<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, 1998
[ ] 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, 1998, 18,027,548 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
<TABLE>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Condensed Consolidated Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations and
Comprehensive Income (Unaudited)
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Legal Proceedings 10
Other Information 10
Signatures 12
</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,
1998 1997
------------ ------------
(Thousands of dollars, except per share amounts) (UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,441 $ 2,371
Accounts receivable, net of allowance 1,139 1,040
Costs and estimated earnings in excess of billings
on uncompleted contracts 922 1,716
Inventories, at lower of cost (first-in,
first-out method) or market 2,237 2,544
Other current assets 138 111
------------ ------------
Total current assets 5,877 7,782
Equipment, furniture and fixtures, net 773 802
Other 85 78
------------ ------------
Total assets $ 6,735 $ 8,662
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 397 $ 575
Billings in excess of costs and estimated earnings on
uncompleted contacts 652 386
Accrued payroll and related taxes 789 839
Related party liability 146 146
Other current liabilities 1,898 2,624
------------ ------------
Total current liabilities 3,882 4,570
Shareholders' equity:
Common shares; no par value: authorized shares
50,000,000 - issued and outstanding shares 18,027,548
51,103 51,103
Accumulated deficit (48,183) (46,659)
Foreign currency translation adjustment (67) (352)
------------ ------------
Total shareholders' equity 2,853 4,092
------------ ------------
Total liabilities and shareholders' equity $ 6,735 $ 8,662
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
(Thousands of dollars, except per share amounts)
Revenues:
Sales of products $ 1,301 $ 1,724
Services 525 650
------------ ------------
Total revenues 1,826 2,374
Costs of revenues:
Cost of sales of products 1,152 1,545
Cost of services 379 403
------------ ------------
Total costs of revenues 1,531 1,948
------------ ------------
Gross profit 295 426
Engineering, research and development 539 326
Selling, general and administrative 1,295 1,848
------------ ------------
Loss from operations (1,539) (1,748)
Other income and (expense), net 15 186
------------ ------------
Net loss (1,524) (1,562)
============ ============
Other comprehensive income:
Foreign currency translation adjustments 285 (136)
------------ ------------
Comprehensive loss ($ 1,239) ($ 1,698)
============ ============
Net loss per share - basic and diluted ($ 0.08) ($ 0.09)
============ ============
Number of shares used in computation of net
loss per share - basic and diluted 18,028 18,016
============ ============
</TABLE>
See accompanying notes.
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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) 1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,524) ($1,562)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 96 182
Gain on sale of subsidiaries and lottery service
operations -- 159
Changes in assets and liabilities:
Accounts receivable (99) (247)
Costs and estimated earnings in excess of billings
on uncompleted contracts 794 389
Deposit -- (2,247)
Inventories 307 172
Accounts payable (178) 106
Billings in excess of costs and estimated earnings on
uncompleted contracts 266 (159)
Accrued payroll and related taxes (50) 5
Related party liability -- (220)
Other (755) (105)
------------ ------------
Net cash used for operating activities (1,143) (3,527)
------------ ------------
Cash flows from investing activities:
Additions to equipment (65) (45)
Other (7) (28)
------------ ------------
Net cash used for investing activities (72) (73)
------------ ------------
Effect of exchange rate changes on cash 285 (136)
------------ ------------
Decrease in cash and cash equivalents (930) (3,736)
------------ ------------
Cash and cash equivalents at beginning of period 2,371 5,387
------------ ------------
Cash and cash equivalents at end of period $ 1,441 $ 1,651
============ ============
</TABLE>
See accompanying notes.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 1998
(Thousands of dollars)
1. The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, all adjustments (consisting only of normal
recurring adjustments), considered necessary for a fair presentation of
the financial condition, results of operations and comprehensive income
and cash flows for such periods 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 31, 1997 as included in the Registrant's Annual Report to
Shareholders for the year ended December 31, 1997.
The Registrant's consolidated financial statements 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 $13,869, $5,498 and
$5,938 in 1995, 1996 and 1997, respectively, while revenues decreased
from $18,641 in 1995 to $10,826 in 1997. During the three months ended
March 31, 1998, revenues were $1,826 and the Registrant incurred a net
loss of $1,524. 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, 1998, the Registrant has a backlog of
$7,400 compared to backlog of $5,000 at December 31, 1997.
At March 31, 1998, the Registrant had working capital of $1,836.
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
February 27, 1998, the Registrant's largest shareholder, Berjaya Lottery
Management (Berjaya), agreed to provide financial support if and when
necessary to ensure that the Registrant's operations continue for at
least one year from December 31, 1997. 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.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
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, 1998 and December 31,
1997 is composed entirely of raw materials and work in process.
4. The Registrant is obligated under a $3,100 contract, signed in 1994,
with The Revenue Markets Inc. (TRMI) to supply ticket handling equipment
for The New York State Thruway Authority (NYSTA).
The Registrant delivered substantially all of the hardware under the
contract in the first quarter of 1998. In prior years, the Registrant
has accrued and recognized the entire estimated loss of $1,100 on the
contract and does not expect to realize any losses beyond amounts
accrued at March 31, 1998.
5. In July 1995, the Registrant sold all interests in its Papua New Guinea
lottery operation to the principal shareholders of the lottery licensee
for $175 in cash and a note of $1,300. The Registrant is accounting for
the sale under the cost recovery method. At March 31, 1998, 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, 1998 and 1997, payments aggregating $0 and $159,
respectively, were received and recognized as other income. As of March
31, 1998, future payments expected to be received aggregate
approximately $700.
6. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7. On January 1, 1998 the Registrant adopted SFAS No. 130, "Reporting
Comprehensive Income." The effect of the implementation was to include
the change in the foreign currency translation adjustment in
shareholders' equity as a component of the statement of operations and
comprehensive income. All prior periods were restated to conform with
the implementation of SFAS No. 130.
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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, 1998, revenue from the sale of products
decreased by 25%, or $423, to $1,301 from $1,724 in the quarter ended March 31,
1997. This decrease is the result of lower levels of spares shipments and
contract revenues. Service related revenues decreased by 19%, or $125, to $525
from $650 in the quarter ended March 31, 1997. This decrease is the result of
fewer customer support projects in 1998. The gross profit on sales of products
was 11% in 1998, compared to 10% in 1997. The gross profit on services was 28%
in 1998 compared to 38% in 1997. The decrease in services gross profit was due
to a higher level of costs incurred related to customer software support
agreements in 1998. Engineering, research and development expenses in the first
quarter of 1998 increased 65% to $539 compared to $326 in the first quarter of
1997. The 1998 costs were primarily related to expanding the functionality of
the Data Trak lottery software and development of an off-line selling system
which can interface with on-line Datamark terminals. Selling, general and
administrative expenses decreased by 30%, or $553, to $1,295 for the first
quarter of 1998 compared to $1,848 for the first quarter of 1997. This decrease
is primarily due to cost reduction actions implemented in 1997.
As part of its strategic plan, the Registrant intends to pursue long-term
service contracts as a source of revenue. Service contracts pose capital
investment risks for the Registrant that do not exist in its product sale
business. Service contracts require up-front investments of capital which is
repaid only after a system becomes operational, based upon a percentage of the
customer's gross receipts from the system. The Registrant, therefore, bears the
risk that scheduling delays may occur, a system may not become operational or
that the customer's gross receipts from the system may be less than projected.
If the Registrant enters into a long-term service contract, the Registrant must
seek the funds necessary to implement the project from Berjaya or other sources.
Liquidity and Capital Resources
During the quarter ended March 31, 1998, the Registrant's working capital
decreased by $1,376 primarily as a result of the $1,524 net loss for the
quarter. The Registrant's consolidated financial statements for the year ended
December 31, 1997 and the three months ended March 31, 1998 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, 1998, the Registrant had working capital of $1,836.
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 obtaining 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 February 27, 1998, the Registrant's largest shareholder, Berjaya Lottery
Management (Berjaya), agreed to provide financial support if and when necessary
to ensure that the Registrant's operations
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
continue for at least one year from December 31, 1997. 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.
The Registrant's reporting currency is the U.S. dollar. Historically, a majority
of the Registrant's sales have been denominated in U.S. dollars, with the
balance denominated in foreign currencies. These foreign currency sales have
been effected principally by the Registrant's international subsidiaries. In
accordance with U.S. accounting requirements, sales denominated in foreign
currencies are translated into the local functional currency and then into U.S.
dollars, at an average exchange rate in effect during the period. In addition,
the Registrant incurs operating and technical support related expenses in
Australian dollars in connection with its Australian operations and also
incurred operating expenses in local currency at its United Kingdom location.
Thus, changes from reporting period to reporting period in the exchange rates
between various foreign currencies and the U.S. dollar have had, and will in the
future continue to have, an impact on revenues and expenses reported by the
Registrant, and such effect may be material in any individual reporting period.
To the extent that the Registrant incurs operating expenses in local currencies
at its foreign subsidiaries, the Registrant has a natural hedge against a
portion of the possible fluctuation in foreign currency exchange rates of
revenues in such currencies. As the contracts are predominantly denominated in
the functional currency of the subsidiary performing under the contract, the
Registrant has historically incurred immaterial amounts of transaction gains or
losses.
Additionally, the balance sheet of the Registrant's Australian subsidiary is
translated into U.S. dollars and consolidated with the balance sheet of the
Registrant's domestic subsidiary in accordance with U.S. accounting
requirements. Changes in the U.S. dollar value of the foreign currency
denominated assets are accounted for as an adjustment to shareholders' equity.
Therefore, changes from reporting period to reporting period in the exchange
rates between various foreign currencies and the U.S. dollar have had, and will
continue to have an impact on the foreign currency translation component of
shareholders' equity reported by the Registrant, and such effect may be material
in any individual reporting period.
As of March 31, 1998 there were no material commitments for capital
expenditures.
Year 2000
Management has initiated an enterprise-wide program to prepare the Registrant's
computer systems and applications for the Year 2000. The Registrant expects to
incur internal staff costs as well as other expenses related to infrastructure
and facilities enhancements necessary to prepare the systems for the Year 2000.
The Registrant is still evaluating the effort required, and the related costs
will be expenses as incurred.
Forward Looking Statements
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
Registrant's products are marketed, fluctuations in quarter-by-quarter operating
results and other factors described in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
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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 filed an appeal with the California Fourth
District Court of Appeal.
Item 5. Other Information
NASDAQ Notification
On April 3, 1998, the Registrant received a letter from NASDAQ informing the
Registrant, pursuant to NASDAQ regulations that became effective in February
1998, that the Registrant's stock closing bid price had not exceeded $1.00 for a
30 consecutive day period ending on April 3, 1998. Pursuant to the letter, the
Registrant's stock price must comply with the NASDAQ $1.00 minimum bid price
rule for 10 consecutive trading days during a 90-day compliance period ending
July 3, 1998 or the Registrant's stock will be removed from the NASDAQ listing
on either its National or Small Cap Market at the opening of business on July 7,
1998. If the Registrant's stock were so delisted, any stock trading would be
conducted on the OTC Bulletin Board or in the over the counter market.
Proposed 3 for 1 Reverse Stock Split
In order to increase the price of the Common Stock to a level above the $1.00
minimum bid price requirement for its NASDAQ listing, the Board of Directors of
the Registrant has unanimously approved, subject to shareholder approval on June
1, 1998 at the Annual Shareholders Meeting, a proposed amendment to the
Registrant's Articles of Incorporation, (the "Amendment"), which will effect a
three for one reverse stock split (the "Reverse Split") of the Registrant's
outstanding shares of Common Stock.
There can be no assurance, however, that the Reverse Split will increase the
stock price above the $1.00 per share minimum. If the Reverse Split occurs, and
the Registrant's stock price meets the $1.00 minimum bid price, there can be no
assurance that the Registrant will be able to maintain its NASDAQ listing.
Specifically, the Registrant's net tangible assets are below the $4 million
NASDAQ National Market minimum threshold as a result of the 1998 first quarter
loss. As a result, the Registrant will require an addition to equity capital by
late May 1998 to avoid having NASDAQ move the Registrant's common stock from the
NASDAQ National Market to the NASDAQ Small Cap Market. Moreover, any further
Registrant quarterly losses in 1998 may cause the Registrant to fall below the
$2 million net tangible asset threshold necessary to maintain a listing on the
NASDAQ Small Cap Market and the Registrant's stock would be moved to the OTC
Bulletin Board.
In the event that the Registrant's securities are removed from the NASDAQ
National Market and moved to the OTC Bulletin Board, investors could find it
difficult to obtain accurate quotations as to the price of the Common Stock and
to buy or sell the Common Stock, and there may be reduced media coverage of the
Registrant.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
The Board reserves the right, notwithstanding shareholder approval, not to
proceed with the Reverse Split, if, at any time prior to filing the Amendment
with the California Secretary of State, the Board of Directors, in its sole
discretion, determines that the Reverse Split is no longer in the best interest
of the Registrant or its shareholders. However, it is the Board's present
intention to effect the Reverse Split as promptly as practicable following
receipt of the requisite shareholder approval unless prior to the filing of the
Amendment in early June 1998, the Registrant's stock price equals or exceeds
$1.00 per share for 10 consecutive trading days as required by the NASDAQ
regulations.
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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/ M. MARK MICHALKO
-------------------------------
M. Mark Michalko
President
/s/ DENNIS D. KLAHN
-------------------------------
Dennis D. Klahn
Chief Financial Officer
Date: May 15, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,441
<SECURITIES> 0
<RECEIVABLES> 1,139
<ALLOWANCES> 0
<INVENTORY> 2,237
<CURRENT-ASSETS> 5,877
<PP&E> 773
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,735
<CURRENT-LIABILITIES> 3,882
<BONDS> 0
0
0
<COMMON> 51,103
<OTHER-SE> (48,250)
<TOTAL-LIABILITY-AND-EQUITY> 6,735
<SALES> 1,826
<TOTAL-REVENUES> 1,826
<CGS> 1,531
<TOTAL-COSTS> 1,531
<OTHER-EXPENSES> 1,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (1,524)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,524)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,524)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
