UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
________________
FORM
10-Q
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(Mark
One)
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|
R
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2007
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OR
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£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE TRANSITION PERIOD FROM
_______________TO______________________
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Commission
file number: 1-8300
WMS
INDUSTRIES INC.
(Exact
name of registrant as specified in its Charter)
| Delaware |
36-2814522
|
|
(State or
other Jurisdiction of
|
(I.R.S. Employer Identification No.) |
| incorporation or organization) |
800
South Northpoint Blvd.
Waukegan,
IL 60085
(Address
of Principal Executive Offices)
(847)
785-3000
(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 reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See
definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer R Accelerated
filer £ Non-accelerated
filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes 0 No R
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 50,625,350 shares of common
stock, $0.50 par value, were outstanding at January 31, 2008.
WMS
INDUSTRIES INC.
INDEX
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Page
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Part I.
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Financial
Information
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Item
1.
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3
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4
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5
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6
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Item
2.
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13
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Item
3.
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24
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Item
4.
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24
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Part
II.
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Other
Information
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Item
1.
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25
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Item
1A.
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25
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Item
2.
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25
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Item
3.
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25
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Item
4.
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25
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Item
5.
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26
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Item
6.
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26
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27
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2
PART I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
WMS
INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For
the Three and Six Months Ended December 31, 2007 and 2006
(in
millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
|
Three
Months Ended
|
Six
Months Ended
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||||||||||||||||
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December
31,
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December
31,
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||||||||||||||||
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2007
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2006
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2007
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2006
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||||||||||||||
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REVENUES:
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|||||||||||||||||
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Product sales
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$ | 104.7 | $ | 93.8 | $ | 185.6 | $ | 162.4 | |||||||||
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Gaming
operations
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54.5 | 40.8 | 106.1 | 82.8 | |||||||||||||
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Total
revenues
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159.2 | 134.6 | 291.7 | 245.2 | |||||||||||||
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COSTS
AND EXPENSES:
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|||||||||||||||||
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Cost
of product sales(1)
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54.4 | 51.7 | 96.7 | 91.1 | |||||||||||||
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Cost
of gaming operations(1)
|
11.3 | 9.4 | 21.9 | 18.0 | |||||||||||||
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Research
and development
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17.5 | 14.1 | 34.3 | 26.6 | |||||||||||||
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Selling
and administrative
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34.1 | 26.6 | 61.9 | 50.2 | |||||||||||||
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Depreciation
(1)
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17.8 | 16.0 | 36.0 | 31.2 | |||||||||||||
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Total
costs and expenses
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135.1 | 117.8 | 250.8 | 217.1 | |||||||||||||
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OPERATING
INCOME
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24.1 | 16.8 | 40.9 | 28.1 | |||||||||||||
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Interest
expense
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(1.0 | ) | (1.1 | ) | (2.0 | ) | (2.8 | ) | |||||||||
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Interest
and other income, net
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1.4 | 0.5 | 2.5 | 1.4 | |||||||||||||
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Income
before income taxes
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24.5 | 16.2 | 41.4 | 26.7 | |||||||||||||
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Provision
for income taxes
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8.5 | 4.0 | 14.3 | 7.4 | |||||||||||||
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NET
INCOME
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$ | 16.0 | $ | 12.2 | $ | 27.1 | $ | 19.3 | |||||||||
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Earnings
per share:
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|||||||||||||||||
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Basic
|
$ | 0.32 | $ | 0.25 | $ | 0.54 | $ | 0.41 | |||||||||
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Diluted
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$ | 0.27 | $ | 0.22 | $ | 0.46 | $ | 0.35 | |||||||||
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Weighted-average
common shares:
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|||||||||||||||||
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Basic
common stock outstanding
|
50.2 | 48.0 | 50.0 | 47.6 | |||||||||||||
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Diluted
common stock and common stock equivalents
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61.0 | 58.8 | 60.9 | 58.3 | |||||||||||||
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(1) Cost
of product sales and cost of gaming operations exclude the following
amounts of depreciation, which
are included in the depreciation line item:
|
|||||||||||||||||
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Cost
of product sales
|
$ | 0.9 | $ | 0.6 |
$
|
1.7 |
$
|
1.2 | |||||
|
Cost
of gaming operations
|
$ | 14.7 | $ | 13.2 |
$
|
30.1 | $ | 25.9 |
The
accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
WMS
INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December
31, 2007 and June 30, 2007
(in
millions of U.S. dollars and millions of shares)
|
December
31,
|
June
30,
|
|||||||
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2007
|
2007
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|||||||
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ASSETS
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(unaudited)
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|||||||
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CURRENT
ASSETS:
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||||||||
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Cash
and cash equivalents
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$ | 57.7 | $ | 37.2 | ||||
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Restricted cash
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24.4 | 16.0 | ||||||
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Total
cash, cash equivalents, and restricted cash
|
82.1 | 53.2 | ||||||
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Accounts
receivable, net of allowances of $2.1 and $2.5,
respectively
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107.3 | 114.5 | ||||||
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Notes
receivable, current portion
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64.4 | 59.4 | ||||||
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Inventories
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73.8 | 79.3 | ||||||
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Deferred
income tax assets
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9.6 | 9.4 | ||||||
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Other
current assets
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30.0 | 26.4 | ||||||
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Total current
assets
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367.2 | 342.2 | ||||||
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NON-CURRENT
ASSETS:
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||||||||
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Gaming operations equipment, net of accumulated depreciation of $149.8 and
$129.3, respectively
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85.7 | 90.0 | ||||||
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Property, plant and equipment, net of accumulated depreciation of $65.5
and $57.9, respectively
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105.8 | 91.9 | ||||||
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Intangible
assets
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105.5 | 97.0 | ||||||
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Deferred
income tax assets
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23.7 | 19.9 | ||||||
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Other
assets
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15.4 | 14.7 | ||||||
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Total
non-current assets
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336.1 | 313.5 | ||||||
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TOTAL
ASSETS
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$ | 703.3 | $ | 655.7 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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CURRENT LIABILITIES:
|
||||||||
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Accounts
payable
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$ | 36.5 | $ | 38.8 | ||||
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Accrued
compensation and related benefits
|
11.8 | 17.5 | ||||||
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Other
accrued liabilities
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36.9 | 30.4 | ||||||
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Total current
liabilities
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85.2 | 86.7 | ||||||
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NON-CURRENT LIABILITIES:
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||||||||
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Deferred
income tax liabilities.
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11.2 | 9.4 | ||||||
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Long-term
debt
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115.0 | 115.0 | ||||||
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Other
non-current liabilities
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12.9 | 11.0 | ||||||
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Total non-current
liabilities
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139.1 | 135.4 | ||||||
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Commitments,
contingencies and indemnifications (see Note 12)
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— | — | ||||||
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STOCKHOLDERS’
EQUITY:
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||||||||
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Preferred
stock (5.0 shares authorized, none issued)
|
— | — | ||||||
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Common
stock (100.0 shares authorized, 50.6 and 50.0 shares issued,
respectively)
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25.3 | 25.0 | ||||||
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Additional
paid-in capital
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283.0 | 269.1 | ||||||
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Retained
earnings
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163.5 | 138.2 | ||||||
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Accumulated
other comprehensive income
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7.6 | 1.3 | ||||||
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Treasury
stock
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(0.4 | ) | — | |||||
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Total stockholders’
equity
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479.0 | 433.6 | ||||||
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TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 703.3 | $ | 655.7 | ||||
The
accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
WMS
INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Six Months Ended December 31, 2007 and 2006
(in
millions of U.S. Dollars)
(Unaudited)
|
Six
Months Ended
December
31,
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||||||||
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2007
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2006
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
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Net
income
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$ | 27.1 | $ | 19.3 | ||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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||||||||
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Depreciation
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36.0 | 31.2 | ||||||
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Non-cash
expenses
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17.6 | 11.8 | ||||||
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Bad
debt expense
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1.6 | 0.8 | ||||||
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Deferred
income taxes
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(2.2 | ) | (3.6 | ) | ||||
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Change
in operating assets and liabilities, net of business
acquisitions
|
(10.2 | ) | (14.9 | ) | ||||
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Net
cash provided by operating activities
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69.9 | 44.6 | ||||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
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||||||||
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Purchase
of business, net of cash acquired
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(0.2 | ) | (20.9 | ) | ||||
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Purchase
of property, plant and equipment
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(19.8 | ) | (16.0 | ) | ||||
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Additions
to gaming operations equipment
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(28.7 | ) | (32.3 | ) | ||||
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Investment
and advances in royalties, licensed technologies, patents, and trademarks,
net of business acquisitions
|
(6.0 | ) | (15.3 | ) | ||||
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Purchase
of restricted long-term investments
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(0.7 | ) | — | |||||
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Net
cash used in investing activities
|
(55.4 | ) | (84.5 | ) | ||||
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CASH
FLOWS FROM FINANCING ACTIVITIES:
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||||||||
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Cash
received from exercise of stock options
|
10.8 | 14.3 | ||||||
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Tax
benefit from exercise of stock options
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4.9 | 4.7 | ||||||
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Proceeds
from borrowings under revolving credit facility
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— | 10.0 | ||||||
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Repayments
of borrowings under revolving credit facility
|
— | (10.0 | ) | |||||
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Purchases
of treasury stock
|
(10.0 | ) | — | |||||
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Net
cash provided by financing activities
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5.7 | 19.0 | ||||||
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Effect
of Exchange Rates on Cash and Cash Equivalents
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0.3 | 1.7 | ||||||
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INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
20.5 | (19.2 | ) | |||||
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CASH AND CASH
EQUIVALENTS, beginning of period
|
37.2 | 39.1 | ||||||
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CASH AND CASH
EQUIVALENTS, end of period
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$ | 57.7 | $ | 19.9 | ||||
The
accompanying Notes are an integral part of these Condensed Consolidated
Financial Statements.
WMS
INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular
amounts in millions of U.S. dollars and millions of shares,
except per share amounts)
(Unaudited)
1. BASIS
OF PRESENTATION AND BUSINESS OVERVIEW
The
accompanying unaudited interim Condensed Consolidated Financial Statements of
WMS Industries Inc. (“WMS”, “we”, “us” or “the Company”) have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”) for quarterly reports on Form 10-Q and do not include all of the
information and note disclosures required by U.S. generally accepted accounting
principles for complete financial statements. The Condensed Consolidated
Financial Statements should therefore be read in conjunction with the
Consolidated Financial Statements and Notes thereto for the fiscal year ended
June 30, 2007 included in the Company’s Annual Report on Form 10-K filed with
the SEC on August 29, 2007. The accompanying unaudited interim
Condensed Consolidated Financial Statements have been prepared in accordance
with U.S. generally accepted accounting principles and reflect all adjustments
of a normal, recurring nature that are, in the opinion of management, necessary
for a fair presentation of results for these interim periods.
Sales of
our gaming machines to casinos are generally strongest in the spring and slowest
in the summer months, while gaming operations revenues are generally strongest
in the spring and summer. 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 three and six months ended December 31,
2007 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2008. For further information, refer to the
Consolidated Financial Statements and Notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2007.
We market
our gaming machines in two principal ways. First, product sales include the
sales of new and used gaming machines, video lottery terminals (“VLTs”),
conversion kits, parts, amusement-with-prize gaming machines, gaming-related
systems for smaller international casino operators and equipment manufactured
under original equipment manufacturing agreements to casinos and other gaming
machine operators. Second, we license our game content to third parties for
distribution and we lease gaming machines and VLTs to casinos and other licensed
gaming machine operators for payments based upon (1) a percentage of the net
win, which is the casinos’ earnings generated by casino patrons playing the
gaming machine, (2) fixed daily fees or (3) in the case of gaming machines on a
wide-area progressive (“WAP”) jackpot system, a percentage of the amount
wagered, or a combination of a fixed daily fee and a percentage of the amount
wagered. We categorize our lease arrangements into five groups: WAP
participation gaming machines; local-area progressive (“LAP”) participation
gaming machines; stand-alone participation gaming machines; casino-owned daily
fee games; and gaming machine and VLT leases. We refer to WAP, LAP and
stand-alone participation gaming machines as “participation games” and when
combined with casino-owned daily fee games, royalties we receive under license
agreements with third parties to utilize our game content and intellectual
property, and gaming machine, VLT and other lease revenues, we refer to this
business as our “gaming operations.”
Data for
product sales and gaming operations is only maintained on a consolidated basis
as presented in our Condensed Consolidated Financial Statements, with no
additional separate data maintained for product sales and gaming operations
(other than the revenues and costs of revenues information included in the
Condensed Consolidated Statements of Income and cost of gaming operations
equipment and related accumulated depreciation included in the Condensed
Consolidated Balance Sheets).
2. PRINCIPAL
ACCOUNTING POLICIES
Accounting
for Income Taxes
We
account for income taxes using the asset and liability method. Under this
method, income taxes are provided for amounts currently payable and for
amounts deferred as income tax assets and liabilities based upon differences
between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Deferred income taxes are measured
using the enacted tax rates that are assumed will be in effect when the
differences reverse. We recognize interest and penalties related to income
taxes in income tax expense.
Other
Principal Accounting Policies
For a
description of the Company’s other principal accounting policies, see Note 2,
“Principal Accounting Policies,” to the Consolidated Financial Statements in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2007.
Recently
Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes
a framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. We are
required to adopt this statement beginning July 1, 2008 and we continue to
evaluate the impact of the provisions of SFAS 157.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of SFAS
115,” (“SFAS 159”). SFAS 159 allows entities to choose, at specific election
dates, to measure eligible financial assets and liabilities at fair value that
are not otherwise required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that item’s fair value in
subsequent reporting periods must be recognized in current earnings. We are
required to adopt this statement beginning July 1, 2008 and we continue to
evaluate the impact of the provisions of SFAS 159.
WMS
INDUSTRIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(tabular
amounts in millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
3. EARNINGS
PER SHARE
Basic and
diluted earnings per share are calculated as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
|
December
31,
|
December
31,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Basic earnings per
share:
|
||||||||||||||||
|
Net
income
|
$ | 16.0 | $ | 12.2 | $ | 27.1 | $ | 19.3 | ||||||||
|
Basic
weighted average common shares outstanding
|
50.2 | 48.0 | 50.0 | 47.6 | ||||||||||||
|
Basic
earnings per share of common stock
|
$ | 0.32 | $ | 0.25 | $ | 0.54 | $ | 0.41 | ||||||||
|
Diluted earnings per
share:
|
||||||||||||||||
|
Net
income
|
$ | 16.0 | $ | 12.2 | $ | 27.1 | $ | 19.3 | ||||||||
|
After
tax interest expense and amortization of issuance costs on convertible
subordinated notes
|
0.5 | 0.6 | 1.0 | 1.2 | ||||||||||||
|
Diluted
earnings
|
$ | 16.5 | $ | 12.8 | $ | 28.1 | $ | 20.5 | ||||||||
|
Basic
weighted average common shares outstanding
|
50.2 | 48.0 | 50.0 | 47.6 | ||||||||||||
|
Dilutive
effect of stock options
|
1.9 | 1.9 | 2.0 | 1.8 | ||||||||||||
|
Dilutive
effect of restricted common stock and warrants
|
0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||
|
Dilutive
effect of convertible subordinated notes
|
8.7 | 8.7 | 8.7 | 8.7 | ||||||||||||
|
Dilutive
weighted average common stock and common stock equivalents
|
61.0 | 58.8 | 60.9 | 58.3 | ||||||||||||
|
Diluted
earnings per share of common stock and common stock
equivalents
|
$ | 0.27 | $ | 0.22 | $ | 0.46 | $ | 0.35 | ||||||||
|
Common
stock equivalents excluded from the calculation of diluted earnings per
share because their exercise prices would render them
anti-dilutive
|
|
1.1 | 0.1 | 1.7 | ||||||||||||
Included
in the anti-dilutive common stock equivalents for the three and six months ended
December 31, 2006 are warrants to purchase 375,000 shares of common stock that
were issued in September 2003 as part of an inducement to a licensor to extend
its license agreement with us. The warrants’ exercise price is $23.36
per share of our common stock, subject to adjustment.
4. BUSINESS
ACQUISITION
On July
19, 2007, we completed the acquisition of 100% of the outstanding stock of
privately held Systems in Progress GmbH (“SiP”), an Austrian-based company
focused on developing and selling gaming related systems, including linked
progressive systems and slot accounting systems applicable for smaller
international casino operators. The total consideration for SiP, excluding
acquisition costs, was $4.7 million. SiP’s former majority shareholder is a
customer of WMS and $4.5 million of the total consideration resulted from
extinguishing a receivable owed by that customer to WMS for its entire equity
ownership in SiP. Two minority shareholders were paid equal value in
cash and shares of WMS common stock that in total aggregated approximately $0.2
million. The transaction is expected to be immaterial to our fiscal
2008 net income and, therefore, pro forma financial information is not
provided. The business valuation is not yet complete and, therefore,
the purchase price allocation is preliminary. See also Note 6, “Intangible
Assets.”
5. INVENTORIES
Inventories
consisted of the following:
|
December
31,
|
June
30,
|
|||||||
|
2007
|
2007
|
|||||||
|
Raw
materials and work-in-process
|
$ | 50.1 | $ | 52.5 | ||||
|
Finished
goods
|
23.7 | 26.8 | ||||||
|
Total
inventories
|
$ | 73.8 | $ | 79.3 | ||||
|
Legacy
inventory balances included in the totals above
|
$ | 2.9 | $ | 8.5 | ||||
WMS
INDUSTRIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(tabular
amounts in millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
6. INTANGIBLE
ASSETS
Goodwill
The
changes in the carrying amount of goodwill for the six months ended December 31,
2007 include:
|
Goodwill
balance at June 30,
2007
|
$ | 17.4 | ||
|
Additions: SiP
acquisition (see Note
4)
|
4.5 | |||
|
Foreign
currency translation
adjustment
|
1.4 | |||
|
Goodwill
balance at December 31,
2007
|
$ | 23.3 | ||
Other
Intangible Assets
Additions
to other intangible assets, which include capitalized legal costs and
expenditures to third parties, during the six months ended December 31, 2007,
were as follows:
|
Additions
|
||||
|
Finite
lived intangibles:
|
||||
|
Patents
|
$ | 2.1 | ||
|
Customer
relationships
|
– | |||
|
Royalties
and licensed technologies
|
3.7 | |||
|
Trademarks
|
0.2 | |||
|
Total
|
$ | 6.0 | ||
|
Indefinite
lived intangibles:
|
||||
|
Brand
names
|
$
|
|||
A
majority of the patent additions pertain to unissued patent applications and we
anticipate that a majority of these patents will be amortized over four to
seventeen years beginning in approximately July 2009. Royalties and
licensed technologies additions have a weighted-average life of 1.8
years. As the business valuation for the SiP acquisition is not yet
complete, no amounts have been allocated to other intangible assets as of
December 31, 2007.
Other
intangible assets consisted of the following:
|
December
31, 2007
|
June
30, 2007
|
|||||||||||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||
|
Finite
lived intangible assets:
|
||||||||||||||||||||||||
|
Patents
|
$ | 16.4 | $ | (1.5 | ) | $ | 14.9 | $ | 14.4 | $ | (0.9 | ) | $ | 13.5 | ||||||||||
|
Customer
relationships
|
4.9 | (1.2 | ) | 3.7 | 4.4 | (0.7 | ) | 3.7 | ||||||||||||||||
|
Royalties
and licensed technologies
|
104.3 | (37.9 | ) | 66.4 | 100.6 | (33.9 | ) | 66.7 | ||||||||||||||||
|
Trademarks
|
0.8 | (0.2 | ) | 0.6 | 0.7 | (0.1 | ) | 0.6 | ||||||||||||||||
|
Total
|
$ | 126.4 | $ | (40.8 | ) | $ | 85.6 | $ | 120.1 | $ | (35.6 | ) | $ | 84.5 | ||||||||||
|
Indefinite
lived intangible assets:
|
||||||||||||||||||||||||
|
Brand
names
|
$ | 3.3 | $ | – | $ | 3.3 | $ | 3.0 | $ | – | $ | 3.0 | ||||||||||||
Certain
of our other intangible assets are denominated in foreign currency and, as such,
the balances above include the effects of foreign currency
translation.
General
The
following table reconciles Goodwill and Other intangible assets presented above
to Intangible assets recorded on our Condensed Consolidated Balance Sheets
at:
|
December
31,
|
June
30,
|
|||||||
|
2007
|
2007
|
|||||||
|
Goodwill
|
$ | 23.3 | $ | 17.4 | ||||
|
Finite
lived intangible assets, net
|
85.6 | 84.5 | ||||||
|
Indefinite
lived intangible assets
|
3.3 | 3.0 | ||||||
|
Less: royalties
and licensed technologies, short-term included in other current
assets
|
(6.7 | ) | (7.9 | ) | ||||
|
Total
intangible assets
|
$ | 105.5 | $ | 97.0 | ||||
Amortization
expense for finite lived intangible assets was $3.2 million and $3.7 million for
the three months ended December 31, 2007 and 2006, respectively and $5.2 million
and $5.7 million for the six months ended December 31, 2007 and 2006,
respectively.
WMS
INDUSTRIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(tabular
amounts in millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
The
estimated aggregate amortization expense for finite lived intangible assets for
each of the next five years is as follows:
|
Year
ended June 30,
|
||||
|
2008
|
$ | 3.5 | ||
|
2009
|
8.4 | |||
|
2010
|
10.2 | |||
|
2011
|
8.8 | |||
|
2012
|
6.1 | |||
The
estimated aggregate future intangible amortization as of December 31, 2007 does
not reflect the significant commitments we have for future payments for
royalties and licensed technologies. See also Note 12, “Commitments,
Contingencies and Indemnifications.”
7. INCOME
TAXES
The
effective income tax rate was approximately 34.7% and 24.7% for the three months
ended December 31, 2007 and 2006, respectively and 34.5% and 27.7% for the six
months ended December 31, 2007 and 2006, respectively. The December 2007 three
and six month effective tax rates reflect the impact of the expiration of the
export sales deduction as of December 31, 2006 and additional unrecognized tax
benefits under FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No.
109, Accounting for Income Taxes which we adopted effective July 1, 2007.
The December 2006 three and six month period effective tax rate reflects
utilization of the export sales deduction, which expired in December 2006, as
well as the domestic manufacturing deduction and the effect of the retroactive
reinstatement of the research and development tax credit legislation back to
January 1, 2006, including the credit earned for the period January 1, 2006
through June 30, 2006, which aggregated $0.01 per diluted share, in addition to
the tax credit earned during the six month period ended December 31,
2006. At the end of each interim period, we make our best estimate of
the effective tax rate expected to be applicable for the full fiscal year and
the impact of discrete items, if any, and adjust the quarterly rate, as
necessary. As the research and development tax credit legislation expired on
December 31, 2007, we expect our effective tax rate for the second half of
fiscal 2008 to range between 36% and 37%. The Company recognizes interest and
penalties related to income taxes in income tax expense.
We
adopted the provisions of FIN 48 on July 1, 2007 and as a result, we recorded a
$1.8 million increase in our liability for unrecognized tax benefits that was
accounted for as a reduction in our retained earnings as of July 1,
2007. As of July 1, 2007, we had $5.7 million of gross unrecognized
tax benefits including accrued interest of $0.4 million and zero in amounts
accrued for tax penalties.
As of
December 31, 2007, we had $6.4 million of gross unrecognized tax benefits
including accrued interest of $0.7 million. The change in gross unrecognized tax
benefits during the six months ended December 2007 includes an increase of $0.3
million in accrued interest and zero in amounts accrued for tax
penalties. Of the total unrecognized tax benefits, $6.0 million (net
of the federal benefit) represents the portion that, if recognized, would impact
the effective tax rate. The Company files tax returns in various jurisdictions
and does not anticipate a significant change in the amount of unrecognized tax
benefits within the next twelve months.
The
Company, or one of its subsidiaries, files income tax returns in the U.S.
federal, various state, local and foreign jurisdictions. The Company is no
longer subject to any significant U.S. federal, state, local or foreign income
tax examinations by tax authorities for years before fiscal 2004.
8. CONVERTIBLE
SUBORDINATED NOTES AND REVOLVING CREDIT FACILITY
Convertible
Subordinated Notes
At
December 31, 2007, we had $115 million of convertible subordinated notes
outstanding, bearing interest at 2.75%, maturing on July 15, 2010. The notes are
exchangeable at any time into an aggregate of 8.7 million shares of our common
stock at a conversion price of $13.19 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, aggregating $3.2 million
annually. The conversion of the 2.75% convertible subordinated notes to common
stock is dependent on individual holders’ choices to convert, which
is dependent on the spread of the market price of our stock above the
conversion strike price of $13.19 per share, and would reduce our annual
interest expense. None of the holders have converted any of their convertible
subordinated notes into our common stock. Our convertible notes are conventional
convertible debt instruments in which the holder may only realize the value
of the conversion option by exercising the option and receiving a fixed number
of shares of our common stock.
We have
no maturities of debt or sinking fund requirements through June 30,
2010.
Revolving
Credit Facility
We have a
multi-year revolving credit agreement, as amended, that provides for $100
million of unsecured borrowings through December 31, 2009, including the
potential to expand the line up to $125 million. Up to $10 million of the credit
facility is available for the issuance of letters of credit. The credit
agreement requires that we maintain certain financial ratios, which could limit
our ability to declare dividends or make any distribution to holders of any
shares of capital stock, or redeem or otherwise acquire such shares of our
Company. At December 31, 2007, approximately $112.9 million was available for
such purposes under the most restrictive of these covenants. No amounts were
outstanding under the revolving credit facility as of December 31, 2007 and
June 30, 2007.
WMS
INDUSTRIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(tabular
amounts in millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
9. STOCKHOLDERS'
EQUITY
Common
Stock Repurchase Program
On August
6, 2007, our Board of Directors authorized the repurchase of up to $50 million
of our common stock over the following twenty-four months. This authorization
replaces the $35 million authorization that expired on August 8, 2007. Pursuant
to the authorization, purchases may be made from time to time in the
open market, through block purchases or in privately negotiated
transactions. The timing and actual number of shares repurchased will depend on
market conditions. We did not repurchase any shares under either of the
authorized plans during the three months ended September 30, 2007. During
the three months ended December 31, 2007, we purchased 306,101 shares
for approximately $10 million at an average cost of $32.61 per share. As of
December 31, 2007, we had approximately $40 million remaining under this share
repurchase authorization.
Equity
Compensation Plan
On
December 12, 2007, we issued a total of 42,750 stock options to certain
employees of our Company. The number of options awarded to each employee varied.
The options vest evenly over four years, expire on December 12, 2014 and have a
fair value of $11.06 per share based on the Black-Scholes calculation using the
following assumptions: $31.33 strike price; risk-free interest rate of 3.41%;
expected life of 4.75 years; expected volatility of 0.35; and 0.0% dividend
yield.
On
December 13, 2007, we issued a total of 25,000 stock options to a newly
appointed Board of Director member. The options vest after one year and expire
on December 13, 2014. The options have a fair value of $10.38 per
share based on the Black-Scholes calculation using the following assumptions:
$32.01 strike price; risk-free interest rate of 3.54%; expected life of 4.00
years; expected volatility of 0.35; and 0.0% dividend yield.
On
December 13, 2007, we issued a total of 37,500 stock options to a former Board
of Director member who became a director emeritus. The options vested
immediately and expire on December 13, 2012. The options have a fair
value of $7.96 per share based on the Black-Scholes calculation using the
following assumptions: $32.01 strike price; risk-free interest rate of 3.22%;
expected life of 2.50 years; expected volatility of 0.35; and 0.0% dividend
yield.
On
September 5, 2007, we issued a total of 25,000 stock options to a newly
appointed Board of Director member. The options vest after one year and expire
on September 5, 2014. The options have a fair value of $9.62 per
share based on the Black-Scholes calculation using the following assumptions:
$28.94 strike price; risk-free interest rate of 4.05%; expected life of 4.00
years; expected volatility of 0.35; and 0.0% dividend yield.
On
September 17, 2007, we issued a total of 83,750 stock options to certain
employees of our Company. The number of options awarded to each employee varied,
vest evenly over four years and expire on September 17, 2014. The
options have a fair value of $11.05 per share based on the Black-Scholes
calculation using the following assumptions: $30.03 strike price; risk-free
interest rate of 4.20%; expected life of 4.75 years; expected volatility of
0.35; and 0.0% dividend yield.
On
September 18, 2007, we granted 7,336 shares of restricted stock to each of our
non-employee directors (for a total of 58,688 shares of restricted stock
granted). The restrictions will lapse over two years, 50% on
September 18, 2008 and 50% on September 18, 2009. The grant-date fair value of
our stock was $30.67 per share.
On
September 19, 2007, our Board of Directors approved the fiscal 2008 equity
grants to select employees under our long-term incentive program. The value
granted to each employee was based on a percentage of each employee’s base
salary. The grant date fair value of our stock was $30.55 and the value was
granted through three equity components – restricted shares, stock options and
equity-based performance units – as follows:
|
Ø
|
89,911
shares of restricted stock, which restrictions will lapse evenly over four
years.
|
|
Ø
|
251,765
stock options that vest evenly over three years and expire on September
19, 2014. The options have a fair value of $10.91 per share
based on the Black-Scholes calculation using the following assumptions:
$30.55 strike price; risk-free interest rate of 4.19%; expected life of
4.5 years; expected volatility of 0.35; and 0.0% dividend
yield.
|
|
Ø
|
89,911
equity-based performance units, which will vest upon achievement of
performance goals set by the Board. The goals are based on
levels of total revenue and earnings per share over the period July 1,
2007 through June 30, 2010. The number of shares of stock awarded to
participants is dependent upon the achievement of the performance goals
and the extent to which each goal is achieved or exceeded, and can result
in shares issued up to 200% of the targeted number of shares under each
grant.
|
Total
share-based payment expense for the three months ended December 31, 2007 and
2006 was $4.9 million and $3.9 million, respectively, and for the six months
ended December 31, 2007 and 2006 was $8.1 million and $6.6 million,
respectively. The increase in expense in the three month period ended December
31, 2007 relates to the Company recording a provision for equity-based
performance units based on the current assessment of achievement of the
performance goals. Prior to the December 2007 quarter, the Company concluded the
achievement of the performance goals was not probable.
Rights
Agreement
The
rights that accompanied our shares of common stock expired in November 2007. See
Note 11 to our Consolidated Financial Statements included in our Annual Report
on Form 10-K for the year ended June 30, 2007.
WMS
INDUSTRIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(tabular
amounts in millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
10. COMPREHENSIVE
INCOME
Comprehensive
income consists of the following:
|
Three
Months
|
Six
Months
|
|||||||||||||||
|
Ended
December 31,
|
Ended
December 31,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Net
income
|
$ | 16.0 | $ | 12.2 | $ | 27.1 | $ | 19.3 | ||||||||
|
Foreign
currency translation adjustment
|
2.7 | 2.7 | 6.3 | 2.1 | ||||||||||||
|
Total
comprehensive income
|
$ | 18.7 | $ | 14.9 | $ | 33.4 | $ | 21.4 | ||||||||
11. SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
The
amount of gaming operations machines transferred to inventory, a non-cash
investing activity, was $2.0 million and $1.4 million for the six months ended
December 31, 2007 and 2006, respectively.
Income
taxes paid was $7.4 million and $5.9 million for the six months ended December
31, 2007 and 2006, respectively. Interest paid was $1.7 million and
$1.8 million for the six months ended December 31, 2007 and 2006,
respectively.
Refer
also to Note 4, “Business Acquisition” regarding the extinguishment of
receivables in exchange for an equity interest in SiP, and to Note 7, “Income
Taxes” regarding the recognition of $1.8 million in additional liability for
unrecognized tax benefits as a result of the adoption of FIN 48. Both
items are non-cash transactions in operating activities.
12. COMMITMENTS,
CONTINGENCIES AND INDEMNIFICATIONS
We
routinely enter into license agreements with others for the use of intellectual
properties in our products. These agreements generally provide for royalty and
license advances when the agreements are signed, minimum commitments which are
cancellable in certain circumstances, as well as contingent payments based on
future events.
We had
total royalty and license commitments, advances and payments made and potential
future payments as follows as of December 31, 2007:
|
Minimum
|
||||
|
Commitments
|
||||
|
Total
royalty and license
commitments
|
$ | 132.0 | ||
|
Advances
and payments
made
|
104.3 | |||
|
Potential
future
payments
|
$ | 27.7 | ||
As of
December 31, 2007, we estimate that potential future royalty payments in each
fiscal year will be as follows:
|
Minimum
Commitments
|
||||
|
2008
|
$ | 9.8 | ||
|
2009
|
6.1 | |||
|
2010
|
6.5 | |||
|
2011
|
5.2 | |||
|
2012
|
0.1 | |||
|
Total
|
$ | 27.7 | ||
WMS
INDUSTRIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(tabular
amounts in millions of U.S. dollars and millions of shares, except per share
amounts)
(Unaudited)
Indemnification
Agreements
We have
agreements in which we may be obligated to indemnify other parties with respect
to certain matters. Generally, these indemnification provisions are included in
sales orders and agreements arising in the normal course of business under which
we customarily agree to hold the indemnified party harmless against claims
arising from a breach of representations related to matters such as title to
assets sold and licensed, defective equipment or certain intellectual property
rights. Payments by WMS under such indemnification provisions are generally
conditioned on the other party making a claim. Such claims are typically subject
to challenge by us. Further, our obligations under these agreements may be
limited in terms of time and/or amount and, in some instances, we may have
recourse against third parties. It is not possible to predict the maximum
potential amount of future payments under these indemnification agreements due
to the conditional nature of the obligations and the unique facts of each
particular agreement. Historically, we have not made any payments under these
agreements that have been material individually or in the aggregate. As of
December 31, 2007, we were not aware of any obligations arising under
indemnification agreements that would require material payments, except for the
matter disclosed in Note 13, “Litigation.”
We have
agreements with our directors and certain officers that require us, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers. We have also agreed to
indemnify certain former officers and directors of acquired companies. We
maintain director and officer insurance, which may cover our liabilities arising
from these indemnification obligations in certain circumstances. As of December
31, 2007, we were not aware of any obligations arising under these agreements
that would require material payments.
Self-Insurance
We are
self-insured for various levels of workers’ compensation, electronic errors and
omissions liability, automobile collision insurance, as well as employee
medical, dental, prescription drug, and disability coverage. We purchase
stop-loss coverage to protect against unexpected claims. Accrued insurance
claims and reserves include estimated settlements for known claims, and
actuarial estimates of claims incurred but not reported.
13. LITIGATION
On
October 2, 2003, La Societe de Loteries du Quebec (“Loto-Quebec”) filed claims
against us and Video Lottery Consultants Inc., a subsidiary of IGT (“VLC”) in
the Superior Court of the Province of Quebec, Quebec City District
(200-06-000017-015). The pleadings allege that Loto-Quebec would be entitled to
be indemnified by the manufacturers of Loto-Quebec’s VLTs, specifically WMS and
VLC, if the class action plaintiffs, described below, are successful in the
pending class action lawsuit against Loto-Quebec. We are currently proceeding
with discovery, and we are vigorously defending ourselves against the
allegations. The trial is set to begin in September 2008. Although we have valid
grounds of defense, it is too early to assess the outcome of these actions, or
to reasonably estimate the range of possible loss, if any.
The class
action lawsuit discussed in Loto-Quebec’s claim was brought on May 18, 2001
against Loto-Quebec in the Superior Court of the Province of Quebec. It alleges
that the members of the class developed a pathological gambling addiction by
using Loto-Quebec’s VLTs and that Loto-Quebec, as owner, operator and
distributor of VLTs, failed to warn players of the alleged dangers associated
with VLTs. Spielo Manufacturing Inc., another manufacturer of VLTs, voluntarily
intervened to support Loto-Quebec’s position. Class status was granted by the
Court on May 6, 2002, authorizing Jean Brochu to act as the representative
plaintiff. The class, which is currently undetermined, but potentially
comprising more than 119,000 members, is requesting damages potentially in
excess of $700 million Canadian dollars, plus interest.
|
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and Notes thereto included
elsewhere in this Report. This discussion and analysis also
contains forward-looking statements – see “Forward Looking Statements and
Risk Factors” below.
As
used in this Report, the terms “we”, “us”, “our”, “the Company” and “WMS”
mean WMS Industries Inc., a Delaware corporation, and its
subsidiaries. All references to years, unless otherwise noted, refer to our
fiscal year, which ends on June 30. All references to quarters, unless
otherwise noted, refer to the quarters of our fiscal year.
Product
names mentioned in this Report are trademarks of WMS Gaming, Inc., except for
the following licensed marks: MONOPOLY, is a trademark of Hasbro; and PRESS
YOUR LUCK is a trademark of FremantleMedia Operations BV.
OVERVIEW
Our
mission is to create the most entertaining products in the world and service the
customer with uncompromising passion for quality. We design, manufacture and
distribute gaming machines and video lottery terminals (“VLTs”) for customers in
legalized gaming jurisdictions worldwide. Our products consist primarily of
video gaming machines, mechanical reel gaming machines and VLTs. Our gaming
machines are installed in all of the major regulated gaming jurisdictions
in the United States, as well as in over 100 international gaming jurisdictions.
We generate revenue in two principal ways: from product sales and from gaming
operations.
Product
sales revenue includes the sale of new and used gaming machines, VLTs, parts,
conversion kits (including theme and/or operating system conversions),
amusement-with-prize (“AWP”) gaming machines, gaming-related systems for smaller
international casino operators and equipment manufactured under original
equipment manufacturing (“OEM”) agreements to casinos and other licensed gaming
machine operators. We derive product sales revenue from the sale of
the following:
|
Ø
|
Multi-line,
multi-coin video gaming machines, including our Bluebird® and Orion Twinstar ™
cabinets;
|
|
Ø
|
Mechanical
reel-spinning gaming machines;
|
|
Ø
|
Video
poker machines, which are primarily offered as a casino-owned daily fee
game, where the casino purchases the base hardware and then leases the top
box and game for a low lease price
point;
|
|
Ø
|
Replacement
parts and conversion kits for our legacy, Bluebird, Twinstar and AWP gaming
machines, and CPU-NXT® upgrade
kits;
|
|
Ø
|
Used
gaming machines that are acquired on a trade-in basis or that were
previously placed on a participation
basis;
|
|
Ø
|
AWP
gaming machines in certain international
markets;
|
|
Ø
|
Gaming-related
systems, including linked progressive systems and slot accounting systems
applicable to smaller international casinos;
and
|
|
Ø
|
Gaming
stations in legacy, Bluebird and Twinstar cabinets in
limited cases under OEM agreements to certain third
parties.
|
We earn
gaming operations revenues from leasing gaming machines, participation games,
and VLTs, and earn royalties that we receive from third parties under
license agreements to use our game content. Our gaming operations include
the following product lines:
|
Ø
|
Participation
games, which are gaming machines owned by us that we lease based upon any
of the following payment methods: (1) a percentage of the net win,
which is the casinos’ earnings generated by casino patrons playing the
gaming machine, (2) fixed daily fees, or (3) in the case of wide-area
progressive gaming machines, a percentage of the amount wagered or a
combination of a fixed daily fee and a percentage of the
amount wagered. We have the ability to place these gaming machines on
a participation basis because of the popularity of the brand and the
superior performance of the game, which generates higher wagering and net
win to the casinos or gaming machine operators than the gaming
machines we sell to casinos or other gaming machine
operators. Participation games include the following
categories:
|
|
Ø
|
Wide-area
progressive participation games
(“WAP”);
|
|
Ø
|
Local-area
progressive participation games
(“LAP”);
|
|
Ø
|
Stand-alone
participation games;
|
|
Ø
|
Casino-owned
daily fee games;
|
|
Ø
|
Leased
gaming machines;
|
|
Ø
|
Video
lottery terminals; and
|
|
Ø
|
Licensing
revenues.
|
Refer
also to Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in our Form 10-K for
the fiscal year ended June 30, 2007, for further information regarding our
gaming operations product lines.
Key
Priorities
With the
marketplace dynamics in fiscal 2008 echoing much of what the industry
experienced in the prior year, we remain focused on the five key strategic
priorities that we executed on in fiscal 2007: (1) continue to grow our gaming
operations business with its recurring revenue stream and higher gross profit
margins; (2) extend our North American market share gains through innovative new
product offerings; (3) expand globally to further diversify our revenue mix and
reduce our dependence on North American revenues; (4) increase margins through
operating process improvements; and (5) continue to generate and grow
sustainable, recurring cash flows.
Our first
priority is to continue to pursue the managed expansion of our high-margin
gaming operations business, while working to achieve a greater mix of higher
revenue producing products on the slot floor, specifically a greater number of
higher-revenue producing WAP products. During the three and six month
periods ended December 31, 2007, our average installed base of
participation gaming machines increased 23% and 21%, respectively over the same
period in the prior year and, at December 31, 2007, our total installed
participation footprint stood at 9,186 units. On a quarterly
sequential basis over September 2007, our average installed base of gaming
machines increased 5%. The period end WAP units comprised 20% of the footprint
in the December 2007 quarter, up from 19% in the September 2007 quarter despite
the higher growth in the stand-alone participation games in the December 2007
quarter. Our installed base of stand-alone participation gaming
machines continued to grow, with additional placements of our MONOPOLY™ Big Event®, PRESS YOUR LUCK™ Big Event and MONOPOLY Super Grand
Hotel®
offerings. The growth in the installed base, along with a 9% improvement in the
average daily revenue generated, produced a 34% year-over-year increase in
revenue from our gaming operations business for the December 2007
quarter.
Our
second priority remains gaining North American product sales market share. We
are dependent, in part, on innovative new products and casinos expansions and
new market opportunities to generate growth. We have continued to spend more on
research and development activities to be able to offer creative and high
earning products to our customers. Expansion and new market opportunities may
come from political action as governments look to gaming to provide tax revenues
in support of public programs and view gaming as a key driver for tourism. The
lack of significant casino openings and major expansions or new jurisdiction
openings in the first half of fiscal 2008 made for a tough comparison
to last year. The North American replacement cycle has also been slow, and
thus the overall industry demand has been reduced. Yet, in spite of this,
revenues from sales of new units in North America declined only 7% due
to our continued ability to gain market share with high earning products in a
competitive marketplace. We continue to capture a greater portion of
our customers’ available capital dollars because of our ability to offer
innovative and differentiated video and mechanical reel games. In addition, our
expanded bandwidth coupled with our strength in available content contributed
directly to the stronger demand for our game theme conversions.
Third, we
continue to expand our international revenue base. During
the December 2007 quarter, international shipments increased 52% year-over-year,
driven by strong demand across the range of international markets, from Asia to
Latin America to Europe. Shipments to international markets
represented 38% of our total new unit shipments in the December 2007 quarter,
compared with 25% a year ago. The addition of Orion and now, Systems
in Progress (“SiP”), also contributed to our expanding worldwide presence
through complementary technology and game development
capabilities. We believe we will continue to increase our global
market share.
Our
fourth priority is a focus on improving our operating margin, which improved to
15.1% in the December 2007 quarter from 12.5% a year ago. We are
still only in the early stages of implementing our lean sigma and strategic
sourcing initiatives, but we are realizing positive results, and we believe
these initiatives will continue to drive margin improvement in future
quarters. In addition, through disciplined cost management, we
continue to expect to realize operating leverage from higher
revenues. In the December 2007 quarter, our operating margin
increased 260 basis points over last year, even as research and development
expenses increased year-over-year by $3.4 million, or 24%. Our
research and development spending represents the ongoing investment we are
making to create intellectual property and advanced technologies that will power
our innovative products in the future and support our existing product
lines.
Our fifth
priority is to drive higher cash flow. During the December 2007
quarter, net cash provided by operations increased by $12.4 million to $31.3
million, or 64% higher than the same period a year ago. We believe there are
opportunities to reduce our investment in operating assets in the coming
quarters. Furthermore, significant improvement is being made in our
ability to more effectively manage the capital deployed in our gaming operations
business. During the December 2007 quarter, the installed footprint
of participation games increased by 492 units over the September 30, 2007
installed base, while our investment in these gaming machines totaled $13.9
million, compared to the $14.8 million invested in the September 2007 quarter
and $18.3 million in the December 2006 quarter. Our investment in gaming
operations equipment reflects the continued strong positive response to our
three new participation platforms: Community Gaming, “Sensory
Immersion” Gaming and Transmissive Reels™ gaming
technology. We also deployed additional capital for the continued
placement of leased games in Oklahoma, which are not included in the installed
participation base at period end. As a result of our improving cash
flow, our total cash and cash equivalents, including restricted cash as of
December 31, 2007 rose 54% to $82.1 million from $53.2 million as of June
30, 2007.
The
priorities for the utilization of our improving cash flow are to continue to
enhance shareholder value by emphasizing internal and external investments to
create and license advanced technologies and intellectual property, continuing
to seek acquisitions that can extend our international presence, increase our
intellectual property portfolio and expand our earnings potential, and when
appropriate, repurchase shares in the open market, through stock purchases or in
privately negotiated transactions. In the December 2007 quarter, our research
and development spending increased $3.4 million over the December 2006 quarter,
we also expended $4.6 million in investments and advances in royalties,
technologies and brand licenses and repurchased shares totaling approximately
$10 million.
Server-Based
Gaming
We
believe that server-based gaming (“SBG”) will be the next significant technology
development in the gaming machine industry. Server-based gaming refers to a
gaming system in which games and software in peripheral equipment are downloaded
to gaming machines, configured, maintained and refreshed over a network that
links groups of gaming machines to a remote server that enables custom
configuration by operators and may also enable central determination of game
outcomes. Server-based gaming initiatives will require regulatory approval
in gaming jurisdictions prior to any implementation and will represent a
significant addition to our existing portfolio of product
offerings.
Our
vision for SBG expands on the basic functionality described above and emphasizes
enhanced game play and excitement for the player. In a
networked environment, we believe game play will no longer be limited to an
individual gaming machine; rather, we believe SBG will permit game play to
be communal among several players. We will continue SBG development,
working with our competitors and customers to ensure the future is powered by a
networked environment that enables products from multiple suppliers to
efficiently work together with limited investment in additional programming or
interfaces.
Our path
to the server-enabled marketplace takes elements of our technology road map and
converts it into commercializable products in advance of the launch of the full
functionality of server-based gaming. Fiscal 2007 was highlighted by the
successful launch of Community
Gaming, made possible by using a server outside the gaming machine to
drive the bonusing activity for an entire bank of games, thereby creating a true
communal gaming experience. In fiscal 2007, we also commercialized
the next step forward in computing power and capability with our CPU-NXT2 operating
system and platform that we expect will be the basis for our server-enabled
games. CPU-NXT2 drives
real-time, 3D graphics and surround sound capabilities for our “Sensory
Immersion” series. Further, we combined an interactive see-through
LCD with the traditional appeal of authentic mechanical spinning reels to make
Transmissive Reels a
potential fixture on the server-based slot floor. We demonstrated
Adaptive Gaming™, another key component to
our server based technology at the G2E trade show in November 2007, and we
expect to launch this technology in summer 2008. We also demonstrated
the Bluebird2 cabinet, which is
server ready, and we expect to begin full commercialization of this new hardware
in the December 2008 quarter. At the G2E trade show in November 2007 and the ICE
trade show in January 2008, we also demonstrated the inter-operability of our
Bluebird2 cabinets and our CPU-NXT2 operating system
with other manufacturers’ products and systems using the open access of the
industry standard communication protocols developed by GSA (G2S and
S2S).
The first
version of our software containing the basic functionality for the server-based
world is presently being tested by the gaming regulators, and we have the first
fully G2S compliant software in front of the regulators. We expect to
begin a GLI field trial of our first-point release of the basic server-based
functionality in the next few weeks and we expect to follow that with a Nevada
field trial in the coming weeks. The subsequent phase of our
server-enabled software development will include additional server-enabled
features, including some first-of-their-kind player and operator
benefits, which we expect to submit to regulators in mid-calendar
2008. We continue to expect approval of the first commercial version
of the WAGE-NET™ system in mid-calendar
2009, as previously disclosed.
Acquisition
of Systems in Progress
On July
19, 2007, we completed the acquisition of 100% of the outstanding stock of
privately held SiP, an Austrian-based company focused on developing and selling
gaming related systems, including linked progressive systems and slot accounting
systems applicable for smaller international casino operators. The
total consideration for SiP, excluding acquisition costs, was $4.7 million.
SiP’s former majority shareholder is a customer of ours and $4.5 million of the
total consideration resulted from extinguishing trade accounts receivable owed
by that customer to us for the customer’s entire equity ownership in
SiP. Two minority shareholders were paid equal value in cash and shares of
our common stock that in total aggregated approximately $0.2
million. The transaction is expected to be immaterial to our fiscal
2008 net income and, therefore, pro forma financial information is not
provided. The business valuation is not yet complete and, therefore,
the purchase price allocation is preliminary.
See also
Note 4, “Business Acquisition” to our Condensed Consolidated Financial
Statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a
description of our critical accounting policies and estimates, refer to Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” to our Form 10-K for the fiscal year ended June 30,
2007. We have not made any changes relating to the application of
these policies during the six months ended December 31, 2007, with the exception
of our accounting for income taxes. We adopted the provisions of FASB
Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income
Taxes, on July 1, 2007. In accordance with FIN 48, we
recognize interest and penalties related to income taxes in income tax
expense. The other aspects of our income tax critical accounting
policy and estimates as disclosed in our Form 10-K for the fiscal year ended
June 30, 2007 have not changed.
We have
discussed the development, selection and disclosure of our critical accounting
policies and estimation with the Audit and Ethics Committee of our Board of
Directors.
RESULTS
OF OPERATIONS
Seasonality
Sales of
our gaming machines to casinos are generally strongest in spring and slowest in
the summer months, while gaming operations revenue are generally strongest
in the spring and summer. 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 three and six months ended
December 31, 2007 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2008.
Three
Months Ended December 31, 2007 Compared to Three Months Ended December 31,
2006
Revenues,
Gross Margins and Key Performance Indicators are as follows (in millions of
dollars, except unit and gross margin data):
|
Three
Months Ended
|
Percent
|
|||||||||||||||
|
December
31,
|
Increase
|
Increase
|
||||||||||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||||||||||
|
Product
Sales Revenues:
|
||||||||||||||||
|
New unit sales
revenues
|
$ | 89.7 | $ | 83.4 | $ | 6.3 |
7.6
|
% | ||||||||
|
Other
product sales revenues
|
15.0 | 10.4 | 4.6 |
44.2
|
||||||||||||
|
Total
product sales revenues
|
$ | 104.7 | $ | 93.8 | $ | 10.9 | 11.6 | |||||||||
|
New
units sold
|
7,064 | 6,930 | 134 | 1.9 | ||||||||||||
|
Average
sales price per new unit
|
$ | 12,683 | $ | 12,043 | $ | 640 | 5.3 | |||||||||
|
Gross
profit on product sales revenues(1)
|
$ | 50.3 | $ | 42.1 | $ | 8.2 | 19.5 | |||||||||
|
Gross
margin on product sales revenues(1)
|
48.0 | % | 44.9 | % | 310 | bp | 6.9 | |||||||||
|
Gaming
Operations Revenues:
|
||||||||||||||||
|
Participation
revenues
|
$ | 48.8 | $ | 36.5 | $ | 12.3 | 33.7 | |||||||||
|
Other
gaming operations revenues
|
5.7 | 4.3 | 1.4 | 32.6 | ||||||||||||
|
Total
gaming operations revenues
|
$ | 54.5 | $ | 40.8 | $ | 13.7 | 33.6 | |||||||||
|
WAP
games at period end
|
1,810 | 1,485 | 325 | 21.9 | ||||||||||||
|
LAP
games at period end
|
2,294 | 1,909 | 385 | 20.2 | ||||||||||||
|
Stand-alone
games at period end
|
5,082 | 4,019 | 1,063 | 26.4 | ||||||||||||
|
Total
installed participation base at period end
|
9,186 | 7,413 | 1,773 | 23.9 | ||||||||||||
|
Average
participation installed base
|
8,767 | 7,123 | 1,644 | 23.1 | ||||||||||||
|
Average
revenue per day per participation machine
|
$ | 60.46 | $ | 55.65 | $ | 4.81 | 8.6 | |||||||||
|
Installed
casino-owned daily fee games at period end
|
797 | 705 | 92 | 13.0 | ||||||||||||
|
Average
casino-owned daily fee games installed base
|
749 | 711 | 38 | 5.3 | ||||||||||||
|
Gross
profit on gaming operations revenues(1)
|
$ | 43.2 | $ | 31.4 | $ | 11.8 | 37.6 | |||||||||
|
Gross
margin on gaming operations revenues(1)
|
79.3 | % | 77.0 | % | 230 | bp | 3.0 | |||||||||
|
Total
revenues
|
$ | 159.2 | $ | 134.6 | $ | 24.6 | 18.3 | |||||||||
|
Total
gross profit(1)
|
$ | 93.5 | $ | 73.5 | $ | 20.0 | 27.2 | |||||||||
|
Total
gross margin(1)
|
58.7 | % | 54.6 | % | 410 | bp | 7.5 | |||||||||
|
bp
|
basis
points
|
|
(1)
|
As
used herein, gross profit and gross margin exclude depreciation
expense.
|
Revenues
and Gross Profit
Total
revenues for the December 2007 quarter increased 18.3%, or $24.6
million, over the December 2006 quarter, reflecting:
|
Ø
|
A
$6.3 million, or 7.6%, increase in new unit sales revenue as a result
of:
|
|
Ø
|
A
134 unit increase in new units sold. International new units
sold increased 51.8% over the prior year, reflecting growth in Macau with
our Mandarin-based games and continued growth throughout Europe, South
Africa and South America. North American new units sold in the December
2007 quarter decreased by 774 units from the December 2006 quarter due to
the continued sluggish North American replacement
market. Additionally, the December 2006 quarter benefited from
initial shipments of 1,463 new units to properties located in the newly
opened Pennsylvania and Broward County, Florida jurisdictions. Sales of
mechanical reel products in the December 2007 quarter exceeded 2,100
units, or approximately 30% of total new units sold compared to 27% in the
prior year quarter.
|
|
Ø
|
A
5.3% increase in the average selling price of new gaming
units, primarily reflects the benefit of higher list
prices.
|
|
Ø
|
A
$4.6 million increase in other product sales revenues, reflecting
strong sales of conversion kits and used games partially offset by lower
parts revenues.
|
|
Ø
|
We
earned revenue on approximately 2,400 conversion kits in the December 2007
quarter, compared to approximately 750 conversion kits in the December
2006 quarter, due to the positive response to our new video and mechanical
reel games.
|
|
Ø
|
We
sold more than 900 used gaming machines at higher prices in the December
2007 quarter, compared to more than 2,200 used gaming machines in the
December 2006 quarter.
|
|
Ø
|
A
$13.7 million, or 33.6%, growth in total gaming operations revenues due
primarily to:
|
|
Ø
|
A 23.1%
increase in the average installed base of participation gaming machines,
driven by the growth in our WAP, LAP, and stand-alone installed
bases. The total number of units in the installed participation base
as of December 31, 2007 was 1,773 units higher than at December 31, 2006,
reflecting continued strong performance of our Community
Gaming, “Sensory Immersion” and Transmissive Reels
platforms in fiscal 2008. Our controlled WAP roll-out strategy has led to
the desired result of a higher level of incremental footprint for the WAP
units. The WAP installed base at December 31, 2007
increased 159 units since September 30, 2007 and accounted for 20% of
the installed base, up from 19% at September 30,
2007.
|
|
Ø
|
Overall
average revenues per day increased by $4.81, or 8.6%, principally
reflecting favorable player response to the new games for our three
innovative participation platforms.
|
Total
gross profit, as used herein excluding depreciation expense, increased 27.2%, or
$20.0 million, to $93.5 million for the December 2007 quarter from $73.5 million
for the December 2006 quarter. This improvement reflects:
|
Ø
|
Gross
margin on product sales revenues of 48.0% for the December 2007
quarter, compared to 44.9% for the December 2006 quarter. Gross
margin for the December 2007 quarter benefited from the continued success
with the ongoing implementation of our lean sigma process improvement and
strategic sourcing initiatives.
|
|
Ø
|
Gross
margin on gaming operations revenues of 79.3% in the December 2007
quarter, compared to 77.0% in the December 2006 quarter, reflecting
continued lower relative WAP jackpot expense and the positive influence of
the high performing Community Gaming, “Sensory
Immersion” and Transmissive Reels games.
|
We expect
to generate another quarter of solid double-digit year-over-year revenue growth
in our gaming operations in the March 2008 quarter. However, with no
new additional products to be introduced on these platforms until the June 2008
quarter, we expect the installed base of gaming machines to remain relatively
stable during the March 2008 quarter. We expect the installed base
will grow again in the June 2008 quarter and through fiscal 2009 with the
planned launch of new game themes. In addition, our current licensing
arrangement with Stargames Corporation Pty. Ltd. whereby we provided our game
content to them for use on their gaming platform in Australia and New Zealand in
return for royalty payments, ended January 31, 2008 commencing a six-month
sell-off period per the agreement. We expect continued improvements in our
product sales gross margin, resulting from the ongoing implementation of process
improvements throughout the entire organization with the utilization of lean
sigma tools, results from our strategic sourcing initiatives and the benefits
from ongoing leveling of the production schedule throughout each
quarter.
Operating
Expenses
Operating
expenses were as follows (in millions of dollars):
|
Three
Months Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
Increase
|
||||||||||||||||||||||
|
Dollar
|
As
% of Revenue
|
Dollar
|
As
% of Revenue
|
Dollar
|
Percent
|
|||||||||||||||||||
|
Research
and development
|
$ | 17.5 | 11.0 | % | $ | 14.1 | 10.5 | % | $ | 3.4 | 24.1 | % | ||||||||||||
|
Selling
and administrative
|
34.1 | 21.4 | 26.6 | 19.7 | 7.5 | 28.2 | ||||||||||||||||||
|
Depreciation
|
17.8 | 11.2 | 16.0 | 11.9 | 1.8 | 11.3 | ||||||||||||||||||
|
Total
operating expenses
|
$ | 69.4 | 43.6 | % | $ | 56.7 | 42.1 | % | $ | 12.7 | 22.4 | % | ||||||||||||
Research
and development expenses increased $3.4 million to $17.5 million for the
December 2007 quarter, compared to $14.1 million in the prior year
period. The year-over-year increase reflects our expanded product
development initiatives for server-enabled gaming, the creation of intellectual
property, the support for our expanded product portfolio, including higher
payroll-related costs associated with improved operating performance, and the
inclusion of research and development expenses for SiP since the mid-July 2007
acquisition.
Selling
and administrative expenses increased $7.5 million to $34.1 million in the
December 2007 quarter compared to $26.6 million in the December 2006 quarter.
The increase reflects higher payroll-related costs associated with
improved operating performance and headcount increases during the past twelve
months to support international expansion and overall growth in the company’s
business, including higher spending on customer service and field operations
support activities to sustain our larger participation installed base and
increased customer touch points, and higher legal expenses and non-cash charges
for bad debt expense, as well as the impact of consolidating SiP results. In
addition, due to the continued strength of our financial performance, in the
December 2007 quarter we recorded a non-cash, provision related to certain
performance-based equity grants. We expect selling and administrative
costs to decline sequentially in the March 2008 quarter compared with the
December 2007 period, and to be lower during the remainder of fiscal 2008 as a
percentage of total revenues. As a result, we anticipate such costs
to be within a range of 19% to 20% of total revenues for fiscal 2008, an
improvement from the 20.3% level in fiscal 2007.
Depreciation
increased $1.8 million, or 11.3%, to $17.8 million in the December 2007 quarter
compared to $16.0 million in the December 2006 quarter. This reflects the 23.1%
increase in the average installed base of participation games. We
invested $13.9 million in gaming operations equipment, top boxes and related
equipment during the December 2007 quarter, $75.9 million during fiscal 2007 and
$68.7 million during fiscal 2006.
Overall,
with higher revenues and improved gross margins, we expect continued expansion
in our operating margin in fiscal 2008 and fiscal 2009, even with the
additional spending on research and development and selling and administrative
initiatives, and additional depreciation as a result of investments in our
gaming operations installed base.
Income
Taxes
The
effective income tax rate was approximately 34.7% and 24.7% for the three months
ended December 31, 2007 and 2006, respectively.
The
December 2007 three-month period effective tax rate reflects:
|
Ø
|
The
domestic manufacturing deduction
|
|
Ø
|
The
research and development credit,
and
|
|
Ø
|
The
impact of the additional unrecognized tax benefits resulting from the
implementation of FASB Interpretation No. 48 (“FIN 48”) effective July 1,
2007.
|
The
December 2006 three month period effective tax rate reflects:
|
Ø
|
Utilization
of the export sales deduction, which expired in December
2006
|
|
Ø
|
The
domestic manufacturing deduction,
and
|
|
Ø
|
The
effect of the retroactive reinstatement of the research and development
tax credit legislation which was reinstated in December 2006, retroactive
to January 1, 2006. The effective tax rate includes the credit earned from
January 1, 2006 thru June 30, 2006, which aggregated $0.01 per diluted
share, in addition to the tax credit earned during the six month period
ended December 31, 2006.
|
At the
end of each interim period, we make our best estimate of the effective tax rate
expected to be applicable for the full fiscal year and the impact of discrete
items, if any, and adjust the quarterly rate, as necessary. As the research and
development tax credit legislation expired on December 31, 2007, we expect our
effective tax rate for the second half of fiscal 2008 to range between 36% and
37%.
Earnings
Per Share
Diluted
earnings per share increased to $0.27 for the December 2007 quarter from $0.22
for the December 2006 quarter. The increase in earnings per share is
attributable to increased net income in the December 2007 quarter partially
offset by a higher diluted share count resulting from the issuance of common
shares and an increase in the dilutive effect of stock options. The increase in
our common stock market price during fiscal 2007 and the second quarter of
fiscal 2008 drove the increase in the dilutive effect of stock options. In
addition, the December 2006 quarter includes a $0.7 million, or $0.01 per
diluted share benefit related to the period January 1, 2006 through June 30,
2006, due to the retroactive reinstatement of the research and development tax
credit legislation.
Six
Months Ended December 31, 2007 Compared to Six Months Ended December 31,
2006
Revenues,
Gross Margins and Key Performance Indicators are as follows (in millions of
dollars, except unit and gross margin data):
|
Six
Months Ended
|
Percent
|
|||||||||||||||
|
December
31,
|
Increase
|
Increase
|
||||||||||||||
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
|||||||||||||
|
Product
Sales Revenues:
|
||||||||||||||||
|
New unit sales
revenues
|
$ | 152.5 | $ | 140.8 | $ | 11.7 | 8.3 | % | ||||||||
|
Other
product sales revenues
|
33.1 | 21.6 | 11.5 | 53.2 | ||||||||||||
|
Total
product sales revenues
|
$ | 185.6 | $ | 162.4 | $ | 23.2 | 14.3 | |||||||||
|
New
units sold
|
11,958 | 11,641 | 317 | 2.7 | ||||||||||||
|
Average
sales price per new unit
|
$ | 12,747 | $ | 12,101 | $ | 646 | 5.3 | |||||||||
|
Gross
profit on product sales revenues(1)
|
$ | 88.9 | $ | 71.3 | $ | 17.6 | 24.7 | |||||||||
|
Gross
margin on product sales revenues(1)
|
47.9 | % | 43.9 | % | 400 | bp | 9.1 | |||||||||
|
Gaming
Operations Revenues:
|
||||||||||||||||
|
Participation
revenues
|
$ | 95.1 | $ | 74.2 | $ | 20.9 | 28.2 | |||||||||
|
Other
gaming operations revenues
|
11.0 | 8.6 | 2.4 | 27.9 | ||||||||||||
|
Total
gaming operations revenues
|
$ | 106.1 | $ | 82.8 | $ | 23.3 | 28.1 | |||||||||
|
WAP
games at period end
|
1,810 | 1,485 | 325 | 21.9 | ||||||||||||
|
LAP
games at period end
|
2,294 | 1,909 | 385 | 20.2 | ||||||||||||
|
Stand-alone
games at period end
|
5,082 | 4,019 | 1,063 | 26.4 | ||||||||||||
|
Total
installed participation base at period end
|
9,186 | 7,413 | 1,773 | 23.9 | ||||||||||||
|
Average
participation installed base
|
8,558 | 7,061 | 1,497 | 21.2 | ||||||||||||
|
Average
revenue per day per participation machine
|
$ | 60.38 | $ | 57.09 | $ | 3.29 | 5.8 | |||||||||
|
Installed
casino-owned daily fee games at period end
|
797 | 705 | 92 | 13.0 | ||||||||||||
|
Average
casino-owned daily fee games installed base
|
749 | 740 | 9 | 1.2 | ||||||||||||
|
Gross
profit on gaming operations revenues(1)
|
$ | 84.2 | $ | 64.8 | $ | 19.4 | 29.9 | |||||||||
|
Gross
margin on gaming operations revenues(1)
|
79.4 | % | 78.3 | % | 110 | bp | 1.4 | |||||||||
|
Total
revenues
|
$ | 291.7 | $ | 245.2 | $ | 46.5 | 19.0 | |||||||||
|
Total
gross profit(1)
|
$ | 173.1 | $ | 136.1 | $ | 37.0 | 27.2 | |||||||||
|
Total
gross margin(1)
|
59.3 | % | 55.5 | % | 380 | bp | 6.8 | |||||||||
|
bp
|
basis
points
|
|
(1)
|
As
used herein, gross profit and gross margin exclude depreciation
expense.
|
Revenues
and Gross Profit
Total
revenues for the December 2007 six-month period increased 19.0%, or
$46.5 million, over the December 2006 six-month period, reflecting:
|
Ø
|
An
$11.7 million, or 8.3%, increase in new unit sales revenue as a
result of:
|
|
Ø
|
A
317 unit increase in new units sold. International new units
sold increased 36.7% over the prior year, reflecting growth in Macau with
our Mandarin-based games and continued growth throughout Europe, South
Africa and South America. North American new units sold in the December
2007 six-month period decreased by 882 units from the December 2006
six-month period due to the continued sluggish North American replacement
market. Additionally, the North American new unit sales in the December
2006 quarter benefited from initial shipments of 1,463 new units to
properties located in the newly opened Pennsylvania and Broward County,
Florida jurisdictions, as well as a strong contribution from Oklahoma
which was a new market for us at the time. Sales of mechanical reel
products exceeded 3,500 units, or approximately 30% of total new units
sold compared to 25% of units sold in the prior six-month
period.
|
|
Ø
|
A
5.3% increase in the average selling price of new gaming units, principally
reflecting the benefit of higher list
prices.
|
|
Ø
|
An
$11.5 million increase in other product sales revenues, reflecting
strong sales of conversion kits and used
games.
|
|
Ø
|
We
earned revenue on approximately 4,900 conversion kits in the December
2007 six-month period, compared to just over 1,600 conversion kits in
the December 2006 six-month period, due to the positive response to
our new video and mechanical reel
games.
|
|
Ø
|
We
sold approximately 2,500 used gaming machines at higher prices in the
December 2007 six-month period, compared to approximately 3,300 used
gaming machines in the December 2006 six-month
period.
|
|
Ø
|
A
$23.3 million, or 28.1%, growth in total gaming operations revenues due
primarily to:
|
|
Ø
|
A 21.2%
increase in the average installed base of participation gaming machines,
driven by the growth in our WAP, LAP, and stand-alone installed bases. The
period end WAP units in the installed base as of December 31, 2007 was 325
units higher than at December 31, 2006, reflecting continued strong
performance of our “Sensory Immersion” and Transmissive Reels
platforms in fiscal 2008. Our controlled WAP roll-out strategy has led to
the desired result of a higher level of incremental footprint for the WAP
units. The WAP installed base accounted for 20% of the installed base at
December 31, 2007 and 2006.
|
|
Ø
|
Overall
average revenues per day increased by 5.8%, principally reflecting
favorable player response to the new games for our three innovative
participation platforms.
|
Total
gross profit, as used herein excluding depreciation expense, increased 27.2%, or
$37.0 million, to $173.1 million for the December 2007 six-month period from
$136.1 million for the December 2006 six-month period. This improvement
reflects:
|
Ø
|
Gross
margin on product sales revenues of 47.9% for the December 2007
six-month period, compared to 43.9% for the December 2006 six-month
period. Gross margin for the December 2007 six month period
reflects continued success with the ongoing implementation of our lean
sigma process improvement and strategic sourcing initiatives, greater
sales of higher-margin conversion kits and revenues from a VLT contract,
partially offset by a lower mix of premium-priced products than a year
ago.
|
|
Ø
|
Gross
margin on gaming operations revenues of 79.4% in the December 2007
six-month period compared to 78.3% for the December 2006 six-month
period, reflecting continued lower relative WAP jackpot expense and the
positive influence of the high performing Community Gamming,
“Sensory Immersion” and Transmissive Reels
games.
|
Operating
Expenses
Operating
expenses were as follows (in millions of dollars):
|
Six
Months Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
Increase
|
||||||||||||||||||||||
|
Dollar
|
As
% of Revenue
|
Dollar
|
As
% of Revenue
|
Dollar
|
Percent
|
|||||||||||||||||||
|
Research
and development
|
$ | 34.3 | 11.8 | % | $ | 26.6 | 10.8 | % | $ | 7.7 | 28.9 | % | ||||||||||||
|
Selling
and administrative
|
61.9 | 21.2 | 50.2 | 20.5 | 11.7 | 23.3 | ||||||||||||||||||
|
Depreciation
|
36.0 | 12.3 | 31.2 | 12.7 | 4.8 | 15.4 | ||||||||||||||||||
|
Total
operating expenses
|
$ | 132.2 | 45.3 | % | $ | 108.0 | 44.0 | % | $ | 24.2 | 22.4 | % | ||||||||||||
Research
and development expenses increased $7.7 million to $34.3 million for the
December 2007 six-month period, compared to $26.6 million in the prior year
period. The year-over-year increase reflects our expanded product
development initiatives for server-enabled gaming, the creation of intellectual
property, the support for our expanded product portfolio, including higher
payroll-related costs associated with improved operating performance and the
inclusion of research and development expenses for SiP since the mid-July 2007
acquisition.
Selling
and administrative expenses increased $11.7 million to $61.9 million in the
December 2007 six-month period compared to $50.2 million in the December
2006 six-month period. The increase includes higher marketing, promotion
and distribution costs related to the roll-out of new products and branding
initiatives, as well as increased payroll-related costs associated with improved
operating performance and headcount increases during the past twelve months to
support international expansion and overall growth in the company’s
business. In addition, the year-over-year increase reflects higher
spending on customer service activities to support our larger participation
installed base and increased customer touch points, higher legal expenses and
non-cash charges for bad debt expense, as well as the impact of consolidating
SiP results. In addition, due to the continued strength of our financial
performance, in the December 2007 quarter we recorded a non-cash, provision
related to certain performance-based equity grants.
Depreciation
increased $4.8 million, or 15.4%, to $36.0 million in the December 2007
six-month period compared to $31.2 million in the December 2006 six-month
period. This reflects the 21.2% increase in the average installed
base of participation games. We invested $28.7 million in gaming
operations equipment, top boxes and related equipment during the December 2007
six month period, $75.9 million during fiscal 2007, and $68.7 million during
fiscal 2006.
Income
Taxes
The
effective income tax rate was approximately 34.5% and 27.7% for the six months
ended December 31, 2007 and 2006, respectively.
The
December 2007 six month-period effective tax rate reflects:
|
Ø
|
The
domestic manufacturing deduction
|
|
Ø
|
The
research and development credit,
and
|
|
Ø
|
The
impact of unrecognized tax benefits resulting from the implementation of
FASB Interpretation No. 48 (“FIN 48”) effective July 1,
2007.
|
The
December 2006 six month period effective tax rate reflects:
|
Ø
|
Utilization
of the export sales deduction, which expired in December
2006
|
|
Ø
|
The
domestic manufacturing deduction,
and
|
|
Ø
|
The
effect of the retroactive reinstatement of the research and development
tax credit legislation back to January 1, 2006. Since the research and
development tax credit legislation was reinstated in December 2006,
retroactive to January 1, 2006, the effective tax rate includes the credit
earned for the period January 1, 2006 through June 30, 2006, which
aggregated $0.01 per diluted share, in addition to the tax credit earned
during the six month period ended December 31,
2006.
|
At the
end of each interim period, we make our best estimate of the effective tax rate
expected to be applicable for the full fiscal year and the impact of discrete
items, if any, and adjust the quarterly rate, as necessary. As the research and
development tax credit legislation expired on December 31, 2007, we expect our
effective tax rate for the second half of fiscal 2008 to range between 36% and
37%.
Earnings
Per Share
Diluted
earnings per share increased to $0.46 for the December 2007 six-month period
from $0.35 for the December 2006 six- month period. The increase in
earnings per share is attributable to increased net income in the December 2007
six-month period partially offset by a higher diluted share count, resulting
from the issuance of common shares and an increase in the dilutive effect of
stock options. The increase in our common stock market price during
fiscal 2007 and the first six-month period of fiscal 2008 drove the increase in
the dilutive effect of stock options. In addition, the December 2006 quarter
includes a $0.7 million, or $0.01 per diluted share benefit related to the
period January 1, 2006 through June 30, 2006, due to the retroactive
reinstatement of the research and development tax credit legislation.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary sources of liquidity are:
|
·
|
Existing
cash and cash equivalents,
|
|
·
|
Cash
flows from operations, and
|
|
·
|
Debt
capacity available under our revolving credit
facility.
|
Selected
balance sheet accounts are summarized as follows (in millions of
dollars):
|
Increase
/ (Decrease)
|
||||||||||||||||
|
December
31,
2007
|
June
30,
2007
|
Dollar
|
Percent
|
|||||||||||||
|
Total
cash, cash equivalents, and restricted cash(1)
|
$ | 82.1 | $ | 53.2 | $ | 28.9 | 54.3 | % | ||||||||
|
Total
current assets(A)
|
367.2 | 342.2 | 25.0 | 7.3 | ||||||||||||
|
Total
assets
|
703.3 | 655.7 | 47.6 | 7.3 | ||||||||||||
|
Total
current liabilities(B)
|
85.2 | 86.7 | (1.5 | ) | (1.7 | ) | ||||||||||
|
Long-term
debt
|
115.0 | 115.0 | – | – | ||||||||||||
|
Stockholders’
equity
|
479.0 | 433.6 | 45.4 | 10.5 | ||||||||||||
|
Net
working capital (A) – (B)
|
282.0 | 255.5 | 26.5 | 10.4 | ||||||||||||
|
|
(1)
|
Includes
restricted cash of $24.4 million and $16.0 million as of December 31, 2007
and June 30, 2007, respectively. Cash required for funding WAP
systems jackpot payments is considered restricted cash and is not
available for general corporate
purposes.
|
Our net
working capital increased $26.5 million from June 30, 2007, and was affected by
the following components:
|
Ø
|
An
increase in cash, cash equivalents and restricted cash of $28.9 million
due primarily to the strong revenues and subsequent cash collections in
the December 2007 six-month period;
|
|
Ø
|
A
decrease in total current accounts and notes receivable, net of $2.2
million to $171.7 million compared to June 30, 2007, despite the increase
in our revenues, as a result of the strong collections during the
December 2007 period;
|
|
Ø
|
A
decrease in inventories of $5.5 million to $73.8 million due to focused
efforts on increasing inventory turns
and
|
|
Ø
|
A
decrease in accrued compensation and related benefits of $5.7 million due
to the payment of fiscal 2007 cash bonuses and the timing of payments
during the December 2007 period.
|
We have
not experienced significant bad debt expense in any of the periods presented. We
expect to invest in working capital throughout fiscal 2008, albeit at a lower
rate than in prior years.
As
described in Note 12, “Commitments, Contingencies and Indemnifications” to our
Condensed Consolidated Financial Statements, we have royalty and license
commitments for brand, intellectual property and technology licenses that are
not recorded in our Condensed Consolidated Balance Sheets.
We
believe that total cash and cash equivalents of $82.1 million at December 31,
2007, inclusive of $24.4 million of restricted cash, and cash flow from
operations will be adequate to fund our anticipated level of
expenses, capital expenditures, cash to be invested in gaming operations
equipment, the levels of inventories and receivables required in the
operation of our business, and any repurchases of common stock for the next
year. In fiscal 2008 and 2009, we expect cash flow from operations to
continue to increase. We do not believe we will need to raise a significant
amount of additional capital in the short-term or long-term, although we
may utilize our revolving credit facility from time-to-time in order to meet
short-term cash needs. We will, however, assess market opportunities as
they arise.
Convertible
Subordinated Notes
At
December 31, 2007, we had $115 million of convertible subordinated notes
outstanding, bearing interest at 2.75%, maturing on July 15, 2010. The notes are
exchangeable at any time into an aggregate of 8.7 million shares of our common
stock at a conversion price of $13.19 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, aggregating $3.2 million
annually. The conversion of the 2.75% convertible subordinated notes to common
stock is dependent on individual holders’ choices to convert, which
is dependent on the spread of the market price of our stock above the
conversion strike price of $13.19 per share, and would reduce our annual
interest expense. None of the holders have converted any of their convertible
subordinated notes into our common stock. Our convertible notes are conventional
convertible debt instruments in which the holder may only realize the value
of the conversion option by exercising the option and receiving a fixed
number of shares of our common stock.
Revolving
Credit Facility
We have a
multi-year revolving credit agreement, as amended, that provides for $100
million of unsecured borrowing through December 31, 2009, including the
potential to expand the line up to $125 million. Up to $10 million of the credit
facility is available for the issuance of letters of credit. The credit
agreement requires that we maintain certain financial ratios, which could limit
our ability to declare dividends or make any distribution to holders of any
shares of capital stock, or redeem or otherwise acquire such shares of our
Company. At December 31, 2007, approximately $112.9 million was available for
such purposes under the most restrictive of these covenants. No amounts were
outstanding under the revolving credit facility as of December 31, 2007 and June
30, 2007.
Common
Stock Repurchase Program
On August
6, 2007, our Board of Directors authorized the repurchase of up to $50 million
of our common stock over the following twenty-four months. This authorization
replaces the $35 million authorization that expired on August 8, 2007. Pursuant
to the authorization, purchases may be made from time to time in the
open market, through block purchases or in privately negotiated
transactions. The timing and actual number of shares repurchased will depend on
market conditions. We did not repurchase any shares under either of the
authorized plans during the three months ended September 30, 2007. During the
three months ended December 31, 2007, we repurchased approximately $10
million worth of our common stock. As of December 31, 2007, we had
approximately $40 million remaining under this share repurchase
authorization.
Cash
Flows Summary
Cash
flows from operating, investing and financing activities, as reflected in our
Condensed Consolidated Statements of Cash Flows, are summarized in the
following table (in millions of dollars):
|
Six
Months Ended December 31,
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Net
cash provided by (used in):
|
||||||||||||
|
Operating
activities
|
$ | 69.9 | $ | 44.6 | $ | 25.3 | ||||||
|
Investing
activities
|
(55.4 | ) | (84.5 | ) | 29.1 | |||||||
|
Financing
activities
|
5.7 | 19.0 | (13.3 | ) | ||||||||
|
Effect
of exchange rates on cash and cash equivalents
|
0.3 | 1.7 | (1.4 | ) | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 20.5 | $ | (19.2 | ) | $ | 39.7 | |||||
Operating activities: The
$25.3 million increase in cash provided by operating activities in the December
2007 six-month period compared to the December 2006 six-month period resulted
from:
|
Ø
|
A
positive impact from the $7.8 million increase in net income and a $4.8
million increase in depreciation,
|
|
Ø
|
A
positive impact from a $6.6 million increase in non-cash expense,
including bad debt expense, and
|
|
Ø
|
A
positive impact from improved utilization of working capital indicated by
a $4.7 million net decrease in changes in operating assets and
liabilities, as the December 2007 six-month period decrease in accounts
receivable and inventories was only partially offset by a slight increase
in notes receivable and other current
assets.
|
We
anticipate a higher amount of cash to be provided by operations in fiscal 2008
than in fiscal 2007 due to anticipated increases in revenues from higher
new unit sales at a higher average selling price, a greater average
participation gaming machine installed base, and a higher average revenue
per day for participation gaming machines, partially offset by higher research
and development expenses, as well as higher selling and administrative
costs.
Investing Activities: The
$29.1 million decrease in cash used by investing activities in the December 2007
six-month period compared to the December 2006 six-month period was
primarily due to:
|
Ø
|
Lower
cash used in purchasing businesses by $20.7 million as only $0.2 million
of cash was used for the acquisition of SiP in the December 2007 six-month
period compared to net cash of $20.9 million used for the acquisition of
Orion Gaming during the December 2006
period.
|
|
Ø
|
A
$3.6 million decrease in the amount invested in gaming operations
machines, top boxes and related equipment during the December 2007 six
month period to $28.7 million. We expect the rate of
investment in gaming operations equipment to continue to moderate in
fiscal 2008 and 2009.
|
|
Ø
|
A
$3.8 million increase in the amount invested in property, plant and
equipment during the December 2007 six-month period to $19.8 million, due
primarily to the expansion of our Waukegan, Illinois facility, as well as
investments in manufacturing tools and internal and purchased
software.
|
|
Ø
|
A
$9.3 million reduction in investments and advances in royalties, licensed
technologies, patents and trademarks to $6.0 million in the December 2007
six-month period as we entered into fewer new
agreements.
|
Financing Activities: The
$13.3 million decrease in cash provided by financing activities was
primarily due to:
|
Ø
|
The
use of $10.0 million in the December 2007 six-month period to repurchase
common stock.
|
|
Ø
|
The
lower overall impact of stock option activity by $3.3 million in the
December 2007 six-month period stemming from receipt of $10.8 million
compared to $14.3 million from the exercise of stock options in the
December 2007 and 2006 six month periods, respectively, along with
the related tax benefit of $4.9 million and $4.7 million, respectively.
The amount we receive from the exercise of stock options is dependent on
individuals’ choices to exercise options, which are dependent on the
spread of the market price of our stock above the exercise price of
vested options.
|
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 that are not recorded on our Condensed Consolidated
Balance Sheets. Typically, we are obligated to make minimum commitment
royalty payments over the term of our licenses and to advance payment against
those commitments.
Our
obligations under these arrangements, under our convertible subordinated notes
and other contractual obligations at December 31, 2007, were as follows (in
millions):
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
Years
|
|||||||||||||||
|
Operating
leases
|
$ | 26.1 | $ | 2.5 | $ | 7.0 | $ | 6.0 | $ | 10.6 | ||||||||||
|
Royalty
payments, excluding contingent payments
|
27.7 | 9.8 | 12.6 | 5.3 |
|
|||||||||||||||
|
Non-cancelable
raw material purchase orders
|
5.8 | 5.8 |
|
|
|
|||||||||||||||
|
Accrued
WAP jackpot liability
|
13.7 | 13.7 |
|
|
|
|||||||||||||||
|
Convertible
subordinated notes
|
115.0 |
|
115.0 |
|
|
|||||||||||||||
|
Interest
payments
|
9.6 | 3.2 | 6.4 |
|
|
|||||||||||||||
|
Performance
bonds
|
1.0 | 1.0 |
|
|
|
|||||||||||||||
|
Other,
including guaranteed minimums in employment agreements
|
14.7 | 12.4 | 0.9 | 0.4 | 1.0 | |||||||||||||||
|
Total
|
$ | 213.6 | $ | 48.4 | $ | 141.9 | $ | 11.7 | $ | 11.6 | ||||||||||
As of
December 31, 2007, we had a $6.4 million of gross unrecognized tax benefits,
inclusive of $1.8 million from the adoption of FIN 48. We cannot make a
reasonably reliable estimate of the period of cash settlement for the liability
for unrecognized tax benefits. See Note 7, “Income Taxes,” to our
Condensed Consolidated Financial Statements for further information regarding
our income tax positions.
The
previously disclosed performance bonds outstanding of $13.7 million expired
unused during the six months ended December 31, 2007.
Indemnification
Agreements
We have
agreements in which we may be obligated to indemnify other parties with respect
to certain matters. Generally, these indemnification provisions are included in
sales orders and agreements arising in the normal course of business under which
we customarily agree to hold the indemnified party harmless against claims
arising from a breach of representations related to matters such as title to
assets sold and licensed, defective equipment or certain intellectual property
rights. Payments by us under such indemnification provisions are generally
conditioned on the other party making a claim. Such claims are typically subject
to challenge by us. Further, our obligations under these agreements
may be limited in terms of time and/or amount and, in some instances, we may
have recourse against third parties. It is not possible to predict the maximum
potential amount of future payments under these indemnification agreements due
to the conditional nature of the obligations and the unique facts of each
particular agreement. Historically, we have not made any payments under these
agreements that have been material individually or in the aggregate. As of
December 31, 2007, we were not aware of any obligations arising under
indemnification agreements that would require material payments except for the
matter disclosed in Note 13, “Litigation,” to our Condensed Consolidated
Financial Statements.
We have
agreements with our directors and certain officers that require us, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers. We have also agreed to
indemnify certain former officers and directors of acquired companies. We
maintain director and officer insurance, which may cover our liabilities arising
from these indemnification obligations in certain circumstances. As of December
31, 2007, we were not aware of any obligations arising under these agreements
that would require material payments.
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, restricted stock, equity-based
performance units and deferred stock units to our employees, officers, directors
and consultants and warrants to a licensor, and we have issued convertible
subordinated notes.
Self-Insurance
We are
self-insured for various levels of workers’ compensation, electronic errors and
omissions liability, automobile collision insurance, as well as employee
medical, dental, prescription drug, and disability coverage. We purchase
stop-loss coverage to protect against unexpected claims. Accrued insurance
claims and reserves include estimated settlements for known claims, and
actuarial estimates of claims incurred but not reported.
Refer
also to Note 12, “Commitments, Contingencies and Indemnifications” to our
Condensed Consolidated Financial Statements.
FORWARD
LOOKING STATEMENTS AND RISK FACTORS
This
report contains forward-looking statements concerning our future business
performance, strategy, outlook, plans, liquidity, pending regulatory matters and
outcomes of contingencies including legal proceedings, among
others. Forward-looking statements may be typically identified by
such words as “may,” “will,” “should,” “expect,” “anticipate,” “seek,”
“believe,” “estimate,” and “intend,” among others. These
forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from the expectations expressed in
the forward-looking statements. Although we believe that the
expectations reflected in our forward-looking statements are reasonable, any or
all of our forward-looking statements may prove to be
incorrect. Consequently, no forward-looking statements may be
guaranteed.
You are
advised to consult any further disclosures we make on related subjects in our
Form 10-K, 10-Q and 8-K reports filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are
subject to market risks in the ordinary course of our business, primarily
associated with equity price, interest rate and foreign currency
fluctuations. We do not currently hedge any of these risks, or
utilize financial instruments for trading or other speculative purposes, because
we do not view these risks as material.
Interest
Rate Risk
We have
no exposure to interest rate risk from our 2.75% convertible subordinated notes,
but we have exposure to interest rate risk from our short-term line of
credit. The notes bear interest at a fixed rate and the short-term
line of credit bears interest at a variable rate.
Equity
Price Risk
As of
December 31, 2007, we had $115 million of convertible fixed-rate debt with an
interest rate of 2.75% and a fair value of $319.5 million. Using a discounted
cash flow model and assuming no change in the market price of our common stock
into which the debt is convertible, we currently estimate that a 50 basis point
change in the prevailing market interest rates would impact the fair value of
our convertible fixed rate debt by approximately $1.4 million, but would have no
effect on our cash flows or future results of operations. The fair
value of our convertible fixed rate debt is significantly dependent on the
market price of our common stock into which it can be converted.
Foreign
Currency Risk
During
the six months ended December 31, 2007, we completed the acquisition
of 100% of the outstanding stock of privately-held Systems in Progress, whose
functional currency is the Euro. Given that the acquisition of
Systems in Progress is not material to our consolidated results, there were no
material changes in our foreign currency risk since June 30, 2007.
We have
subsidiaries in Australia, Austria, Canada, China, the Netherlands, Slovakia,
Spain, South Africa, and the United Kingdom for distribution and development
operations. These subsidiaries transact business in their respective foreign
currencies and are exposed to risks resulting from fluctuations in foreign
currency exchange rates. The net assets of these subsidiaries are exposed
to foreign currency translation gains and losses, which are included as a
component of accumulated other comprehensive income in stockholders’ equity.
In addition, foreign governments could impose restrictions on currency
movements that might make it costly or impossible to repatriate earnings to the
U.S.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As of the
end of the period covered by 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
Rule 13a-15(b) under the Securities Exchange Act of 1934. 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
information required to be disclosed in our filings under the Securities
Exchange Act of 1934, is (i) recorded, processed, summarized and reported within
the time periods specified in the Commission rules and forms and (ii)
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes
in Internal Control over Financial Reporting
As a part
of our normal operations, we update our internal controls as necessary to
accommodate any modifications to our business processes or accounting
procedures. No changes have occurred during the most recent fiscal
quarter that materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
For a
description of certain legal proceeding, please see Note 13, “Litigation,” to
our Condensed Consolidated Financial Statements included in this Quarterly
Report on Form 10-Q and the description under “Item 3 – Legal Proceedings”
included in our Annual Report on Form 10-K for the fiscal year ended June 30,
2007.
ITEM
1A. RISK FACTORS
WMS is
subject to risks and uncertainties that could cause our actual results to differ
materially from the expectations expressed in the forward-looking statements.
Factors that could cause our actual results to differ from expectations are
described under “Item 1A. Business – Risk Factors” in our Annual Report on Form
10-K for the fiscal year ended June 30, 2007. There has been no
material change in our assessment of the risk factors affecting our business
since the presentation of risk factors described under Item 1A, “Risk Factors”
to our Form 10-K for the fiscal year ended June 30, 2007, filed with the
Securities and Exchange Commission (the “Commission”) other than the expiration
of our Rights Plan in November 2007 which rendered the risk associated with that
plan inapplicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuance
of Unregistered Securities
None in
the period covered.
Repurchases
of Common Shares
The
following table provides information relating to the Company’s purchases of its
common shares for the second quarter of fiscal 2007:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1)
|
Maximum
Number (Or Approximate Dollar Value) of Shares that May Yet Be Purchased
under the Plans or Programs(1)
|
|
October
1, 2007 – October 31, 2007
|
--
|
--
|
--
|
$
50,000,000
|
|
November
1, 2007 – November 30, 2007
|
274,158
|
32.77
|
274,158
|
$ 41,016,534
|
|
December
1, 2007 – December 31, 2007
|
31,943
|
31.25
|
31,943
|
$ 40,018,458
|
|
Total
|
306,101
|
32.61
|
306,101
|
$ 40,018,458
|
|
(1)
|
On
August 6, 2007, our Board of Directors authorized the repurchase of up to
$50 million of our common stock over the following twenty-four months.
Pursuant to the authorization, purchases may be made from time to time in
the open market, through block purchases or in privately negotiated
transactions. The timing and actual number of shares repurchased will
depend on market conditions.
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The
following matters were submitted to a vote of our stockholders during the Annual
Meeting of Stockholders held on December 13, 2007:
|
1.
|
Election
of Directors
|
Shares
For
|
Shares
Withheld
|
Abstain
|
Broker
Non-Votes
|
|||||
|
|
Louis
J. Nicastro
|
|
46,617,531
|
|
1,972,042
|
–
|
–
|
|||
|
|
Brian
R. Gamache
|
|
46,767,978
|
|
1,821,595
|
–
|
–
|
|||
|
|
Harold
H. Bach, Jr.
|
|
47,974,046
|
|
615,527
|
–
|
–
|
|||
|
Robert
J. Bahash
|
48,298,184
|
291,389
|
–
|
–
|
||||||
|
|
Neil
D. Nicastro
|
|
46,616,812
|
|
1,972,761
|
–
|
–
|
|||
|
|
Edward
W. Rabin
|
|
48,296,581
|
|
292,992
|
–
|
–
|
|||
|
|
Patricia
M. Nazemetz
|
|
48,294,259
|
|
295,314
|
–
|
–
|
|||
|
|
Ira
S. Sheinfeld
|
|
44,934,248
|
|
3,655,325
|
–
|
–
|
|||
|
|
William
J. Vareschi, Jr.
|
|
46,463,534
|
|
2,126,039
|
–
|
–
|
|
2.
|
Ratification
of Ernst & Young LLP as our independent registered public
accountants for our 2007 fiscal
year:
|
|
Shares
For
|
Shares Withheld |
Abstain
|
Broker
Non-Votes
|
|||||||
|
|
|
|
48,251,343
|
|
44,420
|
303,911
|
–
|
ITEM
5. OTHER INFORMATION
|
(a)
|
None.
|
|
(b)
|
None.
|
ITEM
6. EXHIBITS
Exhibit
No. Description
|
3.1
|
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 our Annual
Report on Form 10-K for the year ended June 30, 1994.
|
|
3.2
|
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 our Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1998.
|
|
3.3
|
Form
of Certificate of Designation of Series A Preferred Stock, incorporated by
reference to our Registration Statement on Form 8-A (File no. 1-8300)
filed September 25, 1998 (“the Form 8-A”).
|
|
3.4
|
Amended
and Restated By-Laws of WMS, as amended and restated through May 7, 2007,
incorporated by reference to WMS’ Current Report on Form 8-K filed on May
10, 2007.
|
|
4.1
|
Indenture
dated June 25, 2003 between WMS and BNY Midwest Trust Company, and
Form of Note incorporated by reference to WMS’ Current Report on
Form 8-K filed June 25, 2003.
|
|
31
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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: February 7,
2008
|
By: /s/ Scott D.
Schweinfurth
|
|
Scott
D. Schweinfurth
|
|
|
Executive
Vice President,
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
(Authorized
Officer and
Principal
Financial Officer)
|
|
|
WMS
INDUSTRIES INC.
|
|
|
Dated: February
7, 2008
|
By: /s/ John P. McNicholas
Jr.
|
|
John
P. McNicholas Jr.
|
|
|
Vice
President, Controller and
Chief
Accounting Officer
|
|
|
(Principal
Accounting Officer)
|
|
EXHIBIT INDEX
Exhibit
No. Description
|
3.1
|
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 our Annual
Report on Form 10-K for the year ended June 30, 1994.
|
|
3.2
|
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 our Quarterly Report on Form 10-Q for
the fiscal quarter ended December 31, 1998.
|
|
3.3
|
Form
of Certificate of Designation of Series A Preferred Stock, incorporated by
reference to our Registration Statement on Form 8-A (File no. 1-8300)
filed September 25, 1998 (“the Form 8-A”).
|
|
3.4
|
Amended
and Restated By-Laws of WMS, as amended and restated through May 7, 2007,
incorporated by reference to WMS’ Current Report on Form 8-K filed on May
10, 2007.
|
|
4.1
|
Indenture
dated June 25, 2003 between WMS and BNY Midwest Trust Company, and
Form of Note incorporated by reference to WMS’ Current Report on
Form 8-K filed June 25, 2003.
|
|
31
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32
|
Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
28