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, 1997 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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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.)
2311 South Seventh Avenue
Bozeman, Montana 59715
(Address of principal executive officers) (Zip code)
(406) 585-6600
(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 X 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: 10,318,730 shares of Common
Stock, $.01 par value, outstanding as of June 30, 1997.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Statements of Earnings
Six Months Ended June 30, 1997 and 1996
Three Months Ended June 30, 1997 and 1996 4
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 5
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1997 6
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 19
ITEM 2. Changes in Securities 19
ITEM 3. Defaults Upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Securities Holders 19
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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<PAGE>
Video Lottery Technologies, Inc. (the "Company") was incorporated in
Delaware in May 1991. The Company acts as a holding company for eleven active
corporations. Unless the context otherwise requires, references to the "Company"
or "VLT" refer to Video Lottery Technologies, Inc. and its subsidiaries;
references to "AWI" refer to Automated Wagering International, Inc., one of the
Company's three principal operating subsidiaries, which provides on-line lottery
systems and services primarily to governmental lottery authorities; references
to "VLC" refer to Video Lottery Consultants, Inc., another of the Company's
three principal operating subsidiaries, which designs, manufactures and markets
casino and video lottery gaming machines and central control systems; references
to "United Tote" refer to the Company's third principal operating subsidiary
whose operating units provide computerized pari-mutuel wagering systems for
horse and greyhound racetracks, off-track betting facilities and jai alai
frontons. The Company also owns and operates a racetrack facility in Sunland
Park, New Mexico, which is combined with United Tote to form the wagering
systems and racetrack operation segments for reporting purposes. References to
the "Subsidiaries" refer to AWI, VLC, United Tote, Sunland Park and the other
subsidiaries of the Company.
Certain statements in this 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.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(in thousands except for per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
On-line lottery $48,907 45,353 25,913 22,121
Gaming machine and route operations 31,501 30,453 13,762 15,642
Wagering systems and racetrack operations 14,737 14,144 7,466 7,442
------- ------ ------ ------
Total revenues 95,145 89,950 47,141 45,205
------- ------ ------ ------
COSTS AND EXPENSES:
On-line lottery 32,312 27,361 17,157 12,861
Gaming machine and route operations 16,555 16,061 7,317 7,880
Wagering systems and racetrack operations 10,904 10,412 5,265 5,009
Selling, general and administrative 15,240 15,209 7,546 7,530
Research and development 4,843 3,124 2,346 1,932
Other charges --- 8,235 --- 2,235
Depreciation and amortization 11,841 11,462 5,806 5,597
------- ------ ------ ------
Total costs and expenses 91,695 91,864 45,437 43,044
------- ------ ------ ------
Earnings (loss) from operations 3,450 (1,914) 1,704 2,161
------- ------ ------ -------
OTHER INCOME (EXPENSE):
Interest and other income (expense) 390 381 155 (108)
Interest expense (2,010) (2,176) (1,016) (1,240)
------- ------ ------ ------
(1,620) (1,795) (861) (1,348)
------- ------ ------ ------
Earnings (loss) before income taxes and
extraordinary items 1,830 (3,709) 843 813
Income tax (expense) benefit (1,046) 666 (343) (319)
------- ------ ------ ------
Net earnings (loss) before extraordinary items 784 (3,043) 500 494
Extraordinary gain, net 13,269 4,014 --- ---
------- ------ ------ ------
Net earnings $14,053 971 500 494
======= ====== ====== ======
Net earnings (loss) per share:
Before extraordinary items $ .07 (.24) .05 .04
From extraordinary items 1.28 .32 --- ---
----- ---- ---- ----
$1.35 .08 .05 .04
===== ==== ==== ====
Weighted average shares 10,386 12,595 10,371 12,595
====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,533 4,322
Restricted short-term deposits 1,364 1,364
Accounts receivable, net 16,998 19,353
Current installments of notes receivable, net 2,378 2,818
Inventories 14,965 18,297
Prepaid expenses 1,148 1,027
Income tax refund receivable --- 3,551
Deferred income taxes 10,793 15,500
-------- -------
Total current assets 60,179 66,232
-------- -------
Property, plant and equipment 150,537 153,124
Less accumulated depreciation (80,641) (78,417)
-------- -------
Net property, plant and equipment 69,896 74,707
-------- -------
Restricted cash deposits 2,431 2,521
Notes receivable, excluding current installments 2,973 2,216
Goodwill, net 9,724 10,134
Intangible and other assets, net 11,383 12,233
-------- -------
$156,586 168,043
======== =======
LIABILITIES
Current liabilities:
Notes payable $ --- 7,650
Current installments of long-term debt 8,646 10,604
Accounts payable 5,150 6,646
Accrued expenses 17,281 13,249
Income taxes payable 4,123 ---
-------- -------
Total current liabilities 35,200 38,149
-------- -------
Long-term debt, excluding current installments 32,499 9,312
Other liabilities --- 38,025
Deferred income taxes 11,476 10,326
-------- -------
Total liabilities 79,175 95,812
-------- -------
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 19
Common stock, $.01 par value. Authorized 25,000,000
shares 109 108
Paid-in capital 97,891 97,765
Treasury stock (9,100) ---
Deferred restricted stock compensation (317) (417)
Accumulated deficit (11,191) (25,244)
-------- -------
Total stockholders' equity 77,411 72,231
-------- -------
$156,586 168,043
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A Restricted Total
Preferred Common Stock Stock-
Stock Stock Paid-in Treasury Compen- Accumu- holders'
par value par value Capital Stock sation lated Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, $19 108 97,765 --- (417) (25,244) 72,231
1996
Net earnings --- --- --- --- --- 14,053 14,053
Shares redeemed
pursuant to EDS
settlement --- 1 126 (9,100) --- --- (8,973)
Amortization of
deferred
restricted stock
compensation --- --- --- --- 100 --- 100
--- --- ------ ------ ---- ------- ------
June 30, 1997 $19 109 97,891 (9,100) (317) (11,191) 77,411
=== === ------ ====== ==== ======= ======
- ------------------------------------------------------------------------------------------------------------------------------
1997 Share Data
Treasury Stock
-----------------------------
Series A Common Series A Common
Balance Preferred Stock Issued Stock Issued Preferred Stock Stock
- ------- ---------------------- ------------ --------------- -----
Beginning of period 1,913 10,829 --- ---
Shares redeemed pursuant
to EDS settlement --- 35 (1,913) (545)
----- ------ ------ ----
End of period 1,913 10,864 (1,913) (545)
===== ====== ====== ====
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $14,053 971
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 11,841 11,462
Other charges --- 8,235
Extraordinary gain, net (13,269) (4,014)
Other, net 171 5
Changes in operating assets and liabilities:
Receivables, net 2,038 (1,658)
Inventories 6,481 (4,245)
Prepaid expenses (120) 106
Accounts payable (1,496) 32,507
Accrued expenses 1,894 (2,949)
Income taxes 4,850 375
------- -------
Net cash provided by operating activities 26,443 40,795
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,717) (20,998)
Expenditures on intangible and other noncurrent assets (828) (8,176)
Proceeds from sales of equipment --- 22
Change in restricted cash deposits (2) 852
------- -------
Net cash used in investing activities (5,547) (28,300)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable (7,650) (8,250)
Proceeds from issuance of long-term debt 643 4,251
Repayments of long-term debt (5,678) (6,251)
-------- -------
Net cash used in financing activities (12,685) (10,250)
------- -------
Net increase in cash and cash equivalents 8,211 2,245
Cash and cash equivalents, beginning of period 4,322 1,993
------- -------
Cash and cash equivalents, end of period $12,533 4,238
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Presentation
The consolidated financial statements include the accounts of Video
Lottery Technologies, Inc. and subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The consolidated balance sheet as of June 30, 1997 and the
consolidated statements of operations and cash flows for the six-month
periods ended June 30, 1997 and 1996 and the consolidated statement of
stockholders' equity for the six-month period ended June 30, 1997 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, 1996
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 1996 amounts to
conform to the 1997 presentation. See Note 3.
d. Accounting Pronouncements Not Yet Adopted
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 "(SFAS No.
128"), "Earnings per Share", which simplifies the standards for computing
earnings per share ("EPS") by replacing the presentation of primary EPS
with a presentation of basic EPS. SFAS No. 128 requires dual presentation
of basic and diluted EPS by entities with complex capital structures. Basic
EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity. SFAS No. 128
replaces Accounting Principles Board Opinion 15 and is effective for
financial statements issued for periods ending after December 15, 1997. The
Company has a complex capital structure per SFAS No. 128. Consequently, the
generation of earnings from continuing operations will result in a dual
presentation of basic and diluted EPS. The Statement requires restatement
of prior period EPS presentations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Statement 131
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for
financial statements for periods beginning after December 15, 1997. Earlier
application is encouraged. In the initial year of application, comparative
information for earlier years is to be restated, unless it is impracticable
to do so. Statement 131 need not be applied to interim financial statements
in the initial year of its application,
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
but comparative information for interim periods in the initial year of
application shall be reported in financial statements for interim periods
in the second year of application.
2. EDS SETTLEMENT
In January 1994, Electronic Data Systems Corporation ("EDS") purchased
545,454 shares of the Company's Common Stock and 1,912,728 shares of Series A
Junior Preferred Stock (Series A Preferred Stock), each at a share price of
$27.50. The Series A Preferred Stock was convertible to an equal number of
shares of Common Stock after ninety days prior written notice.
In conjunction with the stock sale to EDS in 1994, the Company entered into
a ten-year agreement with EDS which, among other things, called for EDS to
provide to the Company enhanced computing, communications, system and
engineering and field maintenance services under the lottery services
subsidiary's on-line lottery contracts. In 1996, the Company withheld certain
payments to EDS primarily due to EDS performance issues and related on-line
lottery customer disputes. In mid-1996 the contract with EDS was terminated and
EDS filed a complaint against the Company seeking payment of outstanding fees.
On January 30, 1997, the Company and EDS settled all claims against each other
and agreed to transition the EDS services to the Company. The settlement
resulted in a net of taxes extraordinary gain on debt extinguishment of
approximately $13,269,000 for the Company. The terms of the settlement include
the receipt by the Company of all of the common and preferred shares owned by
EDS (545,454 common and 1,912,728 preferred shares) certain inventories
(approximately $1,200,000) and property, plant and equipment (approximately
$2,700,000) used in the provision of EDS services to on-line lottery customers
and the extinguishment of approximately $38,000,000 of outstanding fees in
return for a note payable with a present value of $26,100,000. The note payable
calls for interest payments only for the first two years and principal and
interest payments in years three through seven (maturity). The note is secured
by the 2,458,182 shares of redeemed Common and Preferred Stock, certain
inventories, fixed assets and software technology and carries prepayment
provisions upon the disposal of substantially all the assets or stock of the
Company or certain of its subsidiaries. The transition of the EDS services and
related employees to the Company was substantially completed in the second
quarter of 1997.
3. BUSINESS COMBINATION AND SETTLEMENT
On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of United Wagering Systems, Inc. ("UWS"), which included
United Tote and Sunland Park. The original purchase price included the issuance
of $10,000,000 notes, payable over a three-year period.
During the fourth quarter 1994 and the first quarter 1995, certain negative
developments affecting United Tote and the pari-mutuel wagering industry became
increasingly apparent. During 1995, the Company did not pay principal and
interest obligations under the terms of the promissory notes to the sellers. 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 a $4,014,000 extraordinary gain on debt extinguishment.
The Company, in the fourth quarter 1995, made a decision to sell UWS,
exclusive of the racetrack in Sunland Park, New Mexico; however, due to
operational improvements and industry and market conditions, the Company decided
to no longer actively pursue the disposal of the wagering systems segment. In
accordance with the requirements outlined in Financial Accounting Standards
Board Emerging Issues Task Force issue No. 90-16 "Accounting for Discontinued
Operations Subsequently Retained," the results of operations of the wagering
systems segment have been reclassified to continuing operations in all periods
presented.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
4. INVENTORIES
A summary of inventory follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Manufacturing:
Raw materials $4,984,000 5,462,000
Work-in-process 393,000 733,000
Finished goods 7,103,000 11,322,000
Ticket paper 2,049,000 610,000
Customer service and other 436,000 170,000
----------- ----------
$14,965,000 18,297,000
=========== ==========
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Note payable at prime with interest only payments through 1998. Thereafter
due in monthly installments, including interest, through January 2004.
Secured by certain inventories, property and equipment, intangible
assets and treasury stock (see Note 2) $26,263,000 ---
8.25% note payable in monthly installments, including interest, through
September 2001 (see Note 3) 5,290,000 5,729,000
7.2% to 11.0% capital lease obligations, due in monthly install- ments of
$4,573 to $26,567 including interest, maturing through March 2002 1,785,000 1,753,000
9.0% note payable in monthly installments including interest through
December 1998, secured by assets leased to others 3,537,000 5,164,000
LIBOR plus 2.25% notes payable in equivalent monthly installments of
$250,000 plus interest through February 1998. Secured by stock of
certain subsidiaries 4,270,000 7,270,000
----------- ----------
41,145,000 19,916,000
Less current installments 8,646,000 10,604,000
----------- ----------
Long-term debt, excluding current installments $32,499,000 9,312,000
=========== ==========
</TABLE>
The aggregate maturities of long-term debt are as follows:
Twelve months ending June 30,
1998 $8,646,000
1999 4,124,000
2000 6,431,000
2001 6,450,000
2002 5,896,000
Thereafter 9,598,000
==========
The Company maintains a revolving line of credit with First Bank, N.A. Of
the $19,500,000 line, $9,500,000 is committed under the Company's bonding
program and $10,000,000 is available for working capital. At June 30, 1997, the
full $10,000,000 was available for the Company to draw on.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES
The Company periodically sells notes receivable from gaming machine
equipment sales 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 outstanding balance of the
notes receivable sold with recourse was approximately $2,707,000 at June 30,
1997. The Company has established reserves for estimated losses under the
recourse provisions. At June 30, 1997, the Company had guaranteed or pledged
security for the indebtedness of others in the amount of approximately
$3,636,000 (including $2,707,000 notes receivable sold to banks and other third
parties).
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. The Company accrues any 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, 1997, the Company had collateral in
support of the various bonds outstanding consisting of $3,350,000 of restricted
deposits and $7,500,000 of irrevocable standby letters of credit. Should the
Company fail to meet contractually specified obligations during the contract
term, the lottery authority may assess damages and exercise its right to collect
on the applicable bond. The Company has had disputes with customers over
implementation schedules, deliverables and other issues. The Company works with
these customers to resolve these differences; however, should the Company be
unable to resolve any disputes in a mutually satisfactory manner, the Company
may suffer negative consequences in its relationships with these and other
customers and its pursuit of future business. The ultimate cost to the Company
of such damages (if any) would be net of its claims under risk management
policies.
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 1996, was named the
successful bidder for a new on-line lottery contract with the Florida lottery.
The award by the Florida Lottery has been protested by a competitor. If the
award is upheld, the Company will begin negotiations of a new contract. Sizable
capital expenditures in excess of current capital sources may be required in
advance of any anticipated capital generated by the new Florida contract,
accordingly, the Company may need additional financing, the availability and the
terms of which are subject to various uncertainties, with no assurance that such
financing can be obtained.
The recovery of a significant amount of the Company's investment in the
racetrack operations in Sunland Park, New Mexico is largely contingent upon the
implementation of gaming legislation in the state. On March 21, 1997, the New
Mexico legislature voted to allow casino gaming at pari-mutuel racetracks in New
Mexico, including the Company's racetrack in Sunland Park. The bill allows,
among other things, the operation of up to 300 video gaming machines per
pari-mutuel racetrack facility for up to twelve hours per day. The
implementation of gaming is subject to the timing and satisfaction of conditions
of the legislation, including the state's formation of a separate commission to
oversee the gaming and other regulatory matters (including the grant of
necessary licenses to the Company). Consequently, the Company does not
anticipate that any revenues will be generated from the approved gaming until
mid-1998. The Company has developed preliminary architectural plans for casino
gaming at the racetrack facility.
A significant percentage of the Company's consolidated revenues are derived
from sales to customers in jurisdictions that have enacted legislation
permitting various types of gaming. Such enacted legislation may change due to
political and economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 were sought, along with injunctive relief to bar the
alleged practices. On November 6, 1996, the court granted the Company's and
other defendants' motion for summary judgment and dismissed, with prejudice, all
claims of the plaintiffs. In December 1996, plaintiffs filed an appeal of this
ruling with the Eighth Circuit of the U. S. Court of Appeals. The Company cannot
predict the outcome of the appeal.
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
or results of operations.
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<PAGE>
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 seven states as well as
revenue from installation and sales of on-line lottery equipment primarily in
international markets. The segment experiences fluctuations in revenue levels
based on relative sizes of jackpots, the number of terminals on-line and tickets
sold in the states in which the Company operates and on the timing of on-line
lottery equipment sales and installations. The Company expects on-line lottery
services revenue to continue to be a significant component of its total
revenues. On-line lottery revenue is generated by 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 the
operation of gaming machine routes. Route operations revenue consists primarily
of gaming machine wagers net of pay-outs to patrons and state gaming taxes.
Revenue from gaming machine sales is subject to potentially significant
fluctuations. When and if new jurisdictions approve legislation for video
lottery gaming operations or forms of casino gaming, and if the Company is
awarded a contract in any such jurisdictions, the segment may experience a surge
in sales revenue that may or may not decline dramatically depending on the
jurisdiction and gaming venue. Gaming machine and route operations includes
lease revenue which is derived from the lease of terminals to the Oregon, Rhode
Island and Delaware lotteries. The Company expects video lottery and route
operations revenue to continue to be a significant component of its total
revenues. Gaming machine revenue is primarily generated by VLC.
Revenue from wagering systems and racetrack operations is generated
primarily from a contractual percentage of handle processed through computerized
pari-mutuel wagering systems from approximately 120 contracts in North America,
international sales and lease of pari-mutuel wagering systems, and 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 these segments of
its business. The Company expects wagering systems and racetrack operations
revenue to be a significant component of total revenues. Wagering systems
revenue is generated by United Tote. Racetrack operations revenue is generated
by the Sunland Park, New Mexico Racetrack.
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 any special or other 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 costs of equipment
sales, inclusive of materials, labor and allocated manufacturing overhead. 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 wagering systems operations
include direct and allocated indirect costs associated with the operation of
totalisator equipment at the racetracks at which the Company has a contract as
well as direct costs of equipment sales.
Selling, general and administrative expenses consist of labor costs,
professional fees, licenses and investigative 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 or research and development as discussed below.
Research and development costs represent costs incurred to gain and develop
new knowledge applicable to the Company's various gaming systems inclusive of
software and hardware technology. Included in the costs are labor, material,
consulting, occupancy and other expenses associated with the research and
- 13 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
development efforts. Development costs are capitalized and amortized in
accordance with Statement of Financial Accounting Standards Board Statement No.
86 for certain software developed for sale or lease.
Other charges include special and unusual charges recorded by the Company
for restructurings, asset valuation impairments, liquidated damage assessments
and other contract losses that are considered by the Company to be operating
expenses not specifically attributable to normal individual segment revenues.
Second Quarter 1997 Compared with Second Quarter 1996
- -----------------------------------------------------
Consolidated revenue in the second quarter 1997 increased by $1.9 million,
or 4%, to $47.1 million from $45.2 million in 1996. Overall gross profit
decreased by $2.1 million, or 11%, to $17.4 million from $19.5 million in 1996.
Consolidated net earnings were $.5 million in the second quarters ended June 30,
1997 and 1996. The decrease in the gross profit level reflects reductions in
both the on-line lottery and gaming machine segments discussed below. In the
second quarter 1996, the Company recorded approximately $2.2 million of pre-tax
special charges related to disputes with on-line lottery customers.
On-line Lottery
Revenue from the on-line lottery subsidiary increased by $3.8 million, 17%,
to $25.9 million from $22.1 million in the second quarter 1996. The increase
reflects new sources of revenues from two customers as well as additional
revenue from previously existing customers. The Company performed in excess of
40% of the work to install and implement an on-line lottery system in Chile for
a new customer in the second quarter resulting in approximately $2.9 million of
revenue. Additionally, operations under the contract with the Maryland Lottery
commenced in the third quarter 1996 resulting in $ 2.1 million in revenue in the
second quarter 1997. The Company sold an additional 500 on-line lottery
terminals in Norway in the three months ended June 30, 1997 and experienced
increased revenues from its contract with the Delaware Lottery for the operation
of the gaming machine central system through the Company's MasterLink(R)
Advanced Gaming System software technology. These gains in revenue generation
were offset partially due to the expiration of the Company's contract with the
State of Washington in June 1996.
In 1996, the Company was named the successful bidder for a new on-line
lottery contract by the Florida Lottery. The award is being protested by a
competitor. If the award is upheld, the Company will begin negotiations of a new
contract with the Florida Lottery. The existing contract had an initial
expiration date of June 30, 1996. AWI is continuing the operation of the current
on-line lottery system under the existing contract.
The gross profit margin was 34% in the second quarter 1997 as compared to
42% in the second quarter 1996. The decrease is primarily attributable to lower
margins attained on the revenues from the contract with the Maryland Lottery
implemented in the third quarter 1996. The Company anticipates the gross profit
margin levels to improve as the system operation matures; however, there can be
no assurance of such improvements. The lower gross profit margins in the second
quarter 1997 also reflect lower-than-normal fees for services provided by EDS in
the second quarter 1996 in conjunction with the termination of agreements
between the Company and EDS discussed earlier. The expiration of the Company's
contract with the Washington Lottery in June 1996 also contributed to the
decline in gross profit margins due to the relatively higher margin levels from
the contract. The gross profit margin from equipment sales of $4.7 million was
36% in the second quarter 1997 as compared to 28% on $.4 million of sales in
1996.
Gaming Machine and Route Operations
Revenue from the gaming machine and route operations segment decreased by
$1.8 million, or 12%, to $13.8 million from $15.6 million in 1996. The decrease
reflects the 1996 sales of gaming machines and system equipment to Peru and
Norway without corresponding sales in 1997.
Revenue was recognized on shipments of 1,059 units in the second quarter
1997 as compared to 1,133 units in 1996. Included in the total units were 0 and
18 royalty unit sales in the quarters ended
- 14 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
June 30, 1997 and 1996, respectively. The Company had approximately 371 units at
customer locations under trial arrangements at June 30, 1997. Revenue from
leasing and revenue sharing arrangements was $2.5 million on 4,090 units in the
second quarter 1997 as compared to $2.6 million on 5,765 units in 1996.
The following table reflects domestic and foreign revenue sources
representing 10% or more of the segment's revenues for the second quarters of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------
1997 1996 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 1.6 1.0 0.6 60.0
Montana routes 4.3 4.0 0.3 7.5
Oregon 1.0 1.4 (0.4) (28.6)
Other, combined 6.3 3.9 2.4 61.5
----- ---- ---- ------
13.2 10.3 2.9 28.2
----- ---- ---- ------
Foreign:
Norway --- 1.8 (1.8) (100.0)
Peru --- 2.6 (2.6) (100.0)
Other, combined 0.6 0.9 (0.3) (33.3)
----- ---- ---- ------
0.6 5.3 (4.7) (88.7)
----- ---- ---- ------
$13.8 15.6 (1.8) (11.5)
===== ==== ==== ======
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue as well as royalty and lease revenues was
47% in the second quarter 1997 as compared to 50% in the second quarter 1996.
The gross profit margin from route operations was 28% in the second quarters of
1997 and 1996.
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operation segments remained
at approximately $7.5 million in the second quarters of 1997 and 1996. Decreased
revenues due to customer racetrack closures were offset by increased revenues
from new and existing customers. Revenues from the racetrack operations in
Sunland Park, New Mexico was approximately $1.8 million in the second quarters
of 1997 and 1996. Revenue from sales of wagering systems equipment was $.6
million in the second quarters of 1997 and 1996.
The recovery of a significant amount of the Company's investment in the
racetrack operations in Sunland Park, New Mexico is largely contingent upon the
implementation of gaming legislation in the state of New Mexico. On March 21,
1997 the New Mexico legislature voted to allow casino gaming at pari-mutuel
racetracks in New Mexico, including the Company's racetrack. The bill allows,
among other things, the operation of up to 300 gaming machines per facility for
up to twelve hours per day. The legal and regulatory processes necessary to
implement the gaming legislation are progressing as expected. The Company has
developed preliminary architectural plans and performed additional market
research in anticipation of a 1998 opening of casino operations at the racetrack
facility.
The gross profit margin from wagering systems service revenue was 37% in
the second quarter 1997 as compared to 44% in 1996. The decrease is attributable
to increased operating costs related to start-up of operations for live racing
at Lone Star Park in Texas, the newest thoroughbred racetrack in North America
as well as higher operating costs in certain other states. Also contributing to
the decrease is the closure of two customer racetracks which carried relatively
higher gross profit margins. The gross profit margin on wagering systems service
revenue fluctuates primarily based on the pari-mutuel racing seasons of customer
racetracks. Typically, the segment experiences relatively higher revenues and
gross profit margins in the second and third quarters of the calendar year.
Management does not anticipate this trend to change in the near future and does
not anticipate any significant increase in gross profit margin levels on service
revenue in the near future. The gross profit from equipment sales of $.6 million
was 58% in the second quarter 1997 as compared to 40%
- 15 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
on $.6 million of sales in 1996. The Company experienced a negative gross profit
from the racetrack operations of approximately $.1 million in the second
quarters of 1997 and 1996.
Selling, General and Administrative
Total selling, general and administrative (S,G&A) expenses were $7.5
million in the second quarters ended June 30, 1997 and 1996. As a percentage of
revenues, S,G&A expenses were 16% in the second quarter 1997 as compared to 17%
in the second quarter 1996.
Research and Development
Research and development expense, net of amounts capitalized for the
development of MasterLink(R) Advanced Gaming System software, was $2.3 million
in the second quarter 1997 as compared to $1.9 million in the second quarter
1996. The Company capitalized $.3 million in the second quarter 1997 and $.9
million in 1996. Total research and development expenditures approximated 6% of
consolidated revenues in the second quarters of 1997 and 1996. Management plans
to continue to expend similar levels on product research and development in the
foreseeable future.
Six Months Ended June 30, 1997 and 1996
- ---------------------------------------
Consolidated revenues increased by $5.1 million, or 6%, to $95.1 million
from $90.0 million in the first six months of 1996. All segments of the Company
experienced higher revenue levels. The overall gross profit decreased by $.7
million (2%) to $35.4 million from $36.1 million in the six months ended June
30, 1996. The Company had net earnings before extraordinary items of $.8 million
in the first six months of 1997 as compared to a net loss of $3.0 million in
1996. Included in the 1996 results of operations were special, pre-tax charges
of $8.2 million related to the on-line lottery segment. Excluding the special
charges, net of estimated tax benefits, the first six months of 1996 would have
reflected net earnings before extraordinary items of approximately $2.0 million
versus the loss of $ 3.0 million. The decreases in the gross profit level and
earnings before extraordinary items is primarily attributable to the on-line
lottery segment as discussed below.
On-line Lottery
Total revenues from the on-line lottery segment increased by $3.5 million,
or 8%, to $48.9 million from $45.4 million in 1996. The increase reflects new
sources of revenues from two customers as well as additional revenue from
previously existing customers. The Company performed in excess of 40% of the
work to install and implement an on-line lottery system in Chile for a new
customer in the second quarter resulting in approximately $2.9 million of
revenue. Additionally, the contract with the Maryland Lottery, which started-up
in the third quarter 1996 resulted in $4.2 million of revenue in the first six
months of 1997. The Company sold an additional 500 on-line lottery terminals in
Norway in the six months ended June 30, 1997 and experienced increased revenues
from its contract with the Delaware Lottery for the operation of the State's
gaming machine central system through the Company's MasterLink(R) Advanced
Gaming System software technology. These gains in revenue generation were offset
partially by the expiration of the Company's contract with the State of
Washington in June 1996 which generated approximately $5.5 million of revenue in
the first six months of 1996.
The gross profit margin in the on-line lottery segment was 34% in the first
six months of 1997 as compared to 40% in the first six months of 1996. The
decrease is primarily attributable to lower margins attained on the revenues
from the contract with the Maryland Lottery implemented in the third quarter
1996. The Company anticipates the gross profit margin levels to improve as the
system operation matures; however, there can be no assurance of such
improvements. The lower gross profit margins in the first six months of 1997
also reflect lower-than-normal fees for services provided by EDS in the second
quarter 1996 in conjunction with the termination of agreements between the
Company and EDS in 1996, discussed in Note 2 to the Consolidated Financial
Statements. The expiration of the Company's contract with the Washington Lottery
in June 1996 also contributed to the decline in gross profit margins due to the
relatively higher margin
- 16 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
levels from the contract. The gross profit margin from on-line lottery equipment
and system sales was 37% on $5.5 million of revenue in the first six months of
1997 as compared to 43% on $.9 million of revenue in 1996.
Gaming Machine and Route Operations
Revenue from the gaming machine and route operations segment increased by
$1.0 million, or 3%, to $31.5 million from $30.5 million in the first six months
of 1996.
Revenue was recognized on shipments of 3,657 units in the first six months
of 1997 as compared to 2,507 units in 1996. Included in the total units were 75
and 120 royalty unit sales in the six months ended June 30, 1997 and 1996,
respectively. Revenue from leasing and revenue sharing arrangements was $5.5
million in the first six months of 1997 as compared to $5.1 million in 1996.
The following table reflects domestic and foreign revenue sources
representing 10% or more of the segment's revenues for the first six months of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------
1997 1996 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 2.2 1.6 0.6 37.5
Montana routes 8.7 8.0 0.7 8.8
Oregon 4.6 3.1 1.5 48.4
Other, combined 10.9 6.1 4.8 78.7
----- ---- ---- ------
26.4 18.8 7.6 40.4
----- ---- ---- ------
Foreign:
Quebec 3.2 2.0 1.2 60.0
Peru --- 3.5 (3.5) (100.0)
Other, combined 2.9 6.2 (2.3) (37.0)
----- ---- ---- ------
5.1 11.7 (6.6) (56.4)
----- ---- ---- ------
$31.5 30.5 1.0 3.3
===== ==== ==== ======
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue as well as royalty and lease revenues was
47% in the first six months of 1997 and 1996. The gross profit margin from route
operations was 28% in the first six months of 1997 and 1996.
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operation segments was
$14.7 million in the first six months of 1997 as compared to $14.1 million in
1996. Revenues from the racetrack operations in Sunland Park, New Mexico was
$4.0 million in the first six months of 1997 as compared to $4.1 million in
1996. Revenue from sales of wagering systems equipment was $1.8 million in the
first six months of 1997 as compared to $1.0 million in 1996.
The gross profit margin from wagering systems service revenue was 35% in
the first six months of 1997 as compared to 39% in 1996. The decrease is
attributable to increased operating costs in the second quarter of 1997 related
to start-up of operations for live racing at Lone Star Park in Texas, the newest
thoroughbred racetrack in North America as well as higher operating costs in
certain other states. Also contributing to the decrease is the closure of two
customer racetracks which carried relatively higher gross profit margins. The
gross profit margin on wagering systems service revenue fluctuates primarily
based on the pari-mutuel racing seasons of customer racetracks. Typically, the
segment experiences relatively higher revenues and gross profit margins in the
second and third quarters of the calendar year. Management does not anticipate
this trend to change in the near future and does not anticipate any significant
increase gross profit margin levels on service
- 17 -
<PAGE>
revenue in the near future. The gross profit margin from equipment sales of $1.8
million was 51% in the first six months of 1997 as compared to 40% on $1.0
million of sales in 1996. The Company experienced a negative gross profit from
the racetrack operations of approximately $.2 million in the first six months of
1997 and 1996.
Selling, General and Administrative
Total selling, general and administrative (S,G&A) expenses were $15.2
million in the six months ended June 30, 1997 and 1996. As a percentage of
revenues, S,G&A expenses were 16% in the first six months of 1997 as compared to
17% in 1996.
Research and Development
Research and development expense, net of amounts capitalized for the
development of MasterLink(R) Advanced Gaming System software, was $4.8 million
in the first six months of 1997 as compared to $3.1 million in 1996. The Company
capitalized $.5 million in the first six months of 1997 and $3.1 million in
1996. Total research and development expenditures approximated 7% of
consolidated revenues in the first six months of 1997 and 8% of consolidated
revenues in 1996.
Liquidity and Capital Resources
- -------------------------------
Working capital, defined as current assets less current liabilities,
decreased by $3.1 million to $25.0 million at June 30, 1997 from $28.1 million
at December 31, 1996 as current assets were used to pay down long-term debt.
Cash generated from operations of $26.4 million in the six months ended June 30,
1997 was used to repay interest-bearing debt of approximately $12.7 million and
invest in additional long-lived capital assets of approximately $5.5 million and
increase cash balances by $8.2 million to a balance of $12.5 million at June 30,
1997.
Inventory levels decreased by $3.3 million to $15.0 million from $18.3
million at December 31, 1996. The reduction primarily reflects sales of on-line
lottery equipment to international jurisdictions.
Management believes that its position to obtain capital resources improved
during the first six months of 1997 as a result of the Company's improved cash
and debt positions. Total liabilities decreased by $16.6 million in the first
six months of 1997 due to the settlement between the Company and EDS and due to
the repayments made on interest-bearing debt noted above. Included in the
repayments of interest-bearing debt in the first six months of 1997, is the
pay-down of the Company's revolving line of credit with First Bank, N.A. Of the
$19.5 million revolving line of credit, $9.5 million is committed to the
Company's bonding program and $10.0 million is available for working capital
needs. At June 30, 1997 the full $10.0 million was available for the Company.
In 1996, the Company was named the successful bidder for a new on-line
lottery contract by the Florida Lottery. The award is being protested by a
competitor. If the award is upheld, the Company will begin negotiating a new
contract which may require significant capital resources in advance of any
anticipated capital generated by a new contract. Accordingly, the Company may
need additional financing, the availability and the terms of which are subject
to various uncertainties, with no assurance that such financing can be obtained.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
- 18 -
<PAGE>
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, 1996 Form 10-K.
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
On April 1, 1997, the Company announced that AWI had signed a new five-year
contract, totaling an estimated $45.0 million, to continue to provide on-line
services for the Minnesota State Lottery after AWI was deemed the successful
proposer in the Lottery's competitive bidding process. AWI has been the on-line
system services provider for Minnesota during the past seven years. Under the
new contract, which begins in August 1997, the Lottery will continue to use the
existing central control system and terminals to service more than 1,900
retailers in the state.
On April 23, 1997, the Company's subsidiary, United Tote Company, announced
the successful installation and operation of its Horizon SystemTM and family of
pari-mutuel wagering terminals for the inaugural weekend of Lone Star Park's
live race meet located in Grand Prairie, Texas halfway between Dallas and Fort
Worth. Total combined system handle was a record $2.7 million. United Tote
installed 500 state-of-the-art wagering terminals for Lone Star's 73-day
inaugural thoroughbred meet. United Tote has been servicing Lone Star's
simulcasting center, the Post Time Pavilion, since it opened on May 3, 1996 with
record attendance and handle numbers.
On April 24, 1997, a subsidiary of the Company announced that the Nevada
Gaming Commission unanimously approved VLC for permanent licensing to
manufacture and distribute its gaming equipment in Nevada. The Company was also
granted a slot route operator license to own and operate gaming machine routes
in Nevada. VLC obtained temporary licensing in the state in 1995 and the Nevada
Gaming Commission unanimously approved VLC's multi-game touchscreen machine,
Winning Touch(R), for sale to Nevada casinos last April. The Winning Touch(R)
machine embraces state-of-the-art touchscreen technology pioneered by VLC and
allows players to operate the game solely by touching the screen. Unlike other
touchscreen machines currently on the market, Winning Touch(R) has no buttons
and offers players an entire menu of games available on one machine. In
addition, the Company's subsidiary, VLC, gained approval from the Ontario Gaming
Control Commission as a casino gaming-related supplier authorized to sell its
gaming devices in the province.
On May 8, 1997, the Company announced that the Florida Administrative Law
Judge has recommended to the Florida Lottery that the evaluation committee
reconvene to reevaluate certain limited aspects of both proposals submitted for
operation of the Lottery. The judge did not reverse the Lottery's selection of
the Company's subsidiary AWI, found AWI to be fully qualified and, further,
found AWI's proposal to fully comply with the requirements of the Lottery. On
November 1, 1996, the Florida Lottery awarded a new five-year contract to AWI to
continue operating its lottery system.
On May 29, 1997, the Company's subsidiary, VLC, announced its participation
in the newly opened Crown Casino in Melbourne, Australia. The $2.5 billion
casino in downtown Melbourne opened May 8 is a complete entertainment facility
containing 40 restaurants, 14 movie theaters, four night clubs, designer shops
- 19 -
<PAGE>
and a 1,000-room hotel. Of the 2,500 gaming machines in operation in the Crown
Casino, VLC has supplied 450 Winning Touch(R) machines. Currently in Australia,
VLC participates in the gaming markets in Victoria, South Australia, Northern
Territory and West Australia. In Victoria, VLC has supplied 7,000 of the 24,000
total gaming machines in operation and in South Australia, VLC has supplied
1,000 of the 10,000 gaming machines in operation. VLC has been in the Australian
market since 1992, and has placed machines in the Lassiters, Burswood, Adelaide
and Crown casinos. VLC, which designed and installed the world's first
state-wide gaming control system in 1989, has also installed four central
control systems in the Australia states of Victoria, South Australia and
Northern Territory. The control system links gaming machines to a central
computer system providing control and monitoring of security, integrity and
accounting data on a jurisdiction-wide basis.
On June 4, 1997, the Company announced that AWI entered into a contract to
provide its MasterLink(R) gaming technology and support services to an
established lottery in Latin America in connection with a leading Latin American
information technologies services company's contract to provide an on-line
lottery system. The contract is expected to provide a minimum of $12 million in
revenue for AWI over its eight-year term. Additional revenue is expected based
on the planned expansion of the original system. In addition, the contract can
be renewed for an additional five-year term. On June 20, 1997, AWI announced
that the contract was executed with SONDA, S.A. and that AWI will be the
sub-contractor to SONDA for its contract with Loteria de Concepcion, both of
which are headquartered in Santiago, Chile, to upgrade the technology of an
existing lottery. Loteria de Concepcion, the oldest lottery in Chile which began
in 1921, provides revenue to the Red Cross, University de Concepcion and other
educational institutions throughout Chile.
On June 6, 1997, the Company's subsidiary, VLC, announced that the
Mpumalanga Gaming Board approved VLC for a license to manufacture, maintain, and
supply gaming devices to license holders in the Mpumalanga Province, South
Africa.
On June 19, 1997, VLC announced Nevada field trials for its new enhanced
graphics Winning Touch(R) Power(TM) gaming machine. The field trials are taking
place at Sam's Town Hotel & Gambling Hall in Las Vegas and the Holiday Hotel &
Casino in Reno. The processing speed and capacity utilized in the Power
Series(TM) surpasses that used in standard video gaming machines, enabling the
Power Series(TM) to offer superior graphics and animation. The machine provides
256 colors from a palette of over one quarter million available colors and has
sound capabilities which can reproduce virtually any music, voice, or other
sound effects.
On July 1, 1997 the Company announced that Richard M. Haddrill, President
of the Company, has assumed the additional title and responsibility of Chief
Executive Officer for the Company. On July 2, 1997, the Company announced
organizational changes at the Company and at it subsidiaries AWI, United Tote
and VLC. Chuck Brooke, the Company's Senior Vice President of Government
Relations, will assume the additional responsibilities of Government Sales for
all of the Company's subsidiaries, as well as direct Corporate Marketing and
Public Relations for the Company. Ron Utterback has joined the Company as Vice
President of International Sales. John Beach was appointed AWI's Chief Operating
Officer and Bob Evers was appointed Vice President for Domestic Operations.
Michael Eide, President of VLC, will also head up the development of the
Company's new gaming business at Sunland Park Racetrack in New Mexico. Duane
Frahm will become VLC's Vice President of Sales based in Bozeman. Don Fuller has
been promoted to Chief Operating Officer of United Tote. Bob Campbell,
previously with AmTote, was made Vice President of Operations at United Tote,
and Kit Kotz, formerly with AutoTote, will serve as legal counsel for United
Tote. Additionally, in May 1997, Susan J. Carstensen was made Chief Financial
Officer and Dennis V. Gallagher was made Secretary of VLT.
On July 7, 1997, the Company's subsidiary, VLC, announced that Mick D.
Roemer, a former senior executive with International Game Technology, will be
joining VLC as Vice President of Nevada Sales and Operations based in Las Vegas.
On July 9, 1997, the Company's subsidiary, VLC, announced that Casiloc
Inc., a subsidiary of Loto Quebec, had ordered 1,175 Winning Touch(R) gaming
machines and approximately 5,000 bill acceptor assemblies. The gaming machines
will be assembled in Quebec. The order represents a total purchase price in
excess of $10 million. Currently, VLC supplies Winning Touch(R) video gaming
machines to seven of the eight Canadian provinces that allow video lottery.
Winning Touch(R) machines comprise more than one-third of all gaming machines
operated throughout Canadian video lottery programs. Additionally, VLC provides
wide area central control systems to five of the eight Canadian provinces,
including Quebec.
- 20 -
<PAGE>
On July 29, 1997 the Company's subsidiary, AWI, announced the successful
conversion of the Norsk Tipping AS Lottery's on-line games to AWI's new
MasterLink(R) system with a transparent launch on Jun 16, 1997. The Norwegian
Lottery now has its wide array of products including sports betting, lotto games
and player registration operating on state-of-the-art IBM UNIX systems. The
MasterLink(R) upgrade allows game construction through a parameter driven engine
that facilitates new game introduction and changes allowing Norsk Tipping to
remain in a leadership position in the lottery marketplace. The new technology
also provides operational and maintenance benefits.
On August 12, 1997 the Company's subsidiary, VLC, announced receipt of an
order from South African Video Gaming Corp. (SAVGC) for 600 Winning Touch(R)
gaming machines and the Company's VLC Advanced Gaming SystemTM, with annual
maintenance, totaling approximately $4 million. SAVGC, associated with the South
African Clothing and Textile Worker's Union, will be applying for several
licenses to operate gaming machines and central control systems.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
EX-27 Financial Data Schedule (For SEC Use Only)
EX-27.1 Financial Data Schedule - Restated (For SEC Use Only)
b. Reports on Form 8-K
Form 8-K dated August 6, 1997, and exhibits, reporting the resignation
of Board member William P. Lyons, Jr.
- 21 -
<PAGE>
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 12, 1997 /S/ SUSAN J. CARSTENSEN
--------------------------------------------
Susan J. Carstensen, Chief Financial Officer
(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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,364
<SECURITIES> 0
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<ALLOWANCES> 1,249
<INVENTORY> 14,965
<CURRENT-ASSETS> 60,179
<PP&E> 150,537
<DEPRECIATION> 80,641
<TOTAL-ASSETS> 156,586
<CURRENT-LIABILITIES> 35,200
<BONDS> 41,145
0
19
<COMMON> 109
<OTHER-SE> 77,283
<TOTAL-LIABILITY-AND-EQUITY> 156,586
<SALES> 24,258
<TOTAL-REVENUES> 95,145
<CGS> 14,624
<TOTAL-COSTS> 59,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 76
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<INCOME-TAX> 1,046
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<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Amounts restated to reflect reversal of discontinued
operations presentation of wagering systems segment.
</LEGEND>
<RESTATED>
<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> 3,063
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0
19
<COMMON> 107
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<SALES> 18,615
<TOTAL-REVENUES> 89,950
<CGS> 11,077
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<INTEREST-EXPENSE> 2,176
<INCOME-PRETAX> (3,709)
<INCOME-TAX> (666)
<INCOME-CONTINUING> (3,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,014
<CHANGES> 0
<NET-INCOME> 971
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
