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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number: 0-10294
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
formerly International Totalizator Systems, Inc.(R)
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(Exact Name of Registrant as specified in its charter)
CALIFORNIA 95-3276269
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2131 FARADAY AVENUE, CARLSBAD, CALIFORNIA 92008-7297
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(Address of Principal Executive Offices) (Zip Code)
(619) 931-4000
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(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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
As of September 30, 1995, 16,816,211 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
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<S> <C>
Condensed Consolidated Balance Sheets
September 30, 1995 and December 31, 1994 3
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1995 and 1994
and Nine Months Ended September 30, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
(Thousands of dollars) (UNAUDITED) (NOTE)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,191 $ 9,467
Accounts receivable, net of allowance 1,232 2,398
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,505 3,382
Inventories at lower of cost (first-in,
first-out) or market 8,649 10,499
Other current assets 1,153 1,233
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Total current assets 19,730 26,979
Non-current accounts receivable 61 --
Investment in lottery service agreements, net 2,795 2,254
Equipment, furniture and fixtures, net 1,339 1,650
Computer software costs, net 668 1,005
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Total assets $ 24,593 $ 31,888
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 179 $ 909
Note payable to bank -- 300
Capital lease obligations - current 61 --
Billings in excess of costs and estimated earnings on
uncompleted contracts 162 968
Accrued payroll and related taxes 1,217 595
Warranty reserves 292 348
Other current liabilities 6,460 1,623
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Total current liabilities 8,371 4,743
Notes payable - long term 141 --
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Total Liabilities 8,512 4,743
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Shareholders' equity:
Common shares; no par value: Authorized shares
50,000,000 - Issued and outstanding shares
16,816,211 (16,803,711 in 1994) 48,673 48,650
Retained earnings (accumulated deficit) (32,578) (21,354)
Foreign currency translation adjustment (14) (151)
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Total shareholders' equity 16,081 27,145
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Total liabilities and shareholders' equity $ 24,593 $ 31,888
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</TABLE>
Note: The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(UNAUDITED) (UNAUDITED)
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(Thousands of dollars,
except per share amounts) 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Contract revenue and sales $ 3,977 $ 5,722 $ 13,428 $ 18,930
Costs & expenses:
Cost of sales 5,025 4,467 14,776 24,567 (A)
Engineering, research & development 517 497 878 1,281
Selling, general & administrative 5,025 2,197 9,224 6,402
------- ------- -------- --------
Total costs and expenses 10,567 7,161 24,878 32,250
------- ------- -------- --------
Loss from operations (6,590) (1,439) (11,450) (13,320)
Other income:
Interest and other income, net 53 104 226 381
------- ------- -------- --------
Income (loss) before income taxes (6,537) (1,335) (11,224) (12,939)
Provision for taxes based on income -- -- -- --
------- ------- -------- --------
Net (loss) $(6,537) $(1,335) $(11,224) $(12,939)
======= ======= ======== ========
Net (loss) per common share:
- ---------------------------
Primary and fully diluted $(0.39) $(0.08) $(0.67) $(0.77)
====== ====== ====== ======
Shares used in per share amounts:
Primary and fully diluted 16,816 16,801 16,810 16,743
====== ====== ====== ======
</TABLE>
(A) Includes a $9,800 charge for service contract reserves.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
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(Thousand of dollars) 1995 1994
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<S> <C> <C>
Cash flow from operating activities:
Net loss $(11,224) $(12,939)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 979 1,241
Stock Option Compensation -- 304
Lottery service agreement write-off and write-down -- 9,800
Changes in assets and liabilities:
Accounts receivable 1,166 1,612
Costs and estimated earnings in excess of
billings on uncompleted contracts (123) 122
Inventories 1,850 (4,269)
Accounts payable (730) (506)
Billings in excess of costs and estimated earnings on
uncompleted contracts (806) (1,536)
Accrued payroll and related taxes 622 252
Other 5,247 1,115
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Net cash used for operating activities (3,019) (4,804)
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Cash flow used for investing activities:
Investment in lottery service agreements (977) (5,068)
Lottery service agreement sale proceeds 355 --
Non-current accounts receivable (61) 111
Additions to equipment (284) (815)
Additions to computer software costs (150) (259)
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Net cash used for investing activities (1,117) (6,031)
Cash flow provided by (used for) financing activities:
Payments on notes payable (300) --
Proceeds from issuance of common shares 23 607
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Net cash provided by (used for) financing activities (277) 607
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Effect of exchange rate changes on cash 137 111
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Increase (decrease) in cash and cash equivalents (4,276) (10,117)
Cash and cash equivalents at beginning of year 9,467 22,903
-------- --------
Cash and cash equivalents at end of year $ 5,191 $ 12,786
======== ========
</TABLE>
Non Cash Investing & Finance Activities
A capital lease obligation in the amount of $196 was incurred in 1995 to
acquire fixed assets.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements
September 30, 1995
(Thousands of dollars)
1. In the opinion of management, the accompanying unaudited, condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Registrant's financial position and results of
operations at September 30, 1995 and for the three and nine months
then ended. The accounting policies followed by the Registrant are
set forth in Note 1 to the Registrant's consolidated financial
statements in the Registrant's 1994 Annual Report which is
incorporated by reference.
2. The results of operations for the interim periods shown in this report
are not necessarily indicative of the results to be expected for the
full year.
3. Inventories - The current inventory balance at September 30, 1995 is
composed of raw materials and work in process totaling $8,343 and
finished goods totaling $306.
4. Papua New Guinea Lottery - In July 1995 the Registrant sold all
interests in its Papua New Guinea ("PNG") lottery operations to the
principal shareholders of the lottery licensee, The Lotto Pty. Ltd.,
in return for $175 cash and a note of $1,525 to be paid in monthly
installments of approximately $90 per month for a period of 17 months
commencing in September 1995. Additionally, the Registrant will
receive a percentage of the annual gross lotto sales for an annual sum
of $260, whichever is greater for a period of five years, provided
that the additional sums shall not exceed $3,000. The installment
payments and the minimum percentage payments are secured by all
lottery assets and the personal guarantees and indemnifications of all
of the shareholders of The Lotto Pty. Ltd. The Registrant's remaining
investment in the PNG lottery is approximately $639 at September 30,
1995 and is included in other current assets. The Registrant will not
record any gain until the balance of the receivable has been
collected.
5. On November 6, 1995 the Registrant terminated its Russian lottery
project after exhausting numerous financing and joint venture
possibilities. Accordingly, the Registrant increased a previously
established reserve to include the write-off of its remaining
investment in the project, a related reduction in its Russian work
force and costs related to the unwinding of the Registrant's Russian
lottery project.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Thousands of dollars)
RESULTS OF OPERATIONS
During the quarter ended September 30, 1995, revenue decreased by
$1,745, or 30% as compared to the quarter ended September 30, 1994. The
decrease reflects lower contract volume in 1995. Cost of sales, as a
percentage of revenue was 113% (excluding a provision for unwinding the
Registrant's Russian lottery project) in 1995 compared to 1994's cost of sales
percentage of 78%. The increase in cost of sales was primarily a result of
higher unfavorable manufacturing variances due to the low level of contract
volume, lower contract margins and after- market sales, and costs related to
the unwinding of the Registrant's Russian lottery project.
Engineering, research and development costs of $517 in 1995 related
essentially to the development of software for the North American lottery
market, whereas the costs of $497 in 1994 were primarily attributable to the
development costs of the DATAMARK Flipper.(TM)
Selling, general and administrative expenses increased $2,828 from the same
period in 1994. This increase was primarily the result of litigation costs and
costs associated with the proposed settlement of a shareholders' class action
lawsuit.
During the nine month period ended September 30, 1995, revenue decreased by
$5,502, or 29% as compared to the same period in 1994. This decrease reflects
lower contract volume in 1995. Cost of sales as a percentage of revenue,
increased to 106% (excluding a provision for unwinding the Registrant's Russian
lottery project) for the nine month period ended September 30, 1995, as
compared to 78% (excluding the $9,800 service contract write-offs and write
down) for the like period in 1994. The increase in cost of sales was primarily
a result of higher unfavorable manufacturing variances and costs related to the
Registrant's Russian lottery project, including the unwinding costs.
Engineering, research and development costs decreased $403, or 31% for the nine
month period ended September 30, 1995, as compared to the like period in 1994.
As explained above, 1995 costs were primarily attributable to the development
of software for the North American lottery market.
Selling, general and administrative costs increased $2,822 from the same period
in 1994. This increase was the result of litigation costs and costs associated
with the proposed settlement of a shareholders' class action lawsuit.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1995, the Registrant's
working capital decreased $10,877 due primarily to additional investment made
in and costs related to the unwinding of the Registrant's Russian lottery
project and a provision for a settlement of shareholders' lawsuit. Cash and
current receivables totaled $6,423 at September 30, 1995. The Registrant
currently has a revolving line of credit which expires in August 1996. No
borrowing against the line was outstanding at September 30, 1995.
As of September 30, 1995, there were no material commitments for
capital expenditures.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Shareholder Class Action Litigation - The Registrant and certain of
its officers and directors who are defendants in a shareholders' consolidated
class action litigation filed in June and July 1994, have agreed in principle
to a settlement with the law firm representing the plaintiffs. The proposed
settlement includes a cash payment and a number of authorized but unissued
common shares of the Registrant, and is subject to agreement by the
shareholders included in the class period and approval by the court. The
Registrant has recorded a reserve for its obligations anticipated under the
proposed settlement, which includes an estimate of the value of the shares at
date of issuance as a current liability.
ILTS v M. Kadirova - With respect to the action filed by the
Registrant against M. Kadirova and others, in the U.S. Federal District Court
in Florida and the subsequent counterclaim by Kadirova against the Registrant,
the court dismissed the actions, with prejudice, as to all parties in October
1995.
James Walters v ILTS - On November 3, 1995, Mr. Walters, the former
chairman and president of the Registrant, who retired in 1994, filed an action
in the San Diego County Superior Court against the Registrant, its current
president, Frederick A. Brunn, a publishing company and an author alleging that
certain statements in a magazine article were slander per se by ILTS and Brunn
and libel by the publishing company and the author, and that Mr. Walters
suffered an invasion of privacy by all defendants. In addition, Mr. Walters
alleged that information in the Registrant's 1995 proxy statement relating to
Mr. Walters' compensation and retirement date was erroneous, resulting in two
other magazine articles publishing alleged incorrect information. Mr. Walters
seeks general and special damages of $9 million and punitive damages. The
Registrant and Mr. Brunn deny all allegations in Mr. Walters' complaint and
will defend the litigation accordingly.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
/s/ WILLIAM A. HAINKE
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William A. Hainke
Chief Financial Officer,
Corporate Secretary and
Treasurer
Date: November 13, 1995
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 5,191
<SECURITIES> 0
<RECEIVABLES> 1,232
<ALLOWANCES> 0
<INVENTORY> 8,649
<CURRENT-ASSETS> 19,730
<PP&E> 1,339
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,593
<CURRENT-LIABILITIES> 8,371
<BONDS> 0
<COMMON> 48,673
0
0
<OTHER-SE> (32,578)
<TOTAL-LIABILITY-AND-EQUITY> 24,593
<SALES> 13,428
<TOTAL-REVENUES> 13,428
<CGS> 14,776
<TOTAL-COSTS> 24,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> (11,224)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,224)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> 0
</TABLE>
