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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 March 31, 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 Registrant as specified in its charter)
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<S> <C>
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
(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 April 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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PART I FINANCIAL INFORMATION PAGE
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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 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Signatures 12
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>
MARCH 31,
2000
------------
($ in thousands, except
share amounts)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,875
Accounts receivable, net 4,160
Inventories, net 135
Costs in excess of billings on uncompleted contracts 1,351
Other current assets 1,243
------------
Total current assets 10,764
Equipment, furniture and fixtures, net 505
------------
$ 11,269
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,946
Billings in excess of costs on uncompleted contracts 687
Accrued payroll and related taxes 531
Related party liability 339
Other current liabilities 1,743
------------
Total current liabilities 6,246
Shareholders' equity:
Common shares, no par value, 50,000,000 shares authorized,
12,943,000 shares issued and outstanding 56,326
Accumulated deficit (51,208)
Other accumulated comprehensive loss (95)
------------
Total shareholders' equity 5,023
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$ 11,269
============
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See notes to consolidated financial statements.
3
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------------------
2000 1999
------------ ------------
($ in thousands, except
per share amounts)
<S> <C> <C>
Revenues:
Sales of products $ 11,290 $ 810
Services 174 567
------------ ------------
11,464 1,377
Cost of revenues:
Cost of sales of products 8,204 740
Cost of services 177 383
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8,381 1,123
------------ ------------
Gross profit: 3,083 254
Engineering, research and development 257 230
Selling, general and administrative 1,611 1,145
------------ ------------
Income / (loss) from operations 1,215 (1,121)
Other income and (expense), net 369 (3)
------------ ------------
Net income / (loss) $ 1,584 $ (1,124)
------------ ------------
Net income / (loss) per share:
Basic $ .12 $ (0.19)
============ ============
Diluted $ .12 $ (0.19)
============ ============
Number of shares used in computation of net income
/loss per share:
Basic 12,943 6,009
============ ============
Diluted 13,050 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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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2000 1999
------------ ------------
($ in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income / (loss) $ 1,584 $ (1,124)
Adjustments to reconcile net income / loss to net
cash provided by (used for) operating activities:
Depreciation and amortization 54 63
Changes in assets and liabilities:
Accounts receivable (3,743) 773
Costs in excess of billings on uncompleted
contracts (1,351) (2)
Inventories -- 256
Accounts payable 2,262 (247)
Billings in excess of costs on uncompleted
contracts (1,550) 112
Accrued payroll and related taxes (90) (16)
Other 230 (166)
------------ ------------
Net cash used for operating activities (2,604) (351)
------------ ------------
Cash flows from investing activities:
Additions to equipment (288) (28)
------------ ------------
Net cash used for investing activities (288) (28)
------------ ------------
Effect of exchange rate changes on cash (34) 8
------------ ------------
Decrease in cash and cash equivalents (2,926) (371)
Cash and cash equivalents at beginning of period 6,801 2,270
------------ ------------
Cash and cash equivalents at end of period $ 3,875 $ 1,899
============ ============
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See notes to consolidated financial statements.
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 Registrant's Annual Report on Form 10-KSB for the year ended December 31,
1999.
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.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 2000 (in thousands, except per share
amounts):
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Numerator:
Net income $ 1,584
-------
Numerator for basic earnings per share - income
available to common stockholders $ 1,584
=======
Denominator:
Denominator for basic earnings per share -
weighted average shares 12,943
Effect of dilutive securities:
Stock option plans 107
-------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 13,050
=======
Basic earnings per share $ 0.12
=======
Diluted earnings per share $ 0.12
=======
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
For the three months ended March 31, 1999, net loss per share is computed using
the weighted average number of common shares outstanding during the period.
Outstanding stock options are not included in the per share calculation because
their effect would be antidilutive. Therefore, there is no difference between
basic and diluted net loss per share for that period. The weighted average
number of shares outstanding for the three months ended March 31, 1999 was 6009.
3. INVENTORIES
The inventories at March 31, 2000 are composed entirely of raw materials and
work in process.
4. COMPREHENSIVE 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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<CAPTION>
Three Months
Ended
March 31,
-------------------------
2000 1999
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Net income/ (loss) $ 1,584 $ (1,124)
Foreign currency translation adjustment (34) 8
------- --------
Comprehensive income / (loss) $ 1,550 $ (1,116)
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INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements in this filing that 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 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-KSB for the year ended December 31, 1999.
SUMMARY OF SIGNIFICANT DEVELOPMENTS
In August 1999, the Registrant was awarded a contract by long-time customer AB
Trav och Galopp ("ATG") of Sweden for 815 DATAMARK Flipper terminals and related
spare 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. Eighteen
terminals were delivered in January 2000. The most significant portion of the
order will be shipped during the second quarter, with the final 60 terminals
shipped in the third quarter. Revenue is recognized upon final acceptance of the
terminals by the customer.
In September 1999, the Registrant announced the signing of two agreements with
Global Technologies, Ltd. ("GTL") under which the Registrant will supply an
on-line lottery system and facilities management services. Under the terms of
the purchase agreement, the Registrant will provide a complete DataTrak on-line
lottery system including central system hardware and software as well as a
minimum of 3,500 DATAMARK Xclaim terminals with a value of $12.3 million. In
addition, under a separate facilities management agreement, the Registrant 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. Manufacture of the lottery terminals began in the fourth quarter of 1999
and 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 under the sales contract is expected to be recognized in the
second quarter.
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
Registrant. This maintenance agreement expired on January 31, 2000 and the
operations of the Australian subsidiary were significantly reduced.
During the three months ended March 31, 2000, revenues and net income were
$11.46 million and
8
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$1.58 million respectively. The Registrant had incurred significant net losses
for the last four years prior to this quarter.
The Registrant is largely dependent upon significant contracts for its revenue
that typically include a deposit upon contract signing and up to three months
lead-time before delivery of hardware begins. Management anticipates it will be
successful in recovering its remaining investment in existing contracts and 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 new contract revenues. 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, secure
additional new contracts, install terminals on a timely basis, and ultimately
achieve a sustainable level of profit from operations.
RESULTS OF OPERATIONS
Product sales in the first quarter of fiscal 2000 increased $10.48 million from
$.81 million in the first 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 completed in March 2000. As discussed above, management expects to
recognize the remaining system sale revenue in the second quarter, and payments
under the facilities management contract began to generate on-going revenue in
April.
Service revenues decreased $393,000 from $567,000 in first quarter 1999. This
reduction was the result of the January 31, 2000 expiration of the terminal
maintenance agreement with the Australian customer.
Gross profit on first quarter product sales was $3.09 million or 27%, compared
with a gross profit of $.70 million or 9% in 1999. This increase reflects
management's decision to outsource manufacturing and reduce overhead. The gross
loss on first quarter service revenues was 1% in 2000 compared to a gross profit
of 32% in 1999. The decrease was due to costs associated with the expiration of
the Australian terminal maintenance agreement described above and the completion
of software support agreements.
Engineering, research and development expenses in the first quarter of 2000
increased 12% to $257,000 from $230,000 in the first quarter of 1999. The
increase reflects costs incurred for product development. Selling, general and
administrative expenses increased by 41%, or $466,000, for the first quarter of
2000 compared to the first quarter of 1999. This increase was the result of
hiring new staff to operate the new United Kingdom subsidiary.
Other income and expense, net, increased 124% or $372,000. The increase
primarily related to payments received from a customer under a contract
provision restricting the hiring of the company's employees, royalties received
on the Registrant's processes, and interest earned on investments.
9
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Registrant had working capital of $4.52 million. During
the quarter ended March 31, 2000, accounts receivable increased $3.74 million
while cash decreased $2.93 million. Significant cash outlays were required to
fund the GTL project and to purchase fixed assets for the new UK subsidiary.
On October 5, 1999, the Registrant consummated the sale of 6,933,817 shares of
authorized, but unissued shares of Common Stock to Berjaya Lottery Management
(H.K.) Limited ("Berjaya"). The purchase price for the shares was $0.75 per
share for an aggregate purchase price of $5.2 million. Prior to the purchase,
Berjaya owned 2,311,500 shares, or approximately 38.5% of the Registrant's
outstanding Common Stock. As a result of the purchase, Berjaya now owns
9,245,317 shares or approximately 71.4% of the Registrant's outstanding Common
Stock. In Management's opinion, this additional investment significantly
improves the Registrant's ability to continue its operations and pursue future
contracts.
As of March 31, 2000 there were no material commitments for capital
expenditures.
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 affected 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.
YEAR 2000
As of April 30, 2000, the Registrant had not experienced any significant
disruptions as a result of the rollover from 1999 to 2000. However, the success
to date of the Year 2000 efforts cannot guarantee that a Year 2000 problem
affecting third parties, upon which the Registrant may rely, will not become
apparent in the future that could harm operations.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Registrant 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 Registrant's
consolidated financial position or results of operations.
10
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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: May 15, 2000
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,875
<SECURITIES> 0
<RECEIVABLES> 4,160
<ALLOWANCES> 0
<INVENTORY> 135
<CURRENT-ASSETS> 10,764
<PP&E> 505
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,269
<CURRENT-LIABILITIES> 6,246
<BONDS> 0
0
0
<COMMON> 56,326
<OTHER-SE> (51,208)
<TOTAL-LIABILITY-AND-EQUITY> 11,269
<SALES> 11,464
<TOTAL-REVENUES> 11,464
<CGS> 8,381
<TOTAL-COSTS> 8,381
<OTHER-EXPENSES> 1,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,584
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,584
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
