<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1996 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
------------ ------------
COMMISSION FILE NUMBER 0-19322
-------
VIDEO LOTTERY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 81-0470853
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
115 PERIMETER CENTER PLACE, SUITE 911
ATLANTA, GEORGIA 30346
(Address of principal executive officers) (Zip code)
(770) 481-1800
(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 report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ --------
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
-------- --------
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 10,682,109 shares of Common
Stock, $.01 par value, outstanding as of March 31, 1996.
1
<PAGE> 2
VIDEO LOTTERY TECHNOLOGIES, INC.
AND CONSOLIDATED SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 4
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1996 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Securities Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES:
On-line lottery $23,231,873 25,083,141
Gaming machine and route operations 14,811,532 14,864,343
Racetrack operations 2,322,564 2,470,986
----------- ----------
Total revenues 40,365,969 42,418,470
----------- ----------
COSTS AND EXPENSES:
On-line lottery 14,500,438 15,499,422
Gaming machine and route operations 8,181,081 8,183,224
Racetrack operations 2,499,385 2,618,444
Selling, general and administrative 6,987,754 7,558,311
Research and development 1,016,123 2,211,380
Other charges 6,000,000 ---
Depreciation and amortization 4,890,280 4,692,584
----------- ----------
Total costs and expenses 44,075,061 40,763,365
----------- ----------
Earnings (loss) from continuing operations (3,709,092) 1,655,105
----------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 171,401 339,284
Interest expense (764,488) (360,281)
----------- ----------
(593,087) (20,997)
----------- ----------
Earnings (loss) from continuing operations before
income taxes and extraordinary items (4,302,179) 1,634,108
Income tax benefit (expense) 765,135 (484,118)
----------- ----------
Net earnings (loss) from continuing operations (3,537,044) 1,149,990
Net loss from discontinued operations --- (1,443,050)
----------- ----------
Net loss before extraordinary items (3,537,044) (293,060)
----------- ----------
Extraordinary gain, net 4,014,050 ---
----------- ----------
Net earnings (loss) $ 477,006 (293,060)
=========== ==========
Net earnings (loss) per share:
From continuing operations $ (.28) .11
From discontinued operations --- (.14)
From extraordinary items .32 ---
----------- ----------
$ .04 (.03)
=========== ==========
Weighted average shares 12,601,367 10,633,544
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,116,138 1,406,979
Available-for-sale securities and restricted
short-term deposits 3,212,046 3,768,385
Accounts receivable, net 20,128,303 19,320,286
Current installments of notes receivable, net 1,792,284 2,441,063
Inventories 28,838,413 23,462,545
Prepaid expenses 1,218,697 1,261,159
Deferred income taxes 8,275,989 7,732,606
------------ ------------
Total current assets 66,581,870 59,393,023
------------ ------------
Property, plant and equipment 115,749,813 114,235,306
Less accumulated depreciation (59,026,935) (55,025,879)
------------ ------------
Net property, plant and equipment 56,722,878 59,209,427
------------ ------------
Restricted cash deposits 777,643 803,011
Notes receivable, excluding current installments 1,668,011 892,029
Goodwill, net 10,747,520 10,952,241
Intangible and other assets, net 12,219,756 10,090,117
Net assets of discontinued operations 8,644,554 7,270,505
------------ ------------
$157,362,232 148,610,353
============ ============
LIABILITIES
Current liabilities:
Notes payable $ 3,700,000 8,250,000
Current installments of long-term debt 8,097,408 6,077,708
Accounts payable 23,930,712 14,853,802
Accrued expenses 12,900,678 8,951,040
------------ ------------
Total current liabilities 48,628,798 38,132,550
------------ ------------
Long-term debt, excluding current installments 13,189,975 6,235,336
Other liabilities --- 10,000,000
Deferred income taxes 8,579,462 7,794,305
------------ ------------
Total liabilities 70,398,235 62,162,191
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued --- ---
Series A Junior Preferred stock, $.01 par value, convertible
non-cumulative. Authorized 1,912,728 shares 19,127 19,127
Common stock, $.01 par value. Authorized 25,000,000
shares 106,821 106,821
Paid-in capital 97,284,358 97,284,358
Deferred restricted stock compensation (414,162) (452,991)
Accumulated deficit (10,032,147) (10,509,153)
------------ ------------
Total stockholders' equity 86,963,997 86,448,162
------------ ------------
$157,362,232 148,610,353
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Series A Restricted
Preferred Common Stock Accumu- Total Stock-
Stock Stock Paid-in Compen- lated Deficit holders'
par value par value Capital sation Equity
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, $ 19,127 106,821 97,284,358 (452,991) (10,509,153) 86,448,162
1995
Net earnings --- --- --- --- 477,006 477,006
Amortization of
deferred
restricted stock
compensation --- --- --- 38,829 --- 38,829
March 31, 1996 19,127 106,821 97,284,358 (414,162) (10,032,147) 86,963,997
-------------------------------------------------------------------------------------------------------------------
1996 SHARES ISSUED AND OUTSTANDING
Series A Common
Balance Preferred Stock Stock
------- --------------- -----
Beginning and end of period 1,912,728 10,682,109
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 477,006 (293,060)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Net loss from discontinued operations --- 1,443,050
Depreciation and amortization 4,890,280 4,692,584
Other charges 6,000,000 ---
Extraordinary gain, net (4,014,050) ---
Sales of receivables --- 1,207,501
Other, net 18,444 (22,273)
Changes in operating assets and liabilities:
Receivables, net (935,220) (1,592,291)
Inventories (5,375,868) (1,210,771)
Prepaid expenses 42,462 244,759
Accounts payable 9,076,910 (13,804,689)
Accrued expenses (1,812,249) (1,122,944)
Deferred income taxes 241,774 (783,844)
----------- -----------
Net cash provided (used) by continuing operating activities 8,609,489 (11,241,978)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,617,663) (457,011)
Expenditures on intangible and other noncurrent assets (2,771,946) (277,114)
Proceeds from sales of equipment 15,150 34,773
Change in restricted cash deposits 25,368 95,325
Maturities (purchases) of available-for-sale securities, net 556,339 3,592,192
Investment in discontinued operations (1,374,049) (1,446,524)
----------- -----------
Net cash used by investing activities (5,166,801) 1,541,641
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from notes payable to banks (4,550,000) 4,500,000
Proceeds from issuance of long-term debt 4,250,956 9,695,588
Repayments of long-term debt (1,434,485) (2,658,958)
----------- -----------
Net cash (used) provided by financing activities (1,733,529) 11,536,630
----------- -----------
Net increase in cash and cash equivalents 1,709,159 1,836,293
----------- -----------
Cash and cash equivalents, beginning of period 1,406,979 3,869,749
----------- ------------
Cash and cash equivalents, end of period $ 3,116,138 5,706,042
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Presentation
The consolidated financial statements include the accounts of
Video Lottery Technologies, Inc. and consolidated subsidiaries (the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The consolidated balance sheet as of March 31, 1996 and the
consolidated statements of operations and cash flows for the three-month
periods ended March 31, 1996 and 1995 and the consolidated statement of
stockholders' equity for the three-month period ended March 31, 1996 have
been prepared by the Company, without audit. In the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary to
present fairly the financial position, results of operations and cash flows
as of and for the periods indicated have been made. The December 31, 1995
consolidated balance sheet was derived from consolidated financial
statements audited by KPMG Peat Marwick LLP in connection with the
Company's annual audit.
b. Earnings (Loss) Per Common Share
Earnings per common share is computed by dividing net earnings by
the weighted average number of common shares outstanding and the common
stock equivalents of convertible preferred stock and stock options
outstanding using the treasury stock method. Common stock equivalents are
excluded from the loss per share calculation when the effect is
anti-dilutive.
c. Reclassifications
Certain reclassifications have been made to the 1995 amounts to
conform to the 1996 presentation.
2. DISCONTINUED OPERATIONS
The Company, in the fourth quarter 1995, decided to sell United Wagering
Systems, Inc. ("UWS"), its wagering systems segment, exclusive of the racetrack
in Sunland Park, New Mexico. The Company entered into a non-binding letter of
intent in the fourth quarter for the sale of this segment; however, this
transaction has now been abandoned because final terms could not be negotiated.
The Company continues to review other potential opportunities for the sale of
this operation, although there can be no assurance as to the outcome of such
efforts.
The estimated net realizable value of UWS of $8,644,554 is net of estimated
selling costs. Management estimates that the discontinued segment's operations
will break even during the estimated disposal period, although there can be no
assurance that these results can be achieved.
3. INVENTORIES
A summary of inventory follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Manufacturing:
Raw materials $18,331,048 14,044,823
Work-in-process 1,895,460 673,082
Finished goods 8,142,865 8,435,462
Customer service and other 469,040 309,178
----------- ----------
$28,838,413 23,462,545
=========== ==========
</TABLE>
7
<PAGE> 8
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCING AND INVESTING ACTIVITIES
In the first quarter 1995, the Company had non-cash transfers of
approximately $1,030,000 of inventory to property, plant and equipment in
connection with leasing activities and approximately $3,900,000 in connection
with installations of terminals under on-line lottery contracts. The Company
had no significant non-cash transfers in the first quarter 1996. At March 31,
1996, the Company had approximately $800,000 and $2,100,000 of gaming machine
and on-line lottery inventories, respectively, that are anticipated to be
transferred in the near future to fixed assets under gaming machine lease
arrangements and on-line lottery contracts as the equipment is delivered.
During the first quarters 1996 and 1995, the Company sold notes receivable
from equipment sales, with a face value of none and $1,207,501, respectively,
to banks and other third parties. The notes are secured by the underlying
equipment. The receivables sold are subject to recourse provisions in the
event of default by the primary obligor.
5. EXTRAORDINARY ITEMS
During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes from the Company to the sellers in the
aggregate amount of $10,000,000 made in conjunction with the acquisition by
the Company of all the outstanding shares of UWS in May 1994. On March 25,
1996, the Company reached an agreement with the sellers settling all
outstanding claims and disputes between them, including dismissal of all
outstanding litigation, and restructured and reduced notes payable resulting in
the extraordinary gain on debt extinguishment of $4,014,050.
6. COMMITMENTS AND CONTINGENCIES
The Company is obligated to provide services and/or equipment under certain
of its contracts. In addition, the various state on-line lottery and video
gaming contracts contain provisions under which the Company may be subject to
monetary penalties for central computer downtime, terminal failures, delays in
servicing inoperable terminals within specified time periods and ticket stock
shortages among other things. Electronic Data Systems Corporation ("EDS") has
agreed to indemnify the Company's subsidiary, Automated Wagering International,
Inc. ("AWI"), against certain liabilities under its contracts. The Company
accrues net losses in fulfilling the terms of these contracts when the loss is
probable and can be reasonably estimated.
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At March 31, 1996, the Company had issued
collateral in support of the various bonds outstanding consisting of $3,200,000
of restricted short-term deposits and $7,500,000 of irrevocable standby letters
of credit and a pledge of revenue streams of domestic on-line lottery
contracts. Should the Company fail to meet contractually specified obligations
during the contract term, the lottery authority may assess damages and exercise
its right, under its contract, to collect on the applicable bond.
Currently, the Company has disputes with two of its on-line lottery
customers over certain performance measures under the respective lottery
contracts. On May 9, 1996, the Arizona Lottery Commission decided to seek
termination of its on-line lottery contract with AWI, due to the claimed
inability of AWI to comply with certain contractual requirements in a timely
fashion, and has threatened to assess substantial damages for related claims of
non- performance. The Company believes the decision and threatened assessment
of damages to be unjustified and intends to protest. The Company is reviewing
applicable risk management policies and EDS indemnities and believes at this
time that it is probable that any ultimate damage claims, if any, would be
substantially recoverable. Further, at March 31, 1996, the Company's
investment in the contract with the Arizona Lottery Commission inclusive of
receivables, inventories, fixed assets, primarily lottery terminals, and
deferred start-up charges was approximately $10,000,000. Additionally, the
Company has related investments in capitalized software development and data
center equipment common to other on-line lottery contracts that could possibly
be affected by the non-renewal of current contracts or the inability to obtain
new contracts.
8
<PAGE> 9
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 14, 1996, the Minnesota Lottery notified AWI that under its contract
it has not met certain of its obligations. As a result of these issues, the
Lottery has assessed penalties and withheld certain payments to the Company.
As of March 31, 1996, the Receivable balance from the Lottery totaled
approximately $3,400,000. The Lottery has advised that AWI has made
substantial progress toward meeting these obligations and has indicated that it
intends to continue to work with the Company to achieve the results mandated
under the contract. The Company believes that these issues can be resolved in
a constructive manner.
As a result of various disputes with EDS under the Master Services
Agreement between the Company and EDS and other matters, the Company withheld
certain payments to EDS. EDS has notified the Company of its intent to seek
remedies for such non-payment. The Company believes that is has rightfully
withheld such payment and intends to defend its position vigorously. At March
31, 1996, the Company had a net payable recorded to EDS of approximately
$18,400,000.
In the quarter ended March 31, 1996, the Company has recorded approximately
$6,000,000 of contingent non-recurring charges for a contract rework and the
various disputes discussed above. In the opinion of management, the ultimate
liability to the Company cannot currently be reasonably estimated. Should the
Company fail to resolve and settle the disputes satisfactorily, the Company's
consolidated financial position and results of operations could possibly
experience a material adverse change.
Historically, the Company has met its cash flow requirements primarily with
cash provided by operations, public offerings of equity securities, and from
borrowings from financial institutions. The Company, in 1995 won several
significant new on-line lottery contracts with estimated 1996 capital
expenditures of approximately $30,000,000, and may be successful in obtaining
significant new contracts for the on-line or gaming machine segments. Sizable
capital expenditures in excess of current capital sources will be required in
advance of any anticipated capital generated by the new contracts.
Accordingly, for the new contracts, the Company is seeking additional
financing, the availability and the terms of which are subject to various
uncertainties. Given the various uncertainties and the recent developments in
the on-line lottery segment of the Company, there can be no assurance that such
financing can be obtained or on terms satisfactory to the Company.
As previously reported, a purported class action, alleging violations of
the federal antitrust laws, was filed in June 1994, in the federal district
court in South Dakota against the Company and certain video lottery machine
operators in South Dakota by a group of other video lottery machine operators,
alleging, among other things, a combination and conspiracy to unlawfully
restrain trade in video lottery machines by fixing lease prices for such
machines, allocating territories and refusing to deal with other operators.
Unspecified treble damages are sought, along with injunctive relief to bar the
alleged practices. On April 12, 1996, the court granted the plaintiffs' motion
to certify a class consisting of all video machine operators or licensed
establishments to whom the Company allegedly refused to sell gaming machines
during the relevant period. The action is still in the early stages of
discovery, and it is not possible at this time to determine the outcome of the
litigation. Accordingly, no provision for any loss, if any, that may result
from resolution of this matter has been made in the accompanying financial
statements.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these other
matters will not have a material adverse effect on its consolidated financial
position and statement of operations.
9
<PAGE> 10
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Revenue from the on-line lottery segment consists primarily of a
contractual percentage of lottery ticket sales in eight states as well as
revenue from on-line lottery equipment sales. The segment revenue will
experience fluctuations depending on relative sizes of jackpots and the number
of terminals on-line and selling tickets in the states in which the Company
operates. The Company expects on-line lottery services revenue to continue to
be a significant component of total revenues. On-line lottery revenue is
generated primarily by the Company's subsidiary, AWI.
Revenue from the gaming machine and route operations segment consists of
sales and lease of video gaming machines, sales of parts, central control site
hardware and software, service of terminals, license fees, and from operation
of gaming machine route operations. The revenue from route operations consists
primarily of machine gaming wagers net of pay-outs to patrons and state gaming
taxes. Revenue from gaming machine sales is subject to significant
fluctuations as new jurisdictions approve legislation for video lottery gaming
operations and if the Company is awarded a contract in any such jurisdictions.
Gaming machine and route operations includes lease revenue which is derived
from the lease of terminals to the Oregon Lottery, which commenced video
lottery in April 1992, to the Rhode Island Lottery, which implemented a limited
form of video lottery at two pari-mutuel racetracks in September 1992, and to
the Delaware Lottery beginning in December 1995. In December 1995, the Company
began leasing video lottery gaming machines to the Delaware Lottery. The
Company expects video lottery and route operations revenue to continue to be a
significant component of total revenues. Gaming machine revenue is generated
primarily by the Company's Video Lottery Consultants, Inc. ("VLC"), subsidiary.
Revenue from racetrack operations is generated primarily from commissions
on live and simulcast pari-mutuel wagering from the ownership and operation of
a racetrack in Sunland Park, New Mexico. While on-track attendance and handle
from pari-mutuel wagering in the United States has markedly decreased over the
last decade as jurisdictions have legalized other forms of gaming, there has
also been a substantial increase in simulcast and off-track wagering handle
during the same period. Due to the significant increase of alternate forms of
gaming during the last several years, there can be no assurance that such
historical patterns will remain the same in the future, nor can the Company
predict the magnitude of any resulting net economic effects on this segment of
its business. The Company expects racetrack operations revenue to be a small
component of total revenues.
Gross profit for each segment is herein defined as revenues for that
segment less the corresponding costs and expenses (excluding depreciation and
amortization expense). Costs and expenses related to on-line lottery revenue
include all direct costs and allocated indirect costs involved in operating the
on-line lottery equipment in each jurisdiction in which the Company has a
contract as well as direct costs of equipment sales. Costs and expenses
related to gaming machine revenue include direct costs of production, including
labor and allocated manufacturing overhead. Costs and expenses related to
route operations include the locations owners' share of the net machine
revenues. Costs and expenses related to racetrack operations include direct and
allocated indirect costs associated with the operation of the racetrack.
Selling, general and administrative expenses consist of labor costs,
professional fees, repairs and maintenance expense, promotion and advertising
costs, occupancy and other costs, other than those included in costs and
expenses applicable to the determination of gross profit as defined above.
FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
Total revenue in the first quarter 1996 decreased by $2.1 million (4.8%) to
$40.3 million from $42.4 million in the first quarter 1995. Overall gross
profit decreased by $.9 million (5.6%) to $15.2 million from $16.1 million in
the first quarter 1995. The Company had a net loss from continuing operations
before extraordinary items of $3.5 million as compared to net earnings of $1.1
million in the first quarter 1995. The decrease is primarily attributable to
lower revenues and gross margin from the on-line lottery segment and other
special charges recorded in the first quarter 1996. Net earnings, inclusive of
the results of continuing and discontinued operations, and extraordinary items,
was $.5 million in the first quarter 1996 as compared to a net loss of $.3
million in the first quarter 1995.
10
<PAGE> 11
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
In November 1995, the Company decided to sell its investment in its
pari-mutuel wagering systems segment, UWS, acquired in May 1994. A provision
for the estimated loss on the planned sale, inclusive of break-even operations
through the anticipated sale date, was recorded in the third quarter 1995
consolidated financial statements The discontinued segment generated revenues
of $4.4 million in the first quarter 1996. The discontinued segment incurred a
net loss of $1.4 million in the first quarter 1995 on $4.2 million of revenue.
During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes from the Company to the sellers in the
aggregate amount of $10.0 million made in conjunction with the acquisition by
the Company of all the outstanding shares of UWS. On March 25, 1996, the
Company reached an agreement with the sellers settling all outstanding claims
and disputes between them, including dismissal of all outstanding litigation,
and a restructuring and reduction of the notes payable, resulting in an
extraordinary net gain on debt extinguishment of $4.0 million.
ON-LINE LOTTERY
Revenue from the on-line lottery segment decreased by $1.9 million (7.6%)
to $23.2 million from $25.1 million in the first quarter 1995. The reduction
is primarily the result of a decrease in international equipment sales as well
as a decrease in revenue from the contract with the Florida Lottery,
substantially offset by revenues from a contract with the Arizona Lottery which
started in the fourth quarter 1995.
The current contract with the Florida Lottery expires in June 1996;
however, the competitive bid process for a new contract has experienced delays.
The terms of the bid process provide the successful bidder 180 days from the
notice of contract award to implement the new lottery system. The Florida
Lottery contract accounted for 38.5% of the Company's on-line lottery revenues
in 1995 and the Company has submitted a bid for the new contract. There can be
no assurance that the Florida Lottery will award the new contract to the
Company.
The contract for the Washington State Lottery expires in June 1996 and has
been awarded to a competitor. The contract generated revenues of $2.5 and $3.0
million in the first quarters of 1996 and 1995, respectively.
In 1995, in addition to Arizona, the Maryland and Kentucky lottery
authorities awarded five-year, on-line lottery contracts to the Company. The
Maryland and Kentucky system implementations and start-up are scheduled to
occur in July and October 1996, respectively. The contract with Kentucky has
not been finalized.
The gross profit margin of the on-line lottery segment was 37.6% in the
first quarter 1996 as compared to 38.2% in the first quarter 1995. The gross
profit margin on services revenue in the on-line lottery segment was 37.6% in
the first quarter 1996 as compared to 39.4% in the first quarter 1995. The
reduction is primarily a result of a decline in lottery ticket sales in two
jurisdictions coupled with the annual decline in the contractual fee rate under
the current Florida Lottery contract. The gross profit margin on on-line
lottery equipment sales was 35.1% and 26.8% in the first quarter 1996 and 1995,
respectively.
Currently, the Company has disputes with two of its on-line lottery
customers over certain performance measures under the respective lottery
contracts. On May 9, 1996, the Arizona Lottery Commission decided to seek
termination of its on-line lottery contract with AWI, due to the claimed
inability of AWI to comply with certain contractual requirements in a timely
fashion, and has threatened to assess substantial damages for related claims of
non- performance. The Company believes the decision and threatened assessment
of damages to be unjustified and intends to protest. The Company is reviewing
applicable risk management policies and EDS indemnities and believes at this
time that it is probable that any ultimate damage claims, if any, would be
substantially recoverable. Further, at March 31, 1996, the Company's
investment in the contract with the Arizona Lottery Commission inclusive of
receivables, inventories, fixed assets, primarily lottery terminals, and
deferred start-up charges was approximately $10,000,000. Additionally, the
Company has related investments in capitalized software development and data
center equipment common to other on-line lottery contracts that could possibly
be affected by the non-renewal of current contracts or the inability to obtain
new contracts.
On May 14, 1996, the Minnesota Lottery notified AWI that under its contract
it has not met certain of its obligations. As a result of these issues, the
Lottery has assessed penalties and withheld certain payments to the
11
<PAGE> 12
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Company. As of March 31, 1996, the receivable balance from the Lottery totaled
approximately $3,400,000. The Lottery has advised that AWI has made
substantial progress toward meeting these obligations and has indicated that it
intends to continue to work with the Company to achieve the results mandated
under the contract. The Company believes that these issues can be resolved in
a constructive manner.
As a result of various disputes with EDS under the Master Services
Agreement between the Company and EDS and other matters, the Company withheld
certain payments to EDS. EDS has notified the Company of its intent to seek
remedies for such non-payment. The Company believes that it has rightfully
withheld such payment and intends to defend its position vigorously.
In the quarter ended March 31, 1996, the Company has recorded
approximately $6,000,000 of contingent non-recurring charges for a contract
rework and the various disputes discussed above. In the opinion of management,
the ultimate liability to the Company cannot currently be reasonably estimated.
Should the Company fail to resolve and settle the disputes satisfactorily, the
Company's consolidated financial position and results of operations could
possibly experience a material adverse change.
GAMING MACHINE AND ROUTE OPERATIONS
Revenue from gaming machine and route operations decreased by $.1 million
to $14.8 million from $14.9 million in the first quarter 1995.
Revenue was recognized on shipments of 1,380 units in the first quarter
1996 as compared to 2,134 in the first quarter 1995. Included in the total
units were approximately 102 and 761, respectively, of royalty unit sales in
the first quarters 1996 and 1995. Additionally, the Company shipped 100 gaming
machines under lease arrangements to the Oregon Lottery in the first quarter
1996 as compared to 361 units in the first quarter 1995. The reduction of
revenues from unit shipments in the first quarter 1996 was offset by an
increase in lease revenue from the Company's contracts with the Oregon and
Delaware lotteries.
The following table reflects domestic and foreign revenues for the first
quarters of 1996 and 1995 (amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------
1996 1995 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 0.6 0.3 0.3 100.0
Montana routes 4.0 3.7 0.3 8.1
South Dakota 0.7 1.7 (1.0) (58.8)
Louisiana --- 3.3 (3.3) ---
Oregon 0.1 0.4 (0.3) (75.0)
Oregon lease 1.4 0.9 0.5 55.6
Rhode Island lease 0.5 0.6 (0.1) (16.7)
Delaware lease 0.5 --- 0.5 ---
Other 1.4 0.7 0.7 100.0
------ ---- ---- -------
9.2 11.6 (2.4) (20.7)
------ ---- ---- -------
Foreign:
Alberta, Canada 2.5 0.6 1.9 316.7
Atlantic Canada 0.2 0.6 (0.4) (66.7)
Quebec, Canada 1.9 0.1 1.8 1800.0
Victoria, Australia 0.2 2.0 (1.8) (90.0)
South Australia 0.2 --- 0.2 ---
Northern Territory, Australia 0.6 --- 0.6 ---
------ ---- ---- -------
5.6 3.3 2.3 69.7
------ ---- ---- -------
$ 14.8 14.9 (0.1) (0.7)
====== ==== ==== =======
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as royalty and lease revenue
remained constant at approximately 50% for the first quarters of
12
<PAGE> 13
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
1996 and 1995. The gross profit margin from route operations increased from
27.7% to 29.1% in the first quarter 1996.
RACETRACK OPERATIONS
Revenue from the operations in Sunland Park, New Mexico, decreased by $.2
million (8.0%) to $2.3 million from $2.5 million in the first quarter 1995.
The segment had negative gross profits margins of 7.6% and 6.0% in the first
quarters of 1996 and 1995, respectively.
The recovery of a significant amount of the Company's investment in the
racetrack operations in New Mexico is largely contingent upon the passage of
gaming legislation in the State which would permit the racetrack to operate
gaming machines. There can be no assurance of such legislation being enacted
in the foreseeable future. The Company's investment in the racetrack
operations is approximately $20.0 million at March 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Total selling, general and administrative expenses decreased by $.6
million (7.9%) to $7.0 million from $7.6 million in the first quarter 1995.
The decrease reflects a lower level of legal and professional fees in the first
quarter 1996. Management estimates selling, general and administrative
expenses to remain at or above current levels subject to business development
levels in the State of Nevada as a result of the Company's receiving final
approval from the Nevada Gaming Commission to sell gaming machine terminals in
the State.
Net research and development expense decreased by $1.2 million reflecting
primarily relatively more amounts capitalized as software development in the
first quarter 1996 as compared to 1995. The Company capitalized $2.2 million
and $.3 million in the first quarters of 1996 and 1995, respectively. The
capitalized costs are related to the continued development and enhancements of
MasterLinkTM, the Company's central system software which is intended for use
in on-line and video gaming lottery systems to be implemented in 1996. The
contracts for these on-line lottery systems were awarded to the Company in
1995, including Arizona, where the State's Lottery Commission decided, on May
9, 1996, to seek termination of that State's contract with AWI.
DEPRECIATION AND AMORTIZATION
Consolidated depreciation and amortization increased by $.2 million to
$4.9 million from $4.7 million in the first quarter 1995 primarily due to the
implementation and start-up of the lottery system in Arizona in the fourth
quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital, defined as current assets less current liabilities,
decreased by $3.2 million to $18.0 million from $21.2 million at December 31,
1995.
As a result of various disputes with EDS under the Master Services
Agreement between VLT and EDS and other matters, the Company withheld certain
payments to EDS. EDS has notified the Company of its intent to seek remedies
for such non- payment. At March 31, 1996, the Company had a net payable
recorded to EDS of approximately $18,400,000.
The $5.4 million increase in inventories includes approximately $1.3
million for the manufacture of on-line lottery terminals in anticipation of the
Maryland lottery contract start-up in July 1996, and approximately $3.7 million
of video gaming machine inventories for anticipated sales in Nevada (see Item 5
- "Other Information" for discussion of Nevada) as well as to meet the
commitment to provide an additional 1,075 gaming machine terminals under the
lease agreement with the Oregon Lottery.
The Company had proceeds from issuance of long-term debt of approximately
$4.3 million in the first quarter 1996. The debt is secured by gaming machines
under a lease arrangement. This issuance is in addition to $5.2 million of
long- term debt issued in the fourth quarter 1995 secured by similar assets.
The term of the debt issued in the fourth quarter 1995 and first quarter 1996
is approximately five years.
13
<PAGE> 14
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
As discussed earlier, the Company reached a favorable settlement with the
sellers of UWS. The settlement, among other things, resulted in the
extinguishment of approximately $4.0 million of $10.0 million of notes payable
to the sellers, which had been recorded as an other non-current liability on
the consolidated balance sheet at December 31, 1995. The remaining $6.0
million is payable over a five-year period with acceleration clauses for the
occurrence of certain events with $1.2 million payable only upon the passage of
certain gaming legislation in the State of New Mexico.
At March 31, 1996, the Company had approximately $8.8 million of available
credit under its revolving credit agreement. In April 1996, the revolving
credit agreement was amended to extend the expiration date from May 1,1996 to
June 30, 1997.
In the first quarter 1996, the Company expended $1.6 million on fixed
assets. The gaming machine and route operations segment accounted for
approximately $.9 million for the manufacture and placement of gaming machines
under lease arrangement and in route operations locations in Montana. The
on-line lottery segment accounted for approximately $.7 million of the capital
expenditures on fixed assets, primarily for the installation of on-line lottery
terminals in Arizona. The on-line lottery segment also expended and
capitalized approximately $2.8 million for intangible and other assets,
including approximately $2.2 million for software development and $.6 million
for deferred start-up costs associated with on-line lottery contracts.
The Company, in the first quarter 1996, invested an additional $1.4
million in the UWS segment which the Company decided to sell in the fourth
quarter 1995. The additional investment was made primarily to satisfy
contractual commitments to deliver additional new totalizator terminals.
Historically, the Company has met its cash flow requirements primarily
with cash provided by operations, public offerings of equity securities, and
from borrowings from financial institutions. The Company, in 1995 won several
significant new on-line lottery contracts with estimated 1996 capital
expenditures of approximately $30,000,000, and may be successful in obtaining
significant new contracts for the on-line or gaming machine segments. Sizable
capital expenditures in excess of current capital sources will be required in
advance of any anticipated capital generated by the new contracts.
Accordingly, for the new contracts, the Company is seeking additional
financing, the availability and the terms of which are subject to various
uncertainties. Given the various uncertainties and the recent developments in
the on-line lottery segment of the Company, there can be no assurance that such
financing can be obtained or on terms satisfactory to the Company.
14
<PAGE> 15
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No significant changes have occurred with regard to legal proceedings as
disclosed in Part 1, Item 3, of the Company's December 31, 1995 Form 10-K,
except as follows:
As previously reported, a purported class action, alleging violations of
the federal antitrust laws, was filed in June 1994, in the federal district
court in South Dakota against the Company and certain video lottery gaming
machine operators in South Dakota, by a group of other video lottery gaming
machine operators, alleging, among other things, a combination and conspiracy
to unlawfully restrain trade in video lottery gaming machines by fixing lease
prices for such machines, allocating territories and refusing to deal with
other operators. Unspecified treble damages are sought, along with injunctive
relief to bar the alleged practices. On April 12, 1996, the court granted the
plaintiffs' motion to certify a class consisting of all video machine operators
or licensed establishments to whom the Company allegedly refused to sell gaming
machines during the relevant period. The action is still in the early stages
of discovery, and it is not possible at this time to determine the outcome of
the litigation.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
The Board of Directors, through its Strategic Planning Committee, is
continuing, with the assistance of its investment banker, Salomon Brothers, to
explore and evlauate various strategic alternatives and opportunities designed
to enhance shareholder value.
In January 1996, eight Winning Touch(R) gaming machines were placed at
Sam's Town Hotel and Casino in Nevada on a field trial. The New Jersey Casino
Control Commission and the Gaming Commissions of the states of Minnesota and
Wisconsin approved the sale of Winning Touch(R) gaming machines in those
states. In New Jersey, VLC can now sell gaming machines to Atlantic City
casinos subject to separate approval of each sales transaction. The Minnesota
approval allows VLC to sell gaming machines to the Native American casinos in
that state.
In January 1996, the Oregon State Lottery ordered an additional 1,075
video lottery terminals for lease from VLC. This order represents a 26%
increase in the number of terminals leased by the state agency from VLC.
In April 1996, the Nevada Gaming Commission unanimously approved VLC's
Winning Touch(R) gaming machine for sale in Nevada.
On April 4, 1996, Jeffrey D. Cushman, the designated EDS representative to
the Company's Board of Directors, resigned from the Board.
15
<PAGE> 16
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
EX-27 Financial Data Schedule (For SEC Use Only)
b. Reports on Form 8-K
Form 8-K dated May 9, reporting the decision by the Arizona Lottery
Commission to seek termination of its on-line lottery contract with AWI, due
to the claimed inability of AWI to comply with certain contractual requirements
in a timely fashion.
16
<PAGE> 17
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
VIDEO LOTTERY TECHNOLOGIES, INC.
Date: May 17, 1995 /s/ Richard M. Haddrill
--------------------------------------------
Richard M. Haddrill, Chief Financial Officer
and Treasurer (authorized to sign on
behalf of Registrant)
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,116
<SECURITIES> 3,212
<RECEIVABLES> 24,504
<ALLOWANCES> 916
<INVENTORY> 28,838
<CURRENT-ASSETS> 66,582
<PP&E> 115,750
<DEPRECIATION> 59,026
<TOTAL-ASSETS> 157,362
<CURRENT-LIABILITIES> 46,629
<BONDS> 24,987
0
19
<COMMON> 107
<OTHER-SE> 88,838
<TOTAL-LIABILITY-AND-EQUITY> 88,964
<SALES> 8,387
<TOTAL-REVENUES> 40,366
<CGS> 5,073
<TOTAL-COSTS> 25,181
<OTHER-EXPENSES> 6,000
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<INTEREST-EXPENSE> 765
<INCOME-PRETAX> (4,302)
<INCOME-TAX> (765)
<INCOME-CONTINUING> (3,537)
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