-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N+iMt0GU8sFg6nNxPP4XIMm8Wvdl9zgqThiDy5WsPwOhTg8XU9PQj+kfRzXMxOX+ +qGWYHxQ2hGcEO7jnxqjZA== 0000936392-00-000181.txt : 20000331 0000936392-00-000181.hdr.sgml : 20000331 ACCESSION NUMBER: 0000936392-00-000181 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS INC CENTRAL INDEX KEY: 0000354813 STANDARD INDUSTRIAL CLASSIFICATION: CALCULATING & ACCOUNTING MACHINES (NO ELECTRONIC COMPUTERS) [3578] IRS NUMBER: 953276269 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-10294 FILM NUMBER: 588828 BUSINESS ADDRESS: STREET 1: 2131 FARADAY AVE CITY: CARLSBAD STATE: CA ZIP: 92008-7297 BUSINESS PHONE: 6199314000 MAIL ADDRESS: STREET 1: 2131 FARADAY AVE CITY: CARLSBAD STATE: CA ZIP: 92008 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL TOTALIZATOR SYSTEMS INC DATE OF NAME CHANGE: 19920703 10KSB40 1 FORM 10-KSB405 YEAR ENDED DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-KSB ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 0-10294 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3276269 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2131 FARADAY AVENUE CARLSBAD, CALIFORNIA 92008-7297 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (760) 931-4000 REGISTRANT'S HOME PAGE HTTP://WWW.ILTS.COM SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: (TITLE OF CLASS) COMMON SHARES Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 23, 2000 was approximately $6,184,299. Revenues for the year ended December 31, 1999 were $5,650,000. Number of common shares outstanding at March 23, 2000 was 12,943,000 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1999 Annual Report to Stockholders of the Registrant: Part II Portions of the Proxy Statement for 2000 Annual Meeting of Stockholders: Part III Transitional Small Business Disclosure Format............Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PART I ITEM 1. DESCRIPTION OF BUSINESS..................................... 1 General..................................................... 3 DATAMARK(R) and Intelimark(TM)Terminals..................... 3 Central System Wagering Application Software -- DataTrak(R)..................................... 4 Lottery Systems Service Agreements.......................... 4 Spare Parts/Software Support Agreements..................... 5 Revenue Sources............................................. 5 Product Development......................................... 5 Backlog..................................................... 5 Marketing and Business Development.......................... 6 Manufacturing and Materials................................. 6 Competition................................................. 7 Employees................................................... 7 Patents, Trademarks and Licenses............................ 7 Regulation.................................................. 7 Dependence Upon a Few Customers............................. 7 Year 2000................................................... 8 Forward-Looking Statements.................................. 8 Seasonality................................................. 8 Working Capital Practices................................... 8 Environment Effects......................................... 8 Export Sales................................................ 8 ITEM 2. DESCRIPTION OF PROPERTY..................................... 8 ITEM 3. LEGAL PROCEEDINGS........................................... 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 9 EXECUTIVE OFFICERS OF THE REGISTRANT........................ 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS......................................... 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS........................ 10 ITEM 7. FINANCIAL STATEMENTS........................................ 10 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 10 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT......................................................... 11 ITEM 10. EXECUTIVE COMPENSATION...................................... 11 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 11 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 11 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................ 11
2 3 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Registrant designs, manufactures, sells, manages, supports and services computerized wagering systems and terminals for the global pari-mutuel and on-line lottery industries. The Registrant also provides facilities management services to global on-line lottery owners. The Registrant's technology can be used in other transaction-processing applications, such as keno gaming and automated ticket printer/readers for toll turnpike systems. The Registrant's wagering systems include the DATAMARK(R) and Intelimark(TM) family of point-of-sale terminals, a central computer installation that is comprised of Compaq computer hardware and a commercially available operating system used in conjunction with ILTS' DataTrak(R) application software, and the required communication network to interface the terminals to the central computer installation. System features include real-time processing of data received from multiple locations, hardware redundancy and complete communications redundancy in order to provide the highest level of fault tolerant operation. The point-of-sale, proprietary component of the Registrant's systems are the DATAMARK(R) and Intelimark(TM) family of ticketing terminals. These terminals are compact, reliable, Intel microprocessor-based units, which scan marksense slips or interpret operator-input data in order to produce a thermal ticket receipt to be retained by the customer. The Registrant sells the DATAMARK(R) and/or Intelimark(TM) terminal separately or as part of a turnkey wagering application system or the Registrant will modify a terminal's features or configurations and central system software to meet specific customer requirements. The Registrant's proprietary central system software application, DataTrak(R), controls the overall lottery operation. This system is the result of years of evolution of Registrant's first central system that was originally developed by The Hong Kong Jockey Club (HKJC), one of the world's largest horseracing and lottery operators in the world. The required communication network to interface the DataTrak(R) central system and the wagering terminals is designed by ILTS to best fit each customer's specific application using commercially available hardware and software. DATAMARK(R) AND INTELIMARK(TM) TERMINALS The Registrant has developed several models of both terminals to meet the varied requirements of different wagering applications. All are PC compatible, Intel microprocessor-based and have a compact, lightweight design for countertop operation. The terminals are approximately 12" deep, 12" wide, 10" high, weigh approximately 27 pounds, and are accompanied by a built-in or external display and keyboards. The DATAMARK(R) models utilize a patented, compact, single ticket path which allows the terminal to print and read from both sides of the same ticket without operator intervention. The terminal utilizes quick, quiet thermal printing that does not require an inked cartridge or ribbon as do impact, dot matrix printers, thereby improving print quality and reliability, and reducing maintenance expenses. The terminals use either pre-cut thermal coated tickets or thermal coated roll stock tickets or both. Some models will sequentially read and print up to 50 tickets entered at one time through the use of a "bulk feed" option. The DATAMARK(R) terminal is best suited for application in the racing industry, and is capable of issuing tickets for standard betting, as well as for any feature pool wagers currently being used in pari-mutuel wagering. The terminals are designed to facilitate multiple bets on one ticket and multiple selections for each bet. In addition, the bettor marks bets on a pre-printed playslip, which is then read optically by the terminal, the amount wagered is calculated and the bet details printed on the back of the same ticket. Because the ticket is prepared away from the pari-mutuel clerk's window, betting transaction time is reduced, efficiency of the operation is improved and the bettor obtains more privacy in the betting transaction. 3 4 The newly developed Intelimark(TM) terminal has been specifically designed to make use of a commercially available point-of-sale terminal computer with custom designed reader/printer mechanisms as an integral part of the single unit design. A variant of the DATAMARK(R) mechanism has been developed in order to meet the requirements of racing applications. In the case of lottery applications, the reader/printer is designed to use a commercially available optical mark sense reader, and roll stock thermal printer. This configuration can be offered with touch screen color SVGA display, or integral keyboard, or both depending on the requirements of the customer. All of these configurations have been developed to provide a very cost competitive terminal for the lottery application. Both the horseracing and lottery applications that utilize the touch screen make use of the ILTS patent pending graphical user interface for the placement of wagers. This interface greatly simplifies and reduces the time necessary to place a bet. Registrant is a registered Value-Added Reseller (VAR) of point-of-sale terminal equipment manufactured by Epson America, Inc. CENTRAL SYSTEM WAGERING APPLICATION SOFTWARE -- DATATRAK(R) The nucleus of each wagering system is the central computer installation that receives information from ticket-issuing terminals, accumulates wagering data, calculates odds and payouts, and provides a means of database management in order to distribute information and allow generation of management reports. In cooperation with the customer, the Registrant designs the configuration of the central computer installation to provide the required games, fault-tolerant operation, high throughput and security. The DataTrak(R) system has been developed by ILTS to make use of commercially available software operating systems and software programs to facilitate modification at a much lower cost to the customer than in the past where proprietary software limited the customer's ability to perform changes to the system. Each central computer installation typically includes a client-server computer configuration that uses Alpha computers manufactured by Compaq. ILTS is a registered VAR of Compaq computer equipment. Certain of the Registrant's customers presently use software in their pari-mutuel systems that is proprietary to the Registrant. The Registrant owns non-exclusive rights to permanently use the central system software developed by HKJC for use and modification in its pari-mutuel wagering and lottery systems. Under the terms of the amended license, the Registrant has use of the HKJC software royalty-free for all systems sold after May of 1999. The Registrant has made significant modifications and enhancements to the HKJC software. Chief among them is the migration of the system to a client-server architecture using Compaq computer hardware, the incorporation of Sybase relational database software, and the utilization of a Windows operating system for management information and control. The entire application is called DataTrak(R). These modifications and enhancements provide scalability to the system so that each customer's unique requirements can be met in a most cost effective way, the configuration can be changed easily as required, and the customer is able to process data within a familiar software user interface environment. The Registrant has also added numerous new features to the base software, including instant ticket validation and player registration. The system has the following characteristics: rapid processing; storage and retrieval of transaction data in high volumes and in multiple applications; the ability to down-line load, i.e., to reprogram the wagering terminals from the central computer installation via the communications network; a high degree of security and redundancy to guard against unauthorized access and tampering and to ensure fault tolerant operation without data loss; and a comprehensive management information and control system. LOTTERY SYSTEM SERVICE AGREEMENTS On September 8, 1999, the Registrant entered into agreements with Interactive Flight Technologies, Inc. (now named Global Technologies Limited (GTL)) under which the Registrant is supplying an on-line lottery system and facilities management services to GTL for operation of lotteries on behalf of charities throughout the United Kingdom. The lottery will operate under a license granted by the Gaming Board of Great Britain to 4 5 Inter Lotto (UK) Ltd., and an operating agreement between Inter Lotto and GTL, which has a substantial minority ownership interest in Inter Lotto. Under the terms of the agreement, the Registrant is providing a complete DataTrak(R) on-line lottery system including central system hardware and software as well as a minimum of 3,500 DATAMARK(R) XClaim terminals, with potential for expansion up to 15,000 terminals. In addition, under a separate facilities management agreement, the Registrant, through a United Kingdom subsidiary, is providing a full range of services in connection with the lottery system, including installation, training, computer operations, network management and field maintenance. The facilities management agreement has a base term of eight years with options for extensions. The lottery is targeted to launch operations in the first quarter of 2000. SPARE PARTS/SOFTWARE SUPPORT AGREEMENTS In addition to sales of terminals and systems, the Registrant realizes ongoing revenue from the sale of spare parts for use in the maintenance of its terminals, of which approximately 39,000 have been delivered to date. The Registrant also enters into contracts with its customers to provide software modifications, upgrades and support for its installed products. REVENUE SOURCES The following table sets forth the revenue for the periods indicated attributable to different applications of the Registrant's technology:
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Racing Products and Services.............. $1,658 $ 6,733 $ 2,443 $11,183 $10,448 Lottery Products and Services............. 3,402 5,705 7,729 5,105 7,680 Other..................................... 590 734 654 305 513 ------ ------- ------- ------- ------- Total........................... $5,650 $13,172 $10,826 $16,593 $18,641 ====== ======= ======= ======= =======
PRODUCT DEVELOPMENT The Registrant's ability to compete successfully depends in part upon its ability to meet the current and anticipated needs of its customers. To that end, the Registrant devotes a significant portion of its research and development activity to refining and enhancing the features of existing products, systems and software. In 1999, the Registrant spent approximately $1.2 million on engineering, research and development, as compared to $1.5 million in 1998. The Registrant has recently developed a product called the Intelimark(TM), a terminal based on commercially available hardware and software integrated with a reader and printer mechanism to provide the standard terminal features with the following enhancements: the option for a full color SVGA touch screen user interface; optional keyboard configurations to allow fast operator input; and optional peripherals such as magnetic stripe readers, smart card readers, and barcode readers which can be incorporated into the configuration. The unit currently utilizes the Pentium class processor, but is scaled to accommodate future processors as the need for additional capability arises. The unit provides faster processing, higher resolution thermal printing, and the ability to utilize cost effective, commercial off-the-shelf PC peripherals. The Registrant has been certified since February 1996 under ISO 9001 registration. This certification demonstrates quality in design development and manufacturing under ISO standards. BACKLOG The backlog of orders for its products and services believed by the Registrant to be firm, amounted to approximately $16.4 million as of December 31, 1999, as compared to a backlog of approximately $3.6 million 5 6 as of December 31, 1998. Of such backlog at December 31, 1999, approximately $16.4 million is expected to be filled during 2000. See DESCRIPTION OF BUSINESS, Dependence Upon A Few Customers. MARKETING AND BUSINESS DEVELOPMENT Management believes that the Registrant's continuing ability to obtain and retain contracts for its wagering systems and terminals is directly related to its reputation in its various fields of expertise. Because of its reputation, the Registrant often receives unsolicited inquiries from potential customers. The Registrant also learns of new business opportunities through the close contacts that its personnel maintain with key officials in the international horse racing and lottery industries. Contracts to provide products to the horse racing and lottery industries often are awarded through a competitive bidding process which can begin years before a contract is awarded and involves substantial expenditures by the Registrant. Through its contacts with existing customers and others in these industries, the Registrant often becomes aware of prospective projects before the customer circulates a request for proposal. If the Registrant is interested in the project it typically submits a proposal, either before or after the customer circulates a formal request for proposal, outlining the products it would provide and the services it would perform. If the proposal is accepted, the Registrant and its customer negotiate and enter into a contract on agreed terms. The Registrant's marketing efforts are carried out by the Registrant's professional marketing and engineering staff and frequently involve other executive officers of the Registrant. Marketing of the Registrant's products and services throughout the world is often performed in conjunction with consultants with whom the Registrant contracts, from time to time, for representation in specific market areas. In addition, the Registrant has entered into an agreement with eLottery, Inc. to jointly market and develop an interface for allowing the Registrant's lottery systems to process eLottery's web-based retailing of lottery tickets. The Registrant's success depends in large part on its ability to obtain new contracts to replace its existing contracts. The Registrant currently has proposals outstanding to supply systems, terminals or components for use in the pari-mutuel wagering industry and for lotteries in various foreign countries. In addition to contract sales for terminals and systems, the Registrant has had discussions with both new and existing customers regarding supplying products for their operations and expects to bid for additional contracts in the future. Because the realization of revenue from these prospects is dependent upon a number of factors, including the bidding process and product development, there can be no assurance that the Registrant will be successful in realizing revenue from any of these activities. MANUFACTURING AND MATERIALS In March 1999, the Registrant contracted with Anacomp, Inc. to provide contract manufacturing for all DATAMARK(R) terminals. Anacomp is located in nearby Poway, California, and has additional flexibility in their manufacturing facility. The facility has over 200,000 square feet of floor space under one roof, and has the capacity to manufacture nearly 100 terminals per day. The Registrant also benefits from the volume discounts on raw materials and subassemblies that Anacomp receives from its vendors due to the already high volume of parts purchased by them. Anacomp is currently manufacturing 3,675 terminals that are being shipped to GTL in England, and 815 terminals that are being shipped to Ab Trav Och Galopp (ATG) in Sweden. Manufacture consists principally of the assembly of parts, components and subassemblies (most of which are designed by the Registrant) into finished products. The contract manufacturer will purchase many parts, components and subassemblies necessary for the terminals and the systems and assemble them into finished products. These products and purchased computers are then integrated with standard peripherals purchased by the Registrant to construct racing and lottery systems. The Registrant generally has multiple sources for the various items purchased from vendors, but some of these items are state-of-the-art and could be, from time to time, in short supply. Certain other items are available only from a single supplier. For the year ended December 31, 1999 no single vendor accounted for 10% or more of the Registrant's raw material purchases. 6 7 COMPETITION The Registrant competes primarily in the horse racing industry and the on-line lottery industry. The Registrant competes by providing high-quality wagering systems and terminals that are reliable, secure and fast. In addition, management believes that the Registrant offers its customers more flexibility in design and custom options than do most of its competitors. Management believes that the Registrant's main competitors in the sale of horse racing systems and on-line lottery systems in the domestic and international marketplace are: AWA Limited, an Australian company; Essnet, a Swedish company; International Des Jeux, the French national lottery company; and four United States companies: GTECH Holdings Corporation, Autotote Limited, Video Lottery Technologies, and Scientific Games Holding Corporation. Management believes that the Registrant has been a substantial factor in the international marketplace. The Registrant's sales or leases in the United States have been insignificant. In general the Registrant's competitors have significantly greater resources than the Registrant. Competition for on-line lottery system contracts is intense. EMPLOYEES As of December 31, 1999, the Registrant employs 72 people worldwide on a full-time equivalent basis. Of this total, 33 were engaged in operations support, 17 in engineering and software development and 22 in marketing and administrative positions. None of the Registrant's employees are represented by a union, and the Registrant believes its relations with its employees are good. PATENTS, TRADEMARKS AND LICENSES The Registrant has six U.S. patents issued on its products, and one patent pending. The Registrant believes that its technical expertise, trade secrets and the creative skills of its personnel are of substantially greater importance to the success of the Registrant than the benefits of patent protection. The Registrant typically requires customers, employees, licensees, subcontractors, strategic partners, and joint venture partners who have access to proprietary information concerning the Registrant's products to sign nondisclosure agreements, and the Registrant relies on such agreements, other security measures and trade secret law to protect such proprietary information. Central system software in the Registrant's lottery systems was originally developed under a non-exclusive license with HKJC. REGULATION The countries in which the Registrant markets its products generally have regulations governing horse racing or lottery operations, and the appropriate governing body could restrict or eliminate these operations in these countries. Any such action could have a material adverse effect on the Registrant. Foreign countries also often impose restrictions on corporations seeking to do business within their borders, including foreign exchange controls and requirements for domestic manufacturing content. In addition, laws and legal procedures in these countries may differ from those generally existing in the United States and conducting business in these countries may involve additional risk for the Registrant in protecting its business and assets, including proprietary information. Changes in foreign business restrictions or laws could have a significant impact on the Registrant's operations. DEPENDENCE UPON A FEW CUSTOMERS The Registrant's business to date has been dependent on major contracts and the loss of one or failure to replace completed contracts with new contracts would have a materially adverse effect on the Registrant's business. During 1999, the Registrant's revenues were derived primarily from contracts with New South Wales Lottery ($1.8 million); Philippine Gaming Management Corporation ($0.5 million); Olympic Gold Holdings ($0.5 million); HKJC ($0.4 million); Leisure Management Berhad ($0.4 million); Singapore Turf Club ($0.4 million); and all other in the aggregate ($1.6 million). 7 8 YEAR 2000 As of March 23, 2000, we have not experienced any significant disruptions as a result of the rollover from 1999 to 2000. However, the success to date of our Year 2000 efforts cannot guarantee that a Year 2000 problem affecting third parties, upon which we rely, will not become apparent in the future that could harm our operations. FORWARD-LOOKING STATEMENTS The statements in this filing which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements. These risks and uncertainties include the absence of significant contract backlog, the dependence on business from foreign customers sometimes in politically unstable regions, political and governmental decisions as to the establishment of lotteries and other wagering industries in which the Registrant's products are marketed, fluctuations in quarter-by-quarter operating results, and other factors described in this Form 10-KSB. SEASONALITY In general, the Registrant's business is not subject to seasonal effects. WORKING CAPITAL PRACTICES The Registrant's sales contracts typically provide for deposits and progress payments which have provided sufficient working capital for operations. ENVIRONMENT EFFECTS There are no significant capital expenditures required of the Registrant in order to comply with laws relating to protection of the environment. EXPORT SALES The majority of the Registrant's revenues are derived from contracts with foreign companies. As of December 31, 1999, the Registrant's equipment has been delivered and installed in Sweden, Norway, Hong Kong, Singapore, Ukraine, Australia, Finland, England, the Netherlands, Malaysia, Macau, China, Papua New Guinea, Belgium and the Philippines. The companies with which the Registrant contracts are normally sizeable organizations with substantial assets and are capable of meeting the financial obligations undertaken. The Registrant has entered into a few contracts specifying payment in currencies other than the U.S. dollar, thereby assuming the risk associated with fluctuations in value of foreign currencies. The majority of the Registrant's sales are denominated in U.S. dollars and thus not subject to foreign currency fluctuations. However, the ultimate cost of the Registrant's products to its customers have increased due fluctuations in the foreign exchange rates of many southeast Asian countries. The Registrant does not believe that its on-going business has been negatively impacted by the Asian currency-exchange situation, however, one current customer asked in 1998 and the Registrant agreed, to delay to a later undefined date the scheduled delivery of terminals which has resulted in delay of revenues and cash receipts to the Registrant of approximately $1.0 million. See also Note 7 of Notes to Consolidated Financial Statements, incorporated by reference in Part II, Item 7. ITEM 2. DESCRIPTION OF PROPERTY The Registrant's U.S. facilities consist of approximately 22,500 square feet of leased office, warehouse and manufacturing space in Carlsbad, California. The lease on this facility expires in the year 2005. The Registrant's Australian subsidiary currently leases, at a monthly cost of approximately A$8,400, approximately 13,000 square feet consisting of a manufacturing and administrative facility. The lease on this property expires 8 9 in October 2001. Since Registrant's technical support for the New South Wales Lottery has ceased, the Registrant, with the assistance of the lessor, is attempting to sub-lease this building, but in the interim, the Registrant is continuing to use the administrative facility as a sales office for Australia and New Zealand. See Note 7 of Notes to Consolidated Financial Statements, incorporated by reference in Part II, Item 7. Separate office and maintenance facilities to administer the U.K. Charitable Lottery in England are provided by GTL, a customer of the Registrant. ITEM 3. LEGAL PROCEEDINGS WALTERS V. ILTS, ET AL In November, 1995, Mr. James Walters, the former chairman and president of the Registrant, filed an action in the San Diego County Superior Court against the Registrant and its then current president, Frederick A. Brunn, alleging that certain statements in a magazine article were slander per se by the Registrant and Brunn. The case was settled in October 1999 at minimal financial cost to Registrant. The Registrant is also subject to other legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Registrant's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ---- --- -------- M. Mark Michalko.............................. 45 President/Principal Financial Officer Robert McPhail................................ 65 Vice President, Sales and Marketing Timothy R. Groth.............................. 50 Vice President, Technical Operations Lawrence E. Logue............................. 63 Corporate Secretary
9 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Registrant's Common Stock is traded under the symbol ITSI on the Over-the-Counter Bulletin Board (OTCBB). As of December 31, 1999, there were 12,943,000 common shares outstanding and approximately 1,100 shareholders of record. In October, the Registrant's largest shareholder, Berjaya Lottery Management (H.K.) LTD., purchased additional shares of the Registrant's common stock for $5.2 million resulting in an increase in its ownership of the Registrant's total outstanding shares to 71.4%. The Registrant's management owned 1%.
1999 HIGH LOW ---- ---- --------- --- First Quarter............................................. 15/32 9/32 Second Quarter............................................ 1 9/32 Third Quarter............................................. 1 5/16 9/16 Fourth Quarter............................................ 1 17/32 9/16 Average Daily Volume...................................... 14,900 Total Annual Trading Volume............................... 3,933,600
1998 HIGH LOW ---- ---- --------- --- First Quarter............................................. 3 3/4 21/16 Second Quarter............................................ 2 7/16 1/8 Third Quarter............................................. 2 3/16 1/2 Fourth Quarter............................................ 1 11/32 3/16 Average Daily Volume...................................... 17,184 Total Annual Trading Volume............................... 4,536,587
Solely for the purpose of calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant, as set forth on the cover of this report, it has been assumed that all executive officers and directors of the Registrant and Berjaya Lottery Management (H.K.) Ltd. were affiliated persons. All of the Registrant's common shares, the only voting stock outstanding, beneficially owned by each such person (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) have been assumed to be held by that person for this calculation. The market value of the common shares is based on the closing price for March 23, 2000, of $ 1.75 per share. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS The information required by this item is included on pages 7 through 10 of the Registrant's Annual Report to Shareholders as of December 31, 1999 and 1998 for the years then ended under the same caption and is incorporated herein by reference to such Annual Report. ITEM 7. FINANCIAL STATEMENTS The information required by this item is included on pages 11 through 14 of the Registrant's Annual Report to Shareholders as of December 31, 1999 and 1998 for the years then ended and is incorporated herein by reference to such Annual Report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 10 11 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders. ITEM 10. EXECUTIVE COMPENSATION The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits (3) (a) Articles of Incorporation, as amended September 13, 1994, reflecting corporate name change, and as amended January 7, 1998, reflecting authorization for 20 million shares of preferred stock and By-laws (incorporated by reference to Form 10-K for the year ended December 31, 1994, File No. 0-10294). (b) Articles of Incorporation as amended June 2, 1998, reflecting the three-for-one reverse stock split (incorporated by reference to Form 10-K for the year ended December 31, 1998, File No. 0-10294). (c) Articles of Incorporation as amended June 2, 1998, reflecting maximum indemnification for directors permitted by California law (incorporated by reference to Form 10-K for the year ended December 31, 1998, File No. 0-10294). (d) A By-law effective June 2, 1998, amendment relating to officers and directors indemnification and number of directors (incorporated by reference to Form 10-K for the year ended December 31, 1998, File No. 0-10294). (10) (a) Third Amendment to Lease for the Registrant's facility in Carlsbad, California dated August 11, 1999. (b) The Registrant's 1986 Employee Stock Option Plan (incorporated by reference to Exhibit 4(b) to the Form S-8 Registration Statement, File No. 33-34123, as filed on April 4, 1990. (c) The Registrant's 1988 Employee Stock Option Plan (incorporated by reference to Exhibit 4(b) to the Form S-8 Registration Statement, File No. 33-34123, as filed on April 4, 1990). (d) The Registrant's 1990 Stock Incentive Plan (incorporated by reference to Form 10-K for the year ended December 31, 1990, File No. 0-10294 and File No. 33-79938). (e) The Registrant's 1997 Directors' Stock Option Plan (incorporated by reference to Form 10-K for the year ended December 31, 1998, File No. 0-10294).
11 12 (13) Annual Report to Shareholders as of December 31, 1999 and 1998 and for the years then ended. With the exception of the information incorporated by reference into items 5, 6, 7, and 8 of this Form 10-K, the 1999 Annual Report to Shareholders is not deemed filed as part of this report. (21) Subsidiaries of the Registrant. (23A) Consent of Arthur Andersen LLP, Independent Public Accountants. (23B) Report of Arthur Andersen LLP, Independent Public Accountants. (27) Financial Data Schedule
B. A current report on Form 8-K was filed on October 5, 1999 reporting a Change in Control of Registrant by reason of a sale of the Registrant's Common Stock to Berjaya Lottery Management Company (H.K.) Limited (Berjaya) for approximately $5.2 million, increasing Berjaya's stock ownership from 38.5% to 71.4%. 12 13 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. By: /s/ M. MARK MICHALKO --------------------------------------------------- M. Mark Michalko President Dated: March 26, 2000 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ THEODORE A. JOHNSON Chairman of the Board March 26, 2000 - ----------------------------------------------------- Theodore A. Johnson /s/ M. MARK MICHALKO Director, President and March 26, 2000 - ----------------------------------------------------- Principal Financial Officer M. Mark Michalko /s/ ALAIN K.K. LEE Director March 26, 2000 - ----------------------------------------------------- Alain K. K. Lee /s/ FREDERICK A. BRUNN Director March 26, 2000 - ----------------------------------------------------- Frederick A. Brunn Director - ----------------------------------------------------- Ng Foo Leong /s/ MARTIN J. O'MEARA, JR. Director March 26, 2000 - ----------------------------------------------------- Martin J. O'Meara, Jr. /s/ LEONARD G. MORRISSEY Director March 26, 2000 - ----------------------------------------------------- Leonard G. Morrissey Director - ----------------------------------------------------- Michael G. R. Sandberg /s/ CHAN KIEN SING Director March 26, 2000 - ----------------------------------------------------- Chan Kien Sing
13 EX-10.A 2 MATERIAL CONTRACT 1 EXHIBIT 10 (a) THIRD AMENDMENT TO LEASE This Third Amendment to Lease ("Agreement") is dated for reference purposes only as of August 11, 1999, by and between Equus 2131, LLC, a California limited liability company, ("Lessor") successor in interest to Carlsbad Research Center Number Six, ("Lessor"), and International Lottery & Totalizator Systems, Inc., a California corporation ("Lessee"). RECITALS A. Carlsbad Research Center Number Six ("Original Lessor") and Lessee entered into that certain Lease agreement dated June 26, 1992, (the "Lease"), whereby Lessee leased from Original Lessor the Premises known as 2131 Faraday Avenue, Carlsbad, CA 92008. The Lease was subsequently amended by the First Amendment to Lease, dated December 20, 1994, and by the Second Amendment to Lease dated June 6, 1995. B. Lessee now desires to reduce the total square footage of the Premises and extend the term of the Lease, and Lessor, as successor-in-interest to Original Lessor, agrees to thereto on the terms and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the facts contained in the Recitals above, the mutual covenants and conditions below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: AGREEMENT 1. The expiration date of the Lease shall be June 20, 2005 (the "Extended Term"). 2. The total square footage of the Premises will be reduced to 22,530 rentable square feet (the "New Premises") as further described in Exhibit 1-A, attached hereto and incorporated herein by reference. At any time during the Extended Term, upon written notice to Lessee, Lessor may add up to an additional 2,000 rentable square feet, (the "Additional Space") to the New Premises at Lessor's sole option. In the event Lessor exercises its option to add the Additional Space, it will be contiguous to the New Premises and will be located in the rear half of the building, in the crosshatched area of Exhibit 1-A. 3. Effective October 1, 1999, the rental rate shall be $1.00 NNN per rentable square foot per month (which equals $22,530.00 per month, based on the 22,530 rentable square feet). The rental rent shall increase annually by three percent (3%) effective each October 1st, beginning October 1, 2000. 4. Lessee's rent shall be abated for the period from September 16, 1999 through September 30, 1999. 5. The Security Deposit held by Lessor shall be increased by $55,000.00 for a total Security Deposit of $100,000.00. The Security Deposit shall not bear interest for benefit of Lessee, and Lessee agrees to relinquish its right to receive interest during the original term of the Lease. 6. Lessee shall be entitled to sixty-three (63) parking spaces (2.8 parking spaces per 1000 square feet of New Premises). 12 2 7. Unless otherwise procured and maintained at Lessee's expense by Lessor, Lessee shall procure and maintain, at Lessee's expense, a heating, ventilation and air conditioning system maintenance contract reasonably acceptable to Lessor. Lessee will be responsible for payment of all utilities metered exclusively to the New Premises. Any shared utility expenses paid by Lessor shall be reimbursed to Lessor by Lessee. Lessee shall reimburse Lessor for Lessee's prorata share of all other expenses associated with operation, maintenance and repair of the Premises, including Lessor's management fee of three percent (3%) of monthly gross receipts and property taxes. 8. Lessor, at Lessor's sole cost and in conformance to all applicable codes and laws, shall pay all costs to demise the Building in accordance with Exhibit 1-A. Such costs include, but are not limited to, demising walls, fire exits, segregation/addition of electrical service, lighting and mechanical segregation and all applicable soft costs. In addition, Lessor will provide Lessee with an Improvement Allowance ("Allowance") which shall not exceed $67,590.00 ($3.00 per rentable square foot) to improve the New Premises, substantially in accordance with Exhibit 1-A. The Allowance may only be used for actual improvements to the New Premises and will include architectural/space planning, permit fees, and a construction management fee payable to Equus Realty Advisors, Inc. in the amount of five percent (5%) of the total cost of the Improvement Allowance. The improvements shall be completed in accordance with the attached Work Letter, Exhibit 1-B. Lessor shall, at Lessor's sole cost, and in addition to the Allowance, split the existing HVAC system to separately control Lessee's CEO's office and the existing board room. Lessee will be responsible for all costs associated with relocation or modification of its computer, data/cabling, security and telephone equipment and all office systems and furniture. 9. Lessee shall have the exclusive use of the Building address and Lessor will create a separate address for the west half of the building. Lessee agrees that the address of the west half of the building may be 2131 Faraday Avenue, Suite 200, Carlsbad. 10. Lessee shall be allowed to maintain the current location of the generator and air compressor in the back of the Building and shall rerun services from such devices as part of the Tenant Improvement Allowance. 11. Except as specifically modified herein, all other terms and conditions of the Lease shall remain unchanged and in full force and effect. IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of October 1, 1999. LESSOR LESSEE Equus 2131, LLC International Lottery & Totalizator a California limited liability company Systems, Inc., a California corporation By: /s/ David R. Bourne By: /s/ Lawrence E. Logue ------------------------------------ ------------------------------------ David R. Bourne Its: Manager Its: Corporate Secretary and General Counsel ----------------------------- 13 EX-13 3 ANNUAL REPORT 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS The statements in this filing which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements. These risks and uncertainties include the absence of significant contract backlog, the dependence on business from foreign customers sometimes in politically unstable regions, political and governmental decisions as to the establishment of lotteries and other wagering industries in which the Company's products are marketed, fluctuations in quarter-by-quarter operating results, and other factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. OVERVIEW The Company has derived substantially all of its product sale revenues from the sale of betting terminals to racing organizations and lotteries worldwide. The size and timing of these transactions result in variability in product sales revenues from period to period. In past years, service revenues have been derived primarily from providing betting terminal maintenance services to New South Wales Lotteries (NSWL). NSWL is in the process of changing its lottery system to a competitor's system. As a result, substantially all of the Company's service revenue contractually terminated in January 2000. RESULTS OF OPERATIONS 1999 VERSUS 1998 REVENUES: Total revenues in fiscal 1999 decreased 57% or $7.5 million, as compared to fiscal 1998. Product sales decreased 70% in 1999 to $3.4 million from $11.1 million in 1998 primarily resulting from a 99% decrease in terminal shipments in 1999 compared to 1998. Service revenues increased 10% or $0.2 million from 1998, primarily resulting from an increase in demand for software support to one customer. GROSS PROFIT: The gross profit on product sales was 5% in 1999 compared to 37% in 1998. The decreased gross profit percentage was due to lower production volume to absorb fixed costs. The gross profit percentage on service revenues increased to 34% in 1999 from 26% in 1998 due to support costs remaining constant while revenues increased. ENGINEERING, RESEARCH & DEVELOPMENT: Engineering, research and development expenses decreased 20% to $1.2 million in 1999 compared to $1.5 million in 1998. The 1999 projects included the development of additional terminals and software for customers as opposed to 1998 which consisted primarily of expenditures for features for the DataTrak lottery system and the integration of an impact printer into the Company's terminals. SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative expenses decreased 16% or $0.9 million in 1999 compared to 1998. This was primarily due to the costs incurred in 1998 related to a proposed acquisition that was not completed, and marginal decreases in marketing and travel expenditures. PROVISION FOR INCOME TAXES: The provision for income taxes in 1999 and 1998 relates to income earned in the Company's Australian subsidiary. 1998 VS. 1997 REVENUES: Total revenues in fiscal 1998 increased 22% or 2.3 million, versus fiscal 1997. Product sales increased 32% in fiscal 1998 to $11.1 million from $8.4 million in 1997. This is primarily the result of a 61% increase in terminal shipments in 1998 compared to 1997 shipments, which also included one central system sale. Service revenues decreased 15% or $0.4 million from 1997. This decrease is the result of fewer customer support projects and the impact of lower Australian exchange rates in 1998. GROSS PROFIT: The gross profit on product sales was 37% in 1998 compared to 7% in 1997. The increased gross profit percentage was due to the manufacturing efficiencies achieved with the increased level of production, lower production related expenses, sales of earlier model terminals which previously had been fully reserved. Fiscal 1997 included charges of approximately $1.3 million taken to recognize impairment in value of software capitalized in prior years, reserves for inventory obsolescence, provisions for certain development contracts and costs related to the closing of the Company's United Kingdom subsidiary. The gross profit percentage on service revenues was approximately the same both years. 1 2 ENGINEERING, RESEARCH & DEVELOPMENT: Engineering, research and development expenses decreased 13% to $1.5 million in 1998 compared to $1.7 million in 1997. Projects in 1998 included development of additional features for the DataTrak lottery system and integration of an impact printer into the Company's terminals. The 1997 expenditures were primarily directed towards DataTrak lottery software and related features. SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative expenses decreased 16% or $1.0 million in 1998 compared to 1997. This was primarily the result of a lower level of staffing in 1998, partially offset by expenses incurred for a proposed Prime Gaming acquisition described in Note 1. GAIN ON SALES OF SUBSIDIARY AND LOTTERY SERVICE AGREEMENT: In 1998, the Company recognized a gain on the sale of its former Papua New Guinea lottery service agreement of $105 thousand compared to a gain of $419 thousand in 1997. Installment payments from the sale of the Papua New Guinea lottery were suspended in late 1998 due to poor economic conditions in Papua New Guinea. In addition, in 1997 the Company received final payment and recognized a gain of $438 thousand from the 1993 sale of its McKinnie & Associates subsidiary. PROVISION FOR INCOME TAXES: The provision for income taxes in 1998 and 1997 relates to income earned in the Company's Australian subsidiary. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1999, working capital increased by $1.2 million as compared to fiscal 1998 primarily as a result of the Berjaya equity infusion combined with decreases in both accounts receivable and inventory. Although the Company's net loss from operations was $4.2 million, cash on hand increased by $4.5 million. The Company's largest shareholder, Berjaya Lottery Management (H.K.) LTD. purchased additional shares in October 1999 of the Company's common stock for $5.2 million, working capital increased by $1.2 million as described above, and monies were received for contracts in excess of costs incurred. In 1999, the Company took steps to reduce its fixed costs by renegotiating its facilities lease to reduce lease expense and occupying a smaller portion of its existing facility. The Company strategically pursues long-term service contracts as a source of revenue. In September 1999, the Company entered into agreements with subsidiaries of Global Technologies Ltd. (GTL) pursuant to which the Company will provide lottery equipment and, through the Company's United Kingdom subsidiary, all facilities management services in connection with a lottery for the benefit of charities throughout Great Britain under a lottery license granted by the Gaming Board of Great Britain to an affiliate of GTL. Service contracts pose new capital investment risks for the Company that do not exist in its product sale business. Service contracts require an up-front investment of capital, which is repaid only after a system becomes operational, based upon a percentage of the customer's gross receipts from the system. The Company often bears the risk that scheduling delays may occur and that a system may not become operational or that the customer's gross receipts from the system may be less than expected. The Company may have to seek the funds necessary to implement such contracts from Berjaya or other sources. However, the GTL service agreement was primarily customer funded. Costs incurred related to this contract have been accumulated along with billings made under the contract. These amounts are shown net in the balance sheet as "Billings in Excess of Costs on Uncompleted Contracts." The Company's consolidated financial statements have been prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Management recognizes that the Company must generate additional contract sales to maintain its current level of operations in future years. If such contract sales are not obtained, the Company may be required to seek additional sources of funding in the form of debt or equity financing. As of December 31, 1999, there were no material commitments for capital expenditures. Management anticipates that it will be successful in obtaining sufficient product or service contracts to enable the Company to continue normal operations; however, no assurances can be given that the Company will be successful in realizing sufficient contract revenue. If the Company is unable to obtain sufficient contract revenue, management will be required to reduce the Company's operations. FOREIGN EXCHANGE FLUCTUATION The Company's reporting currency is the U.S. dollar. Historically, a majority of the Company's sales have been denominated in U.S. dollars, with the balance denominated in foreign currencies. These foreign currency sales have been effected principally by the Company's international subsidiaries. Changes from 2 3 reporting period to reporting period in the exchange rates between various foreign currencies and the U.S. dollar have had, and will in the future continue to have, an impact on revenue and expense reported by the Company, and such effect may be material in any individual reporting period. As the contracts are predominantly denominated in the functional currency of the subsidiary performing under the contract, the Company has historically incurred immaterial amounts of transaction gains or losses. The balance sheets of the Company's international subsidiaries are translated into U.S. dollars and consolidated with the balance sheet of the Company's domestic subsidiary in accordance with U.S. accounting requirements. Changes in the U.S. dollar value of the foreign currency denominated assets are accounted for as an adjustment to stockholders' equity. Therefore, changes from reporting period to reporting period in the exchange rates between various foreign currencies and the U.S. dollar have had, and will continue to have, an impact on the foreign currency translation component of stockholders' equity reported by the Company, and such effect may be material in any individual reporting period. The Company recognized a foreign exchange gain of $10 thousand in 1999 and a $65 thousand gain in 1998. ASIA Significant portions of the Company's revenues are derived from customers located in Asia. In the last 36 months the currencies of the Asian countries in which the Company's customer are located have declined significantly against the U.S. dollar. Although the Company generally has been paid in U.S. dollars, this decline has effectively increased the cost of the Company's products to its customers. The Company does not believe that its on-going business has been negatively impacted by the Asian currency exchange situation, however, one current customer has asked, and the Company has agreed, to delay to a later undefined date the scheduled delivery of terminals which will result in the delay of Company revenues and cash receipts of approximately $1.0 million. YEAR 2000 As of March 23, 2000, we have not experienced any significant disruptions as a result of the rollover from 1999 to 2000. However, the success to date of our year 2000 efforts cannot guarantee that a Year 2000 problem affecting third parties, upon which we rely, will not become apparent in the future that could harm our operations. 3 4 ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, 1999 1998 $ in thousands, except per share amounts and non-monetary items Statement of operations data Revenue $ 5,650 $ 13,172 Gross profit $ 955 $ 4,599 Operating loss $ (4,594) $ (2,094) Net loss $ (4,241) $ (1,892) Loss per share - basic and diluted (1) $ (.55) $ (.31) AS OF DECEMBER 31, Balance sheet data Total assets $ 8,511 $ 5,078 Shareholders' equity $ 3,473 $ 2,472 Shares outstanding 12,943 6,009 Key ratios and statistics Gross profit percentage 16.90% 34.91% Working capital $ 3,157 $ 2,007 Book value per share $ .27 $ .41 Current ratio 1.63 1.77 Backlog $ 16,402 $ 3,402 Employees 72 72
(1) Reflects weighted average shares used in calculation from stock purchase agreement between ILTS and Berjaya Lottery Management (H.K.) Limited. 5 ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 1998 $ in thousands, except share amounts Assets Current assets: Cash and cash equivalents $ 6,801 $ 2,270 Accounts receivable, net of allowance for doubtful accounts of $92 ($93 in 417 1,338 (1998) Costs in excess of billings on uncompleted contracts - 45 Inventories, net 135 798 Other current assets 842 162 ------------ ------------ Total current assets 8,195 4,613 ------------ ------------ Equipment, furniture and fixtures at cost, less accumulated depreciation of $3,877 ($3,669 in 1998) 316 465 ------------ ------------ $ 8,511 $ 5,078 ------------ ------------ Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 684 $ 474 Billings in excess of costs on uncompleted contracts 2,237 9 Accrued payroll and related taxes 621 603 Related party liability 304 332 Other current liabilities 1,192 1,188 ------------ ------------ Total current liabilities 5,038 2,606 ------------ ------------ Commitments and contingencies (Notes 8 and 12) Shareholders' equity: Common shares; no par value, 50,000,000 shares authorized; 12,943,000 shares issued and outstanding in 1999 and 6,009,183 in 1998 56,326 51,103 Accumulated deficit (52,792) (48,551) Other accumulated comprehensive loss (61) (80) ------------ ------------ Total shareholders' equity 3,473 2,472 ------------ ------------ $ 8,511 $ 5,078 ============ ============
See accompanying notes. 6 ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 1998 $ in thousands, except per share amounts Revenues: Sales of products $ 3,363 $ 11,102 Services 2,287 2,070 -------- -------- 5,650 13,172 -------- -------- Cost of revenues: Cost of sales of products 3,192 7,040 Cost of services 1,503 1,533 -------- -------- 4,695 8,573 -------- -------- Gross profit 955 4,599 Engineering, research and development 1,173 1,464 Selling, general and administrative 4,376 5,229 -------- -------- Loss from operations (4,594) (2,094) -------- -------- Other income: Interest income, net 135 60 Exchange rate gain 10 65 Royalty and other income 344 - Gain on sale of subsidiary and lottery service agreement - 105 -------- -------- Loss before provision for income taxes (4,105) (1,864) -------- -------- Provision for income taxes 136 28 -------- -------- Net loss $ (4,241) $ (1,892) -------- -------- Net loss per share - basic and diluted $ (0.55) $ (0.31) -------- -------- Shares used in determination of net loss per share - Basic and diluted 7,681 6,009 -------- --------
See accompanying notes. 7 ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OTHER ACCUMULATED COMMON STOCK ACCUMULATED COMPREHENSIVE SHARES AMOUNT DEFICIT INCOME (LOSS) TOTAL ------ ------ ------- ---------- ----- Thousands of shares/dollars Balance at December 31, 1997 6,009 $ 51,103 $(46,659) $ (352) $ 4,092 ------- -------- -------- -------- -------- Foreign currency translation adjustment - - - 272 272 Net loss - 1998 - - (1,892) - (1,892) ------- -------- --------- ------- -------- Balance at December 31, 1998 6,009 51,103 (48,551) (80) 2,472 ------- -------- --------- -------- -------- Proceeds from sale of common stock 6,934 5,200 - - 5,200 Compensation expense for options issued to consultants - 23 - - 23 Foreign currency translation adjustment - - - 19 19 Net loss - 1999 - - (4,241) - (4,241) ------- -------- --------- -------- -------- Balance at December 31, 1999 12,943 $ 56,326 $(52,792) $ (61) $ 3,473 ------- -------- -------- -------- --------
See accompanying notes 8 ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 1998 $ in thousands Cash flows from operating activities: Net loss $(4,241) $(1,892) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 244 338 Compensation expense for options issued to consultants 23 - Gain on sale of subsidiary and lottery service operations - (105) Loss on impaired manufacturing assets - 94 Changes in operating assets and liabilities: Accounts receivable 921 (298) Costs in excess of billings on uncompleted contracts 45 1,671 Inventories 663 1,746 Accounts payable 210 (101) Billings in excess of costs on uncompleted contracts 2,228 (377) Accrued payroll and related taxes 18 (236) Related party liability (28) 186 Other assets (681) 27 Other liabilities 12 (1,436) ------- ------- Net cash used for operating activities (586) (383) ------- ------- Cash flows from investing activities: Lottery service agreement sale proceeds and repayment of advances - 105 Additions to equipment (102) (95) ------- ------- Net cash provided by (used for) investing activities (102) 10 ------- ------- Cash flows from financing activities: Proceeds from issuance of common shares 5,200 - ------- ------- Net cash provided by financing activities 5,200 - ------- ------- Effect of exchange rate changes on cash 19 272 ------- ------- Increase (decrease) in cash and cash equivalents 4,531 (101) Cash and cash equivalents, beginning of year 2,270 2,371 ------- ------- Cash and cash equivalents, end of year $ 6,801 $ 2,270 ------- ------- Supplemental cash flow information: Cash paid during the year for interest 1 1 Cash paid during the year for income taxes 19 69
See accompanying notes. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND OTHER ORGANIZATIONAL MATTERS The Company's consolidated financial statements for the year ended December 31, 1999 have been prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to three months lead-time before delivery of hardware begins. The Company has incurred net losses of $1.9 million and $4.2 million in 1998 and 1999 respectively, while revenues have decreased from $13.2 million in 1998 to $5.6 million in 1999. As of December 31, 1999, the Company had a backlog (unaudited) of $16.4 million compared to a backlog (unaudited) of $3.6 million in 1998. On June 1, 1998, the stockholders of the Company approved an amendment to the Articles of Incorporation to effect a three-for-one reverse stock split. Each share of stock owned by stockholders of record at the close of business on June 12, 1998 was converted into 0.333 shares. All share and per share data presented in the Consolidated Financial Statements and footnotes of this Annual Report have been restated to reflect the three-for-one reverse stock split. In October 1999, Berjaya Lottery Management (H.K.) Limited purchased 6.9 million shares of the Company's common stock for $5.2 million, which increased Berjaya's stock ownership to 71.4%. Historically, approximately 70% of the Company's annual service revenues have been derived from a terminal maintenance agreement with an Australian lottery customer. In October 1998, the Australian lottery customer, as a result of a competitive bid, awarded this contract to a competitor of the Company and these service revenues terminated in January 2000. In June 1998, the Company announced it had entered into negotiations to acquire a controlling interest in Prime Gaming Philippines, Inc. ("Prime") from Berjaya Lottery Management (H.K.) Limited ("Berjaya") and/or other Prime shareholders in exchange for the issuance of Company common stock. One requirement to complete the transaction was that Company common shares remain trading on NASDAQ markets. In December 1998, NASDAQ notified the Company that it did not meet NASDAQ listing criteria and that Company shares would begin trading OTCBB. In February 1999, as a result of the Company's transfer from NASDAQ to OTCBB, the Prime shareholders terminated the proposed transaction. At December 31, 1999, the Company had working capital of $3.16 million. Management recognizes that the Company must recover its investment in existing contracts (Note 4) and generate additional contract sales to maintain its current level of operations. Management anticipates that it will be successful in recovering its investment in existing contracts and obtaining sufficient contracts to enable the Company to continue normal operations; however, no assurances can be given that the Company will be successful in realizing sufficient new contract revenues or obtaining additional financing. If the Company is unable to recover its investment in existing contracts, obtain sufficient new contract revenue or financing, management will be required to reduce the Company's operations. The Company's ability to continue its ongoing operations on a long-term basis is dependent upon its ability to recover its investment in existing contracts, to obtain additional financing, secure additional new contracts and ultimately achieve a sustainable level of profit from operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The accompanying consolidating financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions are eliminated. REVENUE RECOGNITION - The Company recognizes revenue on the basis of shipment of products, performance of services, and in certain instances on the percentage-of-completion method of accounting for long term contracts, or on the completed contract method of accounting for long term contracts when all criteria for recognizing revenue under the percentage-of-completion method of accounting cannot be met. Revenues relating to the sale of certain assets, when the ultimate total collection is not reasonably assured, are being recorded under the cost recovery method. USE OF ESTIMATES - The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and Page 1 10 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DEPRECIATION - Depreciation of equipment, furniture and fixtures is provided principally using the straight-line method over estimated useful lives of 3 - 7 years. WARRANTY RESERVES - Estimated expenses for warranty obligations are accrued as income is recognized on related contracts. The reserves are adjusted periodically to reflect actual experience. FOREIGN CURRENCY - The Company has contracts with certain customers that are denominated in foreign currencies, and related transaction gains and losses are recognized as a component of current operations. The consolidated accounts of the Company's Australian subsidiary and UK subsidiary have been translated from their functional currency, the Australian dollar and pound sterling, respectively. The effect of the exchange rate fluctuations between the U.S. dollar, the Australian dollar and the pound sterling are recorded as a component of comprehensive income. PER SHARE INFORMATION - Net loss per share is based on the weighted average number of shares outstanding during the year. The weighted average number of shares outstanding were revised to reflect the three-for-one reverse stock split implemented June 12, 1998. Stock options are not included if their effect would be anti-dilutive. RESEARCH AND DEVELOPMENT - Engineering, research and development costs are expensed as incurred. Substantially all engineering, research and development expenses are related to new product development and designing significant improvements. CONCENTRATION OF CREDIT RISK - Accounts receivable and costs in excess of billings on uncompleted contracts are primarily related to contracts with a few major customers. These amounts are payable in accordance with the terms of individual contracts and generally collateral is not required. Estimated credit losses are provided for in the financial statements. The Company conducts business in the Asia/Pacific region. Certain Asian countries have experienced severe economic turmoil represented by depressed business conditions and volatility in local currencies. Any significant further decline in these economies and in the value of their currencies could have a material adverse effect on the Company. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Included in cash and cash equivalents at December 31, 1999 and 1998 are investments in commercial paper totaling $5.4 million and $1.1 million, respectively, which mature in January 2000 and January 1999, respectively. The estimated fair value of these investments approximates the carrying value; therefore, there are no unrealized gains or losses as of December 31, 1999 or 1998. STOCK OPTIONS - As permitted, the Company has elected the disclosure only provisions of SFAS No. 123. Accordingly, the Company continues to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Options granted to non-employees are recorded at fair value in accordance with SFAS 123. MAJOR CUSTOMERS - During 1999, approximately $4.1 million or 72% of the Company's revenues were derived from six customers. In 1998, the amount was $8.8 million or 67% from six customers. RECENT ACCOUNTING PRONOUNCEMENTS - On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." The effect of the implementation was to show the change in the foreign currency translation adjustment in shareholders' equity as a component of comprehensive income. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was amended by SFAS 137, which is required to be adopted for fiscal quarters of fiscal years beginning after June 15, 2000. At this time, the Company has not entered into any derivative instruments or hedging activities. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics of internal use software and provides assistance in determining when computer software is for internal use. SOP 98-1 was adopted on January 1, 1999. The adoption of SOP 98-1 had no significant impact on the consolidated financial statements, results of operations, or related disclosures thereto. In April 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA SOP Page 2 11 98-5, "Reporting on the Costs of Start-Up Activities." This statement provides guidance on financial reporting of start-up costs and organization costs and requires that such costs of start-up activities be expensed as incurred. SOP 98-5 was adopted on January 1, 1999. The effect of the adoption was not material. All start-up costs are expensed as incurred. In December 1999, the SEC issued Staff Accounting Bulletin-101, "Revenue Recognition in Financial Statements." SAB-101, as amended, is effective no later than the second fiscal quarter of the fiscal year beginning after December 15, 1999. The Company is in the process of evaluating the potential impact of this SAB, but anticipates that the impact, if any, will be insignificant. 3. RELATED PARTY TRANSACTIONS The Company has entered into sales agreements to supply terminals, spares and services to entities in which the Company's largest shareholder, Berjaya, has a significant equity interest. Revenues related to these agreements totaled $0.5 million and $2.5 million in 1999 and 1998, respectively. Included in accounts receivable and costs in excess of billings on uncompleted contracts was $0.2 million and $0.3 million at December 31, 1999 and 1998, respectively, relating to these customers. During 1996 the Company entered into an agreement with Berjaya to purchase specific inventory on behalf of Berjaya to enable the Company to satisfy certain future potential orders in a timely manner. Title to the inventory purchased resides with Berjaya; therefore, no amounts are reflected in the consolidated balance sheets for inventory purchased on their behalf. Advances received in excess of inventory purchased aggregated approximately $304 thousand and $332 thousand and have been reflected as a related party liability in the accompanying consolidated balance sheets as of December 31, 1999 and 1998, respectively. 4. CONTRACTS IN PROCESS The amounts by which total costs exceeded or were less than billings on uncompleted contracts are as follows (in thousands):
AS OF DECEMBER 31, 1999 1998 Costs incurred (including deposits held for outsourced production) $ 3,166 $ 1,273 Estimated earnings - 213 ------- ------- 3,166 1,486 Less: billings (5,403) (1,450) ------- ------- $(2,237) $ 36 ======= ======= Included in the accompanying consolidated balance sheets as follows: Costs in excess of billings on uncompleted contracts $ - $ 45 Billings in excess of costs on uncompleted contracts (2,237) (9) ------- ------- $(2,237) $ 36 ======= =======
5. INVENTORIES At December 31, inventories were comprised of (in thousands):
1999 1998 ---- ---- Raw materials $135 $207 Work in process - 591 Finished goods - - ---- ---- $135 $798 ==== ====
6. LOTTERY SERVICE AGREEMENTS The Company enters into contracts to provide lottery equipment and management of on-line lottery systems on a long-term basis. In September 1999, the Company entered into agreements to provide equipment and facilities management services for a charitable lottery in Great Britain expected to begin operations in Spring 2000. The Company's investment in equipment and services was substantially funded by its customer. Page 3 12 In 1992 and in 1995, the Company entered into contracts to provide lottery equipment in Papua New Guinea and in the United Kingdom, respectively. In July 1995, the Company sold all its interest in the Papua New Guinea lottery operation to the principal shareholders of the licensee for a fixed amount plus a percentage of the annual gross lottery sales or an annual sum of $260 thousand, whichever is greater, for a period of five years, provided that the additional sums shall not exceed $3.0 million. The Company recognized approximately $105 thousand as a gain on the sale of the lottery service agreement in 1998, before payments were suspended due to poor economic conditions in Papua New Guinea. The Company is reviewing its options to recover the remaining amount due under the terms of contract. At December 31, 1999, the Company has no investment remaining on its balance sheet. In 1997 and 1998, the Company recovered part of its investment in the 1995 U.K. lottery service agreement through a sale of a system and terminals to Olympic Gold, which aggregated $3.8 million of which $2.8 million had been previously reserved. Included in royalties and other income is an amount of $290 thousand reflecting proceeds from the settlement of the claim against the Arizona State Lottery pertaining to the procurement for an on-line lottery system. 7. INDUSTRY SEGMENT AND GEOGRAPHICAL DATA The Company operates in one industry segment, which includes totalizator and lottery systems. The Company has an Australian subsidiary, International Lottery & Totalizator Systems Australia Pty., Ltd., and a United Kingdom subsidiary, ILTS UK Limited. Sales between geographic areas are generally priced to recover material costs plus an appropriate markup. Revenue by major customer location is as follows (in thousands):
CUSTOMER LOCATION 1999 1998 ------- ------- Australia $ 1,800 1,500 Philippines 500 2,300 Ukraine 500 900 Hong Kong 400 1,700 Malaysia 400 1,000 Sweden 200 2,400 All other 1,800 3,400 ------- ------- Total $ 5,600 $13,200 ======= =======
The following table summarizes information about the Company's operations in different geographic areas for the years ended December 31, (in thousands):
1999 1998 ------------------------------------------------- --------------------------------------------------- EASTERN EASTERN EUROPE/ CONSOLI EUROPE/ CONSOLI USA PACIFIC EUROPE -DATED USA PACIFIC EUROPE -DATED --------- -------- --------- --------- --------- -------- -------- --------- Sales to unaffiliated customers: Export $ 2,931 $ - $ - $ 2,931 $ 9,537 $ - $ - $ 9,537 Domestic 583 2,136 - 2,719 734 2,838 63 3,635 --------- -------- --------- --------- --------- -------- -------- --------- Sales to: Australia subsidiary 539 - - 539 1,209 - - 1,209 --------- -------- --------- --------- --------- -------- -------- --------- 4,053 2,136 - 6,189 11,480 2,838 63 14,381 --------- -------- --------- --------- --------- -------- -------- --------- Elimination of intercompany sales (539) - - (539) (1,209) - - (1,209) --------- -------- --------- --------- --------- -------- -------- --------- Total revenue 3,514 2,136 - 5,650 10,271 2,838 63 13,172 --------- -------- --------- --------- --------- -------- -------- --------- Net income (loss) $ (4,426) $ 240 $ (55) $ (4,241) $ (2,407) $ 115 $ 400 $ (1,892) --------- -------- --------- --------- --------- -------- -------- --------- Identifiable assets $ 6,973 $ 1,286 $ 252 $ 8,511 $ 4,331 $ 747 $ - $ 5,078 --------- -------- --------- --------- --------- -------- -------- ---------
Page 4 13 8. LEASES The Company leases its facilities in Carlsbad, California and Sydney, Australia under operating lease agreements, which expire in June 2005 and October 2001 respectively. The Carlsbad lease provides for an annual increase and the Sydney lease provides for an increase in minimum annual rent based on increases in various market indices. At December 31, 1999, the Company began to close its Australian service operations and is using the facility as a sales office. The Company remains obligated on the lease through October 2001; however, the Company and the lessor are jointly attempting to lease the facility to a new tenant. Rent expense for the years ended December 31, 1999 and 1998 was $413 thousand and $581 thousand respectively. Minimum future obligations for these leases are as follows (in thousands): 2000 - $496; 2001 - $449; 2002 - $395; 2003 - $308; 2004 - $307; 2005 - $316. 9. INCOME TAXES The provision for income taxes of $136 thousand in 1999 and $28 thousand in 1998 primarily relates to income earned by the Company's Australian subsidiary. The following is a reconciliation of the actual tax provision to the expected tax benefit computed by applying the statutory federal income tax rate to the loss before provision for income taxes (in thousands):
YEARS ENDED DECEMBER 31, 1999 1998 -------- -------- Expected federal income tax benefit at statutory rate $(1,627) $(1,354) U.S. and foreign net operating losses - no benefit 1,627 1,354 Other, net 136 28 Provision for income taxes 136 28 -------- --------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of the Company's deferred tax assets are as follows (in thousands):
DECEMBER 31, 1999 1998 --------- --------- Deferred tax assets: Reserves and accruals 1,126 1,561 Net operating loss and credit carryforwards 21,918 20,253 Other 452 492 --------- --------- Deferred tax assets 23,496 22,306 Valuation allowance (23,496) (22,306) --------- --------- Deferred taxes $ - $ - ========= =========
The Company has Federal and California net operating losses of approximately $58 million and $25 million, respectively, which begin to expire in 2008 and 2,000, respectively, unless previously utilized. The difference between the federal and California net operating loss carryforwards relates primarily to California's statutory 50% annual reduction rule as well as previous expiration of California net operating losses due to the shorter five-year carryover period allowed by California tax statute. The Company has provided a valuation allowance against its net deferred tax asset due to uncertainty regarding its realization. Page 5 14 The Company also has federal general business credit carryforwards of approximately $588 thousand, which begin to expire in 2002. Pursuant to the Tax Reform Act of 1986, use of the Company's business credit and net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three-year period. 10. EMPLOYEE STOCK BONUS PLAN The Company has an employee stock bonus plan, commonly referred to as a 401(k) plan, qualified under the Internal Revenue Code, in which all eligible employees, as defined in the Internal Revenue Code, may elect to participate. Under the Plan, employees may voluntarily make tax-deferred contributions of up to 15% of their compensation to a trust, which provides the participant with various investment alternatives. In addition, the Company, at the discretion of the Board of Directors, may contribute an amount of Company stock for each fiscal year that does not exceed 5% of the annual compensation of all participants in the Plan. The Company made no contributions in 1999 and 1998. 11. STOCK OPTION PLANS The Company has two current employee stock option plans and a directors option plan whereby options to purchase 681 thousand and 26 thousand shares, respectively, of the Company's common stock may be granted. Options granted have 5-to-10 year terms that vest and become fully exercisable two to four years from the date of grant. Pro forma information regarding net loss and net loss per share is required by SFAS No. 123, and has been determined as if the Company has accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options was estimated at the date of grant, using the Black-Scholes option pricing model, with the following weighted average assumptions for 1999 and 1998, respectively: risk-free interest rates 5.97% - 6.68% and 4.58% - 4.95%, respectively; dividend yields of 0% in both 1999 and 1998; volatility factors of the expected market price of the Company's common stock of 111 for 1999, 2.8 for 1998 and a weighted-average life of the option of 7.21 years for both 1999 and 1998. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of applying SFAS No. 123 for pro forma disclosure purposes are not likely to be representative of the effects on pro forma net loss in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The Company's pro forma information follows (in thousands, except per share amounts):
1999 1998 Pro forma net loss $(4,308) $ (2,093) Pro forma loss per share $ (0.56) $ (0.35)
In 1999, the Company granted options to acquire 65,000 shares of the Company's common stock to consultants. The options were issued at fair value with a vesting period of two years and compensation expense of $23,400 was recorded in accordance with SFAS 123. Page 6 15 A summary of the Company's stock option activity and related information for the years ended December 31 follows (options in thousands):
YEARS ENDED DECEMBER 31, 1999 Weighted- 1998 Weighted- Average Average Exercise Exercise Options Price Options Price ------- --------- ------- --------- Outstanding-beginning of year 436 $ 9.92 493 $12.74 Granted 427 $ 1.00 63 $ 1.48 Exercised - $ - - $ - Cancelled (117) $17.03 (120) $16.83 ------- --------- ------- --------- Outstanding-end of year 746 $ 3.70 436 $ 9.92 ------- --------- ------- --------- Exercisable at end of year 222 $ 8.80 263 $14.48 ------- --------- ------- --------- Weighted-average fair value of options granted during the year $ 1.00 $ 1.48 ------- --------- ------- ---------
Exercise prices for options outstanding as of December 31, 1999 ranged from $0.50 to $47.25. The weighted-average remaining contractual life of those options is approximately 6 years. At December 31, 1999, options for 458,844 shares were available for future grant. The following table summarizes information about stock options at December 31, 1999 (shares in thousands):
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS -------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE SHARES CONTRACTUAL LIFE PRICE SHARES PRICE ------ ---------------- ----- ------ ----- RANGE OF EXERCISE PRICES OF 12/31/99 $ 0.5000-$ 3.8439 573 9.37years $ 1.70 49 $ 3.42 $ 3.8445-$ 6.6564 101 4.12years $ 4.62 101 $ 4.62 $ 8.2500-$34.5000 60 2.55years $ 12.54 60 $ 12.54 $47.2500-$47.2500 12 2.71years $ 47.25 12 $ 47.25 ---------------- --- --------- --------- --- --------- $ 0.5000-$47.2500 746 8.00years $ 3.70 222 $ 8.80 ---------------- --- --------- --------- --- ---------
12. LITIGATION In November, 1995, Mr. James Walters, the former chairman and president of the Company, filed an action in the San Diego County Superior Court against the Company and its then current president, Frederick A. Brunn, alleging that certain statements in a magazine article were slander per se by the Company and Brunn. The case was settled in October 1999 at minimal financial cost to Registrant. The Company is also subject to other legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. Page 7 EX-21 4 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT 1. INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS AUSTRALIA, PTY. LTD. Unit 1A, 167 Prospect Highway Seven Hills, New South Wales 2147 Australia 2. ILTS UK LIMITED Oakley Building Broad Lane Bracknell, Berkshire RG12 9GU Great Britain EX-23.A 5 CONSENT OF EXPERTS AND COUNSEL 1 Exhibit 23A CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 25, 2000, included in this Form 10KSB into International Lottery & Totalizator Systems, Inc.'s previously filed From S-8, No. 2-99618, No. 33-34121, No. 33-34123, No. 33-79938 and No. 33-69008, and Form S-3 No. 33-78194. ARTHUR ANDERSEN LLP San Diego, California March 28, 2000 EX-23.B 6 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23B ILTS - INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. We have audited the accompanying consolidated balance sheets of International Lottery & Totalizator Systems, Inc. (a California corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Lottery & Totalizator Systems, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP San Diego, California February 25, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 6,801 0 417 0 135 8,195 316 0 8,511 5,038 0 0 0 56,326 (52,792) 8,511 5,650 5,650 4,695 4,695 5,549 0 1 (4,241) 0 (4,241) 0 0 0 (4,241) (.55) (.55)
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