-----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, ELv764pdCaYGe1ljRBEizCtHgPB4bP74MsG3AilU1tWq1qR3p8wCW3UZV+iPqpvX Wt6awhAQZ+woTC6fK6plWw== 0000936392-99-001302.txt : 19991115 0000936392-99-001302.hdr.sgml : 19991115 ACCESSION NUMBER: 0000936392-99-001302 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748421 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 September 30, 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 September 30, 1999, 6,009,183 shares of common stock were outstanding. 2 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. Index
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet (Unaudited) 3 Consolidated Statements of Operations (Unaudited) 4 Consolidated Statements of Cash Flows (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION Item 1. Legal Proceedings 11 Item 5. Other Information 11 Signatures 12 Exhibits
2 3 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (Unaudited)
SEPTEMBER 30, ($ in thousands, except share amounts) 1999 ------------- ASSETS Current assets: Cash and cash equivalents $ 3,516 Accounts receivable, net 386 Inventories 172 Other current assets 951 -------- Total current assets 5,025 Equipment, furniture and fixtures, net 321 -------- $ 5,346 ======== LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable $ 436 Advance payments from customers 3,562 Employee compensation 458 Related party liability 304 Other current liabilities 924 -------- Total current liabilities 5,684 Shareholders equity: Common shares, no par value, 50,000,000 shares authorized, 6,009,183 shares issued and outstanding 51,103 Accumulated deficit (51,378) Cumulative translation adjustment (63) -------- (338) -------- $ 5,346 ========
See notes to consolidated financial statements. 3 4 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS NINE MONTHS ENDED ENDED ($ in thousands, except per share amounts) SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- Revenues: Sales of products $ 685 $ 4,049 $ 2,673 $ 7,699 Services 556 287 1,713 1,380 ------- ------- ------- ------- 1,241 4,336 4,386 9,079 Cost of revenues: Cost of sales of products 620 2,406 2,182 4,636 Cost of services 427 313 1,175 1,128 ------- ------- ------- ------- 1,047 2,719 3,357 5,764 ------- ------- ------- ------- Gross profit: 194 1,617 1,029 3,315 Engineering, research and development 324 236 951 1,234 Selling, general and administrative 1,060 1,239 3,198 4,253 ------- ------- ------- ------- Income (loss) from operations (1,190) 142 (3,120) (2,172) Other income and (expense), net 46 (20) 294 155 ------- ------- ------- ------- Net income (loss) $(1,144) $ 122 $(2,826) $(2,017) ======= ======= ======= ======= Net income (loss) per share - basic and diluted $ (0.19) $ 0.02 $ (0.47) $ (0.34) ======= ======= ======= ======= Number of shares used in computation of net income (loss) per share - basic and diluted 6,009 6,009 6,009 6,009 ======= ======= ======= =======
See notes to consolidated financial statements. 4 5 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED ($ in thousands) SEPTEMBER 30, ------------------ 1999 1998 ------- ------- Operating activities: Net loss $(2,826) $(2,017) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 184 259 Changes in assets and liabilities: Accounts receivable 952 (1,590) Costs and estimated earnings in excess of billings on uncompleted contracts 45 1,350 Inventories 626 5 Accounts payable (38) 121 Advance payments from customers 3,562 -- Billings in excess of costs and estimated earnings on uncompleted contacts -- 1,356 Accrued payroll and related taxes (145) (120) Other (1,082) (586) ------- ------- Net cash provided by (used in) operating activities 1,278 (1,222) ------- ------- Investing activities: Lottery service agreement sale proceeds and advance repayments -- 80 Additions to equipment, net (49) (133) ------- ------- Net cash used in investing activities (49) (53) ------- ------- Effect of exchange rate changes on cash 17 262 ------- ------- Net increase (decrease) in cash and cash equivalents 1,246 (1,013) Cash and cash equivalents at beginning of period 2,270 2,371 ------- ------- Cash and cash equivalents at end of period $ 3,516 $ 1,358 ======= =======
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 three months lead-time before delivery of hardware begins. The Registrant has incurred significant net losses for the last three years. During the nine months ended September 30, 1999, revenues were $4,386 and the Registrant incurred a net loss of $2,826. At September 30, 1999, the Registrant had negative working capital of $659. Management recognizes that the Registrant must recover its investment in existing contracts and generate additional contract sales to maintain its current level of operations. As detailed in Note 4, Subsequent Events, on October 5, 1999, the Registrant received $5,200 through the sale of authorized, but unissued shares of Common Stock. In Management's opinion, this significantly enhances the Registrant's ability to continue its operations and pursue future contracts. 6 7 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. Historically, approximately $1,600 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. In October 1998, the Australian lottery customer awarded this contract to a competitor of the Registrant. This maintenance agreement expires on December 31, 1999, although the customer has indicated its expectation to seek an extension of an additional six months. In August 1999, the Registrant was awarded a contract by long-time customer AB Trav och Galopp ("ATG") of Sweden for 815 additional DATAMARK Flipper(R) terminals and related spare parts. The contract has a total value of more than $4,000. Delivery of the terminals is expected to start at the beginning of the second quarter of 2000 with revenue to be recognized upon shipment of the terminals. 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(R) on-line lottery system including central system hardware and software as well as a minimum of 3,500 DATAMARK XClaim(R) terminals with a value of $12,300. 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 $30,000. Manufacture of the lottery terminals will begin in the fourth quarter of 1999. Initial delivery of the terminals is scheduled to start in the first quarter of 2000 with the lottery targeted to launch operations shortly thereafter. 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. 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. 2. INVENTORIES The inventories at September 30, 1999 are composed entirely of raw materials and work in process. 7 8 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. 3. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) are as follows (in thousands):
Three Months Nine Months Ended Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- ------- ------- Net income (loss) $(1,144) $ 122 $(2,826) $(2,017) Foreign currency translation adjustment (6) (23) 17 262 ------- ------- ------- ------- $(1,150) $ 99 $(2,809) $(1,755) ======= ======= ======= =======
4. SUBSEQUENT EVENTS On October 18, 1999, Form 8-K was filed with the Securities and Exchange Commission pursuant to the requirements of the Securities Exchange Act of 1934 with regard to Changes in Control of Registrant. Pursuant to a Stock Purchase Agreement dated as of September 8, 1999, on October 5, 1999, the Registrant consummated the sale of 6,933,817 shares of its 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 $5,200,362.75. Prior to the purchase, Berjaya owned 2,311,500 shares, or approximately 38.5%, of the Registrant's outstanding Common Stock. As a result of the purchase, Berjaya now owns 9,245,317 shares or approximately 71.4%, of the Registrant's outstanding Common Stock. Berjaya also continues to have three representatives on the Registrant's nine member Board of Directors. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($ 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. 8 9 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. RESULTS OF OPERATIONS Product sales in the third quarter of fiscal 1999 decreased 83%, or $3,364, versus the third quarter of fiscal 1998. This was due to fewer terminal shipments in the third quarter of 1999 compared to 1998. Service revenues increased 94%, or $269, over the quarter ended September 30, 1998. This improvement was the result of a price increase on the Australian terminal maintenance agreement and a more favorable exchange rate. The gross profit on third quarter product sales was 9% in 1999, compared with 40% in 1998. The decreased gross profit percentage was a result of reduced manufacturing efficiencies due to lower production volume compared to 1998. The gross profit on third quarter service revenues was 23% in 1999 compared to a loss of 9% in 1998. The increase in services gross profit was due to the price increase described above. Engineering, research and development expenses in the third quarter of 1999 increased 37% to $324 from $236 in the third quarter of 1998. The increase was the result of efforts being directed to new projects. Selling, general and administrative expenses decreased by 14%, or $179, for the third quarter of 1999 compared to the third quarter of 1998. This decrease was the result of a lower level of staffing. Product sales in the first nine months of fiscal 1999 decreased 65%, or $5,026, from the same period in 1998. This was the result of fewer contracts and shipments in 1999 as compared to 1998. Service revenues increased 24%, or $333, to $1,713 from $1,380 which was primarily the result of the price increase on the Australian maintenance agreement described above. The gross profit on product sales was 18% for the nine months ended September 30, 1999 compared to 40% in 1998. The decrease in the 1999 gross profit percentage was due to the low volume of contracts to absorb the fixed costs compared to 1998 where sales of earlier model terminals which had been fully reserved reduced production related expenses. The gross profit on services was 31% in 1999 compared to 18% for the same nine-month period in 1998. The increase in services gross profit resulted from the price increases mentioned above. Engineering, research and development expenses for the first nine months of 1999 decreased $283, or 23%, to $951 as compared to $1,234 for the same period in 1998. Costs were reduced from 1998 due to staff reductions and efforts directed toward specific customer projects. Selling, general and administrative costs decreased by $1,055, or 25%, for the nine-month period ended September 30, 1999 compared to the same period in 1998. This decrease resulted from the lower level of staffing in 1999. Other income and expense, net, increased $139, or 90%. The increase primarily related to the recovery of costs associated with the Arizona Lottery bid effort and royalty receipts from a customer. LIQUIDITY AND CAPITAL RESOURCES ($ in thousands) During the quarter ended September 30, 1999, the Registrant increased cash by approximately $2,132, although the loss in the quarter was $1,144. The loss was essentially funded out of working 9 10 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. capital. The Registrant's consolidated financial statements for the year ended December 31, 1998 and the nine months ended September 30, 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 September 30, 1999, the Registrant had negative working capital of $659. Advance payments from customers increased by $762 with the receipt of a deposit upon contract signing with ATG. Management recognizes that the Registrant must generate additional contract sales to maintain its current level of 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 new contract revenue. 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 and ultimately achieve a sustainable level of profit from operations. As of September 30, 1999 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. ASIA Historically, a significant portion of the Registrant's revenues have been 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 10 11 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. 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 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 courts against the Registrant, its former president, Frederick A. Brunn and other parties, relating to statements in a magazine article. The other parties quickly 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 San Diego trial court on the defamation claim. The Registrant filed a petition for review with the California Supreme Court, which affirmed the appellate court decision. Trial had been set to begin January 14, 2000. In early October, all parties reached a mediated settlement to this litigation which has been submitted to the San Diego County Superior Court for approval. The effect on the consolidated financial statements is expected to be immaterial with the majority of the settlement covered by insurance. ITEM 5. OTHER INFORMATION Dennis D. Klahn, Chief Financial Officer, resigned on July 16, 1999 to pursue other business opportunities. ITEM 6. (27) FINANCIAL DATA SCHEDULE 11 12 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 and Acting Chief Financial Officer Date: November 12, 1999 12 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1998 SEP-30-1999 3,516 0 386 0 172 5,025 321 0 5,346 5,684 0 0 0 51,103 (51,378) 5,346 1,241 1,241 1,047 1,047 1,384 0 0 (1,144) 0 (1,144) 0 0 0 (1,144) (.19) (.19)
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