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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 June 30, 1996
/ / 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: 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 June 30, 1996, 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> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1996 and 1995
and Six months Ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
</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>
June 30, December 31,
1996 1995
(Unaudited) (Note)
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(Thousands of dollars)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,117 $ 3,904
Accounts receivable, net of allowance 2,131 1,588
Cost and estimated earnings in excess of
billings on uncompleted contracts 5,679 3,665
Inventories at lower of cost (first-in,
first-out) or market 4,474 6,820
Other current assets 279 642
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Total current assets 15,680 16,619
Non-current accounts receivable 97 52
Investment in lottery service agreements, net 2,793 2,759
Equipment, furniture and fixtures, net 1,253 1,361
Computer software costs, net 641 561
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Total assets $20,464 $21,352
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 511 $ 231
Billings in excess of costs and estimated
earnings on uncompleted contracts 130 115
Accrued payroll and related taxes 1,285 949
Warranty reserves 266 298
Other current liabilities 2,204 6,238
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Total current liabilities 4,396 7,831
Capital lease obligations - long term 75 109
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Total Liabilities 4,471 7,940
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Shareholders' equity:
Common shares 51,087 48,687
Retained earnings (deficit) (35,198) (35,223)
Foreign currency translation adjustment 104 (52)
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Total shareholders' equity 15,993 13,412
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Total liabilities and shareholders' equity $20,464 $21,352
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</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
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Thousands of dollars,
except per share amounts) 1996 1995 1996 1995
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Contract revenue and sales: $4,382 $4,211 $11,243 $9,451
Costs & expenses:
Cost of Sales 3,684 4,817 8,499 9,751
Engineering, research &
development 378 262 698 361
Selling, general &
administrative 571 2,173 2,482 4,200
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Total costs and expenses 4,633 7,252 11,679 14,312
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Loss from operations (251) (3,041) (436) (4,861)
Other Income (expense), net 412 84 611 174
------ ------ ------ ------
Income (loss) before income 161 (2,957) 175 (4,687)
taxes
Provisions for taxes based
on income 150 -- 150 --
------ ------ ------ ------
Net income (loss) $ 11 (2,957) $ 25 (4,687)
====== ====== ====== ======
Net income (loss) per
common share:
Primary and fully diluted $ 0.00 $(0.18) $ 0.00 $(0.28)
====== ====== ====== ======
Shares used in per share
amounts:
Primary and fully diluted 17,016 16,810 16,916 16,807
====== ====== ====== ======
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Unaudited)
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1996 1995
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<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 25 $(4,687)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 311 488
Changes in assets and liabilities:
Accounts receivable (543) 1,062
Costs and estimated earnings in excess of billings
on uncompleted contracts (2,014) (843)
Inventories 2,346 23
Accounts payable 280 (478)
Billings in excess of costs and estimated earnings
on uncompleted contracts 15 (532)
Accrued payroll and related taxes 336 610
Other (1,831) 1,265
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Net cash used for operating activities (1,075) (3,092)
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Cash flow used for investing activities:
Investment in lottery service agreements (34) (26)
Lottery service agreement sale proceeds and
advance repayments 338 --
Non-current accounts receivable (45) (54)
Additions to equipment (147) (149)
Additions to computer software cost (136) (150)
Proceeds from sale of subsidiary 156 --
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Net cash used for investing activities 132 (379)
Cash flow provided by (used for) financing activities:
Payments on notes payable -- (300)
Proceeds from issuance of common shares -- 11
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Net cash used for financing
activities -- (289)
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Effect of exchange rate changes on cash 156 144
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Decrease in cash and cash equivalents (787) (3,616)
Cash and cash equivalents at beginning of year 3,904 9,467
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Cash and cash equivalents at end of period $ 3,117 $ 5,851
======= =======
Supplemental cash flow information:
Cash paid during the six months for interest $ 13 $ 14
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</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements
June 30, 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 June 30, 1996 and for the three and six 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.
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 June 30, 1996 is composed entirely of
raw materials and work in process totaling $4,474.
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 approximately $1,100 will be
recognized using the cost recovery method as payments are received over a
two year period.
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. At June 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 the minimum percentage
payments are secured by the lottery assets and certain personal guarantees.
6. On June 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 June 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 June 30, 1996, revenue increased by $171, or
4% as compared to the quarter ended June 30, 1995. Cost of sales, as a
percentage of revenue was 84% in 1996 compared to 1995's cost of sales
percentage of 114%. The decrease in cost of sales was primarily due to the lack
of Russian lottery project expenses during 1996 and cost-saving measures which
were implemented during 1995.
Engineering, research and development costs increased $116 or 44% from 1995.
This represents accelerated development of software for the lottery market.
Selling, general and administrative expenses decreased $1,602 from the same
period in 1995. This decrease was primarily the result of the reversal of
approximately $1.1 million of previously accrued costs relating to the
shareholders' class action litigation. The judgement was entered in June
1996. Other income and expense, net, increased $328 or 390% from 1995. This
increase primarily relates to the gain recognized under the cost recovery
method from the sale of the McKinnie & Associates subsidiary and the Papua New
Guinea lottery.
During the six month period ended June 30, 1996, revenue increased by $1,792,
or 19% 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 six month period ended June 30, 1996, as compared to 103% for the
same period in 1995. The decrease in cost of sales was primarily due to the
lack of Russian lottery project expenses during 1996 and cost-saving measures
which were implemented during 1995.
Engineering, research and development costs increased $337, or 93% for the six
month period ended June 30, 1996, as compared to the same period in 1995. As
explained above, 1996 costs were primarily attributable to the accelerated
development of software for the lottery market. Selling, general and
administrative costs decreased $1,718 or 41% from the same period in 1995 due
primarily to the reversal of approximately $1.1 million of previously accrued
costs relating to the shareholders' class action litigation. The judgement was
entered in June 1996. Other income and expense, net, increased $437 or 251%
from 1995. This increase primarily relates to the gain 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 six months ended June 30, 1996, the Registrant's working
capital increased by $2,496 due primarily to the reduction of inventory
balances for 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 June 30, 1996.
As of June 30, 1996, 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 were defendants in the shareholders' consolidated
class action litigation filed in June and July 1994, reached a settlement of
the litigation. The settlement included a cash payment, which has been placed
in the class shareholders' escrow account, and 1.2 million authorized but
unissued common shares of the Registrant. On June 17, 1996 the Federal District
Court entered a final order and judgement in the litigation without objection
from any class shareholder as to the settlement. The Registrant valued the
shares to be issued in the settlement as of that date.
Walters v ILTS - On November 3, 1995, Mr. James T. 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. The publishing company and the author
have reached a settlement with Mr. Walters. 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. On July 19, 1996, ILTS and Mr. Brunn filed a motion for summary
judgement which is scheduled to be decided on September 20, 1996. A trial date
has been set for November 15, 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 6, 1996, the Registrant held its 1996 Annual Meeting of
Shareholders. At the Annual Meeting, the following persons were elected as
directors of the Registrant: Frederick A. Brunn, Theodore A. Johnson,
M. Mark Michalko, Ng Aik Chin, Ng Foo Leong, Martin J. O'Meara Jr., and
Sir Michael G.R. Sandberg.
The following is the results of the voting on this matter:
1. The election of directors was conducted by the Inspector of Elections.
For all nominees, at least 15,011,410 -or- 96% of the
votes cast;
Withheld total or partial
authority 574,381 -or- 4% of the votes
cast.
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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
Dated: July 30, 1996
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,117
<SECURITIES> 0
<RECEIVABLES> 2,131
<ALLOWANCES> 0
<INVENTORY> 4,474
<CURRENT-ASSETS> 15,680
<PP&E> 1,894
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,464
<CURRENT-LIABILITIES> 4,396
<BONDS> 0
0
0
<COMMON> 51,087
<OTHER-SE> (35,094)
<TOTAL-LIABILITY-AND-EQUITY> 20,464
<SALES> 11,243
<TOTAL-REVENUES> 11,243
<CGS> 8,499
<TOTAL-COSTS> 8,499
<OTHER-EXPENSES> 3,180
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 175
<INCOME-TAX> 150
<INCOME-CONTINUING> 25
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25
<EPS-PRIMARY> .00
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