<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 JUNE 30, 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 June 30, 1996.
1
<PAGE> 2
Certain statements in this Quarterly Report on Form 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; competitive factors in the
industry, including additional competition from existing competitors or future
entrants to the industry; social and economic conditions; local, state and
federal regulations; changes in business strategy or development plans; the
Company's indebtedness; quality of management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; and other factors.
2
<PAGE> 3
VIDEO LOTTERY TECHNOLOGIES, INC.
AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Statements of Operations
Six Months Ended June 30, 1996 and 1995,
Three Months Ended June 30, 1996 and 1995 4
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 5
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1996 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 20
ITEM 2. Changes in Securities 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Securities Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
On-line lottery $45,353,075 49,039,846 22,121,202 23,956,705
Gaming machine and route operations 30,453,109 33,325,800 15,641,577 18,462,197
Racetrack operations 4,101,766 4,218,867 1,779,202 1,747,881
----------- ---------- ---------- ----------
Total revenues 79,907,950 86,584,513 39,541,981 44,166,783
----------- ---------- ---------- ----------
COSTS AND EXPENSES:
On-line lottery 27,361,511 31,417,313 12,861,073 15,917,891
Gaming machine and route operations 16,060,641 19,660,620 7,879,560 11,478,136
Racetrack operations 4,304,519 4,396,326 1,805,134 1,777,882
Selling, general and administrative 13,954,411 14,786,492 6,966,657 7,228,181
Research and development 2,783,854 4,563,322 1,767,731 2,351,942
Other charges 8,234,982 3,080,000 2,234,982 3,080,000
Depreciation and amortization 9,512,041 9,500,397 4,621,761 4,807,813
----------- ---------- ---------- ----------
Total costs and expenses 82,211,959 87,404,470 38,136,898 46,641,845
----------- ---------- ---------- ----------
Earnings (loss) from continuing operations (2,304,009) (819,957) 1,405,083 (2,475,062)
----------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 356,946 645,860 167,101 314,337
Interest expense (1,857,678) (794,426) (1,093,190) (434,145)
Gain (loss) on disposal of assets (3,250) (148,388) 15,194 (156,149)
----------- ---------- ---------- ----------
(1,503,982) (296,954) (910,895) (275,957)
----------- ---------- ---------- ----------
Earnings (loss) from continuing operations
before income taxes and extraordinary
items (3,807,991) (1,116,911) 494,188 (2,751,019)
Income tax benefit (expense) 765,135 586,284 --- 1,070,402
----------- ---------- ---------- ----------
Net earnings (loss) from continuing operations (3,042,856) (530,627) 494,188 (1,680,617)
Net earnings (loss) from discontinued
operations --- (2,546,961) --- (1,103,911)
----------- ---------- ---------- ----------
Net earnings (loss) before extraordinary items (3,042,856) (3,077,588) 494,188 (2,784,528)
----------- ---------- ---------- ----------
Extraordinary gain, net 4,014,050 --- --- ---
----------- ---------- ---------- ----------
Net earnings (loss) $ 971,194 (3,077,588) 494,188 (2,784,528)
=========== ========== ========== ==========
Net earnings (loss) per share:
From continuing operations $ (.24) (.05) .04 (.16)
From discontinued operations --- (.24) --- (.10)
From extraordinary items .32 --- --- ---
----------- ---------- ---------- ----------
$ .08 (.29) .04 (.26)
=========== ========== ========== ==========
Weighted average shares 12,594,837 10,633,268 12,594,837 10,632,935
=========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,167,773 1,406,979
Available-for-sale securities and restricted
short-term deposits 3,063,428 3,768,385
Accounts receivable, net 18,757,600 19,320,286
Current installments of notes receivable, net 1,673,279 2,441,063
Inventories 25,513,491 23,462,545
Prepaid expenses 1,196,422 1,261,159
Deferred income taxes 7,870,573 7,732,606
------------ -----------
Total current assets 61,242,566 59,393,023
------------ -----------
Property, plant and equipment 132,675,246 114,235,306
Less accumulated depreciation (63,050,027) (55,025,879)
------------ -----------
Net property, plant and equipment 69,625,219 59,209,427
------------ -----------
Restricted cash deposits 654,101 803,011
Notes receivable, excluding current installments 1,219,529 892,029
Goodwill, net 10,542,803 10,952,241
Intangible and other assets, net 16,225,803 10,090,117
Net assets of discontinued operations 10,697,967 7,270,505
------------ -----------
$170,207,988 148,610,353
============ ===========
LIABILITIES
Current liabilities:
Notes payable $ --- 8,250,000
Current installments of long-term debt 7,597,370 6,077,708
Accounts payable 45,255,119 14,853,802
Accrued expenses 9,694,392 8,951,040
------------ -----------
Total current liabilities 62,546,881 38,132,550
------------ -----------
Long-term debt, excluding current installments 11,652,015 6,235,336
Other liabilities --- 10,000,000
Deferred income taxes 8,512,078 7,794,305
------------ -----------
Total liabilities 82,710,974 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 (375,333) (452,991)
Accumulated deficit (9,537,959) (10,509,153)
------------ -----------
Total stockholders' equity 87,497,014 86,448,162
------------ -----------
$170,207,988 148,610,353
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
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 --- --- --- --- 971,194 971,194
Amortization of
deferred
restricted stock
compensation --- --- --- 77,658 --- 77,658
June 30, 1996 19,127 106,821 97,284,358 (375,333) (9,537,959) 87,497,014
- -------------------------------------------------------------------------------------------------------------------
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.
6
<PAGE> 7
VIDEO LOTTERY TECHNOLOGIES, INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 971,194 (3,077,588)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Net loss from discontinued operations --- 2,546,961
Depreciation and amortization 9,512,041 9,500,397
Other charges 8,234,982 3,080,000
Extraordinary gain, net (4,014,050) ---
Sales of receivables --- 1,207,501
Other, net 3,250 133,120
Changes in operating assets and liabilities:
Receivables, net (2,551,511) (3,831,128)
Inventories (3,850,946) 3,497,095
Prepaid expenses 64,737 (68,672)
Accounts payable 32,429,756 (9,988,903)
Accrued expenses (2,814,694) (8,587,641)
Deferred income taxes 579,806 (338,651)
------------ -----------
Net cash provided (used) by continuing operating activities 38,564,565 (5,927,509)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,573,946) (2,836,737)
Expenditures on intangible and other noncurrent assets (8,178,709) (765,007)
Proceeds from sales of equipment 21,871 15,402
Change in restricted cash deposits 148,910 (246,578)
Maturities (purchases) of available-for-sale securities, net 704,957 3,590,515
Investment in discontinued operations (3,455,327) (6,363,389)
------------ -----------
Net cash used by investing activities (29,332,244) (6,605,794)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from notes payable to banks (8,250,000) 5,500,000
Proceeds from issuance of long-term debt 4,250,956 10,086,477
Repayments of long-term debt (3,472,483) (3,621,563)
------------ -----------
Net cash (used) provided by financing activities (7,471,527) 11,964,914
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,760,794 (568,389)
------------ -----------
Cash and cash equivalents, beginning of period 1,406,979 3,869,749
------------ -----------
Cash and cash equivalents, end of period $ 3,167,773 3,301,360
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
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 June 30, 1996 and the
consolidated statements of operations and cash flows for the six-month
periods ended June 30, 1996 and 1995 and the consolidated statement of
stockholders' equity for the six-month period ended June 30, 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 was abandoned because final terms could not be negotiated. The
Company continues to review other potential opportunities for the sale of this
operation. The Company cannot predict the outcome of any such efforts.
The estimated net realizable value of UWS of $10,697,967 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 will be achieved.
3. INVENTORIES
A summary of inventory follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Manufacturing:
Raw materials $14,017,300 14,044,823
Work-in-process 1,872,646 673,082
Finished goods 9,581,003 8,435,462
Customer service and other 42,542 309,178
----------- ----------
$25,513,491 23,462,545
=========== ==========
</TABLE>
8
<PAGE> 9
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCING AND INVESTING ACTIVITIES
During the six-month period ending June 30, 1995, the Company transferred
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 six-month period ending June 30,
1996. During the second quarter 1996, the Company transferred on-line lottery
equipment with a depreciated cost of approximately $6,400,000 from depreciable
property, plant and equipment to property, plant and equipment pending placement
in conjunction with the Arizona contract termination. (See Note 6.) The
equipment will be depreciated when placed in service.
During the six-month period ending June 30, 1995, the Company sold notes
receivable from equipment sales, with a face value of $1,207,501 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. The Company had no significant sales of notes receivable
in the six-month period ending June 30, 1996. As of June 30, 1996 outstanding
receivables sold with recourse totaled approximately $4,950,000. Additionally,
the Company has guaranteed or pledged securities for the indebtedness of others
of approximately $1,100,000.
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, net of taxes, 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 June 30, 1996, the Company had issued collateral
in support of the various bonds outstanding consisting of $1,850,000 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 17, 1996, the Arizona Lottery Commission terminated 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. In July 1996,
the Commission replaced the Company's on-line lottery system in Arizona with a
competitor's system. The Company is reviewing applicable risk management
policies and EDS indemnities and believes at this time that it is probable that
ultimate damage claims, if any, would not be material to the consolidated
financial position.
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 June 30, 1996, the receivable balance from the Lottery totaled approximately
$3,720,000. On
9
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 9, 1996, the Minnesota Lottery notified the Company that its contract
would not be extended beyond the expiration of the contract's base term in
August 1997.
As a result of various disputes with EDS under the Master Services
Agreement ("MSA") between the Company and EDS and other matters, the Company has
withheld certain payments to EDS. In July 1996, the MSA was terminated and an
interim operating arrangement has been implemented while the parties continue
efforts to resolve their differences. The ultimate outcome of these efforts
cannot be predicted. The interim operating arrangement provides for the
continuation of certain services by EDS on a week-to-week basis, through at
least September 8, 1996, with weekly payments in advance of the estimated
charges. At June 30, 1996, the Company had recorded a net payable to EDS of
approximately $38,000,000 representing amounts billed by EDS for services. The
repayment (if any) of the outstanding balance due EDS recorded at June 30, 1996,
could not be made in the near term from current working capital and available
amounts under the Company's loan agreement with its primary lender, First Bank,
NA.
On August 6 and August 7, 1996, respectively, AWI and the Company received
notice of a complaint filed by EDS in state court in Collin County, Texas,
against the Company and AWI alleging breach of an agreement entered into in
connection with services provided by EDS under the MSA. EDS is seeking payment
of charges totaling in excess of $33 million and has requested an injunction to
bar the Company and AWI from diverting any further proceeds received from
on-line lottery contracts until total payment of the disputed amounts have been
made, or a declaration that EDS has properly terminated the MSA and is,
therefore, not subject to the mandatory arbitration provisions of the MSA. The
Company has been withholding these amounts because of EDS performance issues.
The termination of the MSA with EDS constituted an event of default under
the Company's loan agreement with First Bank, NA and the Company is working with
First Bank to revise its facilities and to structure the loan agreement for
anticipated credit resources in the future. The default has been waived subject
to completion of an amendment to the loan agreement. At June 30, 1996, the
Company had outstanding long-term debt with First Bank, including current
installments, of $10,270,000, recorded in continuing and discontinued segments,
and $7,500,000 of outstanding irrevocable letters of credit, leaving $12,500,000
unadvanced on the $20,000,000 revolving line of credit. There can be no
assurance that the negotiations with First Bank will result in terms
satisfactory to the Company. Furthermore, given the various uncertainties and
the recent developments in the on-line lottery segment, there can be no
assurance that additional financing can be obtained or on terms satisfactory to
the Company.
In the quarter ended June 30, 1996, the Company recorded $2,235,000 of
other special charges for asset impairments and contingent liabilities primarily
due to the various disputes discussed above. The other special charges recorded
in the second quarter 1996 are in addition to $6,000,000 recorded in the first
quarter 1996 related primarily to the same disputes. The cumulative charges of
approximately $8,200,000 consist of approximately $2,100,000 for inventory
reserves and writeoffs, $500,000 of deferred start-up costs, $2,000,000 for
contingent liabilities and $1,600,000 for net uncollectible receivable accounts
and $2,000,000 for contractual commitments. The special charges and reserves
represent management's best estimate of the realizability of assets, and
estimate of loss contingencies based on the current strategy for the on-line
lottery segment and related facts and circumstances. The Company continues to
evaluate its strategic direction for the on-line lottery segment in light of the
disputes with certain customers and EDS. Should the Company fail to resolve and
settle the disputes satisfactorily or change its strategic plan, the Company's
consolidated financial position and results of operations could experience a
material adverse change.
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
10
<PAGE> 11
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
11
<PAGE> 12
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 facilities in September 1992, and to the
Delaware Lottery, at two pari-mutuel venues within the state. The Company began
leasing video lottery gaming machines to the Delaware Lottery in December 1995.
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 and other special charges). 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.
Second Quarter 1996 Compared with Second Quarter 1995
Total revenue in the second quarter 1996 decreased by $4.7 million
(8.1%) to $39.5 million from $44.2 million in the second quarter 1995. Overall
gross profit increased by $2.0 million (13.4%) to $17.0 million from $15 million
in the second quarter 1995. The Company had net earnings from continuing
operations before extraordinary items of $.5 million as compared to a net loss
of $1.7 million in the second quarter 1995. The operating results from
continuing operations reflect pre-tax special charges of $2.2 million and $3.1
million in the second quarters ended June 30, 1996 and 1995, respectively.
Inclusive of the results of continuing and
12
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
discontinued operations and extraordinary items the Company had net earnings of
$.5 million in the second quarter 1996 as compared to a net loss of $2.8
million in the second quarter 1995.
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, inclusive of break-even operations through the
anticipated sale date, on the planned sale was recorded in the third quarter
1995 consolidated financial statements. The discontinued segment generated
revenues of $5.7 million in the second quarter, 1996. The discontinued segment
incurred a net loss of $1.1 million in the second quarter 1995 on $4.7 million
of revenue.
On-line Lottery
Currently, the Company has disputes with two of its on-line lottery
customers over certain performance measures under the respective lottery
contracts. On May 17, 1996, the Arizona Lottery Commission terminated 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. In July 1996,
the Commission replaced the Company's on-line lottery system in Arizona with a
competitor's system. 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 not be material to the Company's
consolidated financial position.
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 June 30, 1996, the receivable balance from the Lottery totaled
approximately $3.7 million. On August 9, 1996, the Minnesota Lottery notified
the Company that its contract would not be extended beyond the expiration of the
contract's base term in August 1997.
As a result of various disputes with EDS under the MSA and other
matters, the Company has withheld certain payments to EDS. In July 1996, the
MSA was terminated and an interim operating arrangement has been implemented
while the parties continue efforts to resolve their differences. The ultimate
outcome of these efforts cannot be predicted. The interim operating arrangement
provides for the continuation of certain services by EDS on a week-to-week
basis, through at least September 8, 1996, with weekly payments in advance of
the estimated charges. At June 30, 1996, the Company had a net payable recorded
to EDS of approximately $38.0 million The repayment (if any) of the outstanding
balance due EDS recorded at June 30, 1996, could not be made from current
working capital and available amounts under the Company's loan agreement with
its primary lender, First Bank, NA.
The termination of the MSA constituted an event of default under the
Company's loan agreement with First Bank, NA and the Company is working with
First Bank to revise credit facilities and to structure the loan agreement for
anticipated credit resources in the future. The default has been waived subject
to completion of an amendment to the loan agreement. At June 30, 1996, the
Company had outstanding long-term debt with First Bank, including current
installments, of $10.3 million, recorded in continuing and discontinued
segments, and $7.5 million of outstanding irrevocable letters of credit, leaving
$12.5 million unadvanced on the $20.0 million revolving line of credit. There
can be no assurance that the negotiations with First Bank will result in terms
satisfactory to the Company. Furthermore, given the various uncertainties and
the recent developments in the on-line lottery segment, there can be no
assurance that any additional financing can be obtained or on terms satisfactory
to the Company.
In the quarter ended June 30, 1996, the Company recorded $2.2 million
of other special charges for asset impairments and contingent liabilities
primarily due to the various disputes discussed above. The other special
charges recorded in the second quarter 1996 are in addition to $6.0 million
recorded in the first quarter 1996 related primarily to the same disputes. The
cumulative charges of approximately $8.2 million consist of approximately $2.1
million for inventory reserves and writeoffs, $.6 million of deferred start-up
costs, $2.0 million for contingent liabilities and $1.6 million for net
uncollectible receivable accounts and $2.0 million for contractual commitments.
The special charges and reserves represent management's best estimate of the
realizability of assets, loss contingencies based on the current strategy for
the on-line lottery segment and related facts and circumstances. The Company
continues to evaluate its strategic direction for the on-line lottery segment in
light of the disputes with certain customers and EDS. Should the Company fail
to resolve and settle the disputes
13
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
satisfactorily or change its strategic plan, the Company's consolidated
financial position and results of operations could experience a material
adverse change.
In the second quarter 1995, the Company recorded $3.1 million of
special and other unusual charges associated with exit costs and charges and
asset impairment related to five contracts. In addition to the special and
other unusual charges discussed above, the six months ended June 30, 1995
consolidated results of operations includes $1.3 million of other unusual
charges including $1.0 million for severance costs and $.3 million other
reserves and adjustments.
Revenue from the on-line lottery segment decreased by $1.8 million
(7.7%) to $22.1 million from $23.9 million in the second 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 an increase in revenues from contracts with the Delaware
Lottery. Revenues from sales of on-line lottery equipment and parts was $.4
million and $2.0 million in the second quarters of 1996 and 1995, respectively.
The expiration date of the current contract with the Florida Lottery
was extended from June 30, 1996, to September 28, 1996, as a result of a delay
of the award of a new contract. The award delay is due to pending protest
claims in the bid process. 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 on-line lottery
revenues and 22.9% of total consolidated revenues in 1995 and 34.0% and 19.3%,
respectively, in the six-month period ending June 30, 1996. The Company has
submitted a bid for the new contract; however, there can be no assurance that
the Florida Lottery will award the new contract to the Company.
The contract for the Washington State Lottery expired on July 7, 1996,
and has been awarded to a competitor. The contract generated revenues of $3.1
and $2.5 million in the second quarters of 1996 and 1995, respectively.
The Maryland and Kentucky lottery authorities awarded bids
for five-year on-line lottery contracts to the Company in 1995. The Maryland
system implementation and start-up is scheduled to occur in August 1996. The
contract with Kentucky, with an on-line lottery implementation date of October
1996, has not been finalized and there can be no assurance that any contract
will be finalized. As of June 30, 1996, the Company had expended or committed
to expend $17.1 million and $1.8 million for the Maryland and Kentucky lottery
systems, respectively.
The gross profit margin of the on-line lottery segment was 41.9% in the
second quarter 1996 as compared to 33.6% in the second quarter 1995. The gross
profit margin on services revenue in the on-line lottery segment was 41.8% in
the second quarter 1996 as compared to 36.7% in the second quarter 1995. The
increase reflects lower-than-normal fees for services provided by EDS in the
second quarter 1996 in conjunction with the termination of the MSA. Management
anticipates the gross margin level to be below second quarter 1996 levels under
the interim operating arrangement with EDS. The gross profit margin on on-line
lottery equipment sales was 28.2% and 0.0% in the second quarter 1996 and 1995,
respectively.
Gaming Machine and Route Operations
Revenue from gaming machine and route operations decreased by $2.9
million (15.7%) to $15.6 million from $18.5 million in the second quarter 1995.
Revenue was recognized on shipments of 1,133 units in the second
quarter 1996 as compared to 2,662 in the second quarter 1995. The reduction in
unit sales primarily reflects lower sales in Quebec, Canada, and Louisiana and
lower royalty unit sales in Australia. Included in the total units were
approximately 18 and 302, respectively, of royalty unit sales in the second
quarters 1996 and 1995. Additionally, the Company shipped 600 gaming machines
under lease arrangements to the Oregon Lottery in the second quarter 1996 as
compared to 419 units in the second quarter 1995. As of June 30, 1996, the
Company had approximately 150 gaming machine terminals placed on a test basis
with potential customers in various casino jurisdictions.
14
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
The following table reflects domestic and foreign revenues for the
second quarters of 1996 and 1995 (amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------
1996 1995 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 1.0 1.0 --- ---
Montana routes 4.0 3.8 0.2 5.3
Nevada 0.9 --- 0.9 ---
South Dakota 0.8 1.0 (0.2) (20.0)
Louisiana 0.4 2.7 (2.3) (85.2)
Oregon 0.2 1.0 (0.8) (80.0)
Oregon lease 1.4 1.0 0.4 40.0
Rhode Island lease 0.6 0.6 --- ---
Delaware lease 0.6 --- 0.6 ---
Other 0.5 0.5 --- ---
----- ---- --- ----
10.4 11.6 (1.2) (16.4)
----- ---- --- ----
Foreign:
Atlantic Canada 0.2 0.2 --- ---
Quebec, Canada 0.1 6.0 (5.9) (98.3)
Victoria, Australia 0.2 0.4 (0.2) (50.0)
Norway 1.8 --- 1.8 ---
Peru 2.6 --- 2.6 ---
Other 0.3 0.3 --- ---
----- ---- --- ----
5.2 6.9 (1.8) (11.6)
----- ---- --- ----
$15.6 18.5 (2.9) (15.7)
===== ==== === ====
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as royalty and lease revenue was
49.6% in the second quarter 1996 as compared to 37.8% in the second quarter
1995. The increase reflects the absence of gaming machine sales in Quebec,
Canada and lower sales levels in Louisiana in the second quarter 1996, which
carry lower gross margins, an increase in central site sales over 1995 levels
and an increase in leasing revenues over second quarter 1995 levels. The
Company has delivered approximately 1,490 gaming machines under lease
arrangements since the second quarter of 1995 including approximately 350 to the
Delaware Lottery which initiated a gaming machine program in December 1995. The
gross profit margin from route operations increased from 27.3% to 28.2% in the
second quarter 1996 over the second quarter 1995.
Racetrack Operations
Revenue from the operations in Sunland Park, New Mexico, decreased by $.1
million (5.6%) to $1.7 million from $1.8 million in the second quarter 1995. The
segment had negative gross margins of 1.5% and 1.7% in the second 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 June 30, 1996.
Selling, General and Administrative
Total selling, general and administrative expenses decreased by $.2 million
(2.7%) to $7.0 million from $7.2 million in the second quarter 1995. In the
second quarter 1995 the Company had $1.0 million in severance and related costs.
Absent the severance charges in the second quarter 1995, selling, general and
administrative expenses increased by $.8 million reflecting additional legal and
professional fees associated with certain disputes with EDS and on-line lottery
customers.
15
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Net research and development expense decreased by $.6 million reflecting
relatively more amounts capitalized as software development in the second
quarter 1996 as compared to 1995. The Company capitalized $.9 million and $.3
million in the second quarters of 1996 and 1995, respectively. The capitalized
costs are related to the continued development and enhancements of the Company's
central system software MasterLinkTM.
Six Months Ended June 30, 1996 and 1995
Total revenue decreased by $6.7 million (7.7%) to $79.9 million from $86.6
million in the six months ended June 30, 1995. The overall gross profit
increased by $1.1 million (3.4%) to $32.2 million from $31.1 million in the six
months ended June 30, 1995. The Company had net earnings of $1.0 million and a
net loss of $3.1 million in the six-month periods ending June 30, 1996 and 1995,
respectively. The $1.0 million net earnings in the six months ended June 30,
1996 includes a pre-tax charge of $8.2 million for special charges discussed
below and is net of the extraordinary gain on debt extinguishment of $4.0
million. The net loss of $3.1 million in the six months ended June 30, 1995
includes $3.1 million of pre-tax special charges and $2.5 million of net loss
from discontinued operations. Earnings before income taxes, extraordinary items
and special charges from continuing operations was $4.4 million and $3.1 million
in the six-month periods ended June 30, 1996 and 1995, respectively.
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 $10.0 million in the six months ended June 30, 1996. The discontinued
segment incurred a net loss of $2.5 million in the six months ended June 30,
1995 on $8.9 million of revenue.
During 1995, the Company did not pay principal and interest obligations
under the terms of the promissory notes to the sellers in the aggregate amount
of $10.0 million made in conjunction with the acquisition of UWS. On March 25,
1996, the Company reached an agreement with the sellers settling all outstanding
claims and disputes, including dismissal of all outstanding litigation,
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 $3.6 million (7.5%)
to $45.4 million from $49.0 million for the six months ended June 30, 1995.
Included in the on-line lottery revenue for the six months ended June 30, 1996
and 1995 is $.8 million and $4.4 million, respectively, of revenue from
international on-line lottery equipment and parts sales. Revenue from the
Company's contract with the Florida Lottery decreased by $3.8 million primarily
due to a decline in lottery ticket sales and the reduction in the contractual
fee rate. Also included in on-line lottery revenue for the first three months
of the six months ended June 30, 1996, is $1.6 million attributable to the
contract with the Arizona Lottery which was terminated during the second quarter
1996 as discussed earlier.
The contract for the Washington State Lottery expired on July 7, 1996, and
has been awarded to a competitor. The contract generated revenues of $5.5 and
$5.4 million in the six months ended June 30, 1996 and 1995, respectively.
The gross profit margin in the on-line lottery segment was 39.7% and 35.9%
in the six months ended June 30, 1996 and 1995, respectively. The gross profit
margin on services revenue in the on-line lottery segment for the six months
ended June 30, 1996 was 39.7% as compared to 38.0% in the six months ended June
30, 1995. The increase reflects lower-than-normal fees for services provided by
EDS in the second quarter 1996 in conjunction with the termination of the MSA.
Management anticipates the gross profit margin level to be below second quarter
1996 levels under the interim operating arrangement with EDS. The gross profit
margin on on-line central system parts and equipment sales was 41.0% and 14.5%
for the six months ended June 30, 1996 and 1995, respectively.
16
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Gaming Machine and Route Operations
Revenue from gaming machines and route operations decreased by $2.8 million
(8.4%) to $30.5 million from $33.3 million in the six months ended June 30,
1995.
Revenue was recognized on shipments of 2,507 units as compared to 4,796 for
the six months ended June 30, 1995. The reduction in unit sales primarily
reflects lower sales in Quebec, Canada and lower royalty unit sales in
Australia. Included in the total units were approximately 120 and 1,063,
respectively, of royalty unit sales for the six months ended June 30, 1996 and
1995, respectively. Additionally, the Company shipped 700 gaming machines under
lease arrangements in the six months ended June 30, 1996, as compared to 780 in
the same period in 1995.
The following table reflects domestic and foreign sales for the six months
ended June 30, 1996 and 1995 (amounts in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------
1996 1995 $ Change % Change
------ ------ -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 1.6 1.3 0.3 23.1
Montana routes 8.0 7.5 0.5 6.7
Nevada .9 --- .9 ---
South Dakota 1.5 2.7 (1.2) (44.4)
Louisiana 0.5 5.9 (5.4) (91.5)
Oregon 0.3 1.4 (1.1) (78.6)
Oregon lease 2.8 1.9 0.9 47.4
Rhode Island lease 1.2 1.2 --- ---
Delaware lease 1.1 --- 1.1 ---
Other 0.7 0.1 0.6 600.0
------ ---- ---- -----
18.6 22.9 (4.3) (18.8)
------ ---- ---- -----
Foreign:
Alberta, Canada 2.5 0.6 1.9 316.7
Atlantic Canada 0.4 0.9 (0.5) (55.6)
Quebec, Canada 2.0 6.1 (4.1) (67.2)
Victoria, Australia 0.5 2.4 (1.9) (79.2)
Northern Territory, Australia 0.6 --- 0.6 ---
Norway 1.8 --- 1.8 ---
Peru 3.5 --- 3.5 ---
Other 0.6 0.4 0.2 50.0
------ ---- ---- -----
11.9 10.4 1.5 12.5
------ ---- ---- -----
$ 30.5 33.3 (2.8) (8.4)
====== ==== ==== =====
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as royalty and lease revenue, was
47.3% as compared to 41.0%in for the six months ended June 30, 1995. The
increase reflects the absence of gaming machine sales in Quebec, Canada in the
six months ending June 30, 1996, which carry lower gross margins, an increase in
central site sales over 1995 levels and an increase in leasing revenues over
second quarter 1995 levels. The gross profit margin from route operations was
28.7% compared to 27.5% for the six months ended June 30, 1995.
Racetrack Operations
Revenue from operations in Sunland Park, New Mexico, decreased by $.1
million (2.8%) to $4.1 million from $4.2 million in the six months ending June
30, 1995. The segment had negative gross margins of 5.0% and 4.2% in the second
quarters of 1996 and 1995.
17
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Selling, General and Administrative
Total selling, general and administrative expenses ("SG&A") decreased by
$.8 million (5.6%) to $14.0 from $14.8 million in the six months ended June 30,
1995. As a percentage of sales, SG&A expenses were 17.5% for the six months
ended June 30, 1996 as compared to 17.1% for the six months ended June 30, 1995.
Absent the 1995 severance charges, the SG&A levels have essentially remained
constant in the two periods.
Net research and development expense decreased by $1.8 million reflecting
primarily relatively more amounts capitalized as software development in the six
months ended June 30, 1996 as compared to 1995. The Company capitalized $3.1
million and $.5 million in the six months ending June 30, 1996 and 1995,
respectively. The capitalized costs are related to the Company's central system
software, MasterLinkTM.
Liquidity and Capital Resources
Working capital, defined as current assets less current liabilities,
decreased by $22.6 million to a deficit of $1.3 million from $21.3 million at
December 31, 1995. The reduction reflects the growth in trade accounts payable
to EDS as a result of the Company's decision to withhold certain payments to EDS
due to various disputes with EDS discussed elsewhere.
The net increase in inventories of $2.0 million reflects an impairment
charge of approximately $2.1 million, a $2.3 million reduction in on-line
lottery raw materials inventories (see Note 6 to the Notes to Consolidated
Financial Statements), and an increase in gaming machine inventories of
approximately $6.6 million. The increase in gaming machine inventories reflects
forecasted increased sales in the Nevada, New Jersey and various other casino
markets, although there can be no assurance of increased sales in these
jurisdictions. As of June 30, 1996, the Company had approximately 150 gaming
machine terminals placed on a test basis with potential customers in these
casino jurisdictions. The Company is actively marketing inventories, with a
carrying value of approximately $13.0 million, of international on-line lottery
terminals in a number of locations. Should marketing plans not be met due to
changes in international operations or domestic events, management will consider
the necessity of recording additional reserves and charges to recognize asset
value impairment.
The Company had proceeds from issuance of long-term debt of approximately
$4.3 million in the first quarter 1996 representing the securitization of gaming
machines under lease arrangement with the Oregon Lottery. 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 second quarter 1996 is approximately five years.
As a result of various disputes with EDS under the MSA and other matters,
the Company has withheld certain payments to EDS. In July 1996, the MSA was
terminated and an interim operating arrangement has been implemented while the
parties continue efforts to resolve their differences. The ultimate outcome of
these efforts cannot be predicted. The interim operating arrangement provides
for the continuation of certain services by EDS on a week-to-week basis, through
at least September 8, 1996, with weekly payments in advance of the estimated
charges. At June 30, 1996, the Company had recorded a net payable to EDS of
approximately $38.0 million. The repayment (if any) of the outstanding balance
due EDS recorded at June 30, 1996, could not be made from current working
capital and available amounts under the Company's loan agreement with its
primary lender, First Bank, NA.
The termination of the agreements with EDS constituted an event of default
under the Company's loan agreement with First Bank, NA and the Company is
working with First Bank to revise available credit facilities and to structure
the loan agreement for anticipated credit resources in the future. The default
has been waived subject to completion of an amendment to the loan agreement. At
June 30, 1996, the Company had outstanding long-term debt with First Bank,
including current installments, of $10.3 million, recorded in continuing and
discontinued segments, and $7.5 million of outstanding irrevocable letters of
credit, leaving $12.5 million unadvanced on the $20.0 million revolving line of
credit. There can be no assurance that the negotiations with First Bank will
result in terms satisfactory to the Company. Furthermore, given the various
uncertainties and the recent developments in the on-line lottery segment, there
can be no assurance that any new financing can be obtained or on terms
satisfactory to the Company.
18
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VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
As discussed earlier, the Company reached a favorable settlement with the
sellers of UWS, acquired by the Company in May 1994. 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.
In the six months ended June 30, 1996, the Company expended $18.6 million
on fixed assets composed primarily of $15.2 million for on-line lottery
equipment and $3.4 million for gaming machine and routes operations. The
on-line lottery segment capital expenditures were primarily for the Maryland
Lottery implementation which is scheduled to start up in August. The capital
expenditures in the gaming machine segment were primarily for the delivery of
700 terminals under lease agreement with the Oregon Lottery.
The on-line lottery segment also expended and capitalized approximately
$7.9 million for intangible and other assets including approximately $3.1
million for continued software development to be initially implemented with the
Maryland on-line lottery system and $4.8 million for deferred start-up costs
associated with on-line lottery contracts.
The Company, in the six months ended June 30, 1996, invested an additional
$3.5 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 and
service debt. The Company continues to review opportunities for the sale of
this operation, although the outcome of such efforts cannot be predicted.
19
<PAGE> 20
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:
On August 6 and August 7, 1996, respectively, AWI and the Company received
notice of a complaint filed by EDS in state court in Collin County, Texas,
against the Company and AWI alleging breach of an agreement entered into in
connection with services provided by EDS under the MSA. EDS is seeking payment
of charges totaling in excess of $33 million and has requested an injunction to
bar the Company and AWI from diverting any further proceeds received from
on-line lottery contracts until total payment of the disputed amounts have been
made, or a declaration that EDS has properly terminated the MSA and is,
therefore, not subject to the mandatory arbitration provisions of the MSA. The
Company has been withholding these amounts because of EDS performance issues.
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 evaluate various strategic alternatives and opportunities designed
to enhance shareholder value.
On May 2, 1996, the California State Lottery chose AWI to provide instant
ticket validation terminals in a contract valued at $1.75 million. AWI will
make delivery of 2,200 terminals in the second half of 1996.
On May 17, 1996, the Arizona Lottery Commission terminated its on-line
lottery contract with AWI. In July 1996, the Commission replaced AWI with
another on-line lottery operator.
On May 9, 1996, United Tote Company announced that it processed a record
total combined system handle for Kentucky Oaks Day and Derby Day of $86
million, $32.2 million more than the previous year.
On June 25, 1996, the Montana State Lottery awarded AWI a two-year
contract to provide on-line services worth an estimated $7 million.
On July 15, 1996, the Company announced the termination of its contract
with EDS.
On August 9, 1996, the Company announced that EDS had filed a complaint in
Texas state court against the Company and AWI, claiming the contract under
which eds had been providing AWI with information technology and other
outsourcing services had been breached, and seeking payment of charges totaling
in excess of $33 million, which payment the Company has been withholding
because of EDS performance issues.
On August 9, 1996, the Minnesota Lottery notified the Company that its
on-line lottery contract would not be extended beyond the expiration of the
contract's base term in August 1997.
20
<PAGE> 21
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 July 15, 1996.
21
<PAGE> 22
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: August 13, 1995 /S/ Richard M. Haddrill
------------------------------------------
Richard M. Haddrill, Chief Financial
Officer and Treasurer (authorized to
sign on behalf of Registrant)
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,168
<SECURITIES> 3,063
<RECEIVABLES> 22,644
<ALLOWANCES> 994
<INVENTORY> 25,513
<CURRENT-ASSETS> 61,243
<PP&E> 132,675
<DEPRECIATION> 63,050
<TOTAL-ASSETS> 170,208
<CURRENT-LIABILITIES> 62,547
<BONDS> 19,249
0
19
<COMMON> 107
<OTHER-SE> 87,371
<TOTAL-LIABILITY-AND-EQUITY> 170,208
<SALES> 16,659
<TOTAL-REVENUES> 79,908
<CGS> 8,829
<TOTAL-COSTS> 47,727
<OTHER-EXPENSES> 8,235
<LOSS-PROVISION> 189
<INTEREST-EXPENSE> 1,858
<INCOME-PRETAX> (3,808)
<INCOME-TAX> (765)
<INCOME-CONTINUING> (3,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,014
<CHANGES> 0
<NET-INCOME> 971
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
