Anchor Gaming

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Anchor Gaming

815 Pilot Road, Suite G
Las Vegas, Nevada 89119
U.S.A.
(702) 896-7568
Fax: (702) 896-6221
Web site: http://www.anchorgaming.com

Public Company
Incorporated: 1993
Employees: 869
Sales: $153.8 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: SLOT
SICs: 7993 Coin-Operated Amusement Devices

Anchor Gaming is an industry-leading diversified gaming company with experience as an operator and developer of gaming machines and casinos. The three business segments in which Anchor does business are: a slot machine route in Nevada; casinos in Colorado and Canada; and proprietary games. CEO Stanley E. Fulton and his family owned approximately 37 percent of the company in 1998, and the corporate headquarters were located in Las Vegas, Nevada.

Slot Machine Route

Anchor Gaming operates a slot machine route in the state of Nevada, in which slot machines are placed at taverns, grocery stores, and convenience stores. The slot machines are regularly serviced by Anchor in exchange for a split of the revenues, or for a fixed-fee payment. The company’s Anchor Coin subsidiary operates one of the largest gaming machine routes in the state of Nevada, with more than 800 video poker machines and slot machine units at retail stores and taverns. It is not the largest slot route in the state, but it is the most profitable. Las Vegas, one of the fastest-growing cities in the United States, provides a strong demographic base for slot machine routes. Anchor’s largest customer is the Smith’s Food and Drug Centers chain, where the company has exclusive location contracts locked in until 2010.

The company’s deal with Smith’s is a space-lease agreement, so any upside in slot revenues goes to Anchor rather than being divided with the store. Anchor’s major competitors in the route business are Alliance Gaming and Jackpot Enterprises.

Casinos

Anchor Gaming operates what may be the most profitable casino in the state of Colorado. Limited stakes gambling was made legal in three historic mining towns in the Rocky Mountains of Colorado in November 1990, and Anchor was quick to jump at the opportunity.

The Colorado market in which Anchor participates is both unique to North American gaming and important to the continued growth of Anchor Gaming for a number of reasons. First of all, gaming in Colorado is limited stakes, which means $5 is the maximum permissible wager. Unlike Missouri, however, there is no limit on the amount one patron can lose. The main effect of this maximum bet is that the casinos focus more on gaming machines than on table games. Second, casinos in Colorado are on a much smaller scale than most other U.S. markets (such as the obvious cities of Las Vegas and Atlantic City), for several reasons: Each town’s ordinances state that all casinos must be built in the historical style of the town’s architecture. Because of this, most of the casinos in Colorado are in already-existing buildings and, consequently, are rather small. Additionally, the downtown location of these already existing buildings, combined with the mountainous terrain, limits available parking space as well as any expansion space a casino might want to undertake in the future. In fact, most casinos in Colorado offer little or no parking space for their patrons, and few, if any amenities, such as restaurants, hotel rooms, or bars (only Harvey’s Casino in Central City offered hotel rooms as of 1997).

Due to the building, space, parking, and growth restrictions, major casino operators have stayed away from the Colorado market, so Anchor has not experienced significant competition. In fact, the only other major operators in the cities of Black Hawk and Central City are Harvey’s Wagon Wheel, the Gilpin Hotel & Casino, Promus, Lady Luck, and Fitzgeralds; the remainder are operated as small “Mom & Pop” businesses.

The Colorado Central Station Casino, located in the city of Black Hawk (approximately 40 miles from Denver), however, did not occupy an already existing building. It was built to specifications and features an exterior design resembling a 19th-century railroad station. Colorado Central Station is the larger of the two Anchor facilities, generating more revenue than the smaller Colorado Grande Casino, located in Cripple Creek, which features primarily slot machines, with blackjack and poker tables mixed in. Colorado Central Station, which opened its doors on Christmas Day in 1993, is situated on approximately 1.8 acres of land at the south end of Black Hawk, near Main Street and Colorado State Highway 119, considered by many to be the best location in Black Hawk/Central City, since it is the first casino encountered on the road from Denver and Interstate Highway 70 and the first stop on the shuttle bus from the Black Hawk/Central City public parking lot, which most casino patrons use. Colorado Central Station has more than 680 gaming machines, 19 table games, and a food court restaurant area. The Colorado Central Station building has approximately 49,000 square feet of floor space, with 16,637 square feet of gaming area spread over three floors. The casino has more than 770 parking spaces and is the first shuttle stop from Black Hawk’s 3,000-space public facility. Colorado Central Station generates more than $15 million in annual pretax income and dominates the Colorado market, with 6.5 percent of the state’s casino capacity generating 17 percent of the state’s $420 million casino revenues.

The second casino is The Colorado Grande Casino, 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 Colorado Grande is located at one of the principal intersections in Cripple Creek; the casino features more than 210 gaming machines, a full service restaurant, and bar.

Anchor and Revenue Properties, a Canadian company, entered a joint venture to manage seven charitable casinos in Ontario, Canada. The seven casinos are relatively small, capped at 40 table games and 150 gaming machines per location. The Ontario Gaming Control Commission gave Anchor and Revenue an eight-year lease and the companies will be responsible for casino buildout at existing sites such as racetracks, shopping centers, and hotels. The company will receive ten percent of gaming machine revenue, five percent of table game and food and beverage revenue, and ten percent of operating income.

Proprietary Games

The fastest-growing segment of Anchor Gaming’s business is its proprietary games division, which has grown at an 87 percent compound rate over the past three years. The company does not actually manufacture the games. Instead, it creates ideas for novelty slot and video games, develops the game concepts, and then incorporates those concepts into existing game formats from suppliers such as International Game Technology (IGT), Bally Gaming, and Universal, then places the games in casinos throughout the United States. Proprietary games include Double Down Stud video poker, Clear Winner (a transparent slot machine), the highly-successful Wheel of Gold slot machine, the Wheel of Fortune progressive slot machine (developed in conjunction with IGT), Totem Pole (a nine-reel, eight-foot-high slot machine), and Silver Strike (a slot machine that pays out an encased souvenir silver token on a winning combination). Although Anchor initially began developing 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; rather than selling its games to casino operators, Anchor places them on the casino floor for free in exchange for a share of the revenues. Anchor also controls games such as Cash Ball, Road Rally, and Cash Fire.

According to Anchor’s joint venture agreement with IGT, the latter company has the right to take any or all of Anchor’s games and place them in its wide area progressive systems (WAPs). The WAP systems link these slot machines and create large jackpots that are popular with players. Anchor continues to place its games as freestanding units in addition to the WAP units placed by the joint venture; therefore, most casino floors in the U.S. have a mix of Anchor’s freestanding units and Anchor/ IGT WAP units. In addition to Canada, Colorado, and Nevada, Anchor also is or has been licensed in Arizona, Connecticut, Illinois, Indiana, Iowa, Mississippi, Missouri, New Jersey, and South Dakota.

Entering the Game, 1993

Anchor Gaming was incorporated in Nevada on July 28, 1993 by Stanley E. Fulton, a man who had been involved in the gaming equipment business since the early 1970s. In 1976, he founded Fortune Coin, a company which introduced the first video poker game in 1977. One year later, he sold Fortune Coin, which eventually evolved into International Game Technology, ironically later becoming one of Anchor’s primary business partners.

Fulton then went on to work at Gaming and Technology Inc., where he helped build one of the largest gaming routes in Nevada, eventually becoming chairman of that company, now known as Alliance Gaming Corporation.

Fulton founded Anchor Gaming’s predecessor. Anchor Coin, in 1991, building another large gaming route, and eventually creating Anchor Gaming.

Company Perspectives

Anchor Gaming 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.

Also in 1993, Colorado Grande Casino outperformed the average Cripple Creek casino, generating an average of $73 in daily revenue from each of its 186 slot machines and card tables during its second year of operation (ended September 30, 1993), compared to the citywide average of $50 during the same period.

By 1994, the company operated 629 slot machines leased in 45 locations (primarily Albertson’s grocery stores and Smith’s) throughout the Las Vegas area. In February of that year, The Colorado Grande Gaming Parlor became the second Cripple Creek casino to be owned by a publicly traded company when Anchor Gaming raised $30.7 million in an initial stock offering of 2.75 million shares. Cripple Creek-based Alpine Gaming Inc.—which owns The Long Branch Saloon & Casino, and was making plans to merge with Denver-based Century Casinos Management Inc.—is the only other publicly traded company to own one of the city’s 23 casinos. The public offering came just as the Cripple Creek economy was beginning to feel the hurt by the December closing of a tunnel on Colorado Highway 67, forcing gamblers to take long detours from the principal route to the town. Most of the money from the offering was used to pay off $17.5 million in debts, including $11.2 million to repay loans from Anchor CEO Stanley Fulton and his six children; another $1.8 million was used to buy 163,789 shares from minority shareholders in the Colorado Grande.

The following month, the company used $900,000 in cash from the public offering, and some 1.3 million shares to acquire ownership of Global Gaming Products LLC, and certain related assets from Global Gaming Distributors Inc., which leased slot machines that paid out silver tokens and serviced Anchor’s leases in northern Nevada. The acquisition also gave Anchor the rights to the game Silver Strike.

October of the same year saw the company consolidate its Las Vegas offices into a new headquarters facility, expanding to 17,000 square feet of office space and 30,000 square feet of sub-assembly and warehouse space, all of which is leased. Revenues for 1994 reached $54.8 million, with a net income of $10.5 million. Revenues for the following year jumped to $97.4 million, with net income also rising, to $16 million.

In April 1996, the company completed a second successful public offering, raising nearly $54 million. The following month, Business Week ran an article featuring Anchor Gaming among the six “Hot Growth Companies,” along with Encad Inc. and Remedy Corp., two high-tech firms, as well as Logan’s Roadhouse Inc., HPR Inc., and MedCath Inc. In November, Anchor announced the suspension of a planned $60 million addition of 144,000 square feet of space directly across the street from the existing facility, connected by an enclosed walkway, adding 120 hotel rooms, 36,000 square feet of gaming space, 600 gaming machines, 12 table games, a full-service restaurant, a fast-food restaurant, and 720 additional parking spaces. Revenues for 1996 reached $116.5 million, with net income of $22.3 million.

In the fall of 1997, Anchor Gaming and a Canadian joint venture partner were awarded licenses to operate seven charitable casinos in Ontario, Canada. Poor weather in late October of that year caused the company some worry, but the Colorado casino operations posted record revenues and profits for the quarter. Revenues for the year reached $153.7 million, with net income of $35.7 million. Later that year, Fulton sold 1.8 million shares (at $91 each) to “diversify” his holdings, but some analysts believed the major shareholder was cashing out just in case things went poorly.

In 1998, the company began shipping a stand-alone slot machine game it created, called The Totem Pole. Two other products released in 1998 included Crazy Joker and Wheel Winner Poker, both aimed at the distinct video poker market, an area that Anchor has not really focused on in the past. A third product, called Cash Ball, which features a pinball-type secondary game manufactured by WMS Industries, the world’s leading pinball manufacturer, and Bally Gaming, was introduced on field trial in the Bahamas in 1998, and a fourth product, Pinball Wizard, began shipping as well.

Anchor Gaming and IGT, the largest games manufacturer in the industry, signed a joint venture agreement in September 1996 to market the Wheel of Fortune game. Starting out initially with 650 units in early 1998, by mid-year, over 4,000 units were in use in the Native American, Nevada, New Jersey, Mississippi, and Missouri markets, making it the most successful slot ever introduced on the casino floor. Also part of the joint venture were the Totem Pole progressive slot, Pinball Wizard, and Keno Bucks. But, the joint venture was not without its downside. Revenues generated from the company’s Wheel of Gold game began to decline with the release of Wheel of Fortune.

Additionally, fierce competition from other companies’ games, such as Bally’s Roll the Dice game and IGT’s Jeopardy and Vision Series games, began to squeeze out Anchor’s previously unchallenged games, and analysts at the recent gaming manufacturers conference came away “unimpressed” by Anchor’s Cash Ball, Wheel Winner Poker, and Big Bucks Bingo offerings, but highly touted IGT’s Vision Series (a traditional fitted with an LCD screen, with “bonusing,” i.e., giving the player another chance to win). By the end of fiscal 1998, though, the company should have entered new markets such as Illinois, Louisiana, and Indiana. Anchor’s strong floor presence and previously unchallenged near-monopoly, track record with previous games, and aggressive marketing strategy would likely continue to carry it as an industry leader well into the 21st century.