-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VdKv/qbo5aIOxrR+wiqVoLMgzWJxpaUh8sz9/XUM1NEGZ4+XHw58BCFQ6j8uOsvq or+pPBKdfmfp6hEu253Nfw== 0000936392-97-001098.txt : 19970814 0000936392-97-001098.hdr.sgml : 19970814 ACCESSION NUMBER: 0000936392-97-001098 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC CENTRAL INDEX KEY: 0000354813 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 953276269 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10294 FILM NUMBER: 97658606 BUSINESS ADDRESS: STREET 1: 2131 FARADAY AVE CITY: CARLSBAD STATE: CA ZIP: 92008-7297 BUSINESS PHONE: 6199314000 MAIL ADDRESS: STREET 1: 2131 FARADAY AVE CITY: CARLSBAD STATE: CA ZIP: 92008 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL TOTALIZATOR SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ________________________ Commission File Number: 0-10294 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) (Exact Name of Registrant as specified in its charter) CALIFORNIA 95-3276269 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 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, 1997, 17,176,211 shares of common stock were outstanding. 1 2 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM)
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 1997 (Unaudited) and December 31, 1996 3 Condensed Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, 1997 and 1996 and Six Months Ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION Item 1. Legal Proceedings 11 Submission of Matters to a Vote of Security Holders 11 Signature 12
2 3 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets
JUNE 30, DECEMBER 31, 1997 1996 -------- -------- (Thousands of dollars) (UNAUDITED) (NOTE) ASSETS Current assets: Cash and cash equivalents $ 5,257 $ 5,387 Accounts receivable, net of allowance 518 979 Costs and estimated earnings in excess of billings on uncompleted contracts 2,006 2,452 Inventories, at lower of cost (first-in, first-out method) or market 2,596 3,018 Other current assets 126 142 -------- -------- Total current assets 10,503 11,978 Equipment, furniture and fixtures, net 927 1,128 Computer software costs, net 570 688 Other 110 89 -------- -------- Total assets $ 12,110 $ 13,883 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 221 $ 491 Billings in excess of costs and estimated earnings on uncompleted contracts 343 161 Accrued payroll and related taxes 896 893 Accrued litigation settlement 1,680 1,680 Related party liability 146 366 Other current liabilities 2,063 1,773 -------- -------- Total current liabilities 5,349 5,364 Shareholders' equity: Common shares; no par value: authorized shares 50,000,000 - issued and outstanding shares 17,176,211 49,407 49,407 Accumulated deficit (42,271) (40,721) Foreign currency translation adjustment (375) (167) -------- -------- Total shareholders' equity 6,761 8,519 -------- -------- Total liabilities and shareholders' equity $ 12,110 $ 13,883 ======== ========
Note: The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date. 3 4 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) Condensed Consolidated Statements of Operations (Unaudited)
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, (Thousands of dollars, ----------------------- ----------------------- except per share amounts) 1997 1996 1997 1996 -------- -------- -------- -------- Contract revenue and sales $ 3,986 $ 4,382 $ 6,360 $ 11,243 Costs and expenses: Cost of revenue and sales 2,284 3,684 4,232 8,499 Engineering, research and development 312 378 638 698 Selling, general and administrative 1,496 571 3,344 2,482 -------- -------- -------- -------- Total costs and expenses 4,092 4,633 8,214 11,679 -------- -------- -------- -------- Loss from operations (106) (251) (1,854) (436) Other income and (expense), net 118 412 304 611 -------- -------- -------- -------- Income (loss) before income taxes 12 161 (1,550) 175 Provision for taxes based on income -- 150 -- 150 -------- -------- -------- -------- Net income (loss) $ 12 $ 11 ($ 1,550) $ 25 -------- -------- -------- -------- Net income (loss) per share $ 0.00 $ 0.00 ($ 0.09) $ 0.00 ======== ======== ======== ======== Number of shares used in computation of net income(loss) per share 18,016 17,016 18,016 16,916 ======== ======== ======== ========
4 5 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) . Condensed Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED JUNE 30, --------------------- (Thousands of dollars) 1997 1996 ------- ------- Cash flows from operating activities: Net income (loss) ($1,550) $ 25 Adjustments to reconcile net income(loss) to net cash used for operating activities: Depreciation and amortization 346 311 Changes in assets and liabilities: Accounts receivable 461 (543) Costs and estimated earnings in excess of billings 446 (2,014) on uncompleted contracts Inventories 422 2,346 Accounts payable (270) 280 Billings in excess of costs and estimated earnings on uncompleted contacts 182 15 Accrued payroll and related taxes 3 336 Other (240) (1,831) ------- ------- Net cash used by operating activities (200) (1,075) ======= ======= Cash flows from investing activities: Lottery service agreement sale proceeds and advance repayments 239 338 Additions to equipment (35) (147) Additions to computer software costs -- (136) Proceeds from sale of subsidiary 90 156 Other (21) (79) ------- ------- Net cash provided by investing activities 273 132 ------- ------- Effect of exchange rate changes on cash (203) 156 ------- ------- Decrease in cash and cash equivalents (130) (787) Cash and cash equivalents at beginning of period 5,387 3,904 ------- ------- Cash and cash equivalents at end of period $ 5,257 $ 3,117 ======= =======
5 6 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 1997 (Thousands of dollars) 1. The accompanying condensed consolidated financial statements have been prepared without audit (except for the balance sheet information as of December 31, 1996) in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals), considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements do not include certain footnotes and financial presentations normally required under generally accepted accounting principles and, therefore, should be read in conjunction with the audited financial statements incorporated by reference in the Registrant's Annual Report on Form 10-K for the year ended December 1996 from the Registrant's Annual Report to Shareholders for the year ended December 31, 1996. The Registrant's consolidated financial statements for the year ended December 31, 1996 and the six months ended June 30, 1997 were prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Registrant incurred net losses of $22.6 million, $13.9 million and $5.5 million in 1994, 1995 and 1996, respectively, while revenues decreased from $24.1 million in 1994 to $16.6 million in 1996. During the six months ended June 30, 1997, revenues were $6.4 million and the Registrant incurred a net loss of $1.6 million. The Registrant is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to 3 months lead-time before delivery of hardware begins. At June 30, 1997, the Registrant has a backlog of $6.8 million compared to a backlog of $1.7 million at December 31, 1996. At June 30, 1997, the Registrant had working capital of $5.1 million. Management recognizes that the Registrant must recover its investment in existing contracts and generate additional contract sales to maintain its current level of operations. Additionally, management is currently seeking additional sources of funding through debt or equity financing and consideration of other business transactions which would generate sufficient resources to assure continuation of the Registrant's operations. Management anticipates that it will be successful in recovering its investment in existing contracts and obtaining sufficient contracts to enable the Registrant to continue normal operations; however, no assurances can be given that the Registrant will be successful in realizing sufficient new contract revenues or obtaining additional financing. If the Registrant is unable to recover its investment in existing contracts, obtain sufficient new contract revenue or financing, management will be required to reduce the Registrant's operations. On March 24, 1997, the Registrant's largest shareholder, Berjaya Lottery Management (Berjaya), agreed to provide a line of credit of up to $2.0 million to meet the Registrant's cash needs through at least January 1998. In addition, Berjaya agreed that if the Registrant is declared in default of its contract with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract with the New York State Thruway Association (NYSTA), and if TRMI 6 7 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) collects the performance bond proceeds of $2.7 million from the surety and the surety obtains a judgment against the Registrant for such proceeds, Berjaya will make available to the Registrant the funds necessary to pay such judgment if such judgment would render the Registrant unable to continue its operations. 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. The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the full year. 3. Inventories - The inventory balance at June 30, 1997 is composed entirely of raw materials and work in process totaling $2,596. The inventory balance at December 31, 1996 is composed of raw materials and work in process totaling $3,018. 4. The Registrant is obligated under a $2.8 million contract with TRMI to supply ticket handling equipment for the NYSTA. The Registrant has $1.5 million recorded as costs and estimated earnings in excess of billings on uncompleted contracts and $541 thousand in inventory specific to this project. The Registrant has accrued and recognized the entire estimated loss of $1.1 million on the contract and does not expect to realize any losses beyond amounts accrued at June 30, 1997. TRMI recently notified the Registrant of NYSTA's acceptance of the terminal design subject to certain non-material changes being negotiated. Delivery of production terminals is expected to begin in December 1997. Payments under the contract are expected to be received from TRMI in 1997 and 1998 based on the timing of receipt of payments by TRMI from the NYSTA. 5. In March 1993, the Registrant sold all interests in its subsidiary, McKinnie & Associates Inc. to Shreveport Acquisition for cash and a note. The Registrant is accounting for the sale under the cost recovery method. At June 30, 1997, the Registrant's basis in this asset is zero and all future payments received will be recognized as a gain upon receipt. During the six months ended June 30, 1997 and 1996, payments aggregating $90 and $420 respectively, were received and recognized as other income. At June 30, 1997, future payments expected to be received aggregate approximately $540. 6. In July 1995, the Registrant sold all interests in its Papua New Guinea lottery operation to the principal shareholders of the lottery licensee for cash and a note. The Registrant is accounting for the sale under the cost recovery method. At June 30, 1997, the Registrant's basis in this asset is zero and all future payments received will be recognized as a gain upon receipt. The installment payments and certain minimum percentage payments are secured by the lottery assets and certain personal guarantees. During the six months ended June 30, 1997 and 1996, payments aggregating $239 and $129, respectively, were received and 7 8 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) recognized as other income. As of June 30, 1997, future payments expected to be received aggregate approximately $880. 7. On June 17, 1996, the court entered a judgment in the Registrant's shareholders' class action litigation. The judgment requires a cash payment, which has been placed in the class shareholders' escrow account, and 1.2 million shares of authorized but unissued common stock of the Registrant. Such shares are included in the calculation of earnings per share for the period ended June 30, 1997. The estimated settlement was accrued as of September 30, 1995 and an adjustment of approximately $1.1 million was recorded during the three months ended June 30, 1996 to reduce the accrual to the actual settlement amount, valued as of the judgment date. 8. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Registrant will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. Basic and fully diluted earnings per share pursuant to the requirements of Statement 128 are equal to earnings per share as reported in the accompanying consolidated statements of operations. 8 9 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Thousands of dollars) RESULTS OF OPERATIONS During the quarter ended June 30, 1997, revenue decreased by 9% or $396 , to $3,986 from $4,382 in the quarter ended June 30, 1996. This decrease is primarily the result of a lower level of contract revenues. Spares sales in the second quarter of 1997 decreased 20% or $111 to $446 compared to $557 for the second quarter of 1996. During the second quarter of 1997, the Registrant recognized a gross margin of 57% compared to a gross margin of 16% in the second quarter of 1996. The increase in gross margin in 1997 is primarily due to the gross profit recognized on a contract with a new customer for earlier model terminals which had previously been fully reserved. Engineering, research and development expenses in the second quarter of 1997 decreased 17% to $312 from $378 in the second quarter of 1996. The 1997 costs were primarily related to expanded functionality for the Data Trak lottery software and cost reduction efforts on the Registrant's lottery specific terminals. Selling, general and administrative expenses increased 162% or $925, to $1,496 for the second quarter of 1997 compared to $571 for the second quarter of 1996. This increase is primarily due to the reversal in the second quarter of 1996, of approximately $1.1 million of previously accrued costs relating to the shareholders' class action litigation. Other income and expense, net, decreased $294 or 71%. The decrease relates to the gain recognized under the cost recovery method from the sale of the McKinnie & Associates subsidiary and Papua New Guinea lottery in 1996. The McKinnie & Associates note has been revised with lower monthly payments over an extended period of time. At this time, payments are due from the sale of the Papua New Guinea lottery only based on a minimum percentage of their revenues as the note was paid in full in the third quarter of 1996. During the six month period ended June 30, 1997, revenue decreased 43% to $6,360 from $11,243 for the same period in 1996. This decrease reflects lower contract volume in 1997. Spares sales for the six month period ended June 30, 1997 increased 26%, or $260, to $1,250 from $990 for the same period in 1996. During the six month period ended June 30, 1997 the Registrant recognized a gross margin of 33% compared to a gross margin of 24% for the similar period in 1996. The increase in gross margin is primarily due to the gross profit recognized on a contract with a new customer for earlier model terminals which had previously been fully reserved. Engineering, research and development costs decreased $60, or 9% for the six month period ended June 30, 1997, as compared to the same period in 1996. As explained above, 1997 costs were primarily related to cost reduction efforts on the Registrant's lottery specific terminals and expanded functionality for the Data Trak lottery software. Selling, general and administrative costs increased $862 or 35% from the same period in 1996 due primarily to the reversal in the second quarter of 1996 of approximately $1.1 million of previously accrued costs relating to the shareholders' class action litigation, offset by reduced costs from a lower level of personnel in 1997. Other income and expense, net, decreased $307, or 50%. The decrease relates to the gain recognized under the cost recovery method from the sale of the McKinnie & Associates subsidiary and Papua New Guinea lottery in 1996. The McKinnie & Associates note was revised in 1997 with lower monthly payments over an extended period of time. At this time only minimum percentage payments are due from the Papua New Guinea lottery sale as the note was paid in full in the third quarter of 1996. In 1996, income tax expense of $150 was recorded related to contract sales by the Registrant's Australian subsidiary. The Registrant's existing backlog of $6.8 million includes only a small amount scheduled for delivery in the third quarter. As a result, the Registrant will likely have an operating loss in the third quarter of 1997. 9 10 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 1997, the Registrant's working capital decreased by $1.5 million, which approximates the loss incurred during this period. The Registrant's consolidated financial statements for the year ended December 31, 1996 and the six months ended June 30, 1997 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, 1997, the Registrant had working capital of $5.1 million. Management recognizes that the Registrant must generate additional contract sales to maintain its current level of operations. Additionally, management is currently seeking additional sources of funding through debt or equity financing and consideration of other business transactions which would generate sufficient resources to assure continuation of the Registrant's operations. Management anticipates that it will be successful in obtaining sufficient contracts to enable the Registrant to continue normal operations; however, no assurances can be given that the Registrant will be successful in realizing sufficient contract revenue or obtain additional funding. If the Registrant is unable to obtain sufficient contract revenue or funding, management will be required to reduce the Registrant's operations. On March 24, 1997, the Registrant's largest shareholder, Berjaya Lottery Management (Berjaya), agreed to provide a line of credit of up to $2.0 million to meet the Registrant's cash needs through at least January 1998. In addition, Berjaya agreed that if the Registrant is declared in default of its contract with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract with the New York State Thruway (NYSTA), and if TRMI collects the performance bond proceeds of $2.7 million from the surety and the surety obtains a judgment against the Registrant for such proceeds, Berjaya will make available to the Registrant the funds necessary to pay such judgment if such judgment would render the Registrant unable to continue its operations. 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, 1997 there were no material commitments for capital expenditures. 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 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-K for the year ended December 31, 1996. 10 11 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) Part II OTHER INFORMATION Item 1. Legal Proceedings Walters v ILTS - On November 3, 1995, Mr. James T. Walters, the former chairman and president of the Registrant, who retired in 1994, filed a defamation and invasion of privacy action in the San Diego County Superior Court against the Registrant, its former president, Frederick A. Brunn and others, relating to statements in a magazine article. The other parties previously settled with Mr. Walters. Mr. Walters sought general and special damages of $9 million and punitive damages. On November 1, 1996, a summary judgment was entered in favor of the Registrant. Mr. Walters has appealed the adverse judgment. If the court accepts the appeal, a trial date will be scheduled in 1999. Item 4. Submission of Matters to a Vote of Security Holders On May 15, 1997, the Registrant held its 1997 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. M. Mark Michalko, Ng Aik Chin, Ng Foo Leong, Martin J. O'Meara, Jr., and Sir Michael G.R. Sandberg. The following are the results of the voting on this matter: 1. The election of directors was conducted by the Inspector of Elections. For all nominees, at least 15,336,931 -or- 96% of the votes cast; Withheld total or partial authority 639,039 -or- 4% of the votes cast.
2. A vote was conducted to approve the 1997 Directors' Stock Option Plan of the Registrant. For 94% Against 5% Abstain 1% 11 12 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) /s/ Dennis D. Klahn --------------------------------- Dennis D. Klahn Chief Financial Officer Date: August 14, 1997 12 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 JUN-30-1997 5,257 0 518 0 2,596 10,503 927 0 12,110 5,349 0 0 0 49,407 (42,646) 12,110 3,986 3,986 2,284 2,284 1,808 15 2 12 0 12 0 0 0 12 (0.00) 0
-----END PRIVACY-ENHANCED MESSAGE-----