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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999
Commission file number: 1-8300
WMS INDUSTRIES INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-2814522
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
3401 North California Ave., Chicago, IL 60618
(Address of Principal Executive Offices) (Zip Code)
(773) 961-1111
(Registrant's telephone number, including area code)
N/A
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 30,618,661 shares of common
stock, $.50 par value, were outstanding at November 10, 1999 after deducting
77,312 shares held as treasury shares.
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WMS INDUSTRIES INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three months ended September 30, 1999 and 1998....................... 2
Condensed Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999................................. 3-4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1999 and 1998....................... 5
Notes to Condensed Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8-10
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings.................................................... 11
ITEM 6. Exhibits and Reports on Form 8-K..................................... 11
SIGNATURES ..................................................................... 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
Three Months ended
September 30,
---------------------------
1999 1998
------------ ------------
Revenues
Machine sales $ 32,328 $ 16,844
Participation and leasing 15,692 2,000
------------ ------------
Total gaming revenues 48,020 18,844
Contract manufacturing 3,166 2,924
------------ ------------
Total revenues 51,186 21,768
------------ ------------
Costs and Expenses
Cost of gaming revenues 23,100 13,027
Cost of contract manufacturing 2,750 2,459
Research and development 2,635 1,865
Selling and administrative 9,150 5,425
------------ ------------
Total costs and expenses 37,635 22,776
------------ ------------
Operating income (loss) 13,551 (1,008)
Interest and other income and expense, net 882 922
------------ ------------
Income (loss) from continuing operations before income taxes 14,433 (86)
Provision (credit) for income taxes 5,484 (32)
------------ ------------
Income (loss) from continuing operations 8,949 (54)
Discontinued operations, net of applicable income taxes
Loss from discontinued operations (469) (1,590)
Costs related to discontinuance (13,200) --
------------ ------------
Net loss $ (4,720) $ (1,644)
============ ============
Basic and diluted - per share of common stock
Net income (loss) from continuing operations $ 0.29 $ --
Loss from discontinued operations (0.44) (0.06)
------------ ------------
Net loss $ (0.15) $ (0.06)
============ ============
Weighted average shares outstanding 30,488 27,988
============ ============
See notes to condensed consolidated financial statements.
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WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(unaudited)
September 30, June 30,
1999 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalent $ 38,254 $ 58,663
Short-term investments 28,600 --
------------ ------------
66,854 58,663
Receivables, net of allowances of $3,366 and $2,883 36,095 35,516
Income tax receivable 3,258 3,258
Inventories, at lower of cost (FIFO) or market:
Raw materials and work in progress 17,473 11,452
Finished goods 23,299 24,392
------------ ------------
40,772 35,844
Deferred income taxes 26,075 17,595
Prepaid expenses 392 634
Assets of discontinued operations 20,654 31,702
------------ ------------
Total current assets 194,100 183,212
Gaming machines on participation or lease 28,726 26,866
Less accumulated depreciation (9,329) (7,135)
------------ ------------
19,397 19,731
Property, plant and equipment 50,810 49,590
Less accumulated depreciation (18,876) (17,750)
------------ ------------
31,934 31,840
Other assets 3,525 3,296
------------ ------------
$ 248,956 $ 238,079
============ ============
See notes to condensed consolidated financial statements.
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WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(unaudited)
September 30, June 30,
1999 1999
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,778 $ 5,162
Accrued compensation and related benefits 2,088 2,919
Accrued liability related to 1994 patent litigation 38,535 38,543
Liabilities related to discontinued operations 19,333 13,933
Accrued income taxes 5,774 --
Other accrued liabilities 5,117 4,818
------------ ------------
Total current liabilities 80,625 65,375
Deferred income taxes 428 625
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) -- --
Common stock (30,496,512 and 30,428,621 shares issued) 15,248 15,214
Additional paid in capital 181,499 180,989
Accumulated deficit (28,462) (23,742)
------------ ------------
168,285 172,461
Treasury stock, at cost (77,312 shares) (382) (382)
------------ ------------
Total stockholders' equity 167,903 172,079
------------ ------------
$ 248,956 $ 238,079
============ ============
See notes to condensed consolidated financial statements.
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WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Three Months Ended
September 30,
-----------------------------
1999 1998
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OPERATING ACTIVITIES:
Net loss $ (4,720) $ (1,644)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Loss from discontinued operations 469 1,590
Costs related to discontinued operations 13,200 --
Depreciation and amortization 3,660 897
Receivables provision 483 125
Deferred income taxes (577) (60)
Tax benefit from exercise of stock options 334 75
Increase (decrease) from changes in operating assets and liabilities 3,867 (659)
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Net cash provided by continuing operating activities 16,716 324
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,155) (1,719)
Additions to gaming machines on participation or lease (2,265) (149)
Net change in short-term investments (28,600) (29,400)
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Net cash used by investing activities (32,020) (31,268)
FINANCING ACTIVITIES:
Cash received on exercise of common stock options 210 192
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CASH TRANSFER TO DISCONTINUED OPERATIONS (5,315) (1,230)
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Decrease in cash and cash equivalents (20,409) (31,982)
Cash and cash equivalents at beginning of period 58,663 36,882
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Cash and cash equivalents at end of period $ 38,254 $ 4,900
============= =============
See notes to condensed consolidated financial statements.
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WMS INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 30, 1999
are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2000. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended June 30,
1999.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances, transactions and stockholdings have been
eliminated.
Certain prior year balances have been reclassified to conform to the
current year presentation and restated to reflect the pinball and
cabinets segment as discontinued operations.
3. DISCONTINUED OPERATIONS
On October 25, 1999 (the measurement date), the Company announced the
closing of its pinball and cabinets segment. Accordingly, this segment
is accounted for as a discontinued operation in the accompanying
condensed consolidated financial statements.
Management expects to close down the pinball and cabinets segment by
January 2000. Any remaining property, including inventory and
equipment, is expected to be sold or disposed of at the earliest
practical date. The estimated loss on disposal is as follows (thousands
of dollars):
Pre-tax Income tax
loss benefit Net
------------ ------------ ------------
Estimated loss on disposal $ 17,700 $ 6,700 $ 11,000
Operating losses from October 25,1999
to anticipated disposal date 3,600 1,400 2,200
------------ ------------ ------------
$ 21,300 $ 8,100 $ 13,200
------------ ------------ ------------
Revenues of the pinball and cabinets segment were $14.0 million and
$5.0 million in the quarters ending September 30, 1999 and 1998,
respectively. At September 30, 1999, the assets of the pinball and
cabinets segment consisted of trade receivables, inventories, plant and
equipment amounting to $20.7 million after deducting an allowance of
$11.2 million for write-offs to estimated realizable value. The
liabilities related to discontinued operations were $19.3 million,
including reserves established for shutdown costs of $6.5 million and
estimated operating losses of $3.6 million through the disposal date.
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4. LITIGATION
See Item 1 of Part II for the status of litigation.
5. SEGMENT INFORMATION
The following summarizes the Condensed Consolidated Statements of
Income for the periods shown in the format presented as segment
information in the notes to the year-end consolidated financial
statements reflecting the pinball and cabinets segment as discontinued
operations (thousands of dollars):
Three Months ended
September 30,
---------------------------
1999 1998
------------ ------------
Revenues
Gaming $ 48,020 $ 18,844
Contract manufacturing 3,166 2,924
------------ ------------
Total revenues $ 51,186 $ 21,768
============ ============
Gross Profit
Gaming $ 24,920 $ 5,817
Contract manufacturing 416 465
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Total gross profit $ 25,336 $ 6,282
============ ============
Operating income (loss)
Gaming $ 15,126 $ (665)
Contract manufacturing 234 235
Unallocated general corporate expenses (1,809) (578)
------------ ------------
Total operating income (loss) 13,551 (1,008)
Interest and other income and expense, net 882 922
------------ ------------
Income (loss) from continuing operations before income taxes $ 14,433 $ (86)
============ ============
The basis of segmentation presented above is the same as that presented in the
last annual report.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward looking statements
concerning our future business conditions and outlook based on currently
available information that involves risks and uncertainties. Our actual results
could differ materially from those anticipated in the forward looking statements
as a result of certain risks and uncertainties, including, without limitation,
financial strength of the gaming industry, the expansion of legalized gaming
into new markets, the development, introduction and success of new games and new
technologies and the ability to maintain the scheduling of such introductions,
our ability to qualify for and maintain gaming licenses and approvals, the
outcome of certain legal proceedings to which we are a party and other risks
more fully described under "Item 1. Business--Risk Factors" in our Annual Report
on Form 10-K.
SIGNIFICANT EVENTS AND TRENDS
In October 1999, we announced that we had decided to close our pinball and
cabinets segment as part of a plan to focus on our gaming segment. We estimate
the pre-tax loss on disposal to be $21.3 million, including cash expenses of
$10.1 million for projected operating losses through the disposal date,
severance pay, and shut down expenses. We do not anticipate that this
discontinued operation will have a material effect on our liquidity or
operations in future periods. Of the estimated loss on disposal, we estimate
that about $11.2 million is a non-cash loss from the write-down of receivables,
inventory, plant and equipment to net realizable value on disposal. We
anticipate that we will receive about $1.3 million in cash from the sale of
remaining property and equipment after payment of related liabilities, plus $8.1
million in related tax benefits. The exact amount of the proceeds received and
the loss ultimately recorded will depend upon several factors over the course of
the shut down period and at the date the sale of the remaining assets is
consummated. Our consolidated financial statements have been restated to reflect
the operating loss from the segment and the expected loss on disposal as a
discontinued operation.
FINANCIAL CONDITION
Cash flows from operating, investing and financing activities during the three
months ended September 30, 1999 resulted in a net cash decrease of $20.4 million
as compared to a net cash decrease of $32.0 million during the three months
ended September 30, 1998. The cash decrease in both 1999 and 1998 was primarily
due to purchases of short-term investments.
Cash provided by operating activities was $16.7 million for the three months
ended September 30, 1999 as compared to $0.3 million of cash provided by
operations for the three months ended September 30, 1998. The current quarter's
increase in cash provided from operations relative to the comparable prior
year's quarter is primarily a result of increased revenues and resulting cash
collected from gaming machine sales and participation and lease revenue.
The changes in operating assets and liabilities for the September 30, 1999
quarter were primarily due to increases in trade payables and current income
taxes payable from the comparable balances at June 30, 1999, partially offset by
an increase in inventories. The operating asset and liability changes for the
three months ended September 30, 1998 was primarily due to higher receivable
balance due to slower turnover, offset in part by increased accounts payable
balances due to increased operating activity, from the comparable
June 30, 1998 balances.
Cash used by investing activities was $32.0 million for the three months ended
September 30, 1999 compared with cash used of $31.3 million for the three months
ended September 30, 1998. Cash used for the purchase of property, plant and
equipment during the three months ended September 30, 1999 was $1.2 million
compared to $1.7 million for the three months ended September 30, 1998. We used
$2.3 million cash for additions to gaming machines on participation or lease in
the current quarter, as compared to $0.1 million in the prior year's quarter.
Net cash of $28.6 million was used for the purchase of short-term investments
during the three months ended September 30, 1999, compared to $29.4 million in
the prior year's quarter.
Cash provided by financing activities, which was primarily from common stock
option proceeds, for the three months ended September 30, 1999 was $0.2 million
compared to $0.2 million in the prior year's quarter. We have an unused $25.0
million revolving credit agreement expiring August 1, 2000, which contains
customary bank line of credit terms.
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During the current quarter, management decided to withdraw a proposed offering
of 3,500,000 shares of common stock due to adverse market conditions. Costs and
expenses related to the offering of $0.4 million were written off in the
quarter. We expect no adverse changes in financial condition or results of
operations as a result of this action.
We believe that cash and cash equivalents and short-term investments will be
adequate to fund the anticipated level of inventories and receivables required
in the operation of our business as well as cash required to fund our other
presently anticipated needs.
RESULTS OF OPERATIONS
Segment information is presented in note 5 of the condensed consolidated
financial statements in Part I, Item 1.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1998
Consolidated revenues increased to $51.2 million in the quarter ended September
30, 1999 from $21.8 million in the quarter ended September 30, 1998. Gaming
revenues increased $29.2 million or 155% from the prior year. The gaming revenue
increase resulted primarily from the sale of a greater number of video and
reel-type slot machines in the September 30, 1999 quarter because of the market
acceptance of new models of these gaming machines introduced over the last
twelve months and from revenues from the participation and per diem leases on
the MONOPOLY(R) themed models.
Consolidated gross profit increased to $25.3 million in the quarter ended
September 30, 1999 from $6.3 million in the quarter ended September 30, 1998 due
to the increased revenues from the gaming segment and more favorable gross
margins. The gross margin percentage increased from 28.9% to 49.5% due to two
reasons: (1) we had a greater mix of participation and lease revenue that
generate more favorable gross profits than traditional product sales; and (2)
manufacturing efficiencies resulting from the increase in units manufactured.
Selling, general and administrative expenses increased $3.7 million, or 69%, in
the current quarter to $9.2 million from $5.4 million in the prior
year's quarter, which reflects higher staffing levels to support the 155%
increase in gaming revenues and a $0.4 million one-time charge for the withdrawn
stock offering. Research and development expenses increased $0.8 million, or
41%, in the current quarter to $2.6 million as compared to $1.9 million in the
prior year's quarter, which reflect additional spending to develop new themes
for the gaming machines.
Consolidated operating income was $13.6 million in the September 30, 1999
quarter compared to a loss of $1.0 million in the prior year's quarter. This
increase reflects the results of additional sales revenue and higher gross
margins, partially offset by increased spending on research, selling and
administrative expense categories.
Income from continuing operations was $8.9 million, $0.29 per share, for the
quarter ended September 30, 1999 compared with, in the September 30, 1998
quarter, a loss from continuing operations of $0.1 million, nil per share. These
amounts are net of our provision for current and deferred taxes of $5.5 million
and nil for the current and prior year quarter, respectively.
Net income, which includes continuing operations and discontinued operations,
was a loss of $4.7 million, $0.15 per share, for the quarter ended September 30,
1999 compared to a net loss of $1.6 million, $0.06 per share, for the prior year
fiscal quarter. The current year net loss reflects pre-tax losses from the
discontinued pinball and cabinet segment totaling $22.0 million and $8.3
million of related tax benefits in the current quarter. The pre-tax losses
includes $11.2 million of non-cash write-offs of inventory, accounts receivable
and property and equipment to estimated net realizable value; $10.1 million in
reserves for shutdown expenses (including future operating losses of $3.6
million); and a current quarter operating loss of $0.7 million. The prior year's
quarter reflected a pre-tax loss from the discontinued pinball and cabinets
segment of $1.6 million, which represents the operating losses of that segment
incurred in that quarter.
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YEAR 2000
The term Year 2000 is used to refer to a worldwide computer-related problem
where some software programs and embedded programs in electronic systems
microprocessors will not work properly when processing a date after 1999.
We began addressing this problem in 1996. We believe that most of the systems
utilized for the internal operations of the Company have been made Year 2000
ready at an estimated cost of $1,500,000. The remaining Year 2000-related work
is primarily to upgrade some of our personal computers. This work is expected to
be completed by November 30, 1999 at a cost estimated to be less than $100,000.
We believe that there are no Year 2000 issues with respect to the functionality
of our products sold in the past or to be sold in the future. We also believe
that malfunctioning tools or equipment using embedded microprocessors will not
affect our assembly of products, because the assembly process is not heavily
reliant on these tools or equipment.
We have contacted our most important suppliers and customers to assess their
potential Year 2000 problems, but we cannot determine with certainty our
suppliers' or customers' levels of year 2000 readiness. In the event that they
experience a Year 2000-related failure, they may expose us to Year 2000
problems. Based on the significant level of responses to our inquiries, however,
our suppliers and customers appear to be either Year 2000-ready or working
toward becoming Year 2000-ready. We will continue to follow up with those
suppliers and customers who have not responded or indicated that their Year 2000
work is in process. If needed, to avoid potential Year 2000 problems detected by
our suppliers or customers, we will adjust the shipping dates for products
accordingly. At worst, we would expect a short-term delay in shipments. If a
delay should occur, we do not expect it to have a material effect on our
operating results for any reportable period.
We do not have a contingency plan for undetected Year 2000 problems. We intend
to respond to those problems if and when they occur. We cannot determine the
effect on our business, if any, of any undetected Year 2000 problems.
This discussion of Year 2000 risks and readiness contains certain
forward-looking statements concerning future conditions and our business outlook
based on currently available information that involve risks and uncertainties.
The actual state of our Year 2000 readiness and exposure could differ materially
from that anticipated in the forward-looking statements as a result of certain
risks and uncertainties, including, without limitation, the ability to obtain
supplies and energy, to make deliveries, to communicate with business partners
and the Year 2000 readiness of suppliers, customers and other business partners.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information concerning the patent litigation between International Game
Technology ("IGT") and us as set forth in "Item 3. Legal Proceedings" in our
annual report on Form 10-K for the year ended June 30, 1999 ("1999 10-K") is
incorporated here by this reference. Capitalized terms used and not otherwise
defined here shall have the same meanings as ascribed to those terms in the 1999
10-K.
On September 17, 1999, the United States Court of Appeals for the Federal
Circuit denied our petition for rehearing with respect to the appellate court's
affirmation of the trial court's finding of infringement under the doctrine of
equivalents with respect to our Model 400 slot machine.
On October 29, 1999, IGT filed a lawsuit against our subsidiary, WMS Gaming
Inc., in the United States District Court for the District of Nevada. The suit
alleges infringement of a patent issued to IGT on September 14, 1999, entitled
"Game Machine and Method Using Touch Screen" and seeks preliminary and permanent
injunctions and damages in an unspecified amount. We have retained patent
counsel to review the matter, including questions regarding the validity of the
patent, and we intend to defend the suit vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WMS INDUSTRIES INC.
Dated: November 15, 1999 By: /s/ Jeffrey M. Schroeder
Jeffrey M. Schroeder
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule