<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission file number: 1-8300
WMS INDUSTRIES INC.
-------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-2814522
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(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
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(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 30,699,353 shares of common
stock, $.50 par value, were outstanding at February 9, 2000 after deducting
77,312 shares held as treasury shares.
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WMS INDUSTRIES INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: Page
Number
<S> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and six months ended December 31, 1999 and 1998................ 2
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999.................................. 3-4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 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........................................... 8-11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........... 11
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings.................................................... 12
ITEM 6. Exhibits and Reports on Form 8-K..................................... 12
SIGNATURES ..................................................................... 13
</TABLE>
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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)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Machine sales $ 34,791 $ 22,908 $ 67,119 $ 39,752
Participation and leasing 17,039 2,667 32,731 4,667
--------- --------- --------- ---------
Total gaming revenues 51,830 25,575 99,850 44,419
Contract manufacturing 3,013 4,512 6,179 7,436
--------- --------- --------- ---------
Total revenues 54,843 30,087 106,029 51,855
Costs and Expenses
Cost of gaming revenue 26,672 16,483 49,772 29,510
Cost of contract manufacturing 2,624 3,964 5,374 6,423
Research and development 2,573 2,023 5,208 3,888
Reversal of excess accrual due to settlement of
litigation (13,160) -- (13,160) --
Common stock option adjustments 912 601 912 601
Selling and administrative 10,806 6,522 19,956 11,947
--------- --------- --------- ---------
Total costs and expenses 30,427 29,593 68,062 52,369
--------- --------- --------- ---------
Operating income (loss) 24,416 494 37,967 (514)
Interest and other income and expense, net 678 917 1,560 1,839
--------- --------- --------- ---------
Income from continuing operations before income taxes 25,094 1,411 39,527 1,325
Provision for income taxes 9,536 535 15,020 503
--------- --------- --------- ---------
Income from continuing operations 15,558 876 24,507 822
Discontinued operations, net of applicable taxes
Loss from discontinued operations -- (2,111) (469) (3,701)
Costs related to discontinuance -- -- (13,200) --
--------- --------- --------- ---------
Net income (loss) $ 15,558 $ (1,235) $ 10,838 $ (2,879)
========= ========= ========= =========
Basic earnings (loss) per share of common stock:
Net income from continuing operations $ 0.51 $ 0.03 $ 0.80 $ 0.03
Loss from discontinued operations -- (0.07) (0.44) (0.13)
--------- --------- --------- ---------
Net income (loss) $ 0.51 $ (0.04) $ 0.36 $ (0.10)
========= ========= ========= =========
Diluted earnings (loss) per share of common stock:
Net income from continuing operations $ 0.50 $ 0.03 $ 0.79 $ 0.03
Loss from discontinued operations -- (0.07) (0.44) (0.13)
--------- --------- --------- ---------
Net income (loss) $ 0.50 $ (0.04) $ 0.35 $ (0.10)
========= ========= ========= =========
Shares used in per share calculations:
Basic 30,573 29,039 30,480 28,514
========= ========= ========= =========
Diluted 31,305 29,514 31,240 28,884
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,280 $ 58,663
Short-term investments 23,800 --
--------- ---------
47,080 58,663
Receivables, net of allowances of $3,214 and $2,883 42,564 35,516
Income tax receivable 7,953 3,258
Inventories, at lower of cost (FIFO) or market:
Raw materials and work in progress 13,034 11,452
Finished goods 27,261 24,392
--------- ---------
40,295 35,844
Deferred income taxes 10,167 17,595
Prepaid expenses 427 634
Assets of discontinued operations 13,274 31,702
--------- ---------
Total current assets 161,760 183,212
Gaming machines on participation or lease 32,282 26,866
Less accumulated depreciation (12,744) (7,135)
--------- ---------
19,538 19,731
Property, plant and equipment 51,358 49,590
Less accumulated depreciation (20,002) (17,750)
--------- ---------
31,356 31,840
Other assets 2,289 3,296
--------- ---------
$ 214,943 $ 238,079
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,774 $ 5,162
Accrued compensation and related benefits 2,339 2,919
Accrued liability related to patent litigation -- 38,543
Liabilities related to discontinued operations 12,592 13,933
Other accrued liabilities 7,567 4,818
--------- ---------
Total current liabilities 30,272 65,375
Deferred income taxes 428 625
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) -- --
Common stock (30,736,608 and 30,428,621 shares issued) 15,368 15,214
Additional paid-in capital 182,161 180,989
Accumulated deficit (12,904) (23,742)
--------- ---------
184,625 172,461
Treasury stock, at cost (77,312 shares) (382) (382)
--------- ---------
Total stockholders' equity 184,243 172,079
--------- ---------
$ 214,943 $ 238,079
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 10,838 $ (2,879)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Loss from discontinued operations 13,669 3,701
Reversal of excess accrual due to settlement of litigation (13,160) --
Litigation payment (27,000) --
Depreciation and amortization 7,861 2,354
Receivables provision 370 350
Deferred income taxes 14,417 (567)
Tax benefit from exercise of stock options 336 75
(Decrease) increase from changes in operating assets and liabilities (8,038) 5,253
-------- --------
Net cash provided (used) by continuing operating activities (707) 8,287
Investing activities:
Purchase of property, plant and equipment (1,768) (3,712)
Additions to gaming machines on participation or lease (5,416) (4,651)
Net change in short-term investments (23,800) (34,400)
-------- --------
Net cash used by investing activities (30,984) (42,763)
Financing activities:
Cash received on exercise of common stock options 990 5,635
-------- --------
Cash transfer (to) from discontinued operations (4,682) 736
-------- --------
Decrease in cash and cash equivalents (35,383) (28,105)
Cash and cash equivalents at beginning of period 58,663 36,902
-------- --------
Cash and cash equivalents at end of period $ 23,280 $ 8,797
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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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 and six months ended December 31, 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.
By January 2000, manufacturing for the pinball and cabinets segment was
completed. Management expects to sell the finished goods inventory by June
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):
<TABLE>
<CAPTION>
Pre-tax Income tax
loss benefit Net
------- ---------- --------
<S> <C> <C> <C>
Estimated loss on disposal $17,700 $ 6,700 $11,000
Estimated operating losses from
October 25, 1999 to anticipated disposal date 3,600 1,400 2,200
------- ------- -------
$21,300 $ 8,100 $13,200
======= ======= =======
</TABLE>
Revenues of the pinball and cabinets segment were $5.5 million and $19.5
million for the quarter six months ended December 31, 1999, and $8.9 million
and $13.9 million for the quarter and six months ended December 31, 1998. At
December 31, 1999, the assets of the pinball and cabinets segment consisted
of trade receivables, inventories and plant and equipment amounting to $13.3
million after deducting an allowance of $10.1 million for write-offs to
estimated realizable value. The liabilities related to discontinued
operations were $12.6 million, including $6.1 million of reserves
established for shutdown costs and estimated operating losses 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):
<TABLE>
<CAPTION>
Three Months ended Six Months ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Gaming $ 51,830 $ 25,575 $ 99,850 $ 44,419
Contract manufacturing 3,013 4,512 6,179 7,436
--------- --------- --------- ---------
Total revenues $ 54,843 $ 30,087 $ 106,029 $ 51,855
========= ========= ========= =========
Gross Profit
Gaming $ 25,158 $ 9,092 $ 50,078 $ 14,909
Contract manufacturing 389 548 805 1,013
--------- --------- --------- ---------
Total gross profit $ 25,547 $ 9,640 $ 50,883 $ 15,922
========= ========= ========= =========
Operating income (loss)
Gaming $ 13,338 $ 1,568 $ 28,464 $ 903
Contract manufacturing 239 407 473 642
Reversal of excess accrual due to settlement of litigation 13,160 -- 13,160 --
Common stock option adjustments (912) (601) (912) (601)
Unallocated general corporate expenses (1,409) (880) (3,218) (1,458)
--------- --------- --------- ---------
Total operating income (loss) 24,416 494 37,967 (514)
Interest and other income and expense, net 678 917 1,560 1,839
--------- --------- --------- ---------
Income from continuing operations before
income taxes $ 25,094 $ 1,411 $ 39,527 $ 1,325
========= ========= ========= =========
</TABLE>
The basis of segmentation presented above is the same as that
presented in the last annual report.
7
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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 these risks and uncertainties, including, without limitation, the
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 "-Factors Affecting Future Performance" in our Annual
Report on Form 10-K for the year ended June 30, 1999.
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. In the first
quarter, we recorded a $21.3 million pre-tax loss on disposal, 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. The loss on disposal included about $11.2 million
in non-cash losses from write-downs of receivables, inventory, plant and
equipment to net realizable value on disposal. Tax benefits related to the loss
on disposal were estimated to be $8.1 million. 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.
In December 1999, we announced that we had settled our litigation with
International Game Technology regarding their Telnaes patent. We made a
tax-deductible payment of $27.0 million to them and agreed to split evenly with
them about $3.4 million held in an escrow account pending resolution of this
matter. Because we had previously established a reserve of about $38.5 million
for this litigation and previously expensed the amount, we recognized pre-tax
income of $13.2 million in the current quarter from the reversal of the excess
accrual. This resulted in an increase in income from continuing operations, on
an after-tax basis, of $8.2 million, or $0.26 per diluted share.
RESULTS OF OPERATIONS
Segment information is presented in note 5 of the condensed consolidated
financial statements in Part I, Item 1.
FINANCIAL CONDITION
Cash flows from operating, investing and financing activities during the six
months ended December 31, 1999 resulted in a net cash decrease of $35.4 million
as compared to a net cash decrease of $28.1 million during the six months ended
December 31, 1998.
Cash provided by operating activities before changes in operating assets and
liabilities was $7.3 million for the six months ended December 31, 1999 as
compared to $3.0 million of cash provided by operations for the six months ended
December 31, 1998. The current period's increase in cash provided from
operations relative to the comparable prior year's period is primarily a result
of increased revenues and resulting cash collected partially offset by the $27.0
million litigation settlement payment made in December 1999.
The changes in operating assets and liabilities for the six months ended
December 31, 1999 were primarily due to increases in receivables and inventories
from the comparable balances at June 30, 1999, partially offset by an increase
in accounts payable. The operating assets and liability changes for the six
months ended December 31, 1998 were primarily due to increases in accounts
payable from the comparable balances at June 30, 1998.
Cash used by investing activities was $31.0 million for the six months ended
December 31, 1999 compared with cash used of $42.8 million for the six months
ended December 31, 1998. Cash used for the purchase of property, plant and
equipment during the six months ended December 31, 1999 was $1.8 million
compared to $3.7 million for the six months ended December 31, 1998. We used
$5.4 million of cash for additions to gaming machines on participation or lease
in the current six-month period, as compared to $4.7 million in the comparable
prior year
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period. Net cash of $23.8 million was used for the purchase of short-term
investments during the six months ended December 31, 1999 compared to $34.4
million in the prior year's six-month period.
We have no material commitments for property or equipment investments at this
time.
Cash provided by financing activities, which was primarily from common stock
option proceeds, for the six months ended December 31, 1999 was $1.0 million
compared to $5.6 million in the prior year's six-month period. We have an unused
$25.0 million revolving credit agreement expiring August 1, 2000, which contains
customary bank line of credit terms.
During the current six-month period, 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 first quarter. We expect no adverse changes in financial condition or
results of operations as a result of this action.
We believe that existing cash, cash equivalents, short-term investments and
available borrowing capacity together with funds generated from operations will
be adequate to fund the anticipated level of inventories and receivables
required in the operation of our business as well as to fund our other presently
anticipated needs for the next twelve months.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1998
Consolidated revenues increased to $54.8 million in the quarter ended December
31, 1999 from $30.1 million in the quarter ended December 31, 1998. This
resulted from market share growth in video and reel-type slot machine sales and
from growth in revenues from the participation and per diem leases on the
MONOPOLY(R) themed models. We shipped 4,301 gaming machines in the current
quarter, resulting in product and parts sales of $34.8 million versus 3,078
machines and $22.9 million of sales in the comparable prior year quarter.
Revenues from participation and lease rose to $17.0 million in the current
quarter based on 3,518 units leased at the end of the period as compared to
revenues of $2.7 million in the prior year's quarter from 501 units leased at
the end of the prior year's period.
Consolidated gross profit increased to $25.5 million in the quarter ended
December 31, 1999 from $9.6 million in the quarter ended December 31, 1998 due
to the increased revenues from the gaming segment and more favorable gross
margins. The gross margin percentage increased from 32.0% to 46.6% due to two
reasons:
- - we had a greater proportion of participation and lease revenue, which
generates more favorable gross profits than traditional product sales; and
- - manufacturing efficiencies resulting from the increase in units manufactured.
Research and development expenses increased $0.6 million, or 27.2%, in the
current quarter to $2.6 million as compared to $2.0 million in the prior year's
quarter, which reflect our operating strategy of continuing to develop new
themes and designs for our gaming machines.
Selling, general and administrative expenses increased $4.3 million, or 65.7%,
in the current quarter to $10.8 million from $6.5 million in the prior year's
quarter. The increase reflects continuing investment in staffing and support to
manage sales growth, development of new markets domestically and
internationally, and legal expenses for litigation and regulatory matters.
Consolidated operating income was $24.4 million in the December 31, 1999 quarter
compared to income of $0.5 million in the prior year's quarter. This increase
reflects the results of additional sales revenue, higher gross margins and a
$13.2 million gain due to the litigation settlement for less than the
reserved amount, partially offset by increased spending on research, selling and
administrative expenses described above.
Income from continuing operations was $15.6 million, $0.50 per diluted share,
for the quarter ended December 31, 1999 compared with, in the December 31, 1998
quarter, income from continuing operations of $0.9 million,
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$0.03 per diluted share. These amounts are net of our provision for current and
deferred taxes of $9.5 million and $0.5 million for the current and prior year
quarter, respectively.
Net income, which includes continuing operations and discontinued operations,
was $15.6 million, $0.50 per diluted share, for the quarter ended December 31,
1999 compared to a net loss of $1.2 million, $0.04 per diluted share, for the
prior year fiscal quarter. The current quarter net income reflects a pre-tax
gain of $13.2 million from the litigation settlement for less than the amount
originally reserved, less related tax benefits of $5.0 million. The prior year's
quarter reflected a pre-tax loss from the discontinued pinball and cabinets
segment of $3.4 million, which represents the operating losses of that segment
incurred in that quarter.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
SIX MONTHS ENDED DECEMBER 31, 1998
Consolidated revenues increased to $106.0 million in the six months ended
December 31,1999 from $51.9 million in the six months ended December 31, 1998.
This resulted from market share growth in video and reel-type slot machine sales
and from growth in revenues from the participation and per diem leases on the
MONOPOLY(R) themed models. We shipped 8,384 gaming machines for product sales of
$67.1 million for the current year-to-date period versus 5,413 machines and
$39.8 million in the comparable prior year period. Revenues from participation
and lease rose to $32.8 million in the current quarter based on 3,518 units
leased at the end of the period as compared to revenues of $4.7 million in the
prior year's period from 501 units leased at the end of the prior year's period.
Consolidated gross profit increased to $50.9 million in the six months ended
December 31, 1999 from $15.9 million in the six months ended December 31, 1998
due to the increased revenues from the gaming segment and more favorable gross
margins. The gross margin percentage increased from 30.7% to 48.0% due to two
reasons:
- - we had a greater percentage of participation and lease revenue, which
generates more favorable gross profits than traditional product sales; and
- - manufacturing efficiencies resulting from the increase in units manufactured.
Research and development expenses increased $1.3 million, or 34.0%, in the
current six-month period to $5.2 million as compared to $3.9 million in the
prior year's six-month period, which reflect our operating strategy of
continuing to develop new themes and designs for our gaming machines.
Selling, general and administrative expenses increased $8.1 million, or 67.0%,
in the current six-month period to $20.0 million from $11.9 million in the prior
year's six-month period. The increase reflects continuing investment in staffing
and support to manage sales growth, development of new markets domestically and
internationally, and legal expenses for litigation and regulatory matters.
Consolidated operating income was $38.0 million in the half year ended December
31, 1999, compared to a loss of $0.5 million in the prior year's first half.
This increase reflects a $13.2 million gain due to the litigation settlement for
less than the reserved amount and 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 $24.5 million, $0.79 per diluted share,
for the six months ended December 31, 1999 compared with, in the six months
ended December 31, 1998, income from continuing operations of $0.8 million,
$0.03 per diluted share. These amounts are net of our provision for current and
deferred taxes of $15.0 million and $0.5 million for the current and prior year
six-month period, respectively.
Net income, which includes continuing operations and discontinued operations,
was $10.8 million, $0.35 per diluted share, for the six months ended December
31, 1999 compared to a net loss of $2.9 million, $0.10 per diluted share, for
the prior year six-month period. The current period net income reflects a
pre-tax gain of $13.2 million from the litigation settlement for less than the
amount originally reserved, less related tax benefits of $5.0 million. This was
offset by pre-tax losses from the discontinued pinball and cabinet segment
totaling $22.0 million and $8.3 million of related tax benefits in the first
quarter. The pre-tax losses on discontinued operations 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
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(including future operating losses of $3.6 million); and the first quarter's
operating loss of $0.7 million. The prior year's period reflected a pre-tax loss
from the discontinued pinball and cabinets segment of $6.0 million, which
represents the operating losses of that segment incurred in that period.
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 have not yet experienced any Year 2000 problems with regard to our suppliers
or our tools and production equipment. As a result, we have not experienced any
delay in the receipt of raw material, production of finished goods or shipments
to customers. We have been notified that about 800 of our video lottery
terminals in operation for the Delaware Lottery became temporarily inoperative
in late December 1999. We repaired the problem within a week, which involved
replacing certain computer chips in the machines. The cause of this malfunction
is currently under investigation. We have reserved $750,000 for the expenses
related to fixing this problem and associated costs. Because these machines were
of a specific model used by a single customer, we believe that the malfunction
discussed above represents an isolated case and does not indicate a systemic
risk to us. We are not aware of any other similar problems, and do not
anticipate a materially adverse change in our liquidity or financial position as
a result of such problems.
We began addressing this problem in 1996. We believe that the systems utilized
for our internal operations have been made Year 2000 ready at an estimated cost
of $1,600,000. 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 our experience to date, we believe our suppliers and
customers are Year 2000 compliant. If our suppliers or customers experience any
Year 2000 problems, we will adjust the shipping dates for products accordingly.
At worst, we would expect a short-term delay in shipments, however we have not
experienced any Year 2000 delays in this regard to date.
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 Year 2000 readiness
of suppliers, customers and other business partners.
MONOPOLY(R) is a registered trademark of Hasbro. (C) 1999 Hasbro, Inc. All
rights reserved. Used with permission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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 ascribed to those terms in the 1999
10-K.
On December 10, 1999, we settled both the Model 400 and Model 401 litigation
with IGT regarding their Telnaes patent. We have agreed not to manufacture, use
or sell any gaming machines in violation of the patent, which expires in
February, 2002. We also paid IGT $27.0 million and split evenly with them about
$3.4 million previously held in an escrow account.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Amended and Restated Certificate of Incorporation of WMS dated February
17, 1987; Certificate of Amendment dated January 28, 1993; and Certificate
of Correction dated May 4, 1994, incorporated by reference to Exhibit 3(a)
to our Annual Report on Form 10-K for the year ended June 30, 1994.
3(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of WMS, as filed with the Secretary of the State of Delaware
of February 25, 1998, incorporated by reference to Exhibit 3(a) to our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred Stock,
incorporated by reference to Exhibit A to the Rights Agreement dated as of
March 5, 1998 between us and The Bank of New York, as Rights Agent, filed
as Exhibit 1 to our registration Statement on Form 8-A (File No. 1-8300)
filed March 25, 1998.
3(d) By-Laws of WMS, as amended and restated through June 26, 1996,incorporated
by reference to Exhibit 3(b) to our Annual Report on Form 10-K for the
year ended June 30, 1996.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
12
<PAGE> 14
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: February 14, 2000 By: /s/ Jeffrey M. Schroeder
Jeffrey M. Schroeder
Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
13
<PAGE> 15
EXHIBIT INDEX
No. Description
- ----- -----------
3(a) Amended and Restated Certificate of Incorporation of WMS dated February
17, 1987; Certificate of Amendment dated January 28, 1993; and
Certificate of Correction dated May 4, 1994, incorporated by reference
to Exhibit 3(a) to our Annual Report on Form 10-K for the year ended
June 30, 1994.
3(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of WMS, as filed with the Secretary of the State of
Delaware of February 25, 1998, incorporated by reference to Exhibit
3(a) to our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred Stock,
incorporated by reference to Exhibit A to the Rights Agreement dated as
of March 5, 1998 between us and The Bank of New York, as Rights Agent,
filed as Exhibit 1 to our registration Statement on Form 8-A (File No.
1-8300) filed March 25, 1998.
3(d) By-Laws of WMS, as amended and restated through June 26,
1996,incorporated by reference to Exhibit 3(b) to our Annual Report on
Form 10-K for the year ended June 30, 1996.
27 Financial Data Schedule
14
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