Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

Commission file number: 1-8300

WMS INDUSTRIES INC.

800 South Northpoint Blvd., Waukegan, IL 60085

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: 29,865,109 of common stock, $.50 par value, were outstanding at February 9, 2004, excluding 2,493,206 shares held as treasury shares.

Table of Contents

WMS INDUSTRIES INC.

INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
(Unaudited)

See notes to condensed consolidated financial statements.

3

Table of Contents

WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

See notes to condensed consolidated financial statements.

4

Table of Contents

WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)

See notes to condensed consolidated financial statements.

5

Table of Contents

WMS INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

See notes to condensed consolidated financial statements.

6

Table of Contents

WMS INDUSTRIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		FINANCIAL STATEMENTS
		The accompanying unaudited condensed consolidated financial statements of WMS Industries Inc., (“WMS”, “we”, “us” or “the Company”) 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 notes 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.
		Sales of our gaming machines to casinos are generally strongest in the spring and slowest in the summer months. In addition, quarterly revenues and net income may increase when we receive a larger number of approvals for new games from regulators than in other quarters, when a game that achieves significant player appeal is introduced or if gaming is permitted in a significant new jurisdiction. Operating results for the quarter ended December 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2003.
2.		BASIS OF PRESENTATION
		Our condensed consolidated financial statements include the accounts of WMS and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. We account for our joint operating agreement with International Game Technology (IGT) for the SURVIVOR™ wide-area progressive (WAP) systems, for which no legal entity exists, in our consolidated financial statements by recording our proportionate share of revenues and expenses from operating activities and the full value of all of the assets we own and liabilities we owe related to this agreement. The purpose of the joint operating agreement is to combine our licensing rights and game design expertise with the proprietary WAP system of IGT. Under the agreement, we designed and marketed specified games, which were manufactured by IGT and placed in casinos on IGT’s WAP system. In January 2004, the remaining SURVIVOR WAP was shut down.
		Certain prior period balances have been reclassified to conform to the current period presentation.
3.		STOCK OPTION COMPENSATION AND EARNINGS (LOSS) PER SHARE
		We have elected to continue to follow APB Opinion No. 25 to account for stock options granted to employees and directors, as allowed by SFAS No. 123, “Accounting for Stock Based Compensation.” Under APB No. 25, we do not recognize compensation expense because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date.
		The following table presents a comparison of the reported net loss, loss per share and compensation cost of options granted to employees to the pro forma amounts that would have been reported if stock option compensation expense had been determined using the fair value method allowed by SFAS No. 123 (in thousands of dollars, except per share amounts):

7

Table of Contents

The following weighted average assumptions were used to value the options in the periods indicated:

		At December 31, 2003 and 2002, the Company had approximately 3,761,000 and 3,405,000 stock options and warrants outstanding, respectively.
		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, Chairman of our Board of Directors and a non-employee director. On May 7, 2003, we purchased Mr. Nicastro’s rights to the 250,000 restricted shares for a purchase price of $14.00 per share. The diluted loss per share calculation for the three and six months ended December 31, 2002 does not include the 250,000 shares under the restricted stock grant.
		On June 11, 2003, the Board of Directors approved a grant of restricted stock of 7,478 shares to each of four officers in lieu of any cash bonuses for fiscal 2003. The restricted shares will vest on June 11, 2004, subject to the individual’s continued employment with WMS. The 29,912 shares of unearned restricted stock were not included in the computation of diluted loss per share for the three and six months ended December 31, 2003.
		The following summarizes the stock options exercised during the periods indicated:

For the periods presented, if WMS had recognized income, the total diluted shares outstanding would have increased based upon the hypothetical assumed exercise of stock options and warrants under the treasury stock method and the conversion of our 2.75% convertible subordinated notes. The following table describes the number of additional shares that would have been included in the total diluted shares outstanding assuming the hypothetical exercise of stock options and warrants under the treasury stock method and the conversion of our 2.75% convertible subordinated notes:

8

Table of Contents

4.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands of dollars)

5.		COMPREHENSIVE INCOME (LOSS)
		Comprehensive loss consists of net loss and foreign currency translation adjustments and totaled a loss of $11,000 and $1.0 million for the three months ended December 31, 2003 and 2002, respectively, and totaled a loss of $2.1 million and $423,000 for the six months ended December 31, 2003 and 2002, respectively.
6.		CONVERTIBLE SUBORDINATED NOTES
		In June 2003, we issued $100 million of convertible subordinated notes bearing interest at 2.75% maturing on July 15, 2010. In July 2003, we issued an additional $15 million of convertible subordinated notes under identical terms to cover an over- allotment option granted to the initial purchasers of the notes. The notes are convertible at any time into an aggregate of 5,813,953 shares of our common stock at a conversion price of $19.78 per share, subject to adjustment. The notes are subordinated in right of payment to all existing and future senior debt and are effectively subordinated to all of the indebtedness and liabilities of our subsidiaries. The notes are not callable. We pay interest on the notes semi-annually on January 15 and July 15 of each year, which commenced on January 15, 2004.
		We have no maturities of debt or sinking fund requirements through June 30, 2008.

9

Table of Contents

7.		STOCKHOLDERS’ EQUITY
		Common Stock Repurchase Program
		In January 2002, our Board of Directors authorized a $20 million plan to repurchase our common stock in open market transactions from time to time. In the six months ended December 31, 2002, 1,022,500 shares were repurchased under this plan for $11.4 million. By July 31, 2002, this repurchase program was completed. In total, we repurchased 1,568,000 shares, or approximately 5% of the previously outstanding shares under this $20 million plan.
		In September 2002, our Board of Directors authorized a twelve-month plan to repurchase up to an additional $10 million of our common stock in open market transactions. As of December 31, 2002, repurchases of 151,500 shares at a cost of $2.1 million had been made under this plan. As of March 31, 2003, this repurchase plan was completed with 681,700 shares purchased for a cost of $7.9 million during the March 2003 quarter.
		In April 2003, our Board of Directors authorized a new twelve-month plan to repurchase up to an additional $10 million of our common stock from time to time in open market or privately negotiated transactions. In June 2003, in conjunction with the completion of our private placement of convertible subordinated notes due 2010 to qualified institutional buyers, our Board of Directors authorized the expansion of this repurchase plan to $25 million. During the fiscal year ended June 30, 2003, we repurchased 493,200 shares for an aggregate price of $7.5 million under this plan. During the six months ended December 31, 2003, we purchased 299,100 shares of our common stock on the open market for $5.0 million at an average price of $16.75 per share.
		Since the initial buyback program was authorized in January 2002, we have repurchased 3,193,500 shares, or 9.9% of the previous number of shares outstanding, for a total expenditure of $42.5 million at an average price of $13.31 per share. At December 31, 2003, we had 29.8 million shares outstanding and $12.5 million remaining on the $25 million share buyback plan approved by our Board of Directors in April 2003 and expanded in June 2003. The timing and actual number of shares to be purchased in the future will depend on market conditions.
		Warrant Grant
		In September 2003, our Board of Directors, as part of the inducement to a licensor to extend their license agreement with us, approved a grant of 250,000 common stock purchase warrants valued at $3.9 million. The warrants’ exercise price is $35.04 per share of our common stock, subject to adjustment. The warrants are non-cancelable and vest with respect to 20% of the underlying shares in each year commencing on January 1, 2007 until fully vested on January 1, 2011, subject to earlier vesting under specified circumstances. The warrants expire on September 14, 2013.
		In valuing the warrants, we used the Black-Scholes model and incorporated the following assumptions: risk free rate - 4.15%; expected volatility - .54; expected life - 10 years; and expected dividend - zero. The risk-free rate is determined based on the interest rate of U.S. Government treasury obligations with a maturity date comparable to the life of the warrants issued. Other assumptions, relating to the warrant’s life, strike price and our common stock price, were determined at the date the warrants were issued. We will recognize expense based on the terms of the underlying license agreement.
8.		COMMITMENTS AND CONTINGENCIES
		We routinely enter into license agreements with others for the use of their intellectual properties in our products. These agreements generally provide for royalty advances when the agreements are signed, and provide for minimum guaranteed royalty payments as well as additional contingent payments based on future events. In the September 2003 quarter, we amended licensing agreements and entered into new licensing agreements, which significantly increased our total potential royalty commitments. The total potential royalty commitments at December 31, 2003 increased to $69.2 million from $29.6 million at June 30, 2003. The total potential future royalty payments at December 31, 2003 increased to $40.2 million from $13.0 million at June 30, 2003.

10

Table of Contents

At December 31, 2003, we had total royalty commitments, advances and payments made, and potential, future royalty payments as follows:

	Of the $29.0 million total advances and payments through December 31, 2003, $3.0 million has been charged to expense and the remaining $26.0 million is included in the December 31, 2003 balance sheet with $9.2 million in other current assets and $16.8 million in other assets.

	As of December 31, 2003, we estimate that potential future royalty payments in each fiscal year will be as follows:

		As part of the third phase of our technologies improvement plan, we have licensed technologies from third parties. At December 31, 2003, we had incurred guaranteed minimum payments related to such technologies aggregating $4.1 million, all of which had been paid as advances. An additional $1.4 million of contingent payments may become payable based on future events. These amounts are included in the table above. If we determine that we will not realize the value of a particular licensed technology, we will record an immediate charge against earnings at the time of such determination. If all of the contingent payments became due and all of the technologies were to have no further value to us, we would record a charge of up to $5.5 million.
9.		LITIGATION
		On May 18, 2001, La Societe de Loteries du Quebec (Loto-Quebec) was served with a class action lawsuit alleging that the members of the class developed a pathological gambling addiction by using Loto-Quebec’s video lottery terminals (VLTs) and that Loto-Quebec, as owner, operator and distributor of VLTs, failed to warn players of the alleged dangers associated with VLTs. Class status was granted by the Superior Court, Province of Quebec, District of Quebec on May 6, 2002, authorizing Jean Brochu to act as the representative plaintiff. The class of 119,000 members is requesting damages totaling almost $700 million Canadian dollars, plus interest.
		On October 2, 2003, Loto-Quebec filed a claim against us and Video Lottery Consultants Inc., a subsidiary of IGT (VLC), alleging that, in the event that the class action plaintiffs are successful in the pending class action lawsuit against Loto-Quebec, Loto-Quebec is entitled to be indemnified by the manufacturers of the VLTs, specifically us and VLC. We filed our appearance on October 16, 2003 and are currently proceeding with discovery. We intend to vigorously defend ourselves against the allegations. At this time, we are unable to predict the outcome of these actions, or a reasonable estimate of the range of possible loss, if any, given the status of the litigation.

11

Table of Contents

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”, and “WMS” mean WMS Industries Inc., a Delaware corporation, and its subsidiaries, and the term “common stock” means our common stock, $0.50 par value per share, unless the context indicates a different meaning. “Gaming operations,” as used throughout this report, includes the gaming machines that we lease, based upon any of the following payment methods: (1) a percentage of the net win of the gaming machines, (2) fixed daily fees, or (3) in the case of wide-area progressive games, a percentage of the amount wagered.
		OVERVIEW
		Our historical product sales strength has been in the multi-line, multi-coin video product line, which, together with our VLT product, accounted for substantially all of our new unit sales for the past three fiscal years. Our strategy is to become a full service gaming device provider to casinos by developing and obtaining regulatory approval for three additional product lines:

	•		mechanical reel games,
	•		video poker games and
	•		wide-area progressive (WAP) systems.

		We believe these new product lines account for approximately 75% of the typical casino slot floor and represent a significant market share growth opportunity for us.
		As a result of software anomalies that were present in our legacy operating system that ran our gaming devices, in January 2002, we began to execute a three-part technology improvement plan to first stabilize and then modernize our operating system software. Customers were apprised of this technology improvement plan and our intention to introduce our new Bluebird™ gaming cabinet and new CPU-NXT™ computer circuit board and operating system that would provide features and functionality that our existing products lacked. As a result, since January 2002, our product sales revenues have declined from levels experienced in fiscal 2000 and 2001. We expect that as we receive regulatory approvals throughout fiscal 2004 for our new CPU-NXT, computer circuit board and operating system, new Bluebird cabinet and new games from each of the six North American gaming labs, our product sales revenues will grow. In fiscal 2005, with all of the approvals in hand for all of our product lines, we’ll look to achieve growing market share with our new product lines: mechanical reel, video poker and wide area progressive jackpots.
		Technology Improvement Plan
		In the first phase of this plan, we improved the stability of our operating system by introducing two upgrades, version 2.57 for hopper-based games and version 2.59 for printer-based games. Version 2.57 has now been approved by all six of the North American gaming labs, and we were required to and completed an upgrade of our hopper game operating system to version 2.57 in four jurisdictions. Other jurisdictions may require upgrades in the future. We are making version 2.57 available in other jurisdictions as an optional upgrade. Gaming Laboratories, Inc. (GLI) approved version 2.59, our printer upgrade version, in March 2003. The GLI lab tests product for all of the Native American casinos and the Midwest Riverboat casinos where in the aggregate we believe about 50% of our existing gaming devices are deployed. The Nevada gaming authorities approved version 2.59 in September 2003. We have installed version 2.59 in several riverboat and Native American casinos, which use GLI, and will be upgrading our printer gaming machines installed in casinos in Nevada to version 2.59. Nevada is currently the only jurisdiction requiring all printer games be upgraded to version 2.59. Other jurisdictions may require upgrades in the future, and we are making version 2.59 available in other approved jurisdictions as an optional upgrade.
		The second phase of our technology improvement plan is to introduce our new CPU-NXT computer circuit board and operating system and this phase of the plan continues on schedule. The commercial version of CPU-NXT was approved by Gaming Laboratories, Inc. (GLI) in September 2003 when we also received GLI approval for nine game themes on this new system. In January 2004, we received Nevada and Mississippi lab approval for CPU-NXT and we are on track for the approvals we expect to receive from Michigan, New Jersey and Ontario regulators over the next twelve weeks. In Nevada, Mississippi, New Jersey and Ontario, we need to complete a field trial for ticket-in-ticket-out printer devices.

12

Table of Contents

		We are evaluating specifications and requirements for an even more advanced gaming system that will be developed over the long-term, third phase of the technology improvement plan. We continue to refine the design and specifications to incorporate additional features we desire for this platform and continue to allocate resources to this longer-term effort.
		Bluebird and CPU-NXT Commercialization
		Our focus in the near term is to refresh our existing installed base of video gaming devices in casinos through either replacement with Bluebird video gaming devices or through CPU-NXT upgrade kits. We received approval from GLI for the marketable version of the Bluebird video cabinet at the end of November 2003. The Bluebird video cabinet was approved by the labs in Nevada and Mississippi in January 2004, and we are on track to receive lab approvals from Michigan, New Jersey and Ontario over the next twelve weeks. We expect to sell and ship our first new video Bluebird gaming devices to casinos in Nevada, New Jersey and Detroit, Michigan in the March 2004 quarter and begin shipments to Ontario and Mississippi early in the June 2004 quarter after completion of the field trials.
		Customer acceptance of Bluebird and our new games continues to appear very favorable. From the initial performance data we have received through January 2004 for Bluebird installations, WMS’ new games at a majority of casinos were performing at two times house average win per day. Since we started selling Bluebird, we have corporate agreements or sales orders for over 6,900 Bluebird video gaming devices, of which 896 were delivered in the December 2003 quarter with most of the balance deliverable over the next two quarters. These agreements are with multi-jurisdictional casino operators such as Harrah’s, Argosy, Ameristar, Stations, Pinnacle and Isle of Capri, along with a number of tribal and individual casino properties. We expect order levels to continue at a strong pace now that we have the first Bluebird video gaming devices and new games generating strong performance data, coupled with additional jurisdictional approvals.
		Since we started selling CPU-NXT upgrade kits, we have corporate agreements or sales orders for almost 3,800 CPU-NXT upgrade kits of which 585 were delivered in December 2003 with most of the balance deliverable over the next two quarters. Each jurisdictional approval of the CPU-NXT operating system allows us to submit new games written to that system to the regulators for approval, which enables us to sell and ship additional CPU-NXT upgrade kits. We expect strength in game conversion revenues over the next several months as operators see the value and performance benefits of our CPU-NXT upgrade kits and printer upgrades.
		Product Line Expansion Plan
		In January 2004, we received Nevada regulatory approval for our mechanical reel product and three new game themes: two for our wide area progressive system and one “for sale” game theme. The timing of these approvals is ahead of schedule, and we are beginning to sell this product line in advance of our June 2004 quarter launch date. We plan to submit additional mechanical reel game themes, on which we expect to receive approval in time for our product launch date. The other five regulators are on track for our planned approval schedule for the mechanical reel product.
		We expect to submit our first video poker product to the regulators in the March 2004 quarter and anticipate first approvals and first product shipments in the June 2004 quarter.
		The field trials of our WAP system began the first week of February 2004 in Nevada and should begin in the coming weeks for the Native American wide area progressive link in GLI territories. We continue to expect to receive Nevada and GLI approval for our new progressive jackpot system in June 2004 with product launch in July 2004.
		Brand Licenses
		During the September 2003 quarter, we extended our agreement with Hasbro, Inc. for the use of their MONOPOLY® brand through calendar year 2011. We expect to introduce two new MONOPOLY™ themed participation games by June 2004 and to launch our proprietary wide-area progressive systems featuring the MONOPOLY Money™ progressive jackpot in July 2004.
		In September 2003, we announced our agreement with Sony Pictures Consumer Products to develop, market and distribute MEN IN BLACK™ branded games. We plan to introduce this new series of participation games in our new Bluebird cabinet beginning in our last quarter of fiscal 2004.

13

Table of Contents

		In October 2003, we entered into an exclusive agreement to develop, market and distribute games using the lottery brand POWERBALL® which we intend to develop as a wide-area progressive game. We look forward to debuting the first POWERBALL game on our Bluebird cabinet at the 2004 G2E trade show in October 2004.
		CRITICAL ACCOUNTING POLICIES
		During the quarter ended December 31, 2003, we added revenue recognition as a new critical accounting policy, in addition to those policies reported in our Annual Report on Form 10-K for the year ended June 30, 2003. We have not made any changes in the application of this or any other policy.
		The application of revenue recognition policies has become more critical due to the variety of product sales contracts now being used. We record revenue on product sales, net of rebates, discounts and allowances, when persuasive evidence of an agreement exists, the sales price is fixed or determinable, the product is delivered and collectibility is reasonably assured. When multiple product deliverables are included under the sales contract, we allocate revenue to each product based upon their respective selling prices against total contract value and defer revenue recognition on those deliverables where we have not met all requirements of revenue recognition.
		Gaming operations revenues under operating type lease agreements are estimated and recognized as earned. Lease agreements are based on either a pre-determined percentage of the daily net win of each gaming machine or a fixed daily rental fee. WAP revenues are recognized based upon a percentage of amounts wagered, or coin in, on each gaming machine and are recognized as earned. Royalties from licensees are recorded as earned.
		The application of this policy affects the level of our sales revenue, cost of product sold, accounts receivable, deferred revenue and accrued expenses.
		OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
		We are not dependent on off-balance sheet financing arrangements to fund our operations. We utilize financing arrangements for operating leases of equipment and facilities, none of which are in excess of our current needs. We also have minimum guaranteed royalty payments for intellectual property used in our gaming machines. Our obligations under these arrangements and under our convertible subordinated notes at December 31, 2003, were as follows:

		The total potential royalty commitments, including payments already made and those contingent upon future events, increased from $13.0 million at June 30, 2003 to $40.2 million at December 31, 2003 due to new and amended brand licensing agreements. Although potential royalty commitments could continue to increase in the future as we enter into new brand licensing agreements, we do not expect such increases to be as large as the increase in the six months ended December 31, 2003.
		We do not have any special purpose entities for investment or the conduct of our operations. We have not entered into any derivative financial instruments, although we have granted stock options and restricted stock to our employees, officers, directors and consultants and warrants to a licensor. We do not currently have any significant firm purchase commitments for raw material inventory.

14

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Our sources of liquidity for the six months ended December 31, 2003 were:

	•		Existing cash, cash equivalents and short-term investments,
	•		$15 million cash received from the issuance of additional 2.75% convertible subordinated notes in July 2003,
	•		Non-cash expenses of $11.8 million more than offsetting our net loss of $2.2 million, and
	•		Proceeds from stock option exercises of $6.0 million, excluding related tax related benefits.

		We believe that cash and cash equivalents and short-term investments of $144.8 million at December 31, 2003, inclusive of $1.5 million of restricted cash, will be adequate to fund our anticipated level of expenses, capital expenditures, cash to be invested in gaming operations machines, 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 and we do not expect to borrow any money under our $50 million revolving credit line that expires May 2004.
		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 longer. 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 high credit ratings and to limit the amount of credit exposure to any one issuer.
		During the six months ended December 31, 2003, our net working capital increased primarily due to the issuance of $15.0 million proceeds from additional convertible notes placed under our June 2003 convertible note offering in July 2003. Accounts and notes receivable, net, increased by $14.7 million due to higher new unit sales levels and decreased collections during the six months ended December 31, 2003. Inventory increased by $9.5 million due to higher levels of raw materials as we prepare for an increasing volume of business. Royalty advances increased by $7.1 million due to new technology and brand license agreements we entered into or amended during the six months ended December 31, 2003. Income tax receivables decreased by $1.0 million primarily due to receipt of prior year tax refunds. Current liabilities increased by $2.7 million due to higher accounts payable reflecting higher inventory levels, partially offset by our payment to Midway Games Inc. of a $4.0 million tax advance. We have not experienced significant bad debt expense in any of the periods presented.
		Due to our operating loss in fiscal 2003, we have recorded $6.7 million and $7.7 million of current income tax receivables on our balance sheets as of December 31, 2003 and at June 30, 2003, respectively. This tax receivable is based on our ability to receive tax refunds from applying our fiscal 2003 tax loss against prior years’ income and for refunds of tax payments made in fiscal 2003.
		We also have $14.3 million of deferred tax assets on our balance sheet as of December 31, 2003, an increase of $5.1 million from June 30, 2003. These represent taxable temporary differences expected to reverse in future years, and tax credits and tax operating losses generated in fiscal 2003 and in the six months ended December 31, 2003, that can be claimed on future income tax returns to reduce current tax due in those years. We believe it is more likely than not that we will realize the benefits of these deferred tax assets. On this basis, we have not provided any valuation allowance related to realizability of

15

Table of Contents

		such assets as of December 31, 2003. However, such valuation allowances could be recorded against these deferred tax assets in future periods if our future estimates of amounts realizable are reduced or if the timing of such realization extends beyond our current expectations.
		We utilize financing arrangements for operating leases of regional office facilities and for some equipment. We have royalty commitments for brand and technology licenses that are not recorded in our balance sheet. Our total potential royalty commitments, including payments contingent upon future events, increased from $29.6 million at June 30, 2003 to $69.2 million at December 31, 2003, of which $29.0 million has been paid. Please refer to the table under “Off-Balance Sheet Arrangements and Contractual Obligations” above and Note 8 to our Condensed Consolidated Financial Statements in Item 1 above.
		Capital Resources
		The following table summarizes our sources and uses of cash for the periods shown (in thousands of dollars):