UNITED STATES
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
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EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 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.)
115 Perimeter Center Place, Suite 911
Atlanta, Georgia 30346
(Address of principal executive offices) (Zip code)
(770) 481-1800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
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Applicable only to corporate issuers:
The number of shares outstanding of the issuer's $ .01 par value Common Stock,
as of the latest practicable date of April 15, 1999, was 10,667,190 shares.
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POWERHOUSE TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Statements of Earnings
Three Months Ended March 31, 1999 and 1998 3
Balance Sheets
March 31, 1999 and December 31, 1998 4
Statement of Stockholders' Equity
Three Months Ended March 31, 1999 5
Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 2. Changes in Securities 16
ITEM 3. Defaults Upon Senior Securities 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF EARNINGS
(in thousands except for per share data)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
REVENUES:
Lottery systems $26,038 29,264
Gaming machines and systems 15,785 9,924
Gaming operations 9,031 6,848
Pari-mutuel systems 4,486 4,194
------- ------
Total revenues 55,340 50,230
------- ------
COSTS OF REVENUES:
Lottery systems 16,123 19,107
Gaming machines and systems 8,237 4,798
Gaming operations 7,087 5,853
Pari-mutuel systems 2,997 2,894
------- ------
Total costs of revenues 34,444 32,652
------- ------
Gross profit 20,896 17,578
OTHER OPERATING EXPENSES:
Selling, general and administrative 9,835 8,526
Research and development 2,396 2,565
Depreciation and amortization 5,242 4,820
Other charges 1,328 ---
------- ------
Earnings from operations 2,095 1,667
------- ------
OTHER INCOME (EXPENSE):
Interest and other income 527 368
Interest expense (1,017) (790)
------- ------
Other expense, net (490) (422)
------- ------
Earnings before income taxes and accounting change 1,605 1,245
Income tax expense (994) (632)
------- ------
Earnings before cumulative effect of accounting change 611 613
Cumulative effect of change in accounting principle,
net (235) ---
------- ------
Net earnings $ 376 613
======= ======
SHARE INFORMATION, BASIC AND DILUTED:
Earnings before accounting change $ 0.06 0.06
Effect of accounting change (0.02) ---
------ ----
Net earnings $ 0.04 0.06
====== ====
Weighted average shares:
Basic 10,550 10,467
Potential common stock (excluded if antidilutive) 544 405
------ ------
Diluted 11,094 10,872
====== ======
See accompanying notes to consolidated financial statements.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(in thousands except for share data)
March 31, December 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 7,434 16,371
Restricted short-term deposits 169 1,992
Accounts receivable, net 25,215 21,786
Current installments of notes receivable, net 6,836 6,179
Inventories 19,602 18,630
Prepaid expenses 3,455 1,574
Deferred income taxes 9,597 9,549
-------- -------
Total current assets 72,308 76,081
Property and equipment, net 87,923 76,355
Restricted cash deposits 285 376
Notes receivable, excluding current installments 9,482 10,049
Goodwill, net 8,291 8,495
Intangible and other assets, net 19,636 17,119
-------- -------
$197,925 188,475
======== =======
LIABILITIES
Current liabilities:
Current installments of long-term debt $ 5,530 4,445
Accounts payable 10,321 12,611
Accrued expenses 19,466 17,848
-------- -------
Total current liabilities 35,317 34,904
Long-term debt, excluding current installments 59,500 51,765
Deferred income taxes 14,618 13,828
-------- -------
Total liabilities 109,435 100,497
-------- -------
Commitments and contingencies (see note 7)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued --- ---
Common stock, $.01 par value. Authorized 25,000,000
shares 107 106
Paid-in capital 91,357 91,304
Deferred restricted stock compensation (733) (815)
Accumulated deficit (2,241) (2,617)
-------- -------
Total stockholders' equity 88,490 87,978
-------- -------
$197,925 188,475
======== =======
See accompanying notes to consolidated financial statements.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except for share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Restricted Total
Common Common Stock Accumu- Stock-holders'
Stock Stock Paid-in Compen- lated Equity
Issued par value Capital sation Deficit
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 10,648,317 $106 91,304 (815) (2,617) 87,978
Net earnings --- --- --- --- 376 376
Shares
issued to directors 4,461 --- 62 --- --- 62
Amortization of
deferred
restricted stock
compensation --- --- --- 82 --- 82
Stock options
exercised and shares
issued under
employee stock
purchase plan 59,412 1 574 --- --- 575
Stock redemptions (45,000) --- (583) --- --- (583)
---------- ---- ------ ---- ------ ------
March 31, 1999 10,667,190 $107 91,357 (733) (2,241) 88,490
========== ==== ====== ==== ====== ======
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 376 613
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,242 4,820
Cumulative effect of accounting change, net 235 ---
Other, net 228 135
Changes in operating assets and liabilities:
Receivables, net (3,519) 4,672
Inventories (793) (3,276)
Prepaid expenses (1,864) (219)
Accounts payable (2,290) (2,434)
Accrued expenses 1,700 (2,065)
Income taxes 899 624
------- ------
Net cash provided by operating activities 214 2,870
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures on property and equipment (16,143) (2,493)
Expenditures on intangible and other
noncurrent assets (3,720) (115)
Proceeds from sales of equipment 78 97
Change in restricted cash deposits 1,914 241
------- ------
Net cash used in investing activities (17,871) (2,270)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 10,000 ---
Repayments of long-term debt (1,180) (2,489)
Payments of loan fees (92) ---
Proceeds from issuance of common stock 575 2,080
Redemption of common stock (583) ---
------- ------
Net cash provided by (used in) financing activities 8,720 (409)
------- ------
Net increase (decrease) in cash and cash equivalents (8,937) 191
Cash and cash equivalents, beginning of period 16,371 13,772
------- ------
Cash and cash equivalents, end of period $ 7,434 13,963
======= ======
See accompanying notes to consolidated financial statements.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Presentation
The consolidated financial statements include the accounts of
Powerhouse Technologies, Inc. and its subsidiaries (collectively the
"Company"). All significant intercompany balances and transactions have
been eliminated.
The Company has four business segments:
o Lottery systems includes the design, manufacture, sale,
installation and operation of on-line lottery systems. Revenues
are derived from the Company's AWI subsidiary.
o Gaming machines and systems includes the design, manufacture,
sale and leasing of video gaming machines and central control
systems and provision of related services. Revenues are generated
by the Company's VLC and VLC of Nevada subsidiaries.
o Gaming operations includes operating a casino, gaming machine
routes and racetrack. Revenues are generated at the Company's
Sunland Park Racetrack & Casino and through its Montana route
operations.
o Pari-mutuel systems includes the design, manufacture, sale and
operation of computerized pari-mutuel wagering systems used at
racetracks. Revenues are provided by the Company's United Tote
subsidiary.
The consolidated balance sheet as of March 31, 1999 and the
consolidated statements of earnings and cash flows for the three-month
periods ended March 31, 1999 and 1998 and the consolidated statement of
stockholders' equity for the three-month period ended March 31, 1999 have
been prepared by the Company, without audit. These financial statements
should be read in conjunction with the consolidated financial statements
and notes contained in the Company's 1998 Annual Report on Form 10-K. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows as of and for the periods indicated have been
made.
b. Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
c. Accounting pronouncements not yet adopted
Statement of Financial Accounting Standards No. 133 ("Statement 133"),
issued June 1998, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for
hedging activities. Statement 133 requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 1999. Initial
application of it must be as of the beginning of an entity's fiscal
quarter. The Company expects to adopt this statement January 1, 2000; the
adoption is not expected to have a significant effect on the Company's
financial position, results of operation or cash flows.
2. OTHER CHARGES
The statement of earnings for the quarter ended March 31, 1999 includes
$1.3 million ($1.1 million or $0.10 per diluted share after tax) of charges
relating to the Company's proposed merger with Anchor
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gaming and the startup of the Company's casino at its Sunland Park facility.
Costs related to the proposed merger consist primarily of professional fees,
while those associated with the casino startup include pre-opening costs from
January 1, 1999 through February 21, 1999. Approximately $0.9 million of the
other charges relate to the Company's proposed merger with Anchor Gaming, while
$0.2 million represent Sunland Park casino startup costs.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Pursuant to the required adoption of Statement of Position 98-5 (SOP 98-5),
the Company changed its method of accounting for startup costs. The change
required that startup costs be expensed as incurred rather than capitalized and
amortized to expense. This change resulted in the write-off of casino
pre-opening costs capitalized through December 31, 1998. The cumulative effect
of the write-off totals $235,000 or $0.02 per diluted share (after tax), and is
reflected in the accompanying statement of earnings. As discussed in Note 2,
costs incurred during 1999 were expensed as incurred. The adoption of SOP 98-5
would not have had a significant effect on net earnings or earnings per share
for the three months ended March 31, 1998; as such, pro forma results are not
presented.
4. INVENTORIES
A summary of inventory follows:
March 31, December 31,
1999 1998
---- ----
(000s) (000s)
Manufacturing:
Raw materials $ 6,802 6,497
Work-in-process 1,551 1,166
Finished goods 9,589 9,604
Customer service and other 1,660 1,363
------- ------
$19,602 18,630
======= ======
5. STOCKHOLDERS' EQUITY
During the quarter, the Company purchased 45,000 shares of its outstanding
stock pursuant to a stock buyback authorized by the Company's Board of Directors
in 1998; such shares were cancelled.
6. SEGMENT DATA
Three Months Ended March 31,
1999 1998
---- ----
(000s) (000s)
Segment revenues:
Lottery systems $26,038 29,264
Gaming machines and systems 15,855 10,041
Gaming operations 9,031 6,848
Pari-mutuel systems 4,591 4,316
------- ------
Total revenues 55,515 50,469
Less intercompany (175) (239)
------- ------
Consolidated revenues $55,340 50,230
======= ======
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31,
1999 1998
---- ----
(000s) (000s)
Earnings from operations before other charges:
Lottery systems $ 3,579 3,211
Gaming machines and systems 2,320 914
Gaming operations 392 (90)
Pari-mutuel systems (394) (372)
------- ------
Reportable segments' earnings from
operations before other charges 5,897 3,663
Corporate expenses (2,474) (1,996)
------- ------
Consolidated earnings from operations
before other charges $ 3,423 1,667
======= ======
Earnings from operations including other
charges:
Lottery systems 3,579 3,211
Gaming machines and systems 2,320 914
Gaming operations (42) (90)
Pari-mutuel systems (394) (372)
------- ------
Reportable segments' earnings from
operations including other charges 5,463 3,663
Corporate expenses (3,368) (1,996)
------- ------
Consolidated earnings from operations
including other charges $ 2,095 1,667
======= ======
March 31, December 31,
1999 1998
---- ----
(000s) (000s)
Segment assets:
Lottery systems $ 72,158 57,880
Gaming machines and systems 53,872 52,107
Gaming operations 30,779 28,194
Pari-mutuel systems 22,430 22,357
-------- -------
Reportable segments' assets 179,239 160,538
Corporate assets 18,686 27,937
-------- -------
Consolidated assets $197,925 188,475
======== =======
7. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain of its executive
officers that provide for lump sum severance payments and accelerated vesting of
options and restricted stock upon termination of employment under certain
circumstances or a change in control, as defined. The Company's proposed merger
constitutes a change in control as defined in certain of the employment
agreements as well as in certain stock incentive and incentive compensation
arrangements.
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.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company typically posts bid, litigation, and performance bonds for
on-line lottery contracts. At March 31, 1999, the Company had collateral in
support of the various bonds outstanding consisting of $7.5 million 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. An additional $1.0 million in letters of credit is outstanding related to
supplier and rental contracts entered into in the ordinary course of business.
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 in effect as appropriate.
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 $9.2 million or 4.3% of the Company's consolidated revenues in
1998. 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 and 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.
The Year 2000 issue is pervasive and complex. Virtually every information
technology ("IT") system, including the Company's internal systems, systems
delivered to customers, and suppliers' systems, as well as non-IT systems will
be affected in some way by the rollover of the two-digit year value to "00".
Non-IT systems include manufacturing systems and physical facilities including,
but not limited to, security systems and utilities. The result could create
errors in information or system failures. Recognizing this uncertainty,
management has and is continuing to actively analyze, assess and plan for
various Year 2000 issues. Management has appointed a task force that reports
periodically to the Company's CEO and Board of Directors, and has also engaged
outside consultants to assist and advise management in this assessment process.
The Company's Year 2000 team has completed an inventory of all of its
computer systems and technology that may be impacted by Year 2000 issues. The
programming and testing of mission critical systems, including those systems
delivered to customers or used in the provision of services to customers, is
complete and contingency plans have been developed. In calendar year 1999, the
Company plans to replace or upgrade the remaining systems that are identified as
non-Year-2000 compliant at an incremental cost of approximately $0.5 million.
Non-IT system issues are more difficult to identify and resolve. The Company is
actively identifying non-IT Year 2000 issues concerning its products and
services, as well as its physical facility locations. As non-IT areas are
identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Although management believes that its
efforts will be successful and the costs will be immaterial to its consolidated
financial position and results of operations, it
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
also recognizes that any failure or delay could cause a disruption in its
business and may have a significant financial impact.
The Company has evaluated its strategy and legal obligations for any
communication to its customers. The Year 2000 readiness of its customers varies,
and the Company is encouraging its customers to evaluate and prepare their own
systems. In many cases the Company is assisting customers by providing new or
modified systems to resolve Year 2000 issues.
The Company is also assessing the Year 2000 readiness of its key suppliers.
The Company's direction in this effort is to ensure the adequacy of resources
and supplies to minimize any potential business interruptions. Management
expects to complete this part of its Year 2000 readiness plan in the second
quarter of 1999. As part of the Company's contingency plans, management will, as
considered necessary, begin to identify and communicate with alternative
suppliers to ensure the continuation of its critical business operations.
The Company believes that because of modifications already made and current
plans for additional modifications of existing computer systems, updates by
vendors and conversion to new software, the Year 2000 issue will not pose
significant operations problems for the Company. However, if such modifications
and conversions are not completed properly or in a timely manner, or third party
software and systems relied on by the Company fail, the Year 2000 issue could
have a material impact on the business and operations of the Company. The costs
of modifications and conversions are not anticipated to be material, and 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.
In March 1996, Ladbroke Holdings del Peru S.A. ("Ladbroke") filed an action
in the United States District Court, Eastern District of Michigan, against
United Tote Company and the Company. The complaint alleged, in part, that United
Tote had violated an agreement that it had entered with Ladbroke to "supply,
install, commission and operate" a number of wagering terminals and that United
Tote, without justification, notified Ladbroke that it was terminating the
agreement. Ladbroke alleged that United Tote and the Company's conduct
constituted a breach of contract, wrongful termination of contract, fraudulent
misrepresentation and tortious interference with contract/business relationship.
The complaint does not specify a damage figure but seeks recovery of all
"actual, incidental and consequential damages." The Company and United Tote
filed a counterclaim against Ladbroke alleging claims for breach of certain of
Ladbroke's obligations under the contract and unjust enrichment. The
counterclaim alleged, in part, that Ladbroke failed to identify a sufficient
number of viable retailer locations, and failed to promote, design and market
the game so as to create sufficient demand. The case is in discovery and the
Company intends to continue to vigorously defend the action. The Company cannot
reasonably predict the ultimate outcome of this litigation.
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 or liquidity.
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POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
Recent Developments
- -------------------
On March 9, 1999, the Company signed a definitive merger agreement with
Anchor Gaming. Subject to shareholder and regulatory approval, Anchor will
acquire all outstanding shares of the Company's common stock for $19.50 per
share (approximately $220 million) plus net debt (approximately $70 million) in
an all-cash merger. A special meeting of the Company's shareholders is scheduled
for June 7, 1999, at which the shareholders will vote on the merger. The
transaction is expected to close in the third quarter of 1999.
First Quarter 1999 Compared with First Quarter 1998
- ---------------------------------------------------
Consolidated revenues increased by 10% to $55.3 million compared with the
first quarter 1998, while consolidated gross profit increased by 19% to $20.9
million. The revenue increase resulted from the casino opening at the Company's
Sunland Park Racetrack & Casino and continued increases in casino market gaming
machine sales. Gross margin increased from 35% in 1998 to 38% in 1999 due to
higher margin on AWI equipment and software sales and the casino startup in
February 1999. Earnings from operations were $2.1 million in 1999 and $1.7
million in 1998 and include other charges of $1.3 million ($1.1 million, or
$0.10 per share, after tax). Approximately $0.9 million of the other charges
relate to the Company's proposed merger with Anchor Gaming, while $0.2 million
represent Sunland Park casino startup costs.
Lottery Systems
---------------
Total revenues from the lottery systems segment decreased by 11% to $26.0
million. Gross profit margin for the lottery systems segment was 38% in the
first quarter 1999 compared with 35% in 1998. Profit derived from service
revenues was 36% in 1999 and 35% in 1998, while profit provided by lottery
system and terminal sales was 86% in 1999 and 41% in 1998. The current quarter's
86% margin reflects sales of inventories which had previously been written off.
The Company expects gross profit margins from on-line lottery revenues to
continue increasing over time, although no assurances of increased margins can
be given.
The Company expects the lottery systems segment to remain a significant
segment of the Company and the segment's growth is dependent upon management's
strategy to selectively bid on domestic lottery contracts and aggressively
pursue international on-line lottery opportunities. On-line lottery contracts
for several state lotteries are currently, or will be, up for procurement over
the next three years. Due to the high cost of implementing new lottery
contracts, the Company is targeting those states which it believes will
establish a bidding process based exclusively on technical capability, price and
service. This strategy allows the Company to efficiently allocate its resources
so that it may also continue to pursue international growth opportunities. The
Company is currently pursuing potential opportunities in a number of
jurisdictions worldwide that are expected to implement on-line lottery programs
within the next two years.
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<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
The Company's on-line lottery system MasterLink(R) affords the Company the
ability to develop add-on products and services. Given the maturity of the
on-line lottery industry, operators are in need of ways to increase lottery
ticket sales and reduce costs. The Company expects to develop new products and
services every year for its existing customers as well as reduce operating
costs.
In March 1999, AWI and the Florida Lottery signed an amended contract under
which AWI will provide an on-line lottery system and related services to the
Florida Lottery. A decision by the Lottery not to join the multi-state game
Powerball(R) necessitated the renegotiation of the contract entered into in
October 1998. Under the amended contract, the Company will design, install and
operate a new statewide on-line lottery system for an initial term of five years
and three months, with two, two-year renewal options. The Company estimates that
revenues from the contract over the initial 63-month period will be
approximately $200 million. AWI will be compensated at a base rate of on-line
sales and, if on-line ticket sales exceed targeted amounts, an additional
incentive rate. An attempt by the losing vendor to enjoin the contract was
rejected by the Florida district court; the decision has been appealed.
Gaming Machines and Systems
---------------------------
Revenue from the gaming machines and systems segment increased by 59% to
$15.8 million in the first quarter of 1999 compared with the same period in
1998. 1,314 units were delivered in 1999 compared with 835 units in 1998. Gross
profit margin on gaming machines and systems revenue was 48% in 1999 compared
with 52% in 1998.
The $5.9 million revenue increase over 1998 reflects the Company's
significant sales in the casino gaming market; the success of VLC's innovative
Coin-Free(TM) technology, which provides cash vouchers for winnings instead of
coins; and AGS central system sales.
The Company expects the gaming machines and systems segment to remain a
significant segment of the Company's operations. The growth and success of the
segment is dependent upon the Company's ability to expand its position in the
worldwide video lottery gaming machine market, to continue to penetrate casino
markets such as Nevada, Mississippi and New Jersey and to develop casino
opportunities at pari-mutuel racetracks similar to the Company's racetrack in
Sunland Park, New Mexico. The Company believes that new international markets
and the replacement of older gaming machines and systems in Australia and North
America will provide for significant future growth opportunities for the
Company. Penetration and growth of sales to casino markets is primarily
dependent on the production of games which generate greater than average play
and net win, and on broadening the product line while offering a competitive
price. The Company believes that its gaming machines are capable of producing
greater than average play and net win amounts reflecting their superior graphics
technology and playability. Developing casino opportunities at pari-mutuel
racetracks is dependent initially upon the enactment of legislation to allow
gaming at racetrack facilities. A small number of states, including New Mexico,
West Virginia, Delaware, Iowa, Rhode Island and Louisiana have enacted
legislation to allow gaming at racetracks and the Company anticipates the trend
to continue although there can be no assurance of it.
Gaming Operations
-----------------
Gaming operations revenue, which includes the new casino at Sunland Park
and route and racetrack operations, increased by $2.2 million compared with the
same period last year. On February 22, 1999, the casino addition opened with 152
gaming machines, increasing to 296 gaming machines by March 31, 1999, resulting
in an average of 206 machines in service during the 38-day period. Gross margin
from gaming operations increased from 13% in 1998 to 22% in 1999.
Revenue from route operations was $4.2 million in the first quarter 1999
compared with $4.5 million in 1998. Profit margin from route operations remained
consistent at 27% in both 1999 and 1998. Margin on racetrack and casino
operations increased to a profit of 15% in 1999 from a loss in 1998. Casino
operations provided a 27% margin, while racetrack and other operations provided
a 3% margin.
- 13 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Current New Mexico law allows up to 300 gaming machines at each racing
facility operating for up to twelve hours per day. The Company's casino is
located in Sunland Park, New Mexico, adjacent to El Paso, Texas, with a
population base of two million residents within a 100-mile radius. Although no
assurances can be given as to the continued success of the casino operations,
the Company expects casino revenues to become a significant portion of
consolidated revenues.
Pari-mutuel Systems
-------------------
Revenue from the pari-mutuel systems segment increased by 7% due primarily
to revenues from five new customers. Gross profit margin was 33% in the first
quarter 1999 compared with 31% in 1998. The Company provides wagering systems
and service to over 120 of the approximate 350 pari-mutuel facilities in North
America, including Churchill Downs which has consistently set new attendance and
wagering records with the Company's wagering system and services.
Declines in on-track wagering at pari-mutuel facilities have created
increased pricing pressures for the Company and its pari-mutuel wagering systems
supplier competitors. The Company does not anticipate those pricing pressures to
decrease in the near future. Accordingly, the Company plans to maintain
profitability by improving customer service while maintaining or reducing
operating costs. In 1998 the Company introduced a new hardware and software
platform, the Horizon NT 2000(TM) System. The new platform, using Windows NT(TM)
and the Pentium Plus(TM) family of servers, allows the Company to reduce its
capital costs and be more competitive by creating regional hub systems. The new
platform can be operated on multiple hardware platforms, which the Company
believes is attractive in international markets and could increase market share.
The Company believes that expansion of gaming at racetracks could increase
attendance and on-track wagering at racetracks. A number of jurisdictions have
considered or are considering gaming at racetracks.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 15% to $9.8
million in the first quarter 1999, increasing from 17% to 18% of consolidated
revenues. The increase was in the gaming machines and systems and gaming
operations segments as well as at the corporate level. The gaming machines and
systems segment increase resulted primarily from increased sales efforts and an
increase in the provision for bad debts necessitated by the significant increase
in accounts and notes receivable compared with March 31, 1998 levels. Gaming
operations expenses increased due to personnel and other costs associated with
the casino, while corporate expenses increased due to personnel, legal and
travel costs. The Company anticipates that SG&A expenses will remain at or above
current levels given its strategic business development plans.
Research and Development
- ------------------------
In the first quarter 1999, the Company expended $2.4 million on research
and development activities compared with $2.6 million in 1998. The Company
continues to develop and enhance its central system and terminal software and
games as well as terminal hardware for all three systems segments. Significant
efforts were expended on the implementation of new lottery systems in the first
quarter 1999, redirecting approximately $1.0 million which would otherwise have
been reflected as research and development expense. A number of software
development projects are currently being monitored for technological feasibility
and the Company may capitalize certain development costs as the projects
continue. Research and development expense was 4.3% and 5.1% of consolidated
revenues in the first quarters of 1999 and 1998, respectively.
- 14 -
<PAGE>
POWERHOUSE TECHNOLOGIES, INC. AND SUBSIDIARIES
Depreciation and Amortization
- -----------------------------
Depreciation and amortization increased by 9% to $5.2 million in the first
quarter 1999. The decrease is primarily attributable to equipment upgrades for
certain of the Company's lottery and pari-mutuel system customers. Depreciation
and amortization are expected to increase primarily in the lottery systems
segment as new systems are placed in service.
Liquidity and Capital Resources
- -------------------------------
In the first quarter 1999 the Company generated $0.2 million of cash from
operations compared with $2.9 million in 1998. The reduction reflects an
increase in receivable balances since year-end and as compared with 1998's first
quarter decrease. Working capital decreased by approximately $4.2 million from
$41.2 million at December 31, 1998 to $37.0 million at March 31, 1999.
Approximately $19.9 million was invested in property, equipment and intangible
and other assets in the first quarter 1999 compared with $2.6 million in 1998.
Approximately $15.1 million of the 1999 investment related to the manufacture,
purchase and installation of on-line lottery equipment and approximately $3.4
million was expended for the Sunland Park casino addition, racetrack facility
renovation and purchase of casino gaming machines.
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. In October 1998, the Company entered
into a $100.0 million credit facility (with an option for an additional $25.0
million) with Lehman Brothers, Inc. The facility provided two $25.0 million term
loans maturing in five and six years, respectively, and a $50.0 million
revolving line of credit expiring September 2003. Up to $15.0 million of the
revolver may be used as collateral for the Company's bonding program;
contractual obligations at March 31, 1999 required approximately $8.5 million in
outstanding letters of credit. Proceeds from the two $25.0 million term loans
were used to pay off existing debt of approximately $27.9 million, to provide
capital for existing commitments, to manufacture and implement on-line lottery
systems, and to complete the development of the Sunland Park Racetrack & Casino.
At March 31, 1999, the company had drawn $10.0 million on the line of credit,
leaving $31.5 available for draw. The Company repaid long-term debt of $1.2
million in the first quarter 1999.
Sizable capital expenditures are anticipated related to the Company's
on-line lottery contracts. Total anticipated capital requirements are estimated
at approximately $60.0 million for 1999. Cash provided by operations and draws
on the line of credit are expected to provide sufficient sources of funding for
these expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's sources of market risk
since reported at December 31, 1998.
- 15 -
<PAGE>
POWERHOUSE 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, 1998 Form 10-K.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Listing of Exhibits
EX-27 Financial Data Schedule (For SEC Use Only)
b. Reports on Form 8-K
Form 8-K dated March 12, 1999 reporting the Agreement to Merger with
Anchor Gaming.
Form 8-K dated May 13, 1999 reporting a letter agreement dated as of
May 7, 1999 among Anchor Gaming and the Company permitting Anchor to
acquire less than 5% of the outstanding common stock of the Company prior
to closing of the Merger Agreement.
- 16 -
<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: May 14, 1999 /S/ SUSAN J. CARSTENSEN
--------------------------------------------------
Susan J. Carstensen, Chief Financial Officer and
Treasurer (Principal Financial and Accounting
Officer)(authorized to sign on behalf of
Registrant)
- 17 -
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