Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number: 1-8300
WMS INDUSTRIES INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-2814522
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
800 South Northpoint Blvd., Waukegan, IL 60085
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 785-3000
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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 30,814,753 shares of common
stock, $.50 par value, were outstanding at November 7, 2002, excluding 1,545,812
shares held as treasury shares.
WMS INDUSTRIES INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Condensed Consolidated Income Statements -
Three months ended September 30, 2002 and 2001................ 2
Condensed Consolidated Balance Sheets -
September 30, 2002 and June 30, 2002.......................... 3
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2002 and 2001................ 5
Notes to Condensed Consolidated Financial Statements.......... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.... 15
ITEM 4. Controls and Procedures....................................... 15
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings............................................. 16
ITEM 5. Other Information............................................. 16
ITEM 6. Exhibits and Reports on Form 8-K.............................. 16
SIGNATURES ................................................................. 17
CERTIFICATIONS.............................................................. 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Thousands, except per share amounts)
(Unaudited)
Three Months Ended
September 30,
---------------------
2002 2001
------- -------
Revenues:
Product sales $16,149 $20,858
Participation and lease revenues 26,245 25,448
------- -------
Total revenues 42,394 46,306
------- -------
Costs and Expenses:
Cost of product sales 10,814 11,667
Cost of participation and lease revenue 5,165 3,417
Research and development 7,789 4,853
Selling and administrative 11,346 12,443
Depreciation and amortization 6,719 5,976
------- -------
Total costs and expenses 41,833 38,356
------- -------
Operating income 561 7,950
Interest and other income and expense, net 475 1,295
------- -------
Income before income taxes 1,036 9,245
Provision for income taxes 376 3,415
------- -------
Net income $ 660 $ 5,830
======= =======
Earnings per share of common stock:
Basic $ 0.02 $ 0.18
======= =======
Diluted $ 0.02 $ 0.18
======= =======
Shares used in per share calculations:
Basic 30,901 32,180
======= =======
Diluted 31,156 32,770
======= =======
See notes to condensed consolidated financial statements.
2
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
September 30, June 30,
2002 2002
------------ ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents, including $1,460 and $1,250 of restricted $ 27,795 $ 32,671
amounts for progressive jackpots, respectively
Short-term investments 66,249 72,909
--------- ---------
94,044 105,580
Receivables, net of allowances of $2,567 and $2,642 23,515 24,820
Notes receivable, current portion 8,827 11,589
Income tax receivable 2,496 9,491
Inventories, at lower of cost (FIFO) or market:
Raw materials and work in progress 15,606 15,448
Finished goods 14,783 14,225
--------- ---------
30,389 29,673
Other current assets 11,387 11,532
--------- ---------
Total current assets 170,658 192,685
Gaming machines on participation or lease 82,040 78,748
Less accumulated depreciation (50,917) (47,234)
--------- ---------
31,123 31,514
Property, plant and equipment 61,270 59,403
Less accumulated depreciation (19,233) (17,857)
--------- ---------
42,037 41,546
Other assets 23,934 15,420
--------- ---------
Total assets $ 267,752 $ 281,165
========= =========
See notes to condensed consolidated financial statements.
3
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
September 30, June 30,
2002 2002
------------ ---------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,955 $ 7,646
Accrued compensation and related benefits 3,542 4,770
Other accrued liabilities 9,690 9,221
--------- ---------
Total current liabilities 19,187 21,637
Commitments and contingencies (See note 8)
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) -- --
Common stock (100,000,000 shares authorized, 32,354,269 and
32,346,519 shares issued) 16,177 16,173
Additional paid-in capital 198,773 198,347
Retained earnings 52,905 52,245
Accumulated other comprehensive income 14 67
Unearned restricted stock (250,000 shares) (2,342) (1,960)
Treasury stock, at cost (1,412,012 shares and 372,812 shares) (16,962) (5,344)
--------- ---------
Total stockholders' equity 248,565 259,528
--------- ---------
Total liabilities and stockholders' equity $ 267,752 $ 281,165
========= =========
See notes to condensed consolidated financial statements.
4
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Three Months Ended
September 30,
----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 660 $ 5,830
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,719 5,976
Deferred income taxes (796) (1,072)
Non-cash expenses 212 --
Tax benefit from exercise of stock options 20 16
Increase from changes in operating assets and liabilities 303 8,665
-------- --------
Net cash provided by operating activities 7,118 19,415
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,867) (2,674)
Additions to gaming machines on participation or lease (5,149) (3,059)
Acquisitions, net of cash acquired -- (2,500)
Net change in short-term investments 6,660 (524)
-------- --------
Net cash used by investing activities (356) (8,757)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash received on exercise of common stock options 33 86
Purchase of treasury stock (11,618) --
-------- --------
Net cash (used) provided by investing activities (11,585) 86
EFFECT OF EXCHANGE RATES ON CASH (53) 34
-------- --------
Increase (decrease) in cash and cash equivalents (4,876) 10,778
Cash and cash equivalents at beginning of period 32,671 14,963
-------- --------
Cash and cash equivalents at end of period $ 27,795 $ 25,741
======== ========
See notes to condensed consolidated financial statements.
5
WMS INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (including normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the quarter ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and our wholly-owned subsidiaries. All significant
intercompany balances, transactions and investments have been
eliminated. The Company has an agreement for which no legal entity
exists with International Game Technology (IGT) related to the
operation of SURVIVOR(TM) gaming devices on IGT's wide area progressive
system. Activities under this agreement are accounted for by WMS
recording its 50% proportionate share of revenues and expenses from
operating activities and all assets it owns and liabilities it incurs
related to such agreements in our consolidated financial statements.
Certain prior period balances have been reclassified to conform to the
current period presentation.
3. EARNINGS PER SHARE
At September 30, 2002, the Company had 3,439,000 stock options
outstanding. We have issued 250,000 shares of our common stock to our
Chairman, Mr. Louis J. Nicastro, subject to performance and vesting
conditions under a Restricted Stock Agreement. The diluted earnings per
share calculation for the three months ended September 30, 2002 and
2001 is different from the basic earnings per share calculation because
the diluted calculation includes potential incremental shares of common
stock outstanding from the hypothetical assumed exercise of stock
options under the treasury stock method. The diluted earnings per share
calculation does not include the 250,000 shares subject to the
Restricted Stock Agreement. For the three months ended September 30,
2002 and 2001, the diluted calculation includes 255,000 and 590,000
shares, respectively, of potentially incremental shares outstanding.
For the three months ended September 30, 2002, the diluted earnings per
share calculation excludes 2,388,000 shares underlying employee,
director and consultant stock options because the option exercise price
was greater than the average market value price of the common stock for
the period, and therefore, the effect would be antidilutive.
The following summarizes the stock options exercised during the periods
indicated:
Three Months Ended
September 30,
-------------------
2002 2001
---- ----
Stock options exercised 7,750 27,739
Weighted average exercise price $ 4.24 $ 3.15
6
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS OF
DOLLARS)
Three Months Ended
September 30,
---------------------
2002 2001
---- ----
Income taxes paid $ 7 $ 783
Income tax refunds received $ 5,922 $ 8,000
5. COMPREHENSIVE INCOME AND LOSS
Comprehensive income or loss consists of net income and foreign
currency translation adjustments and totaled income of $0.6 million and
$5.9 million for the three months ended September 30, 2002 and 2001,
respectively.
6. STOCKHOLDERS' EQUITY
Common Stock Repurchase Program
In January 2002, the Board of Directors authorized a $20 million common
stock repurchase plan to repurchase our common stock in open market or
privately negotiated transactions from time to time. In the September
2002 quarter, 1,022,500 shares were repurchased under this
authorization for $11.4 million. By July 31, 2002, this repurchase
program was completed. In total, the Company repurchased 1,568,000
shares, or approximately 5% of the previously outstanding shares, at an
average share price of $12.75 under the $20 million authorization.
In September 2002, the Board of Directors authorized a twelve-month
plan to repurchase up to an additional $10 million of our common stock
in open market or privately negotiated transactions. As of September
30, 2002, repurchases of 16,700 shares at a cost of $0.2 million had
been made under this plan at an average price of $14.71 per share. By
November 7, 2002, repurchases under this plan totaled 151,500 shares
for $2.1 million at an average price of $13.81 per share.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
It applies to all legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and normal operation of a long-lived asset. We adopted SFAS
No. 143 effective July 1, 2002 and such adoption did not have a
material effect on the balance sheet, income statement or cash flows of
the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This statement requires
that the same accounting model be used to recognize an impairment loss
for long-lived assets, whether they are to be held and used, disposed
of by sale, or disposed of other than by sale. This would apply to both
previously held and used or newly acquired assets. It also broadens the
presentation of discontinued operations to include more disposal
transactions. We adopted SFAS No. 144 effective July 1, 2002 and such
adoption did not have a material effect on the balance sheet, income
statement or cash flows of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, and that an
entity's commitment to a plan, by itself, does not create a present
obligation to others that meets the definition of a liability. It
nullifies Emerging Issues Task Force Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." The provisions of this statement are effective for exit or
disposal activities that are initiated
7
after December 31, 2002, with earlier application encouraged. We early
adopted SFAS No. 146 effective July 1, 2002 and such adoption did not
have a material effect on the balance sheet, income statement or cash
flows of the Company.
8. COMMITMENTS AND CONTINGENCIES
WMS routinely enters into license agreements with others for use of
intellectual properties in its products. These agreements generally
provide for royalty advances when the agreements are signed, and
provide for minimum guarantees as well as additional contingent
payments based on future events. In the September 2002 quarter, WMS
entered into new licensing agreements which significantly increased its
total potential royalty commitments. The total potential commitments at
September 30, 2002 increased to $49.8 million from $29.6 million at
June 30, 2002. The total potential future payments at September 30,
2002 increased to $31.3 million from $17.2 million at June 30, 2002. At
September 30, 2002, WMS had total potential royalty commitments,
advances and payments made, and potential, future royalty payments as
follows:
At September 30, 2002
---------------------
Guaranteed Contingent Total
Minimums Payments Potential
-------- -------- ---------
(in thousands)
Total royalty commitments $ 23,827 $ 25,927 $ 49,754
Advances and payments made 16,026 2,438 18,464
-------- -------- --------
Potential future royalty payments $ 7,801 $ 23,489 $ 31,290
======== ======== ========
Of the $18.5 million total advances and payments through September 30,
2002, $2.0 million has been charged to expense and the remaining $16.5
million is included in the September 30, 2002 balance sheet; $5.5
million in other current assets and $11.0 million in other assets.
As of September 30, 2002, WMS estimates that potential future royalty
payments in each fiscal year will be as follows:
Guaranteed Contingent Total Potential
Year Ended June 30, Minimums Payments Payments
------------------- ---------- ---------- ---------------
(in thousands)
2003 $2,495 $ 3,790 $ 6,285
2004 2,615 6,856 9,471
2005 1,391 9,768 11,159
2006 800 1,575 2,375
2007 500 1,000 1,500
Thereafter -- 500 500
------ ------- -------
Total $7,801 $23,489 $31,290
====== ======= =======
The Company announced a three-part technology improvement plan in
January 2002 to stabilize the operating system software that runs its
gaming devices. As part of this technology improvement plan, the
Company has pursued alternative strategies for each phase of the plan,
including licensing technology from third parties. At September 30,
2002, the Company had guaranteed minimum payments related to such
technology alternatives aggregating $6.2 million, all of which had been
paid as advances. An additional $10.1 million of contingent payments
may become payable based on future events. These amounts are included
in the table above. If the Company determines that it will not realize
the value of a particular licensed technology alternative, it will
record an immediate charge against earnings at the time of such
determination of up to $16.3 million if all of the contingent payments
became due and all of the technology alternatives were to have no
further value to the Company.
We have an agreement with IGT for the operation of SURVIVOR gaming
devices on its wide-area progressive system. Under this agreement we
record in our consolidated financial statements our 50% proportionate
share of revenues and costs from operating
8
activities and all of the assets we own and liabilities we incur in
connection with the operating activities under this agreement. In
connection with this agreement, we may have a contingent liability of
approximately $1.1 million, which is not deemed probable at this time.
9. LITIGATION
See Item 1 of Part II for the status of Shuffle Master, Inc.
litigation.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As used in this quarterly report on Form 10-Q, the terms "we", "us", "our",
"Company", and "WMS" mean WMS Industries Inc., a Delaware corporation, and its
subsidiaries, unless the context indicates a different meaning, and the term
"common stock" means our common stock, $0.50 par value per share. When we refer
to "participation games" we mean arrangements by which we lease our gaming
machines to casinos or other gaming machine operators for lease payments either
based upon a percentage of the net win of the gaming machines or based upon
fixed daily fees.
This report contains forward-looking statements concerning our future business
conditions and outlook based on currently available information that involves
risks and uncertainties. These statements reflect information as of the date of
this report. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of these risks and uncertainties,
including, without limitation, the expansion of legalized gaming into new
markets; the development, introduction and success of new games and new
technologies; the ability to maintain the scheduling of these introductions; the
occurrence of software anomalies that affect the Company's games; the ability of
the Company to implement its technology improvement plan; and the ability of the
Company to qualify for and maintain gaming licenses and approvals and other
risks more fully described under "Item 1. Business - Risk Factors" in our Annual
Report on Form 10-K for the year ended June 30, 2002. WMS makes no commitment to
update any forward-looking statements, except as required by law, or to disclose
any facts, events, or circumstances after the date hereof that may affect the
accuracy of any forward-looking statement.
SIGNIFICANT EVENTS AND TRENDS
Technology Improvement Plan
In January 2002, we began to execute a three-part technology improvement plan to
address the near-, mid- and long-term needs for the operating system software
that runs our gaming devices.
In the near term, we began rewriting critical operating code segments, securing
third-party critiques of our design process, and performing software code audits
and other software tests. We set out to improve the stability of our operating
system by introducing two upgrades, version 2.57 and version 2.59.
Version 2.57 was first approved by Mississippi regulators in June 2002 and by
Nevada regulators in August 2002. We completed the upgrade of WMS hopper gaming
devices in casinos to version 2.57 in Mississippi by June 30, 2002, and are
currently upgrading our current WMS hopper gaming devices in Nevada, which we
expect to complete by December 31, 2002. Regulatory approval of the version 2.57
upgrade also resulted in our obtaining our first new game approvals in these two
jurisdictions in over 9 months. Only Mississippi, Nevada, Ontario, Canada and
Puerto Rico regulators have notified us that they require an upgrade of the
operating system in existing WMS gaming devices in their jurisdictions. Other
regulators could require upgrades in the future. All new hopper game approvals
will be on version 2.57 of the operating system software until the next version
of the operating system software is approved.
Version 2.59 has been submitted to the Nevada regulatory testing laboratory in
order to upgrade our printer games, and is expected to be approved in Winter
2003. This upgrade contains modest enhancements and modest robustness
improvements and some new functionality for our games.
Our plan for the mid term is to introduce a new operating system and circuit
board, called CPU-NXT(TM), for our newly developed cabinet design, called
Bluebird(TM). CPU-NXT is currently in internal testing prior to submission to
the gaming regulators. We expect to submit the CPU-NXT operating system and
circuit board to gaming regulators for lab testing in the March 2003 quarter,
and expect field trials to begin in the June 2003 quarter. Our goal is to begin
to receive the first regulatory approvals for CPU-NXT in the September 2003
quarter, which will allow us to begin selling games designed on this system.
Once approved the CPU-NXT circuit board and operating system will be
retrofittable into over 50,000 WMS gaming devices already in casinos.
While we have begun to receive approvals for new games in Mississippi and in
Nevada that utilize version 2.57 operating system, we anticipate that our
revenues from sales of new gaming devices in fiscal 2003 will improve only
10
modestly over the 6,916 units we sold in fiscal 2002. We believe that customers
will wait to purchase our gaming devices until the CPU-NXT operating system and
circuit board and Bluebird cabinet are available, as that operating system is
expected to be an improvement over our existing operating system, and it will
have additional features and functionality desired by our customers that the
version 2.57 and 2.59 operating system upgrades lack. We do expect that revenues
from game conversions will be stronger in fiscal 2003 as customers will refresh
existing WMS gaming devices with new games on the version 2.57 and 2.59
operating systems. With a greater number of game approvals expected in the
second half of fiscal 2003 we expect to be able to refresh our participation
games with greater frequency which should improve our average net win per day.
As part of our technology improvement plan, the Company has pursued alternative
strategies for each phase of the plan, including licensing technology from third
parties. At September 30, 2002, the Company had guaranteed minimum payments
related to such technology alternatives aggregating $6.2 million, all of which
had been paid as advances. An additional $10.1 million of contingent payments
may become payable based on future events. If the Company determines that it
will not realize the value of a particular licensed technology alternative, it
will record an immediate charge against earnings at the time of such
determination of up to $16.3 million if all of the contingent payments become
due and all of the technology alternatives were to have no further value to the
Company.
For the long-term plan, we contracted with an independent specialist to develop
the design specification for our next generation operating system. We received
the completed design specification and were able to have several of the
components of this specification included in the CPU-NXT operating system. We
currently intend to use CPU-NXT as the foundation for our long-term solution.
Effective March 1, 2002, we issued a restricted stock grant of 250,000 shares of
common stock held in treasury to Mr. Louis J. Nicastro, our Chairman of the
Board of Directors and a non-employee director. This grant was issued in
consideration for his agreeing to serve as Chairman of the Executive Committee
of the Board of Directors, which was established to provide enhanced oversight
of the timely completion of our technology improvement plan. The restricted
stock vests on June 30, 2003, subject to the Board of Directors' satisfaction of
the fulfillment of specified performance conditions relating to the Company's
technology improvement plan. The tax effected market value of the restricted
stock grant at the date of the grant is recorded as unearned restricted stock as
a separate component of stockholders' equity and adjusted to current market
value as of the balance sheet date. Under terms of the grant the shares also
vest upon death, disability, involuntary termination or change in control. When
it becomes probable that the fulfillment of the specified performance vesting
conditions will be met, the market value of the restricted stock at that time
will be recorded as compensation expense.
Other Recent Matters
In September 2002, we entered into an agreement with Stargames Corporation Pty.
Ltd., an Australian company, to be the exclusive distributor for their RAPID
ROULETTE(TM) table gaming product in North America. This product combines a
traditional roulette wheel and a live dealer with electronic betting stations to
create a game that has the dual characteristics of a table game and a slot
machine. RAPID ROULETTE has been approved by Nevada regulators, and is offered
as a participation game and we are seeking approval in other jurisdictions.
We entered into new agreements with Sierra Design Group ("SDG") and Multimedia
Games, Inc. (Nasdaq:MGAM) in the September 2002 quarter. We granted SDG
non-exclusive rights to the MONOPOLY(TM) branded series of games developed by
WMS for Washington State and our proprietary base games for Washington State and
New York State. We also granted non-exclusive rights to Multimedia Games for the
HOLLYWOOD SQUARES(TM) series of games for Washington State and non-exclusive
rights to our proprietary base games for Washington State and Class II gaming
venues. In addition, Multimedia Games has ordered 1,000 gaming cabinets from us,
which we expect to begin manufacturing in the December 2002 quarter.
In the Summer of 2002, we introduced a new product which we call 3RV(TM), short
for three reel video, that has the look and feel of a mechanical reel spinning
product but is actually a video based product.
We also entered into new licensing agreements to expand our Classic TV Game Show
Series(TM) of participation games, adding SHOP `TIL YOU DROP(TM) and SUPERMARKET
SWEEP(TM) which brings to six the total number of games for this new series
which we expect to begin to launch in fiscal 2004.
11
CRITICAL ACCOUNTING POLICIES
During the quarter ended September 30, 2002, we have made no changes in our
critical accounting policies or in the application of those policies, as
reported in our form 10-K for the year ended June 30, 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
We have recently adopted SFAS No. 143, SFAS No. 144 and SFAS No. 146 as
discussed in Note 7 to our financial statements above. Such adoption did not
have a material effect on the balance sheet, income statement or cash flows of
the Company.
LIQUIDITY AND CAPITAL RESOURCES
We believe that cash and cash equivalents and short-term investments of $92.6
million at September 30, 2002, exclusive of $1.4 million of restricted cash,
along with our available $50.0 million bank revolving line of credit that
extends to May 21, 2003, and to a lesser extent, cash flow from operations will
be adequate to fund our anticipated level of expenses, capital expenditures,
cash to be invested in participation games, and the levels of inventories and
receivables required in the operation of our business. For the next twelve
months we do not expect to be dependent on cash flow from operations due to the
amount of cash and short-term investments we have and full access to our bank
revolving line of credit. We have no outstanding debt.
Our short-term investments primarily consist of Auction Market Preferred Stocks
stated at cost, which approximates market value. These investments generally
have no fixed maturity date but most have dividend reset dates every 49 days or
more. These investments can be liquidated under an auction process on the
dividend reset dates subject to a sufficient number of bids being submitted. Our
policy is to invest cash with issuers that have a high credit rating and to
limit the amount of credit exposure to any one issuer.
We are not dependent on off-balance sheet financing arrangements to fund our
operations. We utilize financing arrangements for operating leases of regional
office facilities and some equipment and for minimum guaranteed royalty
payments, which we discussed in footnote 11 to the financial statements included
in our Annual Report on Form 10-K for the year ended June 30, 2002. The total
potential royalty commitments, including payments contingent upon future events,
increased from $29.6 million at June 30, 2002 to $49.8 million at September 30,
2002. Please refer to Note 8 to our financial statements above. We do not have
any special-purpose entities for investment or the conduct of our operations. We
do have an agreement with IGT related to the operation of SURVIVOR gaming
devices on its wide area progressive system, under which we record in our
consolidated financial statements our 50% proportionate share of revenues and
costs from operating activities under that agreement, and the full value of
assets we own and liabilities we incur in connection with the operating
activities. Under this agreement, we have a contingent liability of
approximately $1.1 million, which is not deemed probable at this time. We have
not entered into any derivative financial instruments, although we have a
restricted stock grant and stock options granted to employees, members of our
Board of Directors and consultants. We do not currently have any significant
firm purchase commitments for raw material inventory.
Cash provided by operating activities before changes in operating assets and
liabilities was $6.8 million for the first three months of fiscal 2003, as
compared to cash provided of $10.8 million for the first three months of fiscal
2002. The current period decrease relative to the comparable prior year period
was due to lower net income, partially offset by greater depreciation expense in
the current quarter. We anticipate this reduced level of cash from operations to
continue over the next twelve months due to anticipated lower revenues from
decreased game sales and higher research and development expenses to implement
our technology improvement plan, partially offset by our cost reduction efforts.
The changes in operating assets and liabilities resulted in $0.3 million of cash
inflow for the three months ended September 30, 2002, compared with a cash
inflow of $8.7 million during the comparable prior year period. The cash inflow
for the three months ended September 30, 2002 was primarily due to a $7.0
million decrease in income taxes receivable and a $2.1 million decrease in
accounts and notes receivable, partially offset by a $4.9 million increase in
12
short and long-term royalty advances and a $2.5 million reduction in current
liabilities from the comparable balances at June 30, 2002. The decrease in
income taxes, accounts and notes receivable reflects lower reduced sales levels
and increased collections during the period. The increase in royalty advances
was due to new technology and brand license agreements entered into during the
September 30, 2002 quarter. The reduction of current liabilities is due to a
lower level of business. The cash inflow for the three months ended September
30, 2001 was primarily due to a $10.9 million decrease in receivables and an
$8.0 million income tax refund partially offset by an $8.6 million increase in
inventories and a decrease in current liabilities from the comparable balances
at June 30, 2001. We have not experienced significant bad debt expense in any of
the periods presented.
Cash used by investing activities was $0.4 million for the three months ended
September 30, 2002, compared with $8.8 million for the comparable prior year
period. Cash used for the purchase of property, plant and equipment for the
three months ended September 30, 2002 was $1.9 million compared with $2.7
million for the comparable prior-year period. This decrease is due to lower
renovation costs in the September 2002 quarter related to converting our Chicago
facility into a technology campus. Cash used for additions to participation
games was $5.1 million and $3.1 million for the three months ended September 30,
2002 and 2001, respectively. The increase in the three months ended September
30, 2002 was due to our PAC-MAN(TM) themed games, which were introduced in May
2002. Cash of $6.7 million was provided by the redemption of short-term
investments for the three months ended September 30, 2002, compared to $0.5
million used for the purchase of such investments in the comparable prior year
period. We used $2.5 million of cash in the three months ended September 30,
2001 for the acquisition of Bigfoot Software Research and Development, LLC,
which is now engaged in the design and development of a proprietary wide-area
progressive system for us.
In the September 2002 quarter, we completed our twelve-month, $20 million common
stock share repurchase program authorized by our Board of Directors in January
2002. In September 2002, our Board of Directors authorized an additional
twelve-month, $10 million common stock share repurchase program. This program
could further reduce our cash balance and number of outstanding common shares
through September 2003. Both programs allow us to purchase our common stock from
time to time in open market or privately negotiated transactions. The timing and
actual number of shares to be purchased will depend on market conditions. During
the quarter ended September 30, 2002, we repurchased 1,022,500 shares for an
aggregate price of $11.4 million in completing the $20 million program, and
repurchased 16,700 shares for an aggregate price of $0.2 million under the $10
million program. By November 7, 2002, we had purchased an additional 134,800
shares for $1.9 million. Since January 2002, we have repurchased 1,719,500
shares of our common stock, or 5.3% of our previously outstanding shares for
$22.1 million at an average price of $12.85 per share.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 2001
Consolidated revenues decreased 8.4% to $42.4 million in the quarter ended
September 30, 2002 from $46.3 million in the quarter ended September 30, 2001.
Total revenues decreased $3.9 million: $4.7 million from decreased product sales
slightly offset by a $0.8 million increase in participation and lease revenues.
We shipped 1,292 video and reel-type gaming devices in the current quarter,
included in product sales of $16.1 million versus 2,050 gaming devices and $20.9
million of product sales in the comparable prior year quarter. Gaming device
sales were lower due to a lack of regulatory approvals for new games titles and
our inability to sell into certain jurisdictions until the next upgrade of our
current operating software is approved. The average sales price increased 3.0%
from $8,297 in the prior year's quarter to $8,545 in the current year's quarter.
Participation and lease revenues increased from $25.4 million in the September
2001 quarter to $26.2 million in the September 2002 quarter. We had a total of
6,039 units installed at September 30, 2002, compared to 5,940 units installed
at September 30, 2001. The installed base increased due to placements of
HOLLYWOOD SQUARES(TM), PAC-MAN(TM), and SURVIVOR themed games, partially offset
by a decrease in the MONOPOLY(TM) and Puzzle Pays(TM) series of games. Average
net win per day for participation games increased from $40.18 in the September
2001 quarter to $40.42 in the September 2002 quarter. The participation backlog
was approximately 350 units as of November 7, 2002.
13
Consolidated gross profit in the quarter ended September 30, 2002 declined 15.4%
to $26.4 million from $31.2 million in the quarter ended September 30, 2001. The
gross margin percentage decreased from 67.4% in the quarter ended September 30,
2001 to 62.3% in the quarter ended September 30, 2002. The decrease in the
overall gross margin percentage resulted from lower gross margin percentages
from both product sales and participation and lease revenue, partially offset by
a shift in the revenue mix from lower margin product sales to higher margin
participation and lease revenues. Participation and lease revenues were 61.9% of
total revenues in the September 2002 quarter, compared to 55.0% in the September
2001 quarter due to the decline of product sales revenue in the current year
quarter. The gross profit margin percentage on gaming product sales was 33.0% in
the September 2002 quarter, compared to 44.1% in the September 2001 quarter, due
to lower production volume and lower margin products representing a higher
percentage of product sales revenues. The gross profit margin percentage on
participation and lease revenues decreased from 86.6% in the September 2001
quarter to 80.3% in the September 2002 quarter primarily due to the impact of
the SURVIVOR themed wide-area progressive games having a lower gross margin than
our traditional participation games, as well as higher royalty rates on new
games, and higher conversion and parts costs in the September 2002 quarter.
Research and development expenses increased $2.9 million, or 60.5%, in the
current quarter to $7.8 million from $4.9 million in the September 2001 quarter.
This increase was primarily due to higher internal and external costs incurred
to support our technology improvement plan, the development of more games and
development of new product lines such as poker games, a proprietary wide area
progressive system and new mechanical reel spinning gaming devices. We expect
further increases in research and development expenses as we continue to
increase our development staff to become a full service gaming machine provider
to our customers.
Selling and administrative expenses decreased 8.8% from $12.4 million in the
prior year's quarter to $11.3 million in the current year's quarter. The current
quarter reflects the headcount reductions and other cost containment measures
implemented earlier this calendar year to manage controllable expenses given the
reduced revenues we experienced.
Depreciation and amortization, which includes depreciation of participation
games, increased during the current year's quarter to $6.7 million from $6.0
million in the prior year's quarter due to the increase in participation games
and increased plant, property and equipment.
Operating income was $0.6 million in the current year's quarter, compared to
operating income of $8.0 million in the prior year's quarter. The financial
results of the current year's quarter reflect lower gross profits, higher
research and development costs related to new products and technology platforms,
as well as higher depreciation related to growth in the installed base of
participation games.
The provision for income taxes on operations, which includes both current and
deferred taxes, is based on our estimated effective tax rate of 37%, which is
consistent with the September 2001 quarter.
Net income was $0.7 million or $0.02 per diluted share for the current year's
quarter compared to net income of $5.8 million, or $0.18 per diluted share, for
the prior year's quarter.
MONOPOLY(TM) is a trademark of Hasbro, Inc (C) 2002 Hasbro, Inc. All rights
reserved. Used with permission.
HOLLYWOOD SQUARES(TM) is a registered trademark of King World Productions, Inc.
PAC-MAN(TM)and(C)1980 Namco Limited. All rights reserved.
SURVIVOR(TM) is a trademark of Survivor Productions LLC.
RAPID ROULETTE(TM) is a trademark of Stargames Corporation Limited and Crown
Limited.
SHOP `TIL YOU DROP(TM) and all related logos are the trademarks and service
marks of Stone Stanley Entertainment. All rights reserved.
SUPERMARKET SWEEP(TM) is a trademark of Al Howard Products, Inc.
14
Puzzle Pays(TM), CPU-NXT(TM), 3RV(TM), Classic TV Game Show Series(TM)and
Bluebird(TM)are trademarks of WMS Gaming Inc.(C)2002 WMS Gaming Inc. All rights
reserved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
As of a date within 90 days prior to the date of this report, our Chief
Executive Officer and our Chief Financial Officer carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as required by Exchange Act Rule 13a-14. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that material
information about us and our subsidiaries, including the material information
required to be disclosed in our filings under the Securities Exchange Act of
1934, is recorded, processed, summarized and communicated to them as appropriate
to allow timely decisions regarding required disclosure.
There were no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of the
most recent evaluation performed by our Chief Executive Officer and our Chief
Financial Officer, including any corrective actions with regard to significant
deficiencies and material weaknesses.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 13, 2002, we filed a lawsuit against Shuffle Master, Inc. in the
United States District Court for the District of Nevada in Las Vegas. The suit
alleges that Shuffle Master's promotion, sale and installation of kits to
convert our gaming machines into what appear to be Shuffle Master gaming
machines violates our trademark rights and constitutes intentional tortuous
interference with our contracts with our customers. On the same day, Shuffle
Master, Inc. filed suit against us in the United States District Court for the
District of Minnesota seeking a declaratory judgment that it has not violated
any laws in manufacturing and selling its upgrade kits for our Model 550 gaming
machines. We believe the outcome of these lawsuits will not have a material
impact on our financial position or results of operations.
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
On November 8, 2002, Phyllis G. Redstone entered into a Voting Proxy Agreement
with WMS Industries Inc., Louis J. Nicastro and Neil D. Nicastro. Pursuant to
the Voting Proxy Agreement, Louis J. Nicastro has been appointed as proxy holder
(or, in the event Louis J. Nicastro is unable to perform the duties and exercise
the rights of proxy holder, Neil D. Nicastro, has been appointed as proxy
holder) to vote the common stock of WMS beneficially owned by Ms. Redstone
(3,085,700 shares or 10.0% of the outstanding common stock of WMS) in order to
facilitate compliance by WMS with applicable gaming regulations. Ms. Redstone
acquired her shares of our common stock from her former husband, Sumner M.
Redstone, on July 30, 2002, pursuant to a settlement of divorce, as WMS
previously reported. Mr. Redstone and his affiliate National Amusements, Inc.
had entered into a similar voting proxy agreement in 1995 appointing Louis J.
Nicastro (or, in the event Louis J. Nicastro is unable to perform the duties and
exercise the rights of proxy holder, then Neil D. Nicastro) as proxy holder
governing their WMS common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Amended and Restated Certificate of Incorporation of WMS dated February
17, 1987; Certificate of Amendment dated January 28, 1993; and
Certificate of Correction dated May 4, 1994, incorporated by reference
to Exhibit 3(a) to our Annual Report on Form 10-K for the year ended
June 30, 1994.
3(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of WMS, as filed with the Secretary of the State of
Delaware on February 25, 1998, incorporated by reference to Exhibit 3.1
to our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred Stock,
incorporated by reference to Exhibit A to the Form of Rights Agreement
filed as Exhibit 1 to our Registration Statement on Form 8-A (File No.
1-8300) filed March 25, 1998 ("the Form 8-A").
3(d) By-Laws of WMS, as amended and restated through June 26, 1996,
incorporated by reference to Exhibit 3(b) to our Annual Report on Form
10-K for the year ended June 30, 1996.
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WMS INDUSTRIES INC.
Dated: November 12, 2002 By: /s/ Scott D. Schweinfurth
-------------------------
Scott D. Schweinfurth
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
17
CERTIFICATIONS
I, Brian R. Gamache, Chief Executive Officer of WMS Industries Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of WMS Industries
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 12, 2002
/s/ Brian R. Gamache
--------------------
Brian R. Gamache
Chief Executive Officer
18
I, Scott D. Schweinfurth, Chief Financial Officer of WMS Industries Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of WMS Industries
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 12, 2002
/s/ Scott D. Schweinfurth
-------------------------
Scott D. Schweinfurth
Chief Financial Officer
19
EXHIBIT INDEX
3(a) Amended and Restated Certificate of Incorporation of WMS dated February
17, 1987; Certificate of Amendment dated January 28, 1993; and
Certificate of Correction dated May 4, 1994, incorporated by reference
to Exhibit 3(a) to our Annual Report on Form 10-K for the year ended
June 30, 1994.
3(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of WMS, as filed with the Secretary of the State of
Delaware on February 25, 1998, incorporated by reference to Exhibit 3.1
to our Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred Stock,
incorporated by reference to Exhibit A to the Form of Rights Agreement
filed as Exhibit 1 to our Registration Statement on Form 8-A (File No.
1-8300) filed March 25, 1998 ("the Form 8-A").
3(d) By-Laws of WMS, as amended and restated through June 26, 1996,
incorporated by reference to Exhibit 3(b) to our Annual Report on Form
10-K for the year ended June 30, 1996.
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
20