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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, 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 September 30, 1996, 17,176,211 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1996 (Unaudited) and December 31, 1995 3
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 1996 and 1995
and Nine Months Ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 9
Signature 11
</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,
1996 1995
(UNAUDITED) (NOTE)
-------- --------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,704 $ 3,904
Accounts receivable, net of allowance 2,887 1,588
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,976 3,665
Inventories, at lower of cost (first-in, first-out
method) or market 3,546 6,820
Other current assets 172 642
-------- --------
Total current assets 14,285 16,619
Non-current accounts receivable 95 52
Investment in lottery service agreements, net 100 2,759
Equipment, furniture and fixtures, net 1,214 1,361
Computer software costs, net 710 561
-------- --------
Total assets $ 16,404 $ 21,352
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 646 $ 231
Billings in excess of costs and estimated earnings
on uncompleted contracts 32 115
Accrued payroll and related taxes 1,386 949
Warranty reserves 181 298
Other current liabilities 1,656 6,238
-------- --------
Total current liabilities 3,901 7,831
Capital lease obligations - long term 56 109
Shareholders' equity:
Common shares; no par value: 50,000,000 shares
authorized; 17,176 211 issued and outstanding
(16,816,211 shares issued and outstanding in 1995) 51,087 48,687
Accumulated deficit (38,772) (35,223)
Foreign currency translation adjustment 132 (52)
-------- --------
Total shareholders' equity 12,447 13,412
-------- --------
Total liabilities and shareholders' equity $ 16,404 $ 21,352
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 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 (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(Thousands of dollars,
except per share amounts) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contract revenue and sales $ 3,550 $ 3,977 $ 14,793 $ 13,428
Costs and expenses:
Cost of sales 2,735 3,572 11,234 11,969
Write-downs of lottery service projects 2,693 1,453 2,693 2,807
Engineering, research and
development 443 517 1,141 878
Selling, general and administrative 1,803 5,025 4,285 9,224
-------- -------- -------- --------
Total costs and expenses 7,674 10,567 19,353 24,878
-------- -------- -------- --------
Loss from operations (4,124) (6,590) (4,560) (11,450)
Other income (expense), net 600 53 1,211 226
-------- -------- -------- --------
Loss before income taxes (3,524) (6,537) (3,349) (11,224)
Provision for taxes based on income 50 -- 200 --
-------- -------- -------- --------
Net loss ($ 3,574) ($ 6,537) ($ 3,549) ($11,224)
======== ======== ======== ========
Net loss per common share -
Primary and fully diluted ($ 0.20) ($ 0.39) ($ 0.21) ($ 0.67)
======== ======== ======== ========
Shares used in per share amounts -
Primary and fully diluted 18,016 16,816 17,284 16,810
======== ======== ======== ========
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Thousands of dollars) 1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,549) $(4,687)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 485 488
Gain on sale of subsidiaries and lottery service operations (1,126) (480)
Write-downs of lottery service agreements 2,693 2,807
Changes in assets and liabilities:
Accounts receivable (1,299) 1,062
Costs and estimated earnings in excess of billings on uncompleted
contracts (311) (843)
Inventories 3,274 23
Accounts payable 415 (478)
Billings in excess of costs and estimated earnings on uncompleted
contracts (83) (532)
Accrued payroll and related taxes 437 610
Other (1,727) (1,062)
------- -------
Net cash used for operating activities (791) (3,092)
Cash flows from investing activities:
Investment in lottery service agreements (34) (26)
Lottery service agreement sale proceeds and advance repayments 675 --
Non-current accounts receivable (43) (54)
Additions to equipment (266) (149)
Additions to computer software costs (221) (150)
Proceeds from sale of subsidiary 396 --
------- -------
Net cash provided by (used for) investing activities 507 (379)
Cash flows from financing activities:
Payments on notes payable -- (300)
Proceeds from issuance of common shares -- 11
------- -------
Net cash used for financing activities -- (289)
Effect of exchange rate changes on cash 84 144
------- -------
Decrease in cash and cash equivalents (200) (3,616)
Cash and cash equivalents at beginning of year 3,904 9,467
------- -------
Cash and cash equivalents at end of period $ 3,704 $ 5,851
======= =======
Supplemental cash flow information:
Cash paid for interest $ 24 $ 25
======= =======
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1996
(Thousands of dollars)
1. The accompanying condensed consolidated financial statements have been
prepared without audit (except for the balance sheet information as of
December 31, 1995) in accordance with generally accepted accounting
principles for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments (consisting only of normal recurring
accruals, except for the Registrant's United Kingdom Lottery Project -
discussed in Note 4), considered necessary for a fair presentation have
been included.
The accompanying condensed consolidated financial statements do not
include certain footnotes and financial presentations normally required
under generally accepted accounting principles and, therefore, should
be read in conjunction with the audited financial statements
incorporated by reference in the Registrant's Annual Report on Form
10-K for the year ended December 1995 from the Registrant's Annual
Report to Shareholders for the year ended December 31, 1995.
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 inventory balance at September 30, 1996 is composed
entirely of raw materials and work in process totaling $3,546. The
inventory balance at December 31, 1995 is composed of raw materials and
work in process totaling $6,670 and finished goods totaling $150.
4. The 1996 third quarter operating costs and expenses includes a $2,693
charge to reflect a reserve provided by the Registrant for its United
Kingdom lottery system project. The reserve was established after an
affiliate of the customer was unable to obtain the additional funding
necessary for the project start-up and on-going operations. At this
time, the customer has not indicated when a start-up may occur. The
amount of the charge approximates the Registrant's tangible investment,
previously carried on the balance sheet as "Investment in Lottery
Service Contracts." The Registrant is pursuing recovery of its
investment in this project through resumption of the United Kingdom
project, other lottery service projects or the outright sale of the
equipment. However, no assurance can be provided that the Registrant
will be successful in these efforts.
5. Terminals delivered by the Registrant under its contract with The
Revenue Markets Inc. ("TRMI") for the New York Thruway, have not yet
been accepted. In the event the Registrant is unable to negotiate or
litigate a favorable resolution with TRMI or is unable to complete the
fulfillment of its contractual obligations, the recoverability of the
related contract receivables, and inventory aggregating approximately
$2,300, may be delayed or deferred indefinitely. In addition, the
Registrant could be required to recognize certain performance
obligations up to $2,700. At this time, however, the Registrant expects
to be able to fulfill its contractual obligations and collect all
amounts owed under this contract.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
6. In March 1993, the Registrant sold its subsidiary, McKinnie &
Associates, Inc. to Shreveport Acquisition for cash and a note.
Unrecorded gain and interest of approximately $860 continue to be
recognized using the cost recovery method as payments are received over
the next two years. During the three months and nine months ended
September 30, 1996 and 1995, the Registrant recognized gains of $240
and $180, respectively and during the nine months ended September 30,
1996 and 1995, the Registrant recognized $660 and $480, respectively.
7. 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. At September 30, 1996, the Registrant's basis
in this asset is zero and all future payments received will be
recognized as a gain. The installment payments and certain minimum
percentage payments are secured by the lottery assets and certain
personal guarantees. During the three months ended September 30, 1996
and 1995, payments aggregating $337 and $0, and during the nine months
ended September 30, 1996 and 1995, payments aggregating $466
and $0, respectively, were received and recognized as other income. At
September 30, 1996, future payments expected to be received aggregate
approximately $1,279.
8. On July 17, 1996, the court entered a judgement in the Registrant's
shareholders' class action litigation. The judgement requires a cash
payment, which has been placed in the class shareholders' escrow
account, and 1.2 million shares of authorized but unissued common stock
of the Registrant. Such shares are included in the calculation of
earnings per share for the period ended September 30, 1996. The
estimated settlement was accrued as of September 30, 1995 and an
adjustment of approximately $1.1 million was recorded during the three
months ended June 30, 1996 to reduce the accrual to the actual
settlement amount, valued as of the judgement date.
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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, 1996, revenue decreased by $427,
or 11%, as compared to the quarter ended September 30, 1995. Management expects
a significant decrease in revenues for the fourth quarter 1996 as compared to
the third quarter of 1996 and the fourth quarter of 1995 as a result of the
significant reduction in backlog as of September 30, 1996.
Cost of sales (excluding provisions for the Registrant's United Kingdom
lottery service project in 1996 and for unwinding the Registrant's Russian
lottery project in 1995) as a percentage of revenue was 77% in the 1996 period
compared to 90% in the 1995 period. The 1996 third quarter operating costs and
expenses include a $2,693 charge to reflect a reserve provided by the Registrant
for its United Kingdom lottery system project. The reserve was established after
an affiliate of the customer was unable to obtain the additional funding
necessary for the project start-up and on-going operations. At this time, the
customer has not indicated when a start-up may occur. The amount of the charge
approximates the Registrant's tangible investment, previously carried on the
balance sheet as "Investment in Lottery Service Contracts." The Registrant is
pursuing recovery of its investment in this project through resumption of the
United Kingdom project, other lottery service projects or the outright sale of
the equipment. However, no assurance can be provided that the Registrant will be
successful in these efforts.
Engineering, research and development costs decreased $74, or 14%, from the
comparable 1995 period. The 1996 period costs were primarily attributable to the
development of Datatrak software for the lottery market. Selling, general and
administrative expenses decreased $3,222 from the same period in 1995. The 1995
amount included an accrual for the estimated cost to settle the shareholders'
class action litigation. Other income and expense, net, increased $547 from
1995. This increase primarily relates to the gain recognized in the third
quarter of 1996 under the cost recovery method from the sale of the McKinnie &
Associates subsidiary and the Papua New Guinea lottery.
During the nine month period ended September 30, 1996, revenue increased by
$1,365, or 10%, as compared to the same period in 1995. This increase reflects
higher contract volume in 1996. Cost of sales as a percentage of revenue
decreased to 76% for the nine month period ended September 30, 1996, as compared
to 89% for the same period in 1995. The decrease in cost of sales was primarily
due to the winding down of the Russian lottery project in 1995 and the effect of
costsaving measures which were implemented late in 1995. The 1996 nine months
results from operations includes a $2,693 charge in the third quarter to reflect
a reserve provided by the Registrant for its United Kingdom lottery system
project.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Engineering, research and development costs increased $263, or 30%, for the nine
month period ended September 30, 1996, as compared to the same period in 1995.
The 1996 period costs were primarily attributable to the accelerated development
of Datatrak software for the lottery market. Selling, general and administrative
costs decreased $4,939, or 54%, from the same period in 1995. The decrease was
due to a charge in 1995 to accrue for the estimated cost to settle the
shareholders' class action litigation. The June 1996 judgement fixed the cost at
an amount approximately $1,100 less than the 1995 estimate. This $1,100 was
recorded as a reduction to the 1996 second quarter selling, general and
administrative costs. Other income and expense, net, increased $985, or 436%,
from 1995. This increase primarily relates to the gains recognized under the
cost recovery method from the sale of the McKinnie & Associates subsidiary and
the Papua New Guinea lottery.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Registrant's
working capital increased by $1,196 due primarily to the reduction of inventory
balances to fulfill current orders, and a reclassification of an accrued
liability for the settlement of the shareholders' class action litigation into
equity. There were no bank borrowings at September 30, 1996.
As of September 30, 1996, there were no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
facilities and capital leases.
OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The Registrant's operating results may fluctuate due to factors such as
market acceptance of new or enhanced versions of the Registrant's products,
changes in the level of operating expenses, competitive pricing pressures, the
gain or loss of significant customers, new product introductions and legislative
approval of applicable types of gaming in the countries of potential customers.
The Registrant's expense levels are based in part on its expectations regarding
future revenues and in the short-term are fixed to a large extent. Therefore,
the Registrant may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant decline in
demand relative to the Registrant's expectations or any material delay of
customer orders would have a material adverse effect on the Registrant's
business, operating results and liquidity.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Walters v ILTS - On November 3, 1995, Mr. James T. Walters, the former
chairman and president of the Registrant, who retired in 1994, filed a
defamation and invasion of privacy action in the San Diego County Superior Court
against the Registrant, its current president, Frederick A. Brunn and others,
relating to statements in a magazine article. The other parties previously
settled
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
with Mr. Walters. Mr. Walters sought general and special damages of $9 million
and punitive damages. On November 1, 1996, a summary judgment was entered in
favor of the Registrant. Mr. Walters has filed a notice of appeal with the
California appellate court.
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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
---------------------------------------
William A. Hainke
Chief Financial Officer,
Corporate Secretary and
Treasurer
Date: November 14, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,704
<SECURITIES> 0
<RECEIVABLES> 2,887
<ALLOWANCES> 0
<INVENTORY> 3,546
<CURRENT-ASSETS> 14,285
<PP&E> 1,214
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,404
<CURRENT-LIABILITIES> 3,901
<BONDS> 0
0
0
<COMMON> 51,087
<OTHER-SE> (38,640)
<TOTAL-LIABILITY-AND-EQUITY> 16,404
<SALES> 14,793
<TOTAL-REVENUES> 14,793
<CGS> 13,927
<TOTAL-COSTS> 13,927
<OTHER-EXPENSES> 5,426
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (3,349)
<INCOME-TAX> 200
<INCOME-CONTINUING> (3,549)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,549)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> 0
</TABLE>
