<PAGE> 1
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 March 31, 1996
/ / 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
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
(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
(Address of Principal Executive Offices)
(Zip Code)
(619) 931-4000
(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 March 31, 1996, 16,816,211 shares of common stock were outstanding.
1
<PAGE> 2
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Legal Proceedings 8
</TABLE>
2
<PAGE> 3
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
(Thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 3,354 $ 3,904
Accounts receivable, net of allowance 1,908 1,588
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,688 3,665
Inventories at lower of cost (first-in,
first-out) or market 5,087 6,820
Other current assets 421 642
-------- --------
Total current assets 16,458 16,619
Non-current accounts receivable 62 52
Investment in lottery service agreements, net 2,765 2,759
Equipment, furniture and fixtures, net 1,345 1,361
Computer software costs, net 543 561
-------- --------
Total assets $ 21,173 $ 21,352
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 629 $ 231
Billings in excess of costs and estimated earnings on
uncompleted contracts 122 115
Accrued payroll and related taxes 1,100 949
Warranty reserves 281 298
Other current liabilities 5,659 6,238
-------- --------
Total current liabilities 7,791 7,831
Capital lease obligations 93 109
Shareholders' equity:
Common shares; no par value: Authorized shares
50,000,000 - Issued and outstanding shares
16,816,211 (16,803,711 in 1995) 48,687 48,687
Retained earnings (accumulated deficit) (35,209) (35,223)
Foreign currency translation adjustment (189) (52)
-------- --------
Total shareholders' equity 13,289 13,412
-------- --------
Total liabilities and shareholders' equity $ 21,173 $ 21,352
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
3
<PAGE> 4
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
1996 1995
-------- --------
<S> <C> <C>
(Thousands of dollars,
except per share amounts)
Contract revenue and sales $ 6,861 $ 5,240
Costs & expenses:
Cost of sales 4,815 4,934
Engineering, research & development 320 99
Selling, general & administrative 1,911 2,027
-------- --------
Total costs and expenses 7,046 7,060
-------- --------
Loss from operations (185) (1,820)
Other income:
Other income & expense, net 199 90
-------- --------
Income (loss) before provision for income taxes 14 (1,730)
Provision for income taxes -- --
-------- --------
Net income (loss) $ 14 $ (1,730)
======== ========
Net income (loss) per common share:
Primary and fully diluted $ 0.00 $ (0.10)
======== ========
Shares used in per share amounts:
Primary and fully diluted 16,816 16,804
======== ========
</TABLE>
4
<PAGE> 5
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
1996 1995
------- -------
<S> <C> <C>
(Thousand of dollars)
Cash flow from operating activities:
Net profit (loss) $ 14 $(1,730)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 216 190
Changes in assets and liabilities:
Accounts receivable (320) 1,196
Costs and estimated earnings in excess of
billings on uncompleted contracts (2,023) (378)
Inventories 1,733 (370)
Accounts payable 398 (374)
Billings in excess of costs and estimated earnings on
uncompleted contracts 7 (918)
Accrued payroll and related taxes 264 273
Other (809) 825
------- -------
Net cash used for operating activities (520) (1,286)
------- -------
Cash flow used for investing activities:
Investment in lottery service agreements (6) --
Lottery service agreement sale proceeds and advance repayments 156 --
Non-current accounts receivable (10) (55)
Additions to equipment (136) (197)
Additions to computer software costs (53) --
Proceeds from sale of subsidiary 156 --
------- -------
Net cash used for investing activities 107 (252)
------- -------
Cash flow provided by (used for) financing activities:
Payments on notes payable -- (300)
------- -------
Net cash provided by (used for) financing activities -- (300)
------- -------
Effect of exchange rate changes on cash (137) 83
------- -------
Increase (decrease) in cash and cash equivalents (550) (1,755)
Cash and cash equivalents at beginning of year 3,904 9,467
------- -------
Cash and cash equivalents at end of year $ 3,354 $ 7,712
======= =======
Supplemental cash flow information:
Cash paid during the three months for interest $ 6 $ 6
======= =======
</TABLE>
5
<PAGE> 6
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(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 March 31, 1996 and for the three 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 1995 Annual Report which is incorporated by reference.
2. The results of operations for the three month period ended March 31,
1996 are not necessarily indicative of the results to be expected for
the full year.
3. Inventories - The current inventory balance at March 31, 1996 is
composed entirely of raw materials and work in process totaling $5,087.
4. McKinnie & Associates, Inc. - In March 1993, the Registrant sold
its subsidiary, McKinnie & Associates, Inc. to Shreveport Acquisition
for cash and a note. Unrecorded gain and interest of $1,300 will be
recognized using the cost recovery method as payments are received.
5. Papua New Guinea Lottery - In July 1995, the Registrant sold all
interests in its Papua New Guinea lottery operation to the principal
shareholders of the lottery licensee for cash and a note. The
Registrant is accounting for the sale under the cost recovery method.
The installment payments and the minimum percentage payments are
secured by the lottery assets and certain personal guarantees. The
Registrant's remaining investment in the Papua New Guinea lottery at
March 31, 1996 is approximately $182 and is included in other assets.
6
<PAGE> 7
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 March 31, 1996 revenue increased 30.9% compared to the
quarter ended March 31, 1995. This increase in revenue reflected a higher volume
of contract business in 1996. Management does not believe that a similar
increase in revenues will occur in the second quarter of 1996 over the second
quarter of 1995. Cost of sales as a percentage of revenue decreased 24% in 1996
to 70% from 94% in 1995. The decrease in cost of sales percentage was primarily
due to the lack of Russian lottery project expenses and cost-saving measures.
Engineering, research and development costs increased to $320 in 1996 from $99
in 1995. The 1996 costs were primarily related to the development of software
for lottery markets. Selling, general and administrative expenses decreased by
$116 from the prior year due to lower staffing levels in 1996 which offset
higher proposal costs associated with the pursuit of new business. The deferred
gain on the sale of a subsidiary and interest income generated net income for
the quarter ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1996, the Registrant's working capital
decreased by $121. Cash and current receivable balances totaled approximately
$5,262 at March 31, 1996 compared to $5,492 at December 31, 1995. A substantial
amount of total current liabilities reflects a provision for the estimated value
of a number of authorized but unissued common shares of the Registrant to be
issued in accordance with the settlement of a shareholder class action
litigation. There were no bank borrowings at March 31, 1996.
As of March 31, 1996 there were no material commitments for capital
expenditures.
7
<PAGE> 8
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, which has been placed in the class
shareholders' escrow account, and a number of authorized but unissued common
shares of the Registrant, and is subject to agreement by the class shareholders
and approval by the court. The Registrant has recorded a provision for the
estimated value of the shares at date of issuance as a current liability.
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. Since the outcome of the case is not expected
to result in any liability to the Registrant, no provision for any liability
that may result has been included in the consolidated financial statements.
8
<PAGE> 9
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
-------------------------------------
William A. Hainke
Chief Financial Officer,
Corporate Secretary and
Treasurer
Date: May 3, 1996
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,354
<SECURITIES> 0
<RECEIVABLES> 1,908
<ALLOWANCES> 0
<INVENTORY> 5,688
<CURRENT-ASSETS> 16,458
<PP&E> 1,345
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,173
<CURRENT-LIABILITIES> 7,791
<BONDS> 0
0
0
<COMMON> 48,687
<OTHER-SE> (35,398)
<TOTAL-LIABILITY-AND-EQUITY> 21,173
<SALES> 6,861
<TOTAL-REVENUES> 6,861
<CGS> 4,815
<TOTAL-COSTS> 4,815
<OTHER-EXPENSES> 2,231
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 14
<INCOME-TAX> 0
<INCOME-CONTINUING> 14
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-PRIMARY> .00
<EPS-DILUTED> 0
</TABLE>
