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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, 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
Incorporation or Organization) Identification No.)
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 June 30, 1997, 17,176,211 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 1997 and 1996
and Six Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Submission of Matters to a Vote of Security Holders 11
Signature 12
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
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<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
(Thousands of dollars) (UNAUDITED) (NOTE)
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ASSETS
Current assets:
Cash and cash equivalents $ 5,257 $ 5,387
Accounts receivable, net of allowance 518 979
Costs and estimated earnings in excess of billings on
uncompleted contracts 2,006 2,452
Inventories, at lower of cost (first-in,
first-out method) or market 2,596 3,018
Other current assets 126 142
-------- --------
Total current assets 10,503 11,978
Equipment, furniture and fixtures, net 927 1,128
Computer software costs, net 570 688
Other 110 89
-------- --------
Total assets $ 12,110 $ 13,883
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 221 $ 491
Billings in excess of costs and estimated earnings on
uncompleted contracts 343 161
Accrued payroll and related taxes 896 893
Accrued litigation settlement 1,680 1,680
Related party liability 146 366
Other current liabilities 2,063 1,773
-------- --------
Total current liabilities 5,349 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 (42,271) (40,721)
Foreign currency translation adjustment (375) (167)
-------- --------
Total shareholders' equity 6,761 8,519
-------- --------
Total liabilities and shareholders' equity $ 12,110 $ 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)
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THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
(Thousands of dollars, ----------------------- -----------------------
except per share amounts) 1997 1996 1997 1996
-------- -------- -------- --------
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Contract revenue and sales $ 3,986 $ 4,382 $ 6,360 $ 11,243
Costs and expenses:
Cost of revenue and sales 2,284 3,684 4,232 8,499
Engineering, research and development 312 378 638 698
Selling, general and administrative 1,496 571 3,344 2,482
-------- -------- -------- --------
Total costs and expenses 4,092 4,633 8,214 11,679
-------- -------- -------- --------
Loss from operations (106) (251) (1,854) (436)
Other income and (expense), net 118 412 304 611
-------- -------- -------- --------
Income (loss) before income taxes 12 161 (1,550) 175
Provision for taxes based on income -- 150 -- 150
-------- -------- -------- --------
Net income (loss) $ 12 $ 11 ($ 1,550) $ 25
-------- -------- -------- --------
Net income (loss) per share $ 0.00 $ 0.00 ($ 0.09) $ 0.00
======== ======== ======== ========
Number of shares used in computation of net
income(loss) per share 18,016 17,016 18,016 16,916
======== ======== ======== ========
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
.
Condensed Consolidated Statements of Cash Flows (Unaudited)
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SIX MONTHS ENDED
JUNE 30,
---------------------
(Thousands of dollars) 1997 1996
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Cash flows from operating activities:
Net income (loss) ($1,550) $ 25
Adjustments to reconcile net income(loss) to net cash
used for operating activities:
Depreciation and amortization 346 311
Changes in assets and liabilities:
Accounts receivable 461 (543)
Costs and estimated earnings in excess of billings 446 (2,014)
on uncompleted contracts
Inventories 422 2,346
Accounts payable (270) 280
Billings in excess of costs and estimated earnings
on uncompleted contacts 182 15
Accrued payroll and related taxes 3 336
Other (240) (1,831)
------- -------
Net cash used by operating activities (200) (1,075)
======= =======
Cash flows from investing activities:
Lottery service agreement sale proceeds and advance
repayments 239 338
Additions to equipment (35) (147)
Additions to computer software costs -- (136)
Proceeds from sale of subsidiary 90 156
Other (21) (79)
------- -------
Net cash provided by investing activities 273 132
------- -------
Effect of exchange rate changes on cash (203) 156
------- -------
Decrease in cash and cash equivalents (130) (787)
Cash and cash equivalents at beginning of period 5,387 3,904
------- -------
Cash and cash equivalents at end of period $ 5,257 $ 3,117
======= =======
</TABLE>
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 six months ended June 30, 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 six months ended June 30, 1997,
revenues were $6.4 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 June 30, 1997, the Registrant has a backlog of $6.8
million compared to a backlog of $1.7 million at December 31, 1996.
At June 30, 1997, the Registrant had working capital of $5.1 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 June 30, 1997 is composed
entirely of raw materials and work in process totaling $2,596. 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 $1.5 million recorded as costs and estimated
earnings in excess of billings on uncompleted contracts and $541
thousand in inventory specific to this project. The Registrant has
accrued and recognized the entire estimated loss of $1.1 million on the
contract and does not expect to realize any losses beyond amounts
accrued at June 30, 1997.
TRMI recently notified the Registrant of NYSTA's acceptance of the
terminal design subject to certain non-material changes being
negotiated. Delivery of production terminals is expected to begin in
December 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.
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 June 30, 1997, the Registrant's basis in this asset is zero
and all future payments received will be recognized as a gain upon
receipt.
During the six months ended June 30, 1997 and 1996, payments
aggregating $90 and $420 respectively, were received and recognized as
other income. At June 30, 1997, future payments expected to be received
aggregate approximately $540.
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 June 30, 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 six months ended June 30, 1997 and
1996, payments aggregating $239 and $129, respectively, were received
and
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
recognized as other income. As of June 30, 1997, future payments
expected to be received aggregate approximately $880.
7. On June 17, 1996, the court entered a judgment in the Registrant's
shareholders' class action litigation. The judgment 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, 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 judgment date.
8. 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 June 30, 1997, revenue decreased by 9% or $396 , to
$3,986 from $4,382 in the quarter ended June 30, 1996. This decrease is
primarily the result of a lower level of contract revenues. Spares sales in the
second quarter of 1997 decreased 20% or $111 to $446 compared to $557 for the
second quarter of 1996. During the second quarter of 1997, the Registrant
recognized a gross margin of 57% compared to a gross margin of 16% in the second
quarter of 1996. The increase in gross margin in 1997 is primarily due to the
gross profit recognized on a contract with a new customer for earlier model
terminals which had previously been fully reserved. Engineering, research and
development expenses in the second quarter of 1997 decreased 17% to $312 from
$378 in the second quarter of 1996. The 1997 costs were primarily related to
expanded functionality for the Data Trak lottery software and cost reduction
efforts on the Registrant's lottery specific terminals. Selling, general and
administrative expenses increased 162% or $925, to $1,496 for the second quarter
of 1997 compared to $571 for the second quarter of 1996. This increase is
primarily due to the reversal in the second quarter of 1996, of approximately
$1.1 million of previously accrued costs relating to the shareholders' class
action litigation. Other income and expense, net, decreased $294 or 71%. The
decrease relates to the gain recognized under the cost recovery method from the
sale of the McKinnie & Associates subsidiary and Papua New Guinea lottery in
1996. The McKinnie & Associates note has been revised with lower monthly
payments over an extended period of time. At this time, payments are due from
the sale of the Papua New Guinea lottery only based on a minimum percentage of
their revenues as the note was paid in full in the third quarter of 1996.
During the six month period ended June 30, 1997, revenue decreased 43% to $6,360
from $11,243 for the same period in 1996. This decrease reflects lower contract
volume in 1997. Spares sales for the six month period ended June 30, 1997
increased 26%, or $260, to $1,250 from $990 for the same period in 1996. During
the six month period ended June 30, 1997 the Registrant recognized a gross
margin of 33% compared to a gross margin of 24% for the similar period in 1996.
The increase in gross margin is primarily due to the gross profit recognized on
a contract with a new customer for earlier model terminals which had previously
been fully reserved. Engineering, research and development costs decreased $60,
or 9% for the six month period ended June 30, 1997, as compared to the same
period in 1996. As explained above, 1997 costs were primarily related to cost
reduction efforts on the Registrant's lottery specific terminals and expanded
functionality for the Data Trak lottery software. Selling, general and
administrative costs increased $862 or 35% from the same period in 1996 due
primarily to the reversal in the second quarter of 1996 of approximately $1.1
million of previously accrued costs relating to the shareholders' class action
litigation, offset by reduced costs from a lower level of personnel in 1997.
Other income and expense, net, decreased $307, or 50%. The decrease relates to
the gain recognized under the cost recovery method from the sale of the McKinnie
& Associates subsidiary and Papua New Guinea lottery in 1996. The McKinnie &
Associates note was revised in 1997 with lower monthly payments over an extended
period of time. At this time only minimum percentage payments are due from the
Papua New Guinea lottery sale as the note was paid in full in the third quarter
of 1996. In 1996, income tax expense of $150 was recorded related to contract
sales by the Registrant's Australian subsidiary.
The Registrant's existing backlog of $6.8 million includes only a small amount
scheduled for delivery in the third quarter. As a result, the Registrant will
likely have an operating loss in the third quarter of 1997.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1997, the Registrant's working capital
decreased by $1.5 million, which approximates the loss incurred during this
period. The Registrant's consolidated financial statements for the year ended
December 31, 1996 and the six months ended June 30, 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
June 30, 1997, the Registrant had working capital of $5.1 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 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.
As of June 30, 1997 there were no material commitments for capital expenditures.
The statements in this filing which are not historical facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth or implied by forward-looking
statements. These risks and uncertainties include the absence of significant
contract backlog, the dependence on business from foreign customers sometimes in
politically unstable regions, political and governmental decisions as to the
establishment of lotteries and other wagering industries in which the Company's
products are marketed, fluctuations in quarter-by-quarter operating results and
other factors described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
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. Mr. Walters has appealed the adverse
judgment. If the court accepts the appeal, a trial date will be scheduled in
1999.
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 1997, the Registrant held its 1997 Annual Meeting of
Shareholders. At the Annual Meeting, the following persons were elected as
directors of the Registrant: Chan Kien Sing, 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 are the results of the voting on this matter:
1. The election of directors was conducted by the Inspector of Elections.
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For all nominees, at least 15,336,931 -or- 96% of the votes cast;
Withheld total or partial authority 639,039 -or- 4% of the votes cast.
</TABLE>
2. A vote was conducted to approve the 1997 Directors' Stock Option Plan
of the Registrant.
For 94% Against 5% Abstain 1%
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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: August 14, 1997
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 5,257
<SECURITIES> 0
<RECEIVABLES> 518
<ALLOWANCES> 0
<INVENTORY> 2,596
<CURRENT-ASSETS> 10,503
<PP&E> 927
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,110
<CURRENT-LIABILITIES> 5,349
<BONDS> 0
0
0
<COMMON> 49,407
<OTHER-SE> (42,646)
<TOTAL-LIABILITY-AND-EQUITY> 12,110
<SALES> 3,986
<TOTAL-REVENUES> 3,986
<CGS> 2,284
<TOTAL-COSTS> 2,284
<OTHER-EXPENSES> 1,808
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 12
<INCOME-TAX> 0
<INCOME-CONTINUING> 12
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> 0
</TABLE>
