competition, the trend of generally flat year over year route revenue comparisons is expected to continue. The Mayor of Las Vegas recently formed a committee to study the local effect of gaming in grocery and convenience stores. The Company cannot predict the effect, if any, that the study's results will have on its route operation's revenues and profits.
COSTS AND EXPENSES. Total costs and expenses were $125.7 million for the fiscal year ended June 30, 1998, an increase of $25.1 million or 25.0% from $100.6 million for the fiscal year ended June 30, 1997. Total costs and expenses as a percentage of total revenues decreased to 54.2% during fiscal 1998 from 65.4% during fiscal 1997.
Costs and expenses of proprietary games operations were $13.5 million for the fiscal year ended June 30, 1998, an increase of $2.4 million or 22.1% from $11.0 million for the fiscal year ended June 30, 1997. Proprietary games costs and expenses as a percentage of proprietary games revenues decreased to 11.9% during fiscal year 1998 from 22.2% during fiscal year 1997. The increase in proprietary games costs and expenses was due to increased machine parts, production and service payroll, shipping and handling, and production supplies, resulting primarily from increased machine conversions and maintenance. These increases were offset to some extent by decreased costs and expenses relating to the sale of tokens for the proprietary game Silver Strike. The decrease in proprietary games costs as a percentage of revenue is primarily due to equity in the income of the joint venture with IGT, which, for accounting purposes, is recorded net of expenses. Additionally, revenues from the Company's proprietary games, such as Wheel of Gold and Totem Pole, incur less costs and expenses as a percentage of revenue than the Company's Silver Strike game, which previously accounted for a larger percentage of the Company's proprietary games revenue. Developments in world silver markets during the past year have resulted in increased volatility in silver prices, which, if it persists, could affect the profitability of the Silver Strike game.
Costs and expenses of casino operations were $35.1 million for the fiscal year ended June 30, 1998, an increase of $6.0 million or 20.5% from $29.1 million for the fiscal year ended June 30, 1997. Casino costs and expenses as a percentage of casino revenue increased slightly to 42.7% during fiscal year 1998 from 42.0% during fiscal year 1997. The increase in casino costs and expenses was primarily due to increased gaming taxes and promotions, and to a lesser extent direct payroll, at both of the Company's Colorado casinos. Although the Company can not predict the effect of the new and proposed casino openings in Black Hawk on the Colorado Central Station Casino's operations, management believes it is likely to increase both promotion and payroll cost in future periods.
Costs and expenses of route operations were $21.4 million for the fiscal year ended June 30, 1998, an increase of $1.5 million or 7.7% from $19.9 million for the fiscal year ended June 30, 1997. Costs and expenses of route operations as a percentage of route revenue increased to 62.5% during fiscal year 1998 compared to 59.4% during fiscal year 1997. The increase in route costs and expenses was primarily due to increased location costs and, to a lesser extent, increased direct payroll costs, both related to increased machines on route.
SG&A expenses were $41.2 million for the fiscal year ended June 30, 1998, an increase of $13.1 million or 46.4% from $28.2 million for the fiscal year ended June 30, 1997. SG&A expenses as a percentage of total revenue decreased to 17.8% during fiscal year 1998 compared to 18.3% during fiscal year 1997. The increase in SG&A expenses is primarily due to increased expenses in the Company's proprietary games operations of approximately $9.4 million, including increased payroll and compensation costs, valuation allowances, and tax and licensing costs, as well as increased legal costs and development costs incurred at the holding Company level. The Company incurred approximately $1.0 million of development costs related to the Canadian charity based casino initiative that was cancelled by the Ontario provincial government on June 26, 1998.
Depreciation and amortization expense was $12.7 million for the fiscal year ended June 30, 1998, an increase of $3.9 million or 43.9% from $8.8 million for the fiscal year ended June 30, 1997. This increase is primarily due to increased depreciation and amortization expense incurred in the Company's proprietary games operations and, to a lesser extent, increased depreciation and amortization expense incurred at the Company's Colorado Central Station Casino.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income from operations was $106.2 million for the fiscal year ended June 30, 1998, an increase of $53.0 million or 99.7% from $53.2 million for the fiscal year ended June 30, 1997. As a percentage of total revenues, income from operations increased to 45.8% during fiscal year 1998 from 34.6% during fiscal year 1997.
INTEREST INCOME. Interest income was $3.0 million for the fiscal year ended June 30, 1998, a decrease of $804,000 or 21.2% from $3.8 million for the fiscal year ended June 30, 1997. The decrease is due to decreased short-term investments resulting from decreased cash balances during the year.
INTEREST EXPENSE. Interest expense was $226,000 for the fiscal year ended June 30, 1998, a decrease of $62,000 or 21.5% from $288,000 for the fiscal year ended June 30, 1997. The decrease is due to reduced average notes payable during fiscal year 1998 as compared to fiscal year 1997. At June 30, 1998, the Company had no long or short-term notes payable.
NET INCOME. As a result of the factors discussed above, net income was $68.4 million for the fiscal year ended June 30, 1998, an increase of $32.7 million or 91.7% from $35.7 million for the fiscal year ended June 30, 1997.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Total revenues were $153.7 million for the fiscal year ended June 30, 1997, an increase of $37.2 million or 31.9% from $116.5 million for the fiscal year ended June 30, 1996.
Revenues from proprietary games operations were $49.7 million for the fiscal year ended June 30, 1997, an increase of $28.2 million or 131.2% from $21.5 million for the fiscal year ended June 30, 1996. The increase is primarily due to revenues generated from the Company's proprietary game, Wheel of Gold, introduced December 29, 1995, as well as revenues from the Company's strategic alliance with IGT and, to a lesser extent, from its newest proprietary game, Totem Pole, and increased revenues generated from the proprietary game Clear Winner. These increases were offset to some extent by decreased revenues generated from the proprietary game Silver Strike.
Revenues from casino operations were $69.2 million for the fiscal year ended June 30, 1997, an increase of $4.1 million or 6.3% from $65.1 million for the fiscal year ended June 30, 1996. The increase is primarily due to increased revenues at the Colorado Central Station Casino and, to a lesser extent, due to increased revenues at the Colorado Grande Casino.
Revenues from route operations were $33.5 million for the fiscal year ended June 30, 1997, an increase of $4.8 million or 16.7% from $28.7 million for the fiscal year ended June 30, 1996. Machines on route increased to 801 at June 30, 1997, from 692 at June 30, 1996, while average machines on route during fiscal 1997 were 106 machines greater than fiscal 1996.
COSTS AND EXPENSES. Total costs and expenses were $100.6 million for the fiscal year ended June 30, 1997, an increase of $18.0 million or 21.8% from $82.6 million for the fiscal year ended June 30, 1996. Total costs and expenses as a percentage of total revenues decreased to 65.4% during fiscal 1997 from 70.9% during fiscal 1996.
Costs and expenses of proprietary games operations were $11.0 million for the fiscal year ended June 30, 1997, a decrease of $1.1 million or 9.1% from $12.1 million for the fiscal year ended June 30, 1996. Costs and expenses of proprietary games operations decreased primarily due to a decrease in Silver Strike token sales in fiscal year 1997 compared to fiscal year 1996. Prior to the introduction of Wheel of Gold, most of the proprietary games operations' costs were associated with the production of Silver Strike tokens. Proprietary games costs and expenses as a percentage of proprietary games revenues decreased to 22.1% during fiscal year 1997 from 56.3% during fiscal year 1996. The decrease in proprietary games costs and expenses as a percentage of revenue is a result of increased revenues from the Company's newer proprietary games, which incur less costs and expenses as a percentage of revenue than the Company's Silver Strike game, which previously accounted for most of the Company's proprietary games revenue.
Costs and expenses of casino operations were $29.1 million for the fiscal year ended June 30, 1997, an increase of $2.3 million or 8.6% from $26.8 million for the fiscal year ended June 30, 1996. Casino costs and expenses as a percentage of casino revenue increased to 42.0% during fiscal year 1997 from 41.2% during fiscal year 1996. The increase in casino costs and expenses was primarily due to increased gaming taxes and promotions at both of the Company's casinos.
Costs and expenses of route operations were $19.9 million for the fiscal year ended June 30, 1997, an increase of $2.7 million or 15.7% from $17.2 million for the fiscal year ended June 30, 1996. Costs and expenses of route operations as a percentage of route revenue remained fairly constant at 59.4% during fiscal year 1997 compared to 59.9% during fiscal year 1996. The increase in route costs and expenses was primarily due to increased location costs and, to a lesser extent, increased direct payroll costs, both related to increased machines on route.
SG&A expenses were $28.2 million for the fiscal year ended June 30, 1997, an increase of $7.1 million or 33.6% from $21.1 million for the fiscal year ended June 30, 1996. SG&A expenses as a percentage of total revenue remained fairly constant at 18.4% during fiscal year 1997 compared to 18.1% during fiscal year 1996. The increase in total SG&A expenses is primarily due to increased expenses in the Company's proprietary games operations of approximately $4.7 million primarily due to increased research, development, and licensing costs and an increase in SG&A expenses at the Colorado Central Station Casino of approximately $2.0 million.
In November 1996, the Company announced it was re-evaluating the scope and nature of its proposed addition of a new casino across the street from the Colorado Central Station Casino. During the fourth quarter of fiscal year 1997, the Company determined it was necessary to recognize a project cost write-down of $2.1 million. The project costs were specifically related to architectural fees, building design costs, and deferred rent that were determined to have no future benefit.
Depreciation and amortization expense was $8.8 million for the fiscal year ended June 30, 1997, an increase of $4.7 million or 114.6% from $4.1 million for the fiscal year ended June 30, 1996. This increase is primarily due to increased depreciation and amortization expense incurred in the Company's proprietary games operations.
INCOME FROM OPERATIONS. As a result of the factors discussed above, income from operations was $53.2 million for the fiscal year ended June 30, 1997, an increase of $19.3 million or 56.9% from $33.9 million for the fiscal year ended June 30, 1996. As a percentage of total revenues, income from operations increased to 34.6% during fiscal year 1997 from 29.1% during fiscal year 1996.
INTEREST INCOME. Interest income was $3.8 million for the fiscal year ended June 30, 1997, an increase of $1.8 million or 90.0% from $2.0 million for the fiscal year ended June 30, 1996. The increase is due to increased short-term investments resulting from an increase in working capital generated from operations as well as cash invested from the Secondary Offering.
INTEREST EXPENSE. Interest expense was $288,000 for the fiscal year ended June 30, 1997, a decrease of $141,000 or 32.9% from $429,000 for the fiscal year ended June 30, 1996. The decrease is due to reduced average notes payable during fiscal year 1997 as compared to fiscal year 1996.
NET INCOME. As a result of the factors discussed above, net income was $35.7 million for the fiscal year ended June 30, 1997, an increase of $13.4 million or 60.1% from $22.3 million for the fiscal year ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Anchor's principal sources of liquidity have been cash flows from operations and the net proceeds from the Secondary Offering in April 1996 and the IPO in February 1994. Net proceeds to the Company from the Secondary Offering were $53.9 million, and net proceeds from the IPO were $34.1 million. In October 1997, certain shareholders of the Company completed a secondary public offering. The Company did not receive any proceeds from the October 1997 offering. Net cash provided by operating activities was $68.2 million during fiscal year 1998 and $43.4 million during fiscal year 1997. At June 30, 1998, the Company had cash and cash equivalents of $73.2 million, working capital of $54.4 million, and a $10.0 million unsecured revolving bank line of credit (the "Bank Revolver").
In fiscal year 1998, the Company spent $22.5 million on capital expenditures, primarily related to the purchase of gaming devices and equipment for use in its proprietary games operations. The Company anticipates that capital expenditures for the fiscal year ending June 30, 1999 will be at least $19.0 million, which will consist primarily of expenditures to purchase gaming devices and equipment for use in its proprietary games operations.
In April 1997, the board of directors authorized a repurchase of up to 1,000,000 shares of Common Stock. In December 1997, the board of directors authorized a repurchase of up to 513,975 additional shares of Common Stock. As of June 30, 1998, the Company had repurchased 974,375 shares of Common Stock at a cost of $49.6 million, 638,375 shares were repurchased during fiscal 1998 at a cost of $36.1 million and 336,000 shares were repurchased during fiscal 1997 at a cost of $13.5 million. At June 30, 1998 there was a balance of 539,600 authorized shares remaining under the repurchase program.
In April 1997, the Company entered into the Bank Revolver, which expires November 30, 1998. The Bank Revolver bears interest at the prime rate of interest or LIBOR plus 2%, at the Company's option.
The Company has agreed to maintain certain financial and non-financial covenants customary with lending arrangements of this type. The Company has complied with the covenants throughout the term of the expired credit facility and the Bank Revolver. During fiscal year 1998 the Company did not borrow under the Bank Revolver or the line of credit.
The Company believes its principal liquidity requirements will be the purchase of additional proprietary gaming machines in formats that have already been introduced to the market and the development and purchase of proprietary gaming machines in formats that have not yet been introduced. The Company believes that cash on hand, cash flow from operations, and available borrowings under the Bank Revolver will be sufficient to fund its currently planned capital projects and operations.
The Company continually seeks opportunities to expand its gaming oriented businesses in new and existing gaming jurisdictions. If successful in pursuing another opportunity in any gaming oriented business, and depending on the amount of funding required, the Company may be required to obtain additional financing.
RECENTLY ADOPTED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities. This standard provides guidance on the financial reporting for start-up costs and organization costs. This standard requires costs of start-up activities and organization costs to be expensed as incurred and is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. Management believes that this standard could have a material effect on the Company's consolidated financial statements depending on the status of the Company's current and future expansion projects at the time this standard is adopted.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management does not believe this new standard will have a material impact on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131 "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes the segment information required to be disclosed under SFAS 131 will be more comprehensive than previously provided, including expanded disclosure of income statement and balance sheet items for each of its reportable segments under SFAS 131.
YEAR 2000
In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive computer software may recognize a date using "00" as the year 1900 rather than the year 2000. This is generally referred to as the "Year 2000 Problem." If this situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations.
The Company has conducted a comprehensive review of its computer and other systems deemed to be date sensitive (as well as those of its unconsolidated affiliates) to assess its exposure to the Year 2000 Problem. The Company is already in the process of modifying or replacing those systems that are not Year 2000 compliant. Based upon the comprehensive review, management believes that the Company's systems
are compliant or will be compliant by mid-1999. However, if modifications are not made or not completed within an adequate time frame, the Year 2000 Problem could have a material adverse effect on the operations of the Company.
In addition, the Company has communicated with its major vendors and suppliers to determine their state of readiness relative to the Year 2000 Problem and the Company's exposure to third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that representations made to the Company by third parties are in fact accurate. As a result, the failure of a major vendor or supplier to adequately address their Year 2000 Problem could have a material adverse effect on the operations of the Company.
All costs related to the Company's Year 2000 Problem are being expensed as incurred, while the cost of new hardware or software, is being capitalized and amortized over its expected useful life. The costs associated with Year 2000 compliance have not been and are not anticipated to be material to the Company's financial position or results of operations. Specifically, as of June 30, 1998, the Company has spent less than $100,000 and anticipates spending less than $500,000 thereafter. These costs and estimated completion dates are based upon management's best estimates, as well as third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from these plans. The Company does not have a contingency plan relative to the Year 2000 Problem, although it intends to develop one before June 30, 1999.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Anchor Gaming and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Anchor Gaming and subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Anchor Gaming and subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada July 31, 1998
ANCHOR GAMING
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements
ANCHOR GAMING
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Anchor Gaming ("Anchor" or the "Company") is a diversified gaming company that seeks to capitalize on its experience as an operator and developer of gaming machines and casinos by developing gaming oriented businesses. Anchor develops and distributes unique proprietary games, currently operates two casinos in Colorado, and operates one of the largest gaming machine routes in Nevada.
Anchor Gaming was formed July 28, 1993 and completed its initial public offering ("IPO") in February 1994. Simultaneous with the closing of the IPO, Anchor became the holding company of Anchor Coin, C.G. Investments, Inc. ("CGI"), Colorado Grande Enterprises, Inc. ("Colorado Grande") and D D Stud, Inc. ("DD Stud") (collectively the "Subsidiaries"), which were operated under different ownership structures controlled primarily by Stanley E. Fulton, the Chairman of the Board, Chief Executive Officer and principal stockholder of Anchor. Also at the time of the IPO, the Company acquired all of the beneficial ownership of Global Gaming Products, L.L.C. and certain related assets from Global Distributors, Inc. (the "Acquisition"), which were primarily involved in the distribution of the proprietary game Silver Strike. The accounts of the Subsidiaries are consolidated in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated. The financial position and operating results of Colorado Grande Enterprises, Inc. are included in the consolidated financial statements as an 80% consolidated subsidiary.
On April 23, 1996, Anchor completed a secondary offering of 2.3 million shares of common stock at a price of $37 per share, with 1.55 million of these shares sold by the Company (the "Secondary Offering") and the remaining 750,000 shares were sold by selling stockholders. Net proceeds to the Company from the Secondary Offering were $53.9 million.
On October 17, 1997, Anchor completed an offering of 1.8 million shares of common stock at a price of $91 per share, in which all of the shares were sold by selling stockholders. The Company did not receive any proceeds from the offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased with maturities of three months or less at the date of acquisition.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, trade receivables, and trade payables approximates fair value because of the short maturities of these instruments. The Company estimates fair value of its long-term obligations based on quoted market prices or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair values of the obligations closely approximated the carrying values at June 30, 1998 and 1997.
INVESTMENTS IN DEBT SECURITIES
The Company's investment securities, along with certain cash and cash equivalents that are not deemed securities under Statement of Financial Accounting Standards ("SFAS") No. 115, are carried on the consolidated balance sheets in the cash and cash equivalents category. Management determines the appropriate classification of its investment securities at the time of purchase as either held-to-maturity, trading, or available for sale and re-evaluates such determination at each balance sheet date. The Company has classified its investment securities as of June 30, 1998 and 1997 as held-to-maturity. Held-to-
ANCHOR GAMING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) maturity securities are required to be carried at amortized cost. The securities classified as held-to-maturity consist of the following amortized costs at June 30:
All of the Company's investment securities mature in three months or less from the date of purchase. The estimated fair value of the Company's portfolio of investment securities at June 30, 1998 and 1997 approximates amortized cost due to the short term nature of the portfolio.
ACCOUNTS RECEIVABLE
Accounts receivable result from the sale of products and services to gaming properties primarily in the United States. The Company performs credit evaluations of its customers and does not require collateral. Management reviews customer balances for potential credit losses and maintains an allowance for amounts deemed uncollectible. The amounts reserved at June 30, 1998 and 1997 were $1,332,404 and $665,605, respectively.
INVENTORY
Inventory consists of silver and silver tokens, parts for gaming machines, and food and beverage items. Silver inventory of $1,067,381 and $594,615 at June 30, 1998 and 1997, respectively, is classified as raw material. The remainder of inventory is classified as finished goods. All inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Ordinary maintenance and repairs are charged to expense as incurred. Costs that materially increase the life or value of existing assets are capitalized. Assets that have been placed in service are depreciated over their estimated useful lives or amortized over their lease terms using either straight-line or accelerated methods. Estimated useful lives for furniture and equipment are 3 to 7 years, for leasehold improvements are 4 1/2 years to 31 1/2 years and for buildings and improvements are 30 years. Property and equipment is evaluated for recoverability under the requirements of SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" whenever impairment indicators are present.
INTANGIBLE ASSETS
Intangible assets include goodwill associated with the Acquisition, which is amortized on a straight-line basis over 10 years, and goodwill associated with the purchase of assets of an engineering company which is amortized on a straight-line basis over 3 years. Intangible assets also include amounts paid to acquire leases for route locations and casino property, amounts to acquire route participation agreements, costs of patents issued, and organization costs. These amounts are amortized on a straight-line basis over the lives of the leases or agreements ranging from 1 to 15 years. Intangible assets are evaluated for recoverability under the requirements of SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" whenever impairment indicators are present.
OTHER CURRENT LIABILITIES
Included in other current liabilities are $3,519,000 and $333,000 in employee royalties payable at June 30, 1998 and 1997, respectively.
REVENUE RECOGNITION
In accordance with industry practice, the Company recognizes gaming revenues as the net win from gaming operations, which is the difference between amounts wagered by customers and payments to customers. Proprietary games revenue is derived from royalty, revenue participation, or other similar short-term recurring revenue arrangements.
Revenues exclude the retail value of complimentary food and beverage furnished gratuitously to customers. The estimated departmental costs of providing such goods and services as included in casino expense are $1,712,219, $1,365,897, and $1,162,495 for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and are included in selling, general, and administrative costs. Research and development costs of $1,922,000, $2,023,000 and $608,000 were expensed for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
RECLASSIFICATIONS
Certain amounts in the June 30, 1997 balance sheet have been reclassified to be consistent with the balance sheet presentation used at June 30, 1998.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in the financial statements include the estimated depreciable lives of property and equipment and certain estimated liabilities and valuation reserves. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
The American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities". This standard provides guidance on the financial reporting for start-up costs and organization costs. This standard requires costs of start-up activities and organization costs to be expensed as incurred and is effective for fiscal years beginning after December 15, 1998, although earlier application is encouraged. Management believes that this standard could have a material effect on the Company's consolidated financial statements depending on the status of the Company's current and future expansion projects at the time this standard is adopted.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997. This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for financial statements issued for fiscal years beginning after December 15, 1997. Management does not believe this new standard will have a material impact on the Company's consolidated financial statements.
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" was issued in June 1997. This statement establishes additional standards for segment reporting in the financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes the segment information required to be disclosed under SFAS No. 131 will be more comprehensive than previously provided, including expanded disclosure of income statement and balance sheet items for each of its reportable segments under SFAS No. 131.
3. NOTES RECEIVABLE
Notes receivable include notes due from various slot route location owners with interest rates ranging from 8% to 12% to be paid over periods ranging from 3 months to 20 years. At June 30, 1997, notes receivable also include notes due from an unaffiliated gaming company and its stockholders for business development, which accrue interest at the prime rate. These notes were extinguished during the year ended June 30, 1998. Notes receivable consist of the following at June 30:
Loans to employees at June 30, 1997 consist of a $1.2 million line of credit arrangement with an entity controlled by an employee of the Company. Loans outstanding under the line of credit bear interest at prime rate plus 1%. These loans were paid in full during the year ended June 30, 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30:
On November 11, 1996, the Company announced that it was re-evaluating the scope and nature of its proposed addition of a new casino across the street from the Colorado Central Station Casino. During the fourth quarter of the year ended June 30, 1997, the Company determined that it was necessary to recognize a write-down of costs associated with the new casino in the amount of $2,116,968. The costs were
specifically related to architectural fees, building design costs, and deferred rent that were determined to have no future benefit.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at June 30:
During the year ended June 30, 1998, the Company purchased the assets of an engineering company, owned by an employee of the Company, that had previously been developing products for the exclusive use of the Company in its proprietary games operations. The total purchase price of $2,041,000 exceeded the fair value of the identifiable assets by $1,776,000. The excess purchase price is recorded as goodwill and is being amortized over three years on a straight-line basis.
6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has investments in unconsolidated affiliates that are accounted for under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of earnings, losses and distributions of these affiliates. Investments in unconsolidated affiliates consist primarily of a 50% interest in a joint venture (the "Joint Venture") with International Game Technology ("IGT"). The primary business of the Joint Venture is to distribute gaming machines on wide-area progressive systems. The Company's share of net earnings from the Joint Venture are included in revenue from proprietary games operations.
The Joint Venture operates on a September 30 year-end and began operations during the quarter ended March 31, 1997. Summarized results of operations of the Joint Venture for the year ended June 30, 1998 and the period from inception through June 30, 1997 are as follows:
Summarized balance sheet information of the Joint Venture as of June 30 is as follows:
The Joint Venture is subject to various risks and uncertainties including, but not limited to, gaming regulatory requirements. The Company's Annual Report on Form 10-K includes a comprehensive set of the Company's risk factors, including those related to the Joint Venture. The Joint Venture's operations are subject to the licensing and regulatory requirements of multiple jurisdictions throughout the United States and Canada. The Company's, IGT's and the Joint Venture's gaming licenses are subject to certain conditions and periodic renewal. Management believes that the conditions will continue to be satisfied and that subsequent license renewals will be granted.
7. NOTES PAYABLE PRINCIPAL STOCKHOLDER
Notes payable to the principal stockholder of $2,800,000 at June 30, 1997 consist of unsecured notes payable bearing interest at 8% that were due July 1, 1998. The notes were paid in full during the year ended June 30, 1998. Notes payable to the principal stockholder resulted in interest expense of $223,693, $223,693, and $289,373 for the years ended June 30, 1998, 1997, and 1996, respectively, and accrued interest payable of $18,400 at June 30, 1997.
8. OTHER DEBT
In April 1997, the Company entered into a $10 million unsecured revolving bank line of credit (the "Bank Revolver") expiring November 30, 1998. The Bank Revolver bears interest at the prime rate, or LIBOR plus 2%, at the Company's option. The Company has agreed to maintain certain financial and non-financial covenants customary with lending arrangements of this type. Financial covenants include maintenance of minimum cash and cash equivalent balances, tangible net worth, annual EBITDA, and maximum funded debt to EBITDA ratio. The covenants also restrict payment of cash dividends. The Company has remained in compliance with the covenants throughout the term of the credit facility. As of June 30, 1998, the Company had not borrowed under the Bank Revolver.
9. EARNINGS PER SHARE
During the year ended June 30, 1998, the Company adopted SFAS No. 128 "Earnings per Share." This statement established standards for computing and presenting earnings per share and required restatement of all prior-period earnings per share data presented. A reconciliation of income and shares for basic and diluted earnings per share (EPS) for the years ended June 30 is as follows:
10. OPTIONS AND WARRANTS
As of June 30, 1998, 1,085,000 shares of common stock were reserved for issuance upon exercise of employee and director stock options under an employee stock option plan. Employee and director options to purchase 1,054,500 shares at the fair market values at the grant dates have been granted as of June 30, 1998. As of June 30, 1998, options to purchase 541,275 shares had been exercised. Of the 1,054,500 options, 100,000 vest in equal quarterly increments over two years, 93,000 vest in equal annual increments over five years, 50,000 vest in a single installment six months after issuance, 20,000 vest in decreasing
annual increments over five years, 250,000 vest in varying increments and periods over five years, 8,000 vest at the end of three years, 25,000 vest in equal annual installments over ten years, 99,000 vest in three equal installments over five years and the remainder vest in equal quarterly increments over five years.
An additional 40,000 shares are reserved for issuance upon exercise of vested options at the IPO price that were granted to a relative of certain minority stockholders (none of which were exercised at June 30, 1998), and 250,000 shares are reserved for issuance upon exercise of vested warrants granted to the managing underwriters of the IPO (and their designees) exercisable at 120% of the IPO price, all of which were exercised at June 30, 1998.
Options to purchase an additional 600,000 shares were granted at the fair market value at the grant date to certain employees outside of the employee stock option plan. These options vest in varying increments over periods from nine months to eight years.
Summarized information for all options is as follows for the years ended June 30:
The following table summarizes information about the options outstanding at June 30, 1998:
The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par value per share (the "Preferred Stock"), in one or more series, and to designate the rights, preferences, limitations, and restrictions of and upon shares of each series, including voting, redemption, and conversion rights. The board of directors of the Company also may designate dividend rights and preferences in liquidation.
During the fiscal year ended June 30, 1998, the board of directors of Anchor authorized the Company to enter into a Stockholder Rights Plan (the "Rights Plan") providing that one right (a "Right") will be attached to each share of Common Stock as of a record date to be determined by the board of directors of Anchor (the "Record Date"). In connection with the authorization of the Rights Plan, the board of directors of the Company has authorized the designation of 50,000 shares of Preferred Stock as Series A Junior Participating Preferred Stock with a par value of $20.00 per share. Each Right under the Rights Plan will entitle the registered holder to purchase from the Company a unit (a "Unit") consisting of one
one-thousandth of a share of Series A Junior Participating Preferred stock at a purchase price of $400 per Unit, subject to adjustment. The Rights convert in certain circumstances into a right to purchase common stock or securities of a successor entity. The Rights Plan is filed as Exhibit 4.2 to the Company's Annual Report on Form 10-K.
The Company has adopted the disclosures-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation". The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Under APB No. 25, no compensation cost has been recognized in the financial statements for the Stock Option Plan or other stock options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Had compensation cost for the stock option grants been determined based on the fair value at the date of grant for awards consistent with the provision of SFAS No. 123, the Company's net income per common and common equivalent share would have decreased to the pro forma amounts indicated below for the years ended June 30:
The fair value of each option granted in fiscal years 1998, 1997 and 1996 was estimated using the following assumptions for the Black-Scholes option pricing model: (i) no dividends; (ii) expected volatility of 60% for 1998 and 50% for 1997 and 1996; (iii) risk free interest rates averaging 6% for all years; and (iv) an expected average life of 4.6 years for 1998, 3.6 years for 1997 and 3.2 years for 1996. The weighted average fair value of the options granted in 1998, 1997 and 1996 were $30.00, $9.82 and $9.03, respectively. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to July 1, 1995, the resulting pro forma net income may not be representative of that to be expected in future years.
11. OTHER RELATED PARTY TRANSACTIONS
The principal stockholder of the Company owned 100% of the common stock of an Anchor Gaming slot route location. On January 31, 1996, the principal stockholder sold the location to an unaffiliated third party. For providing the gaming machines and slot route services, the Company received a percentage of the net win of the location similar to other route locations. The Company held a note receivable from the slot route operation in the amount of $284,704 at January 31, 1996 of which $257,562 was assumed by the new owner. The remaining balance of the loan due from the principal stockholder at June 30, 1996 of $27,142 was paid in full on July 11, 1996. The slot route operation, under the ownership of the principal stockholder, accounted for $180,822 of gaming revenue and $145,684 of route costs during the year ended June 30, 1996.
In August 1996, the Company made certain payments to an entity controlled by an employee of the Company. These funds were used to repay a debt of $500,000 owed by the employee and his affiliate to the principal stockholder of the Company.
12. INCOME TAXES
The provision for income taxes for the years ended June 30, 1998, 1997 and 1996 are as follows:
The historical provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from continuing operations as a result of the following differences:
SFAS No. 109 "Accounting for Income Taxes" requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred income taxes included in other current assets, deposits and other, and other long-term liabilities on the consolidated balance sheets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax items comprising the Company's net deferred tax asset as of June 30, 1998 and 1997 are as follows:
13. COMMITMENTS AND CONTINGENCIES
NON-CANCELABLE OPERATING LEASES:
The Company leases parking lot space, office space, casino space, and slot route locations under non-cancelable operating leases. The original terms of the leases range from 3 to 15 years with various renewal options from 1 to 15 years.
The casino space lease has contingent rentals based on gaming revenues of the casino occupying the space. The lease provides for a monthly payment of the greater of a base amount of $12,000 or 5% of adjusted gross gaming revenue, with a payment ceiling of $400,000 per year. Contingent rentals paid above base amounts were $256,000, $254,472 and $184,312 for the years ended June 30, 1998, 1997, and 1996, respectively.
Future minimum rentals under non-cancelable operating leases at June 30, 1998 are:
Operating lease rental expense was $11,878,000, $10,940,000, and $9,539,000 for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
Included in deposits at June 30, 1998 and 1997 is a space lease deposit of $3,300,000, which is held by the lessor of several slot route locations pursuant to an agreement that provides that the deposit, or any portion thereof, may, at the option of the Company, be applied against rents owing during the last two years of the lease agreement. Also included in deposits are payments totaling $10,750,000 to this lessor to extend the lease term for these locations through the year 2010. The lease extension payments are amortized to rent expense on a straight-line basis over the remaining term of the lease. The Company's slot route operations at locations leased from this lessor accounted for more than 10% of the Company's total revenues for the years ended June 30, 1997 and 1996.
GAMING REGULATIONS
The Company's route operations are subject to the licensing and regulatory requirements of the Nevada State Gaming Control Board and the Nevada Gaming Commission. The Company's casino operations are subject to the licensing and regulatory requirements of the Colorado Limited Gaming Control Commission. The Company's proprietary games operations are subject to the licensing and regulatory requirements of multiple jurisdictions throughout the United States and Canada including the Nevada and Colorado requirements. The Company's gaming licenses are subject to certain conditions and periodic renewal. Management believes that the conditions will continue to be satisfied and that subsequent license renewals will be granted.
ENVIRONMENTAL MATTERS
The Colorado Central Station Casino is located in an area that has been designated by the Environmental Protection Agency ("EPA") as a superfund site on the National Priorities List, known as the Central City-Clear Creek Superfund Site (the "Site") as a result of contamination from historic mining activity in the area. The EPA is entitled to proceed against owners and operators of properties located within the Site for remediation and response costs associated with their properties and with the entire Site. The Colorado Central Station Casino is located within the drainage basin of North Clear Creek and is therefore subjected to potentially contaminated surface and ground water from upstream mining-related sources. Soil and ground water samples on the Site indicate that several contaminants exist in concentrations exceeding drinking water standards. Records relating to historical uses of the Site are uncertain as to whether mining actually occurred below the Company's property. Records do indicate that an ore loading dock for a railroad depot was once located on an adjacent property, and railroad tracks were present on the Company's property. Management is not aware of any environmental issues associated with these activities. The Company applied the guidance in Statement of Position 96-1 "Environmental Remediation Liabilities" and determined that a liability has not been incurred as the criteria of this standard have not been met.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with six executives and top management personnel. The agreements vary in starting date and are for periods ranging from two to five years. Agreements with aggregate annual salaries of $1,315,000 are terminable at the Company's option with 90 days to one year severance pay.
LITIGATION
Several securities class action lawsuits have been filed against the Company and certain of its current and former officers and directors. The lawsuits were filed in various jurisdictions following the Company's announcement in early December 1997 that the Company's results for the December quarter might not meet analysts' expectations. The lawsuits have been brought on behalf of certain purchasers of the stock of the Company and allege violations of state and/or federal securities laws arising out of alleged misstatements and omissions to state material facts about the Company over various periods of time covered by the lawsuits. The lawsuits have all been consolidated in Nevada, both in federal and state court. The consolidated federal action is captioned IN RE ANCHOR GAMING SECURITIES LITIGATION, Civil Action No. CV-S-97-01751-PMP (RJJ), and the consolidated state action is captioned RYAN, ET AL. V. ANCHOR GAMING, ET AL., Civil No. A383456. 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 consolidated state court action has been stayed by order of the court.
PURCHASE COMMITMENTS
At June 30, 1998, the Company had entered into various purchase agreements to purchase gaming equipment for approximately $2,734,000.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the Company's proxy statement for the November 23, 1998 Annual Meeting of Stockholders under the caption "Management-Directors and Executive Officers."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the Company's proxy statement for the November 23, 1998 Annual Meeting of Stockholders under the caption "Executive Compensation and Other Information", provided that the Performance Graph and the Compensation Committee Report on Executive Compensation are expressly not incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the Company's proxy statement for the November 23, 1998 Annual Meeting of Stockholders under the caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the Company's proxy statement for the November 23, 1998 Annual Meeting of Stockholders under the caption "Executive Compensation and Other Information-Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1)The following documents are filed as part of this Report:
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Income for the fiscal years ended June 30, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2)The following accountants' reports and financial schedules for fiscal years ending June 30, 1998, 1997, and 1996 are submitted herewith:
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted as the required information is inapplicable
(a)(3)Management Contract or Compensatory Plan
See Index to Exhibits. Each of the following Exhibits described on the Index to Exhibits is a management contract or compensatory plan: Exhibits 10.10 through 10.28, 10.32 through 10.36 and 10.38 through 10.40.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended June 30, 1998
(c) Exhibits
See Index to Exhibits.
(d) Financial Statement Schedule filed in Part IV of this report is as follows:
SCHEDULES:
II--Valuation and Qualifying Accounts--Years Ended June 30, 1998, 1997, and 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Anchor Gaming has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated.
INDEX TO EXHIBITS
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* Filed herewith
ANCHOR GAMING
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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(1) Amounts deemed to be uncollectible
(2) Amounts recovered
(3) Primarily charged to development costs included in selling, general, and administrative expenses