10-Q 1 s15-2692_10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 [ ] 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) Delaware 65-0675901 ----------------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 9130 S. Dadeland Blvd. Suite 1602 Miami, FL 33156 ---------------------- (Address of Principal Executive Offices) (305) 670-3838 ---------------- (Registrant's Telephone Number, Including Area Code) N/A -------- (Former Name, Former Address and Former Fiscal Year, if changed Since Last Report) Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 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. [ ] State the number of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date. Class Outstanding at February 7, 2002 -------------- ------------------------------- Common Stock, $.001 par value 888,106 shares LOTTERY & WAGERING SOLUTIONS INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2001 (unaudited)....................................1 Condensed Consolidated Statements of Operations for the Three and Six Months ended December 31, 2001 (unaudited) and the Three and Six Months ended December 31, 2000 (unaudited).......................2 Condensed Consolidated Statements of Cash Flows for the Three and Six Months ended December 31, 2001 (unaudited) and the Three and Six Months ended December 31, 2000 (unaudited).......................3 Notes to Condensed Consolidated Financial Statements..........................4 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations..................9 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds......................15 Item 3. Quantitative and Qualitative Disclosure about Market Risk......15 Item 6. Exhibits and Reports on Form 8-K...............................15 SIGNATURES ..................................................................16 i PART I. FINANCIAL INFORMATION Item 1. Financial Statements LOTTERY & WAGERING SOLUTIONS INC. CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, ~~September~~December 3031, ASSETS 2001 2001 ------ -------------- ---------------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 701,873 $ ~~839~~1,~~647~~028,152 Prepaid and other current assets 76,362 ~~177~~136,~~478~~495 Notes receivable - EMSI 342,000 ~~474~~573,~~250~~750 -------------- ---------------- Total current assets 1,120,235 1,~~491~~738,~~375~~397 Sakhalin development costs 2,100,000 2,100,000 Property, equipment and leasehold improvements, net 4,745,197 4,~~566~~378,~~178~~664 Other assets 39,447 5868,675 -------------- ---------------- TOTAL $ 8,004,879 $ 8,~~216~~285,~~228~~736 ============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 838,324 $ ~~867~~793,~~865~~317 Income tax payable 162,000 ~~267~~417,~~933~~000 Notes and loans payable - current 130,800 6813,~~041~~500 Investor deposits and other 330,000 480,000 -------------- ---------------- Total current liabilities 1,461,124 1,~~683~~703,~~839~~817 -------------- ---------------- Notes payable - long term 515,900 515,900 -------------- ---------------- Deferred income taxes 287,884 ~~310~~131,~~384~~119 -------------- ---------------- Minority interest in consolidated subsidiary 984,429 1,~~096~~296,~~634~~286 -------------- ---------------- Commitments and contingencies STOCKHOLDERS' EQUITY: Preferred stock, par value $.01, 5,000,000 shares authorized, no shares issued and outstanding Common stock, par value $.001; 50,000,000 shares authorized; 18907,~~140,~~000 shares and 17888,~~762,123~~106 shares issued and outstanding at June 30, 2001 and ~~September~~December 3031, 2001, respectively ~~18,141~~907 ~~17,763~~888 Additional paid-in capital 47,~~680~~697,~~676~~910 47,~~662~~679,~~152~~027 Accumulated deficit (42,943,275) (43,~~070~~041,~~444~~300) -------------- ---------------- Total stockholders' equity 4,755,542 4,~~609~~638,~~471~~615 -------------- ---------------- TOTAL $ 8,004,879 $ 8,~~216~~285,~~228~~736 ============== ================

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

For the Three For the Three For the For the Months Months Six Months Six Months Ended Ended ~~September~~Ended 30Ended December 31, ~~September~~December 3031, December 31, December 31, 2000 2001 2000 2001 ---------------- ---------------- ---------------- ---------------- REVENUES $ 1,~~432~~270,~~163~~884 $ 1,~~520~~827,~~940~~505 $ 2,703,047 $3,348,445 OPERATING EXPENSES: Marketing, General and administrative 1,~~343~~270,~~504~~393 1,~~279~~247,~~554~~693 2,613,897 2,527,247 ---------------- ---------------- ---------------- ---------------- INCOME FROM OPERATIONS 88491 579,~~659~~812 ~~241~~89,~~386~~150 821,198 OTHER INCOME (EXPENSE): Interest expense (~~net~~54,914) (5966,~~107~~255) (30114,~~801~~021) (97,056) ---------------- ---------------- ---------------- ---------------- Total other income (expense) (5954,~~107~~914) (3066,~~801~~255) (114,021) (97,056) ---------------- ---------------- ---------------- ---------------- Foreign income ~~taxes~~tax (6920,~~052~~672) (~~225~~284,~~549~~762) (89,724) (510,311) ---------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) BEFORE (75,095) 228,795 (114,595) 213,831 MINORITY INTEREST Minority interest (3951,~~500~~640) (14199,~~964~~652) ~~Minority Interest~~ (81132,~~071~~711) (~~112~~311,~~205~~857) ---------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) $ (~~120~~126,~~572~~735) $ 29,143 $(~~127~~247,~~169~~306) $ (98,025) ================ ================ ================ ================ NET INCOME (LOSS) PER SHARE OF COMMON STOCK: Basic ~~and~~$ (0.15) $ 0.03 $ (0.30) $ (0.11) ================ ================ ================ ================ Diluted $ (0.0115) $ 0.03 $ (0.0130) $ (0.11) ================ ================ ================ ================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS OUTSTANDING 16Basic 834,~~326~~072 888,~~666~~106 17825,~~803~~203 889,~~197~~133 ================ ================ ================ ================ Diluted 834,072 958,777 825,203 889,133 ================ ================ ================ ================

See notes to condensed financial statements. 2 LOTTERY & WAGERING SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Three For the Three For the For the Months Months Six Months Six Months Ended Ended ~~September~~Ended 30Ended December 31, ~~September~~December 3031, December 31, December 31, 2000 2001 2000 2001 ---------------- ---------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) ($126,735) $ 29,143 (~~120~~$247,~~572~~306) $ (~~127~~98,~~169~~025) Adjustments: Compensation expense in connection with issuance of options and warrants 13,000 13,000 Depreciation and amortization ~~192~~193,~~344~~080 192,~~918~~777 385,424 385,695 Consulting services provided for common stock 72,000 72,000 Minority interest 8151,~~071~~640 ~~112~~199,~~205~~652 132,711 311,857 Deferred income taxes 23,~~500~~000 22(179,265) 46,500 (156,765) Gain on common stock redemption (18,900) Changes in current assets and current liabilities: Prepaid expenses and other current assets (325,~~152)~~155 40,983 22,003 (~~101~~60,~~116~~133) Accounts payable and accrued expenses 26(52,~~364~~910) ~~135~~74,~~474~~516 (23,547) 209,990 ----------- --------------- --------------- -------------- Net cash provided by operating activities ~~199~~182,~~555~~894 ~~215~~357,~~912~~806 382,449 573,719 ----------- --------------- --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, equipment and leasehold improvements (301,~~363~~419) (135,~~899~~263) ~~Project~~(31,782) ~~development~~(19,162) ~~costs~~Funds ~~and~~used for other assets (199,~~230~~998) (29,228) Funds used for notes receivable (~~132~~99,~~250~~500) (231,750) ----------- --------------- -------------- --------------- Net cash (used) by investing activities (301,~~363~~419) (~~165~~114,~~379~~761) (31,782) (280,140) ----------- --------------- -------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Investor deposits 150,000 Repayments of notes payable (9489,~~050~~683) (6254,~~759~~540) (183,733) (117,300) ----------- --------------- -------------- --------------- Net cash provided (used) by financing activities (9489,~~050~~683) 87(54,~~241~~540) (183,733) 32,700 ----------- --------------- -------------- --------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 7591,~~142~~792 ~~137~~188,~~774~~505 166,934 326,279 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 290,701 839,647 215,559 701,873 ----------- --------------- --------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $382,493 ~~290~~$ 1,~~701~~028,152 $382,493 ~~839~~$ 1,~~647~~028,152 =========== =============== ============== ===============

See notes to condensed consolidated financial statements. 3 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 consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete 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, 2001 are not necessarily indicative of the results that may be expected for any interim period or the year ending June 30, 2002. The balance sheet at June 30, 2001 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the audited financial statements and footnotes thereto included in the Form 10-K for the year ended June 30, 2001 filed by the Company. The subsidiaries Sakhalin General Trading and Investments Ltd. ("SGTI"), Sakhalin City Center Ltd. ("SCC") and 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 Ruble and the Suriname Guilder. The reporting currency is the U.S. Dollar. (NOTE B) THE COMPANY: LWSI was incorporated under the laws of the State of Delaware on March 6, 1996 as Conserver Corporation of America and changed its name on December 2, 1997 to CCA Companies Incorporated. Subsequently, on October 1, 2001, the Company changed its name to Lottery & Wagering Solutions Inc. The current active business of the Company is (i) operation of a gaming casino in Suriname 50% owned by the Company, and (ii) pursuing 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 will acquire all of the stock of Emerging Market Solutions, Inc., ("EMSI") the primary 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. Completion of such an acquisition would result in the stockholders of EMSI 4 initially owning more than seventy percent of the outstanding common stock of the Company. Authorization for the Company to pursue the transaction and purchase the stock of EMSI was received at a Special Meeting of Stockholders held on September 26, 2001. 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 Sakhalin Project is currently in development and requires the Company to obtain substantial financing to progress further. Despite numerous discussions and several agreements the Company has not yet been able to obtain the necessary financing. The Company is continuing to seek financing. The Sakhalin Project involves plans to develop a $140 million dollar 450- room hotel/casino complex on a ten-acre site in the center of the City of Yuzhno-Sakhalinsk with further development proposed at a nearby ski mountain. The related casino as planned would initially have 70 tables and 350 slot machines. The Company has entered into a nonbinding letter of intent to acquire certain assets of Applied Gaming Solutions of Canada Inc. ("AGS"), for cash and shares of the Company. AGS operates an on-line lottery in Hanoi, Vietnam, and the acquisition of such assets is intended to provide a strategic advantage for the Company in marketing the on-line system to be developed by EMSI. (NOTE C) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: [1] Principles of consolidation The accompanying consolidated financial statements include the accounts of LWSI and its subsidiaries (collectively, the "Company"). Inter-company transactions and balances have been eliminated in consolidation. SCC is currently generating losses. Accordingly, the minority interest held is not reflected in the financial statements. The minority shareholders are not obligated to fund SCC's losses. [2] 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 expenses during the reporting period. Actual results could differ from those estimates. 5 [3] Impairment of Long-Lived Assets The Company adopted the Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." 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. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. [4] Foreign currency translation The functional currency for the Company's subsidiaries, SGTI and SLC, is the United States dollar. All assets and liabilities, materially all contracts, transactions and normal business activities have been transacted, conducted, negotiated and recorded in U.S. dollars. It is the Company's position that the operations of the Company are not integrally connected to the currencies of Cyprus and Suriname. Pursuant to Financial Accounting Standards Board Statement No. 52, "Foreign Currency Translation" (FAS 52), the Company's Russian subsidiary is situated in a highly inflationary economy. Accordingly, the Company's Russian subsidiary's functional currency will be the U.S. dollar. The financial statements for the Company's subsidiaries outside the U.S. have been translated to U.S. Dollars using a methodology consistent with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Assets and liabilities are translated to United States Dollars at the rates prevailing on the balance sheet dates and the statements of operations have been translated from the functional currencies to U.S. Dollars using average exchange rates for the applicable years. [5] Property, Equipment and Leasehold Improvements Property and equipment is recorded at cost. Depreciation and amortization is computed by the straight line method based on the estimated useful lives (3-5 years) of the related assets. Leasehold improvements are amortized over the shorter of the life of the asset or the lease. [6] Income Taxes For the purpose of these 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. 6 Until June 30, 1998 the Company, for tax purposes, did not have any operations and therefore no net operating loss. All of the expenses incurred to that date were pre-operating and accordingly were capitalized. Subsequent to the commencement of operations capitalized expenses are being amortized over sixty months. [7] Earnings Per Share Effective December 31, 1997, the Company adopted Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which simplifies the computation of earnings per share requiring the restatement of all prior periods. Net loss per share of common stock is based on the weighted average number of common shares outstanding during each period. Diluted loss per share of common stock is computed on the basis of the weighted average number of common shares and diluted securities outstanding. Dilutive securities having an anti-dilutive effect are excluded from the calculation. [8] Stock Based Compensation In October 1995, FASB issued SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No. 123 establishes a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. The Company did not adopt the fair value based method for employees but instead discloses the pro forma effects of the calculation required by the statement. [9] Recent Accounting Standards and Pronouncements In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB No. 125". This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Under these standards, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company does not expect that the adoption of SFAS No. 140 will have a material impact on its results of operations, financial position or cash flows. In June 2001, the FASB issued SFAS No. 141, SFAS No. 142 and SFAS No. 143. SFAS No. 141, "Business Combinations" is effective for all business combinations initiated after June 30, 2001 and addresses the financial accounting and reporting for business combinations. SFAS 141 supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38 Accounting for Preacquisition Contingencies of Purchased Enterprises. The Company's financial reporting or presentation is not materially affected by the adoption of SFAS 141. 7 SFAS No 142, "Goodwill and Other Intangible Assets" addresses the financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets SFAS No. 142 and is required to be applied for fiscal years beginning after December 15, 2001. SFAS No. 143, "Accounting for Asset Retirement Obligations" 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 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company's financial reporting and presentation is not expected to be materially affected by the adoption of SFAS No. 142 and 143. (NOTE D) SLC INCOME TAXES AND IMPORT DUTIES: In 1999, SLC requested that the Government of Suriname (the "Government") grant it certain concessions regarding the imposition of taxes and import duties under the Suriname Investment Act. To date the Government has not granted the Company any relief. The Company is continuing to pursue the concessions but feels that at this time, the chance of a favorable ruling is remote. In June 2000, SLC provided for income taxes payable to the Government based on a tax rate of 50% of the net taxable income since inception based on the Suriname Hazard Games Act 1962. The Company made no provisions for income tax or duties prior to this date based on opinions from Counsel regarding the tax concessions that they believe should have been granted. The Ministry of Finance is trying to impose value added tax ("VAT") tax on slot machines. According to the Company's legal counsel, they have not completed their study and deliberations prior to reporting to parliament on the issue. At this time the Company cannot quantify the amount payable, if any, for VAT on slot machines. (NOTE E) COMMITMENTS AND CONTINGENCIES: Rental Commitments Through the year ended June 30, 2000, SLC paid a base rent of $16,667 per month, before any escalations, as required by its original lease on the premises which the Suriname casino operates. Suriname law regulates the maximum amount of rent that a landlord can charge and in July 2000, the Company determined that it was being charged in excess of fair rental value. Based on a Government validated valuation of the maximum rent chargeable under Suriname law on the space occupied by the casino, the Company commenced paying a reduced rental of approximately $3,200 per month and is currently attempting to recover through litigation the excess rent previously charged of approximately $315,000. The landlord is contesting the valuation and the amount of the requested refund. 8 LITIGATION AND ARBITRATION The Company anticipates that it will be subjected to various lawsuits, claims and proceedings of a nature considered normal to its business. MARITIME SERVICES CORPORATION ("MSC") In September 2000, MSC brought an action in the United States District Court of Oregon seeking damages in the amount of $200,250 plus interest. MSC claims that the Company issued shares of its Common Stock in 1998 having a value of $200,250 as partial payment for construction work performed and that the Company was obligated to buy the shares back for the same value. The Company has denied all material allegations of the complaint and believes that it has no liability for the claim. LONG-TERM NOTE PAYABLE Parbhoe, the Company's joint venture partner in SLC, has made a demand on SLC for the repayment in full of the remaining balance of the $600,000 loan it made to LWSI on September 3, 1998. This is being rigorously defended in the Suriname Courts on the basis that, among other defenses, based on the loan's terms, the loan is not repayable on demand but on a pro-rata basis along with loans that are outstanding to LWSI and additionally, the loan is owed by LWSI and not SLC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2001 to Three Months Ended December 31, 2000 Net Income (Loss). The Company generated net income of $29,143, or $0.03 per share, for the three months ended December 31, 2001, as compared to a loss of $126,735, or $0.15 per share, for the three months ended December 31, 2000. The better results were primarily due to the increase in revenue and profits generated by the Suriname casino. 9 Revenues. During the three months ended December 31, 2000, the Company had revenues of $1,270,884 generated from its Suriname casino operations. For the three months ended December 31, 2001, the Company recorded revenues of $1,827,505 from the Suriname casino. The 44% increase in revenues during the current period resulted from both improved economic conditions in Suriname coupled with marketing programs initiated by the Company designed to increase activity and wagering at the casino. Marketing, General and Administrative Expenses. Marketing, General and administrative expenses were $1,270,393 for the three months ended December 31, 2000 consisting primarily of $921,342 related to operating expenses of the Suriname casino and $349,051 for general corporate overhead. For the three months ended December 31, 2001, marketing, general and administrative expenses were $1,247,693 of which $905,082 related to operating expenses of the Suriname casino and $342,611 for general corporate overhead. The current period's Suriname casino operating expenses decreased by $16,260 or 2% as the Company was able to hold expenses in line with last year even though revenues increased by 44% over the prior year's period as a result of the casino's increased activity. This was made possible due to the cost cutting measures implemented by management during the current period in an effort to increase profitability which were partially offset by certain increased expenses incurred as a result of the casino's increased activity. General corporate overhead was held in line with the prior year's period. Interest Expense. For the three months ended December 31, 2000, net interest expense was $54,914 and was $66,255 for the three months ended December 31, 2001. The interest expense during the current and prior periods is primarily attributable to loans made by the Company's Suriname joint venture partner during 1998 and 1999 for the completion of the Suriname casino construction. 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 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, 2000, the joint venture company generated net after tax income of $103,280 after deduction for management fees and interest expenses earned by the Company and eliminated in consolidation. As a result, a minority interest equal to 50% of such amount or $51,640 was recorded by the Company. For the three months ended December 31, 2001, the joint venture company generated net after tax income of $399,304 after deduction for management fees and interest expenses earned by the Company and the Company recorded a minority interest equal to 50% of such amount, or $199,652. Income Taxes. During the three months ended December 31, 2000, SLC accrued for income taxes of $20,672 payable to the Suriname Government based on a tax rate of 50% of the net taxable income pursuant to the Suriname Hazard Games Act 1962. During the three months ended December 31, 2001, SLC accrued for income taxes of $228,795 payable to the Suriname Government. The increased tax in the current year is primarily attributable to the higher revenues experienced by the Suriname casino resulting in an increased taxable income. 10 Comparison of Six Months Ended December 31, 2001 to Six Months Ended December 31, 2000 Net Loss. The Company incurred a loss of $247,306, or $0.30 per share, for the six months ended December 31, 2000, as compared to a loss of $98,025, or $0.11 per share, for the six months ended December 31, 2001. The decrease in loss during the current period was primarily due to the increase in revenue and profits generated by the Suriname casino. Revenues. For the six months ended December 31, 2000, the Company had revenues of $2,703,047 from the operations of the Suriname casino compared with $3,348,445 for the six months ended December 31, 2001. The 24% increase in revenues during the current period resulted from both improved economic conditions in Suriname coupled with marketing programs initiated by the Company designed to increase activity and wagering at the casino. Marketing, General and Administrative Expenses. Marketing, General and administrative expenses were $2,613,897 for the six months ended December 31, 2000 consisting of $1,876,956 related to operating expenses of the Suriname casino and $736,941 for general corporate overhead. For the six months ended December 31, 2001, marketing, general and administrative expenses were $2,527,247 of which $1,755,374 related to operating expenses of the Suriname casino and $771,873 for general corporate overhead. The current period's Suriname casino operating expenses decreased by 6% as a result of cost cutting measures implemented by management in an effort to increase profitability. These cost reductions were partially offset by certain increased expenses incurred as a result of the casino's increased activity. General corporate overhead was held in line with the prior year's period with only a slight 5% increase. Interest Expense. For the six months ended December 31, 2000, net interest expense was $114,021 compared to $97,056 for the six months ended December 31, 2001. The decrease during the current period was attributable to the reduction in the balance remaining on certain short-term loans. The interest expense during the current and prior periods is primarily attributable to loans made by the Company's Suriname joint venture partner during 1998 and 1999 for the completion of the Suriname casino construction. 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 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, 2000, the joint venture company generated net after tax income of $265,422 after deduction for management fees and interest expenses earned by the Company and eliminated in consolidation. As a result, a minority interest equal to 50% of such amount or $132,711 was recorded by the Company. For the six months ended December 31, 2001, the joint venture company generated net after tax income of $623,714 after deduction for management fees and interest expenses earned by the Company and the Company recorded a minority interest equal to 50% of such amount, or $311,857. Income Taxes. During the six months ended December 31, 2000, SLC accrued for income taxes of $89,724 payable to the Suriname Government based on a tax rate of 50% of the net taxable income pursuant to the Suriname Hazard Games Act 1962. During the six months ended December 31, 2001, SLC accrued for 11 income taxes of $510,311 payable to the Suriname Government. The increased tax in the current year's period is attributable to the higher revenues experienced by the Suriname casino during the current period coupled with an adjusted method for computing taxable income as provided by the Suriname tax authority both resulting in an increased taxable income. LIQUIDITY AND CAPITAL RESOURCES Since August, 1999 LWSI'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. Parbhoe owns the hotel where the casino has its leased premises, and is the Company's 50% joint venturer in SLC. Dorsett, the Company's 100% owned Delaware subsidiary, manages SLC and the casino. Cash payments from SLC to LWSI, Parbhoe or their affiliates are made by SLC, under the management control of Dorsett, according to a cash allocation priority established under the Suriname Casino Agreement. That priority is roughly described below. From the monthly cash profits generated by the casino, payments were initially made for certain construction loans from Parbhoe and for the balance of costs of the casino construction, all of which, were fully paid by August 1999. After August 1999 payments of net cash flow were made to Dorsett for the accrued management fees owed, and thereafter for interest and some principal on the Company's loans net of amounts which the Company directed SLC to pay to Parbhoe on account of loans which Parbhoe had made to the Company. After all such total loans are repaid, cash is to be distributed according to the 50% - 50% ownership interests of the joint venturers. There have been no such distributions and none are expected until the substantial amounts of loans due to the joint venturers are repaid. Loans to SLC (and interest thereon) from the Company at September 30, 2001 were approximately $1,738,000, and the Company owed to Parbhoe approximately $516,000. Since January 2000 about 15% of the distributable cash flow of the casino has been paid to Parbhoe (as directed on behalf of the Company) or set aside for payment, and 85% to the Company and Dorsett. The Company believes that payments were and are in accordance with the Suriname Casino Agreement, Parbhoe loan agreement and applicable law. Beginning in June 2000 the casino's revenues were adversely affected by increased local competition from other casinos, by a declining local economy and by worsening conversion value of the local currency. The total paid to the Company was approximately $300,000 per month from September 1999 through May 2000. However, during the fifteen months from June 2000 to August 2001 revenues had declined by approximately 25% to 30% from the fifteen month period ending May 2000, and for this and other reasons payments to the Company had declined to about $150,000 per month. During the past six months, the economy in Suriname has started to improve and revenues have begun to increase. Since August 2001, payments to the Company have increased to approximately $185,000 per month. Suriname has price controls on rents. The Company has been advised that the rent for the casino required by the lease exceeds the lawful rent by approximately $14,000 per month. SLC has sued Parbhoe in Suriname to recover 12 approximately $314,000 in past overpayments. The Company is unable to predict the outcome of that suit, but has been advised by counsel that SLC's position has substantial merit. Any cash recovery or reduction in rent would be subject to the cash payment priorities described above. In June 2000 the Suriname government asserted that an exemption from its 50% tax on local corporate income provided for by the Investment Tax Act did not apply to casino income. As a consequence it assessed what the Company believed were arbitrarily determined amounts of tax. In June 2000 the Company paid an initial assessment of $200,000 against past tax and penalties for calendar years ended 1998 and 1999 and subsequently paid an additional $110,000 as tax for calendar year 2000. In April 2001, SLC together with its Suriname accountants submitted tax reports to the Suriname government for the calendar years ended 1998, 1999 and 2000. The aggregate amount of tax expense calculated was approximately $375,000 payable for periods from inception through December 31, 2000. In December 2001, the government made a determination that the aggregate tax expense for the three calendar years of 1998, 1999 and 2000 would be $715,000. At December 31, 2001, after making a partial payment to the government in December, the balance owed by SLC for this three year period was 140,000. The Sakhalin Project is currently generating cash losses for the Company. Any future development of that project will require substantial financing. Despite numerous discussions and several agreements the Company has not yet been able to obtain the necessary financing. The Company is currently able to provide only what it believes is the minimum cash funding required to maintain the prospects of the project. The other shareholders in SCC are not required either to fund SCC's losses, the continued prospects of the project, or the development of the project. If financing is not obtained, the Company might be forced to abandon the project and to sell its rights for whatever price or other recovery that could be obtained. The Company is not able to quantify what price or recoveries might be obtained. If the Company obtains financing and proceeds with the Sakhalin Project it will have to plan and establish an organization and infrastructure that is not currently in place, and will have to hire other specialists. In the period May 1, 2001 through July 31, 2001, the Company received advances of approximately $480,000 from certain persons who have agreed to subscribe to purchase common stock of the Company. Such funds were used to make advances to EMSI. The acquisition of EMSI described above, and the implementation of the on-line lottery and sports betting system, will require significant funding by the Company which is not currently available. The Company is actively seeking investors to purchase common stock or other securities of the Company in order to provide the funds for these projects. On September 30, 2001 the Company had $1,028,000 in cash or cash equivalents on hand. The Company believes that the distribution of profits from the Suriname casino will provide adequate cash flow to maintain the Company's current operations for the next 12 months. 13 SUBSEQUENT EVENTS OTHER Certain statements in this Quarterly Report on Form 10-Q 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 form 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-K for the year ended June 30, 2001 and other filings with the Securities and Exchange Commission. 14 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On October 1, 2001, the Company effected a twenty into one reverse split of all of its outstanding shares of Common Stock, par value $.001 per share. The following information is furnished pursuant to Item 701(a)-(c) of Regulation S-K in connection with unregistered securities sold or issued by the Company: N/A ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company held no material market risk sensitive financial instruments or interest therein, and held none at December 31, 2001. The Company's loans, payables, or receivables to or from others (including loans, payables or receivables to or from its subsidiaries or joint ventures) and the interest thereon, are all expressed as dollar obligations and payable in dollars. However, the Company's routine daily foreign operations are usually conducted in local foreign currencies. The Company is exposed to foreign currency exchange rate risk between the time foreign gaming revenue or other revenues are received and the time they are converted into dollars. The Company has not entered into any exchange rate protection arrangements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits N/A (b) Reports on Form 8-K N/A 15 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 7, 2002 By: /s/ Dallas Dempster ------------------------------------------ Dallas Dempster Chief Executive Officer and President By: /s/ Miles R. Greenberg ------------------------------------------ Miles R. Greenberg Chief Financial Officer 16

BROKER PROPOSITION FOR AGAINST ABSTAIN NON-VOTES ----------- --- ------- ------- -------- (1) Twenty-into-one reverse split of the outstanding shares of common stock of the Company 12,953,437 215,695 6,896 -- (2) Purchase of all the stock in Emerging Market Solutions International, Inc. 7,615,352 125,815 95,869 5,345,015 (3) Change of Name of the Company to "Lottery & Wagering Solutions Inc." 13,143,132 23,500 9,369 -- (4) Increase to 3,000,000 the number of shares authorized to be issued under the Employee Stock Option Plan 7,386,572 445,595 4,869 5,345,015

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