10QSB 1 a73441e10qsb.txt FORM 10-QSB QUARTER ENDED APRIL 30, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended _______________. [x] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from January 1, 2001 to April 30, 2001 Commission File Number: 0-10294 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. (Exact Name of Company 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 (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 May 31, 2001, 12,943,000 shares of common stock were outstanding. 2 Index INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
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 11 PART II OTHER INFORMATION Item 1. Legal Proceedings 14 Signatures 15 Exhibits
2 3 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (Unaudited)
APRIL 30, (Amounts in thousands, except share amounts) 2001 -------- ASSETS Current assets: Cash and cash equivalents $ 3,279 Accounts receivable, net of allowance for doubtful accounts of $13 1,033 Costs and estimated earnings in excess of billings on uncompleted contracts 771 Inventories, net 2,080 Related party note receivable 1,500 Other notes receivable 140 Other current assets 409 -------- Total current assets 9,212 Equipment, furniture and fixtures, net 406 Notes receivable, net of current portion 327 -------- $ 9,945 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,247 Billings in excess of costs and estimated earnings on uncompleted contracts 435 Accrued payroll and related taxes 400 Deferred revenue 206 Other current liabilities 1,033 -------- Total current liabilities 3,321 Related party liability 392 Deferred revenue, net of current portion 327 Other long-term liabilities 96 -------- 4,136 -------- Shareholders' equity: Common shares, no par value, 50,000,000 shares authorized, 12,943,000 shares issued and outstanding 56,350 Accumulated deficit (50,367) Other accumulated comprehensive loss (174) -------- Total shareholders' equity 5,809 -------- $ 9,945 ========
See notes to consolidated financial statements. 3 4 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOUR MONTHS ENDED APRIL 30, (Amounts in thousands, except per share amounts) ----------------------- 2001 2000 -------- -------- Revenues: Sales of products $ 4,169 $ 11,460 Services 34 476 -------- -------- 4,203 11,936 -------- -------- Cost of revenues: Cost of sales of products 3,235 8,456 Cost of services 29 468 -------- -------- 3,264 8,924 -------- -------- Gross profit 939 3,012 Engineering, research and development 131 291 Selling, general and administrative 1,067 1,824 -------- -------- Income/(loss) from operations (259) 897 Other income (expense): Exchange rate gain/(loss) 15 (65) Other income (expense), net 93 414 -------- -------- Income/(loss) before provision for income taxes (151) 1,246 Provision for income taxes 4 16 -------- -------- Net income/(loss) ($ 155) $ 1,230 ======== ======== Net income/(loss) per share: Basic ($ 0.01) $ 0.10 Diluted ($ 0.01) $ 0.09 Number of shares used in computation of net income/(loss) per share Basic 12,943 12,943 Diluted 12,943 13,056
See notes to consolidated financial statements. 4 5 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOUR MONTHS ENDED APRIL 30, (Amounts in thousands) ------------------------ 2001 2000 -------- -------- Operating activities: Net income/(loss) ($ 155) $ 1,230 Adjustments to reconcile net income/(loss) to net cash used for operating activities: Depreciation and amortization 33 75 Loss on disposal of equipment 1 43 Changes in assets and liabilities: Accounts receivable 410 (3,720) Costs and estimated earnings in excess of billings on uncompleted contracts (771) (949) Inventories (240) 26 Accounts payable 891 1,715 Billings in excess of costs and estimated earnings on uncompleted contracts (1,835) - Accrued payroll and related taxes (14) (15) Related party liability - 35 Other assets 21 (270) Other liabilities (108) 566 -------- -------- Net cash used for operating activities (1,767) (1,264) -------- -------- Investing activities: Additions to equipment, furniture and fixtures (172) (288) Certificate of deposit (matured January 2001) 245 - Related party loan to Berjaya Lottery Management (1,500) - -------- -------- Net cash used for investing activities (1,427) (288) -------- -------- Effect of exchange rate changes on cash (23) (32) -------- -------- Decrease in cash and cash equivalents (3,217) (1,584) Cash and cash equivalents at beginning of period 6,496 6,801 -------- -------- Cash and cash equivalents at end of period $ 3,279 $ 5,217 ======== ======== Supplemental cash flow information: Cash paid for interest $ - $ - Cash paid for income taxes $ 15 $ 67
See notes to consolidated financial statements. 5 6 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 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, 2000. 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 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. Revenues relating to the sale of certain assets, when the ultimate total collection is not reasonably assured, are being recorded under the cost recovery method. 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. INVENTORY - Inventory is composed of raw materials, work in process and finished goods which are stated at the lower of cost or market. See Note 6. 6 7 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. PER SHARE INFORMATION - Basic net income (loss) per share is based on the weighted average number of shares outstanding during the four months ended April 30, 2001 and 2000. In 2001, diluted net loss per share excludes the effect of stock options as the effect would have been anti-dilutive. In 2000, diluted net income per share includes stock options if their effect would be dilutive. 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 - Accounts receivable and costs and estimated earnings 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 - SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities," as amended, was adopted by the Company on January 1, 2001. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of this statement had no impact on the Company. 7 8 3. EARNINGS (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings per share for the four months ended April 30, 2001 and 2000 (in thousands, except per share amounts):
2001 2000 ----------------------------------------------------------------------------------------------- Numerator: Net income (loss) ($ 155) $ 1,230 -------- -------- Numerator for basic earnings (loss) per share - income (loss) available to common stockholders ($ 155) $ 1,230 -------- -------- Denominator: Denominator for basic earnings (loss) per share - Weighted average shares outstanding 12,943 12,943 Effect of dilutive securities: Stock option plans - 113 -------- -------- Denominator for diluted earnings (loss) per share - adjusted weighted average shares and assumed conversions 12,943 13,056 ======== ======== Basic earnings (loss) per share ($ 0.01) $ 0.10 ======== ======== Diluted earnings (loss) per share ($ 0.01) $ 0.09 ======== ========
For the four months ended April 30, 2001, 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 four months ended April 30, 2001 was 12,943,000. For the four months ended April 30, 2000, net income per share is computed using the weighted average number of common shares outstanding during the period including stock options if their effect would be dilutive. The weighted average number of shares outstanding for the four months ended April 30, 2000 including potentially dilutive securities was 13,056,000. 4. RELATED PARTY NOTE RECEIVABLE On February 12, 2001, the Affiliations Committee of the Board of Directors approved a $1.5 million six month short-term loan to Berjaya Lottery Management (H.K.) Ltd., the Company's majority shareholder, at an interest rate of 9% per annum. The note is due on August 13, 2001. 8 9 5. COMPREHENSIVE INCOME (LOSS) The company accounts for comprehensive income in accordance with Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." The components of comprehensive income/(loss) are as follows (in thousands):
Four Months Ended April 30, --------------------- 2001 2000 ------- ------- Net income/(loss) $ (155) $ 1,230 Foreign currency translation adjustment (23) (32) ------- ------- Comprehensive income/(loss) $ (178) $ 1,198 ------- -------
6. SIGNIFICANT CONTRACTS The Company enters into contracts to provide lottery equipment and management of on-line lottery systems on a long-term basis. In September 1999, the Company entered into agreements with Global Technologies Ltd. (GTL) to provide equipment for a contract price of $12.3 million and facilities management services for a fixed fee plus percentage contract for a charitable lottery in Great Britain which began operations in Spring 2000. The Company completed delivery of the system and terminals and lottery operations began in the first quarter of 2000. Revenues of $10.5 million were recognized on this contract for the four month period ending April 30, 2000. During the year ended December 31, 2000, the company recorded revenues of $14.5 million on these contracts. The Company's sale of equipment and services was substantially paid by GTL, however the final payment became delinquent. At the end of the third quarter 2000, the Company reserved $1.8 million for the full unpaid balance as of September 30, 2000. In October of 2000, the Company was notified by GTL that the lottery would no longer be operational. In December 2000, the parties executed a settlement agreement in which GTL returned a negotiated number of terminals to the Company in full satisfaction of the outstanding amounts due to the Company. In connection with the settlement, the reserve recorded in September 2000 was reversed and the terminals were added to inventory at the lower of cost or market, to the extent of the amount previously reserved in the third quarter. None of the terminals received in the settlement and included in inventory have been sold as of April 30, 2001. In November 2000, the Company signed a $2.0 million contract with a customer to provide an on-line lottery system and terminals. Pursuant to this contract, the Company recorded a $518,000 note receivable that was issued to partially finance the customer's payments for the terminals to be delivered over the next two years. The note receivable bears interest at an annual rate of 10% and matures on October 30, 2004. Principal and interest payments are due to the Company monthly. When the note receivable was initially recorded, the Company also recorded deferred revenue for $518,000. Revenue on this contract is recognized in accordance with the percentage-of-completion method. During the four months ended April 30, 2001, the Company recognized revenues of $122,000 on this contract. Accounts receivable as of April 30, 2001 on this contract was $500,000. As of June 13, 2001, $190,000 of this balance has been collected. 9 10 In November 2000, the Company and Sports Toto Malaysia (STM), a subsidiary of Berjaya Group Berhad (Berjaya), executed an agreement for the Company to supply an on-line lottery system and services to STM for $8.1 million. The system is scheduled to be operational in the third quarter of calendar year 2001. Revenues of $3.0 million were recognized on this contract in the four month period ended April 30, 2001 and there were no outstanding balances due on this contract. Also in November of 2000, the Company executed an agreement with a customer to supply extensive software and terminal hardware in a development contract for $1.6 million. Revenue in the four month period ended April 30, 2001 was $377,000. 7. LITIGATION 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. 8. SUBSEQUENT EVENTS In May 2001, an order for additional DMF terminals with an existing customer was received for $0.8 million. Delivery is expected in September 2001. 10 11 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, 2000. SUMMARY OF SIGNIFICANT DEVELOPMENTS The Company enters into contracts to provide lottery equipment and management of on-line lottery systems on a long-term basis. In September 1999, the Company entered into agreements with GTL to provide equipment for a contract price of $12.3 million and facilities management services for a fixed fee plus percentage contract for a charitable lottery in Great Britain which began operations in Spring 2000. The Company completed delivery of the system and terminals and lottery operations began in the first quarter of 2000. Revenues of $10.5 million were recognized on this contract for the four month period ending April 30, 2000. During the year ended December 31, 2000, the company recorded revenues of $14.5 million on these contracts. The Company's sale of equipment and services was substantially paid by GTL, however the final payment became delinquent. At the end of the third quarter 2000, the Company reserved $1.8 million for the full unpaid balance as of September 30, 2000. In October of 2000, the Company was notified by GTL that the lottery would no longer be operational. In December 2000, the parties executed a settlement agreement in which GTL returned a negotiated number of terminals to the Company in full satisfaction of the outstanding amounts due to the Company. In connection with the settlement, the reserve recorded in September 2000 was reversed and the terminals were added to inventory at the lower of cost or market, to the extent of the amount previously reserved in the third quarter. None of the terminals received in the settlement and included in inventory have been sold as of April 30, 2001. In November 2000, the Company signed a $2.0 million contract with a customer to provide an on-line lottery system and terminals. Pursuant to this contract, the Company recorded a $518,000 note receivable that was issued to partially finance the customer's payments for the terminals to be delivered over the next two years. The note receivable bears interest at an annual rate of 10% and matures on October 30, 2004. Principal and interest payments are due to the Company monthly. When the note receivable was initially recorded, the Company also recorded deferred revenue for $518,000. Revenue on this contract is recognized in accordance with the percentage-of-completion method. During the four months ended April 30, 2001, the Company recognized revenues of $122,000 on this contract. Accounts receivable as of April 30, 2001 on this contract was $500,000. As of June 13, 2001, $190,000 of this balance has been collected. In November 2000, the Company and Sports Toto Malaysia (STM), a subsidiary of Berjaya Group Berhad (Berjaya), executed an agreement for the Company to supply an on-line lottery system and services to STM for $8.1 million. The system is scheduled to be operational in the third quarter of calendar year 2001. Revenues of $3 million were recognized on this contract in the four month period ended April 30, 2001 and there were no outstanding balances due on this contract. 11 12 Also in November of 2000, the Company executed an agreement with a customer to supply extensive software and terminal hardware in a development contract for $1.6 million. Revenue in the four month period ended April 30, 2001 was $377,000. On February 12, 2001, the Affiliations Committee of the Board of Directors approved a $1.5 million six month short-term loan to Berjaya Lottery Management (H.K.) Ltd., the Company's majority shareholder, at an interest rate of 9% per annum. The note is due on August 13, 2001. In May 2001, an order for additional DMF terminals with an existing customer was received for $0.8 million. Delivery is expected in September 2001. RESULTS OF OPERATIONS Product sales in the four month period ending April 30, 2001 were $4.2 million, $7.3 million less than the same period in 2000. Substantially all of the prior period revenue was from the sale of the on-line lottery system to GTL that was completed in March 2000. In the four months ended April 30, 2001, revenue was recognized from four contracts with a significant portion derived from the sale of an on-line system and related services to STM, a subsidiary of Berjaya. Service revenues in 2001 decreased $442,000 to $34,000 compared to $476,000 for the four month period in 2000. This decrease resulted from revenues generated through the Company's UK subsidiary for facilities management to GTL that were discontinued in October 2000. The service revenue in 2001 is for software service agreements. Gross profit on product sales for the four month period in 2001 was $934,000 or 22% of revenue compared with a gross profit on product sales of $3.0 million or 26% in 2000. Contracts in the current period provided a gross profit percentage 2% lower than the contracts from the same period in 2000. The gross profit percentage on service revenues for the four month period ending April 30, 2001 was 15% compared to a gross profit percentage of 2% for the same period in 2000. Costs related to the first month of operations on the facilities management agreement from the UK subsidiary to GTL impacted the gross profit percentage in the prior period. GTL closed the operation in October 2000. Engineering, research and development expenses for the 2001 four month period were $131,000 compared to $291,000 for the 2000 four month period. Most of our resources are currently being used to meet current contract deadlines. Increased research and development spending is expected in the future as specific new projects are underway. Selling, general and administrative expenses for the four month period ending April 30, 2001 decreased approximately $0.8 million compared to 2000 expenses of $1.8 million. The decrease in SG&A expenses is attributable to the shutdown of the UK operation established to serve the GTL contract. Other income (expense), net decreased $321,000 for the 2001 four month period to $93,000 compared to $414,000 for the 2000 period. In 2000, $250,000 of other income was earned for the buyout of an employment contract along with $60,000 for a royalty from use of certain technology. The provision for income taxes is based on minimum tax requirements. A larger provision has not been recorded in either period because the Company has sufficient available net operating loss carry forwards to offset any tax liabilities. 12 13 LIQUIDITY AND CAPITAL RESOURCES During the four month period ended April 30, 2001, current assets decreased by $1.4 million compared to December 31, 2000. Cash and cash equivalents decreased by $3.2 million in the four month period, which included the Company funding a short term loan to Berjaya Lottery Management (H.K.) Ltd., a subsidiary of Berjaya of $1.5 million in February 2001. At December 31, 2000, the Company had $0.2 million in a certificate of deposit that was required for a bid earlier in the year. The certificate of deposit matured in January 2001. In November 2000, the Company signed a $2.0 million contract to provide an on-line lottery system and terminals. Pursuant to this contract, the Company recorded a $518,000 note receivable that was issued to partially finance the customer's payments for the terminals to be delivered over the next two years. The note receivable bears interest at an annual rate of 10% and matures on October 30, 2004. Principal and interest payments are due to the Company monthly. When the note receivable was initially recorded, the Company also recorded deferred revenue for $518,000. On February 12, 2001, the Affiliations Committee of the Board of Directors approved a $1.5 million six month short-term loan to Berjaya Lottery Management (H.K.) Ltd., a subsidiary of Berjaya and the Company's majority shareholder, at an interest rate of 9% per annum. The note is due on August 13, 2001. Sources of cash over the next 12 months are expected to come from current contracts, spares revenue estimated from historical sales and repayment of the $1.5 million short-term loan to Berjaya. Uses of cash will be for normal operating expenses and costs associated with contract execution. 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 14 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. 14 15 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: June 14, 2001 15