<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 1999
[ ] 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.
(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 June 30, 1999, 6,009,183 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
Index
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) 5
Notes to 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 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 11
Signatures 12
Exhibits
</TABLE>
2
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Unaudited)
<TABLE>
<CAPTION>
JUNE 30,
($ in thousands, except share amounts) 1999
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,384
Accounts receivable, net 436
Costs and estimated earnings in excess of billings on
uncompleted contracts 49
Inventories 310
Other current assets 439
----------
Total current assets 2,618
Equipment, furniture and fixtures, net 370
----------
$ 2,988
==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable $ 402
Employee compensation 512
Related party liability 304
Other current liabilities 958
----------
Total current liabilities 2,176
Shareholders equity:
Common shares, no par value, 50,000,000 shares
authorized, 6,009,183 shares issued and outstanding 51,103
Accumulated deficit (50,234)
Cumulative translation adjustment (57)
----------
812
----------
$ 2,988
==========
</TABLE>
See notes to consolidated financial statements.
3
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
($ in thousands, except per share amounts) JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Sales of products $ 1,178 $ 2,349 $ 1,988 $ 3,650
Services 590 568 1,157 1,093
---------- ---------- ---------- ----------
1,768 2,917 3,145 4,743
Costs of revenues:
Cost of sales of products 822 1,078 1,562 2,230
Cost of services 365 436 748 815
---------- ---------- ---------- ----------
1,187 1,514 2,310 3,045
---------- ---------- ---------- ----------
Gross profit 581 1,403 835 1,698
Engineering, research and development 397 459 627 998
Selling, general and administrative 993 1,719 2,138 3,014
---------- ---------- ---------- ----------
Loss from operations (809) (775) (1,930) (2,314)
Other income and (expense), net 251 160 248 175
---------- ---------- ---------- ----------
Net loss $ (558) $ (615) $ (1,682) $ (2,139)
========== ========== ========== ==========
Net loss per share - basic and diluted $ (0.09) $ (0.10) $ (0.28) $ (0.36)
========== ========== ========== ==========
Number of shares used in computation of net
loss per share - basic and diluted 6,009 6,009 6,009 6,009
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
4
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
($ in thousands) JUNE 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net loss $ (1,682) $ (2,139)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 125 172
Changes in assets and liabilities:
Accounts receivable 902 (158)
Costs and estimated earnings in excess of billings
on uncompleted contracts (4) 974
Inventories 488 (774)
Accounts payable (72) 651
Billings in excess of costs and estimated earnings
on uncompleted contacts (9) 587
Accrued payroll and related taxes (91) 174
Other (525) (1,315)
---------- ----------
Net cash used for operating activities (868) (1,828)
---------- ----------
Investing activities:
Lottery service agreement sale proceeds and advance
repayments -- 80
Additions to equipment (41) (130)
---------- ----------
Net cash used for investing activities (41) (50)
---------- ----------
Effect of exchange rate changes on cash 23 285
---------- ----------
Net decrease in cash and cash equivalents (886) (1,593)
Cash and cash equivalents at beginning of period 2,270 2,371
---------- ----------
Cash and cash equivalents at end of period $ 1,384 $ 778
========== ==========
</TABLE>
See notes to consolidated financial statements.
5
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in thousands)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The preparation
of financial statements in conformity with GAAP 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.
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. The
accompanying unaudited consolidated financial statements 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,
1998.
On June 12, 1998, a three-for-one reverse stock split was effected, as approved
by the Registrant's Shareholders at the Annual Meeting on June 1, 1998. All
share and per share data presented in the accompanying financial statements and
footnotes to the number of shares and earnings per share have been presented to
reflect the result of the three-for-one reverse stock split.
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
is largely dependent upon significant contracts for its revenue which typically
include a deposit upon contract signing and up to three months lead-time before
delivery of hardware begins. The Registrant has incurred significant net losses
for the last three years. During the six months ended June 30, 1999, revenues
were $3,145 and the Registrant incurred a net loss of $1,682.
At June 30, 1999, the Registrant had working capital of $442. 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.
Historically, approximately $1.6 million of the Registrant's annual revenues or
70% of Registrant's annual service revenues have been derived from a terminal
maintenance agreement with an Australian lottery customer. In October 1998, the
Australian lottery customer, as a result of a competitive bid, awarded this
contract to a competitor of the Registrant. This maintenance agreement expires
in January 2000 although the customer has the option to extend the agreement for
an additional six months.
6
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
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.
Berjaya, the Registrant's largest shareholder, has agreed to provide a line of
credit up to $4.0 million to meet the Registrant's cash needs for operations
through at least June 30, 2000. 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. INVENTORIES
The inventories at June 30, 1999 are composed entirely of raw materials and work
in process.
3. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (558) $ (615) $ (1,682) $ (2,139)
Foreign currency translation adjustment 15 1 23 286
---------- ---------- ---------- ----------
Comprehensive loss $ (543) $ (614) $ (1,659) $ (1,853)
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ($ in thousands)
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, 1998.
7
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
RESULTS OF OPERATIONS
Product sales in the second quarter of fiscal 1999 decreased 50%, or $1,171,
versus the second quarter of fiscal 1998. This was due to the lack of terminal
shipments and new contracts signed in the second quarter of 1999 compared to
1998. Service revenues increased 4%, or $22, over the quarter ended June 30,
1998. This improvement was the result of a price increase on the Australian
terminal maintenance agreement and a more favorable exchange rate partially
offset by fewer customer support projects than in 1998.
The gross profit on second quarter product sales was 30% in 1999, compared with
54% in 1998. The decreased gross profit percentage was a result of lower
contract revenues in 1999 and reduced manufacturing efficiencies due to lower
production volume compared to 1998. The gross profit on second quarter service
revenues was 38% in 1999 compared to 23% in 1998. The increase in services gross
profit was due to a higher billing rate for a service support agreement and the
price increase described above.
Engineering, research and development expenses in the second quarter of 1999
decreased 13% to $397 from $459 in the second quarter of 1998. The reduction was
the result of efforts being directed to specific customer projects and reduced
staffing. Selling, general and administrative expenses decreased by 42%, or
$726, for the second quarter of 1999 compared to the second quarter of 1998.
This decrease was the result of a lower level of staffing.
Product sales in the first six months of fiscal 1999 decreased 46%, or $1,662,
from the same period in 1998. This was the result of fewer contracts and
shipments in 1999 as compared to 1998. Service revenues increased 6%, or $64, to
$1,157 from $1,093 which was primarily the result of the price increase on the
Australian maintenance agreement as described above.
The gross profit on product sales was 21% for the six months ended June 30, 1999
compared to 39% in 1998. The decrease in the 1999 gross profit percentage was
due to the low volume of contracts to absorb the fixed manufacturing costs
compared to 1998 where sales of earlier model terminals which had been fully
reserved reduced production related expenses. The gross profit on services was
35% in 1999 compared to 25% for the same six-month period in 1998. The increase
in services gross profit resulted from the price increases mentioned above.
Engineering, research and development expenses for the first six months of 1999
decreased $371, or 37%, to $627 as compared to $998 for the same period in 1998.
Costs were reduced from 1998 due to staff reductions and efforts directed toward
specific customer projects. Selling, general and administrative costs decreased
by $876, or 29%, for the six month period ended June 30, 1999 compared to the
same period in 1998. This decrease resulted from the lower level of staffing in
1999. Other income and expense, net, increased $73, or 42%. The increase
primarily related to the recovery of costs associated with the Arizona Lottery
bid effort.
8
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 1999, the Registrant consumed approximately
$515 of cash, although the loss in the quarter was $558. The loss was
essentially funded out of working capital. The Registrant's consolidated
financial statements for the year ended December 31, 1998 and the six months
ended June 30, 1999 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, 1999, the Registrant
had working capital of $442. 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. 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.
The Registrant's largest shareholder, Berjaya, has agreed to provide financial
support if and when necessary to ensure that the Registrant's operations
continue through at least June 30, 2000. 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, 1999 there were no material commitments for capital expenditures.
The Registrant intends to strategically 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.
FOREIGN EXCHANGE FLUCTUATION
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.
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. 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.
9
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
ASIA
A significant portion of the Registrant's revenues are derived from customers
located in Asia. In the last 24 months the currencies of the Asian countries in
which the Registrant's customers are located have declined significantly against
the U.S. dollar. Although the Registrant generally has been paid in U.S.
dollars, this decline has effectively increased the cost of the Registrant's
products to its customers. The Registrant does not believe that its on-going
business has been negatively impacted by the Asian currency exchange situation,
however, one current customer has asked, and the Registrant has agreed, to delay
to a later undefined date the scheduled delivery of terminals which will result
in the delay of ILTS revenues and cash receipts of approximately $1 million.
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 has evaluated the effort required and believes that the related
costs will be immaterial and will be expensed as incurred. In addition, the
Registrant has reviewed the software systems and hardware it has previously sold
and determined they are Year 2000 compliant.
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 other parties, 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 20, 1998, the California Court of Appeal (Fourth
District) substantially reversed the summary judgement of the superior court
awarded the Registrant on November 1, 1996, and the appellate court returned the
case to the superior court for trial on the defamation claim. The Registrant
filed a petition for review with the California Supreme Court, which affirmed
the appellate court decision. Trial has been set to begin January 14, 2000.
Settlement negotiations have begun.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 1999, the Registrant held its 1999 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, Alain K.
Lee, M. Mark Michalko, Leonard G. Morrissey, Ng Foo Leong, Martin J. O'Meara,
Jr., and Lord Michael G.R. Sandberg.
The election of directors was conducted by the Inspector of Elections. The
following are the results of the voting on this matter:
For all nominees, received at least 5,469,279 votes, or at least 98%, of the
votes cast.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
ITEM 5. OTHER INFORMATION
Dennis D. Klahn, Chief Financial Officer, resigned on July 16, 1999 to pursue
other business opportunities.
ITEM 6. (27) FINANCIAL DATA SCHEDULE
11
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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.
/s/ M. Mark Michalko
- --------------------------------------------
M. Mark Michalko
President and Acting Chief Financial Officer
Date: August 13, 1999
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,384
<SECURITIES> 0
<RECEIVABLES> 436
<ALLOWANCES> 0
<INVENTORY> 310
<CURRENT-ASSETS> 2,618
<PP&E> 370
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,988
<CURRENT-LIABILITIES> 2,176
<BONDS> 0
0
0
<COMMON> 51,103
<OTHER-SE> (50,234)
<TOTAL-LIABILITY-AND-EQUITY> 2,988
<SALES> 1,768
<TOTAL-REVENUES> 1,768
<CGS> 1,187
<TOTAL-COSTS> 1,187
<OTHER-EXPENSES> 1,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (558)
<INCOME-TAX> 0
<INCOME-CONTINUING> (558)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (558)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
