<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
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 1-12986
INTERNATIONAL LOTTERY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 31-1297916
(State of incorporation) (I.R.S. Employer
Identification Number)
6665 CREEK ROAD, CINCINNATI, OHIO 45242
(Address of principal executive offices, including zip code)
(513) 792-7000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
------------
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
--- ---
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. X
---
The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 25, 1997 was $9,128,125. There were
3,210,000 shares of Common Stock outstanding as of March 25, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1996 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held on May 8, 1997 are incorporated by reference
in Part III hereof.
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INTERNATIONAL LOTTERY, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
Number Number
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PART I
<S> <C> <C>
1. Business ...................................................................................... 3
2. Properties .................................................................................... 23
3. Legal Proceedings ............................................................................. 24
4. Submission of Matters to a Vote of Security Holders ........................................... 25
4(A). Executive Officers of the Registrant .......................................................... 25
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ......................... 27
6. Selected Financial Data ....................................................................... 27
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 27
8. Financial Statements and Supplementary Data ................................................... 27
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 28
PART III
10. Directors and Executive Officers of the Registrant ............................................ 28
11. Executive Compensation ........................................................................ 28
12. Security Ownership of Certain Beneficial Owners and Management ................................ 28
13. Certain Relationships and Related Transactions ................................................ 28
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .............................. 29
SIGNATURES ...................................................... 35
INDEX OF FINANCIAL STATEMENT SCHEDULES .......................... S-1
INDEX OF EXHIBITS ............................................... E-1
</TABLE>
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PART I
ITEM 1. BUSINESS
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General
International Lottery, Inc. (the "Company") is engaged primarily in the
design, manufacture, sale, lease and service of instant winner lottery ticket
vending machines ("ITVMs"). ITVMs are used by public lotteries operated by
states and foreign public entities to dispense instant winner lottery tickets
primarily in retail locations such as supermarkets and convenience stores. An
instant lottery commonly is played by players scratching off a latex coating
from a pre-printed ticket or tearing pull-tabs from a pre-printed ticket to
determine the outcome of the game. The Company's ITVMs dispense instant lottery
tickets without the assistance of an employee of the lottery instant ticket
retailer or agent, thereby permitting the retailer or agent to sell tickets
without disrupting the normal duties of its employees.
The Company's ITVMs dispense scratch-off instant lottery tickets using
a dispensing process that incorporates the Company's patented "burster
technology." The Company believes that this burster technology is superior to
any other ITVM scratch-off dispensing technology on the market and considers it
to be a key to its marketing efforts and the ITVM procurement decisions of the
various lotteries. The Company is unaware of any competitor that incorporates a
substantially equivalent or superior scratch-off dispensing mechanism in its
ITVMs. To dispense pull-tab instant lottery tickets, the Company has developed
an ITVM that incorporates a patented dispensing technology which is different
than the burster technology but that is also believed by the Company to be
superior to any other currently available pull-tab dispensing technology. ITVMs
that dispense pull-tab tickets are sometimes referred to herein as "pull tab
vending machines" or "PTVMs." The term "ITVM" includes both scratch-off vending
machines and PTVMs unless the context indicates otherwise.
As of December 31, 1996, the Company had sold or leased 10,523 ITVMs
under agreements with 16 different state lotteries and three foreign
jurisdictions, or their licensees or contractors. The Company has been awarded
contracts to provide ITVMs for nine of the last ten state lotteries that have
requested bid proposals and was the recipient of all domestic ITVM contracts
that were awarded in 1995 and four of the five domestic ITVM contracts that were
awarded in 1996. Additionally, lotteries in eight states and eight foreign
jurisdictions currently are testing the Company's ITVMs or have requested the
Company to provide ITVMs for testing.
The Company continually seeks to enhance its existing product lines and
develop new products. The Company has developed a prepaid phone card dispensing
machine ("PCDM") that enables providers of long distance telephone service to
dispense prepaid telephone calling cards in retail locations without the
assistance of an employee of the retailer. The dispensing process used in the
Company's PCDM incorporates the same patented technology used in the Company's
PTVM, and the Company believes that this dispensing technology is superior to
any other PCDM dispensing technology on the market. Sales of the Company's PCDMs
began in the latter part of 1995, and as of December 31, 1996, the Company had
sold or leased a total of 318 PCDMs. PCDM revenues in 1995 and 1996 represented
2.2% and 2.0% of total revenues, respectively.
The Company was incorporated on February 20, 1990 under the laws of
Ohio and was reincorporated under the laws of Delaware on March 18, 1994. In
April 1994, the Company completed an initial public offering of Common Stock,
and the Company's Common Stock now trades on the American Stock Exchange under
the symbol "ILI."
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The words "expect", "anticipate", "intend", "plan", "believe", "seek",
"estimate" and similar expressions used in this report are intended to identify
forward-looking statements, although this report also contains other
forward-looking statements. Any forward-looking statements in this report are
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Act of 1995. Investors are cautioned that actual results may differ
substantially from such forward-looking statements. Forward-looking statements
involve risks and uncertainties including, but not limited to, continued
acceptance of the Company's products and services in the marketplace,
competitive factors, new products and technological changes, dependence upon
third party vendors, a limited number of customers, political and other
uncertainties related to customer purchases, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission.
INDUSTRY OVERVIEW
ITVMs
------
The popularity and success of lotteries has increased worldwide in
recent years, and the popularity of instant lotteries has increased at a rate
that is greater than that of lotteries generally. Currently 37 states and the
District of Columbia operate lotteries as compared to 29 states as of June 30,
1989, and 37 states and the District of Columbia currently operate instant
lotteries as compared to 28 states as of June 30, 1989. The Company believes
that factors contributing to the rapid growth in the popularity and success of
instant ticket games, which now comprise 43% of total lottery sales in the
United States as compared to 24% in 1989, include more sophisticated marketing
techniques, the introduction of new state instant ticket lotteries, a broader
appeal among lottery consumers and increased technological advances in the
distribution of instant tickets.
ITVMs were first deployed to serve the instant lottery market in 1991,
and the market for ITVMs has grown rapidly in subsequent years. The number of
installed ITVMs has increased from approximately 900 in 2 states in 1991 to
approximately 23,000 in 26 states, the District of Columbia and 3 foreign
jurisdictions as of December 31, 1996. Eight states and eight foreign
jurisdictions currently are testing or preparing to test ITVMs in the field, and
the Company believes that several other states and foreign jurisdictions are
considering the use of ITVMs. Additionally, because states that utilize ITVMs
typically introduce the ITVMs into the instant ticket distribution system in
stages (preferring to test retail reception to a limited initial deployment of
ITVMs before fully committing funds to the deployment of a significantly larger
number of ITVMs), the Company believes that states currently utilizing ITVMs
represent a growing market for the Company's ITVMs.
Although the Company believes that sales of instant lottery tickets and
the use of ITVMs will continue to increase, any decline in the popularity of
instant lottery games or in the market acceptance of ITVMs, as well as any other
event that results in a decrease in leasing or purchasing ITVMs by lotteries,
would have a material adverse effect on the Company. The Company's ability to
generate additional revenues and earnings will depend upon the continuation of
existing leases of ITVMs, orders for additional ITVMs by the lotteries that
currently utilize ITVMs, the implementation of programs that use ITVMs to
distribute tickets in the 11 additional states as well as foreign jurisdictions
that have instant ticket lotteries, and the approval of lotteries by the
remaining states and foreign jurisdictions. Future orders of ITVMs by lotteries
will depend in large part on continued market acceptance of ITVMs, of which
there can be no assurance. Accordingly, there can be no assurance that any
significant number of jurisdictions will implement or expand lottery programs
that utilize ITVMs.
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PCDMs
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Like instant lottery tickets, the use of prepaid telephone calling
cards also has grown significantly in the past few years. Prepaid telephone
calling cards enable callers to make long distance calls at rates that typically
are lower than the rates ordinarily charged for credit card or collect long
distance telephone calls. This factor, together with the usage control that
results from the pre-established value of the card, is perceived as a distinct
value of the card and is believed to be responsible for the popularity of
prepaid telephone calling cards.
The use of PCDMs as a method of distribution of prepaid telephone
calling cards has paralleled the market acceptance of the card. PCDMs are now
being used successfully to sell prepaid telephone calling cards in truck stops,
military bases, convenience stores, airports, and numerous other types of retail
locations. The Company believes that the sale of prepaid long distance calling
cards and the use of PCDMs are in the very early stages of market development in
the United States and anticipates the continued development of the market.
However, any decline in the popularity of prepaid telephone calling cards or in
the market acceptance of PCDMs would limit the Company's ability to generate
revenues and earnings from its PCDM. There can be no assurance that the Company
will be able to develop successfully the market for its PCDMs.
BUSINESS STRATEGY
The Company's business strategy involves the following elements:
- Expansion of the Company's ITVM into new domestic and
international markets. Lotteries are becoming increasingly
aware of the success of ITVMs in increasing instant ticket
revenues, and many domestic and international jurisdictions
are currently testing and evaluating ITVMs. In the United
States, the Company currently is testing or preparing for
testing of ITVMs for lotteries in Iowa, Kansas, Kentucky,
Georgia, Louisiana, Missouri, New York and West Virginia.
Internationally, the Company currently is testing ITVMs for
lotteries in Argentina, Australia, Brazil, Denmark, Iceland,
Ireland, Israel and Norway. The Company plans to expand
further into new and existing lottery jurisdictions by
expanding its marketing efforts and lowering the cost
associated with the procurement of its ITVMs. The Company also
intends to continue to aggressively market its ITVM products
and services to its existing customers to encourage expanded
use of ITVMs in existing distribution systems.
- PCDM market penetration. The Company has made only an initial
and limited penetration of the PCDM market to date, but the
Company is actively seeking to become a significant presence
in the PCDM market in the United States. The Company believes
that its ITVM has a reputation for quality, performance and
reliability, and the Company intends to capitalize on this
reputation in marketing its PCDM to providers of long distance
telephone services. The Company also intends to demonstrate to
such providers the advantages which its PCDM affords to the
retailers that sell prepaid telephone calling cards, which in
turn should lead to increased sales of prepaid calling cards
by such providers. To this end, the Company is working closely
with several providers of long distance telephone service to
expand the use of PCDMs in the distribution of prepaid
telephone calling cards. Eight such providers are currently
testing or preparing to test the Company's PCDM. The Company
also intends to aggressively market its PCDM products to its
existing customers and to expand its marketing efforts to both
the providers and resellers of long distance services, as well
as to market its PDCMs to retailers of prepaid telephone
cards.
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- Continued product innovation and technological advances.
Management believes that the Company's products are more
technologically advanced than the products of its competitors
and that the technological superiority of the Company's ITVM
is a principal reason for its success to date. To further
expand the Company's market opportunities, the Company
continually seeks to enhance its existing products and develop
complementary products that offer the superior operating
performance of its ITVMs and PCDMs. For example, the Company
has developed what it believes to be the smallest footprint
six and twelve bin ITVMs in the marketplace. The Company
believes that these ITVMs will be attractive to lotteries
primarily because of their small footprint, which will enable
lotteries to deploy them in lottery locations where space and
other considerations often have prohibited the installation of
the Company's eight-game ITVMs. The Company has also
redesigned its eight game ITVM, reducing the width of the
cabinet by 34% to 21". The Company believes that this design
addresses the space considerations of lotteries and retailers.
In 1995, the Company developed an ITVM that incorporates both
the burster technology and the pull-tab dispensing technology
in one cabinet, thus enabling lotteries that market both types
of instant ticket games to merchandise the games in one ITVM.
Additionally, the Company's ITVMs may be purchased with an
on-line communications system that allows lotteries to gather
sales data at any time from, and communicate directly with,
ITVMs located throughout the lottery's jurisdiction.
- Manufacturing efficiencies. The Company continually seeks to
enhance its manufacturing operations to improve its gross
margins and overall profitability. The Company believes that
through design refinements and continued higher production
volumes, it will continue to achieve lower manufacturing costs
by receiving more favorable terms from vendors.
- Develop dispensing devices for other markets. The Company
intends to expand its existing product lines by developing new
dispensing devices for markets other than lotteries. For
example, the Company is developing and testing a device which
dispenses stored value "smart" cards for possible use by the
financial services industry to the extent that consumer use of
smart cards develops in the future.
PRODUCTS
The ITVM
--------
In 1987, the Company's President, Edmund F. Turek, developed the
technology for what the Company believes to be the first automated ITVM. This
burster dispensing technology is a key component of the Company's ITVM for
scratch-off instant lottery tickets and is protected by a patent that the
Company acquired from Mr. Turek's family-owned corporation. See "Patents,
Trademarks, and Copyrights" below.
The Company's ITVMs automatically dispense instant lottery tickets upon
payment from the user. Unlike the products of some of the Company's competitors,
the burster technology in the Company's ITVMs automatically separates one
scratch-off instant ticket from another along the perforations between tickets
to help prevent tearing of the tickets or scarring of the latex on the tickets.
The Company's burster technology, which the Company believes to be the most
technologically advanced scratch-off dispensing system in the ITVM industry,
also enables the Company's ITVM to dispense and account for virtually any known
type of scratch-off instant lottery ticket, allowing the use of a wide range of
sizes, shapes, paper stocks or perforations, without the intervention of a
lottery retailer or agent. This feature allows lotteries to purchase virtually
any known type of scratch-off instant ticket from their instant ticket
manufacturer
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without having to request from the manufacturer major alterations in the ticket
perforations. For example, the Company's ITVM, unlike the products of the
Company's competitors, can dispense recyclable scratch-off tickets without
tearing or scarring the tickets. The Company believes that lotteries will
increasingly require the use of recyclable tickets in their ITVMs. This feature
also is particularly beneficial to foreign lottery jurisdictions that may use
non-standard sizes, shapes and paper stocks. In addition, the ITVM for
scratch-off tickets is faster than manual sales of scratch-off tickets as the
ITVM's entire dispensing process is completed in less than 1.5 seconds once the
ticket selector button has been pushed.
The Company's ITVMs for scratch-off tickets have a proven record of
reliability. Based on an analysis of actual field service data regarding the
dispensing of approximately 55 million scratch-off instant tickets by the
Company's ITVMs during a 48 week period, the Company determined that the Mean
Time Between Failure of these ITVMs is approximately 3.78 years and that the
Mean Time to Repair is approximately 15 minutes. The data indicated that these
ITVMs dispense an average of 392,800 scratch-off instant tickets between
failures. The Company believes that it has developed an ITVM that has proven to
be reliable and that requires less maintenance than the products of its
competitors. The Company believes that the reliability of its ITVM and the lower
maintenance requirements distinguish the Company's ITVM for scratch-off tickets
from those of its competitors. See "Competition" below.
The Company's ITVMs for scratch-off tickets have the capacity to
dispense tickets from one to twelve different bins. Because each bin can
dispense tickets of different sizes, paper stocks and price levels, lotteries
can sell scratch-off tickets for up to twelve different instant winner games
with a single ITVM. The ITVM can accommodate up to 12,000 tickets in the
twelve-game unit and can dispense all tickets in the bin without manual
intervention. When all of the tickets in a bin have been dispensed, tickets can
be easily reloaded by an employee of the retailer or agent. This is in contrast
to the products of the Company's competitors, which the Company believes require
the retailer or other agent to tape the last few tickets in each bin to the next
pack of tickets provided by the retailer or other agent. The ability of the
Company's ITVM to dispense every ticket in each bin not only facilitates the
ticket reloading process but also enhances the accuracy of the inventory and
accounting functions.
All of the Company's ITVMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept foreign currency. The size of
the Company's ITVMs for scratch-off tickets varies from 69 inches tall, 28
inches wide and 24 inches deep for a twelve-game unit to 19.75 inches tall, 15.5
inches wide and 20.5 inches deep for a countertop unit.
All models are anchored to the floor or counter. The ITVMs typically
are custom designed to meet any color and other appearance specifications that a
lottery may desire. All models are Underwriters Laboratory ("UL(R)") listed and
Federal Communications Commission ("FCC") approved, which ensures that the ITVM
has passed nationally recognized safety standards and stringent requirements
designed to preclude machine damage and personal injury due to non-approved
components, devices, installation or application. The Company was the first
manufacturer of ITVMs to obtain UL(R) listing and FCC approval for its ITVMs.
Each ITVM is standardized with an information display that provides the
player with easy-to-read instructions on how to use the machine and gives the
lottery retailer or agent the ability to read sales reports without printing the
report. The ITVM can be ordered with a "BETA BRITE(R)" multi-color LED sign
mounted on the top of the ITVM which is intended to increase attention to the
machine and thereby increase ticket sales. The BETA BRITE(R) sign is programmed
at the Company's manufacturing facility and can display any message the lottery
may desire. The BETA BRITE(R) also may be programmed by the retailer or agent or
can be programmed from the lottery headquarters by utilizing the Company's
optional modem communications system. The Company currently is utilizing the
BETA BRITE(R) on ITVMs installed throughout Arizona, Colorado, Georgia, Idaho,
Indiana, New Hampshire and Rhode Island.
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For security and durability purposes, each of the Company's ITVM
cabinets is manufactured with 16 gauge and 11 gauge steel. The surface of the
ITVM is coated with durable and fade resistant paints. The display windows are
fabricated from a flame resistant, high impact polycarbonate sheet material.
This material is shatter resistant, and to date to the knowledge of the Company,
none of the Company's installed ITVMs has had a polycarbonate window broken or
shattered. Additionally, to the knowledge of the Company, the cabinets have not
had any fading, marring, scratching, chipping or rusting. All of the Company's
ITVMs are manufactured with high security locks which are coded to prevent
unauthorized duplication, and each ITVM is keyed separately, except for ITVMs
deployed in Maryland where the Lottery desired a master key system. For further
security, each of the Company's bill acceptor units must be accessed with a key
unique to the particular acceptor unit.
All of the Company's ITVMs for scratch-off tickets utilize copyrighted
software that can supply up to eleven different reports for accounting and
inventory purposes. These reports can provide to the lottery and its retailers
or agents a complete summary of daily sales, weekly sales, total sales, sales by
game, current status of the machine, inventory of the product currently in the
ITVM, the last three transactions of the ITVM and other types of information.
The software system allows for a simple diagnostic test to identify any
malfunction of the ITVM. The diagnostic mode communicates various information
such as ticket size setting, status of electronics, status of each game and
other information concerning the system software. The Company's ITVM software
system may be programmed to the detail specifications of the specific lottery.
In 1995, the Company completed the development of a common electronic
system to be incorporated in all of the Company's equipment, providing
efficiency in development of common software as well as cost efficiencies in
acquiring electronic components.
To dispense pull-tab instant lottery tickets, the Company's PTVM uses
the same technology, design and specifications as are incorporated in the
Company's PCDM. The Company's PCDM is described in detail below.
The PCDM
--------
Like the Company's ITVM for scratch-off tickets, the key component of
the Company's PCDM is the dispensing technology. The Company has the exclusive
right to the use of this patented dispensing technology, which it acquired from
a company owned by Kazmier J. Kasper, a director of the Company. See "Item 13.
Certain Relationships and Related Transactions."
Similar to the Company's ITVM for scratch-off tickets, the Company's
PCDM automatically dispenses prepaid telephone calling cards upon payment from
the user. Unlike the products of some of the Company's competitors, the
dispenser technology in the Company's PCDMs automatically pulls one prepaid
telephone calling card from the bottom of the stack of cards without the jamming
that is associated with other dispensing processes. The Company's dispensing
technology, which the Company believes to be the most technologically advanced
dispensing system in the PCDM industry, also enables the Company's PCDM to
dispense and account for virtually any known thickness of calling card without
the intervention of the retailer. In addition, the PCDM is faster than manual
sales of prepaid telephone calling cards as the PCDM's entire dispensing process
is completed in less than 3 seconds once the selector button has been pushed.
The Company's PCDMs have the capacity to dispense cards from two to six
different bins. The PCDM can accommodate up to 2,400 cards in the six bin unit
and can dispense all prepaid telephone calling cards in the bin without manual
intervention. When all of the cards in a bin have been dispensed,
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cards easily can be reloaded by an employee of the retailer. The ability of the
Company's PCDM to dispense every card in each bin not only facilitates the card
reloading process but also enhances the accuracy of the inventory and accounting
functions.
All of the Company's PCDMs accept bills in $1, $2, $5, $10 and $20
denominations and, in some applications, accept foreign currency. The size of
the Company's PCDMs varies from 66 inches tall, 26 inches wide and 19 inches
deep for a 6-bin dispenser unit to 22 inches tall, 14 inches wide and 10 inches
deep for a countertop unit. All models are anchored to the floor or counter,
except that the two bin model may be mounted on an optional pedestal. All models
are UL(R) listed and FCC approved. Each PCDM is standardized with an information
display that provides the user with easy-to-read instructions on how to use the
machine and gives the retailer the ability to read sales reports without
printing the report.
For security and durability purposes, each of the Company's PCDM
cabinets is manufactured with 16 gauge and 11 gauge steel. The surface of the
ITVM is coated with durable and fade resistant paints. The display windows are
fabricated from a flame resistant, high impact polycarbonate sheet material. To
the knowledge of the Company, the cabinets have not had any fading, marring,
scratching, chipping or rusting. All of the Company's PCDMs are manufactured
with high security locks that are coded to prevent unauthorized duplication, and
each PCDM is keyed separately. For further security, each of the Company's bill
acceptor units must be accessed with a key unique to the particular acceptor
unit.
All of the Company's PCDMs utilize copyrighted software that can supply
up to nine different reports for accounting and inventory purposes. These
reports can provide retailers a complete summary of daily sales, weekly sales,
total sales, sales by bin, current status of the machine, inventory of the
product currently in the PCDM, the last three transactions of the PCDM and other
types of information. The software system allows for a simple diagnostic test to
identify any malfunction of the PCDM.
MARKETING AND SALES
ITVMs
-----
The Company markets its ITVMs to both domestic and international
lotteries and their licensees or prime contractors. The Company attends lottery
and gaming trade shows, maintains personal contact with lottery officials
through its sales force of five employees and advertises in trade publications
to increase its presence in the lottery industry.
The focus of the Company's marketing strategy is on the superior
performance and reliability of its ITVMs, as well as continued competitive
pricing. Information developed through actual field use and product field tests
demonstrates that a significant factor in increasing instant ticket sales is the
reliability of the ITVM. Increased maintenance visits impair the ITVM "uptime,"
which in turn reduce ticket sales. The Company believes that its ITVMs, based on
actual field performance and product testing, are the most reliable and
technologically superior in the industry. Management believes that actual field
demonstrations comparing the Company's ITVM with those of its competitors is the
Company's best method of marketing. The Company has been awarded contracts to
provide ITVMs for nine of the last ten state lotteries that have requested bid
proposals and was the recipient of all domestic ITVM contracts that were awarded
in 1995 and four of the five domestic ITVM contracts that were awarded in 1996.
The Company currently is participating or preparing to participate in 16 tests
with domestic or international lotteries.
The Company's ITVMs require preventive maintenance only twice a year.
The ITVM "downtime" resulting from this semi-annual preventive maintenance
averages approximately 20 minutes. On the other hand, the Company's principal
competitor, On-Point Technology Systems, Inc. ("On-Point"), for example,
recommends that preventive maintenance be performed on its ITVMs once a month.
All of the Company's
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existing contracts which require the Company to provide preventive maintenance
on its ITVMs provide for semi-annual preventive maintenance except for the
Company's contract with the Ohio Lottery, which, at the request of the Ohio
Lottery, provides for quarterly preventive maintenance. In each case, the
Company is required to provide less preventive maintenance on its ITVMs than
On-Point provides on its ITVMs.
To further increase the likelihood of receiving ITVM orders from
lotteries, the Company intends to offer additional and more flexible financing
alternatives to the lotteries. The Company believes that many state lotteries,
due to budget considerations, cannot afford the high capital costs required to
purchase ITVMs. However, if the Company can provide attractive variations of its
standard and percentage lease financing options for the lotteries, the lotteries
can more affordably deploy ITVMs. The Company believes that these types of
financing alternatives will prove to be increasingly popular.
The Company's ability to generate additional revenues and earnings from
deployments of its ITVMs will depend upon continued market acceptance of ITVMs.
The Company intends to expand its marketing presence with the retail grocers
associations, convenience store operators associations, retail stores at both
the corporate and store levels, and other types of corporate or association
member entities to familiarize these groups with the Company's ITVM. These
retailers are the lotteries' distribution system for all scratch-off and
pull-tab lottery tickets, and management believes that increased exposure to
lottery retailers will be a significant factor in the Company's ability to
expand the market for its lottery products. As the distribution system for all
lottery products, lottery retailers may advise the lotteries with regard to such
matters as new lottery products, improved marketing strategy and improved
product distribution. In many lottery jurisdictions, retailer advisory boards
provide input to the lotteries on various issues affecting the lottery. While
the lotteries must abide by the established procurement laws of their respective
jurisdictions in selecting an ITVM manufacturer, the lotteries may solicit the
opinions of the lottery retailers concerning the ITVMs under consideration by
the lottery because the retailers are directly affected by the selection
decision. The Company believes that retailers' opinions may be a significant
factor in a customer's decision regarding which manufacturer's ITVM to deploy in
its instant ticket distribution system.
The Company believes it is the only company in the industry to use a
selected group of retailers as a Retailers Advisory Board. This group, which
consists of 15 retailers throughout Ohio that utilize the Company's ITVM, meets
at various times to provide their opinions to the Company on matters such as new
products, improved service techniques, player analysis, lottery trends, expanded
merchandising opportunities and any other items that the Advisory Board or the
Company believes to be important to the success of the product. Actions
resulting from the opinions of Advisory Board members then can be implemented
with respect to all jurisdictions.
The Company will continue to participate in cooperative service
arrangements with other lottery suppliers as the lotteries increasingly rely on
these types of arrangements. These arrangements allow lotteries to reduce their
operating costs while increasing lottery revenues. Additionally, these
arrangements allow for a more efficient means for contracting products and
services. The Company's ITVMs are deployed in Georgia and West Virginia pursuant
to cooperative service arrangements between the Company and Scientific Games,
Inc., which is a primary contractor for the Georgia and West Virginia Lotteries,
and will be deployed in New Jersey pursuant to a purchase agreement between the
Company and GTECH Corporation, which is the on-line supplier to the New Jersey
Lottery. Under these arrangements, the Company supplies ITVMs to Scientific
Games, Inc. for use in Georgia and West Virginia and will supply ITVMs to GTECH
Corporation for use in New Jersey. The Company is responsible for installing,
servicing and maintaining the ITVMs in Georgia but is not required to provide
preventive maintenance or servicing for the ITVMs supplied for use in West
Virginia and New Jersey. Management believes that the deployment of the
Company's ITVMs in Georgia, West Virginia and New Jersey resulted in part from
the Company's cooperative service arrangements with Scientific Games, Inc. and
GTECH Corporation and
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<PAGE> 11
that such cooperative service arrangements will prove to be increasingly
attractive to both domestic and international lotteries in the future.
PCDMs
-----
The Company has been marketing its PCDMs since late 1995 and to date
has employed a marketing strategy that is similar to the strategy that it has
used successfully to market its ITVMs. The focus of the Company's marketing
strategy is on the superior performance and reliability of its PCDMs as well as
on competitive pricing. The Company markets its PCDMs to both domestic and
international providers of long distance telephone service. The Company attends
telecommunications trade shows, maintains personal contact with
telecommunications companies through its sales force of two employees and
advertises in trade publications to increase its presence in the
telecommunications industry.
The Company's ability to generate additional revenues and earnings from
the deployment of its PCDMs will depend upon continued market acceptance of
PCDMs. The Company intends to expand its marketing presence with the retail
grocers associations, convenience store operators associations, retail stores at
both the corporate and store levels, and other types of corporate or association
member entities to familiarize these groups with the Company's PCDM. These
retailers are the distribution system for prepaid telephone calling cards, and
management believes that increased exposure to PCDM retailers will be a
significant factor in the Company's ability to expand the market for its PCDM
products. To further increase the likelihood of receiving PCDM orders from
sellers of prepaid telephone calling cards, the Company intends to offer
additional and more flexible financing alternatives.
CONTRACTS
ITVMs
-----
General. The Company's lottery contracts typically are entered into
following a competitive bidding process. Once a lottery has determined to
utilize ITVMs in its distribution network, the lottery usually will request
proposals from ITVM providers. Lotteries within the United States typically
follow a procedure whereby the lottery issues a Request for Proposal ("RFP") to
determine the contract award for installation of ITVMs. The RFP generally seeks
information concerning each company's products, cost of the products or services
to be provided, quality of management, experience in the industry and other
factors that the lottery may deem material to a contract award. The RFP also may
specify product criteria and other qualifications or conditions that must be
satisfied, such as UL(R) listing and FCC approval of the ITVM and in-state or
minority supplier requirements. Generally, an evaluation committee comprised of
key lottery staff members appraise the proposals based on an established point
system, and the contract is awarded to the company with the most points.
The nature of the RFP process varies from jurisdiction to jurisdiction.
The length of time that a lottery might take to award a contract can be
difficult to predict, and delays in the contract award process are frequent and
unpredictable. Additionally, the point system or the weighing of the various
points varies from jurisdiction to jurisdiction, which often makes it difficult
for the bidding companies to determine the relative importance of the various
factors to be considered by the evaluation committee. In certain cases the
contract award is challenged by the losing bidder, which can result in
protracted legal proceedings for all parties.
The Company offers lotteries a choice of three types of contracts: (i)
Standard Lease Agreements; (ii) Sales Agreements; and (iii) Percentage Lease
Agreements. ITVM lease revenues as a percentage of the Company's total revenues
were 95.4%, 47.3% and 63.3% in 1994, 1995 and 1996, respectively.
-11-
<PAGE> 12
The Standard Lease Agreements provide that the lottery will pay a fixed
monthly price per machine for a specific period of time. These agreements
typically specify a number of years for the initial contract term with
additional option periods at the election of the lottery. The lottery may award
a separate service contract for the maintenance of the machines, incorporate the
cost of service into the established monthly lease price or perform machine
service themselves. The lotteries also may select a similar type of arrangement
as described above to procure the necessary supply of replacement parts for the
ITVMs.
As noted above, the lease payments provided for in the typical Standard
Lease Agreement are fixed in most cases during the term of the agreement, and
these agreements typically permit the lottery to order additional ITVMs at any
time during the lease term. If the lottery orders a significant number of ITVMs
near the end of the lease term, the Company would have to incur significant
manufacturing costs but may receive lease payments for only a relatively short
period of time through the remainder of the lease term. However, the Company
believes that it is more likely that the lottery would elect to extend the lease
term rather than return the ITVMs after only a short period of use.
Additionally, the Company is unable to pass along to the lottery any increase in
its manufacturing and service costs during the term of the typical Standard
Lease Agreement. In the case of a Standard Lease Agreement which provides for a
short initial term (such as one year) with an option for the lottery to extend
the lease term for additional one-year periods, if the lottery does not extend
the initial lease term, the Company might incur a loss on the manufacture of the
ITVMs leased to the lottery under the initial lease agreement.
Sales Agreements typically provide that the lottery will buy a certain
number of ITVMs over a specific period of time. Under the Sales Agreement, the
lottery generally pays for the ITVMs when delivered and has complete ownership
of the ITVMs. The lottery usually will contract with a vendor to maintain and
service the ITVMs, although some lotteries provide the maintenance and service
with their own service staffs. The lottery generally will enter into a parts
replacement contract with the vendor for replacement parts.
Percentage Lease Agreements typically allow the lottery to pay a
minimal base fee per month for a designated number of machines. In addition, the
lottery pays to the ITVM vendor a percentage of the revenues of each machine.
Consequently, any decrease in sales of instant tickets through the Company's
ITVMs leased to a lottery under such an agreement could adversely affect the
Company's revenues under such an agreement. Generally, under a Percentage Lease
Agreement, the vendor is responsible for service, maintenance and parts
replacement. Other Percentage Lease Agreements provide for the lease fee to be
based upon a percentage of the dollar value sold through the ITVM, with a
minimum monthly rental established in the event that sales through an ITVM are
low for any given period.
All types of the ITVM contracts typically contain stringent
installation, performance and maintenance requirements. Failure to perform the
contract requirements may result in significant liquidated damages or contract
termination. The Company has various contract performance standards to which it
must adhere. The most rigorous of these performance and maintenance standards
are contained in the Company's lease agreement with the Ohio Lottery Commission.
Under that agreement, the Company must provide service support to the retailer
within two hours of the retailer's call, and the ITVM must be repaired within an
additional two hours. The Company also must provide preventive maintenance every
three months for each ITVM. To date, the Company has satisfied all of its
contractual installation, performance and maintenance requirements and therefore
has not had any contracts terminated by any lotteries.
The Company's lottery contracts also typically require the Company to
indemnify the lottery, its officers and retailers for any liabilities arising
from the operation of the ITVMs or any services provided by the Company. The
Company typically is required to obtain liability insurance, fidelity insurance
and performance and litigation bonds to protect itself and the lottery from
potential liability. No such indemnification or insurance claims have ever been
asserted against the Company.
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<PAGE> 13
The Company's contracts generally have an initial term of one to five
years with options to extend the duration of the contracts for periods of
between one and five years. The option extensions generally are at the lottery's
discretion and are exercised under the same terms and conditions as the original
contract. As of December 31, 1996, the initial term of five of the Company's
contracts had expired, and in each case, the lottery exercised its option to
extend the term. The Company's contracts with lotteries, like most other types
of state contracts, typically permit a lottery to terminate the contract upon 30
days written notice for any reason. Upon termination of a lease contract, the
lottery would return the leased equipment to the Company. It is uncertain,
however, whether the Company would be able to re-lease or sell any ITVMs that
may be returned to the Company following the expiration or cancellation of a
lease. To date, no lottery has terminated its contract with the Company. Upon
termination of a contract, the lottery may award new contracts through a
competitive bid process.
As noted above, the Company believes that 26 states and the District of
Columbia utilize ITVMs in some manner as part of their instant ticket
distribution system. The Company's ITVMs have been deployed in 16 of those
states as well as 3 foreign jurisdictions, and 8 additional states and 8 foreign
jurisdictions currently are testing the Company's ITVMs or have requested that
the Company provide ITVMs for testing. Set forth below is certain information
regarding the Company's contract status and the number of Company ITVMs sold or
leased in each of these jurisdictions as of December 31, 1996. All of the
Company's existing contracts, except for the contract with the Maryland Lottery,
have provisions that allow the lotteries to order additional ITVMs in the
future.
<TABLE>
<CAPTION>
TYPE OF NO. OF ITVMS
STATE STATUS OF CONTRACT AWARD CONTRACT SOLD OR LEASED
- ----- ------------------------ -------- --------------
<S> <C> <C> <C>
Arizona Awarded in October 1993; Standard Lease/ 222
renewed through December 1997, Maintenance
with a one-year renewal
option by the lottery
Colorado Awarded in June 1996; expires Standard Lease/ 306
in June 1998, with two one-year Maintenance
renewal options by the lottery
Georgia (1) Awarded in May 1993; Standard Lease/ 502
expires in May 1998, Maintenance
with a subsequent five-
year renewal option by the
lottery
Idaho Purchases made by purchase Sales 155
order in May and August 1995
and in August 1996
Indiana Awarded in July 1995; Standard Lease 569
expires in October 1997, with
two one-year renewal options
by the lottery; first renewal
option has been exercised
</TABLE>
-13-
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
Iowa Awarded in August 1994; Standard Lease/ 531
expires in December 1998, Maintenance
with two one-year renewal
options by the lottery
Kentucky Awarded in June 1991; Sales 912
expires in June 1997,
with three subsequent
one-year extensions
at lottery's option
Maine Awarded in July 1995; expires Standard Lease/ 200
in July 1998, with two one-year Maintenance
extensions at the
lottery's option
Maryland Awarded in September 1993; Sales/Maintenance 301
expires in September 1998
Minnesota Awarded in December 1996; Standard Lease/ -0-
expires three years from Maintenance
acceptance of each ITVM, with
two one-year renewal options
by the lottery
New Hampshire Awarded in August 1994; Standard Lease 250
expires in June 1997, with
one three-year renewal option
as mutually agreed
New Jersey (2) Purchase order received in Sales -0-
December 1996
New York (3) Awards of purchase contracts Sales/ 2,491
made in May 1992 and January Maintenance/
January 1993; deployment Standard Lease
completed in June 1992 and
February 1993, respectively;
initial one-year purchase and
three-year maintenance contract
entered into in March 1995, with
a one-year renewal option by the
lottery; initial five-year lease
contract awarded in January
1997 for up to 1,000 units,
with two one-year renewal options
Ohio Awarded in January Standard Lease/ 2,100
1992; extended in June 1993 and Maintenance
June 1995; expires in June 1997
</TABLE>
-14-
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
Oregon Purchase order issued in May 1995 Sales 500
Rhode Island (4) Awarded in June 1994; Standard Lease/ 170
renewed through June 1997, Maintenance
with two one-year renewal options
by the lottery
Texas Awarded in January 1995; Standard Lease/ 1,221
renewed through February Maintenance
1998, with a one-year renewal
option by the lottery
West Virginia (3) Awarded in May 1992; Sales 55
initial deployment completed in
June 1992; additional units
deployed in April 1994
Western Australia Purchase order received in Sales 8
May 1995.
Brazil Purchase order received in Sales 4
October 1996
Barcelona, Spain (5) Awarded in February 1994; Standard Lease 11
additional units deployed in
October 1995
Total Sold or Leased 10,523
</TABLE>
- --------------------
(1) The Company's contract is for the lease of ITVMs to Scientific Games,
Inc., the primary contractor for the Georgia Lottery. In September
1994, the Company and Scientific Games, Inc. agreed to convert the
contract from a Percentage Lease Agreement to a Standard Lease
Agreement. The Georgia Lottery is currently testing the Company's PTVM.
(2) The Company's contract is for the sale of 200 ITVMs to GTECH
Corporation for use by the New Jersey Lottery.
(3) The Company's contract was for the sale of ITVMs to Scientific Games,
Inc. for use by the New York and West Virginia Lotteries. The Company
is not the sole manufacturer of ITVMs for the New York Lottery. The
Company entered into a sales/maintenance contract in March 1995
directly with the New York Lottery, including maintenance of ITVMs
previously provided. The West Virginia Lottery also currently is
conducting field tests on the Company's PTVM.
(4) Effective October 1, 1995, the Company and the Rhode Island Lottery
agreed to convert the contract from a Percentage Lease Agreement to a
Standard Lease Agreement.
(5) The Company's contract is with Entitat Autonomas, which provides
lottery services to various Spanish lotteries.
-15-
<PAGE> 16
--------------
Information regarding field testing of the Company's ITVMs is set forth
in the table below.
<TABLE>
<CAPTION>
STATE/ NO. OF ITVMS
JURISDICTION TESTING
- ------------ ------------
<S> <C>
Georgia ................................................... 10
Iowa ...................................................... 1
Kansas .................................................... 1
Kentucky (1) .............................................. 1
Louisiana ................................................. 1
Missouri .................................................. 1
New York .................................................. 2
West Virginia ............................................. 7
Total Under Field Tests ................................... 40
------
Total ................................................ 10,563
</TABLE>
- ----------------------
(1) The Kentucky Lottery Corporation is conducting tests on the Company's
combination ITVM/PTVM.
--------------
Substantially all of the Company's revenues are derived from its
contracts with a limited number of state lottery authorities or their
representatives for the lease, sale or service of ITVMs. During 1994 and 1995,
contracts with the Ohio Lottery, the New York Lottery and Scientific Games, Inc.
(the primary contractor for the Georgia Lottery) accounted for 83.3% and 72.9%,
respectively, of the Company's revenues, and during 1996, contracts with the New
York Lottery, the Ohio Lottery and the Texas Lottery accounted for 67.6% of the
Company's revenues. The loss of any of these contracts would have a material
adverse impact on the Company's financial condition, business operations and
prospects.
PCDMs
-----
Unlike the competitive bidding process applicable to the lotteries'
awards of ITVM contracts, purchasers of PCDMs typically do not issue RFPs or
otherwise mandate a competitive bidding process. Information regarding the
Company and its PCDM, and information regarding a telephone company's product
needs and criteria and other qualifications or conditions that must be
satisfied, typically is exchanged on a less formal basis in sales presentations
and subsequent meetings between representatives of the Company and
representatives of the telephone company. Due to the often complex and highly
structured organization of some telephone companies, the length of time that a
company might take to
-16-
<PAGE> 17
decide whether to select the Company's PCDM can be difficult to predict and,
similar to the lotteries' contract award process, delays in PCDM selection
decisions can be frequent and unpredictable.
Unlike the Company's experience in the ITVM industry in which a lottery
typically enters into a lease or sales contract with the successful bidder, most
purchasers of the Company's PCDMs to date have ordered PCDMs solely through
purchase orders rather than contracts, although two customers entered into a
lease agreement for PCDMs. Like contracts with the lotteries, however, these
purchase orders may contain stringent installation, performance and service
requirements. As of December 31, 1996, the Company had sold 300 PCDMs to 30
customers and had 18 PCDMs under lease to 6 customers.
MANUFACTURING PROCESS
The manufacturing process consists of purchasing component parts,
assembling the ITVMs and PCDMs and then testing the final products. Generally,
the Company's machines use components which are built to Company specifications
and are available from multiple sources. The Company has a strict policy of
product procurement that emphasizes quality, satisfactory inventory of raw
materials, and cost. The Company has a primary vendor and secondary suppliers
for most of its components, and the Company typically has been able to obtain
adequate supplies of required components on a timely basis from its suppliers
or, when necessary, from alternative sources of supply. However, certain
important components, such as components of the Company's ITVM burster and PCDM
dispensing mechanisms and its bill acceptor mechanism, currently are purchased
from a single source. The purchase of components from single-source suppliers
subjects the Company to certain risks, including the continued availability of
suppliers, price increases, potential quality assurance problems and lead time
considerations. Because other suppliers exist that can duplicate these
components should the Company elect or be forced to use a different supplier,
the Company does not believe that any such change in suppliers would result in
the termination of a production contract. However, the Company could experience
a delay of 30 to 60 days in the production of machines should it elect or be
forced to use other suppliers for these components. Such a delay adversely could
affect the Company's ability to make timely deliveries of machines and to obtain
new contracts. The single-source supplier of certain components of the Company's
burster mechanism, PTVM dispensing mechanism and PCDM dispensing mechanism is
Algonquin Industries, Inc. Kazmier J. Kasper, a director of the Company, is the
President and owner of Algonquin Industries. See "Item 13. Certain Relationships
and Related Transactions."
The Company assembles the components utilizing a core group of
manufacturing employees and, on an as needed basis, contracting with an
employment agency for appropriately trained manufacturing labor. The use of
temporary, contract manufacturing labor gives the Company the flexibility to
meet the production schedules required by large orders.
The Company's Quality Control Department has responsibility for
measuring quality levels and overseeing appropriate corrective action in all
areas of the business. This includes supplier performance, in-house
manufacturing and field performance. The Quality Control Department is
responsible for measuring part, operator and assembly quality performance at all
stages of the production process, stopping the assembly line or stopping
shipments if necessary to assure that quality standards are met. The Quality
Control Department also is responsible for measuring vendor product quality and
taking appropriate actions, including rejection and disposition of substandard
material. The Quality Control Department also is responsible for vendor quality
system evaluation and vendor disqualification if necessary to ensure superior
product quality.
The Company's manufacturing facility is located in Cincinnati, Ohio and
has the capacity to produce and provide inventory for approximately 250 machines
per week. The Company believes that this facility is suitable and adequate for
its current and anticipated manufacturing needs at the present time.
-17-
<PAGE> 18
RESEARCH AND NEW PRODUCT DEVELOPMENT
Since its inception, the Company has developed many of the
technological advancements used in the ITVM industry. The Company believes that
its ITVM was the first to obtain UL(R) listing and FCC approval. The Company
also believes that it was the first to (i) manufacture and deliver ITVMs under a
lease contract agreement, (ii) offer a "random play" push button selector option
through which the ITVM rather than the player randomly selects the game to be
played and (iii) receive patent protection for the technology used in its ITVM
burster dispensing mechanism.
The Company currently employs three engineers and two technicians for
research and development but currently subcontracts the majority of its research
and development projects to independent contractors to reduce costs. The
Company's copyrighted software is upgraded continually to meet the different
demands of the various lotteries. In many instances, after an ITVM feature has
been developed for a specific lottery, it is incorporated into the product line
as a standard feature of the machine. The Company retains proprietary rights in
all such developments.
The Company's ITVM may be purchased with an optional modem
communication system which allows lotteries to gather sales data from each ITVM
on an hourly, daily, weekly or monthly basis, depending on the needs of the
customer. This data includes the daily or weekly sales totals and breakdown of
these totals by game, including the total tickets sold. The Company currently is
developing the software to enable each ITVM equipped with the system to
communicate to the host system automatically if there is a malfunction with the
ITVM, thus greatly enhancing the Company's ability to provide prompt service for
the ITVM. The Company currently is developing the software to enable an ITVM
equipped with the system to communicate with the host computer if a ticket bin
is empty, which allows the lottery to call the retailer or agent and inform them
of the situation. Additionally, by utilizing this system with the optional BETA
BRITE(R) message display, the lottery can change the message display on any or
all of itS ITVMs.
The Company has incorporated its patented pull-tab lottery ticket
dispensing mechanism into a combination ITVM which also contains the Company's
patented burster mechanism. The Company currently has six combination ITVMs
under lease to the Iowa Lottery. The pull-tab dispensing mechanism also has been
incorporated into the Company's PCDMs, and the Company believes that the ability
of the mechanism to dispense a variety of thicknesses of prepaid telephone
calling cards significantly differentiates the Company's PCDMs from those of its
competitors.
In an effort to expand its product lines into new markets, the Company
is developing and testing a device which dispenses stored value "smart cards."
This product may be marketed in the future to the financial services industry to
the extent that consumer use of smart cards develops in the future.
Research and development expenditures were $92,817, $145,310 and
$665,449 for 1994, 1995, and 1996, respectively. The Company expects that its
research and development efforts for the foreseeable future will be conducted by
both Company employees and independent contractors.
CUSTOMER SERVICE AND PRODUCT REPAIR
Typically, the Company or its subcontractors install and service the
machines purchased or leased by the Company's customers. The Company also
provides maintenance of the ITVMs leased or sold to certain lotteries.
Additionally, the Company provides part replacement, repair and technical
services for various customers that have leased or purchased the Company's ITVMs
and PCDMs. Service is provided to the retailers by the Company's staff of
trained service technicians and dispatchers after a customer's representative
informs the Company of the problem via the Company's toll-free telephone service
line. The
-18-
<PAGE> 19
service dispatcher either resolves the matter over the telephone or immediately
dispatches one of the Company's service technicians to the machine's location.
The modular design and manufacturing standards of the Company's machines enable
the Company to conduct any necessary repairs and maintenance quickly and
efficiently. The Company estimates that meantime for all repairs is less than 15
minutes after the Company's service technician arrives at the machine's
location.
The most rigorous ITVM maintenance standards are contained in the
Company's lease agreement with the Ohio Lottery. Under that agreement, the
Company must provide support service to the retailer within two hours of the
retailer's call, and the ITVM must be repaired within an additional two hours.
The Company also must provide preventive maintenance every three months for each
ITVM. The Company maintains a staff of twelve service technicians for the Ohio
ITVMs from 8:00 a.m. to 6:00 p.m., six days a week.
The Company believes, based on actual data collected from various
customers that have installed the Company's ITVMs and PCDMs, that the Company's
machines have experienced substantially fewer mechanical problems and machine
failures than machines currently sold by other industry participants. The
Company also believes that the superior performance of its ITVMs and PCDMs will
assist in the increased acceptance of these products among lotteries and
providers of long distance telephone service.
The Company generally grants a 360-day repair or replacement warranty
covering all parts and components of its machines. However, the warranty period
may vary depending on the bid specifications. In certain circumstances the
Company may warrant the product for the complete life of the contract. In these
instances the contract generally will be a lease with the Company retaining
ownership of the machine. Provisions for estimated warranty costs are recorded
at the time of sale and are periodically adjusted to reflect actual experience.
See Note 1 of Notes to Financial Statements contained in the Company's 1996
Annual Report, which is filed as Exhibit 13 to this report.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company currently has four U.S. patents and one pending patent
application relating to its ITVMs and has filed a disclosure document with the
United States Patent and Trademark Office ("PTO"), all as described below.
The Company owns by assignment U.S. Patent No. 4,982,337 entitled
"System for Distributing Lottery Tickets." The assignment is recorded at the
PTO. This patent is for the Company's burster technology, which is the key
component of the Company's ITVM. The patent expires no later than December 31,
2007. The Company believes this patent is essential to the Company's business.
Additionally, the Company has developed an improvement to the burster technology
disclosed in this patent and has a patent application pending with the PTO on
this improvement.
The Company was issued U.S. Patent No. 5,330,185 on July 19, 1994 for
the "Method and Apparatus for Random Play of Lottery Games." This patent expires
no later than March 30, 2013 and has been assigned to the Company, and the
assignment is recorded at the PTO. The technology disclosed in this patent
allows a lottery game user to select a random play button as opposed to
selecting a specific game of a multiple game ITVM. Once the random play button
is pressed, the ITVM selects the game to be played based upon a random number
generation algorithm, thereby adding another element of chance to the lottery
ticket purchase. The Company believes that this patent gives the Company a
competitive advantage over other manufacturers that do not have ITVMs with
similar capabilities. The patent for the random play feature is considered
important but not essential to the Company's business.
-19-
<PAGE> 20
The Company was issued U.S. Patent No. 5,472,247 on December 5, 1995,
for a "Multi-Point High Security Locking Mechanism for Lottery Machines." This
patent expires no later than July 18, 2014 and has been assigned to the Company,
and the assignment is recorded at the PTO. Because of the threat of break-in and
theft of cash and lottery tickets contained within the ITVMs, the machines must
be secured against unauthorized break-in or theft. The technology disclosed in
this patent is a locking mechanism which provides a number of resistance points,
all of which function to impede the unauthorized opening of a door located on
the chassis of the Company's ITVM. The patent for the multi-point, high security
locking mechanism is considered important but not essential to the Company's
business.
The Company was issued U.S. Design Patent No. 376,621 on December 17,
1996 for the Company's double-game countertop ITVM. This patent expires no later
than December 17, 2010 and has been assigned to the Company, and the assignment
is recorded at the PTO. The Company believes that this patent is important but
not essential to the Company's business.
The Company has submitted an Information Disclosure Document to the PTO
for the purpose of identifying technology relating to its "Software Release
Control and Data Security for ITVMs." The technology allows secure remote
transmission of software updates and operations data between the ITVM and the
Company or the respective lottery. The invention also includes a key management
system to control the keys used to encrypt data sent to and decrypt the data
received at the ITVM. The Disclosure Document was filed on April 28, 1993.
The dispensing technology used in the Company's PTVM and PCDM was
developed by Algonquin Industries, Inc. and is licensed to the Company pursuant
to an exclusive license agreement with Algonquin Industries. Algonquin
Industries has been granted U.S. Patent No. 5,335,822 for this mechanism. Under
the terms of the license agreement, the Company is the sole entity entitled to
use this technology on its ITVMs. See "Item 13. Certain Relationships and
Related Transactions."
The Company currently uses operating software to perform all functions
required to dispense and account for instant lottery tickets and prepaid
telephone calling cards. This software is a stand-alone program which does not
require any other software to operate. The software is designed to allow updates
to be made quickly and inexpensively. The software was designed by Future
Designs, a subcontractor to the Company, and employees of the Company. Future
Designs has assigned all of its right, title and interest in and to the software
to the Company. The Company intends to continue to develop software using both
employees and subcontractors who agree to assign the copyright to developed
software to the Company.
The Company has obtained federal registration in the United States of
the following trademarks: INTERLOTT, INTERLOTT and design, and INSTANT SUCCESS.
The Company also has obtained registration of the trademark INTERLOTT in
Benelux, Hungary, Mexico and Spain. The Company does not deem the trademarks to
be critical to the future of its business.
The Company enforces a policy requiring all of its employees and
subcontractors to execute confidentiality and proprietary rights agreements at
the commencement of their employment or contract for service with the Company.
The agreements generally provide that all inventions or discoveries and all
confidential information developed or made known to the employees or
subcontractors during the term of their employment or contract for service will
be assigned to the Company and will be kept confidential and not disclosed to
third parties.
There can be no assurance that current or future patents and other
intellectual property rights of the Company will afford meaningful protection of
the Company's competitive position. Furthermore, the Company's competitors may
have filed patent applications for, or have been issued patents relating to,
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<PAGE> 21
products or technologies competitive with or superior to those of the Company.
The scope and validity of others' patents, the extent to which the Company or
its suppliers may be required to obtain licenses thereunder, and the
availability and cost of any such licenses are unknown, and there is no
assurance that the necessary licenses could be obtained on terms or conditions
which would not have a material adverse effect upon the Company. If the
Company's intellectual property rights are violated, the costs of litigation
could be significant and could divert funds that otherwise would have been
available for other purposes. Moreover, litigation concerning the alleged
violation of intellectual property rights is inherently uncertain, and the
claims and counterclaims that might be asserted against the Company, if
successful, could have a material adverse effect upon the Company's financial
condition and business operations.
COMPETITION
Competition in the markets for the Company's ITVM and PCDM is based on
a number of factors, including technological features, product quality and
reliability, price, compatibility, ease of installation and use, marketing and
distribution capabilities, product delivery time, and service and support. The
Company is aware of four manufacturers of ITVMs and approximately forty
manufacturers of PCDMs in the United States, and competition among these
manufacturers is intense. Of the four ITVM competitors, the Company has the
largest share of the ITVM market in the United States, followed by On-Point and
two smaller manufacturers. The Company is not aware of any published data
regarding market shares in the PCDM industry. The Company believes that of the
forty PCDM competitors, Opal Manufacturing Co. has the largest PCDM market share
in the United States, but there is no clear indication of the market shares of
the remaining companies.
In addition, the ITVM and PCDM markets are relatively new markets that
have grown rapidly, and additional domestic and foreign manufacturers, some of
which have substantially greater resources and experience than the Company, may
elect to enter these markets. The instant ticket market also may face
competition from other types of lottery and gaming products, including
particularly on-line lottery products. The long distance telephone market
similarly may face competition from other types of communications products,
including facsimile, e-mail and other on-line products.
The Company believes that its patented dispensing technologies make its
ITVM and PCDM dispensing mechanisms technologically superior to the dispensing
mechanisms of its competitors and that this is a significant competitive
advantage for the Company. The Company also believes that its products have
earned a strong reputation for their performance, reliability and cost
effectiveness. To remain competitive, the Company believes that it will need to
continue to incorporate new technological developments into its existing
products and to develop new products, as well as to maintain a competitive price
for its products. These efforts, together with the Company's continuing sales
and marketing efforts, will be critical to the Company's future success.
Although the Company believes that its current successes, coupled with its
history of continued product enhancement and cost reduction, will enable it to
compete favorably with its competitors, there can be no assurance that the
Company will be able to maintain or improve its competitive position in the ITVM
and PCDM markets.
GOVERNMENT REGULATION
ITVMs
-----
Lotteries are not permitted in the various states and jurisdictions of
the United States unless expressly authorized by legislation in the subject
jurisdiction. Similarly, the commencement of ITVM sales and leasing in new
jurisdictions requires authorizing legislation and implementing regulations at
the state level. The Company cannot predict the nature of the regulatory process
in any jurisdiction that may authorize the purchase and lease of ITVMs in the
future. Any such regulatory process may be burdensome
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<PAGE> 22
to the Company or its key personnel and stockholders and could include
requirements that the Company would be unable to satisfy.
Currently, 37 states and the District of Columbia have enacted
legislation to allow for the operation of a lottery, and 27 of these
jurisdictions utilize ITVMs in some manner as part of their instant ticket
distribution process. The operation of the lotteries in each of these
jurisdictions is strictly regulated. The formal rules and regulations governing
lotteries vary from jurisdiction to jurisdiction but typically authorize the
lottery, create the governing authority, dictate the prize structure, establish
allocation of revenues, determine the type of games permitted, detail
appropriate marketing structures, specify procedures for selecting vendors and
define the qualifications of lottery personnel. No assurance can be given that
there will not be an adverse change in the lottery laws of any jurisdiction in
which the Company does business. Although the Company believes that it is
unlikely that states which have enacted legislation that expressly authorize the
use of ITVMs will adopt legislation in the foreseeable future that prohibits the
use of ITVMs, there can be no assurance that such legislation will not be
adopted in one or more jurisdictions in the foreseeable future.
To ensure the integrity of the lottery, state laws provide for
extensive background investigations of each of the lottery's vendors and their
affiliates, subcontractors, officers, directors, employees and principal
stockholders. These investigations generally require detailed disclosure on a
continuous basis with respect to the vendors, affiliates, subcontractors,
officers, directors, employees and principal shareholders and, in the event the
lottery deems any of such persons to be unsuitable, the lottery may require the
termination of such persons. The failure of any such persons associated with the
Company to obtain or retain approval in any jurisdiction could have a material
adverse effect on the Company. Generally, regulatory authorities have broad
discretion when granting such approvals. Although the Company has never been
disqualified from a lottery contract as a result of a failure to obtain any such
approvals, no assurance can be given that such approvals will be obtained or
retained in the future.
The Federal Gambling Devices Act of 1962 (the "Act") makes it unlawful,
with certain exceptions, for a person or entity to transport any gambling
devices across interstate lines unless that person or entity has first
registered with the United States Department of Justice. Although the Company
believes that it is not required to register under such Act, the Company has
voluntarily registered under the Act and intends to renew its registration
annually. The Act also imposes various record keeping and equipment
identification requirements. Violation of the Act may result in seizure or
forfeiture of equipment, as well as other penalties.
The Company may retain governmental affairs representatives in various
jurisdictions of the United States to monitor legislation, advise the Company on
contract proposals, and assist with other issues that may affect the Company.
The Company believes it has complied with all applicable state regulatory
provisions relative to disclosure concerning the activities of itself and its
advisors. The Company is not dependent on any such representative for any
material contract.
International jurisdictions that operate lotteries also impose strict
regulations. International regulations may vary from those in the United States.
Additionally, international regulations frequently impose restrictions on
foreign corporations doing business within the specific jurisdiction. As a
result, the Company may contract with local representation or align itself with
a local partner when pursuing international contracts.
Laws and regulations of individual states and countries are subject to
change. The failure to comply with such laws and regulations could have an
adverse impact on the operations of the Company.
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<PAGE> 23
PCDMs
-----
The Company is not aware of any federal, state or local regulations
that apply to the manufacture, lease or sale of PCDMs.
BACKLOG
The Company's backlog of ITVMs committed for production as of December
31, 1996 was approximately $1,097,400, which was equal to the total base lease
payments or sales value for the 294 ITVMs that were committed for production but
had not been shipped to the Colorado, Indiana, New York and Texas Lotteries as
of December 31, 1996. See "Lottery Contracts." At December 31, 1995, the
Company's backlog of ITVMs committed for production was approximately
$2,173,400, which was equal to the total base lease payments or sales value for
the 460 ITVMs that were committed for production but had not been shipped to the
Indiana Lottery and the New York Lottery as of December 31, 1995. It is
anticipated that substantially all of the Company's backlog at December 31, 1996
will be shipped on or before June 30, 1997. The Company had no backlog of PCDMs
committed for production at December 31, 1996.
The Company has entered into various lease or sales agreements that
permit the lotteries, at their sole option, to lease or purchase up to a total
of 761 additional ITVMs as of December 31, 1996. However, the Company does not
include in backlog ITVMs that may be sold or leased under existing contracts
unless the Company has received a firm order for the ITVMs. Due to the
relatively large size of individual orders, the small number of customers and
the long sales cycle of the lottery industry, management considers backlog to be
an indicator of current activity and not necessarily predictive of future
orders.
EMPLOYEES
The Company utilizes a work force of full-time employees supported from
time to time by temporary or contract manufacturing and engineering personnel.
As of December 31, 1996, the Company had 93 full-time employees, of which 34
were manufacturing employees, 6 were engineering employees, 43 were service
employees, 1 was a project manager and 13 were executives or senior managers.
Eight of the executives and senior managers were devoted to sales and 5 were
devoted to management and administration. The Company intends to increase sales
and marketing personnel during 1997 through the addition of one employee, to
increase engineering personnel through the addition of one employee and to
increase management and administrative personnel through the addition of two
employees.
The Company's business requires that it continue to attract and retain
additional personnel with a variety of skills, especially with engineering and
marketing expertise. Significant competition exists for such personnel, and
there can be no assurance that the Company will be able to attract and retain
personnel with the skills and experience needed to achieve and manage growth.
No Company employees are represented by any union, and the Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
- -------------------
The Company's corporate headquarters, manufacturing, distribution, and
research and development facilities currently are located in a single facility
containing approximately 35,000 square feet of leased space in Cincinnati, Ohio.
The facility is comprised of approximately 5,000 square feet of office space and
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<PAGE> 24
approximately 30,000 square feet of manufacturing space with the capacity to
produce and provide inventory for approximately 250 machines per week. The lease
is for a fixed term through December 31, 1999.
Effective January 1, 1997, the Company entered into a lease for a
second facility containing approximately 11,750 square feet of space located a
very short distance from the current facility in Cincinnati. The second facility
will serve as the executive office of the Company housing the executive,
administrative, sales, engineering and service personnel, and the current
facility will be used entirely for the manufacturing operations beginning in the
second quarter of 1997. The lease for the second facility also expires on
December 31, 1999. The Company believes that these two facilities are suitable
for and adequate to support its operations for the foreseeable future.
The Company also leases approximately 1,000 square feet of warehouse
and office space in Alpharetta, Georgia for the purpose of storing and repairing
ITVMs used in connection with the Georgia Lottery. Scientific Games, Inc.
provides this space to the Company at no cost under the terms of the Company's
contract with Scientific Games. The lease is effective for the entire term of
the contract, which has an initial term that expires in May 1998. See "Item 1.
Business -- Contracts -- ITVMs." The Company believes that this facility is
suitable for and adequate to support its operations for the Georgia Lottery.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
On May 17, 1994, the Company and its directors were named as defendants
in a lawsuit filed in the United States District Court for the Southern District
of Ohio, Western Division, by First Vista, L.P. ("First Vista") on behalf of
itself and all other persons who purchased Common Stock of the Company in and
subsequent to the Company's initial public offering of Common Stock in April
1994. The Complaint alleged violations of securities laws in connection with the
Company's initial public offering and a subsequent announcement that certain
revenues that had been previously anticipated to be received in the fourth
quarter of 1994 instead would likely be received in early 1995. After the Court
denied the plaintiff's motion for class certification, the parties agreed to
settle the lawsuit for a nominal sum (which is largely payable by the Company's
insurer). The parties anticipate the exchange of final settlement documentation,
and the entry of the final order of dismissal, in the near future.
In January 1996, the Company filed a lawsuit now pending in the United
States District Court for the Southern District of Ohio against Lottery
Enterprises, Inc. ("LEI," which subsequently changed its name to On-Point
Technology Systems, Inc.) to collect sums that the Company alleges are owed to
it under an Agreement in Principle dated March 23, 1995, relating to the
Company's potential acquisition of LEI by merger (the "Transaction"). The
parties did not consummate the Transaction. The Agreement in Principle required
LEI to reimburse the Company's reasonable out-of-pocket expenses incurred in
connection with the Transaction in the event the parties failed to execute a
definitive merger agreement within 120 days of March 23, 1995, and the primary
reason that the parties did not execute a definitive merger agreement was other
than a breach of the Agreement in Principle by the Company. The Agreement in
Principle also required LEI to pay the Company a "breakup fee" in the event
that, within one year after the termination or abandonment of the Transaction by
LEI, LEI entered into a binding commitment to engage in a recapitalization, debt
issuance or working capital financing other than in the ordinary course of
business, and the primary reason for the termination or abandonment of the
Transaction was other than termination or breach of the Agreement in Principle
by the Company. The Company seeks the reimbursement of approximately $241,000 in
out-of-pocket expenses and a breakup fee of approximately $988,000.
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<PAGE> 25
LEI denied any liability to the Company and also asserted counterclaims
against the Company seeking unspecified money damages exceeding $500,000. LEI
claims that the Company competed unfairly with LEI and wrongfully interfered
with LEI's business by misrepresenting LEI's financial condition to the
Pennsylvania state lottery agency and by utilizing information about LEI
received during the due diligence conducted in connection with the Transaction.
LEI also claims that it is entitled to recover from the Company unspecified
costs and expenses that it incurred in connection with the Transaction and seeks
a declaration from the Court that it is not obligated to pay the Company a
breakup fee under the Agreement in Principle.
On February 25, 1997, the Court granted partial summary judgment in the
Company's favor. The Court ruled that LEI is obliged to reimburse approximately
$241,000 in out-of-pocket expenses incurred by the Company in connection with
the Transaction because a definitive merger agreement was not signed within 120
days of March 23, 1995 for a reason other than a breach of the Agreement in
Principle by the Company. The Court also ruled that within one year after the
Transaction was abandoned or terminated, LEI did enter into a recapitalization,
debt issuance or working capital financing other than in the ordinary course of
business. The Court left open the question of whether LEI abandoned or
terminated the Transaction (as opposed to the Company), which will be determined
at trial. LEI has moved for reconsideration of the Court's decision. The Court
has not yet ruled on that motion. The Court also is still considering whether to
grant summary judgment in the Company's favor on LEI's counterclaim for unfair
competition and tortious interference. LEI recently has made the claim that it
will seek damages of approximately $2.5 million on its counterclaim. If the
Court does not grant summary judgment in the Company's favor on LEI's
counterclaim, the question of whether the Company competed unfairly with LEI and
tortiously interfered with its business will be determined at trial.
The Company is unable to predict the likelihood of success on its
remaining claims or on LEI's counterclaim. The Company is seeking approximately
$988,000 on its claim for the breakup fee but is unable to predict how much, if
any, of any judgment would be collectible. The Company is also unable to predict
whether LEI will prevail on its counterclaim and, if so, the amount of damages
that LEI might recover against the Company. The Company also is unable to
predict the amount of any settlement that might be agreed upon by the parties in
the future or the timing of any such events. However, the Company believes that
LEI's counterclaim is without merit and that the amount of any damages that
ultimately may be awarded to LEI will not have a material adverse effect on the
business, operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted by the Company to a vote of its stockholders
during the fourth quarter ended December 31, 1996.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------
Set forth below, in accordance with General Instruction G(3) to Form
10-K and Instruction 3 to Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company.
L. ROGERS WELLS, JR., age 59, is Chairman of the Board and Chief
Executive Officer of the Company and has been the principal stockholder of the
Company since purchasing 80% of the Common Stock of the Company in September
1992. Mr. Wells served as a director of the Company from September 1992, and as
Chairman of the Board and Chief Executive Officer of the Company from October
1993, until his resignation from these positions in October 1994. He was
re-elected to these positions in February
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<PAGE> 26
1995. Additionally, Mr. Wells owns American Materials, Incorporated, which
assembles and distributes automobile and truck components and serves as a
regional warehousing and distribution center for various businesses. Mr. Wells
also owns International Investments, Inc. ("III"), which invests in and provides
financing to various businesses, including the Company. See "Item 13. Certain
Relationships and Related Transactions." Mr. Wells has been active in various
other industries, including manufacturing, mining, explosives and banking. From
1987 through 1991, Mr. Wells served as Secretary of Finance and Administration
for the Commonwealth of Kentucky, and from 1989 through 1991 served as Secretary
to the Governor's Executive Cabinet. During his tenure as Secretary of Finance
and Administration, Mr. Wells served as Chairman of various finance and
development authorities, including the Kentucky Rural Economic Development
Authority, the Kentucky Infrastructure Authority and the Kentucky Housing
Corporation.
EDMUND F. TUREK, age 70, has served as President and a director of the
Company since February 1990 and served as Chairman of the Board and Chief
Executive Officer of the Company from February 1990 to September 1992. Mr. Turek
began to develop the Company's ITVM in 1987 and has guided the product through
six generations to the current model. Mr. Turek was Vice President of Peripheral
Products in the computer division of SCI Systems, Inc. from 1984 to 1989 where
he developed business opportunities in the commercial market for the design and
manufacture of computer products. From 1953 to 1984, Mr. Turek held management,
product development and operations positions with various companies in the
computer and aerospace industries.
DAVID F. NICHOLS, age 35, has been Senior Vice President of Sales and
Marketing of the Company since August 1994 and was Vice President-Operations of
the Company from March 1993 until August 1994. From December 1991 to December
1992, he was Executive Director of the Board of Tax Appeals of the Commonwealth
of Kentucky. From March 1990 to December 1991, he was Principal Assistant to the
Secretary of Finance and Administration for the Commonwealth of Kentucky, and
from March 1989 to March 1990, he was Principal Assistant to the Kentucky Office
for Social Security. In these two capacities, he advised senior agency officials
on policies, programs and operations of the agency and served as a liaison with
the state legislature and other elected officials. From June 1988 to December
1988, he was Deputy Director of the Kentucky Democratic Party.
H. JEAN MARSHALL, age 51, has been Vice President-Marketing and a
director of the Company since October 1993 and was the Company's Director of
Retailer Relations from 1992 until October 1993. In these capacities, she
primarily is responsible for marketing to the lotteries and vendor support
services for the Company. Ms. Marshall served from 1983 to 1987 as Regional
Manager and then as Regional Coordinator of the Ohio Lottery Commission. From
1987 to 1989 she was an Account Manager for British American Bank Note Company,
a Canadian manufacturer of instant lottery tickets, and in this position had
substantial involvement with the Pennsylvania and New Jersey Lotteries. In 1989,
Ms. Marshall served as a consultant for the Ohio Department of Rehabilitation
and Corrections, Bureau of Community Services. Ms. Marshall returned to the Ohio
Lottery in 1990 as Deputy Director of Sales, where she was responsible for the
development of retailer policies and procedures and coordinating, directing and
managing the sales division. Ms. Marshall currently serves as Vice President of
the Board of Trustees of the Cincinnati Arts Consortium and as a director of the
Cincinnati Minority Business Development Center.
JEROME J. CAIN, age 52, has been Chief Financial Officer of the Company
since 1992. From 1979 until 1991, he was Vice President-Finance and
Administration of American Sign and Marketing Services, Inc., a sign
manufacturing company. From 1972 to 1979, he was Controller of Lockwood
Manufacturing Company, a sheet metal fabricating company. Mr. Cain also served
as an auditor and management consultant with Coopers & Lybrand, certified public
accountants. Mr. Cain is a certified public accountant.
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<PAGE> 27
The executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Information relating to the market for holders of and dividends paid on
the Company's Common Stock is set forth under the caption "Corporate Data and
Shareholder Information" on the inside back cover page of the Company's 1996
Annual Report. Such information is incorporated herein by reference. The 1996
Annual Report is filed as Exhibit 13 to this report.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Selected financial data for the Company for each year of the five-year
period ended December 31, 1996 are set forth under the caption "Selected
Financial Data" on page 6 of the 1996 Annual Report. Such financial data are
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
A discussion of the financial condition and results of operations of
the Company at and for the dates and periods covered by the financial statements
set forth in the 1996 Annual Report is set forth under the caption "Management's
Discussion and Analysis " on pages 6 through 9 of the 1996 Annual Report. Such
discussion is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The following financial statements of the Company and the independent
auditors' report thereon, which are set forth beginning on pages 9 through 16 of
the 1996 Annual Report, are incorporated herein by reference:
Balance Sheets at December 31, 1995 and 1996
Statements of Operations for each of the years in the three-year period
ended December 31, 1996
Statements of Stockholders' Equity (Deficit) for each of the years in
the three-year period ended December 31, 1996
Statements of Cash Flows for each of the years in the three-year period
ended December 31, 1996
Notes to Financial Statements
The Company is not required to provide the supplementary financial
information specified by Item 302 of Regulation S-K.
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<PAGE> 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Within the two-year period ended December 31, 1996 and subsequently,
the Company had no change in independent accountants or disagreements with
independent accountants on accounting and financial disclosure.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Information relating to the directors of the Company is set forth under
the captions "Proposal 2 -- Election of Directors -- Nominees" and "Proposal 2
- -- Election of Directors -- Information Regarding Nominees and Continuing
Directors" in the Company's Proxy Statement for its 1997 Annual Meeting of
Stockholders to be held on May 8, 1997. Such information is incorporated herein
by reference. Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and
General Instruction G(3) to Form 10-K, information relating to the executive
officers of the Company is set forth in Part I, Item 4(A) of this report under
the caption "Executive Officers of the Registrant." Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and beneficial
owners of more than 10% of the Company's Common Stock is set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement referred to in this Item 10 above. Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Information relating to executive compensation is set forth under the
captions "Proposal 2 -- Election of Directors -- Director Compensation" and
"Executive Compensation" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Information regarding ownership of the Company's Common Stock as of
December 31, 1996 by certain persons is set forth under the captions "Voting --
Principal Stockholders" and "Proposal 2 -- Election of Directors -- Information
Regarding Nominees and Continuing Directors" in the Proxy Statement referred to
in Item 10 above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information regarding certain relationships and transactions between
the Company and certain of its affiliates is set forth under the caption
"Certain Transactions" in the Proxy Statement referred to in Item 10 above. Such
information is incorporated herein by reference.
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<PAGE> 29
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) Documents Filed as Part of This Report.
1. Financial Statements
The following financial statements of the Company and
the independent auditors' report thereon are included
in the Company's 1996 Annual Report and are
incorporated by reference in Item 8 hereof:
Balance Sheets at December 31, 1995 and 1996
Statements of Operations for each of the years in the
three-year period ended December 31, 1996
Statements of Stockholders' Equity (Deficit) for each
of the years in the three-year period ended December
31, 1996
Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1996
Notes to Financial Statements
2. Financial Statement Schedules
The following financial statement schedule and the
independent auditors' report thereon are set forth beginning
on page S-1 of this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission have been omitted because such schedules
are not required under the related instructions or are
inapplicable or because the information required is included
in the financial statements or notes thereto.
3. Exhibits
The following exhibits are filed with or incorporated
by reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any
exhibit upon request to Jerome J. Cain, Chief Financial
Officer of the Company, 6665 Creek Road, Cincinnati, Ohio
45242. There is a charge of $.50 per page to cover expenses of
copying and mailing.
3.1 Certificate of Incorporation of the Company, as
amended, including Certificate of Designation of
Series A Preferred Stock (Exhibit 3.1 to the
Company's Registration Statement on Form S-1, No.
33-75142).
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<PAGE> 30
3.2 Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.1 Promissory Note of the Company dated September 22,
1992 to Baumgartner & Brucher Radiology Associates,
Inc. Profit Sharing Plan for the benefit of Thomas E.
Turek, M.D. (Exhibit 4.2 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.2 Promissory Note of the Company dated September 22,
1990 to Mr. Thomas Goila (Exhibit 4.3 to the
Company's Registration Statement on Form S-1, No.
33-75142).
4.3 Invoice Financing Corporate Promissory Note dated as
of September 13, 1995 to Princeton Capital Finance
Company LLC in the principal amount of $10,000,00
(Exhibit 4.3 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
4.4 Purchase Order Corporate Promissory Note dated as of
September 13, 1995 to Princeton Capital Finance
Company LLC in the principal amount of $2,500,000
(Exhibit 4.4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
4.4(a) Contracts Financing Agreement dated as of September
20, 1995 between Princeton Capital Finance Company
LLC and the Company (Exhibit 4.4(a) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995).
4.4(b) Corporate Guaranty dated as of September 20, 1995 by
the Company in favor of Princeton Capital Finance
Company LLC (Exhibit 4.4(b) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.5 Assignment of United States Letters Patent from BLM
Resources, Inc. to the Company with respect to United
States Patent No. 4,982,337, "System for Distributing
Lottery Tickets" (Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.6 Pull-Tab Manufacturing and License Agreement between
Algonquin Industries, Inc., Kazmier Kasper and the
Company dated as of January 13, 1994 (Exhibit 10.6 to
the Company's Registration Statement on Form S-1, No.
33-75142).
10.7 Lease Agreement dated January 14, 1991 by and between
Gallenstein & Gallenstein and the Company related to
the Company's premises located at 6665 Creek Road,
Cincinnati, Ohio 45242 (Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.7(a) Addendum dated May 2, 1994 to Lease Agreement dated
January 14, 1991 (Exhibit 10.7) by and between
Gallenstein & Gallenstein and the Company related to
the Company's premises located at 6665 Creek Road,
Cincinnati, Ohio 45242 (Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
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<PAGE> 31
10.19 Price Contract (No. KL-91-039) dated June 25, 1991
between the Company and the Kentucky Lottery
Corporation with respect to the sale of ITVMs to the
Kentucky Lottery Corporation (Exhibit 10.17 to the
Company's Registration Statement on Form S-1, No.
33-75142).
10.20 Term Contract dated March 1, 1992, between the
Company and the Ohio Lottery Commission with respect
to the lease of ITVMs to the Ohio Lottery Commission
(Exhibit 10.18 to the Company's Registration
Statement on Form S-1, No. 33-75142).
10.21 Instant Ticket Vending Machine Agreement dated May
12, 1993 between the Company and Scientific Games,
Inc. with respect to the ITVMs leased for use in the
Georgia Lottery (Exhibit 10.19 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.22 Instant Ticket Vending Machines Contract dated
September 17, 1993 by and between the Company, the
State of Maryland and the Maryland State Lottery
Agency with respect to the sale of ITVMs to the
Maryland Lottery (Exhibit 10.20 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.23 Arizona State Lottery Request for Proposal and
Contract No. 93-002 dated December 8, 1993, as
amended, between the Company and the Arizona State
Lottery with respect to the lease of ITVMs to the
Arizona Lottery (Exhibit 10.21 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.23(a) Letter dated November 21, 1994 from the Arizona State
Lottery to the Company extending Contract No. 93-002
by one year with respect to the lease of ITVMs to the
Arizona State Lottery (Exhibit 10.23(a) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.23(b) Letter dated November 20, 1995 from the Arizona State
Lottery to the Company extending Contract No. 93-002
by one year with respect to the lease of ITVMs to the
Arizona State Lottery (Exhibit 10.23(b) to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.23(c) Letter dated December 3, 1996 from the Arizona State
Lottery to the Company extending Contract No. 93-002
by one year with respect to the lease of ITVMs to the
Arizona State Lottery - filed herewith.
10.24 Agreement dated September 12, 1994 between the
Company and the Iowa Lottery with respect to the
lease of ITVMs to the Iowa Lottery (Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.25 Instant Ticket Vending Machine Lease and Maintenance
Agreement dated effective as of July 1, 1994 between
the Company and the New Hampshire Sweepstakes
Commission with respect to the lease of ITVMs to the
New Hampshire Sweepstakes Commission (Exhibit 10.25
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
-31-
<PAGE> 32
10.26 Instant Ticket Vending Machine Agreement dated June
24, 1994 between the Company and The Rhode Island
Lottery with respect to the lease of ITVMs to The
Rhode Island Lottery (Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994).
10.27 Contract for Instant Ticket Vending Machines and
Services effective as of February 13, 1995 between
the Company and the Texas Lottery Commission with
respect to the lease of ITVMs to the Texas Lottery
(Exhibit 10.27 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10.28 Purchase Order dated May 10, 1995 from the Idaho
Lottery for the purchase of ITVMs (Exhibit 10.28 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.29 Contract for Instant Ticket Vending Machines and
Related Services dated October 20, 1995 between the
Company and the State Lottery Commission of Indiana
with respect to the lease of ITVMs to the State
Lottery Commission of Indiana (Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.29(a) Exercise of Option to Extend Contract No. 1 dated
October 20, 1995 by the State Lottery Commission of
Indiana (Exhibit 10.29(a) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.29(b) Supplement to Contract dated August 2, 1996 between
the Company and the State Lottery Commission of
Indiana to add twelve-game IVTM to contract dated
October 20, 1995 - filed herewith.
10.30 Contract for Special Services effective as of July
11, 1995 between the Company and the Bureau of Liquor
and Lottery Operations for the State of Maine with
respect to the lease of ITVMs to the Bureau of Liquor
and Lottery Operations for the State of Maine
(Exhibit 10.30 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.31 Purchase Order dated May 12, 1995 from the Oregon
State Lottery for the purchase of ITVMs (Exhibit
10.31 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.32 Agreement dated December 5, 1994 between the Company
and the New York State Division of the Lottery with
respect to the purchase of ITVMs by the New York
State Division of the Lottery (Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.32(a) Letter dated October 6, 1995 from the New York State
Lottery to the Company for the purchase of ITVMs
(Exhibit 10.32(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.32(b) Letter dated November 30, 1995 from the New York
State Lottery to the Company for the purchase of
ITVMs (Exhibit 10.32(b) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
-32-
<PAGE> 33
10.32(c) Letter dated February 7, 1996 from the New York State
Lottery to the Company for the purchase of ITVMs
(Exhibit 10.32(c) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.32(d) Letter dated February 20, 1996 from the New York
State Lottery to the Company for the purchase of
ITVMs (Exhibit 10.32(d) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995).
10.32(e) Letter dated February 21, 1996 from the New York
State Lottery to the Company amending the order of
February 20, 1996 (Exhibit 10.32(e) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995).
10.32(f) Purchase Order dated August 2, 1996 from the Idaho
Lottery for the purchase of ITVMs - filed herewith.
10.33 Contract dated June 13, 1996 between the Company and
the State of Colorado for the use and benefit of the
Department of Revenue, State Lottery Division with
respect to the lease of ITVMs to the State Lottery
Division - filed herewith.
10.34 Technical Assistance and Sales Agreement dated
November 22, 1996 between the Company and Garza
Argentina, S.A. with respect to the sale of PCDMs to
Garza Argentina, S.A. for use in Argentina - filed
herewith.
10.35 Agreement for Instant Ticket Vending Machines (ITVMs)
dated December 1, 1996 between the Company and the
Minnesota State Lottery and related Purchase Order
dated December 4, 1996 from the Minnesota State
Lottery for the lease of ITVMs - filed herewith.
10.36 Purchase Order dated December 4, 1996 from GTECH
Corporation for the purchase of ITVMs for use by the
New Jersey Lottery - filed herewith.
10.37 Agreement for Instant Ticket Vending Machines dated
January 7, 1997 between the Company and the Florida
Department of the Lottery with respect to the lease
of ITVMs to the Florida Department of the Lottery -
filed herewith.
10.38 Management Contracts and Compensatory Plans
(a) 1994 Stock Incentive Plan (Exhibit 10.24 to
the Company's Registration Statement on Form
S-1, No. 33-75142).
(b) 1994 Directors Stock Incentive Plan (Exhibit
10.25 to the Company's Registration
Statement on Form S-1, No. 33-75142).
(c) Employment Agreement dated as of April 21,
1994 between L. Rogers Wells, Jr. and the
Company (Exhibit 10.28(c) to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1994).
-33-
<PAGE> 34
(d) Employment Agreement dated as of April 21,
1994 between Edmund F. Turek and the Company
(Exhibit 10.28(d) to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1994).
(e) Compensation Agreement dated as of October
26, 1994 between the Company and W. Whitlow
Wyatt (Exhibit 10.28(f) to the Company's
Annual Report on Form 10-K for the year
ended December 31, 1994).
11 Statement Regarding Computation of Per Share Earnings
- filed herewith.
13 1996 Annual Report - filed herewith.
23 Consent of KPMG Peat Marwick LLP - filed herewith.
24 Powers of Attorney - filed herewith.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K. No Current Reports on Form 8-K were
filed by the Company during the quarter ended December 31,
1996.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
-34-
<PAGE> 35
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, on March 28, 1997.
INTERNATIONAL LOTTERY, INC.
(REGISTRANT)
By: /s/ L. Rogers Wells, Jr.
--------------------------------------------------
L. Rogers Wells, Jr.
Chairman of the Board and Chief Executive Officer
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 indicated on March 28, 1997.
Signature Title
/s/ L. Rogers Wells, Jr. Chairman of the Board and Chief
- ------------------------------------- Executive Officer
L. Rogers Wells, Jr.
/s/ Edmund F. Turek President and Director
- -------------------------------------
Edmund F. Turek
/s/ H. Jean Marshall Vice President - Marketing and
- ------------------------------------- Director
H. Jean Marshall
Gary S. Bell* Secretary, Treasurer and Director
- -------------------------------------
Gary S. Bell
Kazmier J. Kasper* Director
- -------------------------------------
Kazmier J. Kasper
John J. Wingfield* Director
- -------------------------------------
John J. Wingfield
W. Whitlow Wyatt* Director
- -------------------------------------
W. Whitlow Wyatt
/s/ Jerome J. Cain Chief Financial and Accounting
- ------------------------------------- Officer
Jerome J. Cain
*By: /s/ L. Rogers Wells, Jr.
----------------------------
L. Rogers Wells, Jr.
as attorney-in-fact
-35-
<PAGE> 36
INDEX OF FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................... S-2
Schedule II - Valuation and Qualifying Accounts.............. S-3
</TABLE>
S-1
<PAGE> 37
INTERNATIONAL LOTTERY, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
-------------------------------------------------------------------------------------------------------------
Allowance for
doubtful accounts
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 21,650 33,500 0 0 55,150
-------------------------------------------------------------------------------------------------------------
1995 55,150 145,000 0 98,537 101,613
-------------------------------------------------------------------------------------------------------------
1996 101,613 57,500 0 43,688 115,425
-------------------------------------------------------------------------------------------------------------
</TABLE>
S-2
<PAGE> 38
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
International Lottery, Inc.:
Under date of February 21, 1997, we reported on the balance sheets of
International Lottery, Inc. as of December 31, 1995 and 1996, and the related
statements of operations, stockholder's equity (deficit), and cash flows for
each of the years in the three-year period ended December 31, 1996, as contained
in the 1996 annual report to shareholders. These financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1996. In connection with our audits of the aforementioned
financial statements, we also audited the related financial statement schedule
as listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Louisville, Kentucky
February 21, 1997
S-3
<PAGE> 39
INTERNATIONAL LOTTERY, INC.
INDEX OF EXHIBITS
-----------------
The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parenthesis.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------- ----
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended,
including Certificate of Designation of Series A Preferred
Stock (Exhibit 3.1 to the Company's Registration Statement
on Form S-1, No. 33-75142).
3.2 Bylaws of the Company (Exhibit 3.2 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.1 Promissory Note of the Company dated September 22, 1992 to
Baumgartner & Brucher Radiology Associates, Inc. Profit
Sharing Plan for the benefit of Thomas E. Turek, M.D.
(Exhibit 4.2 to the Company's Registration Statement on
Form S-1, No. 33-75142).
4.2 Promissory Note of the Company dated September 22, 1990
to Mr. Thomas Goila (Exhibit 4.3 to the Company's
Registration Statement on Form S-1, No. 33-75142).
4.3 Invoice Financing Corporate Promissory Note dated as of
September 13, 1995 to Princeton Capital Finance Company
LLC in the principal amount of $10,000,00 (Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
4.4 Purchase Order Corporate Promissory Note dated as of
September 13, 1995 to Princeton Capital Finance Company
LLC in the principal amount of $2,500,000 (Exhibit 4.4
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
4.4(a) Contracts Financing Agreement dated as of September 20, 1995
between Princeton Capital Finance Company LLC and the
Company (Exhibit 4.4(a) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
</TABLE>
E-1
<PAGE> 40
<TABLE>
<S> <C>
4.4(b) Corporate Guaranty dated as of September 20, 1995 by the Company
in favor of Princeton Capital Finance Company LLC
(Exhibit 4.4(b) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995).
10.5 Assignment of United States Letters Patent from BLM
Resources, Inc. to the Company with respect to United
States Patent No. 4,982,337, "System for Distributing
Lottery Tickets" (Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.6 Pull-Tab Manufacturing and License Agreement between
Algonquin Industries, Inc., Kazmier Kasper and the Company
dated as of January 13, 1994 (Exhibit 10.6 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.7 Lease Agreement dated January 14, 1991 by and between
Gallenstein & Gallenstein and the Company related to the
Company's premises located at 6665 Creek Road,
Cincinnati, Ohio 45242 (Exhibit 10.7 to the Company's
Registration Statement on Form S-1, No. 33-75142).
10.7(a) Addendum dated May 2, 1994 to Lease Agreement
dated January 14, 1991 (Exhibit 10.7) by and between
Gallenstein & Gallenstein and the Company related to the
Company's premises located at 6665 Creek Road, Cincinnati,
Ohio 45242 (Exhibit 10.7(a) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.19 Price Contract (No. KL-91-039) dated June 25, 1991 between
the Company and the Kentucky Lottery Corporation with
respect to the sale of ITVMs to the Kentucky Lottery
Corporation (Exhibit 10.17 to the Company's Registration
Statement on Form S-1, No. 33-75142).
10.20 Term Contract dated March 1, 1992, between the Company
and the Ohio Lottery Commission with respect to the
lease of ITVMs to the Ohio Lottery Commission (Exhibit
10.18 to the Company's Registration Statement on Form
S-1, No. 33-75142).
10.21 Instant Ticket Vending Machine Agreement dated May 12,
1993 between the Company and Scientific Games, Inc.
with respect to the ITVMs leased for use in the Georgia
Lottery (Exhibit 10.19 to the Company's Registration
Statement on Form S-1, No. 33-75142).
</TABLE>
E-2
<PAGE> 41
<TABLE>
<S> <C>
10.22 Instant Ticket Vending Machines Contract dated September
17, 1993 by and between the Company, the State of
Maryland and the Maryland State Lottery Agency with
respect to the sale of ITVMs to the Maryland Lottery
(Exhibit 10.20 to the Company's Registration Statement
on Form S-1, No. 33-75142).
10.23 Arizona State Lottery Request for Proposal and Contract
No. 93-002 dated December 8, 1993, as amended, between
the Company and the Arizona State Lottery with respect
to the lease of ITVMs to the Arizona Lottery (Exhibit
10.21 to the Company's Registration Statement on
Form S-1, No. 33-75142).
10.23(a) Letter dated November 21, 1994 from the Arizona State
Lottery to the Company extending Contract No. 93-002 by
one year with respect to the lease of ITVMs to the
Arizona State Lottery (Exhibit 10.23(a) to the Company's
Annual Report on Form 10-K for the year ended December
31, 1994).
10.23(b) Letter dated November 20, 1995 from the Arizona State
Lottery to the Company extending Contract No. 93-002 by
one year with respect to the lease of ITVMs to the
Arizona State Lottery (Exhibit 10.23(b) to the Company's
Annual Report on Form 10-K for the year ended December
31, 1995).
10.23(c) Letter dated December 3, 1996 from the Arizona State Lottery to the
Company extending Contract No. 93-002 by one year with respect to
the lease of ITVMs to the Arizona State Lottery - filed herewith
10.24 Agreement dated September 12, 1994 between the Company
and the Iowa Lottery with respect to the lease of ITVMs
to the Iowa Lottery (Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1994).
10.25 Instant Ticket Vending Machine Lease and Maintenance
Agreement dated effective as of July 1, 1994 between the
Company and the New Hampshire Sweepstakes Commission
with respect to the lease of ITVMs to the New Hampshire
Sweepstakes Commission (Exhibit 10.25 to the Company's
Annual Report on Form 10-K for the year ended December
31, 1994).
</TABLE>
E-3
<PAGE> 42
<TABLE>
<S> <C>
10.26 Instant Ticket Vending Machine Agreement dated June 24,
1994 between the Company and The Rhode Island Lottery
with respect to the lease of ITVMs to The Rhode Island
Lottery (Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.27 Contract for Instant Ticket Vending Machines and Services
effective as of February 13, 1995 between the Company and the
Texas Lottery Commission with respect to the lease of ITVMs to the
Texas Lottery (Exhibit 10.27 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).
10.28 Purchase Order dated May 10, 1995 from the Idaho Lottery for the
purchase of ITVMs (Exhibit 10.28 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
10.29 Contract for Instant Ticket Vending Machines and Related
Services dated October 20, 1995 between the Company and
the State Lottery Commission of Indiana with respect to
the lease of ITVMs to the State Lottery Commission of
Indiana (Exhibit 10.29 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.29(a) Exercise of Option to Extend Contract No. 1 dated October 20, 1995
by the State Lottery Commission of Indiana (Exhibit 10.29(a)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.29(b) Supplement to Contract dated August 2, 1996 between the
Company and the State Lottery Commission of Indiana to add
twelve-game IVTM to contract dated October 20, 1995 - filed herewith
10.30 Contract for Special Services effective as of July 11,
1995 between the Company and the Bureau of Liquor and
Lottery Operations for the State of Maine with respect
to the lease of ITVMs to the Bureau of Liquor and
Lottery Operations for the State of Maine (Exhibit 10.30
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.31 Purchase Order dated May 12, 1995 from the Oregon State
Lottery for the purchase of ITVMs (Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
</TABLE>
E-4
<PAGE> 43
<TABLE>
<S> <C>
10.32 Agreement dated December 5, 1994 between the Company and the
New York State Division of the Lottery with respect to the purchase of
ITVMs by the New York State Division of the Lottery
(Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.32(a) Letter dated October 6, 1995 from the New York State Lottery to the
Company for the purchase of ITVMs (Exhibit 10.32(a) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.32(b) Letter dated November 30, 1995 from the New York State Lottery to
the Company for the purchase of ITVMs (Exhibit 10.32(b) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.32(c) Letter dated February 7, 1996 from the New York State Lottery to the
Company for the purchase of ITVMs (Exhibit 10.32(c) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.32(d) Letter dated February 20, 1996 from the New York State Lottery to the
Company for the purchase of ITVMs (Exhibit 10.32(d) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
10.32(e) Letter dated February 21, 1996 from the New York State
Lottery to the Company amending the order of February
20, 1996 (Exhibit 10.32(e)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
10.32(f) Purchase Order dated August 2, 1996 from the Idaho Lottery for the
purchase of ITVMs - filed herewith.
10.33 Contract dated June 13, 1996 between the Company and the
State of Colorado for the use and benefit of the
Department of Revenue, State Lottery Division with
respect to the lease of ITVMs to the State Lottery
Division - filed herewith.
10.34 Technical Assistance and Sales Agreement dated November 22,
1996 between the Company and Garza Argentina, S.A. with
respect to the sale of PCDMs to Garza Argentina, S.A. for use
in Argentina - filed herewith.
</TABLE>
E-5
<PAGE> 44
<TABLE>
<S> <C>
10.35 Agreement for Instant Ticket Vending Machines (ITVMs) dated
December 1, 1996 between the Company and the Minnesota State
Lottery and related Purchase Order dated December 4, 1996
from the Minnesota State Lottery for the lease of ITVMs - filed herewith.
10.36 Purchase Order dated December 4, 1996 from GTECH
Corporation for the purchase of ITVMs for use by the New
Jersey Lottery - filed herewith.
10.37 Agreement for Instant Ticket Vending Machines dated
January 7, 1997 between the Company and the Florida
Department of the Lottery with respect to the lease of
ITVMs to the Florida Department of the Lottery - filed
herewith.
10.38 Management Contracts and Compensatory Plans
(a) 1994 Stock Incentive Plan (Exhibit 10.24 to
the Company's Registration Statement on
Form S-1, No. 33-75142).
(b) 1994 Directors Stock Incentive Plan (Exhibit
10.25 to the Company's Registration Statement
on Form S-1, No. 33-75142).
(c) Employment Agreement dated as of April 21, 1994
between L. Rogers Wells, Jr. and the Company
(Exhibit 10.28(c) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994).
(d) Employment Agreement dated as of April 21, 1994
between Edmund F. Turek and the Company (Exhibit
10.28(d) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
(e) Employment Agreement dated October 3, 1994
between Joseph T. Brittain and the Company
(Exhibit 10.28(e) to the Company's Annual Report
on Form 10-K for the year ended December 31,
1994).
(f) Compensation Agreement dated as of October 26,
1994 between the Company and W. Whitlow Wyatt
(Exhibit 10.28(f) to the Company's Annual Report
on Form 10-K for the year ended December 31,
1994).
11 Statement Regarding Computation of Per Share Earnings - filed herewith.
13 1996 Annual Report - filed herewith.
</TABLE>
E-6
<PAGE> 45
<TABLE>
<S> <C>
23 Consent of KPMG Peat Marwick LLP - filed herewith.
24 Powers of Attorney - filed herewith.
27 Financial Data Schedule (for SEC use only).
</TABLE>
E-7
<PAGE> 1
EXHIBIT 10.23(c)
Fife Symington Joseph A. Spicola
Governor Executive Director
ARIZONA LOTTERY
[LETTERHEAD]
December 3, 1996
Elizabeth H. Finnegan
General Counsel
International Lottery, Inc.
6665 Creek Rd.
Cincinnati, OH 45242
RE: Extension of Contract #93-002
Instant Ticket Vending Machines - Lease
Dear Ms. Finnegan:
In my capacity as Executive Director, I am hereby exercising the third option
to extend the above referenced contract for a one year period beginning January
1, 1997. This option is found in Part Three, Page 19, Paragraph 3.5 of the
Request for Proposal.
The contract period shall be January 1, 1997 through December 31, 1997 with the
terms and conditions remaining the same.
Please signify your agreement of this extension by affixing your signature
below and returning the original of this letter to me. A copy is enclosed for
your records.
Sincerely,
/s/ Jody Spicola
-------------------------
Jody Spicola
Executive Director
JS:fs
Enclosure
Agreed to this 6th day of December, 1996.
/s/ David F. Nichols for International Lottery, Inc.
<PAGE> 1
EXHIBIT 10.29(b)
SUPPLEMENT TO CONTRACT
The State Lottery Commission of Indiana ("The Lottery") and International
Lottery, Inc. ("Contractor") hereby enter into and execute this Supplement To
Contract to the Contract For Instant Ticket Vending Machines And Related
Services ("Contract") between the parties dated October 20, 1995, thus:
1. The Lottery may lease from Contractor and Contractor shall upon written
demand from the Lottery lease to the Lottery model TTS 12000 instant ticket
vending machines.
2. The Lottery shall pay the Contractor $255.00 per month per leased machine.
3. All other terms and conditions of the Contract shall remain in full force
and effect.
This Supplement is made in accordance with Sections 1.3 and 2.8 of the Contract.
State Lottery Commission International Lottery, Inc.
of Indiana
By: /s/ John J. Dillon
------------------- By: /s/ David F. Nichols
-------------------------
Printed Printed
Name: John J. Dillion Name: David F. Nichols
----------------- -----------------------
Title: Director Title: Senior Vice President
---------------- ----------------------
Date: 8/2/96 Date: 8/1/96
----------------- -----------------------
<PAGE> 1
[IDAHO LOTTERY LOGO] EXHIBIT 10.32(f)
PURCHASE ORDER
IDAHO LOTTERY
P.O. BOX 6537 * BOISE, IDAHO 83707-6537
(208) 334-2600 * FAX (208) 334-2610
Pay From -- Operating Expense
X Purchase Order -- Capital Outlay
--- Invoice -----------------
STATE TAG NUMBER
TO: Interlott SHIP TO: Idaho Lottery
6665 Creek Road 7529 Mossy Cup
Cincinnati, OH Boise, ID 83709
(208) 362-9342
<TABLE>
<CAPTION>
ORDERED RECEIVED UNIT DESCRIPTION UNIT PRICE AMOUNT
<S> <C> <C>
5 12-Game TTS 12000 $7,700.00 $ 38,500.00
10 8-Game TTS 8000 $5,000.00 $ 50,000.00
20 Combo TTS-6 8000 $5,100.00 $102,000.00
40 6-Game TTS 6000 $4,250.00 $170,000.00
</TABLE>
Billing Due Sept 1st
Total $360,500.00
To David Wagner /S/ Pat Reilly
From Pat Reilly -------------------------
ORIGINATOR
/s/
-------------------------
SUPERVISOR APPROVAL
/s/
-------------------------
FINANCIAL APPROVAL
<PAGE> 1
EXHIBIT 10.33
DEPARTMENT OF AGENCY NUMBER
TFA
CONTRACT ROUTING NUMBER
01005
THIS CONTRACT, Made this 13th day of June, 1996, by and between the State of
Colorado for the use and benefit of the Department of Revenue, State Lottery
Division, 720 South Colorado Blvd., Suite 110, Denver, Colorado 80222,
hereinafter referred to as the State, and International Lottery, Inc,
(Interlott), 6665 Creek Rd., Cincinnati, OH 45242-4117, hereinafter referred to
as the contractor.
WHEREAS, authority exists in the Law and Funds have been budgeted,
appropriated and otherwise made available and a sufficient unencumbered balance
thereof remains available for payment in Fund Number 503, G/L Account Number
020, Contract Encumbrance Number C97005; and
WHEREAS, required approval, clearance and coordination has been
accomplished from and with appropriate agencies; and
WHEREAS, the State, operating through the State Lottery Division of
the Department of Revenue, and in order to obtain competitive proposals from
qualified vendors to provide to the State Lottery Division, Scratch Ticket
Vending Machines (STVMs) and related maintenance services, issued bid number
TFA-6-578-50-5 on July 27, 1995 and amended the bid by issuing Addendum 1 on
August 14, 1995 and Addendum 2 on August 16, 1995 (herein collectively referred
to as the Bid); and
WHEREAS, the Lottery, through the State procurement process issued;
and,
WHEREAS, the Contractor timely submitted its response to the Bid on
August 17, 1995 (hereinafter referred to as the Proposal); and
WHEREAS, the Proposal was in compliance with the Bid and Colorado law;
and
WHEREAS, the State evaluated all timely, complete, and qualified
proposals in accordance with the contract award criteria established in the Bid
and the procurement process; and
WHEREAS, the State determined that the Contractor's Proposal was the
second lowest responsible proposal which best serves the interests of the State
and awarded the contract for the goods and services specified in the Bid to the
Contractor; and
WHEREAS, the Lottery was unable to contract with the apparent
successful bidder, and
WHEREAS, the State through the procurement process may contract with
the next most responsive and responsible bidder, and,
WHEREAS, the Contractor has complied with and passed the security and
financial evaluations required by Colorado law and is otherwise qualified; and
WHEREAS, the State and the Contractor desire to enter into this
contract as anticipated by the Bid.
NOW THEREFORE, it is hereby agreed that in consideration of the
mutual convenants and agreements hereinafter set forth, the sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
Page 1 of 10 pages
<PAGE> 2
1. INCORPORATION OF INVITATION FOR BID AND PROPOSAL
Invitation For Bid number TFA-6-578-30-5, as amended and the
Contractor's proposal dated August 17, 1995 are hereby incorporated
by reference as if fully set forth herein, and the terms and conditions
of the Bid and the Proposal hereby become contractual obligations of
the parties. To the extent that there may be a conflict or
inconsistency between the provisions of this contract, the Bid and the
Proposal, then the provision of each of the documents shall be given
effect in accordance with the following order of priority: (1) this
contract (2) the Bid, as amended and (3) the Contractor's Proposal.
2. CONTRACT PERIOD
The time period to be covered by the initial term of this contract is
from July 1, 1996 through June 30, 1998.
Subject to the State Lottery Division being renewed during the 1999
Legislative Session, the contract may be extended under the
original terms at the sole discretion of the State Lottery Division for
two (2) additional one-year periods, up to a maximum of two (2)
additional one-year periods. Thus, the initial contract and all
possible extensions may be from contract signing through June 30, 2000.
3. LEASE
All machines procured under this contract shall be leased. The Lottery
shall acquire no purchase interest in the equipment.
4. PAYMENT
Payments shall be made to the Contractor by the State in accordance
with the matrix set forth in the Contractor's pricing proposal
(Attachment A). Total lease payments under this contract and any
extensions thereof shall not exceed $650,000 per twelve (12) month
period. In the event that the Legislature appropriates less than
$650,000 annually, STVMs may be returned to the Contractor to decrease
the total lease payment to no more than the allowable level of spending
authority without penalty to the Lottery. In the event funding is
appropriated by the Legislature for the lease of additional STVMs, this
contract may be amended to reflect that additional lease authority. If
this additional amount is later reduced by the Legislature, machines
leased under that spending authority may be returned to the Contractor
with no penalty to the Lottery in order to reduce the total lease
payment to no more than the allowable level of spending authority
without penalty to the Lottery.
The Contractor may invoice the State monthly for the lease of STVMs as
set forth in this contract. The Contractor shall send the invoice
to the Lottery Controller at Lottery Headquarters. The State will
process the invoice for payment on a net 30 day basis.
5. INTEGRATION
This agreement is intended as the complete integration of all
understandings between the parties. No prior or contemporaneous
addition, deletion or other amendment hereto shall have any force
or effect whatsoever, unless embodied here in writing. No subsequent
novation, renewal, addition, deletion or other amendment hereto shall
have any force or effect unless embodied in a written contract executed
and approved pursuant to the State Fiscal Rules.
6. AUTHORITY TO EXECUTE
The persons signing this contract warrant and represent that they have
full right, power and authority to execute this contract on behalf
of their respective parties.
7. COMPLETE CONTRACT
The State warrants and represents that the execution of this contract
by the persons whose signatures appear hereon is sufficient to put
this contract into full force and effect and to make this contract a
binding obligation of the State. The State warrants and represents
that no purchase order or other instrument, is required to put this
contract into full force and effect and to make this contract a binding
obligation of the State.
Page 2 of 10
<PAGE> 3
8. PRIME CONTRACTOR RESPONSIBILITIES
The Contractor will assume all responsibility for the performance of
all services, whether or not subcontractors are involved. The State will
consider the Contractor to be the sole point of contact with regard to all
matters and will not initiate or maintain contacts with any subcontractor
except as agreed to in writing by the parties to this Contract. If any
part of the work is to be subcontracted, the Contractor will provide a
complete description of the work to be subcontracted. The Contractor must
furnish the subcontractor's corporate or company name and the names of key
personnel assigned by the subcontractor. Subcontractors may be subject to
security and financial checks if the Lottery deems them necessary. The
costs of such subcontractor investigations may be borne by either the
Contractor or the subcontractor to whom the investigation applies.
9. PREVAILING WAGES
The Contractor shall comply with all State laws, rules and regulations
pertaining to prevailing wages and shall require such compliance by all its
subcontractors.
10. BENEFIT
The agreement is for the benefit of the Contractor and the State, and
not for the benefit of any third party or person.
11. COMPLIANCE WITH LAW
The Contractor agrees to comply with all Federal, State and Local laws,
rules and regulations in its manufacture and transportation of tickets and
related materials and performance of all other terms under this Contract.
12. COVENANT AGAINST CONTINGENT FEES
The Contractor warrants that it has not employed or retained any
company or person (other than a bona fide employee working solely for the
offeror) to solicit or secure this Contract, and that it has not paid or
agreed to pay any person or entity (other than a bona fide employee working
solely for the offeror) any fee, commission, percentage, brokerage fee,
gift, or other consideration on a basis that is contingent upon the award
of this Contract. For breach or violation of this warranty, the State
shall have the right to annul the Contract without liability, or, in its
discretion, to deduct from the Contract price, the full amount of such
commission, percentage, brokerage, or contingent fee.
13. PATENTS, COPYRIGHTS, TRADEMARKS, AND SERVICEMARKS
The Contractor shall indemnify the Lottery and hold it harmless from
any and all claims that the materials or services provided to the Lottery
do not infringe any rights under any existing valid patent, copyright,
trademarks, servicemark or other intellectual property protected by law.
14. NON-DISCLOSURE OF LOTTERY PLANS
The Contractor must use its best efforts to assure that the details of
any game planned by the Lottery are not disclosed to persons or
organizations other than the personnel, agents and subcontractors of the
Contractor whose assistance in the production of the game is necessary,
until the Lottery announces same.
15. ROYALTIES FOR SCENES, PORTRAITS, PHOTOGRAPHS, COPYRIGHTS, TRADEMARKS,
PROPRIETARY MATERIAL, ETC.
The Lottery shall reimburse the Contractor at cost for royalties to be
paid to outside parties for rights to use any proprietary material
provided that the Contractor obtains prior written approval from the
Lottery.
Page 3 of 10
<PAGE> 4
16. NOTICE
Unless another part of this contract specifically provides otherwise,
all notices and communications required by this contract shall be in writing
and shall be mailed by first-class mail to:
IF TO THE STATE: IF TO THE CONTRACTOR:
Mark Zamarripa, Director David F. Nichols
Colorado Lottery International Lottery, Inc.
201 West 8th Street 6665 Creek Road
Pueblo, CO 81003 Cincinnati, OH 45242-4117
17. INDEPENDENT CONTRACTOR
The Contractor shall perform its duties hereunder as an independent
contractor and not as an employee. Neither the Contractor nor any
agent or employee of the Contractor shall be or shall be deemed
to be an agent or employee of the state. Contractor shall pay when due
all required employment taxes and income tax withholding, shall
provide and keep in force worker's compensation (and show proof of such
insurance) and unemployment compensation insurance in the amounts
required by law, and shall be solely responsible for the acts of the
Contractor, its employees and agents.
18. ADDITIONAL SECURITY REQUIREMENTS
Due to the stringent security provisions stipulated by Colorado
statues, the Lottery must control who performs services under this
contract. Therefore, it is expressly understood by the Contractor that
all employees or organizations utilized by the Contractor in the
performance of this contract in either a direct or indirect role must
be approved in advance and in writing by the Lottery Director and
Security Director. Further, such employees or organizations may not
furnish products or services to any other Colorado Lottery contractor
in the performance of its contractual obligations in Colorado unless
permission for such participation is secured in writing from the Lottery
Director and Security Director. Failure to do so may result in
immediate contract cancellation at the discretion of the Lottery
Director. The State will not be liable for any costs incurred by the
Contractor in the case of such contract termination.
The contractor shall notify the Lottery Director and Security Director
when obtaining the services of consultants, contractors or subcontractors
to enhance their business or that of the Lottery. The Contractor shall
provide to the Lottery, copies of any filings with the Colorado Secretary
of State pertaining to contributions, contributions in kind, expenditures
or lobbying activities.
19. INFORMATION UPDATED
a. The Contractor is required to report any changes in ownership or
management writing to the Director of the Lottery within thirty
(30)days of the date such change becomes effective. The Lottery
Director may, at his/her discretion, terminate the contract if such
changes would have prevented the Director form initially awarding
such Contractor the contract.
b. The Contractor is required to submit information on new employees
working on the Lottery account as soon as those persons are assigned
to the account.
c. The Contractor is required to submit updated Release of Information
forms on all employees on an annual basis or as requested by Lottery
investigators.
20. USUFRUCT
If for any reason other than breach of contract by the Lottery,
the Contractor shall fail for any reason to service the contract with
the Lottery, the Lottery will acquire a usufruct in the equipment
furnished by the Contractor under the contract. Said usufruct shall
entitle the Lottery to peacefully and quietly have, hold, possess, use,
operate, maintain, alter and improve the equipment without suit,
molestation or interruption for the benefit of the Lottery in selling
its games. The usufruct shall be limited in time to the duration of the
contract and any extensions thereof.
Page 4 of 10
<PAGE> 5
21. NEWS RELEASES
The Contractor shall not issue news releases regarding matters
concerning the Colorado Lottery without the approval of the Lottery
Director.
22. MACHINE SERVICE RESPONSIBILITIES
It is expressly understood that the lease price submitted in the
Contractor's proposal shall include all costs of repairs, parts and
service on its STVMs for the duration of this contract and any extensions.
All repairs to STVMs will be done at no additional cost to the Lottery.
The Contractor shall maintain a sufficient inventory of parts in-state to
allow for repair or replacement within service times specified in the IFB.
23. ASSIGNMENT OPTION
Per IFB, Page 1, Section 3, Assignment, the Lottery shall, subject to
security review, allow the Contractor to assign payments under this
contract for the purpose of third-party financing to:
Princeton Capital
38 Washington Rd.
Princeton Junction, NJ 08550
Future assignments or sub-assignments shall be subject to Lottery
approval.
24. FORCE MAJEURE
Neither the Contractor nor the Lottery shall be liable to the other for
any delay in or failure of performance of any covenant contained in the
contract nor shall any such delay in or failure of performance constitute
default or give rise to any liability for damages if and only to the
extent that such delay or failure is caused by "force majeure". As herein
used, "force majeure" means fire, explosion, action of the elements,
strikes, interruption of transportation, government interference,
rationing, illegality or any other cause which is beyond the control of
the party affected and which, by the exercise of reasonable diligence,
said party is unable to prevent. The existence of such causes of such
delay or failure shall extend the period for performance to such extent as
may be necessary to enable complete performance in the exercise of
reasonable diligence after the causes of delay or failure have been
removed. Nothing in this paragraph shall prevent the Lottery from
covering its requirement from another Contractor during the period of
delay and a reasonable period thereafter.
25. WILLFUL DAMAGE
In the event that a machine becomes inoperable or partially inoperable
due to acts of vandalism, abuse or misuse beyond the control of the retail
establishment where the machine is placed, the Contractor shall be granted
an extension of response/repair time in order to repair said machine. If
the machine can be repaired at the retail location, the allowable repair
time will be extended to 24 hours from the time the call is placed by the
retailer. If the machine must be replaced or taken to a repair facility,
the allowable repair time will be extended to 48 hours from the time the
call is placed by the retailer. These extended response/repair times will
apply statewide, regardless of where the machine is located.
In the event that the allowable response/repair times as stated above
are exceeded, the liquidated damages as stated on pages 11 and 12, Section
38 - Liquidated Damages shall apply.
26. CRITICAL VS. NON-CRITICAL MACHINE PROBLEMS
Response/repair times as stated on page 18, Section 4 - Maintenance of
the IFB and corresponding liquidated damages as stated on pages 11 and 12,
Section 38 - Liquidated Damages shall apply for all critical machine
problems. Critical machine problems shall be defined as follows:
Page 5 of 10
<PAGE> 6
- - The Scratch ticket vending machine is non-operational (unable to sell
tickets)
- - More than 25% of the available ticket dispensers are non-operational
- - The security and/or integrity of the machine is in jeopardy. Examples of
this criteria include, but are not limited to, the remote shut-off device
is inoperable; the door locks are inoperable; excluding keys lost/damaged by
the retailer or locked in the STVM; the customer display showing the amount
of credit available is not working properly; the alarms are not functional or
are functioning improperly; tickets are being dispensed improperly on any bin
(e.g. customer is able to pull additional tickets from machine, tickets are
bursting improperly, etc.); a bin is not feeding the tickets to the
perforation, etc.
All other problems shall be considered non-critical and a 24 hour
response/repair time, from the time the call is placed by the retailer, shall
be allowed at all locations statewide.
In the event that the allowable response/repair times in the preceding two
paragraphs are exceeded, the liquidated damages as stated on pages 11 and 12,
Section 38 - Liquidated Damages shall apply.
27. PREVENTATIVE MAINTENANCE
The Contractor/subcontractor will perform preventative maintenance at no
additional charge at regularly scheduled intervals that shall not exceed
six (6) months.
28. TICKET CAPACITY
Tickets up to 4 1/4" in width and 8" in length must be accepted. The
machine must be able to accept a variety of paper thickness from 8 point
through 12 point.
29. ELECTRICAL SAFETY
Each unit must operate on standard 110v AC power, and have Underwriters
laboratories (UL) or equivalent approval. The equipment must meet or
exceed industry standards with regard to electrical radiation emissions.
30. PRICING
Lease pricing shall be as stated in the Base Monthly lease Table - Appendix
A and include all of the following items for the duration of this contract
and any extensions for all leased machines:
(a) Preventative maintenance for each machine, not to exceed six
months between service calls
(b) All machine maintenance, including but not limited to
replacement of any defective or malfunctioning parts and
cleaning as necessary at the time intervals specified in the
IFB.
(c) All parts including, but not limited to, bill acceptors, ticket
dispensing mechanisms, circuit boards, printers, buttons,
lights, windows, cabinets, displays and alarms. Lock
replacement, due to lost keys and key replacement due to lost or
damaged keys will be bill directly to the Lottery as follows:
Lock Replacement $100/set
Key Replacement $35/set
(d) Machine upgrades (parts and/or software) as necessary to keep
machines functional (e.g. bill acceptor upgrades for
compatibility with new United States currency)
(e) All training for Lottery personnel and all initial training for
retailers. This includes a training videotape for all
retailers.
(f) All manuals, both operational and service
(g) Retailer supplies as specified in the IFB
Page 6 of 10
<PAGE> 7
(h) Toll-free hotline and dispatch service meeting or exceeding the
specifications in the IFB
(i) All reports required in the IFB on the time schedule specified
in the IFB (e.g. Placement Reporting)
(j) All machine shipping, storage and installation. Charges for
removal and location changes are as follows:
Two percent (2%) of machine population per month Free of Charge
Removals/Re-locations in excess of 2% of machine $150 each
population per month
(k) Cost of security/financial investigation
(l) All other items specified in the IFB not mentioned above plus
any additional items offered at no charge by the Contractor in
its response.
31. CONSEQUENTIAL DAMAGES
The exclusion of consequential damages on page 12 of the Contractor's
proposal shall not extend to bodily injury or damage to tangible personal
property.
Page 7 of 10
<PAGE> 8
APPENDIX A
Base Monthly Lease Table
<TABLE>
<CAPTION>
Machine Type Monthly Lease Including Model Number/Name
Maintenance
<S> <C> <C>
1 Game $125.00 TTS 1000
Counter-top
2 Game $135.00 TTS 2000
Counter-top
4 Game $150.00 TTS 4000
Floor Model
6 Game $160.00 TTS 6000
Floor Model
8 Game $160.00 TTS 8000
Floor Model
</TABLE>
Page 8 of 10
<PAGE> 9
CONTROLLER'S APPROVAL
1. This contract shall not be deemed valid until it shall have been approved
by the Controller of the State of Colorado or such assistant as he may
designate. This provision is applicable to any contract involving the payment
of money by the State.
FUND AVAILABILITY
2. Financial obligations of the State of Colorado payable after the current
fiscal year are contingent upon funds for that purpose being appropriated,
budgeted, and otherwise made available.
BOND REQUIREMENT
3. If this contract involves the payment of more than fifty thousand dollars
for the construction, erection, repair, maintenance, or improvement of any
building, road, bridge, viaduct, tunnel, excavation or other public work for
this State, the contractor shall, before entering upon the performance of any
such work included in this contract, duly execute and deliver to the State
official who will sign the contract, a good and sufficient bond or other
acceptable surety to be approved by said official in a penal sum not less than
one-half of the total amount payable by the terms of this contract. Such bond
shall be duly executed by a qualified corporate surety conditioned upon the
faithful performance of the contract and, in addition, shall provide that if
the contractor or his subcontractors fail to duly pay for any labor, materials,
team hire, sustenance, provisions, provendor or other supplies used or consumed
by such contractor or his subcontractor in performance of the work contracted
to be done or fails to pay any person who supplies rental machinery, tools, or
equipment in the prosecution of the work the surety will pay the same in an
amount not exceeding the sum specified in the bond, together with interest at
the rate of eight per cent per annum. Unless such bond is executed, delivered
and filed, no claim in favor of the contractor arising under such contract
shall be audited, allowed or paid. A certified or cashier's check or a bank
money order payable to the Treasurer of the State of Colorado may be accepted
in lieu of a bond. This provision is in compliance with CRS 38-26-106.
INDEMNIFICATION
4. To the extent authorized by law, the contractor shall indemnify, save, and
hold harmless the State, its employees and agents, against any and all claims,
damages, liability and court awards including costs, expenses, and attorney
fees incurred as a result of any act of omission by the contractor, or its
employees, agents, subcontractors, or assignees pursuant to the terms of this
contract.
DISCRIMINATION AND AFFIRMATIVE ACTION
5. The contractor agrees to comply with the letter and spirit of the Colorado
Antidiscrimination Act of 1957, as amended, and other applicable law respecting
discrimination and unfair employment practices (CRS 24-34-402), and as required
by Executive Order, Equal Opportunity and Affirmative Action, dated April 16,
1975. Pursuant thereto, the following provisions shall be contained in all
State contracts or sub-contracts.
During the performance of this contract, the contractor agrees as follows:
(a) The contractor will not discriminate against any employee or
applicant for employment because of race, creed, color, national origin,
sex, marital status, religion, ancestry, mental or physical handicap, or
age. The contractor will take affirmative action to insure that
applicants are employed, and that employees are treated during
employment, without regard to the above mentioned characteristics. Such
action shall include, but not be limited to the following: employment
upgrading, demotion, or transfer, recruitment or recruitment advertising;
lay-offs or terminations; rates of pay or other forms of compensation; and
selection for training, including apprenticeship. The contractor agrees
to post in conspicuous places, available to employees and applicants for
employment, notices to be provided by the contracting officer setting
forth provisions of this non-discrimination clause.
(b) The contractor will, in all solicitations or advertisements for
employees placed by or on behalf of the contractor, state that all
qualified applicants will receive consideration for employment without
regard to race, creed, color, national origin, sex, marital status,
religion, ancestry, mental or physical handicap, or age.
(c) The contractor will send to each labor union or representative of
workers with which he has a collective bargaining agreement or other
contract or understanding, notice to be provided by the contracting
officer, advising the labor union or workers' representative of the
contractor's commitment under the Executive Order, Equal Opportunity and
Affirmative Action, dated April 16, 1975, and of the rules, regulations,
and relevant Orders of the Governor.
(d) The contractor and labor unions will furnish all information and
reports required by Executive Order, Equal Opportunity and Affirmative
Action of April 16, 1975, and by the rules, regulations and Orders of the
Governor, or pursuant thereto, and will permit access to his books,
records, and accounts by the contracting agency and the office of the
Governor or his designee for purposes of investigation to ascertain
compliance with such rules, regulations and orders.
(e) A labor organization will not exclude any individual otherwise
qualified from full membership rights in such labor organization, or expel
any such individual from membership in such labor organization or
discriminate against any of its members in the full enjoyment of work
opportunity because of race, creed, color, sex, national origin, or
ancestry.
(f) A labor organization, or the employees or members thereof will not
aid, abet, incite, compel or coerce the doing of any act defined in this
contract to be discriminatory or obstruct or prevent any person from
complying with the provisions of this contract or any order issued
thereunder; or attempt, either directly or indirectly, to commit any act
defined in this contract to be discriminatory.
Page 9 of 10
<PAGE> 10
(g) In the event of the contractor's non-compliance with the non-discrimination
clauses of this contract or with any such rules, regulations, or orders, this
contract may be canceled, terminated or suspended in whole or in part and the
contractor may be declared ineligible for further State contracts in accordance
with procedures, authorized in Executive Order, Equal Opportunity and
Affirmative Action of April 16, 1975, and the rules, regulations, or order
promulgated in accordance therewith, and such other sanctions as may be imposed
and remedies as may be invoked as provided in Executive Order, Equal
Opportunity and Affirmative Action of April 16, 1975, or by rules, regulations,
or order promulgated in accordance therewith, or as otherwise provided by law.
(h) The contractor will include the provisions of paragraphs (a) through (h) in
every sub-contract and subcontractor purchase order unless exempted by rules,
regulations, or orders issued pursuant to Executive Order, Equal Opportunity
and Affirmative Action of April 16, 1975, so that such provisions will be
binding upon each subcontractor or vendor. The contractor will take such
action with respect to any sub-contracting or purchase order as the contracting
agency may direct, as a means of enforcing such provisions, including sanctions
for non-compliance; provided, however, that in the event the contractor becomes
involved in, or is threatened with, litigation, with the subcontractor or
vendor as a result of such direction by the contracting agency, the contractor
may request the State of Colorado to enter into such litigation to protect the
interest of the State of Colorado.
COLORADO LABOR PREFERENCE
6a. Provisions of CRS 8-17-101 & 102 for preference of Colorado labor are
applicable to this contract if public works within the State are undertaken
hereunder and are financed in whole or in part by State funds.
b. When a construction contract for a public project is to be awarded to a
bidder, a resident bidder shall be allowed a preference against a non-resident
bidder from a state or foreign country equal to the preference given or
required by the state or foreign country in which the non-resident bidder is a
resident. If it is determined by the officer responsible for awarding the bid
that compliance with this subsection .06 may cause denial of federal funds
which would otherwise be available or would otherwise be inconsistent with
requirements of Federal law, this subsection shall be suspended, but only to
the extent necessary to prevent denial of the moneys or to eliminate the
inconsistency with Federal requirements (CRS 8-19-101 and 102)
GENERAL
7. The laws of the State of Colorado and rules and regulations issued pursuant
thereto shall be applied in the interpretation, execution, and enforcement of
this contract. Any provision of this contract whether or not incorporated
herein by reference which provides for arbitration by any extra-judicial body
or person or which is otherwise in conflict with said laws, rules, and
regulations shall be considered null and void. Nothing contained in any
provision incorporated herein by reference which purports to negate this or any
other special provision in whole or in part shall be valid or enforceable or
available in any action at law whether by way of complaint, defense, or
otherwise. Any provision rendered null and void by the operation of this
provision will not invalidate the remainder of this contract to the extent that
the contract is capable of execution.
8. At all times during the performance of this contract, the Contractor shall
strictly adhere to all applicable federal and state laws, rules, and
regulations that have been or may hereafter be established.
9. The signatories aver that they are familiar with CRS 18-8-301, et. seq.,
(Bribery and Corrupt Influences) and CRS 18-8-401, et. seq., (Abuse of Public
Office), and that no violation of such provisions is present.
10. The signatories aver that to their knowledge, no state employee has any
personal or beneficial interest whatsoever in the service or property described
herein:
IN WITNESS WHEREOF, the parties hereto have executed this Contract on the day
first above written.
<TABLE>
<S> <C>
Contractor:
(Full Legal Name) International Lottery Inc STATE OF COLORADO
---------------------------------------- ROY ROMER, GOVERNOR
By /s/
-------------------------------------------------------
- ---------------------------------------------------------- By /s/ Mark Zamarripa
-----------------------------------------------------
Senior Vice President For the *5 EXECUTIVE DIRECTOR
Position (Title) ----------------------------------------- Mark Zamarripa, Director
Colorado Lottery
311297916 DEPARTMENT
- ---------------------------------------------------------- OF Revenue/Lottery
Social Security Number or Federal ID Number ------------------------------------------------------
If Corporation;)
Attest (Seal)
By /s/
-------------------------------------------------------
Corporate Secretary, or Equivalent, Town/City/County Clerk
APPROVALS
ATTORNEY GENERAL CONTROLLER
By By
-------------------------------------------------------- --------------------------------------------------------
- ----------------------------------------------------------- -----------------------------------------------------------
</TABLE>
Page 10 which is the last of 10 pages
----
<PAGE> 1
EXHIBIT 10.34
TECHNICAL ASSISTANCE and SALES AGREEMENT
AGREEMENT BY AND BETWEEN INTERNATIONAL LOTTERY, INC., A CORPORATION
ORGANIZED UNDER THE LAWS OF DELAWARE, USA ("Interlott"), LOCATED AT 6665
CREEK ROAD, CINCINNATI, OHIO, 45242 USA AND GARZA AGRENTINA, S.A., A
COMPANY ORGANIZED UNDER THE LAWS OF ARGENTINA ("Garza"), LOCATED AT
INGENIERO CARMONA 2280, PARQUE INDUSTRIAL BURZACO, (1852) BURZACO, BUENOS
AIRES, ARGENTINA, ENTERED THIS 22nd DAY OF NOVEMBER, 1996.
WITNESSETH:
WHEREAS, Interlott is a manufacturer of equipment and technology related
to the dispensing of lottery and credit cards;
WHEREAS, Interlott has certain rights (the "Technology"), including
patent no. 5335822, and has applied for patent protection in the United
States for an "Apparatus for Dispensing Tickets, Cards, and the Like"
(serial no. 08/377,182), which Technology is an essential element of an
apparatus (hereinafter the "DC2") with the capability of dispensing
telephone calling cards;
WHEREAS, Interlott has also applied for patent protection in Argentina
for such "Apparatus for Dispensing Tickets, Cards, and the Like" (serial
no. 335,159);
WHEREAS, Garza desires to develop telephone booths in Argentina, and
elsewhere, which incorporate the DC2 and related technology;
WHEREAS, Garza plans to make DC2 units in Argentina, using the technology
gained from Interlott and with certain parts purchased from Interlott; and
WHEREAS, Garza desires to reimburse Interlott for the privilege of
sharing Interlott's expertise pursuant to the terms and conditions
hereinafter set forth;
NOW, THEREFORE, the parties hereto agree as follows:
1. TERMS OF SALE. (a) For the Term of this Agreement, Garza shall
purchase through Interlott from Interlott or its suppliers, all of its
requirements for coin and currency acceptors, dispensers, and electronics for
installation in the DC2 units to be manufactured by Garza. The purchase price
shall be billed to Garza by Interlott's suppliers, or Interlott if manufactured
by Interlott. The parties may add additional products to those set forth
above, and all such products including the coin and currency acceptors,
dispensers, and electronics are hereinafter referred to as the "Products".
1
<PAGE> 2
(b) All Products sold to Garza hereunder will be sold FCA Cincinnati,
USA. Risk of loss shall pass to Garza upon shipment of the products from
Cincinnati.
(c) Garza shall place orders for Products through the issuance of
purchase orders. In the event of a conflict between this Agreement and any
purchase order, the terms of this Agreement shall take precedence.
(d) Garza shall pay Interlott for Products by letter of credit, issued
by a bank satisfactory to Interlott, payable upon receipt by Interlott.
Garza shall provide Interlott with forecasts of purchases it intends to make
for twelve months in advance of such purchases; Garza may make modifications to
such forecasts as necessary. Garza shall submit orders at least ninety (90)
days prior to desired shipment. And shall submit letters of credit five (5)
days prior to desired shipment. Interlott shall ship all Products on or before
the date of desired shipment, as set forth in the preceding sentence. Should
Interlott fail to timely ship an order, Garza may, in its sole discretion,
cancel the delayed order without liability, provided Interlott receives written
notice of the cancellation prior to the shipment of the order.
(e) Garza shall be responsible for payment of all import duties and
taxes resulting from the importation of the Products.
2. GRANT. (a) Interlott hereby grants to Garza the exclusive
right to use and employ Interlott's Technology rights in the manufacture, use
and sale of the DC2 in Argentina and the exclusive right to avail itself of
Interlott's know-how in the said manufacture, use and sale of DC2 units in
Argentina. Garza may not transfer, assign, or sublicense the rights granted
hereunder to any third party without the express written consent of Interlott,
which consent may be withheld at Interlott's sole discretion, except that Garza
may cooperate with its part-owner, Ind. Viauro, S.A. ("Viauro") in the
manufacture of DC2 units.
(b) Although the rights granted hereunder relate solely to rights in
Argentina, the parties agree to explore expanding these rights into other
territories where Garza or its affiliates have existing contacts and where
there is no conflict with other licensees or agents of Interlott.
(c) In addition to the grant set forth herein, Garza may produce DC2
units for shipment outside Argentina as directed by Interlott. It is
anticipated that the parties will negotiate for Garza to manufacture DC2 units
for sale outside Argentina; without such direction or the conclusion of an
agreement relating to shipments outside of Argentina, Garza shall not ship
outside Argentina.
3. IMPROVEMENTS. (a) Interlott agrees to immediately communicate
to Garza any improvements, further invention or design it may discover, make or
develop with respect to the industrial property rights or know-how pertaining
to the manufacture, use and sale of the DC2 and shall fully disclose to Garza
the nature and manner of utilizing such improvements, further invention or
design.
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<PAGE> 3
(b) Garza agrees to immediately communicate to Interlott any
improvements, further invention or design it may discover, make or develop with
respect to the industrial property rights or know-how pertaining to the
manufacture, use and sale of the DC2 and shall fully disclose to Interlott the
nature and manner of utilizing such improvements, further invention or design.
(c) If either party hereto shall discover, make or develop any
improvement, further invention or design required to be disclosed as aforesaid,
Interlott may at its own expense file application for letters patent or take
other necessary legal steps to protect such improvements, further inventions or
designs in any territory as it shall determine.
(d) Interlott shall grant to Garza the right to utilize any improvement,
further invention or design required to be disclosed hereunder, in accordance
with the terms of this Agreement and without additional charge or royalties.
4. ROYALTY. (a) In consideration of Interlott providing
technical assistance to Garza in the areas of its expertise ("Technical
Assistance"), Garza agrees to pay to Interlott royalties as set forth herein:
(i) For the first five hundred (500) DC2 units manufactured by
Garza, Garza shall pay Interlott a royalty of US $350.00 per DC2
unit;
(ii) For all DC2 units manufactured after the first five hundred
(500) units by Garza, Garza shall pay Interlott a royalty of US$
700.00 per DC2 unit; and
(iii) For all DC2 units manufactured by Garza for sale outside
Argentina, Garza shall pay Interlott a royalty as the parties may
agree.
Garza shall advise Interlott no less frequently than monthly of its sales of DC2
units, and shall make payments pursuant to this paragraph, by check or wire
transfer, in U.S. Dollars, within 30 days after the end of the month in which
each sale was made.
(b) In addition to the royalties set forth above, Garza shall
reimburse Interlott for all direct expenses incurred by Interlott for Technical
Assistance requested by Garza and mutually agreed upon.
(c) Garza shall pay all stamp taxes and all taxes of Interlott
with respect to royalties, and may withhold from the gross royalty payment due
Interlott that which it is obligated to withhold under Argentine law.
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4. CONFIDENTIALITY. (a) All information disclosed by Interlott to
Garza or to Garza's shareholder, Ind. Viauro, S.A., whether by means of
written or oral disclosure or otherwise, shall be deemed "Proprietary
Information" and subject to the terms of this Agreement, unless (i) identified
in writing by Interlott to Garza as non-confidential or (ii) excluded from the
class of Proprietary Information pursuant to subsection (b).
(b) Information shall not be considered Proprietary Information if it is
established by Garza that such information (i) was known to Garza or Viauro at
the time of receipt from Interlott (so long as such information was not acquired
directly or indirectly form Interlott); (ii) is or becomes publicly known
through no act or fault of Garza or Viauro; or (iii) is or becomes part of the
public domain through no act or fault of Garza or Viauro.
(c) Garza agrees to use the Proprietary Information only for the purposes
set forth herein. Garza agrees it will not use the Proprietary Information for
its own benefit, or the benefit of others or for any commercial purposes except
as set forth herein. Garza shall disclose the Proprietary Information only to
its personnel or advisors that require to receive it, in order to reach the
collective business objectives of the parties hereto, and Garza will take the
necessary precautions to ensure that such persons will be bound by the
provisions of this Confidentiality provision. Garza further agrees not to use
the Proprietary Information to obtain a competitive advantage in any way or to
prepare or implement a product, item, program, or concept that is competitive
with, or similar to, anything owned, produced, marketed, offered, or planned to
be produced, marketed or offered by Interlott or any affiliate thereof.
(e) The terms of this Confidentiality provision shall survive the
termination of this Agreement.
5. TERM. (a) This Agreement shall be for five (5) years from the date
hereof, and shall continue in force thereafter for further periods of five (5)
years unless notice is given by either party of its desire to terminate within
six (6) months of the date of expiration of the then current period of operation
of this Agreement. Either party may terminate this Agreement for any reason
upon one year written notice to the other.
(b) In the event of any of the following:
i. any breach of this Agreement not cured within thirty (30) days
after notification thereof;
ii. insolvency or bankruptcy of either party; or
iii. appointment of a trustee or receiver for either party;
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<PAGE> 5
then, and in addition to all other rights and remedies which either party may
have in law or equity, the party not in default may at its option terminate this
Agreement by written notice, effective no less than thirty (30) days from the
date of notice.
(c) Termination of this Agreement for any cause whatsoever shall not
affect or prevent payment of any and all royalties and payments then due
hereunder or which will become due with respect to any sales then in process.
6. AUTHORITY. Bruno S. Rossi represents that as Vice Presidente of
Garza he has full power to execute this Agreement on behalf of Garza. Within
thirty (30) days of the date hereof, Garza shall produce a power of attorney or
certified minutes of a meeting of the board of directors of Garza, satisfactory
to counsel for Interlott, verifying Mr. Rossi's authority to commit Garza to
this Agreement, including submission to foreign arbitration.
7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and understanding between the parties hereto in connection with the subject
matter hereof and supersedes all agreements entered into prior to the date
hereof.
8. ARBITRATION. Any disagreement or dispute which may arise with
respect to the interpretation or application of this Agreement, or the breach
thereof, shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. Said arbitration
shall be held in Cincinnati, Ohio, U.S.A. and he conducted in the English
language. Judgment upon the award rendered by the Arbitrator may be entered
into in any court having jurisdiction thereof.
9. GOVERNING LAW. The terms and conditions of this Agreement, the
interpretation thereof and the rights and obligations of the parties thereunder
shall be interpreted and construed as though jointly written and shall be
governed and determined by the laws of the State of Ohio, U.S.A., as such laws
may from time to time exist.
IN WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized representatives.
INTERNATIONAL LOTTERY, INC.
/s/ L. Rogers Wells, Jr.
----------------------------
L. Rogers Wells, Jr., Chairman & CEO
GARZA ARGENTINA, S.A.
/s/ Bruno s. Rossi
------------------------------
Bruno s. Rossi, Vice Presidente
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<PAGE> 1
EXHIBIT 10.35
AGREEMENT FOR
INSTANT TICKET VENDING MACHINES (ITVMs)
BETWEEN
THE MINNESOTA STATE LOTTERY
AND
INTERNATIONAL LOTTERY, INC. (Interlott)
DECEMBER 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
I. Recitals ......................................................... 1
II. Agreement ........................................................ 2
1. Definitions .............................................. 2
2. Term ..................................................... 2
3. Work Statement ........................................... 2
4. Prime Contractor Responsibilities ........................ 3
5. Assignment ............................................... 3
6. Subcontracting ........................................... 4
7. Accounting Records ....................................... 4
8. Right to Audit ........................................... 4
9. Indemnification .......................................... 5
10. Bonds and Insurance Requirement .......................... 5
11. Order of Precedence ...................................... 6
12. Waiver ................................................... 6
13. Amendments, Modifications ................................ 6
14. Absence of Certain Changes or Events ..................... 6
15. Taxes .................................................... 7
16. Termination .............................................. 8
17. Nondiscrimination ........................................ 8
18. Force Majeure ............................................ 9
19. Prices ................................................... 9
20. Vendor Integrity ......................................... 9
21. Appendices ............................................... 9
22. Dispute ..................................................10
23. Notice ...................................................10
24. General Provisions .......................................11
25. Antitrust ................................................11
26. Effective Date ...........................................11
27. Severability .............................................11
Signatures .......................................................11
Appendices
Appendix A LOTTERY'S Request for Proposals Dated July 15, 1996
Appendix B INTERLOTT'S Proposal to the LOTTERY Dated July 22,
1996
Appendix C Prices and Terms
Appendix D Non-Discrimination Provisions
Appendix E Vendor Integrity Provisions
</TABLE>
<PAGE> 3
AGREEMENT FOR THE
DELIVERY, INSTALLATION, AND MAINTENANCE OF
INSTANT TICKET VENDING MACHINES
I. RECITALS
THIS AGREEMENT is made and entered into as of the 15th day of November,
1996, by and between the Minnesota State Lottery (hereinafter referred to as
the "Lottery"), and International Lottery, Incorporated, a duly organized
corporation (hereinafter referred to as "INTERLOTT"), authorized to conduct
business within Minnesota with offices at 6665 Creek Road, Cincinnati, OH 45242
and having Federal Employer Identification Number 31-1297916, and a Minnesota
Tax Identification Number 2904488.
WHEREAS, the LOTTERY has as one of its responsibilities the operation
and management of the LOTTERY, in accordance with the provisions of Minnesota
Statutes, Chapter 349A, and;
WHEREAS, under the provisions of that Law, the LOTTERY has the
authority to pay costs incurred in the operation and administration of the
LOTTERY, including costs resulting from contracts entered into for promotional,
advertising or operational services, or for the purchase of lottery materials;
and,
WHEREAS, the LOTTERY has the authority to expend monies from the
Lottery Fund, Operations Account, to pay the expenses of the operation of the
LOTTERY; and,
WHEREAS, the LOTTERY is in need of Instant Ticket Vending Machines
(ITVMs), as more specifically set forth in its Request for Proposal ("RFP")
dated September, 1996, attached hereto and made a part hereof as Appendix A;
and
WHEREAS, INTERLOTT submitted a proposal for the delivery, installation
and maintenance of the ITVMs, dated October 21, 1996, in response to the RFP
("INTERLOTT's Proposal") attached hereto and made a part hereof as Appendix B,
and has represented that it is qualified by training and experience to perform
the required services in the manner and on the terms and conditions set forth
herein; and
WHEREAS, the Director of the Lottery (hereinafter referred to as the
"DIRECTOR") on behalf of the LOTTERY, has selected the Proposal of INTERLOTT as
responsive to the requirements of the LOTTERY, and desires to enter into an
Agreement for product and services as described herein.
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II. AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual promises hereinafter set forth, and intending to be legally bound, the
parties hereto agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings as
set forth below.
A. DIRECTOR - the Director of the Minnesota State Lottery.
B. LOTTERY - the Minnesota State Lottery.
2. TERM
The term of this Agreement shall begin on December 1, 1996 and shall end
three (3) years from the date of acceptance of each ITVM (equipment
installed and tested). The contract may be extended for two (2), one
year terms at the discretion of the Lottery.
3. WORK STATEMENT
INTERLOTT agrees it shall provide the following products and services:
A. deliver to the LOTTERY in Eagan, Minnesota, for use by the
Lottery, ten (10), 12-Game ITVMs (Model TTS 12000);
B. assist with installation of the ITVMs and provide training to
retailer;
C. each ITVM provided to the LOTTERY under this agreement will
include proof of quality assurance testing (QA/48) as stipulated
in the INTERLOTT's response;
D. each ITVM provided will have semi-annual preventative maintenance
provided by INTERLOTT;
E. ITVMs provided by INTERLOTT under a lease include a
complete maintenance program. INTERLOTT agrees to promptly
replace, at its expense, any defective part or mechanism and will
provide Field Service Representatives to maintain the ITVMs
during regular business hours (8:00 AM - 6:00 PM), five days a
week. Initial calls for service will be attempted to be resolved
over the phone. If ITVMs
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<PAGE> 5
still require service, a Field Service Representative will be
on-site within twenty four (24) hours. (note: As the number
of ITVMs increase, the response time may need to be adjusted
accordingly.)
F. provide all replacement parts and equipment, and provide all
consumable supplies for leased ITVMs.
G. title of the ITVMs shall remain with INTERLOTT at all times
throughout the life of this agreement and subsequent to the
termination of this agreement.
H. Provide signage for each ITVM in a format approved by the
LOTTERY.
4. PRIME CONTRACTOR RESPONSIBILITIES
INTERLOTT shall be the prime contractor, and, as such, is responsible
for all contractual activities performed under this Agreement whether or
not INTERLOTT performs them. INTERLOTT shall be the sole point of
contact with regard to contractual matters, including payment of any or
all charges under this Agreement. The relationship of INTERLOTT to the
LOTTERY is that of an independent contractor. No principal/agent
relationship or employer/employee relationship is contemplated or
created by the parties to this Agreement, except as expressly provided.
5. ASSIGNMENT
INTERLOTT is prohibited from assigning, transferring, or otherwise
disposing of this Agreement or any section or portion thereof, its
rights, title, or interest therein, nor may it execute such agreement
to any other person, company, corporation, or entity without the
previous written consent of the LOTTERY. The LOTTERY shall allow
INTERLOTT to assign payments under this contract for the purpose of
third party financing to:
Princeton Capital Finance Company
38 Washington Rd.
Princeton Junction, NJ 08550
Future assignment or sub-assignments shall be subject to prior written
consent of the LOTTERY.
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<PAGE> 6
6. SUBCONTRACTING
No subcontracting is permitted without the express, written approval
of the LOTTERY. The LOTTERY reserves the right to require INTERLOTT to
replace, at no increase in the contract price or extension of the time
for INTERLOTT'S performance, subcontractors found to be unacceptable to
the LOTTERY. INTERLOTT is totally responsible for adherence by
subcontractors to all provisions of the Agreement. Any change in
subcontractors or in the location of facilities at which work is to be
performed as part of the Agreement must be approved by the LOTTERY in
writing prior to such change.
7. ACCOUNTING RECORDS
INTERLOTT shall maintain, in accordance with generally accepted
accounting principles, all pertinent books, documents, financial and
accounting records and evidence pertaining to the Agreement to the
extent and in such detail as necessary to document all net costs,
direct and indirect for which payment is claimed.
Such financial and accounting records shall be made available for
inspection and copying, upon request, to the LOTTERY, its designees, or
any authorized agency of the State of Minnesota at any time during the
contract period and any extension thereof, and for three years from
expiration date or final payment under this Agreement, whichever is
later in time.
8. RIGHT TO AUDIT
Subject to execution by the LOTTERY, or its designee, of INTERLOTT'S
Confidentiality Statement, INTERLOTT agrees to permit the audit of its
accounting records, as described in Paragraph 7 above, by the LOTTERY
or its designee as permitted or limited by law. All billings, cost,
and financial accounting records, source documentation, data systems,
programs, applications, project planning summaries, and field
summaries, will be available for audit, examination inspection and
copying. The LOTTERY reserves the right to perform at its sole
discretion, additional audits, including, but not limited to, audits
of a financial/compliance, economy/efficiency, program results nature,
or limited scope audits, where appropriate. Additionally, the
LOTTERY reserves the right to inspect and copy any of INTERLOTT'S
third-party auditor's reports and management letters.
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<PAGE> 7
9. INDEMNIFICATION
INTERLOTT shall indemnify and hold harmless the LOTTERY, the State of
Minnesota, and its agents and employees, from and against all claims,
damages, losses and expenses, including attorneys' fees, for loss or
injury alleged to have been caused in whole or part by any negligent or
equally or more culpable act or omission of:
(a) INTERLOTT; or,
(b) any subcontractor to INTERLOTT; or,
(c) any person directly or indirectly employed by INTERLOTT or by a
subcontractor to INTERLOTT; or
(d) any person for whose acts or omissions INTERLOTT or
subcontractor to INTERLOTT may be liable in performing
obligations of INTERLOTT under this Agreement, including
situations in which the allegation is made that the alleged
loss or injury was caused in part by an act or omission of any
person or entity indemnified hereunder.
However, in the case of loss or injury caused in part by persons listed
in (a)-(d) above, INTERLOTT'S indemnification shall be limited to its
comparative share.
10. BONDS AND INSURANCE REQUIREMENT
A. SURETY BOND. Within two weeks of execution of this contract,
INTERLOTT shall obtain a surety bond in the amount of five
thousand dollars ($5,000) in a form approved by the LOTTERY to
be in compliance with the terms of this Agreement, such surety
bond to remain in effect throughout the Agreement. The full
amount of the surety bond shall be collected by the LOTTERY
if INTERLOTT defaults in the performance of the Agreement.
A surety bond must be in the form of a policy or certificate
issued by a surety company authorized to do business in
Minnesota. An irrevocable letter of credit or securities may
be filed with the LOTTERY in lieu of a surety bond in the
manner required under Minnesota Statues, Section 349A.07,
subdivision 5.
B. LIABILITY INSURANCE. INTERLOTT shall obtain professional
lability insurance coverage in an amount not less than
$1,000,000.00 and workers compensation coverage in compliance
with Minnesota law,
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<PAGE> 8
and maintain such coverage throughout the term of this
contract. INTERLOTT will provide the LOTTERY with evidence of
this coverage within two weeks of the effective date of this
contract.
11. ORDER OF PRECEDENCE
This Agreement shall be interpreted in the following order of
precedence:
(a) Contract terms.
(b) INTERLOTT'S proposal.
(c) The RFP.
12. WAIVER
The failure of a party to insist upon strict adherence to any term of
this Agreement shall not be considered a waiver or deprive the party of
the right thereafter to insist upon strict adherence to that term or any
other term of the Agreement.
13. AMENDMENTS, MODIFICATIONS
This Agreement may not be modified, amended, or extended, unless in
writing and signed by both parties and any breach or default by a party
shall not be waived or released other than in writing signed by the
other party.
14. ABSENCE OF CERTAIN CHANGES OR EVENTS
INTERLOTT warrants that:
(a) As of the effective date of this Agreement, INTERLOTT has not,
except as disclosed to the LOTTERY
(1) sold, assigned, voluntarily encumbered, granted a
license or sublicense with respect to or disposed of
all or substantially all of its assets, other than in
the ordinary course of its business as conducted on the
date of its proposal;
(2) entered into any contract or commitment except in the
ordinary course of business except for acquisitions
within its business area as conducted on the date of
INTERLOTT'S Proposal which materially and adversely
affects INTERLOTT'S ability to perform its obligations
hereunder;
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<PAGE> 9
(3) changed in any material respect its business policies
or practices which materially and adversely affects
INTERLOTT'S ability to perform its obligations
hereunder;
(4) altered or revised in any way its accounting
principles, procedures, methods or practices which
materially and adversely affects INTERLOTT'S ability to
perform its obligation hereunder;
(5) removed, or caused or permitted to be removed, from any
of its properties any of its assets except in the
ordinary course of business as conducted on the date
of INTERLOTT'S Proposal which materially and adversely
affects INTERLOTT'S ability to perform its obligations
hereunder; or
(6) entered into any other transaction or taken any other
action except in the ordinary course of business as
conducted on the date of its Proposal which materially
and adversely affects INTERLOTT'S ability to perform
its obligations hereunder. Neither the LOTTERY nor
INTERLOTT are aware of any plans of any member of
INTERLOTT'S management, supervisory or key employees
to retire or cease being an employee of INTERLOTT prior
to or within one (1) year following the commencement of
this Agreement which materially and adversely affects
INTERLOTT'S ability to perform its obligation hereunder.
(b) As of the effective date of this Agreement, there has been no
material adverse change in the financial condition, business,
properties, or prospects of INTERLOTT since the date of the
proposal.
If INTERLOTT experiences any changes as outlined in (a) or (b), above
during the period of this Agreement, INTERLOTT shall notify the
LOTTERY, in the manner set forth in paragraph 23 of this Agreement, of
such change at the time the change occurs or is identified, whichever
is later. Failure to notify the LOTTERY of such change will be
sufficient grounds for terminating this Agreement.
15. TAXES
The LOTTERY shall have no responsibility for the payment of any federal,
state or local taxes which become by INTERLOTT or its subcontractors as
a result of this Agreement.
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<PAGE> 10
The LOTTERY reserves the right to offset any state tax liability
against the compensation due INTERLOTT.
16. TERMINATION
This Agreement may be terminated by the DIRECTOR:
(a) If, because of legislative or other governmental changes or
lack of funding, continuation of lottery games shall be
determined by the LOTTERY not to be in the best interests of
the State of Minnesota. Such termination shall be effected by
the LOTTERY sending notice to INTERLOTT, in writing, of its
intention to terminate at least 30 days prior to the
termination date;
(b) By sending to INTERLOTT at least 30 days' notice that it will
terminate this Agreement due to INTERLOTT'S nonperformance or
inadequate performance or other cause unless INTERLOTT
adequately remedies its nonperformance or inadequate
performance or other cause during such reasonable period as the
LOTTERY shall have specified.
(c) Upon the occurrence of any changes, as set forth in paragraph
20 of this Agreement, which the LOTTERY, in its sole discretion
determines to be contrary to the best interests of the LOTTERY
by sending to INTERLOTT at least 30 days' notice prior to the
termination date;
(d) Without cause or for the convenience of the LOTTERY by sending
notice to INTERLOTT at least 3 months prior to termination date.
In the event of termination under subparagraph A or D above, INTERLOTT
shall receive reimbursement for the cost of any materials, services, or
other expenses, reasonably and actually incurred at the time of receipt
of notification of cancellation and not otherwise usable or recoverable
and those costs to be incurred in the removal of INTERLOTT's ITVMs, by
INTERLOTT. INTERLOTT, upon receipt of notice of termination, shall
take all steps necessary to mitigate the costs and expenses payable
under this section.
17. NONDISCRIMINATION
INTERLOTT agrees to comply with all State laws, rules and regulations
involving nondiscrimination on the basis of race, color, religion,
national origin, age or sex. INTERLOTT agrees to submit such reports
of its
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<PAGE> 11
compliance as are required by the LOTTERY. INTERLOTT will require
similar compliance by any subcontractor that will perform any
of the work specified in this Agreement. Appendix D,
Non-Discrimination Provisions, is attached hereto and made a part hereof
as if set forth fully herein.
18. FORCE MAJEURE
A party shall be excused from any breach or default with respect to
this Agreement to the extent that the party was prevented from
performance by reason of anything beyond the party's control and not
reasonably avoidable such as a strike or other labor disturbance, act
of any governmental authority or agency, fire, flood, wind, storm
or any act of God, or the act or omission of any party not controlled
by that party.
Neither INTERLOTT nor the LOTTERY shall be liable to the other for any
delay in or failure of performance under this Agreement due to a Force
Majeure. Any such delay in or failure of performance shall not
constitute default or give rise to any liability for damages. The
existence of such causes of delay or failure shall extend the period
for performance to such extent as reasonably determined by the DIRECTOR
to be necessary to enable complete performance by INTERLOTT if
reasonable diligence is exercised after the causes of delay of failure
have been removed.
19. PRICES
COSTS AND TERMS, Appendix C, is attached hereto, made a part hereof and
incorporated by reference herein.
20. VENDOR INTEGRITY
INTERLOTT warrants that it has complied with the Contractor integrity
provisions as set forth in Appendix E, attached hereto and made a
part hereof as if fully set forth.
21. APPENDICES
The following documents and schedules are hereby made a part of this
Agreement and are included as appendices hereto:
APPENDIX A LOTTERY'S REQUEST FOR PROPOSALS DATED SEPTEMBER, 1996
APPENDIX B INTERLOTT'S PROPOSAL TO THE MINNESOTA STATE LOTTERY
DATED OCTOBER 21, 1996.
APPENDIX C PRICES AND TERMS
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APPENDIX D NON-DISCRIMINATION PROVISIONS
APPENDIX E CONTRACTOR INTEGRITY PROVISIONS
22. DISPUTE
In the event that any dispute arises between the parties with respect
to the performance which is required of INTERLOTT under this Agreement,
the DIRECTOR shall make a determination in writing of his
interpretation and shall send same to INTERLOTT. That interpretation
shall be final, conclusive and unreviewable in all respects, unless
INTERLOTT within thirty (30) days of receipt of said writings delivers
to the DIRECTOR or duly authorized designee a written appeal. The
decision of the DIRECTOR on any such appeal shall be made within 30
days and shall be final and conclusive and INTERLOTT shall thereafter
with good faith and due diligence render such performance as the
DIRECTOR has determined is required of it. INTERLOTT'S options with
respect to any such decision on appeal shall be either (a) to accept
the determination of the DIRECTOR as a correct and binding
interpretation of the Agreement or (b) to make such claims as it may
desire before the appropriate court of competent jurisdiction.
Pending a final judicial resolution of any such claim, INTERLOTT shall
proceed diligently and in good faith with the performance of this
Agreement as interpreted by the DIRECTOR and the Lottery shall
compensate the INTERLOTT pursuant to the terms of this Agreement.
23. NOTICE
The parties agree that all notices given pursuant to the terms of this
Agreement shall be sufficient if in writing and sent by telecopy
facsimile or courier service with receipt acknowledged. All other
communications shall be sufficient if in writing and mailed postage
prepaid first class. Any such notice or communication shall be sent to
the following addresses or such other addresses as may be designated
from time to time by the parties in writing:
(a) As to the LOTTERY: (b) As to INTERLOTT:
Director Mr. David F. Nichols
The Minnesota State Lottery Senior Vice President
2645 Long Lake Road International Lottery, Inc.
Roseville, Minnesota 55113 6665 Creek Road
Fax: (612) 297-7496. Cincinnati, OH 45242
Fax: (513) 792-0272
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24. GENERAL PROVISIONS
This Agreement shall be governed by and construed according to the laws
of the State of Minnesota. This Agreement constitutes the entire
agreement between the LOTTERY and INTERLOTT with respect to delivering
and maintaining the ITVMs. It shall not be amended or modified except
by an instrument in writing duly signed by both parties. Any such
modification or amendment shall be as the parties may mutually agree.
25. ANTITRUST
INTERLOTT hereby assigns to the LOTTERY all claims for overcharges to
goods and services provided in connection with this Agreement resulting
from antitrust violations which arise under the antitrust laws of the
United States or the State of Minnesota.
26. EFFECTIVE DATE
This Agreement shall be effective only upon full and complete execution
by all of the signatories hereto. No party shall have any right to
rely upon any term of this Agreement until all required signatures have
been affixed to this Agreement.
27. SEVERABILITY
If a court of competent jurisdiction determines any portion of this
Agreement to be invalid, it shall be severed and the remaining portions
of this Agreement shall remain in effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
THE MINNESOTA STATE LOTTERY INTERNATIONAL LOTTERY, INC.
By: /s/ George R. Andersen By: /s/ David Nichols
------------------------ ---------------------------
George R. Andersen David Nichols
DIRECTOR Senior Vice President
11
<PAGE> 14
APPENDIX A
RFP FOR INSTANT TICKET VENDING MACHINES
Issued September, 1996
Copies maintained separately by the LOTTERY and INTERLOTT. [Copies available
upon request to LOTTERY.]
<PAGE> 15
APPENDIX B
INTERLOTT'S PROPOSAL
Dated October 21, 1996
[Copies maintained independently by the LOTTERY and INTERLOTT.]
<PAGE> 16
APPENDIX C
PRICES AND TERMS
I. PRICES
A. For the initial lease of ten (10), 12-game ITVMs
(model TTS 12000), based on 36-month lease: Unit cost -
$275.00 per month (includes all supplies and maintenance).
Price also includes a maximum of three (3) machine relocations
per month. Any relocation above the maximum will be done at a
rate of $150.00 per relocation. Total monthly lease: $2,750.00.
B. Additional ITVM units may be leased. Any additional units will
be delivered at a rate agreed to by INTERLOTT and the
LOTTERY. Pricing will be based on the Cost Proposal that was
submitted as part of INTERLOTT'S response to the RFP. Pricing
for additional ITVM units leased for any period less than 36
months will be at rates mutually agreed to by INTERLOTT and the
LOTTERY and prorated based on INTERLOTT'S Cost Proposal.
C. The LOTTERY agrees to pay INTERLOTT for ITVM signage as
provided under Section 3, item H, of the Work Statement.
D. All prices for product shipments are F.O.B. Eagan, Minnesota or
as otherwise agreed by the LOTTERY and INTERLOTT, unless
specifically noted above.
E. Minnesota State Sales Tax will be added to all applicable
products/services listed above and be stated separately on all
invoices.
III. TERMS
Monthly billing for leased ITVMs shall be due and payable by
the LOTTERY to INTERLOTT within 30 days after testing and
acceptance of equipment by the LOTTERY.
<PAGE> 17
APPENDIX D
NONDISCRIMINATION CLAUSE
During the term of this contract, INTERLOTT agrees as follows:
1. INTERLOTT shall not discriminate against any employee,
applicant for employment, independent contractor, or
any other person because of race, color, religious creed,
ancestry, national origin, age, or sex. INTERLOTT shall take
affirmative action to insure that applicants are employed, and
that employees or agents are treated during employment, without
regard to their race, color,religious creed, handicap,
ancestry, national origin, age, or sex. Such affirmative
action shall include, but is not limited to: employment,
upgrading, demotion or transfer, recruitment or recruitment
advertising; layoff or termination; rates of pay or other forms
of compensation; and selection for training. INTERLOTT shall
post in conspicuous places, available to employees, agents,
applicants for employment, and other persons, a notice to be
provided by the contracting agency setting forth the provisions
of this nondiscrimination clause.
2. INTERLOTT shall, in advertisements or requests for employment
placed by it or on its behalf, state that all qualified
applicants will receive consideration for employment without
regard to race, color, religious creed, handicap, ancestry,
national origin, age or sex.
3. INTERLOTT shall send each labor union or workers'
representative with which it has a collective bargaining
agreement or other contract or understanding, a notice advising
said labor union or workers' representative of its commitment
to this nondiscrimination clause. Similar notice shall be sent
to every other source of recruitment regularly utilized by
INTERLOTT.
4. It shall be no defense to a finding of noncompliance with this
nondiscrimination clause that INTERLOTT had delegated some of
its employment practices to any union, training program, or
other source of recruitment which prevents it from meeting its
obligations. However, if the evidence indicates that INTERLOTT
was not on notice of the third-party discrimination or made a
good faith effort to correct it, such factor shall be
considered in mitigation in determining appropriate sanctions.
<PAGE> 18
5. Where the practices of a union or any training program or other
source of recruitment will result in the exclusion of minority
group persons, so that INTERLOTT will be unable to meet its
obligations under this nondiscrimination clause, INTERLOTT
shall then employ and fill vacancies through other
nondiscriminatory employment procedures.
6. INTERLOTT shall comply with all state and federal laws
prohibiting discrimination in hiring or employment
opportunities. In the event of INTERLOTT'S noncompliance with
the nondiscrimination clause of this contract or with any such
laws, this contract may be terminated or suspended, in whole or
in part, and INTERLOTT may be declared temporarily ineligible
for further LOTTERY contracts, and other sanctions may be
imposed and remedies invoked.
7. INTERLOTT shall furnish all necessary employment documents and
records to, and permit access to its books, records, and
accounts by the contracting agency for purposes of
investigation to ascertain compliance with the provisions of
this clause. If INTERLOTT does not possess documents or
records reflecting the necessary information requested, it
shall furnish such information on reporting forms supplied by
the contracting agency.
8. INTERLOTT shall actively recruit minority and women
subcontractors or subcontractors with substantial minority
representation among their employees.
9. INTERLOTT shall include the provisions of this
nondiscrimination clause in every subcontract, so that such
provisions will be binding upon each Subcontractor.
10. INTERLOTT obligations under this clause are limited to
INTERLOTT'S facilities within Minnesota or, where the contract
is for purchase of goods manufactured outside of Minnesota, the
facilities at which such goods are actually produced.
2
<PAGE> 19
APPENDIX E
VENDOR INTEGRITY PROVISIONS
The INTERLOTT states that:
1. INTERLOTT and its employees shall accept no pay, remuneration, or
gratuity of any value: (a) for performance on or information
derived from this project from any party other than the LOTTERY as
described in this Agreement, or (2) from any party under contract to
the LOTTERY or seeking to contract with the LOTTERY with respect to
this project.
2. INTERLOTT and its employees shall not offer or give any gift, gratuity,
favor, entertainment, loan, or any other thing of monetary value to any
LOTTERY employee.
3. INTERLOTT and its employees shall not disclose any information gained
by virtue of this Agreement to any party without the consent of the
Lottery.
4. INTERLOTT and its employees shall take no action in the performance of
this Agreement to create an unfair, unethical, or illegal competitive
advantage for itself or others.
5. INTERLOTT and its employees shall not have any financial or personal
interests other than the interest in this Agreement in any contract,
subcontract, supply agreement, or other financial relationships
relating to this project without the explicit written consent of the
LOTTERY. For purposes of this provisions, interest shall include but
not be limited to any circumstances under which an organization such as
a contractor, professional, or supplier enjoys pecuniary, managerial,
consultant, or other advantages as a result of managerial, cross-
directorship, common partial or complete ownership, stock interests,
contractual, or other common links with another contracting
professional, supplier, or subcontracting organization supplying
services, material, or labor on the same project. Such advantages may
include but are not limited to foreknowledge of other bid proposals,
proposed specification requirements, anticipated time frames, costs,
and any other particular knowledge which tends to provide the
contractor, subcontractor, or supplier with an unfair, unethical, or
illegal competitive advantage over other parties wishing to bid or
contract such services, materials, or labor. Upon learning that any
of the above may occur, INTERLOTT and its employees shall immediately
notify the LOTTERY in writing.
<PAGE> 20
6. For violation of any of the above provisions, the LOTTERY may terminate
the contract with the LOTTERY, receive restitution from the LOTTERY, debar
INTERLOTT, or take any other appropriate action against INTERLOTT.
For purposes of provisions 1 through 6 above, INTERLOTT shall include
construction firms, architects, engineers, consultants, designers, or any other
person or firm that enters into a contract with the LOTTERY.
2
<PAGE> 21
EXHIBIT 10.35
<TABLE>
<S> <C> <C>
PURCHASE ORDER
(MINNESOTA STATE LOTTERY) PAGE 1
BILL TO: MINNESOTA STATE LOTTERY
ATTN: Accounts Payable P.O. Number
2645 Long Lake Road 10230
Roseville, MN 55113-2533
Phone (612) 635-8100 P.O. Date
Fax (612) 297-7498 12/04/96
VENDOR ADDRESS 2321 SHIP TO ADDRESS
INTERNATIONAL LOTTERY, INC. MINNESOTA STATE LOTTERY
dba INTERLOTT, INC. EAGAN WAREHOUSE
6665 CREEK RD 1060 LONE OAK ROAD SUITE 112
CINCINNATI OH 45242 EAGAN, MN 55121
REMIT TO ADDRESS F.O.B. STATE CONT. #
INTERNATIONAL LOTTERY, INC. FOB DESTINATION L-7032
6665 CREEK RD
CINCINNATI OH 45242 PAYMENT TERMS BUYER NO. DELIVERY DATE
1 12/31/99
===========================================================================================================
LINE ITEM NO./ COST ACCT. UNITS UNIT TOTAL
NO. COM. CODE CTR. NO. ORDERED DESCRIPTION UNIT PRICE PRICE
- -----------------------------------------------------------------------------------------------------------
LEASE OF 10 MACHINES AT $275.00/MO/EA,
36 MONTH CONTRACT, INCLUDES SUPPLIES &
MAINTENANCE, DELIVERY & INSTALLATION.
1 103 311 8815 36.00 RENTAL OF MODEL TTS1200 ITVM MO 2750.0000 99000.00
TOTAL TAX: 6435.00
PURCHASE ORDER TOTAL: 105435.00
INSTRUCTIONS TO VENDOR NOTICE TO VENDOR
1. Submit separate invoices (1 original and 2 copies) 1. All deliveries hereunder shall comply
for each Lottery Purchase Order to "BILL TO". in every respect with all applicable
2. Show P.O. Number on invoice and on all tags, laws of Federal Government and/or the
packages and correspondence. State of Minnesota, including the
3. Discount time shall commence to run from the time State Act Against Discrimination,
delivery is made or invoice admitted, whichever is Minnesota Statutes 363 as amended.
later. If test is required, discount time shall
not begin until material has been approved by test.
4. Partial shipments may be invoiced separately.
ORDERED BY DATE I certify that there are sufficient encumbered
MIKE LANGE/GRA funds in the appropriation from which this
purchase is to be made.
RECEIVED BY DATE
/s/ Michael Hardy 12-4-96
--------------------------- ----------------
Dept. Authorized Signature Date
</TABLE>
<PAGE> 1
EXHIBIT 10.36
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PURCHASE ORDER
(GTECH CORPORATION Logo)
PO number/date
55 TECHNOLOGY WAY, WEST GREENWICH, RHODE ISLAND 02417 4500018147 12/04/1996
TELEPHONE (401)292-1000 / FAX 292-4900
Mail invoices to:
ACCOUNTS PAYABLE Vendor Code Taxable Inspection
55 Technology Way []227 NO NO
West Greenwich, RI 02817
To: Confirming to Confirm to
INTERNATIONAL LOTTERY, INC. Please deliver to: Yes ___ JERRY CAIN
6665 CREEK ROAD GTECH Corporation-New Jersey
CINCINNATI, OH 45242 1333 Brunswick Avenue Terms
Trenton, NJ 08638 Terms pay: NET 30 Cur. USD
GTECH Corporation
1372 Main Street Incatermx Ship Via
Coventry, RI 02816 FOB ORIGIN COMMON CARRIER TRUCK
VENDOR Contact
JERRY CAIN See remarks below
Phone 513-792-7000
Contact Person/Telephone
Barry Tedder/401-392-1526
- ---------------------------------------------------------------------------------------------------------------------------------
ITEM MATERIAL REV DESCRIPTION QTY. ORDERED ROM OPEN QTY DATE SCHED. DEPT/ACCT UNIT PRICE NET VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
10 TTS 8000 200,000 PC 200,000 12/04/96 9465.12500101 5,850.00/1 1,170,000.00
===========================================
Total net value excl. tax USD 1,170,000.00
===========================================
- ---------------------------------------------------------------------------------------------------------------------------------
CONDITIONS
1. REFERENCE OUR PURCHASE ORDER NUMBER ON ALL INVOICES, SHIPPING PAPERS, PACKING SLIPS AND By: /s/ 12/4/96
CORRESPONDENCE. ---------------------------
2. ACCEPTANCE IS CONDITIONAL ON THE TERMS STATED ON THE FACE AND REVERSE SIDE OF THIS ORDER. By: /s/ 12/4/96
NO ADDITIONAL TERMS OR CHANGES MAY MODIFY THIS ORDER UNLESS THE BUYER ASSENTS TO SUCH ---------------------------
CHANGES IN WRITING.
3. PLEASE DO NOT OVERSHIP OR SHIP AHEAD OF SCHEDULE. By:
---------------------------
4. THIS ORDER WILL BE ACCEPTED BY VENDOR'S SIGNATURE. PLEASE FAX BACK TO GTECH
AT (401) 392-4931. Vendor Acknowledgment:
---------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.37
Agreement for Instant Ticket Vending Machines
This Agreement for instant ticket vending machines is entered into
between the State of Florida, Department of the Lottery ("Lottery") and
International Lottery, Inc. d/b/a Interlott ("Interlott").
WITNESSETH:
Whereas, the Lottery issued its Request for Proposal number
95/96-025/R for instant ticket vending machines for the Florida Lottery
("RFP"); and
Whereas, pursuant to the RFP, the Lottery has selected Interlott to
provide instant ticket vending machines ("ITVMs") to the Lottery:
Now, Therefore, the Lottery and Interlott agree as follows:
1. Parties. The parties to this Agreement are the State of Florida,
Department of the Lottery and International Lottery, Inc. d/b/a Interlott.
2. Term. This Agreement shall become effective upon execution by the
parties and shall remain in effect for eighteen (18) months, unless sooner
terminated pursuant to the terms of the RFP. This Agreement may be renewed for
two (2) additional one (1) year terms, as provided in the RFP.
3. Incorporation by Reference. The RFP and any addenda thereto and
the technical and cost proposals of Interlott, including letters from Interlott
to the Lottery dated November 20, 1996, and December 23, 1996, are incorporated
by reference and made integral parts of this Agreement. In the event of
conflict between the terms of the documents that are incorporated by reference
and the terms of this Agreement, the Agreement shall prevail.
4. Covenant for Services. Interlott agrees to provide the technical
requirements and services set forth in Section 3 of the RFP except as modified
herein.
(a) Interlott shall lease to the Lottery a total of 500 12 bin ITVMs
(TTS 12000), including LED message display units. In accordance with the
contract negotiations, the terms of the RFP and Interlott's response to the
RFP.
(b) Commencing in January 1997, Interlott will begin installing ITVMs
throughout the State of Florida. A minimum of 150 ITVMs per month will be
deployed, beginning with the first full month following execution of the
contract, in accordance with
<PAGE> 2
instructions provided by the Lottery, until installation of the 500 ITVMs
described above is complete.
(c) Upon completion of installation of an ITVM and training of
retailer personnel, Interlott shall obtain from the retailer and provide to the
Lottery a signed Receipt of ITVM form which shall specify the date upon which
the ITVM is installed and operational.
(d) Maintenance Requirements.
(1) Interlott shall provide a toll-free hotline number
for retailers to report problems with ITVMs in accordance with
Section 3.11.4 of its proposal. Interlott must respond to calls
received between the hours of 6:00 a.m. and 10:00 p.m., ET.
(2) The response time by Interlott for repair calls considered
to be critical shall be six (6) hours on Tuesday through Saturday and
ten (10) hours on Sunday and Monday. Calls reporting any of the
following problems are considered to be critical:
1. The entire ITVM is unable to sell tickets.
2. The bill acceptor on an ITVM is inoperable.
3. Two or more of the bins on an ITVM are inoperable.
4. An ITVM has accepted a counterfeit bill.
(3) All calls other than those described above as
critical shall be considered non-critical. The response time by
Interlott for non-critical calls shall be twelve (12) hours.
(4) Preventive maintenance shall be performed on each ITVM at
least once every six (6) months to maintain maximum uptime.
(5) Notwithstanding the response times described in
subparagraphs (2) and (3) above, it is understood that maintenance
service, and repair service for non-critical calls, is required to be
provided only during the hours of 8:00 a.m.- 5:00 p.m., ET, Tuesday
through Saturday. Repair service for critical calls shall be provided
8:00 a.m. - 5:00 p.m., ET, seven days a week. Response times do not
include hours outside the required service hours.
2
<PAGE> 3
(e) Liability for acceptance of counterfeit or photocopied currency
will be the responsibility of Interlott when such occurrence is formally
reported by a retailer under the provisions of the retailer agreement. The
Lottery reserves the right to require Interlott to replace the bill acceptor on
an ITVM if the ITVM has accepted a counterfeit bill.
5. Commodities.
(a) Interlott shall provide 22 data transmitters to be used for
programming the LED message display units at a cost of $350 each.
Interlott shall also provide 11 copies of the computer software necessary
to operate the data transmitters, at a cost of $80 per copy, and a license
to use the software for as long as the data transmitters are owned by the
Florida Lottery. The delivery schedule and training on the use of the
data transmitters shall be agreed upon by the parties. Interlott shall
invoice the Lottery for the cost of the data transmitters and software
upon their delivery and shall be compensated in accordance with Section
215.422. Fla. Stat.
(b) Interlott shall provide 5 keypad programmers for the LED message
display units at no charge.
6. Compensation. The Lottery agrees to compensate Interlott, for the
initial term of the contract, the sum of $200 per month per ITVM from the
date of installation of the ITVM, as evidenced by the signed Receipt of
ITVM form. For the month in which an ITVM is installed, payment shall be
prorated from the date of installation based on the number of days in the
month. Payment shall be made to International Lottery, Inc., P.O. Box
8500, S-41855, Philadelphia, Pennsylvania 19178. In the event the
agreement is renewed, compensation for the renewal term will be negotiated
by the parties.
7. Contract Terms. General and Specific contract terms as set forth
in Section 1.32 of the RFP are specifically incorporated by reference as
this paragraph 7 of the Agreement.
8. Public Entity Crime Statement. A person of affiliate who has been
placed on the convicted vendor list following a conviction for public
entity crime may not submit a bid on a contract to provide any goods or
services to a public entity, may not submit a bid on a contract with a
public entity for the construction or repair of a public building or
public work, may not submit bids on leases of real property to public
entity, may not be awarded or perform work as a contractor, supplier,
subcontractor, or consultant under a contract with any public entity, and
may not transact business with any public entity in excess of the
threshold amount provided in Section 287.017, for CATEGORY TWO for a
period of 36 months from the date of being placed on the convicted vendor
list.
3
<PAGE> 4
9. Notice to Contractor. The Department shall consider the employment
by any contractor of unauthorized aliens a violation of section 274A(e) of the
Immigration and Nationalization Act. Such violation shall be cause for
unilateral cancellation of this Agreement.
In Witness Whereof, the parties have executed this Agreement for
instant ticket vending machines on the month, day and year shown below.
State of Florida International Lottery, Inc.
Department of the Lottery d/b/a/Interlott
By: /s/ By: /s/
--------------------- -------------------------
Marcia Mann, Ph.D. (Authorized Signature)
David F. Nichols
As its: Deputy Secretary As its: Senior Vice President
----------------- ---------------------
Date: 7 Jan. 97 Date: 1/6/97
------------------- ----------------------
Approved as to legal form
and sufficiency by:
By: /s/ Date: 1/7/97
--------------------- -----------------------
4
<PAGE> 1
EXHIBIT 11
25-Mar-97
<TABLE>
<CAPTION>
INTERNATIONAL LOTTERY, INC.
Computation of earnings per share
Three months ended Year ended
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common 3,210,000 3,210,000 3,210,000 3,207,587
shares outstanding during
the period
Net income $726,384 $430,320 $1,320,597 $1,987,219
Net income per share $0.23 $0.13 $0.41 $0.62
Assuming full dilution:
Shares
Weighted average common 3,210,000 3,210,000 3,210,000 3,207,587
shares outstanding
during the period
Assuming exercise of 2,000 74,291 2,000 35,897
options
Weighted average common 3,212,000 3,284,291 3,212,000 3,243,484
shares outstanding
as adjusted
Net income $726,384 $430,320 $1,320,597 $1,987,219
Earnings per common $0.23 $0.13 $0.41 $0.61
share assuming full
dilution
</TABLE>
<PAGE> 1
EXHIBIT 13
COMPANY PROFILE
International Lottery, Inc. (dba Interlott) designs, manufactures, sells and
services dispensing machines for the lottery, telecommunications and financial
services industries. Founded in 1990, Interlott is the leading provider of
dependable and secure Instant Ticket Vending Machines (ITVMs) for U.S. and
worldwide lotteries. Having applied this dispensing technology to other
products, Interlott continues to offer a full line of Telephone Card Dispensing
Machines (PCDMs) as well as Smart Card Dispensing Machines (SCDMs).
<PAGE> 2
TO OUR SHAREHOLDERS
Dear Fellow Shareholders:
I am pleased to report that your Company continues to expand its role as the
leading supplier of Instant Ticket Vending Machines (ITVMs) to public lotteries
and was awarded contracts to supply ITVMs to four additional state lottery
commissions during 1996. While our emphasis upon leasing (rather than selling)
equipment resulted in a decrease in profitability last year, the recurring
revenue streams which will be generated by lease contracts and related
servicing activities should enhance future profitability and shareholder value.
Despite lower net income and earnings per share, cash flow from operations (net
income + depreciation/amortization) increased to a record $5,222,985 ($1.63 per
share) last year, compared with $4,969,766 ($1.55 per share) in 1995.
During 1996, we were proud to announce contracts for initial deployment
of our ITVMs in the states of Colorado, Florida, Minnesota, and New Jersey.
Early in 1997, Kansas became the twentieth state lottery to select Interlott's
equipment for the dispensing of "instant" lottery tickets. Fifteen of these
states either lease Interlott equipment or contract with the Company to service
and maintain their ITVMs. Continued requests for information regarding our
ITVMs and Pull Tab Dispensing Machines (PTVMs) suggest that 1997 should provide
opportunities to further expand our customer base and increase the deployment
of additional machines under existing contracts.
While demand for Phone Card Dispensing Machines (PCDMs) expanded at a
slower-than-expected pace during 1996, the growing popularity of prepaid long
distance calling cards, combined with an increased number of active accounts
and inquiries, reinforces our belief that the PCDM market should develop into a
significant source of revenues and earnings for Interlott. We intend to
aggressively pursue additional PCDM business in 1997.
Interlott's management regularly solicits input from current and
prospective purchasers and lessees of our equipment, so that we can enhance the
Company's proprietary dispensing technologies and provide the finest customer
service in the industry. This philosophy of "listening" to the marketplace led
to our development of a new line of space-saving ITVMs for convenience and
grocery stores during the second half of 1996. We are highly encouraged by the
number of state lotteries which have expressed an interest in these new
products. Overall, our research and development efforts resulted in the
introduction of thirteen variations of our dispensing machines last year.
This year, our goals are to (1) further leverage Interlott's position
as a premier provider of innovative dispensing technologies and products to a
variety of industries and (2) continue to expand our annuity of future
revenues/earnings through the aggressive solicitation of additional leasing
contracts.
On behalf of management and the Board of Directors, I would like to
express our appreciation for the continued support of Interlott's employees,
customers, vendors, and shareholders. I look forward to reporting upon further
progress during 1997.
/s/ L. Rogers Wells, Jr.
- --------------------------------
Chairman of the Board and CEO
1
<PAGE> 3
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
=========================================================================================================================
Jan. 2 Dec.31 Dec. 31 Dec. 31 Dec. 31
1993 1993 1994 1995 1996
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues
Machine sales $ 951,536 3,688,528 40,650 9,746,339 5,596,698
Machine leases 1,014,991 3,335,420 6,093,528 9,132,132 11,766,623
Other 51,102 199,785 250,442 435,137 1,235,368
Net revenues 2,017,629 7,223,733 6,384,620 19,313,608 18,598,689
Net income (loss) (2,323,444) 276,907 (932,100) 1,987,219 1,320,597
Net income (loss) per share(1) (2.62) 0.13 (0.32) 0.62 0.41
Depreciation and amortization 768,474 1,028,844 1,884,855 2,982,547 3,902,387
Leased ITVMs, less
accumulated depreciation 2,783,200 4,556,743 8,392,946 10,779,929 10,940,398
Total assets 5,082,148 10,236,989 15,020,321 20,483,686 20,992,733
Total debt 5,082,796 10,750,614 5,398,103 9,040,784 7,715,140
Redeemable preferred stock 1,335,000 1,335,000 1,335,000 1,335,000 1,335,000
=========================================================================================================================
</TABLE>
(1) Reflects the weighted average number of shares outstanding for the
respective periods, taking into account a 21.5 to 1 split of Common Stock
effected in March, 1994.
MANAGEMENT'S DISCUSSION & ANALYSIS
OVERVIEW
The Company's revenue base consists of (i) payments from ITVM and PCDM leases,
(ii) sales of ITVMs and PCDMs, (iii) and to a lesser extent, sales of parts for
ITVMs and PCDMs and service agreements. The Company emphasizes leasing rather
than selling ITVMs to lotteries when possible. Leases provide the Company with
a consistent revenue stream, opportunities to generate income on financing, and
the potential to deploy a greater number of ITVMs within a lottery's budget due
to the lower initial cash outlay required by the lottery. Leasing ITVMs also
gives the lotteries the flexibility to enhance their ITVMs in the future with
new technology from the Company. On the other hand, leasing ITVMs requires the
Company to invest capital or otherwise finance the manufacture of ITVMs, unlike
sales of ITVMs which result in the receipt of payment in full upon delivery of
the ITVMs. When the Company sells ITVMs, the Company generally is able to
manufacture and deliver the ITVMs and receive full payment for them before it
must pay for the materials used to manufacture the ITVMs. Nevertheless, the
Company believes that the advantages of leasing ITVMs as described above,
justify the initial capital investment or financing costs required to
manufacture ITVMs for lease.
For similar reasons, the Company emphasizes leasing rather than selling PCDMs
to providers of prepaid telephone cards. As with ITVMs, the Company believes
that the benefits to the Company of leasing PCDMs warrant the initial capital
investment required to manufacture PCDMs. However, the great majority of the
PCDMs deployed to date, have been sold rather than leased.
The Company historically has experienced fluctuations in its financial results
due to its dependence upon a small number of major customers, the unpredictable
nature, timing and results of the lotteries' contract bid and award process,
and the Company's limited operating history. The Company's revenues and capital
expenditures can vary significantly from period to period because the Company's
sales cycle may be relatively long and because the amount and timing of
revenues and capital expenditures depend on factors such as the amount and
timing of awarded contracts, changes in customer budgets and demands, and
general economic conditions. Operating results may be affected by the lead time
sometimes required for business opportunities to result in signed lease or
sales agreements, working capital requirements associated with manufacturing
ITVMs pursuant to new orders, increased competition and the extended time that
may elapse between the award of a contract and the receipt of revenues from the
sale or lease of ITVMs.
RESULTS OF OPERATIONS
The following table presents selected financial information derived from the
Company's statements of operations expressed as a percentage of revenues for
the years indicated.
<TABLE>
<CAPTION>
Year Ended
----------------------------------
Dec. 31 Dec. 31 Dec. 31
1994 1995 1996
----------------------------------
<S> <C> <C> <C>
Revenues
Machine sales 0.6% 50.5% 30.1%
Machine leases 95.4 47.3 63.3
Other 4.0 2.2 6.6
Total revenues 100.0 100.0 100.0
Cost of revenues,
excluding depreciation 31.3 52.3 47.6
Depreciation 27.8 14.7 20.3
Gross margin 40.9 33.0 32.1
Selling, general and
administrative expenses 37.0 18.3 18.6
Research and
development costs 1.5 .8 3.6
Operating income 2.4 13.9 9.9
Interest expense, net 11.2 3.6 3.8
Nonrecurring expenses 5.8 - -
Income (loss) before
income taxes (14.6) 10.3 6.1
Income tax benefit - - 1.0
Net income (loss) (14.6)% 10.3% 7.1%
===================================================================
</TABLE>
The Company recognized revenues from foreign sources of $2,239, $44,332,
and $60,961 for the years ended December 31, 1994, 1995, and 1996, respectively.
6
<PAGE> 4
1995 AS COMPARED TO 1996
Total revenues decreased by $714,919 from $19,313,608 in 1995 to $18,598,689
in 1996, or 4%, due primarily to a $4,149,641 decrease in sales of ITVMs and
PCDMs, offset by a $2,634,491 increase in lease revenues and a $800,231
increase in other revenues. Revenues from sales of ITVMs and PCDMs decreased by
43% from $9,746,339 in 1995 to $5,596,698 in 1996 corresponding to a decrease
of 910 units from 2,164 sold in 1995 to 1,103 ITVMs and 151 PCDMs sold in 1996.
Lease revenues increased by 29% from $9,132,132 in 1995 to $11,766,623 in 1996,
due to leases of ITVMs to the Arizona, Colorado, Georgia, Indiana, Iowa, Maine,
New Hampshire, Ohio, Rhode Island, and Texas Lotteries. The total number of
ITVMs under lease increased by 1,043, or 21%, from 5,072 at December 31, 1995
to 6,115 at December 31, 1996. As a percent of total revenues, lease revenues
were 47% and 63%, while sales revenues were 50% and 30%, in 1995 and 1996,
respectively. The increase in lease revenues and decrease in sales revenues
from 1995 to 1996 is due primarily to the cumulative effect of the incremental
revenue from machines deployed under leases in 1996 added to continuing
revenues from machines deployed under leases in 1995 and prior, combined with
the decrease in the number of units sold in 1996, as compared to the number of
units sold in 1995. This trend reflects the Company's emphasis on leasing of
equipment. Other revenues increased by $800,231 from $435,137 in 1995 to
$1,235,368 in 1996, a 184% increase. This increase is the result of the
continued maintenance revenues from ITVMs deployed under the Maryland and New
York contracts and sales of replacement parts to the Kentucky, Oregon, and West
Virginia Lotteries.
Cost of revenues for machine sales and other decreased by $2,055,814, or 25%,
from $8,108,577 in 1995 to $6,052,763 in 1996. This decrease reflects a
42% decrease in units from 1995 to 1996, partially offset by the increase in the
number of higher priced units sold during 1996. Cost of revenues for leased
ITVMs, excluding depreciation, increased by $846,909 from $1,992,253 in 1995 to
$2,839,162 in 1996, a 43% increase. As a percentage of lease revenues, cost of
revenues for leased ITVMs, excluding depreciation, increased from 22% in 1995 to
24% in 1996. The 27% increase in cost of revenues of leased equipment from 1995
to 1996 was primarily due to an increase in warranty parts' cost and service
subcontract costs resulting from the greater number of machines deployed. Cost
of lease revenues, excluding depreciation, includes all costs of preventive
maintenance and warranties under various service agreements for all ITVMs leased
by the Company.
Depreciation of ITVMs and PCDMs increased by $902,786 from $2,841,279 in 1995
to $3,744,065 in 1996, an increase of 32%. This increase resulted from the
additional leased ITVMs and PCDMs deployed in 1996, as well as the full year of
depreciation on ITVMs and PCDMs deployed in 1995 and prior years.
Selling, general and administrative expenses decreased slightly from
$3,541,302 in 1995 to $3,461,364 in 1996, a decrease of $79,938
or 2%. Selling, general and administrative expenses, as a percentage of
revenues, increased slightly from 18% in 1995 to 19% in 1996.
Research and development costs increased by $520,139, or 358%, from
$145,310 in 1995 to $665,449 in 1996. This increase reflects the continuing
development of the Company's smart card dispensing machine and the initial
development of two variations of the Company's ITVM dispensing technology to
meet the perceived needs of the lottery industry. The increased expenditures
were primarily amounts paid to contractors, in line with the Company philosophy
that the use of contractors does not commit the Company to continuing expenses
at the completion of the project. The Company's operating income decreased by
$849,000 or 32%, from $2,684,887 in 1995 to $1,835,887 in 1996. When revenue is
recognized as a sale, the entire gross margin is recognized in the period of
shipment, whereas the recognition of revenue as a lease spreads the recognition
of the gross margin over the life of the lease. The decrease in operating income
from 1995 to 1996 reflects the decrease in gross margin resulting from an
increase in the revenues reported as leases from 47% of revenues in 1995 to 63%
of revenues in 1996 and the decrease of revenues reported as sales from 50% of
revenues in 1995 to 30% of revenues in 1996.
Net interest expense increased by $10,621, or 2%, from $697,668 in 1995 to
$708,289
Photo: Fan folded lottery tickets
Photo: Close up of bursting mechanism
Interlott IVTMs dispense tickets which are packaged in fan-folded packs, by
means of our patented technology.
7
<PAGE> 5
Photo: Stacks of blank cards
Photo: Close up of ShurShuttle mechanism
Smart cards and phone cards are dispensed by means of our patented technology,
for a variety of end uses.
in 1996. The increase reflects slightly higher average borrowings in
1996 as compared to 1995, offset by slightly lower interest rates.
The Company reported an income tax benefit for 1996 as compared to no tax
provision in 1995. This benefit results from the recognition of the value of
future net operating loss carryovers, offset by the current provision for taxes
on corporate income.
As a result of the above factors, the Company's net income decreased by
$666,622 or 34%, from $1,987,219 in 1995 to $1,320,597 in 1996.
1994 COMPARED TO 1995
Total revenues increased by $12,928,988 from $6,384,620 in 1994 to $19,313,608
in 1995, a 203% increase, due primarily to an increase in sales of ITVMs and
PCDMs. Revenues from sales of ITVMs and PCDMs increased by $9,705,689 from
$40,650 in 1994 to $9,746,339 in 1995 as a result of an increase of 2,156 units
from the 8 units sold in 1994 to 2,164 units sold in 1995. In 1995, the Company
sold 1,991 ITVMs to three lotteries which had funds already approved for
purchase rather than lease of ITVMs before the lotteries issued their requests
for proposal. The Company sold 149 PCDMs to two providers of prepaid telephone
cards which were not interested in leasing the machines even though the Company
presented proposals for leasing. Additionally, the increase in sales of units
was accompanied by an increase in lease revenues of $3,038,604 from $6,093,528
in 1994 to $9,132,132 in 1995, a 50% increase, due to leases of ITVMs to the
Arizona, Georgia, Indiana, Iowa, Maine, New Hampshire, Ohio, Rhode Island, and
Texas Lotteries in 1995. The total number of ITVMs and PCDMs under lease
increased by 1,606 from 3,466 at December 31, 1994 to 5,072 at December 31,
1995. As a percent of total revenues, lease revenues were 95% and 47%, while
sales revenues were 1% and 50%, in 1994 and 1995, respectively. Other revenues
increased by $184,695 from $250,442 in 1994 to $435,137 in 1995, a 74%
increase. This increase is the result of continued maintenance revenues from
ITVMs deployed under the Maryland Lottery contract, the initial maintenance
revenues from the New York Lottery, and sales of replacement parts to the
Kentucky and West Virginia Lotteries.
Cost of revenues for machine sales and other increased by $7,919,935 from
$188,642 in 1994 to $8,108,577 in 1995. Substantially, all of this
increase reflects the increase of 2,156 ITVMs and PCDMs sold from 8 in 1994 to
2,164 in 1995. Cost of revenues for leased ITVMs, excluding depreciation,
increased by $167,046 from $1,825,207 in 1994 to $1,992,253 in 1995, a 9%
increase. As a percentage of lease revenues, cost of revenues for leased ITVMs,
excluding depreciation, decreased from 30% in 1994 to 22% in 1995. This
decrease reflects the impact of the continued revenue stream from prior lease
deployments as well as the effect of spreading overhead costs over a greater
number of leased ITVMs. Cost of lease revenues, excluding depreciation, includes
all costs for preventive maintenance and warranties under various service
agreements for all ITVMs leased by the Company.
Depreciation of ITVMs and PCDMs increased by $1,066,135 from $1,775,144 in
1994 to $2,841,279 in 1995, an increase of 60%. The increase resulted
primarily from the increase in the number of leased ITVMs deployed in
1995, as well as the full year of depreciation on ITVMs leased in 1994.
Selling, general and administrative expenses increased by $1,177,508 from
$2,363,794 in 1994 to $3,541,302 in 1995, a 50% increase. Selling, general
and administrative expenses, as a percentage of revenues, decreased by 19%
from 37% in 1994 to 18% in 1995. This decrease resulted from the increase
in total revenues in 1995 as well as the smaller proportion of lease
revenues to total revenues in 1995.
Research and development costs increased by $52,493 from $92,817 in 1994 to
$145,310 in 1995, a 57% increase. This increase reflects the continuing
development of the Company's prepaid telephone card dispensing machine and
initial development of dispensing technology for smart card dispensing
machines.
The Company's operating income increased by $2,533,960 from $150,927 in 1994 to
$2,684,887 in 1995, an increase of 1,679%. The increase in operating income
from 1994 to 1995 reflects the increase in gross margin resulting from an
increase in revenues reported as sales from 1% of revenues in 1994 to 50% of
revenues in 1995 and the decrease in revenues reported as leases from 95% of
revenues in 1994 to 47% of revenues in 1995.
8
<PAGE> 6
Net interest expense decreased by $15,359 from $713,027 in 1994 to $697,668 in
1995, a 2% decrease. The decrease reflects lower interest rates resulting from
the completion of a new credit facility.
As a result of the above factors, the Company's net income increased by
$2,919,319 from a net loss of $932,100 in 1994 to net income of $1,987,219 in
1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in 1995 and 1996 was $1,340,406 and
$5,446,262, respectively. Net cash used in investing activities in 1995 and
1996 was $5,079,043 and $3,952,392, respectively. Net cash provided by
financing activities in 1995 was $3,642,681, compared to $1,325,644 used in
financing activities in 1996. These amounts reflect net proceeds from
borrowings of $3,642,681 in 1995 and net repayment of borrowings of $1,325,644
in 1996.
The Company's liquidity and capital resources have been impacted by the
Company's decision to use leasing as a means to market its ITVMs and PCDMs.
Leasing generally offers the Company better gross margins than direct sales
agreements. However, leasing inherently requires significantly more capital and
a longer term payout than sales agreements. As of December 31, 1996, the
Company had a total of 6,115 ITVMs and PCDMs under lease.
At December 31, 1995 and 1996, the Company had working capital deficits of
$1,798,381 and $989,430 respectively. These deficits resulted primarily from
financing the ITVMs under lease with short-term debt. The Company's credit
facility is classified as a current debt, both in 1995 and 1996. This
classification reflects the demand clause of the specific notes rather than the
term of the revolving credit line.
At December 31, 1996, the Company was indebted to Princeton Capital
Finance Company (PCFC) in the aggregate principal amount of $7,230,171 pursuant
to a revolving credit agreement entered into as of September 21, 1995. The
facility permits the Company to borrow through September 1998 up to $12,500,000
at the prime interest rate plus 1%. Borrowings under this agreement are
collateralized by all assets of the Company and assignment of proceeds from
lease agreements. No cash dividends may be declared or paid without prior
written approval of PCFC. The Company may not redeem, retire or otherwise
reacquire shares of its stock from shareholders. At December 31, 1996, the
Company had $5,269,829 available under this agreement. Also as of such date, the
Company was indebted to Star Bank in the aggregate principal amount of $5,969 in
connection with a loan made to the Company to finance the purchase of a delivery
van in 1993.
At December 31, 1996, the Company also was indebted to two stockholders
of the Company in the aggregate principal amount of $479,000 incurred to finance
the manufacture of ITVMs. See Note 6 of Notes to Financial Statements.
The Company's capital expenditures totaled $5,329,043 and $3,952,392 for 1995
and 1996, respectively. These amounts include $5,228,262 and $3,904,534 for the
manufacture of machines leased during the respective periods. Other
expenditures represent tooling, fixtures and facility costs necessary for
production. The Company had no material commitments for additional capital
expenditures as of December 31, 1996 other than for the manufacture of ITVMs
and PCDMs for future lease.
At December 31, 1996, the Company had estimated tax net operating loss
carry-forwards of approximately $1,526,000, which are available to offset
future Federal taxable income, if any, through 2009. The utilization of these
carryforwards is subject to certain annual limitations due to ownership changes
in 1992.
The words "expect", "anticipate", "intend", "plan", "believe", "seek",
"estimate" and similar expressions used in this report are intended to identify
forward-looking statements, although this report also contains other
forward-looking statements. Any forward-looking statements in this report are
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Act of 1995. Investors are cautioned that actual results may differ
substantially from such forward-looking statements. Forward-looking statements
involve risks and uncertainties including, but not limited to, continued
acceptance of the Company's products and services in the marketplace,
competitive factors, new products and technological changes, dependence upon
third party vendors, a limited number of customers, political and other
uncertainties related to customer purchases, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS INTERNATIONAL
LOTTERY, INC.
We have audited the accompanying balance sheets of International Lottery, Inc.
as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three year 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 financial position of International Lottery, Inc.,
as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
Louisville, Kentucky
February 21, 1997
9
<PAGE> 7
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------
1995 1996
----------------
<S> <C> <C>
ASSETS (note 4)
Current assets:
Cash $ 360 188,586
Accounts receivable, less allowance for doubtful accounts of
$101,613 in 1995 and $115,425 in 1996 (note 9) 3,824,442 3,217,019
Inventories (note 3 and 15) 4,481,156 5,086,547
Prepaid expenses 337,406 154,254
- --------------------------------------------------------------------------------------
Total current assets 8,643,364 8,646,406
- --------------------------------------------------------------------------------------
Property and equipment:
Leased machines (note 9) 16,968,351 20,872,885
Machinery and equipment (note 5) 261,273 318,360
Building and leasehold improvements 195,225 195,225
Furniture and fixtures 45,724 36,495
- --------------------------------------------------------------------------------------
17,470,573 21,422,965
Less accumulated depreciation and amortization 6,363,587 10,192,638
- --------------------------------------------------------------------------------------
11,106,986 11,230,327
- --------------------------------------------------------------------------------------
Product development rights, net of accumulated amortization of
$366,664 in 1995 and $440,000 in 1996 733,336 660,000
Deferred tax asset (note 12) - 456,000
- --------------------------------------------------------------------------------------
$20,483,686 20,992,733
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 4) $ 8,551,156 7,230,171
Current installments of long-term debt (note 5) 4,659 5,641
Accounts payable 1,024,501 924,213
Accounts payable - related parties (note 7) 113 306,529
Accrued expenses 861,316 1,067,532
Income taxes payable (note 12) - 101,750
- --------------------------------------------------------------------------------------
Total current liabilities 10,441,745 9,635,836
- --------------------------------------------------------------------------------------
Long-term debt, excluding current installments (note 5) 5,969 328
Notes payable - related parties (note 6) 479,000 479,000
- --------------------------------------------------------------------------------------
Total liabilities 10,926,714 10,115,164
- --------------------------------------------------------------------------------------
Series A, preferred stock, $.01 par value, $1.00 stated value,
20,000,000 shares authorized; 1,335,000 shares issued and
outstanding (note 13) 1,335,000 1,335,000
- --------------------------------------------------------------------------------------
Stockholders' equity (notes 2 & 14):
Common stock, $.01 par value, 20,000,000 shares authorized;
issued 3,210,000 shares in 1995 and 1996 32,100 32,100
Additional paid-in capital 10,376,017 10,376,017
Accumulated deficit (2,186,145) (865,548)
- --------------------------------------------------------------------------------------
Total stockholders' equity 8,221,972 9,542,569
Commitments and contingent liabilities (notes 8 and 15)
$20,483,686 20,992,733
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 8
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------
1994 1995 1996
----------------------------
<S> <C> <C> <C>
Revenues (notes 9 and 10):
Machine sales $ 40,650 9,746,339 5,596,698
Machine leases 6,093,528 9,132,132 11,766,623
Other 250,442 435,137 1,235,368
- -------------------------------------------------------------------------------------------
6,384,620 19,313,608 18,598,689
- -------------------------------------------------------------------------------------------
Cost of revenues (notes 7 and 10):
Machines sales and other 188,642 8,108,577 6,052,763
Machine leases 3,588,440 4,833,532 6,583,227
- -------------------------------------------------------------------------------------------
3,777,082 12,942,109 12,635,990
- -------------------------------------------------------------------------------------------
Gross margin 2,607,538 6,371,499 5,962,699
- -------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses (note 7) 2,363,794 3,541,302 3,461,364
Research and development costs 92,817 145,310 665,449
- -------------------------------------------------------------------------------------------
Total operating expenses 2,456,611 3,686,612 4,126,813
- -------------------------------------------------------------------------------------------
Operating income 150,927 2,684,887 1,835,886
- -------------------------------------------------------------------------------------------
Other income (deductions):
Non-recurring expenses (note 11) (370,000) - -
Interest expense (note 7) (758,229) (714,765) (718,642)
Interest income 45,202 17,097 10,353
- -------------------------------------------------------------------------------------------
(1,083,027) (697,668) (708,289)
- -------------------------------------------------------------------------------------------
Income (loss) before income taxes (932,100) 1,987,219 1,127,597
Income tax benefit (note 12) - - 193,000
- -------------------------------------------------------------------------------------------
Net income (loss) $ (932,100) 1,987,219 1,320,597
- -------------------------------------------------------------------------------------------
Net income (loss) per share (notes 1 and 2) $ (.32) .62 .41
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years ended December 31, 1994, 1995 and 1996
----------------------------------------------------
Common Stock Additional
---------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 2,150,000 $21,500 (136,666) (3,241,264) (3,356,430)
Issuance of common stock (notes 2 and 11) 1,052,598 10,526 10,444,627 - 10,455,153
Net loss - - - (932,100) (932,100)
- --------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 3,202,598 32,026 10,307,961 (4,173,364) 6,166,623
Issuance of common stock (note 11) 7,402 74 68,056 - 68,130
Net income - - - 1,987,219 1,987,219
- --------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 3,210,000 32,100 10,376,017 (2,186,145) 8,221,972
Net income - - - 1,320,597 1,320,597
- --------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1996 3,210,000 $32,100 10,376,017 (865,548) 9,542,569
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE> 9
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1994 1995 1996
--------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (932,100) 1,987,219 1,320,597
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,884,855 2,982,547 3,902,387
Non-cash compensation expense 20,000 - -
Deferred income taxes - - (456,000)
(Increase) decrease in accounts receivable 568,279 (2,078,058) 607,423
Increase in inventories (1,431,838) (1,409,852) (605,391)
(Increase) decrease in prepaid expenses 82,645 (189,157) 183,152
(Increase) decrease in other assets (181,117) 214,242 -
Increase (decrease) in accounts payable 240,264 (49,079) (100,288)
Increase (decrease) in accounts payable - related parties (19,898) (204,161) 306,416
Increase in accrued expenses 392,424 86,705 206,216
Increase in income taxes payable - - 101,750
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 623,514 1,340,406 5,466,262
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cost of leased machines (5,599,435) (5,228,262) (3,904,534)
Purchases of property and equipment (118,262) (100,781) (47,858)
Receipts from collateral bonds 100,000 250,000 -
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,617,697) (5,079,043) (3,952,392)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) notes payable, net 362,776 7,051,156 (1,320,985)
Proceeds from long-term debt 1,064,812 - -
Repayments of long-term debt (2,512,690) (3,296,975) (4,659)
Repayment of notes payable to related parties, net (4,267,409) (111,500) -
Net proceeds from issuance of common stock 10,435,153 - -
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,082,642 3,642,681 (1,325,644)
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash 88,459 (95,956) 188,226
Cash at beginning of year 7,857 96,316 360
- --------------------------------------------------------------------------------------------------------
Cash at end of year $ 96,316 360 188,586
- --------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid $ 745,860 696,718 643,822
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1994, 1995, and 1996
1. Summary of Significant Accounting Policies
a. Business Description
International Lottery, Inc. (the Company) was incorporated in February
1990 under the laws of Ohio and was reincorporated under the laws of
Delaware on March 18, 1994, and does business under the name Interlott.
The Company designs, manufactures, leases, sells and services vending
machines for use in connection with public lotteries operated by states
and foreign public entities, as well as for use by providers of prepaid
telephone cards.
b. Inventories
Inventories consist of parts and supplies, and vending machines
assembled or in the process of assembly. Inventories are stated at the
lower of cost or market, with cost determined by the first-in, first-out
method.
c. Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets. The depreciable life utilized for leased
machines is five years. Leasehold improvements are amortized on the
straight-line method over the lease term.
d. Product Development Rights
Product development rights represent the exclusive rights to certain
patents and other related manufacturing technologies to manufacture and
assemble the instant ticket vending machines. The asset is amortized on
the straight-line method over the lower of the remaining life of the
patents or the estimated remaining life of the technology currently in
use. Amortization is calculated over fifteen years. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the asset balance over its remaining life can be recovered
through projected undiscounted future results.
e. Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
f. Revenue Recognition
Revenue is recognized on machine sales during the period in which title
to the machines has passed to the purchaser. Revenue is recognized on
machine leases during the period in which the lease payment becomes due
and is payable to the Company. Any future losses related to lease
cancellations would be recorded in the period such losses become known
and estimable.
g. Research and Development Costs
Research and development costs are charged to expense in the year
incurred.
h. Warranty Costs
Provision for estimated warranty costs on machines sold is recorded at
the time of sale and periodically adjusted to reflect actual experience.
i. Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average number of
common shares outstanding during the year (2,901,108, 3,207,587 and
3,212,000 for the years ended December 31, 1994, 1995 and 1996,
respectively).
j. Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
2. Initial Public Offering
On April 14, 1994, the Company issued an additional 1,050,000 common
shares through its public offering. The proceeds, net of underwriter discount
and offering expenses, were $10,435,153.
3. Inventories
Inventories at December 31, 1995 and 1996 consist of the following:
<TABLE>
1995 1996
-----------------------------------
<S> <C> <C>
Finished goods $1,043,766 1,634,657
Work in process 381,475 322,515
Raw materials and supplies 3,055,915 3,129,375
Total inventories $4,481,156 5,086,547
</TABLE>
4. Notes Payable
In September 1995, the Company entered into a revolving credit facility
with a finance company that permits the Company to borrow through September
1998 up to $12,500,000 at the prime interest rate plus 1.0% (9.25% at
December 31, 1996). Draws against this facility are made in the form of
demand notes. The Company must pay an annual commitment fee of .25% on the
unused portion of the commitment and a monthly usage fee equal to .25% of the
highest outstanding balance during each month. Borrowings under this
agreement are collateralized by all assets of the Company and assignment of
proceeds from lease agreements. No cash dividends may be declared or paid
without prior written approval of the finance company. The Company may not
redeem, retire, or otherwise reacquire shares of its stock from
shareholders. At December 31, 1995 and 1996, the Company had borrowings of
$8,551,156 and $7,230,171 outstanding, respectively, with an additional
$5,269,829 available at December 31, 1996.
5. Long-Term Debt
The Company has the following long-term debt at December 31, 1995 and
1996:
<TABLE>
<S> <C> <C>
Term note payable to a bank with final payment due February 20, 1998,
payable in monthly installments of $448, including interest at a rate of
7.99% per annum. The note is collateralized by automotive equipment. $10,628 5,969
- --------------------------------------------------------------------------------------------------
Less current installments 4,659 5,641
- --------------------------------------------------------------------------------------------------
$5,969 328
- --------------------------------------------------------------------------------------------------
Aggregate principal repayment requirements of long-term debt for the years
ending December 31 are as follows:
- --------------------------------------------------------------------------------------------------
1997 $5,641
1998 328
- --------------------------------------------------------------------------------------------------
Total $5,969
- --------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Notes Payable - Related Parties
The Company has the following notes payable to related parties at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Note payable to a stockholder due in
annual installments equal to twenty-five
percent (25%) of the net profits, if any,
of the Company from its business
operations as reported in the Company's
annual financial statements prepared in
accordance with generally accepted
accounting principles. The payments shall
begin on the first business day of the
fourth month of the Company's fiscal
year, for income tax purposes,
immediately following (1) the payment of
all debts of the Company outstanding as
of September 25, 1992 and (2) the posting
by the Company of retained earnings of a
least $1,000,000 determined in accordance
with generally accepted accounting
principles, and continue on the same day
each year until the principal and unpaid
interest is paid in full. The note
bears interest at the prime rate of Chase
Manhattan Bank of New York (8.25% at
December 31, 1996). The note is
unsecured. $400,000 400,000
Note payable to a stockholder due and
limited to twenty-five percent (25%) of
the net profits of the Company, if any,
from its business operations as reported
in the Company's annual financial
statements prepared in accordance with
generally accepted accounting principles.
The payments shall begin on the first
business day of the fourth month of the
Company's fiscal year, for income tax
purposes, immediately following (1) the
payments of all debts of the Company
outstanding as of September 25, 1992; (2)
the posting by the Company of retained
earnings of at least $1,000,000
determined in accordance with generally
accepted accounting principles; and (3)
payment in full of principal and interest
due by the Company to a stockholder in
the amount of $400,000. The note does not
provide for any interest and is
unsecured. 79,000 79,000
----------------------------------------------------------------------------
$479,000 479,000
Less current position - -
----------------------------------------------------------------------------
$479,000 479,000
----------------------------------------------------------------------------
</TABLE>
7. Related Party Transactions
Accounts payable - related parties are $113 and $306,529 at December 31,
1995 and 1996, respectively, and represent management fees and expenses
payable to a Company owned 100% by the majority stockholder and parts
expenses payable to an entity which is owned by a director.
Amounts expensed related to the Company owned by the majority
stockholder were $186,274, $135,566 and $73,321 for the years ended December
31, 1994, 1995 and 1996, respectively.
The entity owned by a director supplies the Company with certain parts
for its dispensing mechanisms. In addition, on January 13, 1994, the
Company entered into a manufacturing and license agreement with this entity
pursuant to which the Company purchased an exclusive license to make, use
and sell pull-tab lottery ticket dispensing mechanisms produced by this
entity. The Company had purchases from this entity which were charged to
cost of revenues of approximately $1,168,000, $1,848,000 and $1,986,000 for
the years ended December 31, 1994, 1995, and 1996, respectively.
Interest expense arising from notes payable-related parties amounted to
$282,206, $97,018 and $33,085 for the years ended December 31, 1994, 1995
and 1996, respectively.
8. Lease Commitments
The Company leases its office and manufacturing facilities under a
noncancelable operating lease. This lease expires on June 30, 1999, and
requires lease payments of $91,000 a year through expiration. Total rent
expense under this lease approximated $82,800, $91,000 and $91,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
9. Equipment Leases
The Company leases instant ticket vending machines (ITVMs) to ten state
lotteries. The leases generally provide for the lotteries to make monthly or
quarterly payments for rentals of the ITVMs over various lease terms. At
December 31, 1996, the Company had leases with these lotteries for 6,071
machines with a cost of $20,872,885 and accumulated depreciation of
$9,932,487. These machines provide for monthly rental income of
approximately $1,160,000 at December 31, 1996. The Company has a receivable
of approximately $1,795,150 from these customers at December 31, 1996. There
were no contingent rentals included in income during 1994, 1995 or 1996.
Future minimum lease receipts for years ending after December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
----------------------------------------------
<S> <C>
1997 $ 9,326,000
1998 3,182,000
----------------------------------------------
$12,508,000
----------------------------------------------
</TABLE>
10. Customer and Supplier Concentrations
A significant portion of the Company's revenues are derived from a
limited number of state lottery authorities or their representatives for the
lease, sale or service of instant ticket vending machines. For the years
ended December 31, 1994, 1995 and 1996, one customer generated 70%, 55% and
45%, respectively, of the machine lease revenues. While a current lease
contract with this customer expires in June, 1997, the Company is of the
opinion that the remaining minimum lease receipts under such contract plus
the salvage value of the machines' components will be sufficient to recover
the net book value recorded for such machines at December 31, 1996, if the
contract is not renewed. In addition, single state contracts generated 61%,
67% and 69% of the machine sales revenues for the years ended December 31,
1994, 1995 and 1996. Future revenue from machine sales are dependent upon
winning awards in a competitive bidding process.
The Company currently purchases certain components used in its vending
machines, including components used in its burster mechanism and its bill
acceptor mechanism, from single suppliers. The purchase of components from
outside suppliers on a sole source basis subjects the Company to certain
risks, including the continued availability of suppliers, price increases
and potential quality assurance problems. Because other suppliers exist that
can duplicate these components should the Company elect or be forced to use
a different
14
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
supplier, the Company does not believe that any such change in suppliers
would result in the termination of a production contract. However, the
Company could experience a delay of 30 to 60 days in the production of
vending machines should it elect or be forced to use other suppliers for
these components. Any delay of more than 30 to 60 days could adversely
affect the Company's ability to make timely deliveries of vending machines
and to obtain new contracts.
11. Non-Recurring Expenses
During 1994, the Company recorded a $250,000 provision for various legal
claims, including attorneys' fees and costs.
In addition, during 1994, the Company entered into a compensation agreement
with a director for services related to his role as chairman of a board
committee, which evaluated the strategic financial alternatives for the
Company. The total value of the compensation agreement of $120,000 was paid
with a combination of cash and the Company's common stock.
12. Income Taxes
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------------------------------------
1994 1995 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ - - 263,000
Deferred - - (456,000)
- ------------------------------------------------------------------------------------------
Total $- - - (193,000)
- ------------------------------------------------------------------------------------------
A reconciliation of income tax expense benefit in relation to the amounts
computed by application of the U.S. federal income tax rate of 34% to pretax
income (loss) follows:
Federal income tax expense (benefit)
at the statutory rate $(317,000) 676,000 383,000
Increase (reduction) in income taxes resulting from:
Change in the beginning-of-the-year
balance of the valuation allowance
for the deferred tax assets allocated
to income tax expense. 253,000 (713,000) (672,000)
Amortization of product development rights 25,000 25,000 25,000
Officer life insurance 23,000 - -
State and local taxes, net of federal benefit - - 63,000
Other 16,000 12,000 8,000
- ------------------------------------------------------------------------------------------
$ - - (193,000)
- ------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary
differences that give rise to
significant portions of the deferred
tax assets and deferred tax liabilities
at December 31, 1995 and 1996 are
presented below:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 34,000 39,000
Warranty costs 31,000 12,000
Net operating loss carryforwards 678,000 510,000
Other, net (71,000) (105,000)
- -----------------------------------------------------------------
Total gross deferred tax assets 672,000 456,000
Less valuation allowance (672,000) -
- -----------------------------------------------------------------
Net deferred tax asset $ - 456,000
- -----------------------------------------------------------------
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1995,
was $672,000. The net change in the valuation allowance for the years ended
December 31, 1995 and 1996 was a decrease of $713,000 and $672,000,
respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future income, and tax planning
strategies in making this assessment.
At December 31, 1996, the Company has net operating loss carryforwards
for Federal income tax purposes of approximately $1,500,000 which are
available to offset future Federal taxable income, if any, through 2009.
However, due to an ownership change on September 25, 1992, utilization of
these carryforwards is subject to certain annual limitations.
13. Preferred Stock
The Company's preferred stock is nonparticipating and has no rights to
dividends. The holders of the preferred stock are entitled to sell to the
Company all of their shares of preferred stock at a price of $1.00 per share
upon (i) the payment of all debts of the Company outstanding as of September
25, 1992, (ii) the reporting by the Company of retained earnings of at
least $1,000,000 determined in accordance with generally accepted accounting
principles, and (iii) the payment in full by the Company of a promissory
note in the original amount of $400,000 to a related party. Due to the
redemption feature of the preferred stock, it has been classified separately
from stockholders' equity in the Company's balance sheet.
The Company may, at its discretion, redeem all or part of the
outstanding preferred stock at any time. The redemption price for the
preferred stock is $1.00 per share and may be payable in the form of a
promissory note.
15
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. Stock Incentive Plans
In March 1994, the Company and its Board of Directors approved and
adopted the Company's 1994 Stock Incentive Plan and the Company's 1994
Directors' Stock Incentive Plan (collectively, the "Plans"), which became
effective at the date of the initial public offering. The Plans provide for
the issuance of up to 260,000 shares of common stock to officers, employees,
consultants and other supporters of the Company and up to 60,000 shares of
common stock to nonemployee directors of the Company. Stock options are
granted with an exercise price equal to the stock's fair market value at the
date of grant. Options may be exercised subject to a vesting schedule which
provides for the vesting each year for a period of four years subject to the
recipient's continued employment or service to the Company, and must be
exercised within 10 years after that date.
As permitted by SFAS No. 123, the Company applies the intrinsic value
method prescribed by APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the accompanying statements of operations.
A summary of the status of the Company's stock option plans as of
December 31, 1994, 1995, and 1996 and the changes therein for the years then
ended is presented below:
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year -- $ -- 49,975 $11.50 131,725 $ 9.66
Granted 49,975 11.50 81,750 8.54 15,500 7.00
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
-----------------------------------------------------------------------
Outstanding at
end of year 49,975 11.50 131,725 9.66 147,225 9.38
-----------------------------------------------------------------------
Options
exercisable
at year-end -- -- 14,494 10.79 46,926 10.05
-----------------------------------------------------------------------
Weighted-average
fair value
of options
granted during
the year $5.00 $6.22 N/A
-----------------------------------------------------------------------
</TABLE>
Had compensation cost for options granted during 1995 and 1996 been
determined consistent with the fair value methodology of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts presented below:
<TABLE>
<CAPTION>
1995 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $1,987,219 1,320,597
Pro forma 1,898,908 1,307,807
Earnings per share As reported .62 .41
Pro forma .59 .41
----------------------------------------------------------------
</TABLE>
The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is recognized over the options' vesting
period of four years and compensation cost for options granted prior to
January 1, 1995 is not considered.
The fair value of options granted during 1995 and 1996 for purposes of
the accompanying pro forma disclosures is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividends paid, as it has been the Company's policy not to
declare or pay dividends since its initial public offering in 1994 and the
Company does not anticipate paying dividends in the foreseeable future;
expected volatility of 52% based on the calculated volatility of the
Company's stock since its initial public offering; risk-free rates of return
of 7.46% and 6.66%, respectively; and expected lives of 10 years.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Range Weighted-Avg.
of Remaining Weighted-Avg. Weighted-Avg.
Exercise Number Contractual Exercise Number Exercisable
Prices Outstanding Life Price Exercisable Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.38 - 8.63 97,250 10.0 yrs $ 8.30 21,938 $ 8.39
11.50 49,975 8.9 11.50 24,988 11.50
-----------------------------------------------------------------------
147,225 9.6 $ 9.38 46,926 $10.05
-----------------------------------------------------------------------
</TABLE>
15. Commitments and Contingent Liabilities
Purchase Commitments
As of December 31, 1996, the Company had outstanding purchase
commitments for raw materials of approximately $5,518,000, of which
$4,698,000 and $456,000 are used in the manufacturing of instant ticket and
prepaid long distance telephone card vending machines, respectively.
Management intends to fill these orders as machines are produced. While the
market for the instant ticket vending machines has been proven, the prepaid
long distance telephone card market is new and difficult to predict. No
estimate can be made of a range of loss on commitments or inventories that
is reasonably possible should the prepaid long distance telephone card
market not prove successful for the Company.
16
<PAGE> 14
CORPORATE DATA AND
SHAREHOLDER INFORMATION
HEADQUARTERS
International Lottery, Inc.
6655 Creek Road
Cincinnati, OH 45242
(513) 792-7000
INVESTOR INQUIRIES
Chief Financial Officer
6665 Creek Road
Cincinnati, OH 45242
(513) 792-7000
REGISTRAR AND TRANSFER AGENT
First Union National Bank
230 South Tryon Street
Charlotte, NC 28288-1154
DIRECTORS
L. Rogers Wells, Jr.
Chairman of the Board and CEO
Edmund F. Turek
President
Gary S. Bell
Secretary and Treasurer
Kazmier J. Kasper
President, Algonquin Industries, Inc.
a manufacturer of metal and machined parts
H. Jean Marshall
Vice President, Marketing
John J. Wingfield
Mgr., A.G. Edwards & Sons, Inc., Louisville
an investment banking company
W. Whitlow Wyatt
Chairman of the Board and CEO
Altama Delta Corporation
a manufacturer of boots
OFFICERS
L. Rogers Wells, Jr.
Chairman of the Board and CEO
Edmund F. Turek
President
David F. Nichols
Senior Vice President
Gary S. Bell
Secretary and Treasurer
H. Jean Marshall
Vice President, Marketing
Jerome J. Cain
Chief Financial Officer
[Portraits of all officers and board members
L. Rogers Wells, Jr. Edmund F. Turek Gary S. Bell Kazmier J. Kasper H.
Jean Marshall John J. Wingfield W. Whitlow Wyatt David F. Nichols Jerome J.
Cain]
CORPORATE COUNSEL
Alston & Bird LLP
Atlanta, Georgia
Taft, Stettinus & Hollister
Cincinnati, Ohio
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Louisville, Kentucky
The Company's Common Stock has been traded on the American Stock Exchange
under the Symbol "ILI" since the Companys initial public offering of Common
Stock in April 1994. Prior to the initial public offering, there was no
established trading market for the Company's Common Stock. The following
tables show the high and low closing sale prices per share for the Common
Stock as reported by the American Stock Exchange for the periods indicated:
<TABLE>
<CAPTION>
1995 HIGH LOW
<S> <C> <C>
First Quarter 10 7 3/8
Second Quarter 8 1/8 6 1/4
Third Quarter 11 1/4 5 3/4
Fourth Quarter 13 5/8 7 7/16
1996
HIGH LOW
First Quarter 11 8
Second Quarter 12 3/4 10 1/2
Third Quarter 11 6 1/2
Fourth Quarter 8 5/8 6 13/16
</TABLE>
At March 24, 1997, there were 81 stockholders of record and an unknown
number of beneficial owners holding stock in nominee or "street" name. The
Company has paid no cash dividends on its Common Stock and currently intends to
retain all future earnings for use in the development of its business. The
consent of Princeton Capital Finance Company is required before the Company may
pay cash dividends on its Common Stock.
FORM 10-K: A copy of the Company's 1996 Annual Report in Form 10-K, as
filed with the Securities and Exchange Commission, is available, without
exhibits, free of charge to shareholders. Requests should be addressed to:
SHAREHOLDER RELATIONS
INTERNATIONAL LOTTERY, INC.
6665 Creek Road
Cincinnati, OH 45242
The 1997 Annual Meeting will be held at The Best Western Blue Ash Hotel
and Conference Center, Cincinnati, Ohio, on May 8, 1997 at 10:00am, local time.
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors and Stockholders
International Lottery, Inc.:
We consent to incorporation by reference in the Registration Statement No.
333-08999 on Form S-3 of International Lottery, Inc. of our report dated
February 21, 1997, relating to the balance sheets of International Lottery,
Inc. as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1996, and the related
schedule, which report appears in the 1996 annual report to shareholders, which
is incorporated by reference in the December 31, 1996 Form 10-K of
International Lottery, Inc.
/s/
---------------------
KPMG Peat Marwick LLP
Louisville, Kentucky
March 27, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of International Lottery, Inc. for the fiscal year ended
December 31, 1996, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
This 24th day of March, 1997.
/s/ Gary S. Bell
---------------------------
Gary S. Bell
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of International Lottery, Inc. for the fiscal year ended
December 31, 1996, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
This 24th day of March, 1997.
/s/ Kazmier J. Kasper
---------------------------
Kazmier J. Kasper
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of International Lottery, Inc. for the fiscal year ended
December 31, 1996, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
This 24th day of March, 1997.
/s/ John J. Wingfield
---------------------------
John J. Wingfield
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints L. Rogers Wells, Jr. and Jerome J. Cain and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, to sign the Annual
Report on Form 10-K of International Lottery, Inc. for the fiscal year ended
December 31, 1996, and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the American Stock Exchange, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
This 24th day of March, 1997.
/s/ W. Whitlow Wyatt
---------------------------
W. Whitlow Wyatt
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.<F1>
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 189
<SECURITIES> 0
<RECEIVABLES> 3,217
<ALLOWANCES> 0
<INVENTORY> 5,087
<CURRENT-ASSETS> 8,646
<PP&E> 21,423
<DEPRECIATION> 10,193
<TOTAL-ASSETS> 20,993
<CURRENT-LIABILITIES> 9,636
<BONDS> 479
1,335
0
<COMMON> 32
<OTHER-SE> 9,511
<TOTAL-LIABILITY-AND-EQUITY> 20,993
<SALES> 5,597
<TOTAL-REVENUES> 18,599
<CGS> 0
<TOTAL-COSTS> 16,763
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 708
<INCOME-PRETAX> 1,128
<INCOME-TAX> (193)
<INCOME-CONTINUING> 1,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,321
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line item on the
condensed balance sheet and statement of operations are reported as 0 herein.
Notes and accounts receivable are reported net of allowances for doubtful
accounts in the condensed balance sheet.
</FN>
</TABLE>
