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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, 2000
[ ] 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 Company as specified in its charter)
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CALIFORNIA 95-3276269
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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2131 FARADAY AVENUE, CARLSBAD, CALIFORNIA 92008-7297
(Address of Principal Executive Offices)
(Zip Code)
(760) 931-4000
(Company's Telephone Number, Including Area Code)
Indicate by check mark whether the Company (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 Company 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, 2000, 12,943,000 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
Index
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PAGE
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PART I FINANCIAL INFORMATION
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 (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Signatures 13
Exhibits
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Unaudited)
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<CAPTION>
JUNE 30,
($ in thousands, except share amounts) 2000
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ASSETS
Current assets:
Cash and cash equivalents $4,771
Accounts receivable, net 3,846
Inventories 74
Other current assets 545
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9,236
Equipment, furniture and fixtures, net 489
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$9,725
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,934
Billings in excess of costs and estimated earnings on
uncompleted contracts 344
Employee compensation 556
Related party liability 339
Other current liabilities 1,213
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Total current liabilities 4,386
Shareholders' equity:
Common shares, no par value, 50,000,000 shares authorized,
12,943,000 shares issued and outstanding 56,327
Accumulated deficit (50,928)
Cumulative other comprehensive income / (loss) (60)
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5,339
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$9,725
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See notes to consolidated financial statements.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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SIX MONTHS
THREE MONTHS ENDED ENDED
JUNE 30, JUNE 30,
($ in thousands, except per share amounts) -------- --------
2000 1999 2000 1999
---- ---- ---- ----
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Revenues:
Sales of products $ 4,153 $ 1,178 $ 15,443 $ 1,988
Services 1,039 590 1,213 1,157
-------- -------- -------- --------
5,192 1,768 16,656 3,145
Cost of revenues:
Cost of sales of products 3,209 822 11,414 1,562
Cost of services 897 365 1,074 748
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4,106 1,187 12,488 2,310
-------- -------- -------- --------
Gross profit 1,086 581 4,168 835
Engineering, research and development 96 397 353 627
Selling, general and administrative 705 993 2,316 2,138
-------- -------- -------- --------
Income / (loss) from operations 285 (809) 1,499 (1,930)
Other income and (expense), net (5) 251 365 248
-------- -------- -------- --------
$ 280 ($ 558) $ 1,864 ($ 1,682)
======== ======== ======== ========
Net income / (loss)
Net income / (loss) per share:
Basic .02 ($ 0.09) .14 ($ 0.28)
======== ======== ======== ========
Diluted .02 ($ 0.09) .14 ($ 0.28)
======== ======== ======== ========
Number of shares used in computation of net income /
loss per share
Basic $ 12,943 $ 6,009 $ 12,943 $ 6,009
======== ======== ======== ========
Diluted $ 13,064 $ 6,009 $ 13,064 $ 6,009
======== ======== ======== ========
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See notes to consolidated financial statements.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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SIX MONTHS ENDED
JUNE 30,
($ in thousands) 2000 1999
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Operating activities
Net income / (loss) $ 1,864 ($1,682)
Adjustments to reconcile net income / (loss) to net cash
used for operating activities:
Depreciation and amortization 114 125
Changes in assets and liabilities:
Accounts receivable (3,429) 902
Costs and estimated earnings in excess of billings
on uncompleted contracts -- (4)
Inventories 61 488
Accounts payable 1,250 (72)
Billings in excess of costs and estimated earnings
on uncompleted contacts (1,893) (9)
Employee compensation (69) (91)
Other 399 (525)
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Net cash used for operating activities (1,703) (868)
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Investing activities
Additions to equipment (328) (41)
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Net cash used for investing activities (328) (41)
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Effect of exchange rate changes on cash 1 23
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Decrease in cash and cash equivalents (2,030) (886)
Cash and cash equivalents at beginning of period 6,801 2,270
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Cash and cash equivalents at end of period $ 4,771 $ 1,384
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See notes to consolidated financial statements.
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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-QSB 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 Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The Company'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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidating financial
statements include the accounts of the Company and its subsidiaries, all of
which are wholly owned. All significant intercompany accounts and transactions
are eliminated.
REVENUE RECOGNITION - The Company recognizes revenue on the basis of
shipment of products, performance of services, and in certain instances on the
percentage-of-completion method of accounting for long term contracts, or on the
completed contract method of accounting for long term contracts when all
criteria for recognizing revenue under the percentage-of-completion method of
accounting cannot be met. Revenues relating to the sale of certain assets, when
the ultimate total collection is not reasonably assured, are being recorded
under the cost recovery method.
USE OF ESTIMATES - The preparation of financial statements, in
conformity with accounting principles generally accepted in the United States,
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.
DEPRECIATION - Depreciation of equipment, furniture and fixtures is
provided principally using the straight-line method over estimated useful lives
of three - seven years.
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WARRANTY RESERVES - Estimated expenses for warranty obligations are
accrued as income is recognized on related contracts. The reserves are adjusted
periodically to reflect actual experience.
FOREIGN CURRENCY - The Company has contracts with certain customers that
are denominated in foreign currencies, and related transaction gains and losses
are recognized as a component of current operations. The consolidated accounts
of the Company's Australian subsidiary and UK subsidiary have been translated
from their functional currency, the Australian dollar and pound sterling,
respectively. The effect of the exchange rate fluctuations between the U.S.
dollar, the Australian dollar and the pound sterling are recorded as a component
of comprehensive income.
RESEARCH AND DEVELOPMENT - Engineering, research and development costs
are expensed as incurred. Substantially all engineering, research and
development expenses are related to new product development and designing
significant improvements.
CONCENTRATION OF CREDIT RISK - Accounts receivable and costs in excess
of billings on uncompleted contracts are primarily related to contracts with a
few major customers. These amounts are payable in accordance with the terms of
individual contracts and generally collateral is not required. Estimated credit
losses are provided for in the financial statements. The Company conducts
business in the Asia/Pacific region. Certain Asian countries have experienced
severe economic turmoil represented by depressed business conditions and
volatility in local currencies. Any significant further decline in these
economies and in the value of their currencies could have a material adverse
effect on the Company.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS - In December 1999, the Securities
Exchange Commission ("SEC") staff released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition," as amended by SAB No. 101A and SAB No. 101B, to
provide guidance on the recognition, presentation and disclosure of revenue in
financial statements. SAB No. 101 explains the SEC staff's general framework for
revenue recognition, stating that certain criteria be met in order to recognize
revenue. SAB No. 101 also addresses the question of gross vs. net revenue
presentation and financial statement and Management's Discussion and Analysis
disclosures related to revenue recognition. The Company has not yet adopted SAB
No. 101 but does not anticipate that the adoption of this bulletin will result
in a material effect on the financial statements.
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the six months ended June 30, 2000 (in thousands, except per share
amounts):
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Numerator:
Net Income $ 1,864
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Numerator for basic earnings per share - income
available to common stockholders $ 1,864
=======
Denominator:
Denominator for basic earnings per share -
Weighted average shares 12,943
Effect of dilutive securities:
Stock option plans 121
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Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 13,064
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Basic earnings per share $ 0.14
=======
Diluted earnings per share $ 0.14
=======
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For the six months ended June 30, 1999, net loss per share is computed using the
weighted average number of common shares outstanding during the period. The
weighted average number of shares outstanding for the six months ended June 30,
1999 was 6009.
4. INVENTORIES
The inventories at June 30, 2000 are composed entirely of raw materials and work
in process.
5. COMPREHENSIVE INCOME/LOSS
The company accounts for comprehensive income in accordance with the Statement
of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive
Income." The components of comprehensive income / (loss) are as follows (in
thousands):
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Three Months Six Months
Ended Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
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Net income/ (loss) $ 280 $ (558) $ 1,864 $ (1,682)
Foreign currency translation adjustment 34 15 1 23
-------- -------- --------- ---------
Comprehensive income / (loss) $ 314 $ (543) $ 1,865 $ (1,659)
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6. SUBSEQUENT EVENTS
In July 2000, Company entered into a Security Agreement and a U.C.C. Financing
Agreement with Anacomp, Inc. pursuant to which Company pledged its accounts
receivables and other rights to receive contractual payments to secure amounts
owed to Anacomp by reason of terminals manufactured and delivered to GTL for the
U.K. Charitable Lottery. The due date of payments to Anacomp are dependent on
deliveries by Anacomp to Company under the ATG contract but the payments are
expected to be concluded no later than November 30, 2000.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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-KSB for the year ended December 31, 1999.
SUMMARY OF SIGNIFICANT DEVELOPMENTS
In August 1999, the Company was awarded a contract by long-time customer AB Trav
och Galopp ("ATG") of Sweden for 815 DATAMARK Flipper terminals and related
parts. In March 2000, this contract was amended to add 60 terminals. The
contract as amended has a total value of more than $4.25 million. As of June 30,
2000, 378 terminals have been delivered and the final 497 terminals are being
shipped in the third quarter. Revenue is recognized upon final acceptance of
each shipment of the terminals by the customer.
In September 1999, the Company announced the signing of two agreements with
Global Technologies, Ltd. ("GTL") under which the Company supplied an on-line
lottery system and is providing facilities management services. Under the terms
of the purchase agreement, the Company provided a complete DataTrak(TM) on-line
lottery system including central system hardware and software as well as a
minimum of 3,500 DATAMARK XClaim(TM) terminals with a value of $12.3 million. In
addition, under a separate facilities management agreement, the Company will
provide a full range of services in connection with the lottery system,
including installation, training, computer operations, network management and
field maintenance. The facilities management contract has a base term of eight
years with options for extensions and a base value estimated to be a minimum of
$30 million. Payment under the facilities maintenance agreement began in April
2000. Substantially all of the terminals were delivered in the first quarter of
2000. The on-line lottery system commenced operation on March 27, 2000.
Approximately $10.45 million of revenue has been recorded in the quarter ended
March 31, 2000 based on delivery terms and acceptance by the customer. The
remaining revenue of $1.85 million under the sales contract was recognized in
the second quarter.
In May 2000, the Company announced that it had signed a contract with
long-standing customer, Leisure Management Berhad of Malaysia for the Company to
supply 140 DM Flipper(TM) terminals. Deliveries will occur during the third
quarter of 2000. The contract is valued at $0.8 million.
Historically, significant service revenue had been derived from a terminal
maintenance agreement with an Australian lottery customer. In October 1998, the
Australian Lottery customer awarded this contract to a competitor of the
Company. This maintenance agreement expired on January 31, 2000 and the
operations of the Australian subsidiary were significantly reduced.
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RESULTS OF OPERATIONS
Product sales in the second quarter of fiscal 2000 increased $2.98 million from
$1.18 million in the second quarter of fiscal 1999. Substantially all of the
increase was revenue recognized from the sale of the on-line lottery system to
GTL that was delivered in March 2000. The remaining 15% of revenue amounting to
$1.85 million was recognized in the second quarter of 2000.
Service revenues increased $449,000 from $590,000 in the second quarter of 1999.
This increase resulted from revenues generated through the Company's UK
subsidiary for facilities management to GTL.
Gross profit on second quarter product sales was $.94 million or 23%, compared
with a gross profit of $.36 million or 30% in 1999. This increase in gross
profit results from increased contract volume, although at a lower margin
percentage. The gross profit percentage on second quarter service revenues was
14% in 2000 compared to a gross profit of 38% in 1999. The gross profit
percentage declined due to GTL margins and final expenses from the
discontinuation of manufacturing in Australia. Engineering, research and
development expenses in the second quarter of 2000 dropped 76% to $96,000 from
$397,000 in the second quarter of 1999. R&D levels were high in 1999 with
development work on new terminal products as well as product development for
GTL. Selling, general and administrative expenses for the second quarter of 2000
decreased by 29%, or $288,000, compared to the second quarter of 1999. This
decrease was the result of labor costs in 2000 being allocated to specific
customer contracts.
Other income and expense for 2000, net, decreased $256,000. The decrease was due
to a settlement award of $290,000 in the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of $4.93 million. During the
quarter ended June 30, 2000, accounts receivable decreased $.31 million to $3.8
million. The unpaid amount on the GTL contract is 74% of the accounts receivable
balance. Cash increased $.90 million compared to March 31, 2000 because of
service revenues from the UK facilities management contract, payments by ATG and
decreased R&D expenses.
During the six months ended June 30, 2000 cash and cash equivalents decreased by
$2.0 million by reason of the manufacture of terminals for the GTL contract.
Accounts receivable for the six-month period increased by over $4.0 million
primarily because of the unpaid amount on the GTL contract. Accounts payable
increased approximately $1.2 million for the period primarily because of unpaid
amounts to Anacomp Inc. for contract manufacturing of the GTL terminals for
ILTS.
Management anticipates payments from GTL to increase its cash balance for the
remainder of 2000. In addition, revenues from profitable contracts to be
delivered in 2000 should enable the Company to continue its normal business
operations beyond the current year.
As of June 30, 2000 there were no material commitments for capital expenditures.
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FOREIGN EXCHANGE FLUCTUATION
The Company's reporting currency is the U.S. dollar. Historically, a majority of
the Company'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 Company'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 Company, 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 Company has historically incurred immaterial
amounts of transaction gains or losses.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the normal
course of business. While the outcome of these proceedings and claims cannot be
predicted with certainty, Management does not believe that the outcome of any of
these matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 6. (27) FINANCIAL DATA SCHEDULE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company 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 11, 2000
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