! SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
(Part I; Items 1 and 2)
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
POWERHOUSE TECHNOLOGIES, INC.
(Formerly known as 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. 10,318,730 shares of Common
Stock, $.01 par value, outstanding as of March 31, 1997.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1996 4
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 5
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1997 6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 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
Signatures 18
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<PAGE>
Powerhouse 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 "PTI" refer to Powerhouse 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
"UWS" or "United Tote" refer to United Wagering Systems, Inc., 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 accounted for as part
of the UWS operating segment. References to the "Subsidiaries" refer to AWI,
VLC, UWS 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
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(in thousands except for per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
REVENUES:
On-line lottery $22,994 23,232
Gaming machine and route operations 17,739 14,811
Wagering systems and racetrack operations 7,271 6,702
------- ------
Total revenues 48,004 44,745
------- ------
COSTS AND EXPENSES:
On-line lottery 15,155 14,500
Gaming machine and route operations 9,238 8,181
Wagering systems and racetrack operations 5,639 5,403
Selling, general and administrative 7,694 7,679
Research and development 2,497 1,192
Other charges --- 6,000
Depreciation and amortization 6,035 5,865
------- ------
Total costs and expenses 46,258 48,820
------- ------
Earnings (loss) from operations 1,746 (4,075)
------- ------
OTHER INCOME (EXPENSE):
Interest and other income 235 489
Interest expense (994) (936)
------- ------
(759) (447)
------- ------
Earnings (loss) before income taxes and extraordinary items 987 (4,522)
Income tax (expense) benefit (703) 985
------- ------
Net earnings (loss) before extraordinary items 284 (3,537)
Extraordinary gain, net 13,269 4,014
------- ------
Net earnings $13,553 477
======= ======
Net earnings (loss) per share:
Before extraordinary items $ .03 (.28)
From extraordinary items 1.26 .32
----- ----
$1.29 .04
===== ====
Weighted average shares 10,498 12,601
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,233 4,322
Restricted short-term deposits 1,364 1,364
Accounts receivable, net 19,865 19,353
Current installments of notes receivable, net 3,064 2,818
Inventories 17,196 18,297
Prepaid expenses 1,305 1,027
Income tax refund receivable --- 3,551
Deferred income taxes 10,292 15,500
-------- -------
Total current assets 57,319 66,232
-------- -------
Property, plant and equipment 148,553 153,124
Less accumulated depreciation (75,919) (78,417)
-------- -------
Net property, plant and equipment 72,634 74,707
-------- -------
Restricted cash deposits 2,537 2,521
Notes receivable, excluding current installments 2,398 2,216
Goodwill, net 9,929 10,134
Intangible and other assets, net 11,767 12,233
-------- -------
$156,584 168,043
======== =======
LIABILITIES
Current liabilities:
Notes payable $ 1,650 7,650
Current installments of long-term debt 10,683 10,604
Accounts payable 5,924 6,646
Accrued expenses 14,354 13,249
Income taxes payable 4,028 ---
-------- -------
Total current liabilities 36,639 38,149
-------- -------
Long-term debt, excluding current installments 32,360 9,312
Other liabilities --- 38,025
Deferred income taxes 10,724 10,326
-------- -------
Total liabilities 79,723 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 (367) (417)
Accumulated deficit (11,691) (25,244)
-------- -------
Total stockholders' equity 76,861 72,231
-------- -------
$156,584 168,043
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Series A
Preferred Restricted Total
Stock Common Stock Accumu- Stock-
par Stock Paid-in Treasury Compen- lated holders'
value par value Capital Stock sation Deficit Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, $19 108 97,765 --- (417) (25,244) 72,231
1996
Net earnings --- --- --- --- --- 13,553 13,553
EDS settlement --- 1 126 (9,100) --- --- (8,973)
Amortization of
deferred
restricted stock
compensation --- --- --- --- 50 --- 50
---- ---- ------ ------ ---- ------- ------
March 31, 1997 $19 109 97,891 (9,100) (367) (11,691) 76,861
=== === ====== ====== ==== ======= ======
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</TABLE>
<TABLE>
<CAPTION>
1997 Share Data
Series A Treasury Common
Balance Preferred Stock Issued Stock* Stock Issued
- ------- ---------------------- ------ ------------
<S> <C> <C> <C>
Beginning of period 1,913 --- 10,829
EDS settlement --- (2,458) 35
----- ------ ------
End of period 1,913 (2,458) 10,864
===== ====== ======
</TABLE>
*Includes 1,913 Series A Preferred Stock and 545 of Common Stock.
See accompanying notes to consolidated financial statements.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $13,553 477
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 6,035 5,865
Other charges --- 6,000
Extraordinary gain, net (13,269) (4,014)
Other, net 31 18
Changes in operating assets and liabilities:
Receivables, net (940) (217)
Inventories 3,778 (6,724)
Prepaid expenses (277) 63
Accounts payable (722) 10,118
Accrued expenses (1,231) (2,605)
Income taxes 4,504 668
------- ------
Net cash provided by operating activities 11,462 9,649
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,141) (2,682)
Expenditures on intangible and other noncurrent assets (375) (2,772)
Proceeds from sales of equipment 5 15
Change in restricted cash deposits (16) 580
------- ------
Net cash used in investing activities (2,527) (4,859)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on notes to banks (6,000) (4,550)
Proceeds from issuance of long-term debt --- 4,251
Repayments of long-term debt (3,024) (3,193)
------- ------
Net cash used in financing activities (9,024) (3,492)
------- ------
Net (decrease) increase in cash and cash equivalents (89) 1,298
------- ------
Cash and cash equivalents, beginning of period 4,322 1,993
------- ------
Cash and cash equivalents, end of period $ 4,233 3,291
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Presentation
The consolidated financial statements include the accounts of
Powerhouse Technologies, Inc. and subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The consolidated balance sheet as of March 31, 1997 and the
consolidated statements of operations and cash flows for the three-month
periods ended March 31, 1997 and 1996 and the consolidated statement of
stockholders' equity for the three-month period ended March 31, 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. Adoption of Accounting Pronouncement
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (the "Statement") issued by the
Financial Accounting Standards Board ("FASB") in June 1996, effective
January 1, 1997. This Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The adoption did not have an effect on the
Company's financial position or results of operations.
e. Accounting Pronouncements Not Yet Adopted
In February 1997, the FASB issued 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.
The Company has capitalized start-up costs in conjunction with its
long-term contracts in the on-line lottery and wagering systems segments in
accordance with Statement of Position (SOP) 81-1.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
The AICPA Accounting Standards Executive Committee (AcSEC) approved for
issuance the SOP, Reporting on the Costs of Start-Up Activities, which will
require that costs incurred during a start-up activity (including
organization costs) be expensed as incurred. Before issuance, the SOP must
be reviewed and cleared by the FASB. If cleared by the FASB, it is
anticipated that the final SOP would be released in the second quarter of
1998 and be effective for fiscal years beginning after December 15, 1998.
Depending on the level of the Company's start-up activities, this change in
accounting method may be material.
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 carries dividend rights equal to the
Company's Common Stock, is non-voting, and is convertible to 1,912,728 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 is anticipated to be completed in the second
quarter of 1997.
3. DISCONTINUED OPERATIONS
On May 3, 1994, the Company completed the purchase of all of the
outstanding stock of United Wagering Systems, Inc. ("UWS"). 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 UWS 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 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>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
4. INVENTORIES
A summary of inventory follows:
March 31, December 31,
1997 1996
---- ----
Manufacturing:
Raw materials $ 4,585,000 5,462,000
Work-in-process 628,000 733,000
Finished goods 9,588,000 11,322,000
Customer service and other 2,395,000 780.000
----------- ----------
$17,196,000 18,297,000
=========== ==========
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
March 31, 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 and
property and equipment and treasury stock $26,150,000 ---
8.25% note payable in monthly installments, including interest,
through September 2001 (see Note 3) 5,465,000 5,729,000
7.2% to 10.4% capital lease obligations, due in monthly install-
ments of $4,573 to $26,567 including interest, maturing
through November 1999 1,458,000 1,753,000
9.0% note payable in monthly installments including interest
through December 1998, secured by assets leased to others 4,200,000 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 subsidiaries 5,770,000 7,270,000
----------- ----------
43,043,000 19,916,000
Less current installments 10,683,000 10,604,000
----------- ----------
Long-term debt, excluding current installments $32,360,000 9,312,000
=========== ==========
</TABLE>
The aggregate maturities of long-term debt are as follows:
Twelve months ending March 31,
1998 $10,683,000
1999 4,070,000
2000 7,000,000
2001 6,518,000
2002 5,830,000
Thereafter 8,942,000
===========
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 $2,899,000 at March 31,
1997. The Company has established reserves for estimated losses under the
recourse provisions. At March 31, 1997, the Company
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
had guaranteed or pledged security for the indebtedness of others in the amount
of approximately $3,304,000 (including $2,899,000 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. At March 31, 1997 and December 31, 1996, respectively, the Company
had accrued liabilities of approximately $2,408,000 and $3,115,000 representing
billings and estimated costs to fulfill its obligations to deliver products and
services under certain customer contracts.
The Company is currently conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
issue is pervasive and complex, as virtually every computer operation of the
Company, including both internal systems and systems delivered to customers,
will be affected in some way by the roll-over of the two-digit year value to
"00." Computer systems that do not properly recognize date- sensitive
information could generate erroneous data or cause a complete system failure.
The Company believes that, with modification of existing computer systems,
updates by vendors and conversion to new software in the ordinary course of its
business, the Year 2000 issue will not pose significant operational problems for
the Company's computer systems. However, if such modifications and conversions
are not completed timely or properly, the Year 2000 issue may have a material
impact on the business and operations of the Company. The costs of modifications
and conversions are not anticipated to be material, but will principally
represent a re-deployment of existing or otherwise planned resources. No
assurance can be given that the Company will successfully avoid any problems
associated with the Year 2000 issue.
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At March 31, 1997, the Company had collateral in
support of the various bonds outstanding consisting of $3,350,000 of restricted
deposits and $9,500,000 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 of
approximately $20.0 million in the racetrack operations in 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, New
Mexico. 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
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
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 early 1998.
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.
International sales denominated in foreign currencies accounted for
approximately $4.4 million or 9% of the Company's total revenues for the three
months ended March 31, 1997 and $16.6 million or 9% of total revenues for the
fiscal year ended December 31, 1996. Management can give no assurances that
changes in currency and exchange rates will not materially affect the Company's
revenues, costs, cash flows and business practices and plans. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
delays in receiving payments on accounts receivable balances, reimbursement
approvals (both governmental and private), difficulties in managing
international operations, potentially adverse tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
foreign laws and regulations. In addition, the Company's foreign operations
would be affected by general economic conditions in the international markets in
which the Company does business, such as a prolonged economic downturn in Europe
or the Asian-Pacific region. There can be no assurances that such factors will
not have a material adverse effect on the Company's future international
revenues and, consequently, on the Company's business, financial condition,
results of operations or cash flows. The Company has not historically attempted
to hedge the risks of fluctuating exchange rates given the currencies involved
and the terms of payment granted to its customers.
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>
POWERHOUSE 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 on-line lottery equipment sales. The segment revenue will
experience fluctuations depending on relative sizes of jackpots and the number
of terminals on-line and selling tickets in the states in which the Company
operates. The Company expects on-line lottery services revenue to continue to be
a significant component of total revenues. On-line lottery revenue is generated
by the Company's AWI subsidiary.
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 and
Rhode Island lotteries which implemented video lottery programs in 1992. The
Rhode Island program is a limited form of video lottery at two pari-mutuel
facilities. In December 1995 the Company began leasing video gaming machines to
the Delaware Lottery. The Company expects video lottery and route operations
revenue to continue to be a major component of total revenues. Gaming machine
revenue is primarily generated by the Company's VLC subsidiary.
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 124 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 this segment of
its business. The Company expects wagering systems and racetrack operations
revenue to be a significant component of total revenues. Wagering systems and
racetrack operations revenue is generated by the Company's UWS subsidiary.
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, 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
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
in the costs are labor, material, consulting, occupancy and other expenses
associated with the research and development efforts. Development costs are
capitalized 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. The Company excludes these other charges from the
calculation of gross profit due to the nature of each charge as disclosed in the
discussion of gross profit margin for each segment of the Company's operations.
Such other charges are considered special and unusual in nature and are not
associated with the revenue stream of any segment of the Company's operations.
Accordingly, the Company believes that the inclusion of such other charges in
the determination of gross profit would not be indicative of past, current or
anticipated future gross profit margins.
First Quarter 1997 Compared with First Quarter 1996
- ---------------------------------------------------
Total revenue in the first quarter 1997 increased by $3.3 million (7.3%) to
$48.0 million from $44.7 million in the first quarter 1996. Overall gross profit
increased by $1.3 million (7.8%) to $18.0 million from $16.7 million in the
first quarter 1996. The Company had net earnings from operations before
extraordinary items of $.3 million as compared to a net loss of $3.5 million in
the first quarter 1996. The increase is primarily attributable to higher
revenues and gross margin from the gaming machine segment and the absence of the
other special charges recorded in the first quarter 1996.
In conjunction with the stock sale to EDS (see Note 2 to the Financial
Statements), 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 an extraordinary gain (net of taxes) on debt
extinguishment of approximately $13.3 million for the Company.
On March 25, 1996, the Company reached an agreement with the sellers of UWS
settling all outstanding claims and disputes between them, including dismissal
of all outstanding litigation, and a restructuring and reduction of the notes
payable, resulting in an extraordinary gain (net of taxes) on debt
extinguishment of $4.0 million.
On-line Lottery
Revenue from the on-line lottery segment decreased by $.2 million (1%) to
$23.0 million from $23.2 million in the first quarter 1996. In the first quarter
1996 the Company recorded revenues from the Arizona and Washington lottery
contracts of approximately $4.0 million. The Arizona contract was terminated and
the Washington Lottery contract expired in the second quarter 1996. The
implementation of a video gaming program in Delaware, which is operated through
the Company's on-line lottery system software MasterLink(R) Advanced Gaming
System, in December 1995 and the start-up of the on-line lottery system in
Maryland in the third quarter of 1996 has resulted in approximately $3.1 million
of additional revenue to the Company in the first quarter 1997 offsetting the
loss of Arizona and Washington contract revenues. Revenues from sales of on-line
lottery equipment increased by $.5 million to $.7 million over first quarter
1996 levels of $.2 million.
In 1996, the Company was named the successful bidder for a new on-line
lottery contract by the Florida Lottery. The award has been protested by a
competitor. If the award is upheld, the Company will begin negotiations of a new
contract with the Florida Lottery. The previous contract had an initial
expiration date of June 30, 1996. The Company's subsidiary AWI is continuing the
operation of the current on-line lottery system until the implementation of a
new contract.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
The gross profit margin of the on-line lottery segment was 34% in the first
quarter 1997 as compared to 38% in the first quarter 1996. The decrease is
primarily attributable to lower margins attained on the revenues from the
Maryland contract which was implemented in the third quarter 1996. The Company
anticipates the margin levels from the contract with Maryland to improve as the
system operation matures.
In the quarter ended March 31, 1996, the Company recorded approximately
$6.0 million of special and other charges for the termination of the Arizona
Lottery contract and disputes with other on-line lottery customers. The disputes
were related to performance issues with EDS. The Company has excluded these
charges from the determination of gross profit due to their nature and believes
the charges are not indicative of past, current or anticipated future gross
profit margins.
Gaming Machine and Route Operations
Revenue from the gaming machine and route operations segment increased by
$2.9 million (19.6%) to $17.7 million from $14.8 million in the first quarter
1997. The increase is due to revenues in jurisdictions in which the Company has
recently been licensed to sell gaming machines including Nevada, New Jersey and
Minnesota and increased sales in Quebec, Canada. Increases in these
jurisdictions were offset by a decrease in revenues from Alberta, Canada.
Revenue was recognized on shipments of 2,508 units in the first quarter
1997 as compared to 1,380 units in the first quarter 1996. Included in the total
units were 75 and 102 royalty unit sales in the first quarters of 1997 and 1996,
respectively. Revenues from sales of units pursuant to royalty arrangements have
minimal related direct costs. The Company previously earned revenues from sales
of units under a royalty arrangement with an Australian company in certain
Australian jurisdictions. the royalty arrangement was terminated effective
mid-1997. Also included in the first quarter 1997 unit sales were 1,375 units to
the Oregon Lottery that were previously leased to the Oregon Lottery. The five
consecutive one-year lease terms of the gaming machines expired in the first
quarter 1997. The Company continues to have 3,375 terminals under lease with
Oregon Lottery, 440 terminals with the Rhode Island Lottery and 275 terminals
under lease agreement with the Delaware Lottery.
The following table reflects domestic and foreign revenues representing 10%
or more of the segments revenues for the first quarters of 1997 and 1996
(amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Domestic:
Montana routes $ 4.4 4.0 0.4 10.0
Oregon 1.7 0.1 1.6 1,600.0
Oregon lease 1.7 1.4 0.3 21.4
Other lease 1.3 1.0 0.3 30.0
Other, combined 4.1 1.8 2.3 127.8
----- ---- ----
13.2 8.3 4.9 59.0
----- ---- ----
Foreign:
Alberta, Canada 0.1 2.5 (2.4) (96.0)
Quebec, Canada 3.1 1.9 1.2 63.2
Other foreign, combined 1.3 2.1 (0.8) (38.1)
----- ---- ----
4.5 6.5 (2.0) (30.8)
----- ---- ----
$17.7 14.8 2.9 19.6
===== ==== ==== =======
</TABLE>
The gross profit margin from the gaming machine segment, which includes
equipment sales and contract revenue, as well as royalty and lease revenue was
48% and 45% for the first quarters of 1997 and 1996, respectively. The gross
profit margin from route operations was 28% in the first quarters of 1997 and
1996.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Wagering Systems and Racetrack Operations
Revenue from the wagering systems and racetrack operations segment
increased by $.6 million (9.0%) to $7.3 million from $6.7 million in the first
quarter 1996. The increase primarily reflects higher sales of wagering systems
equipment in the first quarter 1997 over 1996 levels. Wagering systems services
revenue was $3.9 million in the quarters ended March 31, 1997 and 1996,
respectively. Revenue from the operations of the racetrack in Sunland Park, New
Mexico was $2.2 million and $2.3 million in the first quarters of 1997 and 1996,
respectively.
The Company believes that a growing market exists for video lottery gaming
at pari-mutuel racetracks, which have suffered from declining attendance in
recent years due to proliferation of casino gaming outside of Las Vegas and
Atlantic City. To permit the racing industry to become more competitive, some
states have enacted legislation that allows video gaming devices at racetracks,
a trend that the Company believes will continue. The Company intends to
participate in this growth by supplying its gaming machines and systems,
partnering with or purchasing racetracks and owning and operating its own
facility, Sunland Park. The Company is the only full service supplier of gaming
and pari-mutuel systems and services to racetracks in North America and believes
it has a competitive advantage due to its existing United Tote customer
relationships in the pari-mutuel industry.
The recovery of a significant amount of the Company's investment of
approximately $20.0 million in the racetrack operations in 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, New
Mexico. 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
early 1998.
The gross profit margin from the wagering systems and racetrack operations
segment was 22% and 19%, respectively, in the first quarters of 1997 and 1996.
The increase is due to higher margins on sales of wagering systems equipment.
The gross profit margin on wagering systems service revenue was 33% in both
periods. The gross profit margin on sales of equipment was 48% and 38% in the
quarters ended March 31, 1997 and 1996, respectively. The racetrack operations
resulted in a negative gross profit margin of approximately 8% in the first
quarters of 1997 and 1996.
Selling, General and Administrative
Selling, general and administrative (SG&A) expenses were $7.7 million in
the first quarters of 1997 and 1996. As a percentage of sales, SG&A expenses
were 16% and 17%, respectively, in the first quarters of 1997 and 1996. The
Company expects SG&A levels to be at or above current levels in 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 $2.5 million
and $1.2 million in the first quarters of 1997 and 1996, respectively. The
Company capitalized approximately $.3 million and $2.2 million in the first
quarters of 1997 and 1996, respectively.
Liquidity and Capital Resources
- -------------------------------
Working capital, defined as current assets less current liabilities,
decreased by $7.4 million to $20.7 million from $28.1 million at December 31,
1996. The decrease is primarily due to an increase in net current income taxes
payable resulting from pre-tax earnings from all sources of income of
approximately $23.0 million. Earnings before interest, taxes, depreciation and
amortization and extraordinary items was $7.8 million in the
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
first quarter 1997. Additionally, the Company invested an additional $2.5
million for property, plant and equipment, and intangible and other assets in
the first quarter 1997, including $1.7 million for the wagering systems segment
and $.3 million of additional capitalized software development relating to
MasterLink(R), the Company's central system software used in both the on-line
and gaming machine segments of the Company.
Inventories decreased by $1.1 million to $17.2 million at March 31, 1997
from $18.3 million at December 31, 1996. The Company manufactures inventories
for sale and lease as well as use in the provision of services under long-term
contracts. Inventories purchased and manufactured for use in the provision of
services are transferred to property, plant and equipment when installed
pursuant to the terms of such long term contracts.
In the first quarter 1997, the Company reduced the outstanding balance of
the revolving line of credit with First Bank to $1.7 million leaving $8.3
million available for cash advances on the credit facility. The line of credit
agreement expires in February 1998. Additionally, the Company made principal
payments on long-term debt of $3.0 million in the first quarter 1997 reducing
the Company's interest-bearing debt level (including the revolving line of
credit) to $44.7 million.
During 1996, the Company sold notes receivable from gaming machine
equipment sales, with a face value of $1.5 million 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 $2.9 million at March 31, 1997 and $4.7 million at December 31,
1996. At March 31, 1997, the Company had a reserve of $0.4 million established
for any losses under the recourse provisions. At March 31, 1997 and December 31,
1996, respectively, the Company had guaranteed or pledged security for the
indebtedness of others in the amount of approximately $3.3 million and $5.8
million (including notes receivable sold to banks and other third parties).
The Company's on-line subsidiary, AWI, completed negotiations with the
Minnesota Lottery in the first quarter 1997 for a new five-year contract
commencing in August 1997. The on-line lottery system currently in place in
Minnesota under the current contract will remain in use under the new contract
and the Company does not anticipate significant additional capital expenditures
to satisfy the requirements of the new contract. In 1996, AWI was named as the
successful bidder for a contract with the Florida Lottery to replace the current
contract with AWI. The award has been protested by a competitor and the protest
is still pending. If the award is upheld, the Company will begin negotiations of
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.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
POWERHOUSE TECHNOLOGIES, INC.
Date: February 8, 1998 /S/ SUSAN J. CARSTENSEN
--------------------------------------------
Susan J. Carstensen, Chief Financial Officer
(authorized to sign on behalf of Registrant)
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