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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, 2000
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
--------------------------------------------------------------------------------
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
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 31,577,110 shares of common
stock, $.50 par value, were outstanding at November 10, 2000 after deducting
77,312 shares held as treasury shares.
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WMS INDUSTRIES INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Operations
Three months ended September 30, 2000 and 1999.................. 2
Condensed Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000............................ 3-4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999.................. 5
Notes to Condensed Consolidated Financial Statements............ 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 10
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings............................................... 11
ITEM 6. Exhibits and Reports on Form 8-K................................ 11
SIGNATURES ................................................................ 12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
(Unaudited)
Three Months ended
September 30,
-------------------
2000 1999
-------- --------
Revenues
Machine sales $ 40,261 $ 32,328
Participation and lease 19,581 15,692
-------- --------
Total revenues 59,842 48,020
-------- --------
Costs and expenses
Cost of sales 22,746 18,598
Cost of participation and lease revenue 2,913 1,616
Research and development 3,539 2,553
Selling and administrative 11,830 8,700
Depreciation and amortization 4,063 3,236
Corporate relocation 533 -
-------- --------
Total costs and expenses 45,624 34,703
-------- --------
Operating income 14,218 13,317
Interest and other income and expense, net 1,047 882
-------- --------
Income from continuing operations before income taxes 15,265 14,199
Provision for income taxes 5,802 5,395
-------- --------
Income from continuing operations 9,463 8,804
Discontinued operations, net of applicable income taxes
Pinball and cabinets segment
Loss from discontinued operations - (469)
Costs related to discontinuance - (13,200)
Contract manufacturing segment
Income from discontinued operations - 145
-------- --------
Net income (loss) $ 9,463 $ (4,720)
======== ========
Basic earnings (loss) per share of common stock:
Net income from continuing operations $ 0.30 $ 0.29
Loss from discontinued operations - (0.44)
-------- --------
Net income (loss) $ 0.30 $ (0.15)
======== ========
Diluted earnings (loss) per share of common stock:
Net income from continuing operations $ 0.30 $ 0.29
Loss from discontinued operations - (0.44)
-------- --------
Net income (loss) $ 0.30 $ (0.15)
======== ========
Shares used in per share calculations:
Basic 31,087 30,488
======== ========
Diluted 31,766 30,488
======== ========
See notes to condensed consolidated financial statements.
2
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WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
September 30, June 30,
2000 2000
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 7,344 $ 19,869
Short- term investments 82,000 60,800
--------- ---------
89,344 80,669
Receivables, net of allowances of $3,624 and $3,592 44,590 45,190
Notes receivable, current portion 7,931 9,076
Inventories, at lower of cost (FIFO) or market:
Raw materials and work in progress 11,221 10,152
Finished goods 27,566 22,766
--------- ---------
38,787 32,918
Deferred income taxes 9,465 9,279
Prepaid expenses 1,499 1,198
Assets of discontinued operations 5,797 5,246
--------- ---------
Total current assets 197,413 183,576
Gaming machines on participation or lease 40,312 35,726
Less accumulated depreciation (22,308) (18,917)
--------- ---------
18,004 16,809
Property, plant and equipment 50,695 49,885
Less accumulated depreciation (20,064) (19,420)
--------- ---------
30,631 30,465
Other assets 9,309 8,180
--------- ---------
$ 255,357 $ 239,030
========= =========
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>
September 30, June 30,
2000 2000
------------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,190 $ 8,352
Accrued compensation and related benefits 3,183 3,735
Liabilities related to discontinued operations 6,698 8,242
Accrued income taxes 1,652 2,956
Other accrued liabilities 11,001 10,325
--------- ---------
Total current liabilities 34,724 33,610
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) - -
Common stock (31,590,963 and 30,428,621 shares issued) 15,796 15,460
Additional paid in capital 189,692 184,278
Retained earnings 15,527 6,064
--------- ---------
221,015 205,802
Treasury stock, at cost (77,312 shares) (382) (382)
--------- ---------
Total stockholders' equity 220,633 205,420
--------- ---------
$ 255,357 $ 239,030
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 9,463 $ (4,720)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Discontinued operations
Loss from pinball and cabinets segment - 469
Income from contract manufacturing segment - (145)
Costs related to discontinued operations - 13,200
Depreciation and amortization 4,063 3,236
Receivables provision - 483
Deferred income taxes (1,022) (577)
Tax benefit from exercise of stock options 2,395 334
Increase (decrease) from changes in operating assets and
liabilities (2,060) 3,867
-------- --------
Net cash provided by operating activities 12,839 16,147
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (838) (1,155)
Additions to gaming machines on participation or lease (4,586) (2,265)
Net change in short-term investments (21,200) (28,600)
-------- --------
Net cash used by investing activities (26,624) (32,020)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received on exercise of common stock options 3,355 210
CASH FLOWS FROM DISCONTINUED OPERATIONS
Pinball and cabinets segment (1,864) (5,315)
Contract manufacturing segment (231) 569
-------- --------
Net cash used by discontinued operations (2,095) (4,746)
Decrease in cash and cash equivalents (12,525) (20,409)
Cash and cash equivalents at beginning of period 19,869 58,663
-------- --------
Cash and cash equivalents at end of period $ 7,344 $ 38,254
======== ========
</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 ended September 30, 2000
are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 2001. 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,
2000.
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 contract
manufacturing business 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.
Manufacturing activities for the pinball and cabinets segment were
completed by January 2000. All finished goods have been disposed of and
any remaining assets, including raw material inventory and equipment,
are expected to be sold or disposed of at the earliest practical date.
Sales of the pinball and cabinets segment were $2.4 million and $14.0
million in the quarters ending September 30, 2000 and 1999,
respectively. At September 30, 2000, the assets of the pinball and
cabinets segment consisted of trade receivables, inventories, plant and
equipment amounting to $4.8 million after deducting an allowance of
$6.6 million for write-offs to estimated realizable value. The
liabilities were $4.5 million, including reserves for shutdown costs of
$1.2 million and estimated operating losses of $2.1 million through the
disposal date.
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On August 10, 2000 (the measurement date), the Company announced the
closing of its contract manufacturing segment. Accordingly, this
segment is accounted for as a discontinued operation in the
accompanying condensed consolidated financial statements.
Manufacturing activities for the contract manufacturing segment were
completed by September 2000. Any remaining assets, including inventory
and equipment, are expected to be sold or disposed of at the earliest
practical date.
Sales of the contract manufacturing segment were $1.0 million and $3.2
million in the quarters ending September 30, 2000 and 1999,
respectively. At September 30, 2000, the assets of the contract
manufacturing segment consisted of trade receivables, inventories,
plant and equipment amounting to $1.0 million after deducting an
allowance of $1.6 million for write-offs to estimated realizable value.
The liabilities were $2.2 million, including reserves for shutdown
costs of $1.2 million.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used in this quarterly report on form 10-Q, the terms "we", "us", "our" and
"WMS" mean WMS Industries Inc., a Delaware corporation, and its subsidiaries,
unless the context indicates a different meaning, and the term "common stock"
means our common stock, $0.50 par value per share.
This report 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 and other risks more fully
described under "Item 1. Business - Risk Factors" in our Annual Report on Form
10-K for the year ended June 30, 2000.
SIGNIFICANT EVENTS AND TRENDS
In August 2000, we announced the operations of our contract manufacturing
segment were being discontinued. We expect to complete the windup of this
segment by mid-fiscal 2001. In the fourth quarter of fiscal 2000, we recorded a
$2.8 million pre-tax loss on disposal, including cash expenses of $1.2 million
for 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 $1.6 million
in non-cash losses from write-downs of receivables, inventory, plant and
equipment to net realizable value. Tax benefits related to the loss on disposal
were estimated to be $1.1 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 contract manufacturing segment as a discontinued operation.
In August, 2000, we announced that we would convert our 130,000 square foot
corporate headquarters and manufacturing facility in Chicago to a creative
technology campus where we will conduct all engineering, graphic design and game
development functions. Our corporate headquarters and manufacturing operations
will relocate to our Waukegan, Illinois facility during the December 2000 and
early March 2001 quarters. We will also consolidate two leased regional
warehouses into the Waukegan facility. We anticipate recording charges of $0.07
to $0.09 per diluted share related to these decisions during fiscal 2001, of
which $0.01 was incurred in the September 2000 quarter.
LIQUIDITY AND CAPITAL RESOURCES
We believe that cash and cash equivalents and short-term investments of $89.3
million at September 30, 2000, along with the $25.0 million bank revolving line
of credit that extends to August 1, 2001, the $2.0 million bank revolving line
of credit that extends to August 1, 2002 and cash flow from operations will be
adequate to fund the anticipated level of capital expenditures, cash invested in
gaming machines on participation or lease, and increases in the levels of
inventories and receivables required in the operation of our business.
Cash provided by operating activities before changes in operating assets and
liabilities was $14.9 million for the first quarter of fiscal 2001 as compared
with cash provided of $12.3 million in the comparable quarter of fiscal 2000.
The current period's increase in cash provided from operations before changes in
operating assets and liabilities relative to the comparable prior year's period
was due to increased net income, net of the effect of non-cash charges and
credits and an increase in the tax benefit of stock option exercises. This was
partially offset by a reduction of deferred tax assets in the first quarter of
fiscal 2001.
The changes in operating assets and liabilities resulted in $2.1 million of cash
outflow during the first quarter of fiscal 2001 compared with a cash inflow of
$3.9 million during the comparable quarter of fiscal 2000. Cash outflow in the
first quarter of fiscal 2001 was primarily due to an increase in inventories and
a decrease in accrued compensation, offset, in part, by a decrease in accounts
receivable from the comparable balances at June 30, 2000. The cash
8
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inflow for the first quarter of fiscal 2000 was primarily due to an increase in
trade payables and current income taxes payable, offset, in part, by an increase
in inventories from the comparable balances at June 30, 1999.
Cash used by investing activities was $26.6 million for the first quarter of
fiscal 2001 compared with cash used of $32.0 million for the comparable quarter
of fiscal 2000. Cash used for the purchase of property, plant and equipment
during the first quarter of fiscal 2001 was $0.8 million compared with $1.2
million for the comparable quarter of fiscal 2000. Cash used for additions to
gaming machines on participation or lease was $4.6 million and $2.3 million in
the first quarter of fiscal 2001 and 2000, respectively. Net cash of $21.2
million was used for the purchase of short-term investments during the first
quarter of fiscal 2001 compared with $28.6 million used for the purchase of
short-term investments during the comparable quarter of fiscal 2000.
Cash provided by financing activities, which was from common stock option
proceeds, was $3.4 million for the first quarter of fiscal 2001 compared with
$0.2 million for the first quarter of fiscal 2000.
Cash flows used by discontinued operations was $1.9 million and $0.2 million for
the pinball and cabinets segment and the contract manufacturing segment,
respectively, for the first quarter of fiscal 2001. For the first quarter of
fiscal 2000, the pinball and cabinets segment used $5.3 million of cash and the
contract manufacturing segment provided $0.6 million of cash.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1999
Consolidated revenues increased to $59.8 million, or 24.6%, in the quarter ended
September 30, 2000 from $48.0 million in the quarter ended September 30, 1999.
Total revenue increased $11.8 million; $7.9 million from increased machine sales
and $3.9 million from increased participation and lease revenue. We shipped
4,559 video and reel type gaming devices in the current quarter, resulting in
product and parts sales of $40.3 million versus 4,083 gaming devices and $32.3
million of product and parts sales in the comparable prior year quarter due to
the continued market acceptance of new models introduced over the last twelve
months. In addition, the average sales price increased from $7,487 in the prior
year's quarter to $8,287 in the current year's quarter primarily due to a price
increase implemented in August 1999 and a change in sales mix to higher priced
products.
The increase in participation and lease revenue was from an increase in the
installed base of Monopoly(R)-themed gaming devises which had a total of 4,146
units installed at September 30, 2000 and 3,189 units installed at September 30,
1999. Average net win per day for Monopoly-themed machines decreased from $49.26
in the September 1999 quarter to $45.46 in the September 2000 quarter due to an
expansion of the installed base to lower performing locations.
Consolidated gross profit in the quarter ended September 30, 2000 rose to $34.2
million, or 23.0%, from $27.8 million in the quarter ended September 30, 1999.
The gross margin percentage decreased from 57.9% in the quarter ended September
30, 1999 to 57.1% in the quarter ended September 30, 2000. The decrease in gross
margin resulted from lower gross profit margins on participation and lease
revenues due to a lower average net win per day coupled with a government
mandated decrease in the net win percentage earned on our video lottery
terminals placed in Rhode Island and Delaware, partially offset by the
increase in gross margin on gaming machine sales from 42.5% in the September
1999 quarter to 43.5% in the September 2000 quarter.
Research and development expenses increased $0.9 million, or 38.6%, in the
current quarter to $3.5 million from $2.6 million in the quarter ended September
30, 1999 as we continue to invest in enhancing our product pipeline and product
platform. The increase is due to higher engineering expenditures, including
costs to adapt our games for distribution to international markets.
Selling and administrative expenses increased 36.0% from $8.7 million in the
prior year's quarter to $11.8 million in the current year's quarter as we
increased our cost structure to support our revenue growth. The increase in
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expenses included costs for the successful launch of the Puzzle Pays(TM) series
of participation games with JUMBLE(R) as the first game in the series, and for
our new corporate identity and image campaign.
Corporate relocation expenses of $0.5 million, or $0.01 per diluted share, in
the current year's quarter represent costs associated with the relocation and
centralization of our corporate headquarters and manufacturing and distribution
facilities to Waukegan, Illinois. Our Chicago facility will be converted to a
creative technology campus where we will conduct all engineering, graphic design
and game development functions. These unusual charges are expected to be
partially offset by greater productivity and operating cost efficiencies
realized upon the completion of the relocation. We anticipate an additional $3.0
million to $4.4 million in pre-tax charges associated with this relocation
through the end of the current fiscal year, totaling $0.06 to $0.08 per diluted
share.
Depreciation and amortization, which includes amortization of gaming machines
under participation and lease, increased during the current year's quarter to
$4.1 million from $3.2 million in the prior year's quarter due to the increase
in the installed base of Monopoly machines under lease. The average installed
base was 4,024 units for the September 2000 quarter, compared to 2,977 units for
the September 1999 quarter.
Operating income was $14.2 million in the current year's quarter, compared to
operating income of $13.3 million in the prior year's quarter. The increase was
a result of higher revenues and margins, partially offset by the increases in
research and development, depreciation and amortization and selling and
administrative expenses. In addition, the financial results of the current
year's quarter reflect the pre-tax charge of $0.5 million from the costs
associated with our relocation and centralization of corporate offices and
manufacturing and distribution facilities to Waukegan, Illinois.
The provision for income taxes on continuing operations increased $0.4 million,
to $5.8 million in the current year's quarter from $5.4 million in the prior
year's quarter. The increase was due primarily to higher pre-tax income. The
effective rate was 38.0% in both quarters.
Income from continuing operations was $9.5 million, or $0.30 per diluted share,
in the current year's quarter, compared to income from continuing operations of
$8.8 million, or $0.29 per diluted share, in the prior year's quarter. The
increase was a result of higher revenues and margins, partially offset by the
increases in research and development, depreciation and amortization, selling
and administrative expenses and income tax expense.
Net income, which includes continuing operations and discontinued operations,
was $9.5 million, or $0.30 per diluted share, for the current year's quarter
compared to a net loss of $4.9 million, or $0.15 per diluted share, for the
prior year's quarter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September, 2000, we settled all pending litigation with International Game
Technology Inc. (IGT) regarding IGT's touch-screen/button patent claims and our
antitrust counterclaims. No payments were made by IGT or us in connection with
the settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(hh). Employment Agreement between WMS Gaming Inc. and Robert R.
Rogowski, dated May 1, 2000
27(a) Financial Data Schedule
27(b) Financial Data Schedule
(b) Reports on Form 8-K.
None
11
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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 13, 2000 By: /s/ Scott D. Schweinfurth
Scott D. Schweinfurth
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
12
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EXHIBIT INDEX
No. Description
--- -----------
10(hh) Employment Agreement between WMS Gaming Inc. and Robert R.
Rogowski, dated May 1, 2000
27(a) Financial Data Schedule
27(b) Financial Data Schedule
13
