-----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, BL+LXdlqLa0uoYPq0B5A0uskrL9Req3mqZdstYPstEZMGquWlzxr33bfehVO9xNc gMp/E2khjayg1o3hK7Rcww== 0000936392-99-000573.txt : 19990517 0000936392-99-000573.hdr.sgml : 19990517 ACCESSION NUMBER: 0000936392-99-000573 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-10294 FILM NUMBER: 99621221 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 10QSB 1 FORM 10-QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ____________________ Commission File Number: 0-10294 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. (Exact Name of Registrant as specified in its charter) CALIFORNIA 95-3276269 (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2131 FARADAY AVENUE, CARLSBAD, CALIFORNIA 92008-7297 (Address of Principal Executive Offices) (Zip Code) (760) 931-4000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. As of March 31, 1999, 6,009,183 shares of common stock were outstanding. 1 2 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. Index
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 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION Item 1. Legal Proceedings 9 Signatures 10 Exhibits
2 3 PART I FINANCIAL INFORMATION Item 1. Financial Statements INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (Unaudited)
MARCH 31, ($ in thousands, except share amounts) 1999 ----------- ASSETS Current assets: Cash and cash equivalents $ 1,899 Accounts receivable 565 Costs and estimated earnings in excess of billings on uncompleted contracts 47 Inventories 542 Other current assets 219 --------- Total current assets 3,272 Equipment, furniture and fixtures, net 430 --------- $ 3,702 ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 227 Billings in excess of costs and estimated earnings on uncompleted contracts 121 Employee compensation 587 Related party liability 332 Other current liabilities 1,079 --------- Total current liabilities 2,346 Shareholders' equity: Common shares, no par value, 50,000,000 shares authorized, 51,103 6,009,183 shares issued and outstanding Accumulated deficit (49,675) Cumulative translation adjustment (72) --------- 1,356 --------- $ 3,702 =========
See notes to consolidated financial statements. 3 4 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED ($ in thousands, except per share amounts) MARCH 31, ---------------------------- 1999 1998 ---------- ---------- Revenues: Sales of products $ 810 $ 1,301 Services 567 525 ---------- ---------- 1,377 1,826 Cost of revenues: Cost of sales of products 740 1,152 Cost of services 383 379 ---------- ---------- 1,123 1,531 ---------- ---------- Gross profit 254 295 Engineering, research and development 230 539 Selling, general and administrative 1,145 1,295 ---------- ---------- Loss from operations (1,121) (1,539) Other income and (expense), net (3) 15 ---------- ---------- Net loss ($ 1,124) ($ 1,524) ========== ========== Net loss per share - basic and diluted ($ 0.19) ($ 0.25) ========== ========== Number of shares used in computation of net loss per share - basic and diluted 6,009 6,009 ========== ==========
See notes to consolidated financial statements. 4 5 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED ($ in thousands) MARCH 31, ---------------------------- 1999 1998 ---------- ---------- Operating activities Net loss $(1,124) $(1,524) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 63 96 Changes in assets and liabilities: Accounts receivable 773 (99) Costs and estimated earnings in excess of billings on uncompleted contracts (2) 794 Inventories 256 307 Accounts payable (247) (178) Billings in excess of costs and estimated earnings on uncompleted contacts 112 266 Employee compensation (16) (50) Other (166) (762) ------- ------- Net cash used for operating activities (351) (1,150) ------- ------- Investing activities Additions to equipment (28) (65) ------- ------- Net cash used for investing activities (28) (65) ------- ------- Effect of exchange rate changes on cash 8 285 ------- ------- Decrease in cash and cash equivalents (371) (930) Cash and cash equivalents at beginning of period 2,270 2,371 ------- ------- Cash and cash equivalents at end of period $ 1,899 $ 1,441 ======= =======
See notes to consolidated financial statements. 5 6 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ($ in thousands) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments), considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods shown in this report are not necessarily indicative of the results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements incorporated by reference in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. On June 12, 1998, a three-for-one reverse stock split was effected, as approved by the Registrant's Shareholders at the Annual Meeting on June 1, 1998. All share and per share data presented in the accompanying financial statements and footnotes to the number of shares and earnings per share have been presented to reflect the result of the three-for-one reverse stock split. The Registrant's consolidated financial statements were prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Registrant is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to 3 months lead-time before delivery of hardware begins. The Registrant has incurred significant net losses for the last three years. During the three months ended March 31, 1999, revenues were $1,377 and the Registrant incurred a net loss of $1,124. At March 31, 1999, the Registrant had working capital of $926. Management recognizes that the Registrant must recover its investment in existing contracts and generate additional contract sales to maintain its current level of operations. Additionally, management is currently seeking additional sources of funding through debt or equity financing and consideration of other business transactions. Historically, approximately $1.6 million of the Registrant's annual revenues or 70% of Registrant's annual service revenues have been derived from a terminal maintenance agreement with an Australian lottery customer. This maintenance agreement expires in January 2000, although the customer has the option to extend the agreement for an additional six months. In October 1998, the Australian lottery customer, as a result of a competitive bid, awarded the lottery contract to a competitor of the Registrant. 6 7 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. Management anticipates that it will be successful in recovering its investment in existing contracts and obtaining sufficient contracts to enable the Registrant to continue normal operations; however, no assurances can be given that the Registrant will be successful in realizing sufficient new contract revenues or obtaining additional financing. If the Registrant is unable to recover its investment in existing contracts, obtain sufficient new contract revenue or financing, management will be required to reduce the Registrant's operations. Berjaya, the Registrant's largest shareholder, has agreed to provide a line of credit of up to $4.0 million to meet the Registrant's cash needs for operations through at least June 30, 2000. The Registrant's ability to continue its on-going operations on a long-term basis is dependent upon its ability to recover its investment in existing contracts, obtain additional financing, secure additional new contracts, and ultimately achieve a sustainable level of profit from operations. 2. INVENTORIES The inventories at March 31, 1999 are composed entirely of raw materials and work in process. 3. COMPREHENSIVE LOSS The components of comprehensive loss are as follows (in thousands):
Three months ended March 31, 1999 1998 ---------- ---------- Net loss ($ 1,124) ($ 1,524) Foreign currency translation adjustment 8 285 ---------- ---------- Comprehensive loss ($ 1,116) ($ 1,239)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ in thousands) FORWARD LOOKING STATEMENTS The statements in this filing which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements. These risks and uncertainties include the absence of significant contract backlog, the dependence on business from foreign customers sometimes in politically unstable regions, political and governmental decisions as to the establishment of lotteries and other wagering industries in which the Registrant's products are marketed, fluctuations in quarter-by-quarter operating results and other factors described in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. 7 8 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. RESULTS OF OPERATIONS Product sales in the first quarter of fiscal 1999 decreased by 38% or $491, versus the first quarter of fiscal 1998. This is primarily the result of lower contract revenues in the 1999 first quarter compared to the 1998 first quarter. Service revenues increased 8%, or $42 in the quarter ended March 31, 1999. This increase is primarily the result of a price increase, effective January 1,1999, on the Australian terminal maintenance agreement. The gross profit on first quarter product sales was 9% in 1999, compared with 11% in 1998. The decrease in gross profit percentage was due to the low volume of contracts to absorb the fixed manufacturing costs . The gross profit on first quarter service revenues was 32% in 1999 compared to 28% in 1998. The increase in services gross profit is a result of the price increase described above. Engineering, research and development expenses in the first quarter of 1999 decreased 57% or $309 compared to the first quarter of 1998. The reduction is primarily the result of reduced level of staffing and current efforts more directed to specific customer projects rather than generic DataTrak software development. Selling, general and administrative expenses decreased 12%, or $150, for the first quarter of 1999 compared to the first quarter of 1998. This decrease was primarily the result of a lower level of staffing in 1999. LIQUIDITY AND CAPITAL RESOURCES During the quarter ended March 31, 1999, the Registrant consumed approximately $371 of cash, although the loss in the quarter was $1,124. The loss was essentially funded out of working capital. The Registrant's consolidated financial statements for the year ended December 31, 1998 and the three months ended March 31, 1999 have been prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. At March 31, 1999, the Registrant had working capital of $926. Management recognizes that the Registrant must generate additional contract sales to maintain its current level of operations. The Registrant's largest shareholder, Berjaya, has agreed to provide a line of credit of up to $4.0 million to meet the Registrant's cash needs for operations through at least June 30, 2000. The Registrant's ability to continue its on-going operations on a long-term basis is dependent upon its ability to recover its investment in existing contracts, obtain additional financing, secure additional new contracts and ultimately achieve a sustainable level of profit from operations. As of March 31, 1999 there were no material commitments for capital expenditures. The Registrant intends to strategically pursue long-term service contracts as a source of revenue. Service contracts pose capital investment risks for the Registrant that do not exist in its product sale business. Service contracts require up-front investments of capital which is repaid only after a system becomes operational, based upon a percentage of the customer's gross receipts from the system. The Registrant, therefore, bears the risk that scheduling delays may occur, a system may not become operational or that the customer's gross receipts from the system may be less than projected. If the Registrant enters into a long-term service contract, the Registrant must seek the funds necessary to implement the project from Berjaya or other sources. 8 9 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. FOREIGN EXCHANGE FLUCTUATION The Registrant's reporting currency is the U.S. dollar. Historically, a majority of the Registrant's sales have been denominated in U.S. dollars, with the balance denominated in foreign currencies. These foreign currency sales have been effected principally by the Registrant's international subsidiaries. Changes from reporting period to reporting period in the exchange rates between various foreign currencies and the U.S. dollar have had, and will in the future continue to have, an impact on revenues and expenses reported by the Registrant, and such effect may be material in any individual reporting period. As the contracts are predominantly denominated in the functional currency of the subsidiary performing under the contract, the Registrant has historically incurred immaterial amounts of transaction gains or losses. ASIA A significant portion of the Registrant's revenues are derived from customers located in Asia. In the last 24 months the currencies of the Asian countries in which the Registrant's customers are located have declined significantly against the U.S. dollar. Although the Registrant generally has been paid in U.S. dollars, this decline has effectively increased the cost of the Registrant's products to its customers. The Registrant does not believe that its on-going business has been negatively impacted by the Asian currency exchange situation, however, one current customer has asked, and the Registrant has agreed, to delay to a later undefined date the scheduled delivery of terminals which will result in the delay of ILTS revenues and cash receipts of approximately $1 million. YEAR 2000 Management has initiated an enterprise-wide program to prepare the Registrant's computer systems and applications for the Year 2000. The Registrant expects to incur internal staff costs as well as other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the Year 2000. The Registrant has evaluated the effort required and believes that the related costs will be immaterial and will be expensed as incurred. In addition, the Registrant has reviewed the software systems and hardware it has previously sold and determined they are Year 2000 compliant. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Walters v ILTS - On November 3, 1995, Mr. James T. Walters, the former chairman and president of the Registrant, who retired in 1994, filed a defamation and invasion of privacy action in the San Diego County Superior Court against the Registrant, its former president, Frederick A. Brunn and other parties, relating to statements in a magazine article. The other parties previously settled with Mr. Walters. Mr. Walters sought general and special damages of $9 million and punitive damages. On November 20, 1998, the California Court of Appeal (Fourth District) substantially reversed the summary judgement of the superior court awarded the Registrant on November 1, 1996, and the appellate court returned the case to the superior court for trial on the defamation claim. The Registrant has filed a petition for review with the California Supreme Court, which has affirmed the appellate court decision. Trial has been set to begin January 14, 2000. Settlement negotiations have begun. ITEM 6. (27) FINANCIAL DATA SCHEDULE 9 10 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. 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 /s/ Dennis D. Klahn - --------------------------------------- Dennis D. Klahn Chief Financial Officer Date: May 11, 1999 10 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1998 MAR-31-1999 1,899 0 565 0 542 3,276 430 0 3,702 2,346 0 51,103 0 0 (49,747) 2,346 1,377 1,377 1,123 1,123 1,375 0 0 (1,124) 0 (1,124) 0 0 0 (1,124) (0.19) (0.19)
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