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Anchor Gaming Sues Executives Over $290 Million Merger

23 February 2000

by Grace Leong

Anchor Gaming of Las Vegas and its subsidiary, Powerhouse Technologies Inc. of Atlanta, sued three former Powerhouse executives, alleging they duped Anchor into paying more than Powerhouse's fair value when Anchor acquired the company last June.

In a U.S. District Court suit, Anchor Gaming, which acquired Powerhouse for $290 million or $19.50 per share, is seeking a court order to determine whether Powerhouse "fairly presented its financial position, results of operations, stockholders' equity and cash flows" when it sold the company.

Anchor Gaming alleged former Powerhouse President and Chief Executive Richard N. Haddrill and Chief Financial Officer Susan J. Carstensen prematurely recognized and included revenues and projected profits from its gaming machine sales in 1998 to Louisiana, Peru and Vietnam in Powerhouse's 1998 year-end financial report.

This allegedly inflated Powerhouse earnings and duped Anchor into paying an inflated price for the company, Anchor alleged.

"Haddrill and Carstensen acted with intent to deceive Anchor in making the omissions and misrepresentations alleged," Anchor charged in its suit.

Haddrill and Carstensen could not be reached for comment.

Powerhouse supplies systems software, equipment and related services to online lotteries, video lotteries and pari-mutuel sites worldwide through its four major operating divisions: Video Lottery Consultants Inc. of Bozeman, Mont.; Automated Wagering International Inc. of Atlanta; United Tote of Timonium, Md.; and Sunland Park Racetrack & Casino in New Mexico.

Also sued was Michael L. Eide, president of gaming and director of Video Lottery, which makes and sells video lottery terminals and video poker machines.

The suit said Haddrill and Carstensen, who were involved in negotiating and consummating the acquisition, were unjustly enriched because they were able to sell their own stock at a much higher price during the merger than they would have received had Powerhouse's 1998 financial statements been accurately adjusted to reflect the transactions.

Anchor, which operates two Colorado casinos and a slot machine route in Nevada and developed proprietary games such as Wheel of Fortune and Cashball, said Powerhouse's stock price fell after the acquisition when the transactions were discovered.

The suit said although Video Lottery initially failed to get final approval from the video gaming division of the Louisiana State Police for the sale of 300 video poker machines to its Louisiana distributor, the sale was allegedly prematurely recognized and gross profits of $687,120 were recorded as part of its 1998 year-end financial statements.

The suit said Video Lottery recorded the Louisiana sale in late 1998 after it received prior approval from Gaming Laboratories International Inc. on condition that Powerhouse make modifications to its "Jokers Gold" game and submit the modified machines to the Louisiana State Police for testing.

But test results on Feb. 1, 1999, showed the machines' computer chipsets, which control the game's operations, were defective and the machines weren't approved in Louisiana, the suit said. Video Lottery, which spent 580 work hours and more than $28,000 to rectify the problem, submitted for testing new chipsets on three occasions and finally received approval from the Louisiana State Police on Oct. 15.

The suit said Haddrill and Carstensen violated general accounting principles when they allegedly failed to disclose to Powerhouse auditor KPMG that the Louisiana State Police initially didn't approve the sale and failed to adjust Powerhouse's 1998 financial statements to reflect that.

Also named as defendants are WLC del Peru, S.A., and its parent company, World Lottery Consultants Corp. and two Canadian gaming route operators, 047438N.B Inc. and 055455N.B Inc..

Anchor requested the court to decide whether Video Lottery -- which sold 600 video poker machines to WLC del Peru on March 13, 1996, to develop a gaming network in Peru -- agreed to issue a buy-back agreement that commits it to repurchase the video gaming equipment should WLC del Peru default on its payments.

Anchor, in its lawsuit, denies that such a buy-back agreement exists and alleges it hasn't been able to ascertain the agreement's terms.

Anchor also seeks clarification on whether Video Lottery -- which agreed to sell an additional 600 video poker machines to WLC del Peru on Nov. 16, 1998 -- agreed to modify WLC del Peru's payments under the 1998 deal, and whether any agreement was struck between WLC del Peru and World Lottery, or between WLC del Peru and Video Lottery to increase the number of gaming machines in Peru.

The suit said Powerhouse's auditors questioned whether projected revenues from an 11-year payment stream from the 1998 deal should be recognized as part of its 1998 earnings.

Anchor also asks whether Video Lottery has any rights to take over WLC del Peru and the two Canadian gaming operators' gaming licenses and routes should they default on their payments.

WLC del Peru and World Lottery could not be reached for comment.

The suit also seeks an order to declare whether Powerhouse violated accounting principles when it allegedly prematurely recorded revenues in its 1998 earnings report from its Aug. 18, 1998, sale of computer hardware and equipment to Applied Gaming Solutions of Canada Inc. to operate an online lottery system in the Socialist Republic of Vietnam.

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