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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 September 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)
<TABLE>
<S> <C>
CALIFORNIA 95-3276269
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>
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 November 14, 2000, 12,943,000 shares of common stock were outstanding.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
Index
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<CAPTION>
<S> <C>
PART I FINANCIAL INFORMATION PAGE
----
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 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Signatures 15
Exhibits
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2
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30,
($ in thousands, except share amounts) 2000
--------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,121
Accounts receivable, net 2,948
Costs and estimated earnings in excess of billings 54
on uncompleted contracts
Inventories 426
Other current assets 676
--------
7,225
Equipment, furniture and fixtures, net 511
--------
$ 7,736
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,372
Billings in excess of costs and estimated earnings on
uncompleted contracts 285
Employee compensation 464
Related party liability 392
Other current liabilities 1,162
--------
Total current liabilities 3,675
Shareholders' equity:
Common shares, no par value, 50,000,000 shares authorized, 56,327
12,943,000 shares issued and outstanding
Accumulated deficit
(52,187)
Cumulative other comprehensive income / (loss) (79)
--------
Total Shareholders' equity 4,061
--------
$ 7,736
========
</TABLE>
See notes to consolidated financial statements.
3
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
($ in thousands, except per share amounts)
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Sales of products $ 2,958 $ 685 $ 18,401 $ 2,673
Services 989 556 2,202 1,713
-------- -------- -------- --------
3,947 1,241 20,603 4,386
-------- -------- -------- --------
Cost of revenues:
Cost of sales of products 2,102 620 13,515 2,182
Cost of services 290 427 1,364 1,175
-------- -------- -------- --------
2,392 1,047 14,879 3,357
-------- -------- -------- --------
Gross profit 1,555 194 5,724 1,029
Engineering, research and development 387 324 741 951
Selling, general and administrative 2,476 1,060 4,792 3,198
-------- -------- -------- --------
Income / (loss) from operations (1,308) (1,190) 191 (3,120)
Other income and (expense), net 49 46 414 294
-------- -------- -------- --------
$ (1,259) $ (1,144) $ 605 $ (2,826)
======== ======== ======== ========
Net income / (loss)
Net income / (loss) per share:
Basic $ (0.10) $ (0.19) $ .05 $ (0.47)
======== ======== ======== ========
Diluted $ (0.10) $ (0.19) $ .05 $ (0.47)
======== ======== ======== ========
Number of shares used in computation of net income /
loss per share
Basic 12,943 6,009 12,943 6,009
======== ======== ======== ========
Diluted 12,943 6,009 13,022 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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
($ in thousands)
2000 1999
------- -------
<S> <C> <C>
Operating activities
Net income / (loss) $ 605 $(2,826)
Adjustments to reconcile net income / (loss) to net cash
used for operating activities:
Depreciation and amortization 161 184
Changes in assets and liabilities:
Accounts receivable (2,532) 952
Costs and estimated earnings in excess of billings
on uncompleted contracts (54) 45
Inventories (291) 626
Accounts payable 688 (38)
Advance payments from customers -- 3,562
Billings in excess of costs and estimated earnings
on uncompleted contacts (1,952) --
Employee compensation (157) (145)
Other 279 (1,082)
------- -------
1,278
Net cash used for operating activities (3,253)
------- -------
Investing activities
Additions to equipment (409) (49)
------- -------
Net cash used for investing activities (409) (49)
------- -------
Effect of exchange rate changes on cash (18) 17
------- -------
Increase (decrease) in cash and cash equivalents (3,680) 1,246
Cash and cash equivalents at beginning of period 6,801 2,270
------- -------
Cash and cash equivalents at end of period $ 3,121 $ 3,516
======= =======
</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 accounting principles generally accepted in the United States
(US 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 US 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 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-KSB 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.
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.
6
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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, at December
31, 2000, will result in a material effect on the financial statements.
7
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the nine months ended September 30, 2000 (in thousands, except per
share amounts):
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<CAPTION>
Nine Months
Ended
September 30,
2000
-------------
<S> <C>
Numerator:
Net Income $ 605
-------
Numerator for basic earnings per share -- income
available to common stockholders $ 605
=======
Denominator:
Denominator for basic earnings per share --
Weighted average shares 12,943
Effect of dilutive securities:
Stock option plans 79
-------
Denominator for diluted earnings per share --
adjusted weighted average shares and assumed
conversions 13,022
Basic earnings per share $ 0.05
=======
Diluted earnings per share $ 0.05
=======
</TABLE>
For the three months ended September 30, 2000, 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 three months
ended September 30, 2000 was 12,943.
For the three and nine months ended September 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 three and
nine months ended September 30, 1999 was 6009.
4. INVENTORIES
The inventories at September 30, 2000 are composed entirely of raw materials and
work in process.
8
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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):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net income/ (loss) $(1,259) $(1,144) $ 605 $(2,826)
Foreign currency translation adjustment (19) (6) (18) 17
------- ------- ------- -------
Comprehensive income / (loss) $(1,278) $(1,150) $ 587 $(2,809)
------- ------- ------- -------
</TABLE>
6. SIGNIFICANT CONTRACTS
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 was to provide facilities management services in the United
Kingdom for a term of eight years. Under the terms of the purchase agreement,
the Company provided a complete DataTrak on-line lottery system including
central system hardware and software as well as 3,500 DATAMARK Xclaim terminals
with a value of $12.3 million. Substantially all of the terminals were delivered
in the first quarter of 2000. Approximately $2.9 million was still outstanding
as Accounts Receivable as of September 30, 2000. Payments under the Facilities
Management Agreement began in April 2000 and $1.3 million was received before
GTL ceased operations in mid-October 2000 at which time the Company stopped
accruing revenue on the service contract. As of September 30, 2000,
approximately $0.9 million was outstanding under the Facilities Management
Agreement. In October 2000, GTL paid $2.3 million of amounts owed to the
Company. The remaining balance of $1.8 million remains outstanding under the two
agreements. Management has determined that the remaining balance is
uncollectable and recorded an additional reserve in the three-month period ended
September 30, 2000 for the $1.7 million. The provision is included in selling,
general and administrative expenses in the accompanying statements of
operations. The Company is considering its legal options against GTL under the
purchase agreement and the service agreement.
7. 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 final payment to Anacomp was made in early
November, thereby terminating the Security and U.C.C.
Financing Agreements.
9
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In November 2000, the Company has entered into an agreement with the Singapore
Turf Club for the Company to supply extensive software and terminal hardware in
a pilot development contract with a value of $1.6 million.
In November 2000, the Company agreed to supply Sports Toto Malaysia Sdn Bhd, a
subsidiary of Berjaya Group Berhad, the owner of 70% of the Company's
outstanding shares, an ILTS DataTrak on-line lottery system, an account betting
system and approximately 1,000 terminals for a total purchase price in excess of
$8.1 million. The Company will immediately receive a 25% down payment on the
contract.
10
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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
During the third quarter deliveries were completed for the supply of 815 lottery
terminals to AB Trav och Galopp (ATG) of Sweden and deliveries are continuing on
an additional 60 terminals to ATG and on the 140 lottery terminals to Leisure
Management Berhad of Malaysia for contracts announced in August 1999 and May of
2000, respectively. These are expected to be completed by the end of the 4th
quarter.
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 was to provide facilities management services in the United
Kingdom for a term of eight years. Under the terms of the purchase agreement,
the Company provided a complete DataTrak on-line lottery system including
central system hardware and software as well as 3,500 DATAMARK Xclaim terminals
with a value of $12.3 million. Substantially all of the terminals were delivered
in the first quarter of 2000. Approximately $2.9 million was still outstanding
as Accounts Receivable as of September 30, 2000. Payments under the Facilities
Management Agreement began in April 2000 and $1.3 million was received before
GTL ceased operations in mid-October 2000 at which time the Company stopped
accruing revenue on the service contract. As of September 30, 2000,
approximately $0.9 million was outstanding under the Facilities Management
Agreement. In October 2000, GTL paid $2.3 million of amounts owed to the
Company. The remaining balance of $1.8 million remains outstanding under the two
agreements. Management has determined that the remaining balance is
uncollectable and recorded an additional reserve in the three-month period ended
September 30, 2000 for the $1.7 million. The provision is included in selling,
general and administrative expenses in the accompanying statements of
operations. The Company is considering its legal options against GTL under the
purchase agreement and the service agreement.
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.
11
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RESULTS OF OPERATIONS
Product sales in the third quarter of fiscal 2000 increased to $2.96 million
from $.68 million in the third quarter of fiscal 1999. Substantially all of the
increase was due to revenue recognized from the sale of terminals to ATG in
2000.
Service revenues increased $433,000 to $989,000 compared to $556,000 in the
third quarter of 1999. This increase resulted from revenues generated through
the Company's UK subsidiary for facilities management to GTL. However, GTL
defaulted under the Facilities Maintenance Agreement and in October 2000, the
Company discontinued providing services to GTL under this agreement. Due to the
uncertainty of collection of amounts due from GTL, the Company recorded a
provision for uncollectable accounts receivable at September 30, 2000 for
$912,000 related to the facilities management services.
Gross profit on third quarter product sales was $.86 million or 29%, compared
with a gross profit of $.06 million or 9% in 1999. This increase in gross profit
results from increased contract revenue in the US. Over $2 million in contract
revenue for the third quarter 2000 compared to less than $200,000 of contract
revenue for the third quarter of 1999 provided sufficient support to cover
unbillable operating costs. The gross profit percentage on third quarter service
revenues was 71% in 2000 compared to a gross profit of 23% in 1999. The
facilities management agreement from the UK subsidiary to GTL was responsible
for the increased gross profit percentage in the third quarter 2000. In the
third quarter 1999, the majority of service revenue came from the Australian
subsidiary at a gross profit percentage under 20%.
Engineering, research and development expenses in the third quarter of 2000 were
$387,000 compared to $324,000 in the third quarter of 1999. Selling, general and
administrative expenses for the third quarter of 2000 increased to $2.5 million
over 1999 expenses of $1.1 million. The increase in SG&A expenses for the third
quarter of 2000 results from $1.7 million in provisions for uncollectable
accounts receivable related to GTL. Marketing Expenses were down $209,000 in
third quarter 2000 compared with third quarter 1999 along with various other
SG&A expenses.
Other income and expense, net for 2000 and 1999 were consistent at $49,000 and
$46,000, respectively. This amount primarily includes foreign exchange gain and
loss and interest income.
A provision for income taxes has not been recorded in the three and nine months
ended September 30, 2000, given that the Company has sufficient available net
operating loss carry forwards to offset any tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had working capital of $3.6 million. During
the quarter ended September 30, 2000, accounts receivable decreased $.90 million
to $2.95 million. The additional provision for uncollectable accounts receivable
for the quarter was $1.8 million offset by additional revenue. Cash decreased
$1.6 million compared to June 30, 2000 due to delay in account receivable
payments, payments to Anacomp for the manufacture of terminals for the GTL
contract, and additional marketing expenses. The accounts payable balance
decreased $562,000 in the quarter which is attributable to the payment of
Anacomp, the outside terminal manufacturer used for the GTL contract.
12
<PAGE> 13
During the nine months ended September 30, 2000, cash and cash equivalents
decreased by $3.7 million by reason of payments made for the manufacture of
terminals for the GTL contract. Accounts receivable for the nine-month period
increased by over $2.5 million primarily because of the GTL contract and ATG
sales. Accounts payable increased approximately $0.7 million for the period
primarily because of invoices from Anacomp Inc. for contract manufacturing of
the GTL terminals for ILTS. Payments to Anacomp were temporarily suspended due
to delays in production by Anacomp and delays in cash receipts from GTL. The
Company pledged certain of its accounts receivable balances to Anacomp as
collateral (see also Note 6 to the accompanying financial statements).
Revenues from profitable contracts to be delivered in 2000 and 2001 should
enable the Company to continue its normal business operations into the future.
As of September 30, 2000 there were no material commitments for capital
expenditures.
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. The company does not
engage in any hedging activities. 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.
13
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 22, 2000, the Registrant held its 2000 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 and the Company's Year 2000 Equity
Participating Plan ("Plan") was approved by the Shareholders.
The matters to be voted upon were conducted by the Inspector of Elections. The
following are the results of the voting on these matters.
All nominees received at least 98%, of the votes cast for Directors. Approval of
the Plan received at least 96% of the votes cast.
ITEM 6. (27) FINANCIAL DATA SCHEDULE
14
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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: November 14, 2000
15
