10-Q 1 s11-4252_10q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB _____________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 0-22191 LOTTERY & WAGERING SOLUTIONS INC. --------------------------------------------- (Exact Name of Registrant as specified in its Charter) DELAWARE 65-0675901 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 8201 PETERS ROAD SUITE 1000 FT. LAUDERDALE, FL 33324 ------------------------- (Address of Principal Executive Offices) N/A ------------------------- (Former Name, Former Address and Former Fiscal Year, if changed Since Last Report) State the number of shares outstanding of the issuer's common stock, as of the latest practicable date. Class Outstanding at February 11, 2004 -------- -------------------------------- Common Stock, $.001 par value 905,996 shares Transitional Small Business Disclosure Format (check one): Yes [ ] No. [ X ] Certain statements in this Quarterly Report on Form 10-QSB are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statement. Factors that impact such forward looking statements include, among others, risk factors included in the Company's Annual Report on Form 10-KSB for the year ended June 30, 2003 and other filings with the Securities and Exchange Commission. As set forth herein and therein, the Company is currently subject to material risks and uncertainty as a result of a Court decision in Surname, presently on appeal, which has ordered the Company's joint venture subsidiary evicted from the premises from which it conducts its casino operations. Such operations generate substantially all of the revenue of the Company. (See "Note E" to the financial statements contained herein) INDEX TO FORM 10-QSB PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2003 (unaudited).....................................1 Condensed Consolidated Statements of Operations for the Three and Six Months ended December 31, 2003 (unaudited) and the Three and Six Months ended December 31, 2002 (unaudited)........................2 Condensed Consolidated Statements of Cash Flows for the Three and Six Months ended December 31, 2003 (unaudited) and the Three and Six Months ended December 31, 2002 (unaudited)........................3 Notes to Condensed Consolidated Financial Statements...........................4 Item 2. Management's Discussion and Analysis or Plan of Operation...............................................12 Item 3. Controls and Procedures.........................................15 PART II. OTHER INFORMATION Item 1. Legal Proceedings...............................................16 Item 5. Other Information ..............................................16 Item 6. Exhibits and Reports on Form 8-K................................16 SIGNATURES ...................................................................17 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LOTTERY & WAGERING SOLUTIONS INC. CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements. LOTTERY & WAGERING SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to condensed consolidated financial statements. LOTTERY & WAGERING SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to condensed consolidated financial statements. LOTTERY & WAGERING SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (NOTE A) BASIS OF PRESENTATION AND THE COMPANY: Lottery & Wagering Solutions Inc. ("LWSI") was incorporated on March 6, 1996 and has adopted a fiscal year ending June 30. The accompanying unaudited condensed consolidated financial statements include the accounts of LWSI, its subsidiaries and joint venture (collectively, the "Company"). Intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three and six month periods ended December 31, 2003 are not necessarily indicative of the results that may be expected for any future interim periods or the year ending June 30, 2004. The balance sheet at June 30, 2003 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Form 10-KSB for the year ended June 30, 2003 filed by the Company. The subsidiaries Sakhalin General Trading and Investments Ltd. ("SGTI"), Sakhalin City Center Ltd. ("SCC") and joint venture Suriname Leisure Company A.V.V. ("SLC") are based and operating in Cyprus, Russian Federation and Suriname, respectively. The statutory currencies in the countries of incorporation are respectively the Cyprus Pound, the Russian Rouble and the Suriname Guilder. The reporting currency is the U.S. Dollar. (NOTE B) THE COMPANY: Lottery & Wagering Solutions Inc. ("LWSI") was incorporated under the laws of the State of Delaware on March 6, 1996 as Conserver Corporation of America, changed its name on December 2, 1997 to CCA Companies Incorporated, and on October 1, 2001 changed its name again. The current active business of LWSI (with its subsidiaries, the "Company") is the operation of a gaming casino in Suriname 50% owned by the Company. The Company is also pursuing the sale of property initially acquired by it for the development of a casino and hotel project in Sakhalin in the Russian Federation on an island north of Japan (the "Sakhalin Project"). In addition, in May 2001, the Company entered into a contract under which, subject to significant pre-acquisition conditions, the Company was to acquire all of the stock of Emerging Market Solutions, Inc., ("EMSI") the sole asset of which is a lottery gaming system contract which grants to EMSI the exclusive right to provide an on-line lottery and sports betting system in Ho Chi Minh City and the Southern Provinces of Vietnam. The proposed acquisition was approved by the stockholders of the Company on September 26, 2001, but was not consummated as various preconditions to a closing were not met. In April 2003, the Company restructured its investment in this project by exchanging its interests therein for shares of Pacific Lottery Corporation ("PLC"), a Canadian company whose shares are traded on the Canadian Venture Exchange, and which has undertaken to pursue the development of the lottery system in Vietnam. 4 Since March 1999 the Suriname casino, owned by Suriname Leisure Company A.V.V. ("SLC"), an Aruba joint venture entity 50% owned by the Company, has been operating in permanent quarters in the hotel where previously SLC maintained temporary facilities for its casino operation. The Company's 100% owned Delaware subsidiary, Dorsett Hotel & Resorts, Inc. ("Dorsett") manages the casino. The Company's Suriname casino occupies two leased floors totaling approximately 20,000 square feet in the Plaza Hotel, which is a downtown hotel in the capital city of Paramaribo. The casino has approximately 15 gaming tables, 181 slot machines and a 50-seat restaurant. There are other casinos in Paramaribo, the capital city, and currently three compete with the Company for the same local gaming clientele. The Suriname casino was constructed by the Company pursuant to an agreement with Parbhoe Handelmij NV ("Parbhoe"), the local company that owned the casino license and which became the 50% owner of the joint venture entity, SLC. SLC entered into the Suriname Casino Management Agreement in April 1998 for the Company, through Dorsett, to operate the Casino for fifteen years at a base fee equal to 3% of gross revenues calculated on an annual basis and payable monthly, plus an incentive fee of ten percent of gross operating profits, payable monthly. SLC entered into a lease agreement for the casino premises from Parbhoe, which represented to Dorsett that it was the hotel owner, for fifteen years beginning February 1998. On July 30, 2003, the Subdistrict Court of Suriname issued an order evicting SLC from such quarters finding that Parbhoe, the lessor, did not have the legal right to grant the lease under which SLC was occupying such premises. The order of eviction has been appealed and is suspended until the conclusion of the appeals process. As there is no assurance that the order of eviction will ultimately be reversed or nullified, the Company is seeking an alternative location in Paramaribo for the operation of a casino. In this regard, the Company through its subsidiary has acquired its own license to operate a casino in Suriname. If the Company relocates the Suriname Casino to a different location, it will have to design and set up infrastructure, incur additional relocation costs associated with removal, transportation and installation of equipment, leasehold improvements, advertising and all other costs associated with relocation and statutory costs associated with the set up of operations at a new location. In addition, there is the potential for a full or partial impairment, depending on the outcome of the court proceedings, of the leasehold improvements in SLC, which have a net book value of approximately $2,933,000 at December 31, 2003. The Company entered into a stock purchase agreement on October 24, 1997, (the "Sakhalin Agreement") with Sakhalin General Trading Investments Limited ("SGTI") and an assignment agreement with Sovereign Gaming and Leisure Limited ("Sovereign") on December 12, 1997, each a limited liability company organized under the laws of Cyprus. Pursuant to the Sakhalin Agreement, the Company acquired all of the outstanding shares of SGTI and SGTI's rights and interest in a project to develop the Sakhalin Project, and SGTI's ownership interest in 85% of Sakhalin City Center Ltd. ("SCC"). SCC is a closed joint stock company incorporated under the laws of the Russian Federation that holds certain rights, including a 101-year ground lease on the proposed site of the Sakhalin Project, and a guarantee by the city of Yuzhno-Sakhalinsk (the "City") to issue a gaming license to SCC. 5 Pursuant to the Sakhalin Agreement, SCC was to develop, subject to obtaining financing, a hotel/casino complex on a ten-acre site in the center of the City of Yuzhno-Sakhalinsk. Because the Company has been unable to obtain financing for this project, it has made efforts to sell its rights in the Sakhalin Project or sub-lease all or a portion of the property, which it has leased from the City for the Sakhalin Project. In April 2003, SGTI entered into a series of agreements (dated as of March 20, 2003) under which it transferred one half of the leasehold rights held by SCC to a third party in return for net proceeds of $1,100,000. Under these agreements, SCC transferred to the purchaser the sublease rights to approximately five acres of the property, and one half of the shares of SCC which it held. The purchaser has agreed to return to SGTI, for nominal consideration, the shares of SCC if it acquires a direct lease from the City for the portion of the property subject to the sublease. Approximately $1,000,000 expended in connection with obtaining the original lease agreement and demolition costs remains on the Company's consolidated balance sheet at December 31, 2003. The Company is continuing to explore alternatives for the sale or other disposition of its remaining interests in the Sakhalin Project. In May 2001, the Company entered into a contract to acquire an entity ("EMSI") which held the exclusive right and obligation to supply an on-line lottery and sports lottery system, and to operate it, in Ho Chi Minh City and the Southern provinces of Vietnam. Certain conditions to that contract were not fulfilled, and the Company subsequently determined that it was in its best interests to assign its rights in the contract to a Canadian entity, Pacific Lottery Corporation ("PLC"), and to restructure its cash investment in the project into common shares of PLC. In a transaction which was consummated as of April 7, 2003, the Company acquired from PLC 7,962,620 of its common shares in satisfaction of indebtedness owed to the Company by PLC at a deemed purchase price of $.30CDN per share. The transaction was part of a debt and equity reorganization of PLC, and a private placement by PLC of its common shares and warrants to a wholly owned subsidiary of Genting International ("Genting") for $4.50 Million CDN. The funds from the private placement are to be exclusively used in connection with the development of the online lottery program in Ho Chi Minh City and the Southern provinces of Vietnam. Securities of PLC are traded on the Canadian Venture Exchange under the symbol TSX-Venture: "LUK". 6 The Company also received from PLC a "finders option" upon the closing of the private placement to compensate the Company for assisting in bringing about the private placement. The finders option consists of common stock purchase warrants to purchase 1,400,000 additional common shares of PLC at $.30CDN per share (exercisable for a twenty-four month period). The acquisition of these securities gives the Company current ownership of approximately 19.7% of the common shares of PLC (or 13.6% of such common shares following the conversion to common shares of the outstanding preferred shares), or 11.9% of the common shares on a fully diluted basis. In the private placement, Genting acquired an approximate 30% equity stake in PLC, assuming all the preferred shares are converted into common shares of PLC, and potentially up to a 47% equity stake (fully diluted) assuming Genting exercises all of the warrants it received. Genting is a diversified investment company whose subsidiaries include investment holdings, property development and provision of sales and marketing services to resort-related businesses. Securities of Genting are listed on the Luxembourg Stock Exchange and quoted on the Singapore Stock Exchange. On November 28, 2003, the Board of Directors of the Company authorized the grant as an incentive to each of its directors and officers (Messrs. Dallas Dempster, James Stanton and Miles Greenberg), options to acquire from the Company up to 10% or 796,260 of the PLC shares which the Company acquired from PLC. Such options may be exercised by the grantees at any time, at an exercise price equal to the Company's cost of such shares, CDN$.30 per share. The options will expire November 28, 2006. Mr. Dempster received options for 398,130 of such shares and Messrs. Stanton and Greenberg each received 199,065. The Company is investigating the desirability of participating in the development and operation of a casino in Vietnam, approximately 80 miles from Ho Chi Minh City, and is actively seeking a casino license to conduct such operations. On September 16, 2003, the Company posted a refundable deposit of $250,000 with an agency of the Vietnamese government as a demonstration of its interest in negotiating an acceptable agreement for the casino license. (NOTE C) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation - The accompanying consolidated financial statements include the accounts of LWSI and its subsidiaries. Inter-company transactions and balances have been eliminated in consolidation. SCC is currently generating losses and the minority shareholders are not obligated to fund these losses. Accordingly, the minority interest held in SCC is not reflected in the consolidated financial statements. Casino Revenue - Casino revenue is the net win from gaming activities, which is the difference between gaming wins and losses. Cash and Cash Equivalents - The Company considers investments with original maturities of three months or less at the time of purchase to be cash equivalents. At times, cash balances in the Company's bank accounts in the United States may exceed federally insured limits. 7 Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles 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 expenditures during the reporting period. Actual results could differ from those estimates. Financial Instruments - The carrying amounts of financial instruments including accounts payable and notes payable approximate fair value. Property, Equipment and Leasehold Improvements - Property and equipment are recorded at cost. Depreciation and amortization is computed by the straight-line method based on the estimated useful lives (2 - 5 years) of the related assets. Leasehold improvements are amortized over the shorter of the life of the asset or the lease term. Investments - The Company accounts for its investment in the common stock of PLC at cost. PLC is traded on the Canadian Venture Exchange and, therefore, does not meet the criteria for reporting at fair value pursuant to FAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Income Taxes - For the purpose of these consolidated financial statements, the Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" for all periods presented. Under the asset and liability method of SFAS 109, deferred taxes are recognized for differences between financial statement and income tax bases of assets and liabilities. Stock Based Compensation - The Company accounts for stock options issued to employees in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which permits entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and provide pro forma disclosures of the effect on net income (loss) and net earnings (loss) per share for employee stock option grants as if the fair value based method, as defined in SFAS No. 123 and 148 in its annual consolidated financial statements, has been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123 and 148. Under APB Opinion No. 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted at a price below the fair market value on the day of grant. The Company utilizes SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Under the provisions of this statement, the Company has evaluated its long-lived assets for financial impairment and will continue to evaluate them as events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. 8 Foreign Currency Translation - The statutory currencies in the countries in which the Company's subsidiaries are based are the Cyprus Pound, the Russian Rouble, the United States Dollar and the Suriname Guilder. The reporting currency is the United States Dollar. Reclassifications - Certain prior year balances have been reclassified to conform to the 2003 presentation. RECENT PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 was effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company's financial reporting and presentation has not been materially affected by the adoption of this standard. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." The statement retains the previously existing accounting requirements related to the recognition and measurement of the impairment of long-lived assets to be held and used while expanding the measurement requirements of long-lived assets to be disposed of by sale to include discontinued operations. It also expands the previously existing reporting requirements for discontinued operations to include a component of an entity that either has been disposed of or is classified as held for sale. The Company's adoption of SFAS No. 144 did not have a material effect on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt". Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. The Company's adoption of SFAS No. 145 did not have a material effect on the Company's financial statements. 9 In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" which is effective for exit or disposal activities that are initiated after December 31, 2002. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. There was no material impact on the Company's financial statements as a result of adopting SFAS No. 146. On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies", relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods that end after December 15, 2002. The disclosure provisions have been implemented and no disclosures were required at June 30, 2003. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of the guarantor's year-end. FIN 45 requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company's adoption of FIN 45 in 2003 has not and is not expected to have a material effect on the Company's financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for the Company's June 30, 2003 financial statements. The Company's adoption of SFAS No. 148 did not have a material effect on its financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51", which addresses consolidation of variable interest entities. FIN 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated by a business entity, and requires existing unconsolidated variable interest entities (which include, but are not limited to, Special Purpose Entities, or SPEs) to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 is not expected to have a material effect on the Company's financial statements. (NOTE D) SLC TAXES: Corporate income taxes are paid by SLC in accordance with the Suriname Hazard Games Act of 1962 which stipulates that income taxes are payable at a rate of 50% of net taxable income as determined under Suriname tax law. Additionally, in January 2003, the Suriname government began assessing a new monthly property tax on slot machines and gaming tables used in casino operations. The monthly taxes (based on the current legal exchange rate of 2,800 Guilders = US$1.00) are approximately $143 per slot machine and between $1,070 and $1,420 per gaming table. The monthly casino taxes are deductible in computing the net taxable income of the Suriname casino. The monthly fees will be subject to change as the exchange rate fluctuates and as additions or reductions in the numbers of slot machines and gaming tables being operated by the Suriname casino occur. 10 (NOTE E) COMMITMENTS AND CONTINGENCIES: On July 30, 2003, the Subdistrict Court in Suriname issued an order evicting SLC from the premises it occupies in the Plaza Hotel and from which it conducts all of its casino operations. The Court ruled that Stichting Dim (Dim Foundation), the plaintiff in the eviction proceeding which took title to the Hotel through a mortgage foreclosure, was not bound by the 1998 casino lease between SLC and Parbhoe, as Parbhoe did not hold registered title to the premises. SLC is appealing such order, and in a separate proceeding has been granted an order suspending its execution until the conclusion of the appeals process. According to the attorneys for SLC, the chances in the appeal are reasonable. As there is no assurance that the appeal will be successful, the Company through its subsidiaries is seeking alternative locations in Paramaribo to relocate its casino operations. If the Company relocates the Suriname Casino to a different location, it will have to design and set up infrastructure, incur additional relocation costs associated with removal, transportation and installation of equipment, leasehold improvements, advertising and all other costs associated with relocation and statutory costs associated with the set up of operations at a new location. In addition, there is the potential for a full or partial impairment, depending on the outcome of the court proceedings, of the leasehold improvements in SLC, which have a net book value of approximately $2,933,000 at December 31, 2003. On July 30, 2001, Parbhoe acting in the name of SLC, put a garnishment on the bank accounts operated by Dorsett, the manager on behalf of SLC (SLC v. Dorsett & Clague, A.R. 01/2894), claiming that Dorsett was transferring SLC's money illegally, and that Clague was not authorized to act as General Manager. Parbhoe claims that Dorsett and Clague owes to SLC US $4,152,254. The garnishment was lifted in Summary proceedings (Clague & Dorsett v. SLC, A.R. 01/3005). The main proceeding is still pending. In this case, the B-directors Dempster, Clague and Dorsett have petitioned to be admitted as parties in the case, with the express purpose of objecting to the fact that Parbhoe started the lawsuit on behalf of SLC, without permission of the Board of Directors. On May 10, 2002, Parbhoe undertook an identical action to block the bank accounts of Dorsett (SLC v. Dorsett & Clague, A.R. no.01/3216). The garnishment was also lifted (Clague & Dorsett v. SLC, A.R. 02/2012), but the main case, with the same contents as the previous one, is also pending. 11 SLC and Dorsett are engaged in other legal proceedings in Suriname in which SLC seeks to recover approximately $315,000 in rental payments which were made to Parbhoe, its Landlord. According to a decision of the district commissioner such payments were in excess of the maximum rentals permitted by law. Parbhoe has counterclaimed in the proceeding seeking dissolution of the lease and alleging it is due payment of back rent in the amount of $484,000. After consultation with its Suriname attorneys, management of the Company is of the opinion that such counterclaim will not be sustained. On December 9, 2002, Dorsett commenced an action in Suriname, entitled Dorsett v. Parbhoe, A.R. 02/1187, Article 12 of the Joint-Venture Agreement (JVA) between Parbhoe and Dorsett stipulate that a party obtains an option to buy the shares of the other party, if a change of control occurs within that other party. Since Winod Parbhoe died on September 4, 2001, such change of control occurred within Parbhoe's Handelmij NV. Dorsett seeks to enforce this option to purchase Parbhoe's shares in SLC. All of the foregoing legal proceedings predate the finding of the Suriname Court that Parbhoe did not have registered title to the premises at the time it entered into the lease agreement. The Company is currently evaluating the legal remedies available to it in the event this decision is sustained, both to the extent they affect these pending legal proceedings, and to the extent they give rise to other claims which the Company or its affiliates may assert in the future. The Company anticipates that it will be subjected to various lawsuits, claims and proceedings of a nature considered normal to its business. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis of significant factors affecting the Company's operating results and liquidity and capital resources should be read in conjunction with the accompanying financial statement and related notes. RESULTS OF OPERATIONS Comparison of Three Months Ended December 31, 2003 to Three Months Ended December 31, 2002 Net Loss. The Company generated a net loss of $237,355, or $0.23 per share, for the three months ended December 31, 2003, as compared to a net loss of $66,698, or $0.05 per share, for the three months ended December 31, 2002. The greater loss during the current year's period resulted primarily from significantly reduced revenues and operating income at the Suriname casino as described below. Revenues. During the three months ended December 31, 2003, the Company had revenues of $1,208,498 generated from the Suriname casino operations. For the three months ended December 31, 2002, the Company recorded revenues of $2,071,758 from the Suriname casino. As set forth above, SLC is engaged in litigation with the new owner of the Suriname Plaza Hotel where the casino is located. Management believes that the 42% decrease in revenues has resulted primarily from increased competition from new casino openings, a weak economy, and from the harassment of casino customers and other disruptions apparently caused by guests of the Plaza hotel which have occurred since the acquisition of the hotel by its new owners. These disruptions together with the increased competition and the uncertainty of the eviction litigation have contributed to the lower attendance experienced by the Suriname casino during the December 31, 2003 quarter. 12 Marketing, General and Administrative Expenses. For the three months ended December 31, 2003, marketing, general and administrative expenses were $1,419,972 of which $1,078,213 related to operating expenses of the Suriname casino and $341,759 for general corporate overhead. Marketing, general and administrative expenses were $1,552,738 for the three months ended December 31, 2002 consisting primarily of $1,058,513 related to operating expenses of the Suriname casino and $494,225 for general corporate overhead. The Suriname casino's current period operating expenses increased by approximately $20,000 as a result of the new casino tax assessed on gaming equipment which commenced January 1, 2003 and amounted to $134,000 during the current year's period. This increase was partially offset by reductions in marketing and general expenses of the casino in reaction to the lower revenues currently being generated by the casino. General corporate overhead decreased during the current period by $152,466. Corporate overhead during the prior year's period included a bonus paid to the Company's Chief Executive Officer. The bonus was paid by issuing common stock of the Company valued at $112,500. No such bonuses were paid during the current year's period. Minority Interest. The Company has management control of the Suriname casino joint venture company in which it owns a 50% equity interest. As such, the Suriname casino's operations are consolidated with those of the Company and a minority interest is recorded for the 50% interest held by the Company's joint venture partner. During the three months ended December 31, 2002, the joint venture company generated net after tax income of $472,266 after deduction for management fees earned by the Company and eliminated in consolidation. As a result, the Company recorded a minority interest equal to 50% of such amount or $236,133. For the three months ended December 31, 2003, the joint venture company generated net after tax income of $52,742 after deduction for management fees earned by the Company and the Company recorded a minority interest equal to 50% of such amount, or $26,371. Foreign Income Taxes. During the three months ended December 31, 2002, SLC accrued for income taxes of $350,411, payable to the Government based on a tax rate of 50% of the estimated net taxable income pursuant to the Suriname Hazard Games Act 1962. During the three months ended December 31, 2003, SLC did not accrue for any additional income taxes. Comparison of Six Months Ended December 31, 2003 to Six Months Ended December 31, 2002 Net Loss. The Company incurred a loss of $726,845, or $0.68 per share, for the six months ended December 31, 2003, as compared to a loss of $171,042, or $0.13 per share, for the six months ended December 31, 2002. The greater loss during the current year's period resulted primarily from significantly reduced revenues and operating income at the Suriname casino as described below. 13 Revenues. For the six months ended December 31, 2003, the Company had revenues of $2,240,865 from the operations of the Suriname casino compared with $3,698,182 for the six months ended December 31, 2002. As describe hereinabove, SLC is engaged in litigation with the new owner of the Suriname Plaza Hotel where the casino is located. Management believes that the 39% decrease in revenues during the current year's period resulted primarily from increased competition from new casino openings, a weak economy, and from the harassment of casino customers and other disruptions apparently caused by guests of the Plaza hotel which have occurred since the acquisition of the hotel by its new owners. These disruptions together with the increased competition and the uncertainty of the eviction litigation have contributed to the lower attendance experienced by the Suriname casino during the six months ended December 31, 2003. Marketing, General and Administrative Expenses. Marketing, general and administrative expenses were $3,063,707 for the six months ended December 31, 2003 consisting of $2,308,541 related to operating expenses of the Suriname casino and $755,166 for general corporate overhead. For the six months ended December 31, 2002, marketing, general and administrative expenses were $2,972,382 of which $2,075,912 related to operating expenses of the Suriname casino and $896,470 for general corporate overhead. The current period's Suriname casino operating expenses increased by approximately $233,000 or 11% primarily as a result of the new casino tax assessed on gaming equipment which commenced January 1, 2003 and amounted to $274,000 during the current year's period. General corporate overhead decreased during the current period by $141,304. Corporate overhead during the prior year's period included a bonus paid to the Company's Chief Executive Officer. The bonus was paid by issuing common stock of the Company valued at $112,500. No such bonuses were paid during the current year's period. Minority Interest. The Company has management control of the Suriname casino joint venture company in which it owns a 50% equity interest. As such, the Suriname casino's operations are consolidated with those of the Company and a minority interest is recorded for the 50% interest held by the Company's joint venture partner. During the six months ended December 31, 2003, the joint venture company generated a net loss of $188,613 after deduction for management fees earned by the Company and eliminated in consolidation. As a result, the Company recorded a reduction to minority interest equal to 50% of such amount or $94,307. For the six months ended December 31, 2002, the joint venture company generated net after tax income of $802,968 after deduction for management fees earned by the Company and the Company recorded a minority interest equal to 50% of such amount, or $401,484. Foreign Income Taxes. During the six months ended December 31, 2002, SLC accrued for income taxes of $492,141 payable to the Suriname Government based on a tax rate of 50% of the estimated net taxable income pursuant to the Suriname Hazard Games Act 1962. During the six months ended December 31, 2003, SLC did not accrue for any additional income taxes. 14 LIQUIDITY AND CAPITAL RESOURCES Since August 1999, the Company's almost sole recurring source of cash, exclusive of loans and securities sales, was the cash payments from SLC which is the joint venture entity that owns the Suriname casino. Cash payments from SLC to LWSI, Parbhoe or their affiliates are made by SLC, under the management control of Dorsett, the Company's subsidiary, according to a cash allocation priority established under the parties' Joint Venture Agreement. Such payments were initially allocated to management fees and the repayment of construction and other loans and interest. As of December 2003, all loans have been repaid by SLC in full and all distributions are currently first used to pay management fees to Dorsett and then are to be distributed equally to the two venture partners. Significant disputes and litigation have arisen between Parbhoe and the Company and its affiliates, and a Suriname Court has held the lease agreement to be unenforceable by SLC, a decision which SLC is currently appealing. Such disputes and litigation, and the manner in which they are resolved, may materially adversely effect the cash flow of the Company. The Sakhalin Project has consistently generated cash losses for the Company. Under an agreement entered into in April 2003, the Company transferred one half of its leasehold rights to a third party, and is seeking to dispose of its remaining interests in the Project. As of June 30, 2002, the Company had advanced $1,271,472 to EMSI to develop the Lottery Gaming System Contract and to support its operations and those of PLC in Vietnam in anticipation of the acquisition of EMSI by the Company. As set forth above, the Company has converted its interests in EMSI into common shares and warrants of PLC. On December 31, 2003, the Company had approximately $2,232,000 in cash or cash equivalents on hand. The Company believes that it has adequate cash reserves for its operations for the next twelve months. Off-Balance Sheet Arrangements. The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. ITEM 3. CONTROLS AND PROCEDURES An evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13(a) - 15(e) and 15(d) - 15(e) ) as at the end of the fiscal quarter on December 31, 2003, show such controls and procedures to be adequate. No significant changes in such controls or other factors has occurred since the date of such evaluation. 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See (Note E) "Commitments and Contingencies" to the financial statements included herein. ITEM 5. OTHER INFORMATION On November 24, 2003, the Company repurchased and cancelled 66,667 shares of its common stock previously issued to Richard W. DeVries Professional Corporation. The common stock was repurchased for $1.20 per share. On January 7, 2004, the Company repurchased and cancelled 75,000 shares of its common stock previously issued to Auschina Investment Company. The common stock was repurchased for $1.25 per share. On January 22, 2004, the Company repurchased and cancelled 26,114 shares of its common stock previously issued to Peter Janssen. The common stock was repurchased for $1.25 per share. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 31.1 Certification of principal executive officer pursuant to Rule 15d-14(a).* 31.2 Certification of principal financial officer pursuant to Rule 15d-14(a).* 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350.* 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.* * Filed herewith (b) Reports on Form 8-K: N/A 16 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LOTTERY & WAGERING SOLUTIONS INC. Dated: February 11, 2004 By: /s/ Dallas R. Dempster ----------------------------------------- Dallas R. Dempster Chief Executive Officer and President By: /s/ Miles R. Greenberg ----------------------------------------- Miles R. Greenberg Chief Financial Officer 17

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