<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, 1997
[ ] 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)
(760)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, 1997, 17,176,211 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
March 31, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Legal Proceedings 10
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>
MARCH 31, DECEMBER 31,
1997 1996
(Thousands of dollars) (UNAUDITED) (NOTE)
----------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,651 $ 5,387
Accounts receivable, net of allowance 1,226 979
Deposit 2,247 --
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,063 2,452
Inventories, at lower of cost (first-in,
first-out method) or market 2,846 3,018
Other current assets 206 142
-------- --------
Total current assets 10,239 11,978
Equipment, furniture and fixtures, net 1,052 1,128
Computer software costs, net 627 688
Other 118 89
-------- --------
Total assets $ 12,036 $ 13,883
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 597 $ 491
Accrued payroll and related taxes 898 893
Accrued litigation settlement 1,680 1,680
Related party liability 146 366
Other current liabilities 1,894 1,934
-------- --------
Total current liabilities 5,215 5,364
Shareholders' equity:
Common shares; no par value: authorized shares
50,000,000 - issued and outstanding shares
17,176,211 49,407 49,407
Accumulated deficit (42,283) (40,721)
Foreign currency translation adjustment (303) (167)
-------- --------
Total shareholders' equity 6,821 8,519
-------- --------
Total liabilities and shareholders' equity $ 12,036 $ 13,883
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 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
ENDED
MARCH 31,
---------
(Thousands of dollars,
except per share amounts) 1997 1996
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<S> <C> <C>
Contract revenue and sales $ 2,374 $ 6,861
Costs and expenses:
Cost of revenue and sales 1,948 4,815
Engineering, research and development 326 320
Selling, general and administrative 1,848 1,911
-------- --------
Total costs and expenses 4,122 7,046
-------- --------
Loss from operations (1,748) (185)
Other income and (expense), net 186 199
-------- --------
Net income (loss) ($ 1,562) $ 14
======== ========
Net income (loss) per share ($ 0.09) $ 0.00
======== ========
Number of shares used in computation of net income(loss) per share 18,016 16,816
======== ========
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------
(Thousands of dollars) 1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($1,562) $ 14
Adjustments to reconcile net (loss) to net cash used for
operating activities
Depreciation and amortization 182 216
Gain on sales of subsidiary and lottery service (159) --
agreements
Changes in assets and liabilities:
Accounts receivable (247) (320)
Costs and estimated earnings in excess of billings 389 (2,023)
on uncompleted contracts
Deposit (2,247) --
Inventories 172 1,733
Accounts payable 106 398
Accrued payroll and related taxes 5 264
Related party liability (220) --
Other (105) (802)
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Net cash provided by operating activities (3,686) (520)
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Cash flows from investing activities:
Lottery service agreement sale proceeds and advance
repayments 159 156
Additions to equipment (45) (136)
Additions to computer software costs -- (53)
Proceeds from sale of subsidiary -- 156
Other (28) (16)
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Net cash provided by investing activities 86 107
------- -------
Effect of exchange rate changes on cash (136) (137)
------- -------
Decrease in cash and cash equivalents (3,736) (550)
Cash and cash equivalents at beginning of period 5,387 3,904
------- -------
Cash and cash equivalents at end of period $ 1,651 $ 3,354
======= =======
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1997
(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, 1996) 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), 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
1996 from the Registrant's Annual Report to Shareholders for the year ended
December 31, 1996.
The Registrant's consolidated financial statements for the year ended
December 31, 1996 and the three months ended March 31, 1997 were prepared
on a continuing operations basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal
course of business. The Registrant incurred net losses of $22.6 million,
$13.9 million and $5.5 million in 1994, 1995 and 1996, respectively, while
revenues decreased from $24.1 million in 1994 to $16.6 million in 1996.
During the three months ended March 31, 1997, revenues decreased to $2.4
million and the Registrant incurred a net loss of $1.6 million. The
Registrant is largely dependent upon significant contracts for its revenue,
which typically include a deposit upon contract signing and up to 3 months
lead-time before delivery of hardware begins. At March 31, 1997, the
Registrant has a backlog of $1.6 million compared to backlog of $1.7
million at December 31, 1996.
At March 31, 1997, the Registrant had working capital of $5.0 million.
Management recognizes that the Registrant must recover its investment in
existing contracts and generate additional contract sales to maintain its
current level of operations. Additionally, management is currently seeking
additional sources of funding through debt or equity financing and
consideration of other business transactions which would generate
sufficient resources to assure continuation of the Registrant's operations.
Management anticipates that it will be successful in recovering its
investment in existing contracts and obtaining sufficient contracts to
enable the Registrant to continue normal operations; however, no assurances
can be given that the Registrant will be successful in realizing sufficient
new contract revenues or obtaining additional financing. If the Registrant
is unable to recover its investment in existing contracts, obtain
sufficient new contract revenue or financing, management will be required
to reduce the Registrant's operations. On March 24, 1997, the Registrant's
largest shareholder, Berjaya Lottery Management (Berjaya), agreed to
provide a line of credit of up to $2.0 million to meet the Registrant's
cash needs through at least January 1998. In addition, Berjaya agreed that
if the Registrant is declared in default of its contract with The Revenue
Markets Inc. (TRMI), with respect to TRMI's contract with the New York
State Thruway Association (NYSTA), and if TRMI
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
collects the performance bond proceeds of $2.7 million from the surety and
the surety obtains a judgment against the Registrant for such proceeds,
Berjaya will make available to the Registrant the funds necessary to pay
such judgment if such judgment would render the Registrant unable to
continue its operations. The Registrant's ability to continue its on-going
operations on a long-term basis is dependent upon its ability to recover
its investment in existing contracts, obtain additional financing, secure
additional new contracts, and ultimately achieve a sustainable level of
profit from operations.
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 March 31, 1997 is composed entirely
of raw materials and work in process totaling $2,846. The inventory balance
at December 31, 1996 is composed of raw materials and work in process
totaling $3,018.
4. The Registrant is obligated under a $2.8 million contract with TRMI to
supply ticket handling equipment for the NYSTA. The Registrant has
experienced difficulty in satisfying certain of the customer's requirements
during three pilot testing periods and the terminals delivered by the
Registrant have not been accepted.
A fourth and final ninety-day pilot test period commenced on February 28,
1997 and is expected to be concluded on May 28, 1997. Management believes
that all the requirements outlined in the final pilot test program plan
will be met and that delivery of the production units will commence in
September 1997. Payments under the contract are expected to be received
from TRMI in 1997 and 1998 based on the timing of receipt of payments by
TRMI from the NYSTA.
The Registrant has $1.4 million recorded as costs and estimated earnings in
excess of billings on uncompleted contracts and $548 thousand in inventory
specific to this project. The Registrant has accrued and recognized the
entire estimated loss of $1,099 thousand on the contract and does not
expect to realize any losses beyond amounts accrued at March 31, 1997.
In the event the Registrant is unable to fulfill its contractual
obligations, the recovery of the related contract receivables and
inventory, aggregating approximately $1.9 million, may be delayed or
deferred indefinitely. In addition, the Registrant may be required to
recognize certain performance bond obligations up to $2.7 million and
certain other non-performance penalties. At this time, the Registrant
expects to be able to fulfill its contractual obligations and collect all
amounts owed under this contract. However, if the Registrant is unable to
fulfill its contract obligations or negotiate or litigate a favorable
resolution, the Registrant may recognize an additional loss that would be
material in relation to the consolidated statements of financial position
and results of operations.
5. In March 1993, the Registrant sold all interests in its subsidiary,
McKinnie & Associates Inc. to Shreveport Acquisition for cash and a note.
The Registrant is accounting for the sale under the cost recovery method.
At March 31, 1997, the Registrant's basis in this asset is zero and all
future payments received will be recognized as a gain upon receipt.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
During the three months ended March 31, 1997 and 1996, payments aggregating
$0 and $210 respectively, were received and recognized as other income. At
March 31, 1997, future payments expected to be received aggregate
approximately $630. In April 1997, Registrant received a payment from
Shreveport Acquisition under a revised payment schedule.
6. 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 March 31, 1997, the Registrant's basis in this asset is
zero and all future payments received will be recognized as a gain upon
receipt. The installment payments and certain minimum percentage payments
are secured by the lottery assets and certain personal guarantees. During
the three months ended March 31, 1997 and 1996, payments aggregating $159
and $0, respectively, were received and recognized as other income. As of
March 31, 1997, future payments expected to be received aggregate
approximately $960.
7. 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 March 31, 1997. 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.
8. During the first quarter of 1997 the Registrant utilized cash of $2,247 as
a deposit to bid for a lottery terminal supply contract. This deposit is
expected to be returned to the Registrant in the second quarter of 1997.
9. In April 1997, the Registrant received a new order valued at $2.6 million
from Olympic Gold for the supply of computer equipment, terminals, software
and spare parts to be used for a computerized lottery in the Ukraine. In
addition, the Registrant received a new order valued at $4.0 million from
Leisure Management for terminals to be supplied over five years and
software to be delivered in 1997. These orders bring the Registrant's
backlog to $8.2 million at April 30, 1997.
10. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Registrant will be required to change the
method currently used to compute earnings per share and to restate all
prior periods presented. Under the new requirements for calculating basic
earnings per share, the dilutive effect of stock options will be excluded.
Basic and fully diluted earnings per share pursuant to the requirements of
Statement 128 are equal to earnings per share as reported in the
accompanying consolidated statements of operations.
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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 March 31, 1997, revenue decreased by 65%, or $4,487, to
$2,374 from $6,861 in the quarter ended March 31, 1996. This decrease is
primarily the result of a lower level of contract revenues. Spares sales in the
first quarter of 1997 increased 86%, or $371, to $804 compared to $433 for the
first quarter of 1996. During the first quarter of 1997, the Registrant
recognized a gross margin of 18% compared to a gross margin of 30% in the first
quarter of 1996. The decrease in gross margin in 1997 is due to unfavorable
manufacturing variances attributable to the level of contract revenue in 1997.
Engineering, research and development expenses in the first quarter of 1997
increased 2% to $326 compared to $320 in the first quarter of 1996. The 1997
costs were primarily related to cost reduction efforts on the Registrant's
lottery specific terminal and expanded functionality for the Data Trak lottery
software. Selling, general and administrative expenses decreased by 3%, or $63,
to the $1,848 for the first quarter of 1997 compared to $1,911 for the first
quarter of 1996. This decrease was attributable to a lower level of personnel in
the first quarter of 1997 as compared to the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 1997, the Registrant's working capital
decreased by $1,590 as a result of the $1,562 net loss for the quarter. During
the quarter, $2,247 was utilized as a deposit to bid for a lottery terminal
supply contract. This deposit is expected to be returned to the Registrant in
the second quarter of 1997. The Registrant's consolidated financial statements
for the year ended December 31, 1996 and the three months ended March 31, 1997
have been prepared on a continuing operations basis which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. At March 31, 1997, the Registrant had working capital
of $5,024 million. Management recognizes that the Registrant must generate
additional contract sales to maintain its current level of operations.
Additionally, management is currently seeking additional sources of funding
through debt or equity financing and consideration of other business
transactions which would generate sufficient resources to assure continuation of
the Registrant's operations.
Management anticipates that it will be successful in obtaining sufficient
contracts to enable the Registrant to continue normal operations; however, no
assurances can be given that the Registrant will be successful in realizing
sufficient contract revenue or obtain additional funding. If the Registrant is
unable to obtain sufficient contract revenue or funding, management will be
required to reduce the Registrant's operations.
On March 24, 1997, the Registrant's largest shareholder, Berjaya Lottery
Management (Berjaya), agreed to provide a line of credit of up to $2.0 million
to meet the Registrant's cash needs through at least January 1998. In addition,
Berjaya agreed that if the Registrant is declared in default of its contract
with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract with the
New York State Thruway (NYSTA), and if TRMI collects the performance bond
proceeds of $2.7 million from the surety and the surety obtains a judgment
against the Registrant for such proceeds, Berjaya will make available to the
Registrant the funds necessary to pay such judgment is such judgment would
render the Registrant unable to continue its operations. The Registrant's
ability to continue
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
its on-going operations on a long-term basis is dependent upon its ability to
recover its investment in existing contracts, obtain additional financing,
secure additional new contracts, and ultimately achieve a sustainable level of
profit from operations.
As of March 31, 1997 there were no material commitments for capital
expenditures.
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 former president, Frederick A. Brunn and others,
relating to statements in a magazine article. The other parties previously
settled 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. On March 24, 1997 Mr. Walters filed an
appellant's opening brief with the California appellate court.
Item II. Management Changes
On May 2, 1997, M. Mark Michalko, Executive Vice President, replaced
Frederick A. Brunn as President. Mr. Brunn will remain as a director and
consultant. In an unrelated development, William A. Hainke resigned as Chief
Financial Officer and Treasurer on May 1, 1997. Dennis D. Klahn, Controller, was
named acting Chief Financial Officer.
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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/ Dennis D. Klahn
________________________________
Dennis D. Klahn
Chief Financial Officer
Date: May 12, 1997
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,651
<SECURITIES> 0
<RECEIVABLES> 1,226
<ALLOWANCES> 0
<INVENTORY> 2,846
<CURRENT-ASSETS> 10,239
<PP&E> 1,052
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,036
<CURRENT-LIABILITIES> 5,215
<BONDS> 0
0
0
<COMMON> 49,407
<OTHER-SE> (42,586)
<TOTAL-LIABILITY-AND-EQUITY> 12,036
<SALES> 2,374
<TOTAL-REVENUES> 2,374
<CGS> 1,948
<TOTAL-COSTS> 1,948
<OTHER-EXPENSES> 2,174
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (1,562)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,562)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,562)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> 0
</TABLE>
