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 SEPTEMBER 30, 1997 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.)
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 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: 10,325,396 shares of Common
Stock, $.01 par value, outstanding as of September 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
Nine Months Ended September 30, 1997 and 1996
Three Months Ended September 30, 1997 and 1996 4
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 5
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1997 6
Consolidated Statements of Cash Flows
Nine Months Ended September 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 20
PART II. OTHER INFORMATION
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ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Securities Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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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>
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
On-line lottery $ 71,671 65,790 22,764 20,437
Gaming machine and route operations 51,627 43,560 20,126 13,107
Wagering systems and racetrack operations 21,322 21,534 6,585 7,390
-------- ------- ------ ------
Total revenues 144,620 130,884 49,475 40,934
-------- ------- ------ ------
COSTS AND EXPENSES:
On-line lottery 48,244 42,596 15,932 15,235
Gaming machine and route operations 28,790 23,283 12,235 7,222
Wagering systems and racetrack operations 15,300 15,408 4,396 4,996
Selling, general and administrative 22,983 21,618 7,743 6,409
Research and development 7,122 5,062 2,279 1,938
Other charges --- 12,935 --- 4,700
Depreciation and amortization 16,943 17,315 5,102 5,853
-------- ------- ------ ------
Total costs and expenses 139,382 138,217 47,687 46,353
-------- ------- ------ ------
Earnings (loss) from operations 5,238 (7,333) 1,788 (5,419)
-------- ------- ------ ------
OTHER INCOME (EXPENSE):
Interest and other income 709 751 319 311
Interest expense (2,978) (2,911) (968) (735)
-------- ------- ------ ------
(2,269) (2,160) (649) (424)
-------- ------- ------ ------
Earnings (loss) before income taxes and
extraordinary items 2,969 (9,493) 1,139 (5,843)
Income tax (expense) benefit (1,595) 1,198 (549) 532
-------- ------- ------ ------
Net earnings (loss) before extraordinary items 1,374 (8,295) 590 (5,311)
Reversal of provision for loss on discontinuance
of wagering systems operations --- 5,482 --- 5,541
-------- ------- ------ ------
Net earnings (loss) before extraordinary items 1,374 (2,813) 590 230
Extraordinary gain, net 13,269 4,014 --- ---
-------- ------- ------ ------
Net earnings (loss) $ 14,643 1,201 590 230
======== ======= ====== ======
Net earnings (loss) per share:
Before extraordinary items $ .13 (.66) .06 .02
Discontinued operations --- .44 --- ---
From extraordinary items 1.28 .32 --- ---
----- ---- ---- ----
$1.41 .10 .06 .02
===== ==== ==== ====
Weighted average shares 10,406 12,598 10,524 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>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,048 4,322
Restricted short-term deposits 765 1,364
Accounts receivable, net 21,863 19,353
Current installments of notes receivable, net 2,559 2,818
Inventories 14,354 18,297
Prepaid expenses 1,418 1,027
Income tax refund receivable --- 3,551
Deferred income taxes 11,178 15,500
-------- -------
Total current assets 70,185 66,232
-------- -------
Property, plant and equipment 150,991 153,124
Less accumulated depreciation (84,715) (78,417)
-------- -------
Net property, plant and equipment 66,276 74,707
-------- -------
Restricted cash deposits 2,437 2,521
Notes receivable, excluding current installments 2,718 2,216
Goodwill, net9,519 10,134
Intangible and other assets, net 11,513 12,233
-------- -------
$162,648 168,043
======== =======
LIABILITIES
Current liabilities:
Notes payable $ --- 7,650
Current installments of long-term debt 6,095 10,604
Accounts payable 5,275 6,646
Accrued expenses 24,612 13,249
Income taxes payable 4,499 ---
-------- -------
Total current liabilities 40,481 38,149
-------- -------
Long-term debt, excluding current installments 32,028 9,312
Other liabilities --- 38,025
Deferred income taxes 12,032 10,326
-------- -------
Total liabilities 84,541 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 88,847 97,765
Deferred restricted stock compensation (267) (417)
Accumulated deficit (10,601) (25,244)
-------- -------
Total stockholders' equity 78,107 72,231
-------- -------
$162,648 168,043
======== =======
</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 Accumu- Stock-
Stock Stock Paid-in Compen- lated holders'
par value par value Capital sation Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, $19 108 97,765 (417) (25,244) 72,231
1996
Net earnings --- --- --- --- 14,643 14,643
Stock options
exercised/shares --- 1 182 --- --- 183
issued
Shares redeemed
pursuant to EDS --- --- (9,100) --- --- (9,100)
settlement
Amortization of
deferred
restricted stock --- --- --- 150 --- 150
compensation
--- --- ------ ---- ------- ------
September 30,
1997 $19 109 88,847 (267) (10,601) 78,107
=== === ====== ==== ======= ======
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 Share Data
<TABLE>
<CAPTION>
Treasury Stock
---------------------------------
Series A Common Series A Common
Balance Preferred Stock Issued Stock Issued Preferred Stock Stock
- ------- ---------------------- ------------ --------------- -----
<S> <C> <C> <C> <C>
Beginning of period 1,913 10,829 --- ---
Stock options exercised/
shares issued --- 42 --- ---
Shares redeemed pursuant
to EDS settlement --- --- (1,913) (545)
----- ------ ------ ----
End of period 1,913 10,871 (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>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $14,642 1,201
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Reversal of provision for loss on discontinuance
of operations --- (5,482)
Depreciation and amortization 16,943 17,315
Other charges --- 12,935
Extraordinary gain, net (13,269) (4,014)
Other, net 211 ---
Changes in operating assets and liabilities:
Receivables, net (2,678) (2,845)
Inventories 7,296 (4,109)
Prepaid expenses (391) (244)
Accounts payable (1,371) 1,658
Due to EDS --- 26,495
Accrued expenses 9,397 (5,749)
Income taxes 5,397 (1,060)
------- -------
Net cash provided by operating activities 36,177 36,101
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,824) (23,928)
Expenditures on intangible and other non-current assets (1,511) (9,860)
Proceeds from sales of equipment 87 22
Restricted cash deposits 560 2,150
------- -------
Net cash used in investing activities (6,688) (31,616)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes payable (7,650) (750)
Proceeds from issuance of long-term debt 643 4,364
Repayments of long-term debt (8,812) (9,307)
Proceeds from stock options exercised 56 ---
------- -------
Net cash used in financing activities (15,763) (5,693)
------- -------
Net increase (decrease) in cash and cash equivalents 13,726 (1,208)
Cash and cash equivalents, beginning of period 4,322 1,993
------- -------
Cash and cash equivalents, end of period $18,048 785
======= =======
</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 its subsidiaries (collectively the
"Company"). All significant inter-company balances and transactions have
been eliminated in consolidation.
The consolidated balance sheet as of September 30, 1997 and the
consolidated statements of operations and cash flows for the nine-month
periods ended September 30, 1997 and 1996 and the consolidated statement of
stockholders' equity for the nine-month period ended September 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. 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 stockholders. 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, 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.
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 the
Company's 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 repurchase by the Company of all of the Common and Series A Preferred Stock
owned by EDS (545,454 common and 1,912,728 preferred shares), the return to the
Company of 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 repurchased Common
Stock and Series A 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, decided to sell UWS, exclusive of
Sunland Park; however, due to operational improvements and industry and market
conditions, the Company subsequently 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>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Manufacturing:
Raw materials $5,278,000 5,462,000
Work-in-process 330,000 733,000
Finished goods 6,779,000 11,322,000
Ticket paper 1,547,000 610,000
Customer service and other 420,000 170,000
----------- ----------
$14,354,000 18,297,000
=========== ==========
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
September 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 $25,738,000 ---
8.25% note payable in monthly installments, including interest, through
September 2001 (see Note 3) 5,115,000 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 May 2002 1,314,000 1,753,000
9.0% note payable in monthly installments including interest through
December 1998, secured by assets leased to others 3,186,000 5,164,000
LIBOR plus 3.25% notes payable in equivalent monthly installments of
$250,000 plus interest through February 1998. Secured by stock of
certain subsidiaries 2,770,000 7,270,000
----------- ----------
38,123,000 19,916,000
Less current installments 6,095,000 10,604,000
----------- ----------
Long-term debt, excluding current installments $32,028,000 9,312,000
=========== ==========
</TABLE>
The aggregate maturities of long-term debt are as follows:
Twelve months ending September 30,
1998 $6,095,000
1999 6,299,000
2000 7,165,000
2001 6,646,000
2002 5,808,000
Thereafter 6,110,000
==========
The Company maintains a $19,500,000 revolving line of credit with First Bank,
N.A., of which $9,500,000 is committed under the Company's bonding program and
the balance of $10,000,000 is available for working capital. At September 30,
1997, the full $10,000,000 was available to 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 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 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 had
architectural plans developed for casino gaming at the racetrack facility and
has initiated construction. Current plans call for approximately $8,000,000 of
capital expenditures for facility enhancements, gaming machines and related
equipment.
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 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 $2,962,000 at September
30, 1997. The Company has established reserves for estimated losses under the
recourse provisions. At September 30, 1997, the Company had guaranteed or
pledged security for the indebtedness of others in the amount of approximately
$3,860,000 (including $2,962,000 notes receivable sold to banks and other third
parties).
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At September 30, 1997, the Company had collateral in
support of the various bonds outstanding consisting of $2,750,000 of restricted
deposits and $9,500,000 of irrevocable standby letters of credit. First Bank, N.
A., requires the Company to maintain $2,000,000 of restricted deposits as
collateral for the irrevocable 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 was unsuccessfully protested by a competitor,
and the competitor has filed an appeal which has delayed contract negotiations.
The existing contract had an expiration date of June 30, 1996. AWI is continuing
the operation of the current on-line lottery system under the terms of the
expired contract under temporary extension. The Company has submitted a bid to
the Pennsylvania Lottery for an on-line lottery contract to replace the contract
the Company currently has with the lottery. The current contract expires in
December 1998. Sizable capital expenditures in excess of current capital sources
may be required in advance of any anticipated capital generated by a new Florida
or
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<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Pennsylvania 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.
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/or economic conditions within the jurisdiction which could have a
material adverse effect upon the Company's financial position and results of
future operations.
The Company is involved in various 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 systems and equipment,
primarily in international markets. The segment experiences fluctuations in
revenue levels based on relative sizes of awards or 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 systems and 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, service and lease of video gaming machines, sales of parts, central
control system site hardware and software, 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 due to
the timing of orders from new jurisdictions, timing of replacement orders or
expansion or contraction of gaming in jurisdictions in which the Company is
licensed. The Company expects gaming machine 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 percentage of handle processed through computerized pari-mutuel
wagering systems from approximately 120 racetracks 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 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 the revenue from the wagering systems and
racetrack operations segments to be a significant component of total revenues.
Wagering systems revenue is generated by United Tote. Racetrack operations
revenue is generated by Sunland Park.
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 including
software and hardware technology. Included in the costs are labor, material,
consulting, occupancy and other expenses associated with the
- 13 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
research and 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.
Third Quarter 1997 Compared with Third Quarter 1996
- ---------------------------------------------------
Consolidated revenue in the third quarter 1997 increased by $8.5 million,
or 21%, to $49.5 million from $41.0 million in 1996. Overall gross profit
increased by $3.4 million, or 25%, to $16.9 million from $13.5 million in 1996.
Consolidated net earnings were $.6 million in the third quarter 1997 and $.2
million in 1996. The increase in the gross profit level reflects increases in
both the on-line lottery and gaming machine segments discussed below. In the
third quarter 1996, the Company recorded approximately $4.7 million of pre-tax
special charges related to disputes with on-line lottery customers and asset
impairments in the wagering systems segment. The Company also recorded the
reversal of a $5.5 provision for loss on discontinuance of the wagering systems
segment. Excluding the special charges and reversal of loss provision, the
Company would have experienced a net loss of approximately $2.5 million in the
third quarter 1996.
On-line Lottery
Revenue from the on-line lottery subsidiary increased by $2.3 million, 11%,
to $22.7 million from $20.4 million in the third quarter of 1996. Revenues from
on-line lottery equipment and system sales were $2.1 million in the third
quarter 1997 as compared to $1.7 million in 1996. The increase reflects revenues
from new customers as well as additional revenue from existing customers. The
Company implemented an on-line lottery system in Chile for a new customer
resulting in additional revenue from equipment and systems sales. Additionally,
operations under the contract with the Maryland Lottery which commenced in the
middle of the third quarter 1996 resulted in additional revenue to the Company
in the third quarter 1997. These gains in revenue generation were partially
offset by lower on-line lottery equipment sales in Norway.
The gross profit margin from on-line lottery revenues was 30% in the third
quarter 1997 as compared to 26% in the third quarter 1996. The 26% gross profit
margin in 1996 reflects unusually high operating costs associated with the
Company's relationship with EDS in 1996 coupled with relatively lower handle
levels. The Company's contract with the Maryland Lottery is not resulting in
gross profit levels the Company expected. The Company anticipates the gross
profit margin levels to improve as the system operation matures; however, there
can be no assurance of such improvements
In 1996, the Company was named the successful bidder for a new on-line
lottery contract with the Florida Lottery. The award by the Florida Lottery was
unsuccessfully protested by a competitor, and the competitor has filed an appeal
which has delayed contract negotiations. Under the new contract, AWI would
provide services to the Florida Lottery for five more years with options for two
extensions of two additional years each. The existing contract had an expiration
date of June 30, 1996. AWI is continuing the operation of the current on-line
lottery system under the terms of the expired contract under temporary
extension.
The Company has submitted a bid to the Pennsylvania Lottery for an on-line
lottery contract to replace the contract the Company currently has with the
lottery. The current contract expires in December 1998.
- 14 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Gaming Machine and Route Operations
Revenue from the gaming machine and route operations segment increased by
$7.0 million, or 53%, to $20.1 million from $13.1 million in 1996.
Revenue was recognized on shipments of 1,989 units in the third quarter
1997 as compared to 739 units in 1996. The Company had approximately 500 units
at customer locations under trial arrangements at September 30, 1997. Trial
units are recorded as inventory until sold. Revenue from leasing and revenue
sharing arrangements was $3.0 million on 4,090 units in the third quarter 1997
as compared to $2.7 million on 5,765 units in 1996.
In August 1997, the Company announced receipt of an order from South
African Video Gaming Corp. (SAVGC) for 600 gaming machines and the Company's VLC
Advanced Gaming System(TM) (AGS), with annual maintenance, totaling
approximately $4 million. SAVGC is applying for several licenses to operate
gaming machines and central control systems.
In October 1997, the Company announced that VLC and Tabcorp Holdings
Limited of Melbourne, Australia have entered into a long-term technology supply
agreement regarding VLC's AGS. The agreement gives Tabcorp a non-exclusive
license for VLC's AGS, including location and wide-area progressive jackpotting,
in the state of Victoria, Australia. The initial phase of the agreement will
provide approximately $3.5 million of revenue and may provide for additional
fees for new jurisdictions and system enhancements.
The following table reflects domestic and foreign revenue sources
representing 10% or more of the segment's revenues for the third quarters of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------------------------------------
1997 1996 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 0.3 0.9 (0.6) (66.7)
Montana routes 4.5 4.3 0.2 4.7
Oregon 1.4 1.7 (0.3) (17.6)
Other, combined 7.4 2.7 4.7 174.1
----- ---- ----
13.6 9.6 4.0 41.7
----- ---- ----
Foreign:
Quebec 5.6 0.1 5.5 ---
Other, combined 0.9 3.4 (2.5) (73.5)
----- ---- ----
6.5 3.5 3.0 85.7
----- ---- ----
$20.1 13.1 7.0 53.4
===== ==== ==== ====
</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
39% in the third quarter 1997 as compared to 45% in the third quarter 1996. The
decline in the gross profit margin reflects the relatively higher revenue from
sales to Quebec which carry a lower gross profit margin. The gross profit margin
from route operations was 27% in the third quarter of 1997 and 28% in 1996.
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operation segments
decreased by $.8 million, or 11%, to $6.6 million from $7.4 million in the third
quarter of 1996. Decreased revenues due to customer racetrack closures were
partially offset by increased revenues from new and existing customers. Revenue
from sales of wagering systems equipment was $.4 million in the third quarter of
1997 and $.7 million in
- 15 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
1996. Revenue from the racetrack operations in Sunland Park, New Mexico was
approximately $1.3 million in the third quarter of 1997 and $1.4 million in the
third quarter of 1996.
The gross profit margin on wagering systems service and equipment sales
revenues was 40% in the third quarter 1997 as compared to 39% in the third
quarter of 1996. The gross profit margin on wagering systems service revenue
fluctuates primarily based on the pari-mutuel racing seasons of customer
racetracks. Typically, the wagering systems 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 margin from
racetrack revenues was 7% in the third quarter 1997 and 4% in 1996. The gross
profit margin improvement reflects management's efforts to reduce operating
costs at the racetrack and restructure activities that historically resulted in
lower profit margins.
The pari-mutuel industry on-track attendance has experienced significant
declines in the past decade partially replaced by an increase in off-track
wagering and inter-track wagering. The Company views the integration of video
gaming at pari-mutuel facilities as an area for continued growth as evidenced by
gaming legislation currently being implemented in the state of New Mexico where
the Company's racetrack is located.
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 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 had
architectural plans developed for casino gaming at the racetrack facility and
has initiated construction. Current plans call for approximately $8,000,000 of
capital expenditures for facility enhancements, gaming machines and related
equipment.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased by $1.3
million to $7.7 million in the third quarter 1997 from $6.4 million in 1996. As
a percentage of sales, SG&A remained at 16% in the comparative periods. The $1.3
million increase over 1996 levels includes increased personnel and
administrative costs associated with the development of the Company's gaming
machine sales and customer service efforts as well as increased infrastructure
costs related to the transition of on-line lottery services from EDS to the
Company in 1997. The Company expects SG&A costs to remain at or above current
levels for the near future.
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 third quarter 1997 as compared to $1.9 million in the third quarter 1996.
The Company capitalized $.3 million in the third quarter 1997 and $1.0 million
in 1996. Total research and development expenditures approximated 5% of
consolidated revenues in the third quarter of 1997 and 7% in the third quarter
of 1996. Management plans to continue to expend similar levels on product
research and development in the foreseeable future.
- 16 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Nine Months Ended September 30, 1997 and 1996
- ---------------------------------------------
Consolidated revenues increased by $13.7 million, or 10%, to $144.6 million
from $130.9 million in the first nine months of 1996. The overall gross profit
increased by $2.7 million, or 5%, to $52.3 million from $49.6 million in the
nine months ended September 30, 1996. The Company had net earnings before
extraordinary items of $1.4 million in the first nine months of 1997 as compared
to a net loss of $8.3 million in the first nine months of 1996. Included in the
1996 results of operations were special, pre-tax charges of $12.9 million
related to the on-line lottery segment. Excluding the special charges, net of
estimated tax benefits, and extraordinary items, the first nine months of 1996
would have reflected a net loss of approximately $.5 million.
On-line Lottery
Total revenues from the on-line lottery segment increased by $5.9 million,
or 9%, to $71.7 million from $65.8 million in 1996. Revenue from on-line lottery
equipment and system sales was $7.6 million in the first nine months of 1997 as
compared to $2.6 million in the first nine months of 1996. The increase reflects
increased revenues from contracts with certain domestic on-line lotteries as
well as additional revenue from the successful implementation of an on-line
lottery system in Chile. The $5.9 million increase in on-line lottery revenues
for the nine months ended September 30, 1997 is net of a $7.3 million decline
attributable to two state contracts terminated in mid-1996. On-line lottery
service revenues were $64.1 million in the nine months ended September 30, 1997
and $63.2 million in the nine months ended September 30, 1996. Revenues from
equipment sales and on-line lottery system installations were $7.6 million in
the nine months ended September 30, 1997 and $2.6 million in the nine months
ended September 30, 1996.
The gross profit margin on-line lottery revenues was 33% in the first nine
months of 1997 as compared to 36% in the first nine 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
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 that contract
Gaming Machine and Route Operations
Revenue from the gaming machine and route operations segment increased by
$8.1 million, or 19%, to $51.6 million from $43.5 million in the first nine
months of 1996.
Revenue was recognized on shipments of 4,122 units in the first nine months
of 1997 as compared to 3,252 units in 1996. Revenue from leasing and revenue
sharing arrangements was $8.4 million in the first nine months of 1997 as
compared to $7.7 million in 1996.
- 17 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
The following table reflects domestic and foreign revenue sources
representing 10% or more of the segment's revenues for the first nine months of
1997 and 1996 (amounts in millions):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------------------------
1997 1996 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana $ 2.6 2.5 0.1 4.0
Montana routes 13.2 12.2 1.0 8.2
Oregon 6.1 4.8 1.3 27.1
Other, combined 18.0 8.7 9.3 106.8
----- ---- -----
39.9 28.2 11.7 41.5
----- ---- -----
Foreign:
Quebec 8.8 2.0 6.8 340.0
Other, combined 2.9 13.3 (10.4) (78.2)
----- ---- -----
11.7 15.3 (3.6) (23.5)
----- ---- -----
$51.6 43.5 8.1 18.6
===== ==== ===== =====
</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
44% in the first nine months of 1997 and 47% in the first nine months of 1996.
The decrease reflects relatively higher sales to Quebec which results in lower
gross profit margins for the Company. The gross profit margin from route
operations was 27% in the first nine months of 1997 and 29% in the first nine
months of 1996.
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operation segments was
$21.3 million in the first nine months of 1997 as compared to $21.5 million in
1996. Revenues from the racetrack operations in Sunland Park, New Mexico was
$5.4 million in the first nine months of 1997 as compared to $5.5 million in the
first nine months of 1996. Revenue from sales of wagering systems equipment was
$2.1 million in the first nine months of 1997 as compared to $1.7 million in the
first nine months of 1996.
The gross profit margin from wagering systems service revenue was 37% in
the first nine months of 1997 as compared to 39% in 1996. The decrease is
attributable to increased operating costs in 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. Management does
not anticipate any significant increase in gross profit margin levels on service
revenue in the near future. The gross profit margin from equipment sales of $2.1
million was 49% in the first nine months of 1997 as compared to 40% on $1.7
million of sales in the first nine months of 1996. The Company experienced a
negative gross profit from the racetrack operations of approximately $.1 million
in the first nine months of 1997 and 1996.
Selling, General and Administrative
Total selling, general and administrative (S,G&A) expenses were $23.0
million in the nine months ended September 30, 1997 and $21.6 million in the
nine months ended September 30, 1996. As a percentage of revenues, S,G&A
expenses were 16% in the first nine months of 1997 as compared to 17% in 1996.
The $1.8 million increase over 1996 levels reflects increased personnel and
related administrative costs associated with the development of the Company's
gaming machine sales and customer service efforts as well as increased
infrastructure costs related to the transition of on-line lottery services from
EDS to the Company.
- 18 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
Research and Development
Research and development expense, net of amounts capitalized for the
development of MasterLink(R) Advanced Gaming System software, was $7.1 million
in the first nine months of 1997 as compared to $5.1 million in the same period
in 1996. The Company capitalized $.8 million in the first nine months of 1997
and $3.6 million in 1996. Total research and development expenditures
approximated 6% of consolidated revenues in the first nine months of 1997 and 7%
of consolidated revenues in 1996.
Liquidity and Capital Resources
- -------------------------------
Working capital, defined as current assets less current liabilities,
increased by $1.6 million to $29.7 million at September 30, 1997 from $28.1
million at December 31, 1996. Cash generated from operations of $36.2 million in
the nine months ended September 30, 1997 was used to repay interest-bearing debt
of approximately $16.5 million, invest in additional long-lived capital assets
of approximately $7.3 million and increase cash and cash equivalent balances by
$13.7 million to a balance of $18.0 million at September 30, 1997.
Inventory levels decreased by $3.9 million to $14.4 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 nine months of 1997 as a result of the Company's improved cash
and debt positions. Total liabilities decreased by $11.3 million in the first
nine 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 nine 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 September 30, 1997 the full $10.0 million was available to the
Company. The Company's revolving line of credit agreement with First Bank, N.A.
expires in February 1998. The Company expects to extend or replace the credit
facility prior to its expiration; however, its extension or replacement cannot
be assured.
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 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 had
architectural plans developed for casino gaming at the racetrack facility and
has initiated construction. Current plans call for approximately $8,000,000 of
capital expenditures for facility enhancements, gaming machines and related
equipment.
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 was unsuccessfully protested by a competitor
and the competitor has filed an appeal which has delayed contract negotiations.
Under the new contract, AWI would provide services to the Florida Lottery for
five more years with options for two extensions of two additional years each.
The existing contract had an expiration date of June 30, 1996. AWI is continuing
the operation of the current on-line lottery system under the terms of the
expired contract under temporary extension. The Company has submitted a bid to
the Pennsylvania Lottery for an on-line lottery contract to replace the contract
the Company currently has with the lottery. The current contract expires in
December
- 19 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
1998. Sizable capital expenditures in excess of current capital sources may be
required in advance of any anticipated capital generated by a new Florida or
Pennsylvania 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
- 20 -
<PAGE>
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, 1996 Form 10-K except
as follows:
As previously reported, a class action, alleging violations of the federal
antitrust laws, was filed in June 1994, in the federal district court in South
Dakota against the Company and certain video lottery gaming machine operators in
South Dakota by a group of other video lottery gaming machine operators,
alleging, among other things, a combination and conspiracy to unlawfully
restrain trade in video lottery gaming machines by fixing lease prices for such
machines, allocating territories and refusing to deal with other operators.
Unspecified treble damages were sought, along with injunctive relief to bar the
alleged practices. On November 6, 1996, the South Dakota federal district court
granted the Company's and other defendants' motion for summary judgment,
dismissing, with prejudice, all claims of the plaintiffs in this matter. In
December 1996, plaintiffs filed an appeal of this ruling with the Eighth Circuit
of the U. S. Court of Appeals. On August 29, 1997, the court of appeals issued
its opinion affirming the judgment of the district court which dismissed, with
prejudice, all of the claims of the plaintiff. On September 29, 1997, the court
of appeals issued an order denying the suggestion for rehearing en banc and
rehearing by the panel as sought by the plaintiffs/appellants.
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 July 1, 1997 the Company announced that Richard M. Haddrill, President
of the Company was elected to the additional position of Chief Executive Officer
for the Company. On July 2, 1997, the Company announced organizational changes
at the Company and at its 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 primary legal counsel for United Tote. Additionally, in
May 1997, Susan J. Carstensen was appointed Chief Financial Officer and Dennis
V. Gallagher was appointed Secretary of the Company.
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.
- 21 -
<PAGE>
VIDEO LOTTERY TECHNOLOGIES, INC. AND SUBSIDIARIES
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. 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.
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. 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.
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 System(TM).
On September 25, 1997, the Company announced that AWI has completed the
successful implementation of its MasterLink(R) on-line system in Chile, for the
Loteria de Concepcion. The implementation was a cooperative effort by staff of
the Loteria de Concepcion, SONDA, S.A. and AWI. Sales for the new Super 7
on-line game began on September 1, 1997, with the first draw occurring on
September 7, 1997.
On September 26, 1997, the Company's subsidiary, VLC of Nevada, Inc.,
announced that the Nevada Gaming Commission had unanimously approved the
Company's Winning Touch(R) Power Series(TM) gaming machines.
On October 13, 1997, the Company announced that VLC and Tabcorp Holdings
Limited of Melbourne, Australia have entered into a long-term technology supply
agreement regarding VLC's Advanced Gaming System(TM). The agreement gives
Tabcorp a non-exclusive license for VLC's new AGS, including location and
wide-area progressive jackpotting, in the state of Victoria, Australia. The
agreement provides for additional fees for new jurisdictions and additional
system capabilities.
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
On August 6, 1997, the Company filed a current report on Form 8-K
relating to the resignation of William P. Lyons as a Director of the
Company.
- 22 -
<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: November 11, 1997 /S/ SUSAN J. CARSTENSEN
--------------------------------------------
Susan J. Carstensen, Chief Financial Officer
(authorized to sign on behalf of Registrant)
- 23 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 750
<SECURITIES> 15
<RECEIVABLES> 28,516
<ALLOWANCES> 1,375
<INVENTORY> 14,355
<CURRENT-ASSETS> 70,185
<PP&E> 150,991
<DEPRECIATION> 84,714
<TOTAL-ASSETS> 162,648
<CURRENT-LIABILITIES> 40,482
<BONDS> 38,123
0
19
<COMMON> 109
<OTHER-SE> 88,846
<TOTAL-LIABILITY-AND-EQUITY> 162,648
<SALES> 39,646
<TOTAL-REVENUES> 144,620
<CGS> 24,576
<TOTAL-COSTS> 92,334
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 2,978
<INCOME-PRETAX> 2,968
<INCOME-TAX> 1,595
<INCOME-CONTINUING> 1,374
<DISCONTINUED> 0
<EXTRAORDINARY> 13,269
<CHANGES> 0
<NET-INCOME> 14,642
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
</TABLE>
