EXHIBIT 13
----------
FINANCIAL INFORMATION
Selected Financial Data 10
Management's Discussion 11
Market for Company's Common Stock
and Related Security-Holder Matters 15
Report of Independent Auditors 15
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statements of Changes
in Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Quarterly Financial Information 27
Industry Segments 28
9
WMS Industries Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
----------------------------------------------------------------------------------------------------
SELECTED STATEMENT OF INCOME DATA June 30, 1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------
Revenues $385,372 $358,213 $331,129 $227,008 $161,188
----------------------------------------------------------------------------------------------------
Income from operations 33,873 49,288 52,455 29,235 16,616
----------------------------------------------------------------------------------------------------
Income before tax provision, minority
interests and extraordinary item 33,958 46,346 49,664 25,382 9,471
----------------------------------------------------------------------------------------------------
Provision for income taxes 11,841 13,266 15,623 1,750 --
----------------------------------------------------------------------------------------------------
Income before extraordinary item 19,207 28,483 30,709 25,015 8,872
----------------------------------------------------------------------------------------------------
Net income 19,207 28,483 30,709 25,015 10,856
====================================================================================================
Income per common share
Income before extraordinary item $ .80 $1.19 $1.31 $1.21/1/ $ .52/1/
Net income .80 1.19 1.31 1.21 .64
====================================================================================================
Shares used in calculating per share amounts 24,102 24,016 23,374 20,631 17,046
====================================================================================================
SELECTED BALANCE SHEET DATA
Total assets $386,066 $343,141 $306,875 $225,187 $121,358
------------------------------------------------------------------------------------------------
Working capital 139,333 143,990 163,668 75,131 7,836
------------------------------------------------------------------------------------------------
Long-term debt, including current maturities 88,241 92,809 93,569 45,191 54,475
------------------------------------------------------------------------------------------------
Stockholders' equity 208,571 181,472 152,475 115,386 22,522
================================================================================================
/1/ On July 1, 1990 the Company had a net operating loss carryforward for tax
purposes and could not recognize the expected future tax benefits from these
loss carryforwards under SFAS 109. The tax benefits from the net operating
loss carryforwards were recognized in the years ended June 30, 1991 and 1992
resulting in no provision for income taxes in fiscal 1991 and a
significantly reduced provision for income taxes in 1992. Income per share
before extraordinary item would have been $.82 and $.47 for fiscal 1992 and
1991, respectively, if they were calculated on a fully taxed basis
comparable to subsequent years.
10
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Cash flows from operating, investing and financing activities during fiscal 1995
resulted in net cash provided of $11,725,000 as compared with net cash used of
$3,690,000 during fiscal 1994. Cash flow provided by operating activities was
$29,199,000 during fiscal 1995 as compared with $34,599,000 during fiscal 1994.
The principal reason for the decrease was lower net income in fiscal 1995.
Investing cash flows included the purchase of property, plant and equipment
during fiscal 1995 of $19,474,000 as compared with $18,913,000 during fiscal
1994. The asset additions in fiscal 1995 were primarily at the amusement games
business. In fiscal 1994, $14,431,000 of cash was utilized for the acquisition
of Tradewest. Investing cash flows in fiscal 1995 included the net sale of
short-term investments of $15,037,000 and 1994 includes the net purchase of
noncurrent and short-term investments of $4,108,000.
Cash used by financing activities was $5,314,000 for fiscal 1995 compared with
cash provided of $8,130,000 for fiscal 1994. Fiscal 1995 included $37,000
received from the exercise of stock options compared to $10,248,000 in fiscal
1994. The proceeds from long-term debt in fiscal 1994 were used for the purchase
of property, plant and equipment at the hotel/casino businesses.
See the Consolidated Statements of Cash Flows on page 19 for further details
on cash flow items.
The Condado Plaza has a $2,000,000 bank line of credit available which was
fully utilized at June 30, 1995 and the El San Juan has a $1,000,000 bank line
of credit available which was unused at June 30, 1995. Condado Plaza and El San
Juan long-term debt agreements provide that advances, dividends and other
payments to the owners are to be based on defined levels of cash flow from the
respective hotel/casino whereas Williams Hospitality is permitted to make
advances and pay dividends in an amount aggregating $1,800,000 per year as well
as additional amounts approved by the lender. During fiscal 1995 Williams
Hospitality paid dividends of $2,060,000. Management does not have a present
intention to pay additional dividends from the hotel/casino businesses to the
parent except for future payments of dividends by Williams Hospitality.
Management believes that cash flow from hotel/casino operations will be adequate
to pay their long-term debt as it becomes due and provide for the normal planned
capital additions.
WMS Industries Inc. has an uncollateralized bank line of credit which provides
for borrowing up to $25,000,000 or for WMS and its U.S. operating subsidiaries
to have letters of credit up to $25,000,000 outstanding. The letter of credit
availability was increased to $75,000,000 through December 31, 1995. At June 30,
1995 there were no borrowings from the line of credit but there were outstanding
letters of credit totaling $10,200,000. Interest on the initial borrowings will
be at a short-term Eurodollar rate plus .75%. Management believes that cash flow
from operations, cash and cash equivalents, short-term investments and amounts
available under the line of credit will be adequate to fund the fluctuating
level of inventories and receivables required in the operation of the business
and provide for the growth and expansion of the business including the home
video game business and gaming devices.
RESULTS OF OPERATIONS
1995 Compared With 1994
Segment data discussed below is taken or derived from segment disclosures in
Note 15 to the Consolidated Financial Statements.
Consolidated revenues increased 7.5% from $358,213,000 in fiscal 1994 to
$385,372,000 in fiscal 1995. Revenues of the amusement games business increased
11.2% to $314,494,000 in fiscal 1995. The principal reason amusement games
revenues increased was from sales of video game cartridges into the home video
game market (home video software creator and publisher Tradewest was acquired in
April 1994) and $27,000,000 from licensing the distribution of home video games
for use on multipurpose home computers, licensing certain foreign distribution
of home video games and certain other licensing revenues. Fiscal 1994 included
approximately $13,000,000 in net revenues from the Company's business
arrangements with Nintendo of America and Nintendo Co. Ltd. of Japan and certain
other licensing revenues. Coin operated amusement games revenues, after
excluding the Nintendo business arrangements net revenue from fiscal 1994,
decreased 2% in fiscal 1995 compared to fiscal 1994. This decrease was due to a
24% decrease in pinball sales, caused by a soft market, substantially offset by
a 21% increase in coin operated video game sales and increased video lottery
terminal unit sales.
Gross profit (excluding depreciation) of the amusement games business
increased in fiscal 1995 to $72,533,000 (23.1% of amusement games business
revenues) compared with $64,931,000 (22.9% of such revenues) in fiscal 1994.
Excluding the increase in gross profit resulting from the licensing of the
distribution of home video games mentioned above, gross profit from the
amusement game business in fiscal 1995 would have been $48,933,000 (17.0% of
comparable revenues).
11
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Excluding the effects of the Nintendo arrangements and certain other licensing
revenues mentioned above, fiscal 1994 gross profit would have been $51,931,000
(19.3% of comparable revenues). This decrease was primarily due to approximately
$3,300,000 in royalties payable to the external developer of one coin operated
video game sold during fiscal 1995 and a planned increase of $6,601,000 in
research and development expense to $26,779,000 in fiscal 1995 from $20,178,000
in fiscal 1994. The increased research and development expenses include that of
the home video game business and expenses associated with the Company's
development of gaming products and interactive networked video games, the
benefits of which are expected to be realized in future periods.
Operating profit of the amusement games business on a segment basis decreased
to $38,833,000 in fiscal 1995 from $45,012,000 in fiscal 1994. This was
primarily due to the decrease in gross profit as discussed above coupled with
increased selling and administrative and depreciation expenses. The increase in
selling and administrative expense of the amusement games business was primarily
caused by $1,500,000 of higher selling and administration expense for gaming
products and $8,900,000 of higher selling and administrative expense in the home
video game business for a full year in fiscal 1995. The home video game business
is expected to incur higher selling expense as a percent of sales than the coin
operated games business and is expected to generate a higher gross profit as a
percentage of sales to more than offset the increased selling cost, which did
not materialize during fiscal 1995. The increase in depreciation and
amortization expense of the amusement game business of $1,600,000 was primarily
from the home video game business.
Condado Plaza revenues were $57,530,000 in fiscal 1995 compared to $62,600,000
in fiscal 1994. Net casino revenue (casino revenues minus casino promotional
allowances) decreased by $3,469,000 or 16.4% due to a reduced casino handle and
a lower win percentage. Hotel revenues were slightly below fiscal 1994 due
primarily to a lower average room rate and a lower occupancy rate.
The Condado Plaza's profit before selling and administrative expense
(excluding depreciation) decreased to $17,746,000 (30.8% of the Condado Plaza
revenues) in fiscal 1995 from $22,957,000 (36.7% of the Condado Plaza revenues)
in fiscal 1994. The decrease was due to lower revenues as explained above and
increased operating expenses including emergency water cost required during the
drought early in fiscal year 1995.
The Condado Plaza on a segment basis had an operating loss of ($1,465,000) for
fiscal 1995 compared with operating profit of $4,473,000 in fiscal 1994. The
decrease was primarily due to the same reason as for the $5,211,000 decrease in
profit before selling and administrative expense but further reduced by
increased administrative expense, in part from higher insurance expense.
Williams Hospitality revenues (before intersegment elimination) increased to
$17,350,000 in fiscal 1995 from $16,795,000 in fiscal 1994. This increase was
primarily from including El Conquistador management fees for an entire year in
fiscal 1995 compared to only eight months in fiscal 1994. Management fees from
the Condado Plaza and El San Juan were lower during fiscal 1995 compared to
fiscal 1994 because of their reduced revenue and level of operations. Williams
Hospitality operating profit on a segment basis decreased to $9,174,000 in
fiscal 1995 from $9,472,000 in fiscal 1994. The decrease was primarily due to
increased administrative and amortization expense more than offsetting the
increased revenues.
Consolidated selling and administrative expense increased primarily as a
result of the selling and administrative expenses of the home video game
business, higher selling and administrative expenses for gaming products and
increased insurance expense at the Condado Plaza.
Consolidated depreciation and amortization increased due to the acquisition of
Tradewest in April 1994 and equipment additions at the amusement game business.
The equity in loss of nonconsolidated affiliates was ($7,003,000) in fiscal
1995 as compared with ($3,534,000) in fiscal 1994. The increased loss was
primarily due to an increase in the Company's equity in net loss from the newly
opened El Conquistador Hotel and Casino that was ($5,803,000) in fiscal 1995
compared with ($2,311,000) in fiscal 1994, representing only five months of
operations. Like most resort properties El Conquistador is expected to report
losses in its early years, but the Company's 23.3% equity in the losses are
expected to be partially offset by the Company's 62% interest in the management
fees earned during the year by Williams Hospitality from El Conquistador. The
50% equity in the loss of the El San Juan was ($1,200,000) in fiscal 1995
compared to equity in loss of ($1,223,000) in fiscal 1994. The El San Juan's
results were relatively flat, notwithstanding a 21.6% decline in casino revenues
and a small decline in hotel revenues, due to decreased operating expenses
resulting from cost reduction activities.
Income from operations was $33,873,000 in fiscal 1995 as compared with
$49,288,000 in fiscal 1994. The reduction was from both lower operating profit
of the hotel/casino business
12
(including equity in loss of nonconsolidated affiliates) resulting in a decrease
of $9,735,000 and decreased operating profits of the amusement game business as
described above.
Consolidated interest and other income increased primarily due to increased
income on short-term and cash equivalent investments.
The fiscal 1995 provision for income taxes reflects federal, Puerto Rico and
state income taxes and results in an effective rate of 34.9% compared with 28.6%
in fiscal 1994. The increase in effective rate was because the loss at the
Condado Plaza in fiscal 1995 had no tax benefit and a partial federal tax on
certain Puerto Rico income as a result of a tax law change.
Minority interests decreased primarily due to lower net income of Williams
Hospitality and the Company's additional ownership percentage in Williams
Hospitality.
Fiscal 1995 net income was $19,207,000, $.80 per share, in comparison to
$28,483,000 ($1.19 per share) in fiscal 1994. Net income for fiscal 1995
includes $14,562,000, ($.60 per share) relating to licensing the distribution of
video games for use on multipurpose home computers, certain foreign distribution
of home video games and certain other licensing revenue as mentioned above. Net
income for fiscal 1994 includes $8,320,000 ($.35 per share) from the business
arrangements with Nintendo of America and Nintendo Co. Ltd. of Japan and certain
other licensing revenues noted above. The decline in fiscal 1995 net income was
due to a net loss in the hotel/casino business resulting in a reduction of
consolidated net income of $6,022,000, $.25 per share, and lower operating
results of the amusement game business, as described above, which includes a net
loss from the home video game business after excluding licensing net revenue.
Higher research and development expense and gaming products selling and
administrative expense in fiscal 1995 also decreased net income, the benefits of
which are expected to be realized in future periods.
1994 Compared With 1993
Consolidated revenues increased from $331,129,000 in fiscal 1993 to $358,213,000
in fiscal 1994. Revenues of the amusement games business increased 8.6% to
$282,733,000 in fiscal 1994. The increase in amusement games revenues was
primarily due to an 18% increase in video arcade game sales, increased video
lottery terminal sales, increased royalty income from the license of the
Company's video arcade games for the home video game cartridge market and
approximately $13,000,000 of net revenue received from the Company's business
arrangements with Nintendo of America and Nintendo Co. Ltd. of Japan and
certain other licensing revenue, offset in part by a 13.9% decline in pinball
game sales. The decline in pinball sales resulted from a 21% decrease in unit
sales offset by an increase in the average sales price. During fiscal 1994 the
average sales price of a pinball game increased 10% but did not increase as fast
as the costs to manufacture an average pinball game increased. The fiscal 1994
pinball models generally have wider play fields with more playing devices that
have increased manufacturing costs.
Gross profit (excluding depreciation) of the amusement games business
increased in fiscal 1994 to $64,931,000 (22.9% of amusement games business
revenues) from $59,265,000 (22.8% of amusement games business revenues) in
fiscal 1993. The increase resulted primarily from increased revenues as
explained above offset in part by a lower margin percentage on pinball sales for
fiscal 1994 compared to fiscal 1993. In fiscal 1994 gross profit of the
amusement games business absorbed a $6,409,000 increase in research and
development expense incurred, in part, to expand the Company's future product
base including gaming devices, interactive video games and home video games, the
benefits of which are expected to be realized in future periods as these new
businesses come on line. Operating profit of the amusement games business on a
segment basis increased to $45,012,000 in fiscal 1994 from $43,220,000 in fiscal
1993. This was primarily due to the same reasons as the increase in gross profit
described above but reduced by increased selling and administrative expense and
depreciation expense. These expenses increased, in part, because of continued
start-up costs of the gaming device business.
Condado Plaza revenues were $62,600,000 in fiscal 1994 compared to $64,813,000
in fiscal 1993. The decrease was primarily due to reduced food and beverage
revenues of $1,493,000 from the group and banquet areas and reduced net casino
revenues (casino revenues minus casino promotional allowances) of $1,325,000
because of reduced casino handle.
The Condado Plaza's profit before selling and administrative expense
(excluding depreciation) decreased to $22,957,000 (36.7% of the Condado Plaza
revenues) in fiscal 1994 from $23,694,000 (36.6% of the Condado Plaza revenues)
in fiscal 1993 because of the decline in revenue explained above exceeding the
net reduction in costs. The operating profit of the Condado Plaza on a segment
basis decreased to $4,473,000 in fiscal 1994 from $6,759,000 for fiscal 1993.
The decrease was primarily as described above and from the increase in
administrative expense resulting from higher insurance costs.
13
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Williams Hospitality revenues increased to $16,795,000 (before intersegment
elimination) in fiscal 1994 from $9,874,000 in fiscal 1993. This increase was
primarily from increased fees for certain centralized services provided to the
Company's affiliated hotel/casino properties and from management fees earned
from the newly opened El Conquistador Hotel and Casino. Williams Hospitality
operating profit on a segment basis increased to $9,472,000 in fiscal 1994 from
$7,403,000 in fiscal 1993. The increase was less than the increase in revenues
due to the additional cost incurred for centralized services.
Consolidated selling and administrative expense in fiscal 1994 was $32,848,000
or 9.1% of consolidated revenues as compared with $26,784,000 or 8.1%. The
increase was primarily as a result of growth at the amusement games business and
its previously mentioned start-up costs, increased insurance cost at the Condado
Plaza and higher general corporate expenses.
Consolidated depreciation and amortization expense increased primarily due to
equipment additions at the amusement game business.
The equity in loss of nonconsolidated affiliates was ($3,534,000) in fiscal
1994 as compared with equity in loss (before the extraordinary charge) of
nonconsolidated affiliate of ($135,000) in fiscal 1993. This unfavorable
difference was due to both equity in net loss from the newly opened El
Conquistador Hotel and Casino and equity in net loss from the El San Juan. The
equity in net loss of the El San Juan was ($1,223,000) in fiscal 1994 compared
to equity in net loss (before the extraordinary charge) of ($135,000) in fiscal
1993. The unfavorable difference was due to increased casino expenses including
higher bad debt expense and higher casino special guest expense coupled with a
lower win percentage in the casino. The equity in loss of the El Conquistador
was ($2,311,000) in fiscal 1994. El Conquistador opened for business in November
1993 and the first five months of operations included certain start-up costs.
Like most resort properties El Conquistador is expected to report losses in its
early years but the Company's 23.3% equity in the losses are expected to be
offset by the Company's 62% interest in the management fees earned by Williams
Hospitality from El Conquistador.
Income from operations was $49,288,000 in fiscal 1994 as compared with
$52,455,000 in fiscal 1993. The reduction was primarily from decreased operating
profit of hotel/casino operations (including equity in loss of nonconsolidated
affiliates), offset in part by a modest increase in operating profit of the
amusement games business.
Consolidated interest and other income-net increased primarily due to
increased income on short-term investments and the absence of the 1993 charge of
$601,000 for the El San Juan retirement of debt. See note 3 to Notes to
Consolidated Financial Statements.
Consolidated interest expense increased $1,532,000 primarily from the interest
expense on 53/4% convertible debentures that were sold on December 1, 1992
resulting in interest expense on the debentures for seven months in fiscal 1993
in comparison to twelve months in fiscal 1994.
The fiscal 1994 provision for income taxes reflects federal, Puerto Rico and
state income taxes and results in an effective rate of 28.6% compared with 31.5%
in fiscal 1993. The decrease in effective rate was primarily due to foreign
sales corporation benefits and increased utilization of capital loss carry
forwards, offset in part by the 1 percentage point increase in the federal tax
rate.
Minority interest in income increased to $4,597,000 in fiscal 1994 from
$3,332,000 in fiscal 1993 primarily due to increased net income of Williams
Hospitality.
Net income was $28,483,000 ($1.19 per share) in fiscal 1994 as compared with
$30,709,000 ($1.31 per share) in fiscal 1993. The average number of shares
outstanding increased 2.7% in fiscal 1994. Net income for fiscal 1994 decreased
as a result of a $3,555,000 ($.16 per share) reduction in the hotel/casino
contribution to net income as compared to fiscal 1993 and in the current year
higher expenses, after tax, of $3,900,000 ($.16 per share) incurred to expand
the Company's business into three new business areas: casino gaming products,
home video games; and, interactive networked video games. Net income for fiscal
1994 was increased by approximately $8,320,000 ($.35 per share) relating to the
Company's business arrangements with Nintendo of America and Nintendo Co. Ltd.
of Japan and certain other licensing revenues noted above.
IMPACT OF INFLATION
During the past three fiscal years, the general level of inflation affecting the
Company's operations in the United States and its hotel/casino operations in
Puerto Rico has been at a relatively low level. The ability of the Company to
pass on future cost increases in the form of higher sales prices and average
room rates will continue to be dependent on the prevailing competitive
environment.
14
MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED SECURITY-HOLDER MATTERS
The Company's Common Stock, $.50 par value, is traded on the New York Stock
Exchange (ticker symbol -- WMS). The table sets forth the high and low sales
prices of the Common Stock on the New York Stock Exchange for the periods
indicated:
---------------------------------------------------------
Calendar Period High Low
---------------------------------------------------------
1993
Third Quarter $29 $21 3/4
Fourth Quarter 33 7/8 26 5/8
---------------------------------------------------------
1994
First Quarter $29 7/8 $23 1/2
Second Quarter 27 3/8 16 1/2
Third Quarter 20 5/8 17
Fourth Quarter 19 3/8 16
---------------------------------------------------------
1995
First Quarter $24 1/4 $16 5/8
Second Quarter 21 18
Third Quarter (through Sept. 8, 1995) 23 7/8 19 5/8
No cash dividends were declared or paid during fiscal 1995 or 1994. The
payment of future cash dividends will depend upon, among other things, earnings,
anticipated expansion and capital requirements and the financial condition of
the Company.
At September 8, 1995, there were approximately 2,000 holders of record of the
Common Stock.
REPORT OF INDEPENDENT AUDITORS
The Stockholders and the Board of Directors
WMS Industries Inc.
We have audited the accompanying consolidated balance sheets of WMS Industries
Inc. and Subsidiaries as of June 30, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 1995. These financial statements
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 principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WMS Industries
Inc. and Subsidiaries at June 30, 1995 and 1994, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
June 30, 1995 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 31, 1995
15
WMS Industries Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
----------------------------------------------------------------------------------------------------
June 30, 1995 1994
----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 45,964 $ 34,239
Short-term investments 47,863 62,900
Receivables, net 57,919 55,926
Receivables from nonconsolidated affiliates 3,376 4,877
Inventories
Raw materials and work in progress 36,667 21,199
Finished goods 5,221 6,430
----------------------------------------------------------------------------------------------------
41,888 27,629
Deferred income taxes -- 553
Other current assets 6,218 5,222
----------------------------------------------------------------------------------------------------
Total current assets 203,228 191,346
Investments in, receivables and advances to nonconsolidated affiliates 26,320 26,490
Investment in marketable equity securities 23,187 15,500
Property, plant and equipment, net 81,194 70,697
Excess of purchase cost over amount assigned to net assets acquired, net 20,109 19,578
Other assets 32,028 19,530
----------------------------------------------------------------------------------------------------
Total assets $386,066 $343,141
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,922 $ 23,336
Accrued compensation and related benefits 5,859 7,686
Income taxes payable 5,328 --
Deferred income taxes 1,819 --
Other accrued liabilities 11,154 9,780
Notes payable 2,000 2,000
Current maturities of long-term debt 3,813 4,553
----------------------------------------------------------------------------------------------------
Total current liabilities 63,895 47,355
Long-term debt, less current maturities 84,428 88,256
Deferred income taxes 4,088 3,006
Other noncurrent liabilities 8,721 6,665
Minority interests 16,363 16,387
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) -- --
Common stock (issued 24,165,612 shares in 1995 and 24,160,612 shares in 1994) 12,083 12,080
Additional paid-in capital 81,851 81,666
Retained earnings 119,367 100,160
----------------------------------------------------------------------------------------------------
213,301 193,906
Treasury stock, at cost (56,312 shares in 1995 and 62,312 shares in 1994) (159) (176)
Unrealized loss on noncurrent marketable equity securities (4,571) (12,258)
----------------------------------------------------------------------------------------------------
Total stockholders' equity 208,571 181,472
----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $386,066 $343,141
====================================================================================================
See notes to consolidated financial statements.
16
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
--------------------------------------------------------------------------------------------------
Years ended June 30, 1995 1994 1993
--------------------------------------------------------------------------------------------------
REVENUES
Amusement games $314,494 $282,733 $260,449
Management fees -- Williams Hospitality 13,348 12,880 5,867
Condado Plaza hotel/casino:
Casino 24,584 29,560 30,946
Casino promotional allowances (6,872) (8,379) (8,440)
Rooms 25,210 26,183 25,715
Food and beverage 11,412 11,713 13,206
Other 3,196 3,523 3,386
--------------------------------------------------------------------------------------------------
57,530 62,600 64,813
--------------------------------------------------------------------------------------------------
Total revenues 385,372 358,213 331,129
COSTS AND EXPENSES
Cost of sales (excluding depreciation) -- amusement games 241,961 217,802 201,184
Williams Hospitality operating expenses (excluding depreciation) 5,175 5,724 1,397
Condado Plaza operating expenses (excluding depreciation):
Casino 13,737 14,612 14,557
Rooms 9,081 8,969 9,355
Food and beverage 10,503 10,153 10,873
Other 6,463 5,909 6,334
--------------------------------------------------------------------------------------------------
39,784 39,643 41,119
Selling and administrative 45,891 32,848 26,784
Depreciation and amortization 11,685 9,374 8,055
Equity in loss of nonconsolidated affiliates 7,003 3,534 135
--------------------------------------------------------------------------------------------------
Total costs and expenses 351,499 308,925 278,674
--------------------------------------------------------------------------------------------------
Income from operations 33,873 49,288 52,455
Interest and other income -- net 7,239 4,958 3,577
Interest expense (7,154) (7,900) (6,368)
--------------------------------------------------------------------------------------------------
Income before tax provision and minority interests 33,958 46,346 49,664
Provision for income taxes (11,841) (13,266) (15,623)
Minority interests in income (2,910) (4,597) (3,332)
--------------------------------------------------------------------------------------------------
Net income $ 19,207 $ 28,483 $ 30,709
==================================================================================================
Net income per share of common stock $ .80 $ 1.19 $ 1.31
==================================================================================================
Shares used in calculating per share amount 24,102 24,016 23,374
==================================================================================================
See notes to consolidated financial statements.
17
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
----------------------------------------------------------------------------------------------------------------------------------
Receivable
Additional from sale Treasury Unrealized Total
Common paid-in Retained of common stock, holding stockholders'
stock capital earnings stock at cost loss equity
----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1992 $11,618 $64,686 $ 40,968 $(1,705) $(181) $ -- $115,386
Net income for the year ended June 30, 1993 -- -- 30,709 -- -- -- 30,709
Collection of receivable from sale of
common stock -- -- -- 1,705 -- -- 1,705
Issuance of 368,000 shares of common stock
through exercise of options 184 2,109 -- -- -- -- 2,293
Tax benefit from exercise of common stock
options -- 2,382 -- -- -- -- 2,382
----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1993 11,802 69,177 71,677 -- (181) -- 152,475
Net income for the year ended June 30, 1994 -- -- 28,483 -- -- -- 28,483
Issuance of 556,450 shares of common stock
through exercise of options 278 9,970 -- -- -- -- 10,248
Issuance of 2,000 treasury shares through
the treasury share bonus plan -- 40 -- -- 5 -- 45
Unrealized holding loss on noncurrent
investment in marketable equity securities -- -- -- -- -- (12,258) (12,258)
Tax benefit from exercise of common stock
options -- 2,479 -- -- -- -- 2,479
----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1994 12,080 81,666 100,160 -- (176) (12,258) 181,472
Net income for the year ended June 30, 1995 -- -- 19,207 -- -- -- 19,207
Issuance of 5,000 shares of common stock
through exercise of options 3 34 -- -- -- -- 37
Issuance of 6,000 treasury shares through
the treasury share bonus plan -- 134 -- -- 17 -- 151
Reduction of unrealized holding loss on
noncurrent investment in marketable
equity securities -- -- -- -- -- 7,687 7,687
Tax benefit from exercise of common stock
options -- 17 -- -- -- -- 17
----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 1995 $12,083 $81,851 $119,367 $ -- $(159) $ (4,571) $208,571
==================================================================================================================================
See notes to consolidated financial statements.
18
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
---------------------------------------------------------------------------------------------------------------------
Years ended June 30, 1995 1994 1993
---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 19,207 $ 28,483 $ 30,709
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,685 9,374 8,055
Receivables provision 5,135 2,015 1,523
Undistributed loss of nonconsolidated affiliates 7,003 3,534 736
Minority interests 2,910 4,597 3,332
Deferred income taxes 3,454 3,212 7,019
Tax benefit from exercise of common stock options 17 2,479 2,382
Increase (decrease) resulting from changes in operating assets and liabilities:
Receivables (13,711) (8,370) (14,904)
Inventories (14,259) (2,574) (3,821)
Other current assets (1,231) (2,236) (1,003)
Accounts payable and accruals 10,134 3,747 (3,356)
Income taxes payable 5,328 -- --
Net amounts due from nonconsolidated affiliates (5,857) (5,383) (1,152)
Other assets and liabilities not reflected elsewhere (616) (4,279) (427)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,199 34,599 29,093
INVESTING ACTIVITIES
Purchase of property, plant and equipment (19,474) (18,913) (11,335)
Purchase of additional shares of subsidiaries (3,925) (660) (865)
Acquisition of Tradewest operating assets -- (14,431) --
Net change in short-term investments 15,037 23,650 (86,550)
Purchase of noncurrent marketable equity securities -- (27,758) --
Investment in and advances to nonconsolidated affiliates (1,360) (3,473) (3,480)
Collections from nonconsolidated affiliates 2,010 1,973 13,691
Other (4,448) (6,807) --
---------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (12,160) (46,419) (88,539)
FINANCING ACTIVITIES
Net proceeds from public sale of 53/4% convertible debentures -- -- 55,600
Proceeds from long-term debt and notes payable -- 4,664 963
Payment of long-term debt and notes payable (4,568) (4,674) (10,835)
Dividends paid to minority shareholders of subsidiary (783) (2,108) (3,826)
Cash received on exercise of stock options and receivable from sale of common stock 37 10,248 3,998
---------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (5,314) 8,130 45,900
---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 11,725 (3,690) (13,546)
Cash and cash equivalents at beginning of year 34,239 37,929 51,475
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 45,964 $ 34,239 $ 37,929
=====================================================================================================================
See notes to consolidated financial statements.
19
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: PRINCIPAL ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of WMS Industries
Inc. ("WMS") and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated.
Investments in companies that are 20% to 50% owned are accounted for by the
equity method. WMS records its equity in the results of operations of El
Conquistador L.P. on that partnership's year end of March 31.
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (determined by the first-in, first-
out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated by the
straight-line method over their estimated useful lives.
Excess of Purchase Cost Over Amount Assigned to Net Assets Acquired (Goodwill)
Goodwill of $22,849,000 (net of accumulated amortization of $3,740,000) at June
30, 1995 arising from acquisitions is being amortized by the straight-line
method over 15 to 40 years. Goodwill of $1,000,000 which arose in 1968 is not
being amortized.
Intellectual Properties Licenses
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed. Unit royalties on sales that exceed the guarantee are
recognized as revenue as earned.
Home Video Game Revenues
Home video game revenues are recorded when products are shipped to customers. An
allowance for returns and discounts is also recorded based upon management's
evaluation of historical experience as well as current industry trends.
Casino Revenues
Casino revenues are the net win from gaming activities, which is the difference
between gaming wins and losses.
Casino Promotional Allowances
Casino promotional allowances represent the retail value of complimentary food,
beverage and hotel services furnished to patrons, commissions and transportation
costs.
Research and Development Expense
Research and development expense charged to earnings for fiscal 1995, 1994 and
1993 was $26,779,000, $20,178,000 and $13,769,000, respectively.
Advertising Expense
The cost of advertising is charged to earnings as incurred and for fiscal 1995,
1994 and 1993 was $7,579,000, $2,194,000 and $1,721,000, respectively.
NOTE 2: PROPOSED ACQUISITION AND ACQUISITIONS
On June 21, 1995, the Company and Bally Gaming International, Inc. (Bally)
executed a definitive merger agreement pursuant to which the Company will
acquire Bally by the exchange of .55 shares of its common stock for each share
of Bally common stock outstanding at the date of merger. The Company is expected
to issue approximately 6,176,000 shares of common stock. Bally is engaged in the
design, manufacture and sale of electronic gaming machines and the design and
sale of computerized tracking systems for casino slot and video machines.
Consummation of the merger is subject to, among other things, Bally's
disposition of its German operations under specified conditions, stockholder
approval of both companies and regulatory approvals including certain state
gaming authorities.
20
On April 29, 1994, a WMS subsidiary, Williams Entertainment Inc., acquired
substantially all of the operating assets and business of three commonly owned
companies ("Tradewest"): Tradewest, Inc., Tradewest International, Inc. and The
Leland Corporation. The assets acquired are utilized in the amusement games
business of developing, publishing and distributing home video games in various
formats including game cartridges. The acquisition is being accounted for by the
purchase method of accounting.
The final purchase price will be equal to five times average annual pre-tax
income of the acquired business during the four year period commencing May 1,
1994 subject to a minimum and a maximum. The minimum purchase price is
$14,131,000 based upon a closing balance sheet of Tradewest and the maximum
purchase price is $50,131,000. The additional purchase price, if any, will be
allocated to goodwill when accrued and amortized over 15 years.
The unaudited pro forma consolidated statement of income data for fiscal 1994
included below assumes the Tradewest acquisition occurred July 1, 1993.
------------------------------------------------
(in thousands) 1994
------------------------------------------------
Revenues $380,375
================================================
Net income $ 26,031
================================================
Net income per share of common stock $ 1.08
================================================
In July 1994 the Company acquired 2.5% of Posadas de Puerto Rico Associates,
Incorporated, owner of the Condado Plaza Hotel & Casino ("Condado Plaza"),
increasing its interest from 92.5% to 95%. In each of May 1993 and January 1994,
the Company acquired 1% of Williams Hospitality Group Inc. ("Williams
Hospitality") increasing its interest from 55% to 57%. In July 1994 the Company
acquired 5% of Williams Hospitality increasing its interest from 57% to 62%.
NOTE 3: INVESTMENTS IN NONCONSOLIDATED AFFILIATES
Investments in nonconsolidated affiliates consist of a 50% interest in Posadas
de San Juan Associates, a partnership ("PSJA"); a 23.3% indirect interest in El
Conquistador Partnership L.P. ("El Conquistador") through a 46.5% interest in
WKA El Con Associates, a partnership ("WKA El Con").
Current receivables from nonconsolidated affiliates at June 30 were:
------------------------------------------------
(in thousands) 1995 1994
------------------------------------------------
PSJA $ -- $ 650
WKA El Con 1,130 1,602
El Conquistador 2,029 2,625
Las Casitas 217 --
------------------------------------------------
$ 3,376 $ 4,877
================================================
Investments in and noncurrent receivables and advances to nonconsolidated
affiliates at June 30 were:
------------------------------------------------
(in thousands) 1995 1994
------------------------------------------------
Investments:
PSJA $(6,999) $(5,799)
WKA El Con 1,566 6,418
Receivables and advances:
PSJA 21,263 20,312
WKA El Con 4,547 5,025
El Conquistador 5,943 534
------------------------------------------------
$26,320 $26,490
================================================
PSJA operates as a partnership, therefore, 50% of its accumulated deficit is
recorded as an investment. PSJA owns the El San Juan Hotel &Casino ( "El San
Juan"). Summarized financial data for PSJA at June 30, 1995 and 1994 and for
fiscal 1995, 1994 and 1993 were:
-------------------------------------------------------------------
(in thousands) 1995 1994 1993
-------------------------------------------------------------------
Current assets $ 7,745 $ 13,411
Noncurrent assets 35,929 36,747
-------------------------------------------------------------------
Total assets $ 43,674 $ 50,158
===================================================================
Payable to affiliates $ -- $ 650
Other current liabilities 9,935 12,154
-------------------------------------------------------------------
Total current liabilities 9,935 12,804
Noncurrent payables to affiliates 21,263 20,312
Other noncurrent liabilities 26,474 28,638
-------------------------------------------------------------------
Total noncurrent liabilities 47,737 48,950
Partners capital deficiency (13,998) (11,596)
-------------------------------------------------------------------
Total liabilities and partners
capital deficiency $ 43,674 $ 50,158
===================================================================
Revenues $ 51,797 $ 55,923 $57,314
Costs and expenses 54,198 58,371 58,786
-------------------------------------------------------------------
Net (loss) $ (2,401) $ (2,448) $(1,472)
===================================================================
Net (loss) of PSJA in 1993 includes an extraordinary charge of $1,202,000 for
the write-off of deferred loan fees resulting from mortgage debt refinanced in
1993. The Company's 50% equity in this write-off of $601,000 is included in the
fiscal 1993 consolidated statement of income in the caption "interest and other
income -- net."
21
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company has a 46.5% interest in WKA El Con which has a 50% interest in El
Conquistador. Summarized financial data for WKA El Con at June 30, 1995 and 1994
and fiscal year ended June 30, 1995 and eight months ended June 30, 1994 were:
---------------------------------------------------------------
(in thousands) 1995 1994
---------------------------------------------------------------
Loans receivable from El Conquistador $ 14,043 $12,619
Investment in El Conquistador--net (215) 13,552
Other assets--net 3,597 1,987
---------------------------------------------------------------
Total assets $ 17,425 $28,158
===============================================================
Current payable to Williams Hospitality $ 1,130 $ 1,602
Other payables 683 832
Long-term payable to Williams Hospitality -- 926
Long-term note payable including interest 4,797 4,470
Long-term notes payable to partners
including interest 9,258 8,340
Partners' equity 1,557 11,988
---------------------------------------------------------------
Total liabilities and equity $ 17,425 $28,158
===============================================================
---------------------------------------------------------------
1995 1994
---------------------------------------------------------------
Net operating expenses $ (356) $ (239)
Equity in net loss of El Conquistador
to March 31 (13,739) (5,024)
Equity in net income of Las Casitas
to June 30 1,627 297
---------------------------------------------------------------
Net (loss) $(12,468) $(4,966)
===============================================================
The WKA El Con long-term note payable including interest is collateralized by
a pledge of a second mortgage on land owned by the Company that cost $3,761,000
and a WMS guarantee of $1,000,000.
El Conquistador is located in Las Croabas, Puerto Rico and is a destination
resort and casino which began operations in November 1993. Summarized financial
data for El Conquistador at March 31, 1995 and 1994 (the partnership's fiscal
year end) and the fiscal year ended March 31, 1995 and the five months ended
March 31, 1994 were:
------------------------------------------------------------------
(in thousands) 1995 1994
------------------------------------------------------------------
Current assets $ 15,316 $ 25,269
Land, building and equipment--net 195,989 199,095
Deferred debt issuance and
pre-opening costs--net 12,696 17,713
Other assets 1,190 1,510
------------------------------------------------------------------
Total assets $ 225,191 $243,587
==================================================================
Current liabilities $ 27,288 $ 29,055
Long-term debt 151,759 153,625
Long-term due to Partners and affiliates 37,428 24,716
Partners' equity 8,716 36,191
------------------------------------------------------------------
Total liabilities and equity $ 225,191 $243,587
==================================================================
------------------------------------------------------------------
1995 1994
------------------------------------------------------------------
Revenues $ 84,743 $ 32,973
Costs and expenses (101,096) (38,747)
Depreciation and amortization (11,124) (4,274)
------------------------------------------------------------------
Net (loss) $ (27,477) $(10,048)
==================================================================
Williams Hospitality has pledged cash equivalents and investments of
$1,850,000 as collateral for certain financing made by El Conquistador. In
addition, Williams Hospitality has provided guarantees amounting to $5,200,000
in connection with leasing and other financing transactions of El Conquistador.
Consolidated retained earnings of the Company at June 30, 1995 is reduced by
$18,613,000 for the accumulated deficit of PSJA and WKA El Con which are
accounted for under the equity method.
22
NOTE 4: INVESTMENT IN SECURITIES
Effective July 1, 1994, the Company adopted, which had no effect on the
consolidated financial statements, Statement of Financial Accounting Standards
115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity
Securities". SFAS 115 requires the classification of securities into one of
three categories, trading, held-to-maturity and available for-sale. All
investments are classified by the Company as available-for-sale. Available-for-
sale securities are recorded at market value with the holding gain or loss
reflected in stockholders' equity. A summary of securities held at June 30 were
as follows:
------------------------------------------------------------
Gross
Unrealized Market
(in thousands) Cost Losses Value
------------------------------------------------------------
1995
----------------------
Securities included as part
of cash equivalents $25,843 $ -- $25,843
Short-term investments 47,863 -- 47,863
Marketable equity
securities noncurrent 27,758 4,571 23,187
1994
----------------------
Short-term investments $62,900 $ -- $62,900
Marketable equity
securities noncurrent 27,758 12,258 15,500
Short-term investments consist principally of money market preferred stocks
that generally have no fixed maturity dates but have dividend reset dates every
49 days or less.
NOTE 5: RECEIVABLES
At June 30 net receivables were:
-----------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------
Accounts receivable -- trade $59,833 $57,181
Less allowances (1,914) (1,255)
-----------------------------------------------------
Net receivables $57,919 $55,926
=====================================================
The Company obtains notes receivable from the sale of video lottery equipment
and has agreements to sell the notes receivable to financial institutions. As of
June 30, 1995 the Company, under certain circumstances, may be required to
repurchase $482,000 of these notes.
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
At June 30 net property, plant and equipment were:
--------------------------------------------------------
(in thousands) 1995 1994
--------------------------------------------------------
Land $ 10,744 $ 10,702
Buildings and improvements 64,381 51,783
Machinery and equipment 41,796 35,577
Furniture and fixtures 16,643 15,723
--------------------------------------------------------
133,564 113,785
Less accumulated depreciation (52,370) (43,088)
--------------------------------------------------------
Net property, plant and equipment $ 81,194 $ 70,697
========================================================
NOTE 7: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes. Deferred tax assets also include the
future tax benefit from unrealized capital loss and capital loss carryforwards.
Significant components of the Company's deferred tax assets and liabilities at
June 30 were:
----------------------------------------------------------------
(in thousands) 1995 1994
----------------------------------------------------------------
Deferred tax assets resulting from:
Unrealized capital loss $ 1,800 $ 4,862
Capital loss carryforwards -- 1,139
Inventory valuation 1,370 781
Book over tax loss of WKA El Con 2,840 820
Accrued expenses not currently deductible 1,110 --
Receivable allowance 632 211
Other 1,527 1,006
----------------------------------------------------------------
Total deferred tax assets 9,279 8,819
Valuation allowance for:
Unrealized capital loss (1,800) (4,862)
Capital loss carryforwards -- (1,139)
----------------------------------------------------------------
Net deferred tax assets 7,479 2,818
----------------------------------------------------------------
Deferred tax liabilities resulting from:
Tax over book depreciation 1,467 1,115
Tax over book deductions of PSJA 1,605 1,246
Revenues deferred in tax reporting 8,476 1,371
Other 1,838 1,539
----------------------------------------------------------------
Total deferred tax liabilities 13,386 5,271
----------------------------------------------------------------
Net deferred tax liabilities $(5,907) $(2,453)
================================================================
23
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Significant components of the provision for income taxes for the years ended
June 30, 1995, 1994 and 1993 were:
-----------------------------------------------------------
(in thousands) 1995 1994 1993
-----------------------------------------------------------
Current:
Federal $ 6,572 $ 5,165 $ 3,560
State 1,045 1,457 1,419
Puerto Rico 753 953 1,243
-----------------------------------------------------------
Total current 8,370 7,575 6,222
Deferred:
Federal 2,641 2,901 6,363
State 813 311 656
-----------------------------------------------------------
Total deferred 3,454 3,212 7,019
Provision for tax benefits
resulting from stock options 17 2,479 2,382
-----------------------------------------------------------
Provision for income taxes $11,841 $13,266 $15,623
===========================================================
For financial reporting purposes, income before income taxes and minority
interests is comprised of the following components for the years ended June 30:
--------------------------------------------
(in thousands) 1995 1994 1993
--------------------------------------------
Pretax income:
United States $28,304 $36,039 $38,734
Puerto Rico 5,654 10,307 10,930
--------------------------------------------
$33,958 $46,346 $49,664
============================================
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
-------------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 34.0%
Puerto Rico income taxed at lower rates (4.7) (5.7) (5.0)
Puerto Rico loss resulting in no tax benefit 4.5 -- --
State income taxes, net of federal benefit 3.6 3.1 3.3
Foreign sales corporation benefits (1.7) (2.0) --
Utilization of capital loss carryforwards (3.0) (2.6) (1.3)
Other, net 1.2 .8 .5
-------------------------------------------------------------------
34.9% 28.6% 31.5%
===================================================================
Undistributed earnings of the Puerto Rico subsidiaries that operate as Section
936 corporations under U.S. income tax regulations were approximately
$32,279,000 at June 30, 1995. Those earnings are considered indefinitely
reinvested and, accordingly, no provision for income or toll gate taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
the Company would be subject to U.S. income tax of approximately $1,810,000 and
toll gate withholding taxes of approximately $700,000.
During fiscal 1995, 1994 and 1993 income taxes paid were $3,199,000,
$9,707,000 and $5,546,000, respectively.
NOTE 8: NOTES PAYABLE AND LONG-TERM DEBT
WMS has an uncollateralized bank line of credit which provides for borrowing up
to $25,000,000 or for WMS and its U.S. operating subsidiaries to have letters of
credit up to $25,000,000 outstanding. The letter of credit availability was
increased to $75,000,000 through December 31, 1995. Interest on the initial
borrowings will be at a short-term Eurodollar rate plus .75%. At June 30, 1995,
there were no borrowings from this line of credit but there were outstanding
letters of credit totaling $10,200,000.
The Condado Plaza has a $2,000,000 bank line of credit which is payable on
demand with interest at the prime rate plus 1 percentage point, 9.75% and 8.5%
at June 30, 1995 and 1994, respectively. Borrowings under the line at June 30,
1995 and 1994 were $2,000,000. The line of credit is collateralized by a
mortgage on the Condado Plaza property and accounts receivable.
Long-term debt at June 30 was:
-------------------------------------------------------------------
(in thousands) 1995 1994
-------------------------------------------------------------------
Convertible subordinated debentures $57,500 $57,500
Condado Plaza mortgage note, due in increasing
annual amounts through 1999, 12% 26,150 27,950
Williams Hospitality note payable to bank,
due in installments, LIBOR (6.5%) plus
2 percentage points 900 2,700
Other 3,691 4,659
-------------------------------------------------------------------
88,241 92,809
Less current maturities (3,813) (4,553)
-------------------------------------------------------------------
$84,428 $88,256
===================================================================
24
The $57,500,000 of 53/4% convertible subordinated debentures due 2002 are
convertible by the holders into common stock at a conversion price of $29.00 per
share. The debentures are redeemable by the Company after December 1, 1995 at
103.6% of principal, declining to 100% on November 30, 2000.
The Williams Hospitality note payable to bank is guaranteed up to $533,000 by
the minority shareholders of Williams Hospitality and certain management fees
earned each year by Williams Hospitality are pledged as collateral.
Scheduled payments for the next five fiscal years on long-term debt are as
follows: $3,813,000 in 1996; $3,208,000 in 1997; $3,608,000 in 1998; $19,919,000
in 1999 and $193,000 in 2000.
The amount of interest paid (excluding $485,000, $204,000 and $516,000
capitalized in fiscal 1995, 1994 and 1993, respectively) during fiscal 1995,
1994 and 1993 was $7,160,000, $7,889,000 and $6,118,000, respectively.
NOTE 9: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Authorized common stock of the Company consists of 60,000,000 shares of $.50 par
value. At June 30, 1995, 6,416,809 shares of common stock were reserved for
possible issuance for the convertible debentures and the stock option plans.
Additionally, there are 5,000,000 shares of $.50 par value preferred stock
authorized. The preferred stock is issuable in series, and the relative rights
and preferences and the number of shares in each series are to be established by
the Board of Directors.
Earnings per share amounts are computed based upon the weighted average number
of outstanding common shares and dilutive common equivalent shares (relating to
stock options). In fiscal 1995, 1994 and 1993, per share amounts were computed
using the weighted average number of outstanding common shares of 24,102,051,
24,016,174 and 23,373,682, respectively.
NOTE 10: COMMON STOCK PLANS
Under the stock option plans the Company may grant both incentive stock options
and nonqualified options on shares of common stock through the year 2003.
Options may be granted to employees and under certain conditions to non-employee
directors. The stock option committee has the authority to fix the terms and
conditions upon which each employee option is granted, but in no event shall the
term exceed ten years or be granted at less than 100% of the fair market value
of the stock at the date of grant.
Under the plans, options were outstanding to acquire 3,058,050 shares ($1.88
to $26.88 per share -- 486,550 shares exercisable) and 2,768,550 shares ($1.88
to $26.88 per share) at June 30, 1995 and 1994, respectively. At June 30, 1995
outstanding options include options to acquire 1,600,000 shares at $26.88 per
share that do not become exercisable until the market value of the Company's
common stock reaches $35.00 per share. During fiscal 1995, options were granted
to purchase 304,000 shares ($17.25 to $19.63 per share), options were cancelled
for 9,500 shares, and options were exercised for 5,000 shares ($7.31 per share).
At June 30, 1995 and 1994, 1,376,000 and 1,680,000 shares, respectively, were
available for the granting of future options under the plans.
The Company has a Treasury Share Bonus Plan for key employees covering all the
shares of common stock held in the treasury. The vesting and other terms of the
awards are flexible. Awards for 4,000 shares of treasury stock were outstanding
at June 30, 1995 that vest during fiscal 1996 when the treasury shares will be
issued.
NOTE 11: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit and market risk consist primarily of cash equivalents, short-term
investments, trade accounts receivable from the sale of games and marketable
equity securities. By policy, the Company places its cash equivalents and short-
term investments
25
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
only in high credit quality securities and limits the amounts invested in any
one security. At June 30, 1995, 70% of trade accounts receivable are from sale
of games to the Company's distributors located primarily throughout the United
States and Western Europe and because of the number and geographic distribution,
concentration is limited. Foreign sales are typically made in U.S. dollars and
typically on the basis of a letter of credit.
The estimated fair value of financial instruments at June 30, 1995 has been
determined by the Company, using available market information and valuation
methodologies considered to be appropriate. The amounts reported for cash
equivalents, short-term investments, current notes payable and Williams
Hospitality note payable to bank are considered to be a reasonable estimate of
their fair value. The amount reported for marketable equity securities is valued
at the closing market price on June 30, 1995.
The $57,500,000 of 53/4% convertible subordinated debentures issued in
December 1992 are traded on the New York Stock Exchange and based on the last
trade on June 30, 1995 had a fair value of $51,463,000. The debentures are
callable at a premium after 1995 and convertible by the holder into common stock
at $29.00 per share.
The $26,150,000 Condado Plaza 12% mortgage note payable is estimated to have a
fair value of $28,801,000 using discounted cash flow analysis based on an
estimated interest rate of 7.8%. The mortgage note is subject to a substantial
prepayment penalty based on interest rate differentials plus a fixed percentage.
NOTE 12:LEASE COMMITMENTS
The Company's commitments for minimum rentals under non-cancelable operating
leases at June 30, 1995 are as follows:
-----------------------------------
(in thousands)
-----------------------------------
1996 $ 2,262
1997 1,324
1998 1,134
1999 1,112
2000 1,122
Thereafter 3,505
-----------------------------------
$10,459
===================================
Operating leases relate principally to hotel, office and manufacturing
facilities and equipment. A portion of the hotel facilities are leased from a
partnership owned by a minority shareholder of the Condado Plaza. The minority
shareholder lease extends through 2004 at an annual rent of $684,000 through
1998 with periodic escalations thereafter to an annual rent of $827,000 in 2004.
Rent expense for fiscal 1995, 1994 and 1993 was $2,783,000, $2,735,000 and
$2,743,000, respectively (including $684,000, $668,000 and $622,000 paid in
1995, 1994 and 1993 respectively under the minority shareholder lease at the
Condado Plaza).
NOTE 13: PENSION PLANS
During fiscal 1992 the Company suspended the defined benefit pension plan that
covers salaried employees of the amusement game business and corporate
headquarters. The Company continued the defined benefit pension plan covering
certain hourly employees of the amusement game business.
The defined benefit plans provide pension benefits that are based on a flat
monthly rate multiplied by the number of years of service. The Company's funding
policy for these plans is to make at least the minimum annual contributions
required by ERISA. Plan assets are invested primarily in guaranteed insurance
contracts.
26
The components of net periodic pension cost based on an expected long-term
rate of return on plan assets of 9% were:
------------------------------------------------------------------
(in thousands) 1995 1994 1993
------------------------------------------------------------------
Service costs-benefits earned
during the year $ 205 $ 187 $ 174
Interest cost on projected obligation 434 414 421
Actual return on plan assets (209) (268) (315)
Net amortization of unrecognized net
obligation at transition and deferrals (70) (10) 28
------------------------------------------------------------------
Net periodic pension cost for the year $ 360 $ 323 $ 308
==================================================================
The plans' funded status and amounts included in the Company's consolidated
balance sheets at June 30 were:
------------------------------------------------------------------
(in thousands) 1995 1994
------------------------------------------------------------------
Actuarial present value of projected benefit
obligation, including vested obligations of
$4,803 and $4,541, respectively $(5,433) $(5,255)
Fair value of plan assets 3,778 3,838
------------------------------------------------------------------
Funded status (1,655) (1,417)
Unrecognized net obligations being
recognized over a remaining 7 years 519 590
Unrecognized net loss (gain) 294 (40)
Adjustment required to recognize
minimum liability (739) (495)
------------------------------------------------------------------
Accrued pension liability $(1,581) $(1,362)
==================================================================
The discount rate used to determine the actuarial present value of the
projected benefit obligation was 7.5% at June 30, 1995 and 1994. Other assets
include an intangible asset of $739,000 and $495,000 at June 30, 1995 and 1994,
respectively, resulting from the adjustment required to recognize the minimum
pension liability.
The Company has three defined contribution employee retirement savings plans.
These defined contribution plans cover certain hourly and salaried employees of
the amusement game business and corporate headquarters. The Company's
contribution to these plans are based on employee participation with certain
limitations. The Company may change any of the factors which determine the
Company's contribution to such plans. Certain subsidiaries are required to make
contributions on behalf of unionized employees to defray part of the costs of
the multi-employer pension plans established by their respective labor unions.
Such contributions are computed using a fixed charge per employee. Contributions
to the defined contribution and multi-employer plans for fiscal 1995, 1994 and
1993 were $779,000, $607,000 and $528,000, respectively.
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1995 and 1994 are as
follows:
---------------------------------------------------------------------
(in thousands, except Sept. 30 Dec. 31 Mar. 31 June 30
per share amounts) 1994 1994 1995 1995
---------------------------------------------------------------------
Fiscal 1995 Quarters:
Revenues $82,387 $112,559 $ 93,456 $96,970
Income from operations 224 10,800 14,034 8,815
Net income (loss) (1,073) 6,102 8,027 6,151
Net income (loss) per share (.04) .25 .33 .26
Shares used 24,098 24,098 24,103 24,108
---------------------------------------------------------------------
(in thousands, except Sept. 30 Dec. 31 Mar. 31 June 30
per share amounts) 1993 1993 1994 1994
---------------------------------------------------------------------
Fiscal 1994 Quarters:
Revenues $63,194 $101,273 $106,448 $87,298
Income from operations 1,823 17,516 23,184 6,765
Net income 455 10,104 14,228 3,696
Net income per share .02 .42 .59 .15
Shares used 23,824 24,039 24,095 24,097
Revenues for the quarters ended December 31, 1994, March 31, 1995 and June 30,
1995 included certain licensing revenues of $10,000,000, $15,000,000 and
$2,000,000, respectively, that increased net income by $5,184,000, $.22 per
share, $8,130,000, $.34 per share, and $1,248,000, $.05 per share, respectively.
Revenues for the quarter ended June 30, 1995 included $916,000 from a fiscal
1994 ocean oil spill claim in Puerto Rico that increased net income by $870,000,
$.04 per share.
Revenues for the quarter ended March 31, 1994 included net revenues of
$9,000,000 from the business arrangement with Nintendo of America and Nintendo
Co. Ltd. of Japan that increased net income by $5,760,000, $.24 per share.
Revenues for the quarter ended June 30, 1994 included certain licensing revenue
of $4,000,000 that increased net income by $2,560,000, $.11 per share.
27
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 15: INDUSTRY SEGMENTS
The Company's operations are conducted through three industry segments: the
development, manufacture and sale of amusement games for the coin operated and
consumer entertainment market, the operation of the Condado Plaza and the
management of hotel/casinos.
Corporate assets consist principally of cash and cash equivalents, short-term
investments and marketable equity securities. Industry segment information
follows:
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(in thousands) 1995 1994 1993
-------------------------------------------------------------------------------------------------------------------------
Revenues
Amusement games $314,494 $282,733 $260,449
Condado Plaza 57,530 62,600 64,813
Williams Hospitality 17,350 16,795 9,874
Intersegment revenues elimination -- Williams Hospitality fees charged to Condado Plaza (4,002) (3,915) (4,007)
-------------------------------------------------------------------------------------------------------------------------
Total revenues $385,372 $358,213 $331,129
=========================================================================================================================
Operating profit
Amusement games $ 38,833 $ 45,012 $ 43,220
Condado Plaza (1,465) 4,473 6,759
Williams Hospitality 9,174 9,472 7,403
-------------------------------------------------------------------------------------------------------------------------
Total operating profit 46,542 58,957 57,382
Equity in (loss) of nonconsolidated affiliates (7,003) (3,534) (135)
General corporate expenses (5,666) (6,135) (4,792)
Interest and other income -- net 7,239 4,958 3,577
Interest expense (7,154) (7,900) (6,368)
-------------------------------------------------------------------------------------------------------------------------
Income before tax provision and minority interests $ 33,958 $ 46,346 $ 49,664
=========================================================================================================================
Identifiable assets
Amusement games $157,278 $117,879 $ 81,542
Condado Plaza 57,879 63,077 60,804
Williams Hospitality 17,737 16,419 14,454
Corporate 123,476 114,399 122,057
Investments in, receivables and advances to nonconsolidated affiliates 29,696 31,367 28,018
-------------------------------------------------------------------------------------------------------------------------
Total identifiable assets $386,066 $343,141 $306,875
=========================================================================================================================
Depreciation of property, plant and equipment
Amusement games $ 3,880 $ 2,649 $ 1,874
Condado Plaza 4,656 4,488 4,179
Williams Hospitality 681 316 --
Corporate 65 33 24
-------------------------------------------------------------------------------------------------------------------------
Total depreciation of property, plant and equipment $ 9,282 $ 7,486 $ 6,077
=========================================================================================================================
Capital expenditures
Amusement games $ 17,392 $ 7,897 $ 5,859
Condado Plaza 2,030 7,992 4,365
Williams Hospitality 36 2,979 1,064
Corporate 16 45 47
-------------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 19,474 $ 18,913 $ 11,335
=========================================================================================================================
Export sales
Amusement games (primarily to Western Europe) $138,530 $144,080 $143,843
=========================================================================================================================
Sales to a major customer
Amusement games $ 52,343 $ 58,844 $ 58,400
=========================================================================================================================
28