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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-10294
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FORMERLY INTERNATIONAL TOTALIZATOR SYSTEMS, INC.
------------------------
<TABLE>
<S> <C>
CALIFORNIA 95-3276269
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (760) 931-4000
REGISTRANT'S HOME PAGE HTTP://WWW.ILTS.COM
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
COMMON SHARES
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 _
Aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 24, 1997 was approximately $13,955,671
------------------------
Number of common shares outstanding at March 24, 1997 was 17,176,211
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Stockholders of the Registrant: Parts II
and IV
Portions of the Proxy Statement for Annual Meeting of Stockholders, May 15,
1997: Part III
------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X
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TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
ITEM 1. BUSINESS...................................................................... 1
General....................................................................... 1
DATAMARK(R) Terminals......................................................... 1
Wagering and Other Terminal Products.......................................... 2
Lottery Systems/Sales and Service Agreements.................................. 2
Revenue Sources............................................................... 3
Product Development........................................................... 3
Backlog....................................................................... 3
Marketing and Business Development............................................ 4
Manufacturing and Materials................................................... 4
Competition................................................................... 5
Employees..................................................................... 5
Patents, Trademarks and Licenses.............................................. 5
Regulation.................................................................... 5
Dependence Upon a Few Customers............................................... 5
Seasonality................................................................... 6
Working Capital Practices..................................................... 6
Environment Effects........................................................... 6
Export Sales.................................................................. 6
ITEM 2. PROPERTIES.................................................................... 6
ITEM 3. LEGAL PROCEEDINGS............................................................. 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 7
EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS......... 7
ITEM 6. SELECTED FINANCIAL DATA....................................................... 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................................... 7
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS............................................. 8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.................................................................... 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................ 8
ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................................... 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT..................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 8
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K........................................................................... 8
</TABLE>
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PART I
ITEM 1. BUSINESS
General
The Registrant designs, manufactures, sells, leases, manages, supports and
services computerized ticket issuing systems and terminals for the global
pari-mutuel and on-line lottery industries. The principal applications for the
Registrant's products are in the automated horse racing and on-line government
sponsored lottery industries. The Registrant has also bid for long-term service
contracts under which it intends to operate on-line lottery systems. The
Registrant utilizes its technology in other ticket-processing applications, such
as keno gaming and automated ticket printer/readers for toll turnpike systems.
The principal proprietary component of the Registrant's systems are the
DATAMARK(R) terminals, a compact, reliable microprocessor-based ticketing
terminal, which can print and process up to approximately 30 tickets per minute.
The Registrant sells the DATAMARK(R) terminal separately or as part of a turnkey
wagering application system and can modify a terminal's features or
configurations and central system software to meet specific customer
requirements.
The Registrant's wagering application systems include DATAMARK(R)
terminals, a central computer installation, communication network and display
equipment. System features include real-time central processing of data received
from multiple locations, back-up hardware capability and complete communications
redundancy designed to provide fault tolerant operation.
DATAMARK(R) Terminals
The Registrant has developed several models of DATAMARK(R) terminals for
different wagering applications. All are microprocessor-based and have a
compact, lightweight design for countertop operation. The more recent models use
the "Flipper" concept and are approximately 12" deep, 12" wide, 10" high, weigh
approximately 27 pounds, and are accompanied by a detached keyboard that may be
positioned to suit the convenience of the operator. Other older models are
slightly larger and may have built-in or external displays or keyboards.
The latest DATAMARK(R) models utilize a compact ticket path which allows
the terminal to print on one side and read from both sides of the same ticket.
The terminal contains a thermal printer which prints tickets quickly and quietly
without ink, ribbons or impact, thereby improving print quality and reliability,
and reducing maintenance expenses. The terminals use either pre-cut
thermal-coated tickets or thermal-coated roll stock tickets or both. Some models
will sequentially process up to 50 tickets entered at one time.
The basic functions of the DATAMARK(R) terminal are similar in all its
wagering system applications. Initially, wagering or other selection data is
entered into the terminal either manually by the operator via a keyboard, or by
a ticket marked by the customer. The terminal transmits that information to the
central computer, where a serial number is assigned to the transaction and a
response is sent back to the terminal which then thermally prints the data
either on the back of the customer-marked ticket or on a new ticket. After the
data has been printed on the ticket, in both numerical and machine readable (bar
code) form, but before the ticket is delivered to the customer, the terminal
reads the bar code in order to verify that it is correct and readable when later
presented to any terminal for cashing or validation. When a ticket is cashed or
presented for validation, the terminal optically reads the bar code and accesses
the central computer to verify that payment is to be made with respect to the
ticket. The central computer calculates the payout amount, transmits this data
to the terminal and records the fact that the ticket has been paid, ensuring
that tickets are not paid twice. The terminal prints the payout amount on the
ticket giving visual evidence that the ticket has been paid, and directs the
processed ticket to the operator.
The DATAMARK(R) terminal's basic functions are supplemented by various
features. In the horse racing industry, the DATAMARK(R) terminal is capable of
issuing tickets for pool or for any feature pool currently being used in horse
racing. The terminals are designed to facilitate multiple bets on one ticket and
multiple selections for each bet. In addition, the bettor is able to mark bets
on a pre-printed playslip, which is then read
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optically by the terminal, the amount wagered calculated and the bet details
printed on the back of the same ticket. Because the ticket is prepared away from
the pari-mutuel clerk's window, betting transaction time is reduced, efficiency
of the operation is improved and the bettor obtains more privacy in the betting
transaction.
Similarly, in the lottery industry, a player marks the numbers selected on
a pre-printed ticket or playslip which is read optically by the DATAMARK(R)
terminal and entered into the central system. The selections and the transaction
total are then either printed on the back of the playslip or on a separate
ticket and delivered to the player.
Wagering and Other Terminal Products
The Registrant historically has derived revenue in the horse racing
industry from sales contracts for DATAMARK(R) terminals and for wagering
systems, which include DATAMARK(R) terminals, a central computer installation
and peripheral and display equipment. The Registrant's systems are "sell-pay"
systems, which means that each terminal is capable of being used both for
selling all types of wagering tickets and for making payment to the ticket
holders after validation of winning tickets.
The nucleus of each wagering system is the central computer installation
that receives information from ticket-issuing terminals, accumulates wagering
data, calculates odds and payouts, distributes information to the display
systems and terminals, and generates management information reports. In
cooperation with the customer, the Registrant designs the configuration of the
central computer installation to provide fault-tolerant operation, high
throughput and security. Each central computer installation typically includes a
computer configuration and various peripheral devices, such as magnetic storage
devices, management terminals and hardcopy printers, all of which are
manufactured by others. Although certain of the Registrant's customers presently
use software in their pari-mutuel systems which is proprietary to the
Registrant, the software presently being offered by the Registrant in its horse
racing system is software, as enhanced and modified by the Registrant, acquired
by license from The Hong Kong Jockey Club (The HKJC).
In addition to sales of terminals and systems, the Registrant realizes
ongoing revenue from the sale of spare parts for use in the maintenance of its
terminals of which approximately 30,000 have been delivered to date. The
Registrant also enters into contracts with its customers to provide software
modifications, upgrades and support for its installed products.
Lottery Systems/Sales and Service Agreements
Computerized, or on-line, lotteries are currently operated in many
countries. Existing lottery systems include both manual systems and modern
on-line systems. In an on-line lottery system, betting terminals are connected
to a central computer installation by a communications network and the system
typically utilizes a pari-mutuel pool or fixed payout or both in offering
"lotto" and other numbers games.
Prior to 1994, the Registrant entered into a contract to provide lottery
equipment and management of on-line lottery system on a long-term basis in Papua
New Guinea, In July 1995, ILTS sold its facilities management and equipment
lease contracts for the lottery in Papua New Guinea to the principal
shareholders of the operating company, The Lotto Pty. Ltd ("Lotto Pty."). ILTS
will receive a percentage of Lotto Pty.'s sales over the next four years.
Proceeds of the sale are anticipated to accelerate the Registrant's return on
its investment, and to ultimately provide a greater return than if the
Registrant had continued to operate the lottery for Lotto Pty.
In June 1995, the Registrant announced a ten year service and supply
agreement with Pascal & Company (Pascal) of the United Kingdom. Under the
agreement, the Registrant provides a lottery system and services to Pascal for
operation of an on-line lottery on behalf of the National Hospital Trust (NHT)
in England and provides 1,000 DATAMARK(R) on-line terminals and associated
software, a central computer system and software, training, support,
installation and maintenance. In September 1996, it became apparent that an
affiliate of the customer was unable to obtain the additional funding necessary
for the project start-up and on-going operations. As a result, the Registrant
recorded a $2.8 million charge to reflect a reserve for the project. In 1996,
the Registrant reserved $2.8 million for its investment in the project and
declared Pascal to be in
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default under the contract. The Registrant continues to discuss with Pascal
investors the supply of terminals under the existing contract.
The Registrant owns non-exclusive rights to use the central system software
developed by The HKJC for use in its pari-mutuel wagering and lottery systems.
Under the terms of the amended license, the Registrant pays The HKJC a royalty
equal to a percentage of the revenue it receives in connection with a sale,
lease or providing a service of any lottery system using this software. In
addition, the Registrant is obligated to provide The HKJC with any modifications
which the Registrant makes to the software, except where ownership to such
modifications vests in the Registrant's customers.
The Registrant has made significant modifications to The HKJC software,
including changes to the system's communications network and changes which
permit the generation of more detailed management reports. In the Registrant's
lottery system, tickets are processed on DATAMARK(R) terminals which are
connected to a central computer installation, usually by telephone lines. The
central computer installation utilizes Digital Equipment Corporation hardware.
The system has the following characteristics: rapid processing, storage and
retrieval of transaction data in high volumes and in multiple applications; the
ability to down-line load, i.e., to reprogram the wagering terminals from the
central computer installation via the communications network; a high degree of
security and redundancy to guard against unauthorized access and tampering and
to ensure fault tolerant operation without data loss; and, a comprehensive
management information and control system.
Revenue Sources
The following table sets forth the revenue for the periods indicated
attributable to different applications of the Registrant's technology:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Racing Products and Services............. $11,183 $10,448 $13,932 $14,680 $14,851
Lottery Products and Services............ 5,105 7,680 9,231 10,322 4,417
Other.................................... 305 513 926 15 569
------- ------- ------- ------- -------
Total.................................... $16,593 $18,641 $24,089 $25,017 $19,837
======= ======= ======= ======= =======
</TABLE>
Product Development
The Registrant's ability to compete successfully depends in part upon its
ability to meet the current and anticipated needs of its customers. To that end,
the Registrant devotes a significant portion of its research and development
activity to refining and enhancing the features of existing products, systems
and software. In 1996, the Registrant spent approximately $1.7 million on
engineering, research and development, as compared to $1.4 million and $1.6
million in 1995 and 1994, respectively.
The Registrant developed the Single Roller Flipper Terminal with a unique
reader/printer mechanism that meets the needs of many different applications by
combining into one unit all of the functional capabilities of previous
DATAMARK(R) reader/printer mechanisms in a modular fashion. Also, the Registrant
has developed a terminal specifically aimed at lottery applications called the
XClaim. This terminal can be configured to print tickets using thermal or impact
printing.
In February 1996, the Registrant received its ISO 9001 registration. This
demonstrates quality in design development and manufacture under ISO standards.
Backlog
The backlog of orders for its products and services believed by the
Registrant to be firm, amounted to approximately $1.7 million as of December 31,
1996, as compared to a backlog of approximately $9.2 million
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as of December 31, 1995. Of such backlog at December 31, 1996, approximately
$1.7 million is expected to be filled during 1997. See BUSINESS -- Dependence
Upon a Few Customers.
Marketing and Business Development
Management believes that the Registrant's continuing ability to obtain and
retain contracts for its wagering systems and terminals is directly related to
its reputation in its various fields of expertise. Because of its reputation,
the Registrant often receives unsolicited inquiries from potential customers.
The Registrant also learns of new business opportunities through the close
contacts which its personnel maintain with key officials in the international
horse racing and lottery industries.
Contracts to provide products to the horse racing and lottery industries
often are awarded through a competitive bidding process which can begin years
before a contract is awarded and involves substantial expenditures by the
Registrant. Through its contacts with existing customers and others in these
industries, the Registrant often becomes aware of prospective projects before
the customer circulates a request for proposal. If the Registrant is interested
in the project it typically submits a proposal, either before or after the
customer circulates a formal request for proposal, outlining the products it
would provide and the services it would perform. If the proposal is accepted,
the Registrant and its customer will negotiate and enter into a contract on
agreed terms.
The Registrant's marketing efforts are carried out by the Registrant's
professional marketing and engineering staff and frequently involves other
executive officers of the Registrant. Marketing of the Registrant's products and
services throughout the world is often performed in conjunction with consultants
with whom the Registrant contracts, from time to time, for representation in
specific market areas.
The Registrant's success depends in large part on its ability to obtain new
contracts to replace its existing contracts. The Registrant currently has
proposals outstanding to supply systems, terminals or components for use in the
pari-mutuel wagering industry and for lotteries in various foreign countries. In
1996, the Registrant unsuccessfully bid on one service/operating contract for a
U.S. state lottery and it intends to continue this marketing effort in 1997 and
future years. In addition, the Registrant has had discussions with both new and
existing customers regarding supplying products for their operations and expects
to bid for additional contracts in the future. Because the realization of
revenue from these prospects is dependent upon a number of factors, including
the bidding process and product development, there can be no assurance that the
Registrant will be successful in realizing revenue from any of these activities.
Late in 1994, prototype deliveries began on the $2.8 million contract announced
in 1993 with The Revenue Markets, Inc. (TRIM) which is automating the New York
State Thruway toll road system. These units are currently being operated in a
pilot test mode and have not been accepted by the Thruway authorities. See Note
3 of Notes To Consolidated Financial Statements incorporated by reference from
part II, Item 8.
Natural Avenue Sdn, Bhd of Malaysia, a new customer of the Registrant
placed a $2.2 million order for DATAMARK(R) lottery terminals and a computer
operations system. Natural Avenue operates an on-line lottery in the state of
Sarawak, in eastern Malaysia, which began in February 1996.
Manufacturing and Materials
Manufacture of the Registrant's systems and terminals is performed at its
facilities in Carlsbad, California, and consists principally of the assembly of
parts, components and subassemblies (most of which are designed by the
Registrant) into finished products. The Registrant purchases many parts,
components and subassemblies (some of which are designed by The Registrant)
necessary for its terminals and the systems manufactured by the Registrant from
outside sources and assembles them into finished products. These products and
purchased computers are then integrated with standard peripherals purchased by
the Registrant to construct racing and lottery systems. The Registrant generally
has multiple sources for the various items purchased from vendors, but some of
these items are state-of-the-art and could, from time to time, be in short
supply. Certain other items are available only from a single supplier. For the
twelve months ended December 31, 1996 no vendor accounted for 10% or more of the
Registrant's raw material purchases.
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Competition
The Registrant competes primarily in the horse racing industry and the
on-line lottery industry. The Registrant competes by providing high-quality
wagering systems and terminals that are reliable, secure and fast. In addition,
management believes that the Registrant offers its customers more flexibility in
design and custom options than do most of its competitors.
Management believes that the Registrant's main competitors in the sale of
horse racing systems and on-line lottery systems in the domestic and
international marketplace are: AWA Limited, an Australian company, Essnet, a
Swedish company, International Des Jeux, the French national lottery company,
GTECH Holdings Corporation, Autotote Limited and Video Lottery Technologies, all
United States companies. Management believes that the Registrant's sales of its
products in the past five years have been a substantial factor in the
international marketplace. The Registrant's sales or leases in the United States
have been insignificant. In general, the Registrant's competitors have
significantly greater resources than the Registrant. Competition for on-line
lottery system contracts is intense.
Employees
As of December 31, 1996, the Registrant employs 143 persons worldwide on a
full-time equivalent basis. Of this total, 51 were engaged in manufacturing and
operations support, 45 in engineering and software development and 47 in
marketing and administrative positions. None of the Registrant's employees is
represented by a union, and the Registrant believes its relations with its
employees are good.
Patents, Trademarks and Licenses
The Registrant has filed five patent applications on its products, all of
which have been issued by the U.S. Patent Office. The Registrant believes that
its technical expertise, trade secrets and the creative skills of its personnel
are of substantially greater importance to the success of the Registrant than
the benefits of patent protection. The Registrant typically requires customers,
employees, licensees, subcontractors and joint venturers who have access to
proprietary information concerning the Registrant's products to sign
nondisclosure agreements, and the Registrant relies on such agreements, other
security measures and trade secret law to protect such proprietary information.
Central system software used in the Registrant's lottery system has been
obtained under a nonexclusive license with The HKJC.
Regulation
The countries in which the Registrant markets its products generally have
regulations governing horse racing or lottery operations, and the appropriate
governing body could restrict or eliminate these operations in these countries.
Any such action could have a material adverse effect on the Registrant. Foreign
countries also often impose restrictions on corporations seeking to do business
within their borders, including foreign exchange controls and requirements for
domestic manufacturing content. In addition, laws and legal procedures in these
countries may differ from those generally existing in the United States and
conducting business in these countries may involve additional risk for the
Registrant in protecting its business and assets, including proprietary
information. Changes in foreign business restrictions or laws could have a
significant impact on the Registrant's operations.
Dependence Upon a Few Customers
The Registrant's business to date has been dependent on major contracts and
the loss of one or failure to replace completed contracts with new contracts
would have a materially adverse effect on the Registrant's business. During
1996, the Registrant's revenues were derived primarily from contracts with AB
Travoch Galopp (ATG) of Sweden ($4.3 million), SATAB ($2.0 million); Hong Kong
Jockey Club ($2.4 million); New South Wales Lottery ($1.6 million); the
Phillippines Gaming Management Company, ($.5 million); Western Australia
Totalisator Agency Board, ($.5 million); and Natural Ave Sdn Bhd, a Malaysian
company ($1.4 million). See Note 4 of Notes to Consolidated Financial
Statements, incorporated by reference from
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Part II, Item 8, and Management's Discussion and Analysis of Financial Condition
and Results of Operations incorporated by reference in Part II, Item 7.
Seasonality
In general, the Registrant's business is not subject to seasonal effects.
Working Capital Practices
The Registrant's sales contracts typically provide for deposits and
progress payments which, have provided sufficient working capital for
operations. With the Registrant entering into long-term lottery service
agreements, a substantial portion of its working capital has been expended in
attempting to establish viable operations in these investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 of Notes To The Consolidated Financial Statements
incorporated by reference from Part II, Items 7&8.
Environment Effects
There are no significant capital expenditures required of the Registrant in
order to comply with laws relating to protection of the environment.
Export Sales
The majority of the Registrant's revenues are derived from contracts with
foreign companies. As of December 31, 1996, the Registrant's equipment has been
delivered and installed in Sweden, Norway, Hong Kong, Singapore, Australia,
Finland, England, the Netherlands, Malaysia, Macau, China, Papua New Guinea,
Belgium, the Philippines. The companies with which the Registrant contracts are
normally sizeable organizations with substantial assets and are capable of
meeting the financial obligations undertaken. The Registrant has entered into a
few contracts specifying payment in currencies other than the U.S. dollar,
thereby assuming the risk associated with fluctuations in value of foreign
currencies.
The Registrant has a wholly-owned foreign sales corporation and conducts
its foreign business through such subsidiary in order to obtain U.S. tax
benefits associated with this corporation. In addition, the Registrant operates
wholly-owned subsidiaries in Australia, and the United Kingdom. Also, see Note 5
of Notes to Consolidated Financial Statements, incorporated by reference in Part
II, Item 8.
ITEM 2. PROPERTIES
The Registrant's U.S. facilities consist of approximately 41,500 square
feet of leased office, warehouse and manufacturing space in Carlsbad,
California. The lease on this facility expires in the year 2000. The
Registrant's Australian subsidiary leases approximately 13,000 square feet
consisting of a manufacturing and administrative facility. The lease on this
property expires in October 1997. The Registrant's United Kingdom subsidiary
currently occupies an office-technical support facility in West Drayton, England
of approximately 2,400 square feet, under a lease expiring in April, 1998. See
Note 6 of Notes to Consolidated Financial Statements, incorporated by reference
from Part II, Item 8.
ITEM 3. LEGAL PROCEEDINGS
Shareholders' Class Action Litigation
In 1994, shareholders of the Registrant filed class action lawsuits against
the Registrant and several of its officers and directors. Those actions were
consolidated in the United States District Court for the South District of
California. Plaintiffs contended that during the class period (June 22, 1993
through June 21, 1994) the Registrant and the individual defendants made a
series of public statements that failed to disclose adverse information about
the Registrant's lottery service contracts, that these purported nondisclosures
artificially inflated the price of the Registrant's stock, and that those
purchasers who acquired their shares in reliance on the integrity of the market
suffered damages as a result. On June 17, 1996, the court entered a judgement of
a
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cash payment to the class shareholders and 1.2 million shares of authorized but
unissued common stock of the Registrant.
Walters v ILTS, et al
In November, 1995, Mr. James Walters, the former chairman and president of
the Registrant, filed an action in the San Diego County Superior Court against
the Registrant and its current president, Frederick A. Brunn, alleging that
certain statements in a magazine article were slander per se by ILTS and Brunn
and libel by the publishing company and the author, and that Mr. Walters
suffered an invasion of privacy by all defendants. In addition, Mr. Walters
alleged that erroneous information in the Registrant's 1995 proxy statement
resulted in two other magazine articles publishing allegedly incorrect
information. Mr. Walters seeks general and special damages of $9 million and
punitive damages. On November 1, 1996, the San Diego County Superior Court
entered a summary judgement in favor of the Registrant and Mr. Brunn. Mr.
Walters has filed a notice of appeal with the California Appellate Court. See
Note 11 to The Consolidated Financial Statements incorporated by reference from
Part II, Item 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ --- ------------------------------------------
<S> <C> <C>
Frederick A. Brunn.................. 52 President
Timothy R. Groth.................... 47 Vice President, Technical Operations
William A. Hainke................... 55 Chief Financial Officer, Corporate
Secretary and Treasurer
M. Mark Michalko.................... 42 Executive Vice President
</TABLE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information required by this item is included in the Registrant's
Annual Report to Shareholders for the fiscal year ended December 31, 1996 under
the same caption and is incorporated herein by reference to such Annual Report.
Solely for the purpose of calculating the aggregate market value of the
voting stock held by non-affiliates of the Registrant, as set forth on the cover
of this report, it has been assumed that all executive officers and directors of
the Registrant and Berjaya Lottery Management (H.K.) Ltd. were affiliated
persons. All of the Registrant's Common shares, the only voting stock
outstanding, beneficially owned by each such person (as defined in Rule 13d-3
under the Securities Exchange Act of 1934) have been assumed to be held by that
person for this calculation. The market value of the Common shares is based on
the closing price reported in the Wall Street Journal for March 24, 1997, of
$.8125 per share.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included on page 5 of the
Registrant's Annual Report to Shareholders for the fiscal year ended December
31, 1996 under the same caption and is incorporated herein by reference to such
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included on pages 6 through 9,
inclusive of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 under the same caption and is incorporated herein by
reference to such Annual Report.
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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The information required by this item is included on pages 10 through 20,
inclusive of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 and is incorporated herein by reference to such Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) List the following documents filed as a part of the report:
1. and 2. Index to Consolidated Financial Statements and Financial
Statement Schedules:
<TABLE>
<S> <C> <C>
(i) Report of Ernst & Young LLP, Independent Auditors*
(ii) Consolidated Balance Sheets at December 31, 1996 and 1995*
(iii) Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1996*
(iv) Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1996*
(v) Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996*
</TABLE>
8
<PAGE> 11
<TABLE>
<S> <C> <C>
(vi) Notes to Consolidated Financial Statements*
*incorporated by reference from the Annual Report to
Shareholders for the fiscal year ended December 31, 1996.
(vii) Schedule II -- Valuation and Qualifying Accounts (Form 10-K,
page 10)
All other schedules are omitted since the required
information is not present.
</TABLE>
3. Exhibits
<TABLE>
<S> <C> <C>
(3) Articles of Incorporation, as amended September 13, 1994,
reflecting corporate name change, and By-laws (incorporated
by reference to Form 10-K for the fiscal year ended December
31, 1994, File No. 0-10294).
(10) (a) Lease for the Registrant's facility in Carlsbad, California
dated June 30, 1992, as amended by First Amendment to Lease
dated January 23, 1987 (incorporated by reference to Exhibit
10.11 to Registration Statement File No. 33-18238 effective
February 19, 1988).
(b) Agreement with Sir Michael G. R. Sandberg dated May 20, 1987
(incorporated by reference to Exhibit 10.15 to Registration
Statement File No. 33-18238 effective February 19, 1988).
(c) The Registrant's 1982 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(b) to Post-Effective
Amendment No. 1 to Form S-8 Registration Statement, File No.
2-99618, as filed on April 4, 1990).
(d) The Registrant's 1986 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(b) to the Form S-8
Registration Statement, File No. 33-34121, as filed on April
4, 1990).
(e) The Registrant's 1988 Employee Stock Option Plan
(incorporated by reference to Exhibit 4(b) to the Form S-8
Registration Statement, File No. 33-34123, as filed on April
4, 1990).
(f) The Registrant's 1990 Stock Incentive Plan (incorporated by
reference to Form 10-K for the fiscal year ended December 31,
1990, File No. 0-10294 and File No. 33-79938).
(g) Agreement with The Royal Hong Kong Jockey Club dated May 11,
1989 and amended on January 13, 1992 (incorporated by
reference to Form 10-K for the fiscal year ended December 31,
1991, File No. 0-10294).
(h) The Registrant's 1993 Directors' Stock Option Plan as amended
May 26, 1995 (incorporated herein by reference to Form 10-K
for the fiscal year ended December 31, 1994, File No.
0-10294).
(i) Service and Supply contract dated August 3, 1995 including
Schedule 1, between Registrant and Pascal & Company, a United
Kingdom company.
(13) Annual Report to Shareholders for the fiscal year ended
December 31, 1996. With the exception of the information
incorporated by reference into items 5, 6, 7, and 8 of this
Form 10-K, the 1996 Annual Report to Shareholders is not
deemed filed as part of this report.
</TABLE>
9
<PAGE> 12
<TABLE>
<S> <C> <C>
(21) Subsidiaries of the Registrant.
(23) Consent of Ernst & Young LLP, Independent Auditors
(b) No reports on Form 8-K have been filed during the last
quarter of the period covered by this report.
</TABLE>
10
<PAGE> 13
SCHEDULE II
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- ---------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Years Ended:
December 31, 1996
-- Warranty Reserves..................... $ 297,727 $ 84,594 $124,400 $ 257,921
-- Allowance for Doubtful Accounts....... $ 62,956 $ 61,764 $ 13,608 $ 111,112
December 31, 1995
-- Warranty Reserves..................... $ 347,117 $ 76,015 $125,405 $ 297,727
-- Allowance for Doubtful Accounts....... $ 208,550 $ 60,000 $205,594 $ 62,956
December 31, 1994
-- Warranty Reserves..................... $ 193,000 $255,370 $101,253 $ 347,117
-- Allowance for Doubtful Accounts....... $ 75,000 $140,000 $ 6,450 $ 208,550
</TABLE>
Warranty reserve deductions primarily reflect actual warranty costs
incurred by the Registrant.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERNATIONAL LOTTERY & TOTALIZATOR
SYSTEMS, INC.(TM)
By: /s/ WILLIAM A. HAINKE
-------------------------------------
William A. Hainke
Chief Financial Officer, Corporate
Secretary and Treasurer
Dated:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<S> <C> <C>
/s/ THEODORE A. JOHNSON Chairman of the Board
- ------------------------------------------
Theodore A. Johnson March 27, 1997
/s/ FREDERICK A. BRUNN President
- ------------------------------------------ Director
Frederick A. Brunn March 27, 1997
/s/ WILLIAM A. HAINKE Chief Financial Officer,
- ------------------------------------------ Corporate Secretary and Treasurer
William A. Hainke March 27, 1997
/s/ M. MARK MICHALKO Executive Vice President
- ------------------------------------------ Director
M. Mark Michalko March 27, 1997
/s/ Director
- ------------------------------------------
Ng Foo Leong March 27, 1997
/s/ MARTIN J. O'MEARA, JR. Director
- ------------------------------------------
Martin J. O'Meara, Jr. March 27, 1997
/s/ SIR MICHAEL G.R. SANDBERG Director
- ------------------------------------------
Sir Michael G.R. Sandberg March 27, 1997
/s/ CHAN KIEN SING Director
- ------------------------------------------
Chan Kien Sing March 27, 1997
/s/ NG AIK CHIN Director
- ------------------------------------------
Ng Aik Chin March 27, 1997
</TABLE>
12
<PAGE> 1
Exhibit 10(i)
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. (ILTS)
AND
PASCAL & COMPANY
CONTRACT NUMBER: 6193
SERVICES AND SUPPLY
STANDARD AGREEMENT AND SCHEDULES
Contents
Purchase Agreement
Schedule 1 Terms and Conditions, Prices and Payment Schedule
Schedule 2 Project Schedule
Schedule 3 Hardware Products to be Delivered by Supplier
Schedule 4 Software Products to be Delivered by Supplier
Schedule 5 Services to be Delivered by Supplier
Schedule 6 Change Control Procedure
Schedule 7 Software Support Agreement
<PAGE> 2
Services and Supply Agreement
- --------------------------------------------------------------------------------
(This page intentionally left blank.)
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
Page ii Customer:________ Supplier:________ March 25, 1997
<PAGE> 3
Services and Supply Agreement
- --------------------------------------------------------------------------------
SERVICES AND SUPPLY AGREEMENT
This Agreement dated August 3, 1995 is entered into between International
Lottery & Totalizator Systems, Inc., a California corporation, United States of
America (herein referred to as "Supplier") and Pascal & Company (herein referred
to as "Customer").
Attached hereto and made part of this Agreement are the following Schedules:
Schedule 1 Terms and Conditions Schedule
Schedule 2 Project Schedule
Schedule 3 Hardware Products to be Delivered by Supplier
Schedule 4 Software Products to be Delivered by Supplier
Schedule 5 Services to be Delivered by Supplier
Schedule 6 Change Control Procedure
Schedule 7 Software Support Agreement
1.0 PURCHASE AND SALE OF DELIVERABLES. Supplier agrees to provide the
Deliverables as described in Schedules 3, 4 and 5. The payment terms
shall be as set forth in Schedule 1 and the timetable for the delivery,
installation and acceptance of the Deliverables shall be as set forth
in Schedule 2.
2.0 INDEMNITIES AND LIMITS ON SUPPLIER'S LIABILITY. Customer hereby
indemnifies and holds harmless and shall keep Supplier indemnified and
held harmless to the extent permitted under existing law, from and
against all damages, costs, actions, claims and demands whatsoever,
including reasonable legal fees, which may be recovered or made against
Supplier by any person including members of the public, for any injury
they may sustain while in or upon any building or structure or any part
thereof or any other location in which the Deliverables or any part
thereof is installed or from which it is operated or in connection with
Customer's use or operation of the Deliverables or any part thereof or
any act or omission of Customer or its employees or agents unless the
injury is caused by Supplier or Supplier's employees willful or
negligent act or omission, provided that, this indemnity shall not
extend to any injury suffered by Supplier's staff or members of the
public in space occupied by the supplier, which shall be covered by
insurance arranged by Supplier at its cost.
2.1 Customer acknowledges that the Deliverables may contain magnetic
memories or other devices in which
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
March 25, 1997 Customer:________ Supplier:________ Page 1
<PAGE> 4
Services and Supply Agreement
- --------------------------------------------------------------------------------
substantial data may be accumulated. Supplier shall not become liable
to Customer or anyone else if any such data is lost or rendered
inaccurate, unless caused by gross negligence or intentional
misconduct, omission or breach of contract. Supplier shall not be
liable to Customer or any other person for any act, omission,
occurrence or event causing loss, damage or injury to person or
property in connection with Supplier's obligations under this
Agreement, or its exercise of any rights or privileges hereunder,
unless caused by gross negligence, intentional misconduct, omission or
breach of contract of Supplier. In no event, whether in contract,
warranty, tort (including negligence), or otherwise, shall Supplier be
liable to Customer or any other person for indirect, incidental,
special or consequential damages including, but not limited to, loss of
actual or anticipated profits or revenues, loss of use of products,
loss of data, cost of capital, cost of substitute products, facilities
or services, downtime costs, or claims of Customer for such damages in
connection with providing or failing to provide the Deliverables or
arising out of the use of the Deliverables.
2.2 Supplier's liability to Customer for any cause whatsoever shall be
limited to five million U.S. Dollars ($5,000,000). This limitation will
apply regardless of the form of action, whether contract or tort,
including without limitation negligence. The foregoing limitation does
not apply to damages resulting from personal injury caused by
Supplier's negligence.
2.3 Any action against Supplier must be brought within twelve (12) months
after the cause of action arises.
3.0 PATENTS AND COPYRIGHT. If any action or proceeding is brought against
Customer for alleged infringement of any letter patent by the
Deliverables or any part thereof or if any allegation of copyright
infringement is made and if Customer gives Supplier notice without
undue delay in writing of any such allegations of infringement or of
the institution of any such action or proceeding and permits Supplier
to answer the allegation and to defend the action or proceeding and
also if Customer gives Supplier all information, reasonable assistance
and authority required for those purposes and does not by any action
(including any admission or acknowledgment) or omission prejudice the
conduct of such defense then:
1. Supplier will at its own election either effect any settlement or
compromise which it deems reasonable or at its own expense defend
any such action or proceeding, and
2. Supplier will pay the amount of any settlement or compromise
effected by Supplier including all damages and costs including any
reasonable Customer legal fees awarded against Supplier and/or
Customer in any such action or proceeding, and
3. If the Deliverables or any part thereof is in such action or
proceeding held to constitute infringement and
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
Page 2 Customer:________ Supplier:________ March 25, 1997
<PAGE> 5
Services and Supply Agreement
- --------------------------------------------------------------------------------
is the subject of an injunction restraining its use or any order
providing for its delivery or destruction, Supplier shall at its
own election and expense either:
a) procure for Customer the right to retain and continue to use the
Deliverables or part thereof; or
b) modify the Deliverables or part thereof so that it becomes
non-infringing.
3.1 Supplier shall not be under any of the obligations specified pursuant
to subsection 3.0 above in either of the following events:
1. any infringement which is based upon the use of the Deliverables or
part thereof in combination with equipment or other devices not
made or supplied by Supplier or in any manner for which the
Deliverables or part thereof was not supplied unless consented to
by the Supplier; or
2. Customer enters into any compromise or settlement in respect of any
such action or proceeding without Supplier's prior written consent.
4.0 CONFIDENTIAL INFORMATION. Customer acknowledges that information
relating to the technical and operational aspects of the Deliverables
is confidential to Supplier. Subject to Grant of License, Schedule 1,
Customer shall not, and shall take all reasonable steps to insure that
its employees and agents do not, without the prior written consent of
Supplier, divulge any information relating to technical or operational
aspects of the Deliverables or the terms of this Agreement to any third
party except as required by law during the term of this agreement,
during any renewal or renewals thereof and for a period thereafter of
10 years.
4.1 Supplier acknowledges that Customer's system is confidential to
Customer and that any disclosure thereof could not be rectified.
Supplier shall not, and shall take all reasonable steps to insure that
its employees and agents do not, without the prior written consent of
Customer, divulge any information relating to Customer's system or the
terms of this Agreement to any third party except as required by law
during the term of this Agreement, during any renewal or renewals
thereof and for a period thereafter of 10 years.
5.0 Upon delivery of the deliverables Customer:
1. will comply with all laws relating in any way to the use, operation
or maintenance of the Deliverables;
2. will grant Supplier the right to inspect the Deliverables at any
reasonable time upon due notice; and the Customer shall have the
right for such inspection of trade deliverables for which Customer
does not have possession and which are in the custody of the
Customer;
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
March 25, 1997 Customer:________ Supplier:________ Page 3
<PAGE> 6
Services and Supply Agreement
- --------------------------------------------------------------------------------
3. shall not make any alterations, additions, modifications or
improvements to the Deliverables without the prior written consent
of Supplier.
6.0 FORCE MAJEURE. Neither party shall be responsible to the other for not
fulfilling its obligations under this Agreement for the period which
this is not feasible due to or circumstances beyond the reasonable
control of either party including, without limiting the generality of
the foregoing, acts of God, war, sabotage, riot, insurrection, civil
commotion, change in legislation, regulation, decree or other legally
enforceable order or pursuant to stated policy of any government,
governmental or other competent authority (including any court of
competent jurisdiction), strike action (whether or not involving
employees of the party concerned), union bans or lock-outs.
6.1 If a party is or reasonably expects to be prevented from performing any
of its obligations under this Agreement as a result of Force Majeure it
shall, promptly after having knowledge of the act, event or cause
constituting Force Majeure, give to the other party notice of the
nature of the Force Majeure and likely duration of the disability
resulting therefrom and shall further notify the other party forthwith
upon cessation of that disability.
6.2 Any party notifying Force Majeure shall use reasonable endeavors to
overcome that Force Majeure or remedy the disability resulting
therefrom as promptly as possible, provided always that party shall not
be required hereby to settle any labor dispute on terms contrary to its
wishes nor to test the validity of any law, regulation, decree or order
by way of legal proceedings.
6.3 In the event that Force Majeure shall subsist for a period in excess of
one hundred eighty (180) days the parties agree that there is a mutual
termination of the agreement without prejudice to either parties rights
and remedies under this agreement or by law.
7.0 TERM OF THE AGREEMENT. The term of the Agreement expires on 31 May
2005, unless extended by a subsequent mutual Agreement. Supplier to
submit draft extension agreement to Customer no later than 31 December
2003.
7.1 TERMINATION. Should either party, at any time before acceptance of all
Deliverables cease conducting business in the normal course, become
insolvent, make a general assignment for the benefit of creditors,
admit in writing its inability to pay its debts as they mature, suffer
or permit the appointment of a receiver for its business or assets, or
have an order for winding-up made against it, or fail to perform any of
its material obligations hereunder for a period of ninety (90) days
after written notice by the other party
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
Page 4 Customer:________ Supplier:________ March 25, 1997
<PAGE> 7
Services and Supply Agreement
- --------------------------------------------------------------------------------
requiring performance save that the ninety (90) days period shall not
apply where a different period has been expressly dictated by the terms
of this Agreement or where the failure to perform is incapable of
remedy, such party shall be considered as having committed a material
breach of this Agreement and the other party may at any time (or
immediately in the case of a breach which in incapable of remedy)
terminate this Agreement without prejudice to it's rights and remedies
under this Agreement or at law.
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
March 25, 1997 Customer:________ Supplier:________ Page 5
<PAGE> 8
Services and Supply Agreement
- --------------------------------------------------------------------------------
8.0 ENTIRE AGREEMENT. This Agreement embodies the entire agreement between
the parties and supersedes in its entirety all previous understandings,
agreements, and representations between the parties oral or written
with respect to the subject matter hereof. This Agreement may not be
amended or modified except by an instrument in writing duly executed on
behalf of the parties. Any waiver of any breach of this Agreement shall
be limited to the particular instance and shall not operate or be
deemed to waive any future breach. Any representation or statement not
contained in this Agreement shall not be binding upon Supplier as a
warranty or otherwise.
9.0 ASSIGNMENT. Neither Supplier nor Customer may assign either its rights
or its obligations hereunder without the prior written consent of the
other party, which consent shall not be unreasonably withheld.
10.0 LEGAL FEES. If any action at law or in equity, including any action for
declaratory relief, is brought to enforce or to interpret the
provisions of this Agreement, the prevailing party shall be entitled to
reasonable legal fees and costs, which may be set by the tribunal in
the same proceeding or action, or in a separate proceeding or action
brought for that purpose, in addition to any other relief to which it
may be entitled.
11.0 GOVERNING LAW. The governing law of this Agreement shall be the law of
England and Wales. Any dispute arising out of or in connection with
this Agreement, including any question regarding its existence,
validity or termination, shall be referred to and finally resolved by
arbitration under the Rules of the London Court of International
Arbitration, which Rules are deemed to be incorporated by reference
into this clause.
The tribunal shall comprise three arbitrators, two of them to be
nominated (one each) by the respective parties. The place of
arbitration shall be London. The language of arbitration shall be
English.
12. NOTIFICATION NAMES AND ADDRESSES
Any notice of legal action to be given hereunder by either party to the
other may be effected by personal delivery in writing or by facsimile
or by registered or certified mail, postage prepaid, return receipt
requested. Mailed notices shall be addressed to the parties at their
addresses as follows, but each party may change its address by written
notice in accordance with this agreement.
Customer:
Name: Pascal & Company
Address: 119 Horseley Fields
Wolverhampton, WVA 3DG
United Kingdom
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
Page 6 Customer:________ Supplier:________ March 25, 1997
<PAGE> 9
Services and Supply Agreement
- --------------------------------------------------------------------------------
Telephone: 1902-455-633
Fax: 1902-453-939
Contact(s): Administrator: Howard Kerbel
Financial: Paul Startin
Technical Management: David Griffiths
Delivery Address: same
Supplier
Name: International Lottery & Totalizator Systems, Inc.
Address: 2131 Faraday Avenue
carlsbad, CA 92008
USA
Telephone: 619-931-4000
Fax: 619-931-1789
Contact(s): Sales:
Account Manager: Dale Rostamo
Financial: William Hainke
Project Name: NHS Lotto
Contract Date: 1 June 1995
Delivery Date: 18 September 1995
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
March 25, 1997 Customer:________ Supplier:________ Page 7
<PAGE> 10
Services and Supply Agreement
- --------------------------------------------------------------------------------
Pascal & Company International Lottery & Totalizator Systems, Inc.
119 Horseley Fields, 2131 Faraday Avenue
Wolverhampton, WV1 3DG Carlsbad, California 92008
United Kingdom United States of America
- ------------------------- -------------------------
CUSTOMER SUPPLIER
/s/ Jim Holmes /s/ Frederick A. Brunn
- ------------------------- -------------------------
Signed Signed
Director President
- ------------------------- -------------------------
Title Title
8/3/95
- ------------------------- -------------------------
Date Date
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement
Page 8 Customer:________ Supplier:________ March 25, 1997
<PAGE> 11
SCHEDULE 1
TERMS & CONDITIONS, PRICES & PAYMENT
<PAGE> 12
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
1.1 Terms and Conditions............................................ 1
1.1.1 Prices and Fees.......................................... 1
1.1.1.1 Prices, Fees and Other Charges.................. 1
1.1.1.2 Taxes........................................... 1
1.1.1.3 Delivery........................................ 1
1.1.1.4 Payment......................................... 1
1.1.1.5 Non-Hire of Employees........................... 2
1.1.2 Warranty................................................. 2
1.1.2.1 Supplier Software Products...................... 2
1.1.2.2 Limitation of Warranty.......................... 2
1.1.2.3 Service Warranty................................ 3
1.1.2.4 Liabilities and Remedies........................ 3
1.1.3 Software License......................................... 3
1.1.3.1 Grant of Software License ...................... 3
1.1.3.2 Standard License Terms ......................... 3
1.1.3.3 License Termination ............................ 4
1.1.4 Fee Summary.............................................. 5
1.2 Hardware Deliverables........................................... 5
1.3 Services Deliverables........................................... 6
1.3.1 Publication Services..................................... 6
1.3.1.1 Ticket Design Services.......................... 6
1.3.1.2 Individual Services Prices for 1995............. 6
1.4 Software deliverables........................................... 7
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement Schedule 1
March 25, 1997 Customer:_________ Supplier:________ Page 1-i
<PAGE> 13
(This page intentionally left blank.)
- --------------------------------------------------------------------------------
Schedule 1 Pascal & Company Services and Supply Agreement
Page 1-ii Customer:_________ Supplier:________ March 25, 1997
<PAGE> 14
1 TERMS AND CONDITIONS, PRICES AND PAYMENT
- --------------------------------------------------------------------------------
1.1 TERMS AND CONDITIONS
1.1.1 PRICES AND FEES
1.1.1.1 PRICES, FEES AND OTHER CHARGES
Prices and fees for Products and Services are specified herein.
1.1.1.2 TAXES
Fees are exclusive of and Customer is responsible for all
applicable taxes, duties, assessments and value added tax (VAT) on
the sale, license or use of Products or on the provision of
Services.
1.1.1.3 DELIVERY
Products will be delivered Free Carrier (FCA according to
Incoterms 1990) Supplier's facilities. Customer will be
responsible for constructed transportation charges, and for
insurance at rates in effect at the time of this agreement.
Customer may elect to provide its own insurance by providing
specific written notice to Supplier. Supplier will use Supplier's
own freight forwarder; however, upon request from Customer the
Supplier can use one specified by Customer and attach a 3% special
handling fee to the transportation charges.
1.1.1.4 PAYMENT
Customer shall provide Supplier with a report from the on-line
system which specifies gross sales for the week and the average
sales per the average number of on-line terminals for the same
period. The report shall be provided no later than one day
following each draw. Gross sales shall mean all sales minus
cancellations.
Based upon the report an invoice will be transmitted to the
Customer by facsimile on the date shown on the invoice and this is
defined as the date of invoice. Upon special request the original
of the invoice can be mailed to the Customer for backup or for
required business practice. Customer invoice facsimile, number and
postal address to be sent to are:
Payment for Products is due thirty (30) days from the date of
invoice. Payments for services and/or fees for which no "delivery"
of Products is involved is due upon date of invoice. Payment shall
be made by wire transfer to:
Totalizator Systems (U.K.) Ltd.,
c/o Midland Bank PLC
Corporate Branch, High Street
Uxbridge, Middlesex UB8 1BY
Account No. 51294040
Sort Code 40-45-08
Tel No. 1-895-272090
Fax No. 1-895-232226
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement Schedule 1
March 25, 1997 Customer:_________ Supplier:________ Page 1-1
<PAGE> 15
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
Invoices past due thirty (30) days will bear a late charge fee at
the rate of one percent (1%) per month or portion thereof
accumulative. Payment is deemed to have been effected on the day
when Supplier's bank account has been credited with the payment.
All invoices are payable in United Kingdom, Pounds Sterling.
1.1.1.5 NON-HIRE OF EMPLOYEES
In the event that the Customer hires a Supplier employee either as
a contract or permanent employee during the term of this
Agreement, and for a period of two years after the termination of
this Agreement hereof, the Customer agrees to reimburse the
Supplier for the investment in training the employee in the
products and services of the Supplier in the following amounts:
<TABLE>
<CAPTION>
Term of Supplier Employee Employment Amount
------------------------------------ --------
<S> <C>
Employment of 0 through 1 year $ 43,000
Employment of 1 through 2 years $ 75,000
Employment of 2 through 5 years $ 160,000
Greater than 5 years $ 250,000
</TABLE>
Invoice to be generated and sent to Customer no sooner than one
month after Customer hire date of Supplier Employee.
1.1.2 WARRANTY
1.1.2.1 SUPPLIER SOFTWARE PRODUCTS
Supplier warrants to Customer that the Supplier Software Products
designated as warranted will conform to the Schedule 4
Specification applicable to the Software Products at the time of
contract. The warranty period for Supplier Software Products is
for the term of this Agreement and any renewals thereof. The
warranty period begins on the date of go-live. Supplier does not
warrant that the execution of Software shall be uninterrupted or
error-free.
1.1.2.2 LIMITATION OF WARRANTY
The warranty provided in Subparagraph 1.1.2.1 are limited
warranties and do not apply to:
1. any Products, other than Supplier Software Products, which may be
sold or licensed by Supplier. These Products are sold or licensed
"as is", or are warranted directly to Customer by a third party,
or
2. conditions resulting from improper use of the Supplier Hardware
or Software Products or operation of the Supplier Hardware
outside the specified environmental conditions, or
3. conditions resulting from causes external to the Supplier
Hardware or Software Products after delivery, or
4. conditions resulting from modifications to Supplier Hardware or
Software Products other than modifications made by Supplier, or
5. Supplier Hardware Products from which Supplier's serial numbers
have been removed or mutilated.
- --------------------------------------------------------------------------------
Schedule 1 Pascal & Company Services and Supply Agreement
Page 1-2 Customer:_________ Supplier:________ March 25, 1997
<PAGE> 16
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
6. Supplier Hardware Products when used with operating supplies
(ticket paper stock) not in accordance with Supplier
specifications.
7. Consumable products such as lamps, fuses, printheads and other
expendable items.
1.1.2.3 SERVICE WARRANTY
Supplier warrants that Services will be provided in a workmanlike
manner in accordance with Schedule 5.
1.1.2.4 LIABILITIES AND REMEDIES
Supplier's entire liability and Customer's remedies are set forth
in this Paragraph, except as provided in the Agreement. These
remedies are Customer's exclusive remedies and are in lieu of any
other remedy at law or in equity. In all situations involving
performance or non-performance Software Products furnished
hereunder, Customer's remedy is if notified by Customer of the
defect within the warranty period, or remedy, by Supplier in the
manner specified in Schedule 1, of a non-conformance of Software
during the stated warranty period. If Supplier fails to perform
its warranty or service responsibilities, or if Customer has any
other claim related to Deliverables purchased or licensed from
Supplier, Customer shall be entitled to recover only direct
damages and only up to the limits set forth in the Agreement.
1.1.3 SOFTWARE LICENSE
Customer receives no right to use any Software Product except by a
grant of a Software License by Supplier. Title to the Software
Product shall remain with Supplier. These terms and conditions
govern the License granted by Supplier to Customer and Customer's
obligations thereunder.
1.1.3.1 GRANT OF SOFTWARE LICENSE
Supplier grants Customer a Software License as provided below.
Supplier grants no Software Licenses whatsoever, either explicitly
or implicitly, except by this contract, for a Software License.
Supplier grants to Customer a Software License for Software
supplied by Supplier with Hardware Products or in connection with
Services. Customer agrees to comply with and not deliberately
modify or make inoperable any feature which is incorporated in the
Software to prevent access to unlicensed Software.
1.1.3.2 STANDARD LICENSE TERMS
1.1.3.2.1 SOFTWARE EXECUTION
Customer may execute the Software and may load, copy or transmit
the Software, in whole or in part, only as necessary for
execution. Customer may make archival copies of the Software as
provided in the Copyright Law of the United States. Customer
agrees to reproduce Supplier's copyright and all other legal
notices, including but not limited to other proprietary notices
and notices mandated by governmental entities, on all complete or
partial copies or transmissions of the Software. Software usage
may not exceed the License or the number of users for which
Customer is licensed.
1.1.3.2.2 ACCESS TO SOFTWARE
Customer may make the Software available to its employees and
agents to the extent needed to exercise its License hereunder.
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement Schedule 1
March 25, 1997 Customer:_________ Supplier:________ Page 1-3
<PAGE> 17
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
1.1.3.2.3 PERSONAL, NON-EXCLUSIVE LICENSES
Customer's License is personal and non-exclusive, and may not be
transferred without Supplier's express written consent, which
consent shall not be unreasonably withheld.
1.1.3.2.4 LICENSE LIMITATION, REVERSE ENGINEERING
Software is proprietary to Supplier. Supplier transfers no title
to or ownership of any Software to Customer or to third party.
Except as explicitly set forth in these terms and conditions,
Customer shall not execute, use, copy or modify the Software nor
disclose any part of the Software. Customer shall not decompile or
reverse assemble the Software, or analyze or otherwise examine the
Software, including any hardware or firmware implementation of the
Software for the purpose of reverse engineering.
1.1.3.3 LICENSE TERMINATION
Customer shall use the Software only in the ordinary course of its
business as an operator. This Software License shall commence on
the date that the Software is delivered to Customer and, except as
set forth herein, shall terminate when Customer ceases operating
the Software in Customer's system. Supplier may terminate any
Licenses granted and any Software orders placed hereunder if
Customer neglects or fails to perform or observe any of its
obligations to Supplier hereunder, and such condition is not
remedied within thirty (30) days after written notice has been
given to Customer. Termination, whether by Supplier or Customer,
shall apply to all versions of the Software licensed for execution
hereunder. Before any termination by Customer becomes effective,
and in the event of any termination by Supplier, Customer shall:
1. return to Supplier any License furnished by Supplier
2. destroy all copies of all versions of the Software in Customer's
possession, and
3. remove all portions of all versions of the Software OR any
adaptations made by Customer and destroy such portions and
4. certify in writing that all copies, including all those included
in Customer's adaptations, have been destroyed.
- --------------------------------------------------------------------------------
Schedule 1 Pascal & Company Services and Supply Agreement
Page 1-4 Customer:_________ Supplier:________ March 25, 1997
<PAGE> 18
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
1.1.4 FEE SUMMARY
<TABLE>
<CAPTION>
AVERAGE SALES PER TERMINAL PER LOTTERY WEEK % OF GROSS RECEIPTS
------------------------------------------- -------------------
<S> <C>
pound sterling 449 or less 5.25%
pound sterling 450 up to pound sterling 599 5.00%
pound sterling 600 up to pound sterling 749 4.75%
pound sterling 750 up to pound sterling 999 4.50%
pound sterling 1000 up to pound sterling 1499 4.25%
pound sterling 1500 up to pound sterling 1999 4.00%
pound sterling 2000 or more 3.75%
</TABLE>
The average sales per terminal per lottery week will be calculated
by taking the summation of each day's gross sales and dividing it
by each day's terminal count and dividing the total at the end of
the lottery week by number of days that sales took place during
the lottery week. Mathematically, this is expressed as follows:
n
Average sales per terminal per week = sum [(SDn divided by TDn)]
divided by n
1
Where n = the number of sales days per week
SDn = the gross sales for day n
TDn = the number of on-line terminals selling one or more
tickets for day n.
The above percentage does not include supply by Supplier of
playslips and ticket stock. ILTS will receive an additional 0.75%
if Supplier provides these items.
1.2 HARDWARE DELIVERABLES
<TABLE>
<CAPTION>
Item Product
No. Number Product Description Qty
--- ------ -------------------- ---
<S> <C> <C> <C>
TERMINAL PRODUCTS:
1 DATAMARK 9 Total of 1000 of a combination
2 of these terminal products.
3 DATAMARK Flipper
</TABLE>
Supplier agrees to deliver up to 5000 DATAMARK terminals maximum
under the same terms and conditions as the initial 1000 terminals.
Add-on orders to the original 1000 DATAMARK terminals will be
mutually agreed to through the use of the Change Proposal Document
(CPD) Schedule 6 of this Agreement.
CENTRAL SYSTEM PRODUCTS:
As defined in Schedule 4
Supplier agrees to provide initial installation and recurring
central system maintenance that will meet minimum Digital
Equipment Corporation requires for the equipment.
COMMUNICATIONS PRODUCTS
Modems 1000
INITIAL INSTALLATION AND MAINTENANCE
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement Schedule 1
March 25, 1997 Customer:_________ Supplier:________ Page 1-5
<PAGE> 19
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
Provided by Supplier refer to Schedule 5, Section 5.7
- --------------------------------------------------------------------------------
Schedule 1 Pascal & Company Services and Supply Agreement
Page 1-6 Customer:_________ Supplier:________ March 25, 1997
<PAGE> 20
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
1.3 SERVICES DELIVERABLES
A description of each of these services is provided in Schedule 5.
1.3.1 PUBLICATION SERVICES
DATAMARK TERMINAL OPERATIONS MANUAL
Price: 1 copy per 10 terminals installed are provided at no charge.
Additional copies are available at $25.00 per copy.
Quantity _____at $25.00 ___________
DATAMARK QUICK REFERENCE CARD
Price: 2 copies per terminal installed are provided at no charge.
Additional copies are available at $10.00 per copy.
Quantity _____ at $10.00 ___________
CENTRAL SYSTEMS OPERATIONS MANUAL
Price: 10 copies are provided at no charge. Additional copies are
available at $35.00 per copy.
Quantity _____ at $35.00 ___________
1.3.1.1 TICKET DESIGN SERVICES
The price for this service is: no charge for the term of this
Agreement for the initial layout for each ticket/coupon/betslip
and $600 for each major or minor modification/change after the
fourth change. This service is purchased by separate Purchase
Order as this service is required. The invoice date for these
services is defined as the date Supplier receives the Customer
Purchase Order.
1.3.1.2 INDIVIDUAL SERVICES PRICES FOR 1995
Services can be purchased from the Supplier on a time and material
basis for activities beyond the scope of this Agreement. The
invoice date for these services is defined as the date Supplier
receives the Customer Purchase Order.
Services are based on 8-hour work day, 40-hour work week, 173-hour
work month and 2076 hours in a work year.
<TABLE>
<CAPTION>
Standard
Description Price Per
----------- ---------
<S> <C>
Hardware and Software
Engineering, Training
and Documentation Hour $ 140
Day $ 1,120
Week $ 5,040
Month $ 20,160
Year $221,760
</TABLE>
- --------------------------------------------------------------------------------
Pascal & Company Services and Supply Agreement Schedule 1
March 25, 1997 Customer:_________ Supplier:________ Page 1-7
<PAGE> 21
Terms & Conditions, Prices & Payment
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Account Management Hour $ 170
Day $ 1,360
Week $ 6,120
Month $ 24,480
Year $269,280
Customer Service Hour $ 80
Day $ 640
Week $ 2,880
Month $ 11,520
Year $126,720
</TABLE>
NOTE: SERVICES PRICES DO NOT INCLUDE TRAVEL AND PER DIEM COSTS. SUPPLIER
RESERVES THE RIGHT TO MAKE CHANGES IN THESE CHARGES ANNUALLY DURING
JANUARY OF EACH YEAR.
1.4 SOFTWARE DELIVERABLES
The software systems are defined in Schedule 4 of this Agreement
and will be delivered as defined. New game software will be
provided by Supplier according to the procedure as defined in
Schedule 6, Change Control Procedure at no charge to Customer up
to a limit of $50,000 USD. Changes or modification to the software
which have benefit only to Customer and are not related to new
games will be charged to Customer according to the procedure as
detailed in aforementioned Schedule 6.0.
1.5 ESCROW AGREEMENT
As a security for Supplier's performance under this agreement,
Customer and Supplier shall enter into a security agreement on or
before Milestone 8, Schedule 2, whereby Supplier will provide all
documentation for software products delivered as described in
Schedule 4 as is -- to be updated -- in a sealed container, which
shall be held in escrow by:
Data Securities International, Inc.
6165 Greenwich Drive, Suite 220
San Diego, California 92122
United States of America
Also, this security agreement shall detail the circumstances when
the container can be released to Customer. When released to
customer pursuant to above said security agreement the software
products may be used only for customer's own lottery operation and
such use may require a payment of a paid-up royalty or periodic
royalties to the owner of the software.
- --------------------------------------------------------------------------------
Schedule 1 Pascal & Company Services and Supply Agreement
Page 1-8 Customer:_________ Supplier:________ March 25, 1997
<PAGE> 1
EXHIBIT 13
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
ANNUAL REPORT 1996
<PAGE> 2
CORPORATE PROFILE AND MISSION:
International Lottery & Totalizator Systems, Inc. provides computerized wagering
systems including computer equipment, system software, betting terminals, data
communications, consulting, training, management services and maintenance
support, to racing organizations and lotteries worldwide. We are committed to
providing innovative gaming solutions through quality products and service to
maximize the revenue of our customers and bring a fair return to our
shareholders.
ILTS is an ISO 9001 registered company.
Dear shareholders
<PAGE> 3
In 1996, we moved significantly closer to realizing our long-term strategic
goals. Sales volume, however, fell short of our projections primarily because of
delayed decisions by customers on several key procurements. In addition, we
recorded an accounting charge for our lottery project in the United Kingdom that
was primarily due to the customer's inability thus far to secure the additional
funding needed for start-up. The combined result was a net loss for 1996.
Nevertheless, we made solid progress in improving our product capabilities, and
as we continue to strengthen our products, I believe we will win our share of
new business. I expect 1997 to be a year of continued progress across the board.
Although much remains to be done, we have laid the foundation for long-term
growth and revenue stability.
Our objective is to reposition the Company as a provider of management
services for lotteries in order to reduce our reliance on sales of lottery and
totalizator equipment and systems. We believe that this objective remains sound
and is achievable in the near term.
In 1996, the ILTS management team created and began implementing a plan to
both prepare the Company for re-entry into the management services arena and
simultaneously increase its market share of equipment sales. The plan integrates
the objectives, strategies and tactics of the three primary functional areas of
the Company: marketing, research and development (R&D), and production.
In implementing the plan last year, we focused on R&D. We completed the
first phase of development of DataTrak, a new lottery software system that
incorporates a modern client/server architecture, open systems technology, an
easy-to-use graphical user interface and a powerful relational database. This
new system provides the comprehensive functionality our customers require to
manage their lottery business more efficiently. DataTrak gives the Company a
competitive base product that can be configured, or easily modified to meet the
specific needs of each lottery organization.
We released the first version of DataTrak in October of 1996. Additional
features and functionality will be incorporated in 1997 to further enhance the
system.
To complement the DataTrak gaming system, the Company introduced a new
lottery terminal, the DATAMARK XClaim. Designed and engineered specifically for
the lottery industry, the XClaim combines the legendary reliability of previous
DATAMARK terminal models with modern PC-compatible
ILTS 1
<PAGE> 4
electronics. The result is a full-featured terminal that is modular, easy to use
and very cost-effective.
Together, the new terminal and the DataTrak software system will improve
our competitive position in the worldwide lottery marketplace. The lottery
market consists of two segments, sales and management services. Our new products
give us the capabilities we need to both increase our market share in the sales
segment, and effectively enter the management segment.
The sales segment is composed of those lottery jurisdictions that purchase
computers and terminals and operate the system with their own staff. Most
lotteries outside of the United States operate in this manner, including all of
our present lottery customers. This segment of the lottery market is showing
continued growth as mature lotteries replace old systems and terminals and as
new on-line jurisdictions emerge. The geographic areas offering the greatest
opportunities for lottery equipment sales are the Americas, the Pacific Rim and
Africa.
The management services segment of the lottery market consists of those
jurisdictions that contract for the provision of equipment, software and
management services. The supplier receives compensation as a percentage of gross
lottery sales. The supplier retains ownership of the equipment and is typically
responsible for system operation, system and terminal maintenance, warehousing
and distribution of supplies and consumables, and other services as agreed with
the lottery customer. Contracts for lottery management services usually extend
for a period of 5-7 years. Most U.S. lotteries currently operate in this manner.
Management contracts ensure that the supplier receives a continuing revenue
stream throughout the contract term, which can offset the financial peaks and
valleys associated with relying only on sales of lottery systems. Although this
segment of the market is highly competitive, it represents a significant growth
opportunity for ILTS, as many lotteries are seeking alternatives to the two
existing suppliers of facilities management services.
The totalizator, or racing systems, market is also divided into two
distinct segments: sales and management services. Management services in this
context refer to racetrack owners/operators who contract for the provision of
equipment, software and tote service, with the supplier receiving compensation
as a percentage of the total bets placed. This type of operating arrangement is
common in the U.S., where racing tends to be seasonal. Because of this
seasonality, it is economically
ILTS 2
<PAGE> 5
[PHOTOGRAPHS]
Data trak integrates the entire spectrum of lottery operation and management
into an open client/server system. It's truly modular and scalable, and enables
addition of new functionality as required.
The ILTS InterTote open systems totalizator is UNIX based and platform
independent. It's scalable for flexibility to serve small tracks or large
operations with on-track and off-track betting.
ILTS 3
<PAGE> 6
unfeasible for the racetrack operators to own the equipment. The
management-services segment of the market remains highly price-competitive even
though the racing industry in the U.S. has continued to decline and provides
only a limited opportunity for profitability. ILTS has not been involved in this
market segment and entering it is not part of our future plans.
In international markets, where racetracks often operate year-round, or
where the equipment can efficiently be moved from one racetrack to another,
operators have traditionally purchased the computer system, terminals and
related equipment. This is also the general business model for offtrack betting
organizations that offer betting in a variety of venues year-round. ILTS has
historically been successful in this market segment because of its ability to
provide customized high-tech solutions for very demanding clients. While we
still have the capability, this segment of the market offers fewer new business
opportunities. Very few new racetracks are being built throughout the world and
our current customers are finding ways to extend the life cycle of their present
systems and terminals. There are, however, several specialized opportunities for
totalizator system sales that we are pursuing in certain developing markets.
Our goal is to establish a business base that will provide us with
consistent profitability. To do so, we will devote significant resources to
continued product development, while simultaneously making our manufacturing and
other operations more efficient. However, it is important to note that several
factors outside of our control -- such as delays in receiving new orders and
foreign political uncertainties -- could affect our ability to accomplish this
objective.
I want to express my sincere gratitude and appreciation to our loyal
shareholders and to our dedicated and enthusiastic employees. With the continued
support of our share-holders, employees and valued customers, we will build a
strong and profitable company.
FREDERICK A. BRUNN
President / Director
ILTS 4
<PAGE> 7
Selected Financial Data
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
========================================================================================================
Thousands of dollars, except per share amounts and non-monetary items
<S> <C> <C> <C> <C> <C>
Statement of operations data
Revenue $ 16,594 $ 18,641 $ 24,089 $25,017 $ 19,837
Gross profit 3,441 1,185 4,527 9,038 6,796
Operating income (loss) (6,894) (14,221) (22,943) 302 (679)
Net income (loss) (5,498) (13,869) (22,620) 605 (629)
Earnings (loss) per share (0.31) (0.83) (1.35) 0.05 (0.06)
Balance sheet data
Total assets 13,883 21,352 31,888 54,924 19,883
Shareholders' equity 8,519 13,412 27,145 48,855 10,828
Key ratios and statistics
Gross margin 20.7% 6.4% 18.8% 36.1% 34.3%
Operating margin/(loss) (41.5%) (76.3 (95.2%) 1.2% (3.4%)
Working capital 6,614 8,679 22,236 31,670 3,774
Book value per share(1) 0.47 0.80 1.62 2.94 1.10
Current ratio 2.23 2.12 5.69 6.22 1.42
Backlog 1,709 9,214 11,168 15,250 16,819
Employees 144 176 277 249 216
Shares outstanding (1) 18,016 16,816 16,804 16,574 9,782
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1996 amount includes 840 thousand shares reserved for issuance in 1997
to the shareholder class in settlement of a class action lawsuit.
See Note 11 of Notes to Consolidated Financial Statements.
ILTS 5
<PAGE> 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
1996 VS. 1995
Contract Revenue and Sales: Revenue decreased by 11% to $16.6 million in 1996
from $18.6 million in 1995. The decrease is a result of lower levels of contract
revenues caused by the booking by the Company of $3.0 million in new orders in
1996 compared to $12.6 million of new orders in 1995. Spares sales in 1996
increased 103% or $1,087 over 1995 sales. This increase in spares was due to the
increased number of ILTS terminals in service and the timing of customer orders.
Gross Margin: During 1996, the Company recognized a gross margin of 21%
compared to a gross margin of 6% in 1995. The increase in gross margin is due to
a more favorable sales mix in 1996, costs related to the winding down of the
Russian lottery project in 1995 and the effect of cost-saving measures which
were implemented late in 1995.
Write-offs and Write-downs of Lottery Service Agreements: During 1996, the
charge of $2.8 million relates entirely to the U.K. lottery. The reserve was
established after an affiliate of the customer was unable to obtain the
additional funding necessary for the project start-up and on-going operations.
At this time, the customer has not indicated when a start-up may occur. The
amount of the charge approximates the Company's tangible investment, previously
carried on the balance sheet as "Investment in Lottery Service Contracts." The
Company is pursuing recovery of its investment in this project through
resumption of the United Kingdom project, other lottery service projects or the
outright sale of the equipment. However, no assurance can be provided that the
Company will be successful in these efforts. The 1995 charge related to the
withdrawal by the Company from its Russian Lottery project. At December 31, 1996
the Company's net book value of its investment in Lottery Service agreements is
zero.
Engineering, Research & Development: Engineering, research and development
expenses in 1996 increased $302 thousand or 22% compared to 1995. Of the $1.7
million expended in 1996, $1.0 million went toward development of DataTrak
lottery software. The DataTrak software was completed for release in October
1996 and future research and development costs will be expended to provide
additional features. The 1995 expenditures related to development of the Flipper
terminal and the DataTrak software.
Selling, General and Administrative: Selling, general and administrative
expenses decreased $5.4 million in 1996 compared to 1995. The decrease was due
to a $4.2 million accrual in 1995 for the estimated cost to settle
ILTS 6
<PAGE> 9
the shareholders class action litigation. The June 1996 settlement judgment
fixed the cost at an amount approximately $1.2 million less than the 1995
estimate. This $1.2 million was recorded as a reduction to the 1996 second
quarter selling, general and administrative costs. See Note 11 of Notes to
Consolidated Financial Statements.
Gain on Sales of Subsidiary and Lottery Service Agreement: During 1996, the
Company recognized gains of $691 thousand and $624 thousand on the sales of its
subsidiary McKinnie & Associates, and the Papua New Guinea lottery service
agreement, respectively. These sales which occurred in 1993 and 1995,
respectively, have been recorded under the cost recovery method and, as such, no
income was recognized until the basis of these investments had been recovered.
This occurred in 1996. No related gains were recognized prior to 1996.
Provision for Income Taxes: The provision for income taxes in 1996 relates
to income earned in the Company's Australian subsidiary.
1995 VS. 1994
1995 revenue decreased $5.4 million or 23% compared to 1994. This change mainly
reflects a lower level of contract business in 1995. New orders received in 1995
were $12.6 million compared to $20.0 million in 1994.
As part of its strategic plan, the Company has pursued long-term service
contracts as a source of revenue. Service contracts pose capital investment
risks for the Company that do not exist in its product sale business. Revenues
are received only after a system becomes operational, based upon a percentage of
the customer's gross receipts from the system. The Company, therefore, bears the
risk that scheduling delays may occur, that a system may never become
operational, or that revenue levels may not be sufficient to provide a return of
costs invested. During 1992, the Company entered into a lottery service
agreement in Papua New Guinea. A minimal amount of revenues was earned on this
service contract in the first six months of 1995. In July 1995, the Company sold
all interest in its Papua New Guinea lottery operations to the principal
shareholders of the lottery licensee, The Lotto Pty. Ltd., in return for $175
thousand cash and a note receivable of $1.3 million to be paid in monthly
installments of approximately $79 thousand per month for a period of 17 months
commencing in September 1995. Additionally, the Company will receive a
percentage of the annual gross lottery sales or an annual sum of $260 thousand,
whichever is greater, for a period of five years, provided that the additional
sums shall not exceed $3 million. The installment payments and the minimum
percentage payments are secured by all lottery assets and certain personal
guarantees and indemnifications of all of the shareholders of The Lotto Pty.
Ltd. The Company's remaining investment in the Papua New Guinea lottery at
December 31, 1995 is approximately $338 thousand and is included in other assets
in the accompanying consolidated balance sheet.
In August 1993, the Company entered into management and equipment lease
agreements to operate an on-line lottery within the Russian Federation ("the
Project") with Zodiac On-Line ("Zodiac"), a Russian lottery operating company.
Under the terms of the agreements, the lottery was to be conducted under a
non-exclusive license held by a Russian charitable organization (the
"Foundation"). In 1994, the Company acquired Zodiac making
ILTS 7
<PAGE> 10
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
it a wholly-owned subsidiary. In December 1994, the Company recorded a provision
with respect to its investment and subsequently has expensed all related costs
as they were incurred. In June 1995, the Company became the lottery operator
under a license granted to the Russian Federal Postal Service. In November 1995,
the Company terminated the Project after exhausting numerous financing and joint
venture possibilities. In 1995, project related expenses, including a provision
for future costs to liquidate the operation totaled $2.8 million. In May 1995,
the Company entered into an equipment lease agreement in the United Kingdom
(U.K.) to operate a lottery to benefit the National Hospital System. The Company
had invested $2.8 million in the project at the end of December 1995, which
comprises the entire amount invested in lottery service agreements at that date.
See Note 4 of Notes to Consolidated Financial Statements on page 16.
Cost of sales as a percentage of revenue increased to 94% in 1995 from 81%
in 1994 due mainly to unfavorable manufacturing variances in 1995, costs
associated with a reduction in work force and operational costs in support of
the Company's lottery service operations.
Engineering, research and development expenses in 1995 decreased $258
thousand or 16% compared to 1994. Of the $1.4 million expended in 1995, $0.9
million went toward development of lottery software.
Selling, general and administrative expenses increased $2.8 million in 1995
compared to 1994. The increase in selling, general and administrative expenses
from 1994 is due to increased legal expenses and a proposed settlement of a
shareholders' lawsuit, costs incurred for domestic lottery proposals, and costs
associated with a reduction in work force.
Net interest income was $407 thousand in 1995 compared to net interest
income of $467 thousand in 1994. Interest income is generated from short term
investments.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company generated positive cash flows from operations of $461
thousand on a net loss of $5.5 million. The major reconciling items between the
net loss and cash provided from operations are the non-cash write-off of $2.8
million relating to the U.K. lottery which has been indefinitely postponed and
reductions in the Company's accounts receivables, costs and earnings in excess
of billings on uncompleted contracts and inventories of $0.6 million, $1.2
million and $3.8 million, respectively. These were offset by the gain on sales
of subsidiary and the lottery
ILTS 8
<PAGE> 11
service operations of $1.3 million and a non-cash reduction to selling general
and administrative costs of $1.2 million relating to the difference between the
value of the shares of the Company's common stock at the time of the initial
recording of the class action litigation settlement accrual in 1995 and the
value of the respective shares of common stock on the date of final settlement
in June 1996. During 1996, the Company generated cash flows from investing
activities of $1.1 million primarily as a result of proceeds of $962 thousand
and $740 thousand relating to the sale in previous years of McKinnie &
Associates and of the Papua New Guinea lottery, respectively. During 1996, the
Company spent $283 thousand on equipment and $211 thousand on capitalized
software development costs.
The Company's consolidated financial statements for the year ended December
31, 1996 have been prepared on a continuing operations basis which contemplates
the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Company has incurred net losses of $22.6
million, $13.9 million and $5.5 million in 1994, 1995 and 1996, respectively,
while revenues have decreased from $24.1 million in 1994 to $16.6 million in
1996. The Company is largely dependent on significant contracts for its revenue,
which typically include a deposit upon contract signing and up to 3 months
lead-time before delivery of hardware begins. Currently the Company has a
backlog of $1.7 million compared to backlogs of $11.2 million and $9.2 million
in 1994 and 1995, respectively.
At December 31, 1996, the Company had working capital of $6.6 million.
Management recognizes that the Company must generate additional contract sales
to maintain its current level of operations. Additionally, management is
currently seeking additional sources of funding through debt or equity financing
and consideration of other business transactions which would generate sufficient
resources to assure continuation of the Company's operations.
Management anticipates that it will be successful in obtaining sufficient
contracts to enable the Company to continue normal operations; however, no
assurances can be given that the Company will be successful in realizing
sufficient contract revenue or obtain additional funding. If the Company is
unable to obtain sufficient contract revenue or funding, management will be
required to reduce the Company's operations.
On March 24, 1997, the Company's largest shareholder, Berjaya Lottery
Management (Berjaya), had agreed to provide a line of credit of up to $2.0
million to meet the Company's cash needs through at least January 1998. In
addition, Berjaya has agreed that if the Company is declared in default of its
contract with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract
with the New York State Thruway (NYSTA), and if TRMI collects the performance
bond proceeds of $2.7 million (Note 3) from the surety and the surety obtains a
judgment against the Company for such proceeds, Berjaya will make available to
the Company the funds necessary to pay such judgment if such judgment would
render the Company unable to continue its operations. The Company's ability to
continue its on-going operations on a long-term basis is dependent upon its
ability to recover its investment in existing contracts (Note 3), obtain
additional financing, secure additional new contracts, and ultimately achieve a
sustainable level of profit from operations.
ILTS 9
<PAGE> 12
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
=========================================================================================================
Thousands of dollars, except per share amounts
<S> <C> <C> <C>
Contract revenue and sales $ 16,594 $ 18,641 $ 24,089
- ---------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 13,153 17,456 19,562
Write-offs and write-downs of lottery service agreements 2,793 2,807 17,444
Engineering, research and development 1,662 1,360 1,618
Selling, general and administrative 5,880 11,239 8,408
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses 23,488 32,862 47,032
Loss from operations (6,894) (14,221) (22,943)
Other income:
Interest income, net 173 352 467
Gains on sales of subsidiary and lottery service agreement 1,315 - -
- ---------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (5,406) (13,869) (22,476)
Provision for income taxes 92 - 144
- ---------------------------------------------------------------------------------------------------------
Net loss $ (5,498) $(13,869) $(22,620)
=========================================================================================================
Net loss per share $ (0.31) $ (0.83) $ (1.35)
=========================================================================================================
Weighted average number of shares used in
computation of net loss per share 17,465 16,812 16,760
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
ILTS 10
<PAGE> 13
Consolidated Balance Sheets
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
===========================================================================================================
Thousands of dollars, except share and per share amounts
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 5,387 $ 3,904
Accounts receivable, net of allowance for doubtful accounts of $111
($63 in 1995) 979 1,588
Costs and estimated earnings in excess of billings on uncompleted contracts 2,452 3,665
Inventories, at lower of cost (first-in, first-out method) or market:
Finished goods - 150
Work in process 283 173
Raw materials 2,735 6,497
- -----------------------------------------------------------------------------------------------------------
Total inventories 3,018 6,820
Other current assets 142 642
- -----------------------------------------------------------------------------------------------------------
Total current assets 11,978 16,619
Investment in lottery service agreements, net - 2,759
Equipment, furniture and fixtures at cost, less accumulated depreciation
of $3,737 ($3,222 in 1995) 1,128 1,361
Computer software costs, less accumulated amortization of
$1,420 ($1,331 in 1995) 688 561
Other 89 52
- -----------------------------------------------------------------------------------------------------------
Total assets $ 13,883 $ 21,352
Liabilities and shareholders' equity Current Liabilities:
Accounts payable $ 491 $ 231
Billings in excess of costs and estimated earnings on uncompleted contracts 161 115
Accrued payroll and related taxes 893 949
Accrued litigation settlement 1,680 4,200
Related party liability 366 -
Other current liabilities 1,773 2,445
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 5,364 7,940
===========================================================================================================
Commitments and contingencies
Shareholders' equity:
Common shares; no par value, 50,000,000 shares authorized;
17,176,211 shares issued and outstanding (16,816,211 in 1995) 49,407 48,687
Accumulated deficit (40,721) (35,223)
Foreign currency translation adjustment (167) (52)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 8,519 13,412
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 13,883 $ 21,352
===========================================================================================================
</TABLE>
See accompanying notes.
ILTS 11
<PAGE> 14
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
=============================================================================================================
Thousands of dollars
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,498) $(13,869) $(22,620)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 601 1,061 1,656
Gains on sales of subsidiary and lottery service agreements (1,315) - -
Deferred income taxes - - 148
Stock option compensation - - 304
Provision (reduction) for settlement of shareholder
class action litigation (1,200) 3,600 -
Write-offs and write-downs of lottery service agreements 2,793 2,807 17,444
Changes in operating assets and liabilities:
Accounts receivable 609 810 1,635
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,213 (283) (856)
Inventories 3,802 3,679 (4,003)
Accounts payable 260 (678) (633)
Billings in excess of costs and estimated earnings on
uncompleted contracts 46 (853) (1,432)
Accrued payroll and related taxes (56) 354 (66)
Accrued litigation costs (600) 600 -
Related party payable 366 - -
Other (560) 572 580
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 461 (2,200) (7,843)
- -------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) investing activities:
Investment in lottery service agreements (34) (4,044) (5,934)
Lottery service agreement sale proceeds and advance repayments 962 651 402
Proceeds from sale of subsidiary 740 525 325
Additions to equipment (283) (250) (1,209)
Additions to computer software costs (211) (67) (413)
Other (37) - 330
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 1,137 (3,185) (6,499)
Cash flows provided by (used for) financing activities:
Additions to notes payable - - 300
Payments on notes payable - (300) -
Proceeds from issuance of common stock and warrants - 23 614
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities - (277) 914
- -------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (115) 99 (8)
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 1,483 (5,563) (13,436)
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 3,904 9,467 22,903
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents of end of year $ 5,387 $ 3,904 $ 9,467
=============================================================================================================
Supplemental cash flow information:
Cash paid during the year for interest 20 46 47
- -------------------------------------------------------------------------------------------------------------
Cash paid during the year for income taxes 46 7 8
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
ILTS 12
<PAGE> 15
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained Foreign
Common stock earnings currency
------------------- (accumulated translation
Shares Amount deficit) adjustment Total
=============================================================================================================
Thousands of shares/dollars
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 16,574 $47,732 $ 1,266 $(143) $ 48,855
- -------------------------------------------------------------------------------------------------------------
Proceeds from exercise of warrants 98 471 - - 471
Proceeds from exercise of stock options 132 143 - - 143
Accelerated vesting of stock options for
terminated employees - 304 - - 304
Foreign currency translation adjustment - - - (8) (8)
Net loss - 1994 - - (22,620) - (22,620)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 16,804 48,650 (21,354) (151) 27,145
- -------------------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options 12 23 - - 23
Accelerated vesting of stock options for
terminated employees - 14 - - 14
Foreign currency translation adjustment - - - 99 99
Net loss - 1995 - - (13,869) - (13,869)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 16,816 48,687 (35,223) (52) 13,412
- -------------------------------------------------------------------------------------------------------------
Issuance of shares in settlement of
shareholders' class action lawsuit 360 720 - - 720
Foreign currency translation adjustment - - - (115) (115)
Net loss - 1996 - - (5,498) - (5,498)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 17,176 $49,407 $(40,721) $(167) $ 8,519
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
ILTS 13
<PAGE> 16
Notes to Consolidated Financial Statements
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
International Lottery & Totalizator Systems, Inc. ("the Company") designs,
manufactures, sells, leases, manages, supports and services computerized ticket
issuing systems and terminals for global pari-mutuel and on-line lottery
industries. The principal applications for the Company's products are in the
automated pari-mutuel (horse racing) wagering and on-line government sponsored
lottery industries.
The principal proprietary component of the Company's systems is the
DATAMARK terminal, a compact, reliable microprocessor-based ticketing terminal
which can be modified to meet specific customer feature and configuration
requirements. The Company sells its product principally in international
markets.
The Company's consolidated financial statements for the year ended December
31, 1996 have been prepared on a continuing operations basis which contemplates
the realization of assets and the settlement of liabilities and commitments in
the normal course of business. The Company has incurred net losses of $22.6
million, $13.9 million and $5.5 million in 1994, 1995 and 1996, respectively,
while revenues have decreased from $24.1 million in 1994 to $16.6 million in
1996. The Company is largely dependent upon significant contracts for its
revenue, which typically include a deposit upon contract signing and up to 3
months lead-time before delivery of hardware begins. Currently, the Company has
a backlog of $1.7 million compared to backlogs of $11.2 million and $9.2 million
in 1994 and 1995, respectively.
At December 31, 1996, the Company had working capital of $6.6 million.
Management recognizes that the Company must recover its investment in existing
contracts (Note 3) and generate additional contract sales to maintain its
current level of operations. Additionally, management is currently seeking
additional sources of funding through debt or equity financing and consideration
of other business transactions which would generate sufficient resources to
assure continuation of the Company's operations.
Management anticipates that it will be successful in recovering its
investment in existing contracts (Note 3) and obtaining sufficient contracts to
enable the Company to continue normal operations; however, no assurances can be
given that the Company will be successful in realizing sufficient new contract
revenues or obtaining additional financing. If the Company is unable to recover
its investment in existing contracts (Note 3), obtain sufficient new contract
revenue or financing, management will be required to reduce the Company's
operations. On March 24, 1997, the Company's largest shareholder, Berjaya
Lottery Management (Berjaya), had agreed to provide a line of credit of up to
$2.0 million to meet the Company's cash needs through at least January 1998. In
addition, Berjaya has agreed that if the Company is declared in default of its
contract with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract
with the New York State Thruway (NYSTA), and if TRMI collects the performance
bond proceeds of $2.7 million (Note 3) from the surety and the surety obtains a
judgment against the Company for such proceeds, Berjaya will make available to
the Company the funds necessary to pay such judgment if such judgment would
render the Company unable to continue its operations. The Company's ability to
continue its on-going operations on a long-term basis is dependent upon its
ability to recover its investment in existing contracts (Note 3), obtain
additional financing, secure additional new contracts, and ultimately achieve a
sustainable level of profit from operations.
Principles of Consolidation - The accompanying financial statements
consolidate the accounts of the Company and its subsidiaries, all of which are
wholly-owned. Intercompany accounts and transactions are eliminated in
consolidation.
Revenue Recognition - The Company recognizes long-term contract revenue on
the percentage-of-completion method, based on contract costs incurred to date
compared to total estimated contract costs. The effects of changes in contract
cost estimates are recognized in the period they are determined. 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. All
other revenue is recorded on the basis of shipments of products or performance
of services.
Use of Estimates - 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.
Depreciation - Depreciation of equipment, furniture and fixtures is
provided principally using the straight-line method over estimated useful lives
of 3 - 7 years.
Computer Software Costs - The Company capitalizes the costs of computer
software incurred in the development of specific products, after technological
feasibility has been established. The capitalized software costs are amortized
using the greater of the amount computed using the ratio of current product
revenue to estimated total product revenue or the straight-line method over the
remaining estimated economic lives of the products (3 years). Amortization
expense totaled $89 thousand, $510 thousand and $687 thousand for the years
ended December 31, 1996, 1995, and 1994, respectively.
Impairment of Long-Lived Assets - On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121). The adoption of SFAS 121 did not impact the financial position or
results of operations of the Company in 1996.
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.
ILTS 14
<PAGE> 17
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 have been translated from its functional
currency, the Australian dollar. The effect of the exchange rate fluctuations
between the U.S. dollar and the Australian dollar is recorded as an increase
(decrease) to a separate component of shareholders' equity. The Company's other
foreign subsidiary uses the U.S. dollar as its functional currency and,
accordingly, related translation gains and losses are recognized in current
operations.
Per Share Information - Net loss per share is based on the weighted average
number of shares outstanding during the year. The 1996 computation includes 840
thousand shares of common stock to be issued in 1997, pursuant to a class action
lawsuit settlement rendered by the court on June 17, 1996. (Note 11).
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 of Credit Risk - 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.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations.
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. Included in cash and cash equivalents at December 31, 1996 and 1995
are investments in commercial paper and municipal bonds totaling $2.3 and $2.2
million, respectively, which mature in January 1997 and January 1996,
respectively. The estimated fair value of these investments approximates the
amortized cost; therefore, there are no unrealized gains or losses as of
December 31, 1996 or 1995.
Investment in Lottery Service Agreements - The investment in lottery
service agreements included the direct costs of manufacture and installation of
computerized electronic lotteries, including the terminals, central computer
systems and start-up related implementation costs to the extent that recovery of
such costs is determined to be reasonably assured.
Stock Options - The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Reclassifications - Certain prior year balances have been reclassified to
conform with the 1996 presentation.
2. RELATED PARTY TRANSACTIONS
The Company has entered several sales agreements to supply terminals to entities
in which the Company's largest shareholder, Berjaya Lottery Management
(Berjaya), has a significant equity interest. These revenues totaled $2.0
million, $3.5 million and $5.2 million, in 1996, 1995, and in 1994,
respectively. Included in accounts receivable and costs and estimated earnings
in excess of billings on uncompleted contracts were $0.5 million and $2.3
million at December 31, 1996 and 1995, respectively, relating to these
customers.
During 1996, the Company entered into an agreement with Berjaya to purchase
specific inventory on behalf of Berjaya to enable the Company to satisfy certain
future potential orders in a timely manner. Title to the inventory purchased
resides with Berjaya, therefore, no amounts are reflected in the consolidated
balance sheet for inventory purchased on their behalf. Advances received in
excess of inventory purchased aggregated approximately $366 thousand and have
been reflected as a related party liability in the accompanying consolidated
balance sheet as of December 31, 1996.
3. CONTRACTS IN PROCESS
The amounts by which total costs and estimated earnings exceeded or were less
than billings on uncompleted contracts are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Costs incurred $ 13,449 $ 15,665
Estimated earnings 1,745 4,612
- --------------------------------------------------------------------------------------------------------
15,194 20,277
- --------------------------------------------------------------------------------------------------------
Less: billings (12,903) (16,727)
========================================================================================================
$ 2,291 $ 3,550
- --------------------------------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheets as follows:
Costs and estimated earnings in excess of billings on uncompleted contracts $ 2,452 $ 3,665
Billings in excess of costs and estimated earnings on uncompleted contracts (161) (115)
========================================================================================================
$ 2,291 $ 3,550
- --------------------------------------------------------------------------------------------------------
</TABLE>
ILTS 15
<PAGE> 18
The Company is obligated under a $2.8 million contract with The Revenue
Markets Inc. (TRMI) to supply ticket handling equipment for the New York
Thruway. The Company has experienced difficulty in satisfying certain of the
customer's requirements during three pilot testing periods and the terminals
delivered by the Company have not been accepted.
A fourth and final ninety-day pilot test period is expected to commence on
February 28, 1997 and conclude on May 28, 1997. Management believes that all the
requirements outlined in the final pilot test program plan will be met and that
delivery of the production units will commence in September 1997. Payments under
the contract are expected to be received from TRMI in 1997 and 1998 based on the
timing of receipt of payments by TRMI from the New York Thruway.
As of December 31, 1996, $1.4 million is recorded as costs and estimated
earnings in excess of billings on uncompleted contracts and $548 thousand in
inventory specific to this project. The Company has accrued and recognized the
entire estimated loss of $924 thousand on the contract and does not expect to
realize any losses beyond amounts accrued at December 31, 1996.
In the event the Company is unable to fulfill its contractual obligations,
the recovery of the related contract receivables and inventory, aggregating
approximately $1.9 million, may be delayed or deferred indefinitely. In
addition, the Company may be required to recognize certain performance bond
obligations up to $2.7 million and certain other non-performance penalties. At
this time, the Company expects to be able to fulfill its contractual obligations
and collect all amounts owed under this contract. However, if the Company is
unable to fulfill its contract obligations or negotiate or litigate a favorable
resolution, the Company may recognize an additional loss that would be material
in relation to the consolidated statements of financial position and results of
operations.
4. LOTTERY SERVICE AGREEMENTS
The Company entered into contracts to provide lottery equipment and management
of on-line lottery systems on a long-term basis in Papua New Guinea and the
Republic of Georgia in 1992, in the Dominican Republic and the Russian
Federation in 1993 and entered into a contract to provide lottery equipment in
the United Kingdom in 1995.
The Company committed lottery equipment costing approximately $2.8 million
to its United Kingdom lottery service agreement in 1995. The Company agreed to
provide a complete lottery system for a percentage of lottery revenues. In
September 1996, it became apparent that an affiliate of the customer was unable
to obtain the additional funding necessary for the project start-up and on-going
operations and the Company recorded a $2.8 million charge to reflect a reserve
for the project. The amount of the charge approximates the Company's tangible
investment, previously carried on the balance sheet as "Investment in Lottery
Service Contracts." The Company is pursuing recovery of its investment in the
project through resumption of the United Kingdom project, other service projects
or the outright sale of the equipment. However, no assurance can be provided
that the Company will be successful in these efforts.
The Papua New Guinea lottery commenced operation in March 1993. Revenues
from the lottery in Papua New Guinea did not meet expectations and, in June
1994, the Company wrote down its investment in Papua New Guinea by $3.0 million
to its estimated future cash flows. In July 1995, the Company sold all interests
in the Papua New Guinea lottery operation to the principal shareholders of the
lottery licensee, for $175 thousand in cash and a note of $1.3 million to be
paid in monthly installments of approximately $79 thousand per month for a
period of 17 months commencing in September 1995. Additionally, the Company will
receive a percentage of the annual gross lottery sales or an annual sum of $260
thousand, whichever is greater, for a period of five years, provided that the
additional sums shall not exceed $3.0 million. The Company is accounting for the
sale under the cost recovery method. The installment payments and the minimum
percentage payments are secured by all lottery assets and certain personal
guarantees. During 1996, the Company recognized approximately $624 thousand as a
gain on the sale of the lottery service agreement. The amount reflects the
aggregate amount of payments received under the sales agreement in excess of the
Company's carrying amount of its investment in the lottery service agreement on
the date of the sale. Under the cost recovery method, no amount of gain on the
sale was recognized until the net investment in the lottery service agreement on
the date of sale was recovered in 1996. At December 31, 1996, the Company has no
investment remaining on its balance sheet as the proceeds from the sale have
exceeded the net book value at the time of the sale.
Due to uncertainties which arose in November 1994 regarding the Russian
lottery license process and the continued economic, political and legal
instability in Russia, the Company recorded a provision of $7.6 million to
record the assets at estimated net realizable value with respect to the Russian
lottery investment. In November 1995, the Company terminated its Russian
project. In 1995, the Company incurred $2.8 million in costs toward its Russian
lottery project, including the write-off of costs related to a reduction in its
Russian work force and future costs to liquidate the operation.
In June 1994, the Company wrote off its investment in two lottery service
agreements which totaled $6.8 million, $1.2 million in the Republic of Georgia
and $5.6 million in the Dominican Republic, as projected revenues indicated the
Company would not be able to recover its investment. In January 1995, the
Company ceased operations in the Dominican Republic and, in 1994, closed its
office in the Republic of Georgia.
5. INDUSTRY SEGMENT AND GEOGRAPHIC DATA
The Company operates in one industry segment which includes totalizator and
lottery systems. The Company has an Australian subsidiary, International Lottery
& Totalizator Systems Australia Pty., Ltd., and a United Kingdom subsidiary,
International Lottery & Totalizator Systems (U.K.) Ltd.
ILTS 16
<PAGE> 19
Sales between geographic areas are generally priced to recover material
costs plus an appropriate markup. Revenue from major customers is as follows (in
thousands):
<TABLE>
<CAPTION>
CUSTOMER LOCATION 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sweden $ 4,300 $ 1,900 $ 400
Hong Kong 2,400 600 9,400
Australia* 2,000 4,400 2,400
Philippines 900 2,900 5,200
- ------------------------------------------------------------------------------------------
</TABLE>
* different customer in 1996 as compared to 1995 and 1994
The following table summarizes information about the Company's operations
in different geographic areas for the years ended December 31, 1996, 1995 and
1994 (in thousands). Sales, income and identifiable assets of the Dominican
Republic are included in the U.S., Europe consists of the U.K. subsidiary,
Russia and Georgia, and Pacific includes the Australian subsidiary and Papua New
Guinea.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------
EASTERN EASTERN
EUROPE/ CONSOLI- EUROPE/ CONSOLI-
USA PACIFIC EUROPE DATED USA PACIFIC EUROPE DATED USA
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers:
Export $ 11,313 $ - $ - $ 11,313 $ 15,006 $ - $ - $ 15,006 $ 19,923
Domestic 293 4,482 506 5,281 513 2,614 508 3,635 946
- -----------------------------------------------------------------------------------------------------------------
Sales to:
Australia
subsidiary 1,738 - - 1,738 508 - - 508 423
- -----------------------------------------------------------------------------------------------------------------
13,344 4,482 506 18,332 16,027 2,614 508 19,149 21,292
- -----------------------------------------------------------------------------------------------------------------
Elimination of
intercompany
sales (1,738) - - (1,738) (508) - - (508) (423)
- -----------------------------------------------------------------------------------------------------------------
Total revenue 11,606 4,482 506 16,594 15,519 2,614 508 18,641 20,869
- -----------------------------------------------------------------------------------------------------------------
Write-offs and
write-downs of
lottery service
agreements (2,793) - - (2,793) - - (2,807) (2,807) (5,663)
- -----------------------------------------------------------------------------------------------------------------
Net income
(loss) (5,865) 476 (109) (5,498) (13,561) (76) (232) (10,700) (3,084)
- -----------------------------------------------------------------------------------------------------------------
Identifiable
assets $ 11,638 $2,096 $ 149 $ 13,883 $ 19,572 $ 1,478 $ 302 $ 21,352 $ 27,952
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------
EASTERN
EUROPE/ CONSOLI-
PACIFIC EUROPE DATED
------------------------------
<S> <C> <C> <C>
Sales to unaffiliated
customers:
Export $ - $ - $ 19,923
Domestic 2,612 608 4,166
- -------------------------------------------------------------
Sales to:
Australia
subsidiary - - 423
- -------------------------------------------------------------
2,612 608 24,512
Elimination of
intercompany
sales - - (423)
- -------------------------------------------------------------
Total revenue 2,612 608 24,089
- -------------------------------------------------------------
Write-offs and
write-downs of
lottery service
agreements (3,000) (8,781) (17,444)
- -------------------------------------------------------------
Net income
(loss) (3,084) (8,836) (22,620)
- -------------------------------------------------------------
Identifiable
assets $ 2,322 $ 1,614 $ 31,888
=============================================================
</TABLE>
6. LEASES
The Company leases its facilities under operating lease agreements which expire
at various dates through October 2000. Certain lease agreements provide for
increases in minimum annual rent based on increases in various market indices.
Also, the Company has the option to renew the lease on its U.S. facility for one
additional ten year term. Rent expense for the years ended December 31, 1996,
1995, and 1994 was $605 thousand, $674 thousand and $551 thousand, respectively.
Minimum future obligations for these leases are as follows (in thousands):
1997 - $632; 1998 - $533; 1999 - $524; 2000 - $271, and 2001 - $13.
7. INCOME TAXES
The provision for income taxes of $92 thousand in 1996 and $144 thousand in 1994
relate to income earned by the Company's Australian subsidiary.
The following is a reconciliation of the actual tax provision to the
expected tax benefit computed by adding the statutory federal income tax rate to
the loss before provision for income taxes (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
========================================================================================================
<S> <C> <C> <C>
Expected federal income tax (credit) at statutory rate $ (1,892) $ (4,715) $ (7,642)
U.S. and foreign net operating losses - no benefit 1,892 4,715 7,642
Other, net 92 - 144
- --------------------------------------------------------------------------------------------------------
Total $ 92 - $ 144
========================================================================================================
</TABLE>
ILTS 17
<PAGE> 20
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. The components of the
Company's deferred tax liabilities and assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
========================================================================================================
<S> <C> <C>
Deferred tax liabilities:
Computer software costs $ 310 $ 225
- --------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 310 225
Deferred tax assets:
Installment sale PNG 1,209 1,575
Reserves against investment in lottery service agreements 1,401 235
Reserves and accruals 1,514 1,045
Rent expense 177 160
Employee benefits 88 130
Patent expense 31 35
Net operating loss and credit carryforwards 17,589 12,120
Other 29 18
- --------------------------------------------------------------------------------------------------------
Total deferred tax assets 22,038 15,318
Net deferred tax assets 21,728 15,093
Valuation allowance (21,728) (15,093)
- --------------------------------------------------------------------------------------------------------
Net deferred taxes $ - $ -
========================================================================================================
</TABLE>
The Company has Federal and California net operating losses of
approximately $46 million and $21 million, respectively, which will begin to
expire in 1998 unless previously utilized. The difference between the Federal
and California net operating loss carryforwards relates primarily to
California's statutory 50% annual reduction rule.
The Company also has Federal general business credit carryforwards of
approximately $588 thousand, which begin to expire in 2002.
Pursuant to the Tax Reform Act of 1986, use of the Company's business
credit and net operating loss carryforwards may be limited if a cumulative
change in ownership of more than 50%, as defined, occurs within any three year
period. Management believes such a change in ownership has not occurred.
8. EMPLOYEE STOCK BONUS PLAN
The Company has an employee stock bonus plan, commonly referred to as a 401(k)
plan, qualified under the Internal Revenue Code, in which all eligible
employees, as defined in the Internal Revenue Code, may elect to participate.
Under the Plan, employees may voluntarily make tax-deferred contributions of up
to 15% of their compensation to a trust which provides the participant with
various investment alternatives. In addition, the Company, at the discretion of
the Board of Directors, may contribute an amount for each fiscal year which does
not exceed 5% of the annual compensation of all participants in the Plan.
Company contributions charged to operations were $82 thousand, $198 thousand and
$272 thousand, in 1996, 1995 and 1994, respectively.
9. STOCK OPTION PLANS
The Company has three current employee stock option plans and a directors option
plan whereby options to purchase 2.6 million and 240 thousand shares,
respectively, of the Company's common stock may be granted. Options granted have
5 to 10 year terms and vest and become fully exerciseable 4 to 5 years from the
date of grant.
Pro forma information regarding net loss and net loss per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 5.8% -
6.8% and 5.4% - 6.0%; dividend yields of 0%; volatility factors of the expected
market price of the Company's common stock of 1.2; and a weighted-average life
of the options of 7.2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying Statement 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma results of operations in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995. The Company's pro forma information
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net loss $ (5,645) $ (13,895)
Pro forma net loss per share $ (0.32) $ (0.83)
- --------------------------------------------------------------------------------------------------------
</TABLE>
ILTS 18
<PAGE> 21
A summary of the Company's stock option activity and related information
follows (options in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 1,325 $ 7.28 1,351 $ 7.50 1,287 $ 7.87
Granted 320 $ 1.22 75 $ 2.28 291 $ 4.45
Exercised - - (12) $ 1.87 (132) $ 3.09
Cancelled (144) $ 9.86 (89) $ 7.16 (95) $ 9.24
- -----------------------------------------------------------------------------------------------------------
Outstanding - end of year 1,501 $ 5.74 1,325 $ 7.28 1,351 $ 7.50
Exercisable at end of year 1,007 $ 6.95 931 $ 7.35 710 $ 6.89
Weighted-average fair value of
options granted during the year $ 1.22 $ 2.28 $ 4.45
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$1.03 to $15.75. The weighted-average remaining contractual life of those
options is approximately 5 years.
At December 31, 1996, options for 1,073,095 shares were available for
future grant and 1.8 million shares of the Company's common stock have been
reserved for issuance under all of the Company's stock option plans.
The following table summarizes information about stock options at December
31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
- ---------------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.0312 to $ 1.5000 355 8.82 years $ 1.24 34 $ 1.38
$ 2.2188 to $ 2.7500 375 2.74 years $ 2.58 343 $ 2.61
$ 2.8750 to $ 5.1250 317 4.73 years $ 3.58 245 $ 3.72
$ 6.1250 to $ 11.5000 168 5.32 years $ 9.34 140 $ 9.14
$ 15.7500 to $ 15.7500 286 4.50 years $ 15.75 245 $ 15.75
- ---------------------------------------------------------------------------------------------------------------------------
$ 1.0312 to $ 15.7500 1501 5.22 years $ 5.74 1007 $ 6.95
</TABLE>
10. McKinnie & Associates
On March 31, 1993, the Company sold its subsidiary, McKinnie & Associates, Inc.,
to Shreveport Acquisition for cash and a note receivable. As the ultimate
collection on the sale was in doubt at the time of the sale, it was recorded
under the cost recovery method. During 1996, the remaining book value was
received and the Company recorded $691 thousand of gain due to receipts in
excess of the basis. Unrecorded gain and interest of $0.6 million will be
recognized using the cost recovery method as payments are received.
11. LITIGATION
In 1994, shareholders of the Company filed class action lawsuits against the
Company and several of its officers and directors. Those actions were
consolidated in the United States District Court for the Southern District of
California. Plaintiffs contended that during the class period (June 22, 1993
through June 21, 1994) the Company and the individual defendants made a series
of public statements that failed to disclose adverse information about the
Company's lottery service contracts, that these purported nondisclosures
artificially inflated the price of the Company's stock and that those purchasers
who acquired their shares in reliance on the integrity of the market suffered
damages as a result. On June 17, 1996, the court entered a judgment of a cash
payment to the class shareholders and 1.2 million shares of authorized but
unissued common stock of the Company, of which, 360 thousand shares were issued
in September 1996 and 840 thousand shares will be issued in 1997. Such shares
are reserved for issuance as of December 31, 1996 and were included in the
calculation of earnings per share for the year ended December 31, 1996. The
estimated settlement was accrued as of September 30, 1995 and an adjustment of
approximately $1.2 million was recorded during the three months ended June 30,
1996 to reduce the accrual to the actual settlement amount, valued as of the
judgment date.
In November 1995, Mr. James Walters, the former chairman and president of
the Company, filed an action in the San Diego County Superior Court against the
Company, its current president, Frederick A. Brunn, a publishing company and an
author alleging that certain statements in a magazine article were slander per
se by ILTS and Brunn and libel by the publishing company and the author, and
that Mr. Walters suffered an invasion of privacy by all defendants. In addition,
Walters alleged that erroneous information in the Company's 1995 Proxy Statement
resulted in two other magazine articles publishing allegedly incorrect
information. Mr. Walters seeks general and special damages of $9 million and
punitive damages. On November 1, 1996, the San Diego County Superior Court
entered a summary judgment in favor of the Company. Mr. Walters has filed a
notice of appeal with the California appellate court. Management, based on the
advice of counsel, believes that the outcome of this case will not result in any
liability to the Company. Accordingly, no provision for any liability that may
result has been included in the consolidated financial statements.
The Company is also subject to other 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.
ILTS 19
<PAGE> 22
Report of Ernst & Young, LLP, Independent Auditors
THE BOARD OF DIRECTORS AND SHAREHOLDERS, INTERNATIONAL LOTTERY & TOTALIZATOR
SYSTEMS, INC.
We have audited the accompanying consolidated balance sheets of International
Lottery & Totalizator Systems, Inc. as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of International
Lottery & Totalizator Systems, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
San Diego, California
February 21, 1997
except for Note 1, as to which the date is
March 24, 1997
ILTS 20
<PAGE> 23
Corporate and Common Share Information
DIRECTORS
Theodore A. Johnson
Chairman of the Board
Frederick A. Brunn
President
Chan Kien Sing
Group Executive Director
Berjaya Group Berhad
M. Mark Michalko
Executive Vice President
Martin J. O'Meara Jr.
President,
The Budget Plan, Inc.
Ng Foo Leong
Executive Director,
Sports Toto Malaysia
Sir Michael G.R., Sandberg
Private Investor
Ng Aik Chin
Executive Assistant
to the President
OFFICERS
Frederick A. Brunn
President
Timothy R. Groth
Vice President
Technical Operations
William A. Hainke
Chief Financial Officer
Corporate Secretary
and Treasurer
M. Mark Michalko
Executive Vice President
MARKET FOR COMMON STOCK
The Company's Common Stock is traded under the symbol ITSI on the NASDAQ
National Market system. As of December 31, 1996, there were 17,176,211 common
shares outstanding and 896 shareholders of record. Berjaya Lottery Management
owned 38% of the total outstanding shares and the Company's management owned 1%.
<TABLE>
<CAPTION>
1996 HIGH LOW
- ----------------------------------------------
<S> <C> <C>
First Quarter 1 25/32 1 1/16
Second Quarter 3 3/16 1 1/16
Third Quarter 2 1/2 1 1/8
Fourth Quarter 1 5/16 25/32
Average Daily Volume 42,045
Total Annual Trading
Volume 10,679,305
</TABLE>
<TABLE>
<CAPTION>
1995 HIGH LOW
- ---------------------------------------------
<S> <C> <C>
First Quarter 4 7/8 1 15/16
Second Quarter 4 3/8 1 7/8
Third Quarter 3 3/8 2 1/8
Fourth Quarter 2 11/16 15/16
Average Daily Volume 52,267
Total Annual Trading Volume 13,171,342
</TABLE>
DIVIDEND POLICY
The Company retains earnings to support operations.
FORM 10-K
A Copy of Form 10-K as filed with the Securities and Exchange Commission can be
obtained by contacting:
Investor Relations
ILTS
2131 Faraday Avenue
Carlsbad, CA 92008-7297 USA
(760) 931-4000
ANNUAL MEETING OF SHAREHOLDERS
The 1997 Annual Meeting will be held at 3:00 p.m. PDT on Thursday, May 15, 1997,
at Pea Soup Andersen's, 850 Palomar Airport Road, Carlsbad, California, (760)
438-0880. Shareholders and interested parties are invited to attend.
TRANSFER AGENT
AND REGISTRAR
ChaseMellon
Shareholder Services
85 Challenger Road
Ridgefield Park,
New Jersey USA
1-800-522-6645
(213) 553-9719
(213) 553-9735 Fax
INDEPENDENT AUDITORS
Ernst & Young LLP
501 West Broadway, Suite 1100
San Diego, CA 92101-3536 USA
(619) 235-5000
To receive Company
information via facsimile,
call the Investor Relations Hotline: 1-800-859-5903.
<PAGE> 24
HEADQUARTERS
International Lottery & Totalizator Systems, Inc.
2131 Faraday Avenue
Carlsbad, CA 92008-7297 USA
(760) 931-4000
(760) 931-1789 Fax
TECHNICAL AND MARKETING/SALES SUPPORT FACILITIES
United Kingdom
International Lottery & Totalizator Systems (UK) Ltd.
21 Horton Road
Yiewsley, West Drayton
Middlesex UB7 8HT
England
(44) (1895) 449550
(44) (1895) 420600 Fax
Australia
International Lottery & Totalizator Systems Australia Pty. Ltd.
Unit 1A, 167 Prospect Highway
Seven Hills, New South Wales 2147
Australia
(61) (2) 9624-4300
(61) (2) 9674-6832 Fax
SALES OFFICES
Asia/Pacific
Sales Office
Christina Bldg. Unit 304
Herrera Corner Legaspi Sts.
Legaspi Village, Makati, Philippines
(63) (2) 816-6989
(63) (2) 815-3270
Europe
ILTS Europe
Vollsveien 168
N-1343 Eiksmarka
Norway
(47) (67) 14 73 76
(47) (67) 14 80 68
South Africa
ILTS South Africa
c/o Arbitration House
P.O. Box 653007
Benmore 2110
Docex 25 Johannesburg
Republic of South Africa
(27) (11) 320-0550
(27) (11) 320-0695 Fax
[LOGO]
Visit the ILTS Home Page: http://www.ilts.com
Registered to ISO 9001 Certificate No. A3960
International Lottery & Totalizator Systems, Inc.(R), ILTS(R), ILTSInterToteo,
DataTrak(R) and DATAMARK XClaim(TM) are registered trademarks of International
Lottery & Totalizator Systems, Inc. UNIXis a registered trademark of UNIXSystem
Laboratories.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant had 3 wholly-owned subsidiaries as of December 31, 1996:
ITS Virgin Islands, a Virgin Island corporation; International Lottery &
Totalizator Systems Australia Pty. Ltd., an Australia corporation; International
Lottery & Totalizator Systems (UK) Ltd., a United Kingdom corporation.
12
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of International Lottery & Totalizator Systems, Inc. of our report
dated February 21, 1997 except for Note 1, as to which the date is March 24,
1997 included in the 1996 Annual Report to Shareholders of International
Lottery & Totalizator Systems, Inc.
Our audits also included the financial statement schedule of
International Lottery & Totalizator Systems, Inc. listed in Item 14(a). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8, No. 2-99618) pertaining to the 1982 Employee Stock Option
Plan, (Form S-8, No. 33-34121) pertaining to the 1986 Employee Stock Option
Plan, (Form S-8, No. 33-34123) pertaining to the 1988 Employee Stock Option Plan
of International Lottery & Totalizator Systems, Inc., (Form S-8, No.33- 79938)
pertaining to the 1990 Stock Incentive Plan, (Form S-8, No. 33-69008) pertaining
to the 1993 Directors' Stock Option Plan and the Registration Statement (Form
S-3, No. 33-78194) pertaining to the offer of Common Stock for certain
Shareholders and in the related Prospectuses of our report dated February 21,
1997 except for Note 1, as to which the date is March 24, 1997, with respect to
the consolidated financial statements and schedule ofInternational Lottery &
Totalizator Systems, Inc. included or incorporated by reference in this Annual
Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
San Diego, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,387
<SECURITIES> 0
<RECEIVABLES> 979
<ALLOWANCES> 0
<INVENTORY> 3,018
<CURRENT-ASSETS> 11,978
<PP&E> 1,128
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,883
<CURRENT-LIABILITIES> 5,364
<BONDS> 0
49,407
0
<COMMON> 0
<OTHER-SE> (40,721)
<TOTAL-LIABILITY-AND-EQUITY> 13,883
<SALES> 16,594
<TOTAL-REVENUES> 16,594
<CGS> 15,946
<TOTAL-COSTS> 23,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (5,406)
<INCOME-TAX> 92
<INCOME-CONTINUING> (5,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,498)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0
</TABLE>
