-----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, NxERJdCTT+VwvYmrI0/Hyy+mvcpQs+drIXjPxukCjt7138fG2V/ChtkkIUToVcvx 812YnGV0i8gJKbfSvPxcuw== 0000936392-97-000441.txt : 19970401 0000936392-97-000441.hdr.sgml : 19970401 ACCESSION NUMBER: 0000936392-97-000441 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10294 FILM NUMBER: 97569476 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 10-K405 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-10294 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) FORMERLY INTERNATIONAL TOTALIZATOR SYSTEMS, INC. ------------------------ CALIFORNIA 95-3276269 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2131 FARADAY AVENUE CARLSBAD, CALIFORNIA 92008 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (760) 931-4000 REGISTRANT'S HOME PAGE HTTP://WWW.ILTS.COM SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: (TITLE OF CLASS) COMMON SHARES ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Aggregate market value of voting stock held by non-affiliates of the Registrant as of March 24, 1997 was approximately $13,955,671 ------------------------ Number of common shares outstanding at March 24, 1997 was 17,176,211 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Stockholders of the Registrant: Parts II and IV Portions of the Proxy Statement for Annual Meeting of Stockholders, May 15, 1997: Part III ------------------------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X ================================================================================ 2 TABLE OF CONTENTS PART I ITEM 1. BUSINESS...................................................................... 1 General....................................................................... 1 DATAMARK(R) Terminals......................................................... 1 Wagering and Other Terminal Products.......................................... 2 Lottery Systems/Sales and Service Agreements.................................. 2 Revenue Sources............................................................... 3 Product Development........................................................... 3 Backlog....................................................................... 3 Marketing and Business Development............................................ 4 Manufacturing and Materials................................................... 4 Competition................................................................... 5 Employees..................................................................... 5 Patents, Trademarks and Licenses.............................................. 5 Regulation.................................................................... 5 Dependence Upon a Few Customers............................................... 5 Seasonality................................................................... 6 Working Capital Practices..................................................... 6 Environment Effects........................................................... 6 Export Sales.................................................................. 6 ITEM 2. PROPERTIES.................................................................... 6 ITEM 3. LEGAL PROCEEDINGS............................................................. 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 7 EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS......... 7 ITEM 6. SELECTED FINANCIAL DATA....................................................... 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................... 7 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS............................................. 8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................................... 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................ 8 ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................................... 8 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT.................. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 8 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................................................................... 8
i 3 PART I ITEM 1. BUSINESS General The Registrant designs, manufactures, sells, leases, manages, supports and services computerized ticket issuing systems and terminals for the global pari-mutuel and on-line lottery industries. The principal applications for the Registrant's products are in the automated horse racing and on-line government sponsored lottery industries. The Registrant has also bid for long-term service contracts under which it intends to operate on-line lottery systems. The Registrant utilizes its technology in other ticket-processing applications, such as keno gaming and automated ticket printer/readers for toll turnpike systems. The principal proprietary component of the Registrant's systems are the DATAMARK(R) terminals, a compact, reliable microprocessor-based ticketing terminal, which can print and process up to approximately 30 tickets per minute. The Registrant sells the DATAMARK(R) terminal separately or as part of a turnkey wagering application system and can modify a terminal's features or configurations and central system software to meet specific customer requirements. The Registrant's wagering application systems include DATAMARK(R) terminals, a central computer installation, communication network and display equipment. System features include real-time central processing of data received from multiple locations, back-up hardware capability and complete communications redundancy designed to provide fault tolerant operation. DATAMARK(R) Terminals The Registrant has developed several models of DATAMARK(R) terminals for different wagering applications. All are microprocessor-based and have a compact, lightweight design for countertop operation. The more recent models use the "Flipper" concept and are approximately 12" deep, 12" wide, 10" high, weigh approximately 27 pounds, and are accompanied by a detached keyboard that may be positioned to suit the convenience of the operator. Other older models are slightly larger and may have built-in or external displays or keyboards. The latest DATAMARK(R) models utilize a compact ticket path which allows the terminal to print on one side and read from both sides of the same ticket. The terminal contains a thermal printer which prints tickets quickly and quietly without ink, ribbons or impact, thereby improving print quality and reliability, and reducing maintenance expenses. The terminals use either pre-cut thermal-coated tickets or thermal-coated roll stock tickets or both. Some models will sequentially process up to 50 tickets entered at one time. The basic functions of the DATAMARK(R) terminal are similar in all its wagering system applications. Initially, wagering or other selection data is entered into the terminal either manually by the operator via a keyboard, or by a ticket marked by the customer. The terminal transmits that information to the central computer, where a serial number is assigned to the transaction and a response is sent back to the terminal which then thermally prints the data either on the back of the customer-marked ticket or on a new ticket. After the data has been printed on the ticket, in both numerical and machine readable (bar code) form, but before the ticket is delivered to the customer, the terminal reads the bar code in order to verify that it is correct and readable when later presented to any terminal for cashing or validation. When a ticket is cashed or presented for validation, the terminal optically reads the bar code and accesses the central computer to verify that payment is to be made with respect to the ticket. The central computer calculates the payout amount, transmits this data to the terminal and records the fact that the ticket has been paid, ensuring that tickets are not paid twice. The terminal prints the payout amount on the ticket giving visual evidence that the ticket has been paid, and directs the processed ticket to the operator. The DATAMARK(R) terminal's basic functions are supplemented by various features. In the horse racing industry, the DATAMARK(R) terminal is capable of issuing tickets for pool or for any feature pool currently being used in horse racing. The terminals are designed to facilitate multiple bets on one ticket and multiple selections for each bet. In addition, the bettor is able to mark bets on a pre-printed playslip, which is then read 1 4 optically by the terminal, the amount wagered calculated and the bet details printed on the back of the same ticket. Because the ticket is prepared away from the pari-mutuel clerk's window, betting transaction time is reduced, efficiency of the operation is improved and the bettor obtains more privacy in the betting transaction. Similarly, in the lottery industry, a player marks the numbers selected on a pre-printed ticket or playslip which is read optically by the DATAMARK(R) terminal and entered into the central system. The selections and the transaction total are then either printed on the back of the playslip or on a separate ticket and delivered to the player. Wagering and Other Terminal Products The Registrant historically has derived revenue in the horse racing industry from sales contracts for DATAMARK(R) terminals and for wagering systems, which include DATAMARK(R) terminals, a central computer installation and peripheral and display equipment. The Registrant's systems are "sell-pay" systems, which means that each terminal is capable of being used both for selling all types of wagering tickets and for making payment to the ticket holders after validation of winning tickets. The nucleus of each wagering system is the central computer installation that receives information from ticket-issuing terminals, accumulates wagering data, calculates odds and payouts, distributes information to the display systems and terminals, and generates management information reports. In cooperation with the customer, the Registrant designs the configuration of the central computer installation to provide fault-tolerant operation, high throughput and security. Each central computer installation typically includes a computer configuration and various peripheral devices, such as magnetic storage devices, management terminals and hardcopy printers, all of which are manufactured by others. Although certain of the Registrant's customers presently use software in their pari-mutuel systems which is proprietary to the Registrant, the software presently being offered by the Registrant in its horse racing system is software, as enhanced and modified by the Registrant, acquired by license from The Hong Kong Jockey Club (The HKJC). In addition to sales of terminals and systems, the Registrant realizes ongoing revenue from the sale of spare parts for use in the maintenance of its terminals of which approximately 30,000 have been delivered to date. The Registrant also enters into contracts with its customers to provide software modifications, upgrades and support for its installed products. Lottery Systems/Sales and Service Agreements Computerized, or on-line, lotteries are currently operated in many countries. Existing lottery systems include both manual systems and modern on-line systems. In an on-line lottery system, betting terminals are connected to a central computer installation by a communications network and the system typically utilizes a pari-mutuel pool or fixed payout or both in offering "lotto" and other numbers games. Prior to 1994, the Registrant entered into a contract to provide lottery equipment and management of on-line lottery system on a long-term basis in Papua New Guinea, In July 1995, ILTS sold its facilities management and equipment lease contracts for the lottery in Papua New Guinea to the principal shareholders of the operating company, The Lotto Pty. Ltd ("Lotto Pty."). ILTS will receive a percentage of Lotto Pty.'s sales over the next four years. Proceeds of the sale are anticipated to accelerate the Registrant's return on its investment, and to ultimately provide a greater return than if the Registrant had continued to operate the lottery for Lotto Pty. In June 1995, the Registrant announced a ten year service and supply agreement with Pascal & Company (Pascal) of the United Kingdom. Under the agreement, the Registrant provides a lottery system and services to Pascal for operation of an on-line lottery on behalf of the National Hospital Trust (NHT) in England and provides 1,000 DATAMARK(R) on-line terminals and associated software, a central computer system and software, training, support, installation and maintenance. In September 1996, it became apparent that an affiliate of the customer was unable to obtain the additional funding necessary for the project start-up and on-going operations. As a result, the Registrant recorded a $2.8 million charge to reflect a reserve for the project. In 1996, the Registrant reserved $2.8 million for its investment in the project and declared Pascal to be in 2 5 default under the contract. The Registrant continues to discuss with Pascal investors the supply of terminals under the existing contract. The Registrant owns non-exclusive rights to use the central system software developed by The HKJC for use in its pari-mutuel wagering and lottery systems. Under the terms of the amended license, the Registrant pays The HKJC a royalty equal to a percentage of the revenue it receives in connection with a sale, lease or providing a service of any lottery system using this software. In addition, the Registrant is obligated to provide The HKJC with any modifications which the Registrant makes to the software, except where ownership to such modifications vests in the Registrant's customers. The Registrant has made significant modifications to The HKJC software, including changes to the system's communications network and changes which permit the generation of more detailed management reports. In the Registrant's lottery system, tickets are processed on DATAMARK(R) terminals which are connected to a central computer installation, usually by telephone lines. The central computer installation utilizes Digital Equipment Corporation hardware. The system has the following characteristics: rapid processing, storage and retrieval of transaction data in high volumes and in multiple applications; the ability to down-line load, i.e., to reprogram the wagering terminals from the central computer installation via the communications network; a high degree of security and redundancy to guard against unauthorized access and tampering and to ensure fault tolerant operation without data loss; and, a comprehensive management information and control system. Revenue Sources The following table sets forth the revenue for the periods indicated attributable to different applications of the Registrant's technology:
YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Racing Products and Services............. $11,183 $10,448 $13,932 $14,680 $14,851 Lottery Products and Services............ 5,105 7,680 9,231 10,322 4,417 Other.................................... 305 513 926 15 569 ------- ------- ------- ------- ------- Total.................................... $16,593 $18,641 $24,089 $25,017 $19,837 ======= ======= ======= ======= =======
Product Development The Registrant's ability to compete successfully depends in part upon its ability to meet the current and anticipated needs of its customers. To that end, the Registrant devotes a significant portion of its research and development activity to refining and enhancing the features of existing products, systems and software. In 1996, the Registrant spent approximately $1.7 million on engineering, research and development, as compared to $1.4 million and $1.6 million in 1995 and 1994, respectively. The Registrant developed the Single Roller Flipper Terminal with a unique reader/printer mechanism that meets the needs of many different applications by combining into one unit all of the functional capabilities of previous DATAMARK(R) reader/printer mechanisms in a modular fashion. Also, the Registrant has developed a terminal specifically aimed at lottery applications called the XClaim. This terminal can be configured to print tickets using thermal or impact printing. In February 1996, the Registrant received its ISO 9001 registration. This demonstrates quality in design development and manufacture under ISO standards. Backlog The backlog of orders for its products and services believed by the Registrant to be firm, amounted to approximately $1.7 million as of December 31, 1996, as compared to a backlog of approximately $9.2 million 3 6 as of December 31, 1995. Of such backlog at December 31, 1996, approximately $1.7 million is expected to be filled during 1997. See BUSINESS -- Dependence Upon a Few Customers. Marketing and Business Development Management believes that the Registrant's continuing ability to obtain and retain contracts for its wagering systems and terminals is directly related to its reputation in its various fields of expertise. Because of its reputation, the Registrant often receives unsolicited inquiries from potential customers. The Registrant also learns of new business opportunities through the close contacts which its personnel maintain with key officials in the international horse racing and lottery industries. Contracts to provide products to the horse racing and lottery industries often are awarded through a competitive bidding process which can begin years before a contract is awarded and involves substantial expenditures by the Registrant. Through its contacts with existing customers and others in these industries, the Registrant often becomes aware of prospective projects before the customer circulates a request for proposal. If the Registrant is interested in the project it typically submits a proposal, either before or after the customer circulates a formal request for proposal, outlining the products it would provide and the services it would perform. If the proposal is accepted, the Registrant and its customer will negotiate and enter into a contract on agreed terms. The Registrant's marketing efforts are carried out by the Registrant's professional marketing and engineering staff and frequently involves other executive officers of the Registrant. Marketing of the Registrant's products and services throughout the world is often performed in conjunction with consultants with whom the Registrant contracts, from time to time, for representation in specific market areas. The Registrant's success depends in large part on its ability to obtain new contracts to replace its existing contracts. The Registrant currently has proposals outstanding to supply systems, terminals or components for use in the pari-mutuel wagering industry and for lotteries in various foreign countries. In 1996, the Registrant unsuccessfully bid on one service/operating contract for a U.S. state lottery and it intends to continue this marketing effort in 1997 and future years. In addition, the Registrant has had discussions with both new and existing customers regarding supplying products for their operations and expects to bid for additional contracts in the future. Because the realization of revenue from these prospects is dependent upon a number of factors, including the bidding process and product development, there can be no assurance that the Registrant will be successful in realizing revenue from any of these activities. Late in 1994, prototype deliveries began on the $2.8 million contract announced in 1993 with The Revenue Markets, Inc. (TRIM) which is automating the New York State Thruway toll road system. These units are currently being operated in a pilot test mode and have not been accepted by the Thruway authorities. See Note 3 of Notes To Consolidated Financial Statements incorporated by reference from part II, Item 8. Natural Avenue Sdn, Bhd of Malaysia, a new customer of the Registrant placed a $2.2 million order for DATAMARK(R) lottery terminals and a computer operations system. Natural Avenue operates an on-line lottery in the state of Sarawak, in eastern Malaysia, which began in February 1996. Manufacturing and Materials Manufacture of the Registrant's systems and terminals is performed at its facilities in Carlsbad, California, and consists principally of the assembly of parts, components and subassemblies (most of which are designed by the Registrant) into finished products. The Registrant purchases many parts, components and subassemblies (some of which are designed by The Registrant) necessary for its terminals and the systems manufactured by the Registrant from outside sources and assembles them into finished products. These products and purchased computers are then integrated with standard peripherals purchased by the Registrant to construct racing and lottery systems. The Registrant generally has multiple sources for the various items purchased from vendors, but some of these items are state-of-the-art and could, from time to time, be in short supply. Certain other items are available only from a single supplier. For the twelve months ended December 31, 1996 no vendor accounted for 10% or more of the Registrant's raw material purchases. 4 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, GTECH Holdings Corporation, Autotote Limited and Video Lottery Technologies, all United States companies. Management believes that the Registrant's sales of its products in the past five years have been a substantial factor in the international marketplace. The Registrant's sales or leases in the United States have been insignificant. In general, the Registrant's competitors have significantly greater resources than the Registrant. Competition for on-line lottery system contracts is intense. Employees As of December 31, 1996, the Registrant employs 143 persons worldwide on a full-time equivalent basis. Of this total, 51 were engaged in manufacturing and operations support, 45 in engineering and software development and 47 in marketing and administrative positions. None of the Registrant's employees is represented by a union, and the Registrant believes its relations with its employees are good. Patents, Trademarks and Licenses The Registrant has filed five patent applications on its products, all of which have been issued by the U.S. Patent Office. The Registrant believes that its technical expertise, trade secrets and the creative skills of its personnel are of substantially greater importance to the success of the Registrant than the benefits of patent protection. The Registrant typically requires customers, employees, licensees, subcontractors and joint venturers who have access to proprietary information concerning the Registrant's products to sign nondisclosure agreements, and the Registrant relies on such agreements, other security measures and trade secret law to protect such proprietary information. Central system software used in the Registrant's lottery system has been obtained under a nonexclusive license with The HKJC. Regulation The countries in which the Registrant markets its products generally have regulations governing horse racing or lottery operations, and the appropriate governing body could restrict or eliminate these operations in these countries. Any such action could have a material adverse effect on the Registrant. Foreign countries also often impose restrictions on corporations seeking to do business within their borders, including foreign exchange controls and requirements for domestic manufacturing content. In addition, laws and legal procedures in these countries may differ from those generally existing in the United States and conducting business in these countries may involve additional risk for the Registrant in protecting its business and assets, including proprietary information. Changes in foreign business restrictions or laws could have a significant impact on the Registrant's operations. Dependence Upon a Few Customers The Registrant's business to date has been dependent on major contracts and the loss of one or failure to replace completed contracts with new contracts would have a materially adverse effect on the Registrant's business. During 1996, the Registrant's revenues were derived primarily from contracts with AB Travoch Galopp (ATG) of Sweden ($4.3 million), SATAB ($2.0 million); Hong Kong Jockey Club ($2.4 million); New South Wales Lottery ($1.6 million); the Phillippines Gaming Management Company, ($.5 million); Western Australia Totalisator Agency Board, ($.5 million); and Natural Ave Sdn Bhd, a Malaysian company ($1.4 million). See Note 4 of Notes to Consolidated Financial Statements, incorporated by reference from 5 8 Part II, Item 8, and Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in Part II, Item 7. Seasonality In general, the Registrant's business is not subject to seasonal effects. Working Capital Practices The Registrant's sales contracts typically provide for deposits and progress payments which, have provided sufficient working capital for operations. With the Registrant entering into long-term lottery service agreements, a substantial portion of its working capital has been expended in attempting to establish viable operations in these investments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1 of Notes To The Consolidated Financial Statements incorporated by reference from Part II, Items 7&8. Environment Effects There are no significant capital expenditures required of the Registrant in order to comply with laws relating to protection of the environment. Export Sales The majority of the Registrant's revenues are derived from contracts with foreign companies. As of December 31, 1996, the Registrant's equipment has been delivered and installed in Sweden, Norway, Hong Kong, Singapore, Australia, Finland, England, the Netherlands, Malaysia, Macau, China, Papua New Guinea, Belgium, the Philippines. The companies with which the Registrant contracts are normally sizeable organizations with substantial assets and are capable of meeting the financial obligations undertaken. The Registrant has entered into a few contracts specifying payment in currencies other than the U.S. dollar, thereby assuming the risk associated with fluctuations in value of foreign currencies. The Registrant has a wholly-owned foreign sales corporation and conducts its foreign business through such subsidiary in order to obtain U.S. tax benefits associated with this corporation. In addition, the Registrant operates wholly-owned subsidiaries in Australia, and the United Kingdom. Also, see Note 5 of Notes to Consolidated Financial Statements, incorporated by reference in Part II, Item 8. ITEM 2. PROPERTIES The Registrant's U.S. facilities consist of approximately 41,500 square feet of leased office, warehouse and manufacturing space in Carlsbad, California. The lease on this facility expires in the year 2000. The Registrant's Australian subsidiary leases approximately 13,000 square feet consisting of a manufacturing and administrative facility. The lease on this property expires in October 1997. The Registrant's United Kingdom subsidiary currently occupies an office-technical support facility in West Drayton, England of approximately 2,400 square feet, under a lease expiring in April, 1998. See Note 6 of Notes to Consolidated Financial Statements, incorporated by reference from Part II, Item 8. ITEM 3. LEGAL PROCEEDINGS Shareholders' Class Action Litigation In 1994, shareholders of the Registrant filed class action lawsuits against the Registrant and several of its officers and directors. Those actions were consolidated in the United States District Court for the South District of California. Plaintiffs contended that during the class period (June 22, 1993 through June 21, 1994) the Registrant and the individual defendants made a series of public statements that failed to disclose adverse information about the Registrant's lottery service contracts, that these purported nondisclosures artificially inflated the price of the Registrant's stock, and that those purchasers who acquired their shares in reliance on the integrity of the market suffered damages as a result. On June 17, 1996, the court entered a judgement of a 6 9 cash payment to the class shareholders and 1.2 million shares of authorized but unissued common stock of the Registrant. Walters v ILTS, et al In November, 1995, Mr. James Walters, the former chairman and president of the Registrant, filed an action in the San Diego County Superior Court against the Registrant and its current president, Frederick A. Brunn, alleging that certain statements in a magazine article were slander per se by ILTS and Brunn and libel by the publishing company and the author, and that Mr. Walters suffered an invasion of privacy by all defendants. In addition, Mr. Walters alleged that erroneous information in the Registrant's 1995 proxy statement resulted in two other magazine articles publishing allegedly incorrect information. Mr. Walters seeks general and special damages of $9 million and punitive damages. On November 1, 1996, the San Diego County Superior Court entered a summary judgement in favor of the Registrant and Mr. Brunn. Mr. Walters has filed a notice of appeal with the California Appellate Court. See Note 11 to The Consolidated Financial Statements incorporated by reference from Part II, Item 8. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Inapplicable. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ------------------------------------ --- ------------------------------------------ Frederick A. Brunn.................. 52 President Timothy R. Groth.................... 47 Vice President, Technical Operations William A. Hainke................... 55 Chief Financial Officer, Corporate Secretary and Treasurer M. Mark Michalko.................... 42 Executive Vice President
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information required by this item is included in the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996 under the same caption and is incorporated herein by reference to such Annual Report. Solely for the purpose of calculating the aggregate market value of the voting stock held by non-affiliates of the Registrant, as set forth on the cover of this report, it has been assumed that all executive officers and directors of the Registrant and Berjaya Lottery Management (H.K.) Ltd. were affiliated persons. All of the Registrant's Common shares, the only voting stock outstanding, beneficially owned by each such person (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) have been assumed to be held by that person for this calculation. The market value of the Common shares is based on the closing price reported in the Wall Street Journal for March 24, 1997, of $.8125 per share. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included on page 5 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996 under the same caption and is incorporated herein by reference to such Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is included on pages 6 through 9, inclusive of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996 under the same caption and is incorporated herein by reference to such Annual Report. 7 10 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS The information required by this item is included on pages 10 through 20, inclusive of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996 and is incorporated herein by reference to such Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. ITEM 11. EXECUTIVE COMPENSATION The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required is incorporated herein by reference to the Registrant's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List the following documents filed as a part of the report: 1. and 2. Index to Consolidated Financial Statements and Financial Statement Schedules: (i) Report of Ernst & Young LLP, Independent Auditors* (ii) Consolidated Balance Sheets at December 31, 1996 and 1995* (iii) Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996* (iv) Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996* (v) Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996*
8 11 (vi) Notes to Consolidated Financial Statements* *incorporated by reference from the Annual Report to Shareholders for the fiscal year ended December 31, 1996. (vii) Schedule II -- Valuation and Qualifying Accounts (Form 10-K, page 10) All other schedules are omitted since the required information is not present.
3. Exhibits (3) Articles of Incorporation, as amended September 13, 1994, reflecting corporate name change, and By-laws (incorporated by reference to Form 10-K for the fiscal year ended December 31, 1994, File No. 0-10294). (10) (a) Lease for the Registrant's facility in Carlsbad, California dated June 30, 1992, as amended by First Amendment to Lease dated January 23, 1987 (incorporated by reference to Exhibit 10.11 to Registration Statement File No. 33-18238 effective February 19, 1988). (b) Agreement with Sir Michael G. R. Sandberg dated May 20, 1987 (incorporated by reference to Exhibit 10.15 to Registration Statement File No. 33-18238 effective February 19, 1988). (c) The Registrant's 1982 Employee Stock Option Plan (incorporated by reference to Exhibit 4(b) to Post-Effective Amendment No. 1 to Form S-8 Registration Statement, File No. 2-99618, as filed on April 4, 1990). (d) The Registrant's 1986 Employee Stock Option Plan (incorporated by reference to Exhibit 4(b) to the Form S-8 Registration Statement, File No. 33-34121, as filed on April 4, 1990). (e) The Registrant's 1988 Employee Stock Option Plan (incorporated by reference to Exhibit 4(b) to the Form S-8 Registration Statement, File No. 33-34123, as filed on April 4, 1990). (f) The Registrant's 1990 Stock Incentive Plan (incorporated by reference to Form 10-K for the fiscal year ended December 31, 1990, File No. 0-10294 and File No. 33-79938). (g) Agreement with The Royal Hong Kong Jockey Club dated May 11, 1989 and amended on January 13, 1992 (incorporated by reference to Form 10-K for the fiscal year ended December 31, 1991, File No. 0-10294). (h) The Registrant's 1993 Directors' Stock Option Plan as amended May 26, 1995 (incorporated herein by reference to Form 10-K for the fiscal year ended December 31, 1994, File No. 0-10294). (i) Service and Supply contract dated August 3, 1995 including Schedule 1, between Registrant and Pascal & Company, a United Kingdom company. (13) Annual Report to Shareholders for the fiscal year ended December 31, 1996. With the exception of the information incorporated by reference into items 5, 6, 7, and 8 of this Form 10-K, the 1996 Annual Report to Shareholders is not deemed filed as part of this report.
9 12 (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP, Independent Auditors (b) No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
10 13 SCHEDULE II INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR - ---------------------------------------------- ---------- ---------- ---------- ----------- Years Ended: December 31, 1996 -- Warranty Reserves..................... $ 297,727 $ 84,594 $124,400 $ 257,921 -- Allowance for Doubtful Accounts....... $ 62,956 $ 61,764 $ 13,608 $ 111,112 December 31, 1995 -- Warranty Reserves..................... $ 347,117 $ 76,015 $125,405 $ 297,727 -- Allowance for Doubtful Accounts....... $ 208,550 $ 60,000 $205,594 $ 62,956 December 31, 1994 -- Warranty Reserves..................... $ 193,000 $255,370 $101,253 $ 347,117 -- Allowance for Doubtful Accounts....... $ 75,000 $140,000 $ 6,450 $ 208,550
Warranty reserve deductions primarily reflect actual warranty costs incurred by the Registrant. 11 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.(TM) By: /s/ WILLIAM A. HAINKE ------------------------------------- William A. Hainke Chief Financial Officer, Corporate Secretary and Treasurer Dated: Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ --------------------------------- --------------- /s/ THEODORE A. JOHNSON Chairman of the Board - ------------------------------------------ Theodore A. Johnson March 27, 1997 /s/ FREDERICK A. BRUNN President - ------------------------------------------ Director Frederick A. Brunn March 27, 1997 /s/ WILLIAM A. HAINKE Chief Financial Officer, - ------------------------------------------ Corporate Secretary and Treasurer William A. Hainke March 27, 1997 /s/ M. MARK MICHALKO Executive Vice President - ------------------------------------------ Director M. Mark Michalko March 27, 1997 /s/ Director - ------------------------------------------ Ng Foo Leong March 27, 1997 /s/ MARTIN J. O'MEARA, JR. Director - ------------------------------------------ Martin J. O'Meara, Jr. March 27, 1997 /s/ SIR MICHAEL G.R. SANDBERG Director - ------------------------------------------ Sir Michael G.R. Sandberg March 27, 1997 /s/ CHAN KIEN SING Director - ------------------------------------------ Chan Kien Sing March 27, 1997 /s/ NG AIK CHIN Director - ------------------------------------------ Ng Aik Chin March 27, 1997
12 EX-10.(I) 2 EXHIBIT 10.(I) 1 Exhibit 10(i) INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. (ILTS) AND PASCAL & COMPANY CONTRACT NUMBER: 6193 SERVICES AND SUPPLY STANDARD AGREEMENT AND SCHEDULES Contents Purchase Agreement Schedule 1 Terms and Conditions, Prices and Payment Schedule Schedule 2 Project Schedule Schedule 3 Hardware Products to be Delivered by Supplier Schedule 4 Software Products to be Delivered by Supplier Schedule 5 Services to be Delivered by Supplier Schedule 6 Change Control Procedure Schedule 7 Software Support Agreement 2 Services and Supply Agreement - -------------------------------------------------------------------------------- (This page intentionally left blank.) - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Page ii Customer:________ Supplier:________ March 25, 1997 3 Services and Supply Agreement - -------------------------------------------------------------------------------- SERVICES AND SUPPLY AGREEMENT This Agreement dated August 3, 1995 is entered into between International Lottery & Totalizator Systems, Inc., a California corporation, United States of America (herein referred to as "Supplier") and Pascal & Company (herein referred to as "Customer"). Attached hereto and made part of this Agreement are the following Schedules: Schedule 1 Terms and Conditions Schedule Schedule 2 Project Schedule Schedule 3 Hardware Products to be Delivered by Supplier Schedule 4 Software Products to be Delivered by Supplier Schedule 5 Services to be Delivered by Supplier Schedule 6 Change Control Procedure Schedule 7 Software Support Agreement 1.0 PURCHASE AND SALE OF DELIVERABLES. Supplier agrees to provide the Deliverables as described in Schedules 3, 4 and 5. The payment terms shall be as set forth in Schedule 1 and the timetable for the delivery, installation and acceptance of the Deliverables shall be as set forth in Schedule 2. 2.0 INDEMNITIES AND LIMITS ON SUPPLIER'S LIABILITY. Customer hereby indemnifies and holds harmless and shall keep Supplier indemnified and held harmless to the extent permitted under existing law, from and against all damages, costs, actions, claims and demands whatsoever, including reasonable legal fees, which may be recovered or made against Supplier by any person including members of the public, for any injury they may sustain while in or upon any building or structure or any part thereof or any other location in which the Deliverables or any part thereof is installed or from which it is operated or in connection with Customer's use or operation of the Deliverables or any part thereof or any act or omission of Customer or its employees or agents unless the injury is caused by Supplier or Supplier's employees willful or negligent act or omission, provided that, this indemnity shall not extend to any injury suffered by Supplier's staff or members of the public in space occupied by the supplier, which shall be covered by insurance arranged by Supplier at its cost. 2.1 Customer acknowledges that the Deliverables may contain magnetic memories or other devices in which - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement March 25, 1997 Customer:________ Supplier:________ Page 1 4 Services and Supply Agreement - -------------------------------------------------------------------------------- substantial data may be accumulated. Supplier shall not become liable to Customer or anyone else if any such data is lost or rendered inaccurate, unless caused by gross negligence or intentional misconduct, omission or breach of contract. Supplier shall not be liable to Customer or any other person for any act, omission, occurrence or event causing loss, damage or injury to person or property in connection with Supplier's obligations under this Agreement, or its exercise of any rights or privileges hereunder, unless caused by gross negligence, intentional misconduct, omission or breach of contract of Supplier. In no event, whether in contract, warranty, tort (including negligence), or otherwise, shall Supplier be liable to Customer or any other person for indirect, incidental, special or consequential damages including, but not limited to, loss of actual or anticipated profits or revenues, loss of use of products, loss of data, cost of capital, cost of substitute products, facilities or services, downtime costs, or claims of Customer for such damages in connection with providing or failing to provide the Deliverables or arising out of the use of the Deliverables. 2.2 Supplier's liability to Customer for any cause whatsoever shall be limited to five million U.S. Dollars ($5,000,000). This limitation will apply regardless of the form of action, whether contract or tort, including without limitation negligence. The foregoing limitation does not apply to damages resulting from personal injury caused by Supplier's negligence. 2.3 Any action against Supplier must be brought within twelve (12) months after the cause of action arises. 3.0 PATENTS AND COPYRIGHT. If any action or proceeding is brought against Customer for alleged infringement of any letter patent by the Deliverables or any part thereof or if any allegation of copyright infringement is made and if Customer gives Supplier notice without undue delay in writing of any such allegations of infringement or of the institution of any such action or proceeding and permits Supplier to answer the allegation and to defend the action or proceeding and also if Customer gives Supplier all information, reasonable assistance and authority required for those purposes and does not by any action (including any admission or acknowledgment) or omission prejudice the conduct of such defense then: 1. Supplier will at its own election either effect any settlement or compromise which it deems reasonable or at its own expense defend any such action or proceeding, and 2. Supplier will pay the amount of any settlement or compromise effected by Supplier including all damages and costs including any reasonable Customer legal fees awarded against Supplier and/or Customer in any such action or proceeding, and 3. If the Deliverables or any part thereof is in such action or proceeding held to constitute infringement and - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Page 2 Customer:________ Supplier:________ March 25, 1997 5 Services and Supply Agreement - -------------------------------------------------------------------------------- is the subject of an injunction restraining its use or any order providing for its delivery or destruction, Supplier shall at its own election and expense either: a) procure for Customer the right to retain and continue to use the Deliverables or part thereof; or b) modify the Deliverables or part thereof so that it becomes non-infringing. 3.1 Supplier shall not be under any of the obligations specified pursuant to subsection 3.0 above in either of the following events: 1. any infringement which is based upon the use of the Deliverables or part thereof in combination with equipment or other devices not made or supplied by Supplier or in any manner for which the Deliverables or part thereof was not supplied unless consented to by the Supplier; or 2. Customer enters into any compromise or settlement in respect of any such action or proceeding without Supplier's prior written consent. 4.0 CONFIDENTIAL INFORMATION. Customer acknowledges that information relating to the technical and operational aspects of the Deliverables is confidential to Supplier. Subject to Grant of License, Schedule 1, Customer shall not, and shall take all reasonable steps to insure that its employees and agents do not, without the prior written consent of Supplier, divulge any information relating to technical or operational aspects of the Deliverables or the terms of this Agreement to any third party except as required by law during the term of this agreement, during any renewal or renewals thereof and for a period thereafter of 10 years. 4.1 Supplier acknowledges that Customer's system is confidential to Customer and that any disclosure thereof could not be rectified. Supplier shall not, and shall take all reasonable steps to insure that its employees and agents do not, without the prior written consent of Customer, divulge any information relating to Customer's system or the terms of this Agreement to any third party except as required by law during the term of this Agreement, during any renewal or renewals thereof and for a period thereafter of 10 years. 5.0 Upon delivery of the deliverables Customer: 1. will comply with all laws relating in any way to the use, operation or maintenance of the Deliverables; 2. will grant Supplier the right to inspect the Deliverables at any reasonable time upon due notice; and the Customer shall have the right for such inspection of trade deliverables for which Customer does not have possession and which are in the custody of the Customer; - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement March 25, 1997 Customer:________ Supplier:________ Page 3 6 Services and Supply Agreement - -------------------------------------------------------------------------------- 3. shall not make any alterations, additions, modifications or improvements to the Deliverables without the prior written consent of Supplier. 6.0 FORCE MAJEURE. Neither party shall be responsible to the other for not fulfilling its obligations under this Agreement for the period which this is not feasible due to or circumstances beyond the reasonable control of either party including, without limiting the generality of the foregoing, acts of God, war, sabotage, riot, insurrection, civil commotion, change in legislation, regulation, decree or other legally enforceable order or pursuant to stated policy of any government, governmental or other competent authority (including any court of competent jurisdiction), strike action (whether or not involving employees of the party concerned), union bans or lock-outs. 6.1 If a party is or reasonably expects to be prevented from performing any of its obligations under this Agreement as a result of Force Majeure it shall, promptly after having knowledge of the act, event or cause constituting Force Majeure, give to the other party notice of the nature of the Force Majeure and likely duration of the disability resulting therefrom and shall further notify the other party forthwith upon cessation of that disability. 6.2 Any party notifying Force Majeure shall use reasonable endeavors to overcome that Force Majeure or remedy the disability resulting therefrom as promptly as possible, provided always that party shall not be required hereby to settle any labor dispute on terms contrary to its wishes nor to test the validity of any law, regulation, decree or order by way of legal proceedings. 6.3 In the event that Force Majeure shall subsist for a period in excess of one hundred eighty (180) days the parties agree that there is a mutual termination of the agreement without prejudice to either parties rights and remedies under this agreement or by law. 7.0 TERM OF THE AGREEMENT. The term of the Agreement expires on 31 May 2005, unless extended by a subsequent mutual Agreement. Supplier to submit draft extension agreement to Customer no later than 31 December 2003. 7.1 TERMINATION. Should either party, at any time before acceptance of all Deliverables cease conducting business in the normal course, become insolvent, make a general assignment for the benefit of creditors, admit in writing its inability to pay its debts as they mature, suffer or permit the appointment of a receiver for its business or assets, or have an order for winding-up made against it, or fail to perform any of its material obligations hereunder for a period of ninety (90) days after written notice by the other party - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Page 4 Customer:________ Supplier:________ March 25, 1997 7 Services and Supply Agreement - -------------------------------------------------------------------------------- requiring performance save that the ninety (90) days period shall not apply where a different period has been expressly dictated by the terms of this Agreement or where the failure to perform is incapable of remedy, such party shall be considered as having committed a material breach of this Agreement and the other party may at any time (or immediately in the case of a breach which in incapable of remedy) terminate this Agreement without prejudice to it's rights and remedies under this Agreement or at law. - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement March 25, 1997 Customer:________ Supplier:________ Page 5 8 Services and Supply Agreement - -------------------------------------------------------------------------------- 8.0 ENTIRE AGREEMENT. This Agreement embodies the entire agreement between the parties and supersedes in its entirety all previous understandings, agreements, and representations between the parties oral or written with respect to the subject matter hereof. This Agreement may not be amended or modified except by an instrument in writing duly executed on behalf of the parties. Any waiver of any breach of this Agreement shall be limited to the particular instance and shall not operate or be deemed to waive any future breach. Any representation or statement not contained in this Agreement shall not be binding upon Supplier as a warranty or otherwise. 9.0 ASSIGNMENT. Neither Supplier nor Customer may assign either its rights or its obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. 10.0 LEGAL FEES. If any action at law or in equity, including any action for declaratory relief, is brought to enforce or to interpret the provisions of this Agreement, the prevailing party shall be entitled to reasonable legal fees and costs, which may be set by the tribunal in the same proceeding or action, or in a separate proceeding or action brought for that purpose, in addition to any other relief to which it may be entitled. 11.0 GOVERNING LAW. The governing law of this Agreement shall be the law of England and Wales. Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration, which Rules are deemed to be incorporated by reference into this clause. The tribunal shall comprise three arbitrators, two of them to be nominated (one each) by the respective parties. The place of arbitration shall be London. The language of arbitration shall be English. 12. NOTIFICATION NAMES AND ADDRESSES Any notice of legal action to be given hereunder by either party to the other may be effected by personal delivery in writing or by facsimile or by registered or certified mail, postage prepaid, return receipt requested. Mailed notices shall be addressed to the parties at their addresses as follows, but each party may change its address by written notice in accordance with this agreement. Customer: Name: Pascal & Company Address: 119 Horseley Fields Wolverhampton, WVA 3DG United Kingdom - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Page 6 Customer:________ Supplier:________ March 25, 1997 9 Services and Supply Agreement - -------------------------------------------------------------------------------- Telephone: 1902-455-633 Fax: 1902-453-939 Contact(s): Administrator: Howard Kerbel Financial: Paul Startin Technical Management: David Griffiths Delivery Address: same Supplier Name: International Lottery & Totalizator Systems, Inc. Address: 2131 Faraday Avenue carlsbad, CA 92008 USA Telephone: 619-931-4000 Fax: 619-931-1789 Contact(s): Sales: Account Manager: Dale Rostamo Financial: William Hainke Project Name: NHS Lotto Contract Date: 1 June 1995 Delivery Date: 18 September 1995 - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement March 25, 1997 Customer:________ Supplier:________ Page 7 10 Services and Supply Agreement - -------------------------------------------------------------------------------- Pascal & Company International Lottery & Totalizator Systems, Inc. 119 Horseley Fields, 2131 Faraday Avenue Wolverhampton, WV1 3DG Carlsbad, California 92008 United Kingdom United States of America - ------------------------- ------------------------- CUSTOMER SUPPLIER /s/ Jim Holmes /s/ Frederick A. Brunn - ------------------------- ------------------------- Signed Signed Director President - ------------------------- ------------------------- Title Title 8/3/95 - ------------------------- ------------------------- Date Date - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Page 8 Customer:________ Supplier:________ March 25, 1997 11 SCHEDULE 1 TERMS & CONDITIONS, PRICES & PAYMENT 12 TABLE OF CONTENTS - -------------------------------------------------------------------------------- 1.1 Terms and Conditions............................................ 1 1.1.1 Prices and Fees.......................................... 1 1.1.1.1 Prices, Fees and Other Charges.................. 1 1.1.1.2 Taxes........................................... 1 1.1.1.3 Delivery........................................ 1 1.1.1.4 Payment......................................... 1 1.1.1.5 Non-Hire of Employees........................... 2 1.1.2 Warranty................................................. 2 1.1.2.1 Supplier Software Products...................... 2 1.1.2.2 Limitation of Warranty.......................... 2 1.1.2.3 Service Warranty................................ 3 1.1.2.4 Liabilities and Remedies........................ 3 1.1.3 Software License......................................... 3 1.1.3.1 Grant of Software License ...................... 3 1.1.3.2 Standard License Terms ......................... 3 1.1.3.3 License Termination ............................ 4 1.1.4 Fee Summary.............................................. 5 1.2 Hardware Deliverables........................................... 5 1.3 Services Deliverables........................................... 6 1.3.1 Publication Services..................................... 6 1.3.1.1 Ticket Design Services.......................... 6 1.3.1.2 Individual Services Prices for 1995............. 6 1.4 Software deliverables........................................... 7 - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Schedule 1 March 25, 1997 Customer:_________ Supplier:________ Page 1-i 13 (This page intentionally left blank.) - -------------------------------------------------------------------------------- Schedule 1 Pascal & Company Services and Supply Agreement Page 1-ii Customer:_________ Supplier:________ March 25, 1997 14 1 TERMS AND CONDITIONS, PRICES AND PAYMENT - -------------------------------------------------------------------------------- 1.1 TERMS AND CONDITIONS 1.1.1 PRICES AND FEES 1.1.1.1 PRICES, FEES AND OTHER CHARGES Prices and fees for Products and Services are specified herein. 1.1.1.2 TAXES Fees are exclusive of and Customer is responsible for all applicable taxes, duties, assessments and value added tax (VAT) on the sale, license or use of Products or on the provision of Services. 1.1.1.3 DELIVERY Products will be delivered Free Carrier (FCA according to Incoterms 1990) Supplier's facilities. Customer will be responsible for constructed transportation charges, and for insurance at rates in effect at the time of this agreement. Customer may elect to provide its own insurance by providing specific written notice to Supplier. Supplier will use Supplier's own freight forwarder; however, upon request from Customer the Supplier can use one specified by Customer and attach a 3% special handling fee to the transportation charges. 1.1.1.4 PAYMENT Customer shall provide Supplier with a report from the on-line system which specifies gross sales for the week and the average sales per the average number of on-line terminals for the same period. The report shall be provided no later than one day following each draw. Gross sales shall mean all sales minus cancellations. Based upon the report an invoice will be transmitted to the Customer by facsimile on the date shown on the invoice and this is defined as the date of invoice. Upon special request the original of the invoice can be mailed to the Customer for backup or for required business practice. Customer invoice facsimile, number and postal address to be sent to are: Payment for Products is due thirty (30) days from the date of invoice. Payments for services and/or fees for which no "delivery" of Products is involved is due upon date of invoice. Payment shall be made by wire transfer to: Totalizator Systems (U.K.) Ltd., c/o Midland Bank PLC Corporate Branch, High Street Uxbridge, Middlesex UB8 1BY Account No. 51294040 Sort Code 40-45-08 Tel No. 1-895-272090 Fax No. 1-895-232226 - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Schedule 1 March 25, 1997 Customer:_________ Supplier:________ Page 1-1 15 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- Invoices past due thirty (30) days will bear a late charge fee at the rate of one percent (1%) per month or portion thereof accumulative. Payment is deemed to have been effected on the day when Supplier's bank account has been credited with the payment. All invoices are payable in United Kingdom, Pounds Sterling. 1.1.1.5 NON-HIRE OF EMPLOYEES In the event that the Customer hires a Supplier employee either as a contract or permanent employee during the term of this Agreement, and for a period of two years after the termination of this Agreement hereof, the Customer agrees to reimburse the Supplier for the investment in training the employee in the products and services of the Supplier in the following amounts:
Term of Supplier Employee Employment Amount ------------------------------------ -------- Employment of 0 through 1 year $ 43,000 Employment of 1 through 2 years $ 75,000 Employment of 2 through 5 years $ 160,000 Greater than 5 years $ 250,000
Invoice to be generated and sent to Customer no sooner than one month after Customer hire date of Supplier Employee. 1.1.2 WARRANTY 1.1.2.1 SUPPLIER SOFTWARE PRODUCTS Supplier warrants to Customer that the Supplier Software Products designated as warranted will conform to the Schedule 4 Specification applicable to the Software Products at the time of contract. The warranty period for Supplier Software Products is for the term of this Agreement and any renewals thereof. The warranty period begins on the date of go-live. Supplier does not warrant that the execution of Software shall be uninterrupted or error-free. 1.1.2.2 LIMITATION OF WARRANTY The warranty provided in Subparagraph 1.1.2.1 are limited warranties and do not apply to: 1. any Products, other than Supplier Software Products, which may be sold or licensed by Supplier. These Products are sold or licensed "as is", or are warranted directly to Customer by a third party, or 2. conditions resulting from improper use of the Supplier Hardware or Software Products or operation of the Supplier Hardware outside the specified environmental conditions, or 3. conditions resulting from causes external to the Supplier Hardware or Software Products after delivery, or 4. conditions resulting from modifications to Supplier Hardware or Software Products other than modifications made by Supplier, or 5. Supplier Hardware Products from which Supplier's serial numbers have been removed or mutilated. - -------------------------------------------------------------------------------- Schedule 1 Pascal & Company Services and Supply Agreement Page 1-2 Customer:_________ Supplier:________ March 25, 1997 16 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- 6. Supplier Hardware Products when used with operating supplies (ticket paper stock) not in accordance with Supplier specifications. 7. Consumable products such as lamps, fuses, printheads and other expendable items. 1.1.2.3 SERVICE WARRANTY Supplier warrants that Services will be provided in a workmanlike manner in accordance with Schedule 5. 1.1.2.4 LIABILITIES AND REMEDIES Supplier's entire liability and Customer's remedies are set forth in this Paragraph, except as provided in the Agreement. These remedies are Customer's exclusive remedies and are in lieu of any other remedy at law or in equity. In all situations involving performance or non-performance Software Products furnished hereunder, Customer's remedy is if notified by Customer of the defect within the warranty period, or remedy, by Supplier in the manner specified in Schedule 1, of a non-conformance of Software during the stated warranty period. If Supplier fails to perform its warranty or service responsibilities, or if Customer has any other claim related to Deliverables purchased or licensed from Supplier, Customer shall be entitled to recover only direct damages and only up to the limits set forth in the Agreement. 1.1.3 SOFTWARE LICENSE Customer receives no right to use any Software Product except by a grant of a Software License by Supplier. Title to the Software Product shall remain with Supplier. These terms and conditions govern the License granted by Supplier to Customer and Customer's obligations thereunder. 1.1.3.1 GRANT OF SOFTWARE LICENSE Supplier grants Customer a Software License as provided below. Supplier grants no Software Licenses whatsoever, either explicitly or implicitly, except by this contract, for a Software License. Supplier grants to Customer a Software License for Software supplied by Supplier with Hardware Products or in connection with Services. Customer agrees to comply with and not deliberately modify or make inoperable any feature which is incorporated in the Software to prevent access to unlicensed Software. 1.1.3.2 STANDARD LICENSE TERMS 1.1.3.2.1 SOFTWARE EXECUTION Customer may execute the Software and may load, copy or transmit the Software, in whole or in part, only as necessary for execution. Customer may make archival copies of the Software as provided in the Copyright Law of the United States. Customer agrees to reproduce Supplier's copyright and all other legal notices, including but not limited to other proprietary notices and notices mandated by governmental entities, on all complete or partial copies or transmissions of the Software. Software usage may not exceed the License or the number of users for which Customer is licensed. 1.1.3.2.2 ACCESS TO SOFTWARE Customer may make the Software available to its employees and agents to the extent needed to exercise its License hereunder. - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Schedule 1 March 25, 1997 Customer:_________ Supplier:________ Page 1-3 17 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- 1.1.3.2.3 PERSONAL, NON-EXCLUSIVE LICENSES Customer's License is personal and non-exclusive, and may not be transferred without Supplier's express written consent, which consent shall not be unreasonably withheld. 1.1.3.2.4 LICENSE LIMITATION, REVERSE ENGINEERING Software is proprietary to Supplier. Supplier transfers no title to or ownership of any Software to Customer or to third party. Except as explicitly set forth in these terms and conditions, Customer shall not execute, use, copy or modify the Software nor disclose any part of the Software. Customer shall not decompile or reverse assemble the Software, or analyze or otherwise examine the Software, including any hardware or firmware implementation of the Software for the purpose of reverse engineering. 1.1.3.3 LICENSE TERMINATION Customer shall use the Software only in the ordinary course of its business as an operator. This Software License shall commence on the date that the Software is delivered to Customer and, except as set forth herein, shall terminate when Customer ceases operating the Software in Customer's system. Supplier may terminate any Licenses granted and any Software orders placed hereunder if Customer neglects or fails to perform or observe any of its obligations to Supplier hereunder, and such condition is not remedied within thirty (30) days after written notice has been given to Customer. Termination, whether by Supplier or Customer, shall apply to all versions of the Software licensed for execution hereunder. Before any termination by Customer becomes effective, and in the event of any termination by Supplier, Customer shall: 1. return to Supplier any License furnished by Supplier 2. destroy all copies of all versions of the Software in Customer's possession, and 3. remove all portions of all versions of the Software OR any adaptations made by Customer and destroy such portions and 4. certify in writing that all copies, including all those included in Customer's adaptations, have been destroyed. - -------------------------------------------------------------------------------- Schedule 1 Pascal & Company Services and Supply Agreement Page 1-4 Customer:_________ Supplier:________ March 25, 1997 18 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- 1.1.4 FEE SUMMARY
AVERAGE SALES PER TERMINAL PER LOTTERY WEEK % OF GROSS RECEIPTS ------------------------------------------- ------------------- pound sterling 449 or less 5.25% pound sterling 450 up to pound sterling 599 5.00% pound sterling 600 up to pound sterling 749 4.75% pound sterling 750 up to pound sterling 999 4.50% pound sterling 1000 up to pound sterling 1499 4.25% pound sterling 1500 up to pound sterling 1999 4.00% pound sterling 2000 or more 3.75%
The average sales per terminal per lottery week will be calculated by taking the summation of each day's gross sales and dividing it by each day's terminal count and dividing the total at the end of the lottery week by number of days that sales took place during the lottery week. Mathematically, this is expressed as follows: n Average sales per terminal per week = sum [(SDn divided by TDn)] divided by n 1 Where n = the number of sales days per week SDn = the gross sales for day n TDn = the number of on-line terminals selling one or more tickets for day n. The above percentage does not include supply by Supplier of playslips and ticket stock. ILTS will receive an additional 0.75% if Supplier provides these items. 1.2 HARDWARE DELIVERABLES
Item Product No. Number Product Description Qty --- ------ -------------------- --- TERMINAL PRODUCTS: 1 DATAMARK 9 Total of 1000 of a combination 2 of these terminal products. 3 DATAMARK Flipper
Supplier agrees to deliver up to 5000 DATAMARK terminals maximum under the same terms and conditions as the initial 1000 terminals. Add-on orders to the original 1000 DATAMARK terminals will be mutually agreed to through the use of the Change Proposal Document (CPD) Schedule 6 of this Agreement. CENTRAL SYSTEM PRODUCTS: As defined in Schedule 4 Supplier agrees to provide initial installation and recurring central system maintenance that will meet minimum Digital Equipment Corporation requires for the equipment. COMMUNICATIONS PRODUCTS Modems 1000 INITIAL INSTALLATION AND MAINTENANCE - -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Schedule 1 March 25, 1997 Customer:_________ Supplier:________ Page 1-5 19 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- Provided by Supplier refer to Schedule 5, Section 5.7 - -------------------------------------------------------------------------------- Schedule 1 Pascal & Company Services and Supply Agreement Page 1-6 Customer:_________ Supplier:________ March 25, 1997 20 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- 1.3 SERVICES DELIVERABLES A description of each of these services is provided in Schedule 5. 1.3.1 PUBLICATION SERVICES DATAMARK TERMINAL OPERATIONS MANUAL Price: 1 copy per 10 terminals installed are provided at no charge. Additional copies are available at $25.00 per copy. Quantity _____at $25.00 ___________ DATAMARK QUICK REFERENCE CARD Price: 2 copies per terminal installed are provided at no charge. Additional copies are available at $10.00 per copy. Quantity _____ at $10.00 ___________ CENTRAL SYSTEMS OPERATIONS MANUAL Price: 10 copies are provided at no charge. Additional copies are available at $35.00 per copy. Quantity _____ at $35.00 ___________ 1.3.1.1 TICKET DESIGN SERVICES The price for this service is: no charge for the term of this Agreement for the initial layout for each ticket/coupon/betslip and $600 for each major or minor modification/change after the fourth change. This service is purchased by separate Purchase Order as this service is required. The invoice date for these services is defined as the date Supplier receives the Customer Purchase Order. 1.3.1.2 INDIVIDUAL SERVICES PRICES FOR 1995 Services can be purchased from the Supplier on a time and material basis for activities beyond the scope of this Agreement. The invoice date for these services is defined as the date Supplier receives the Customer Purchase Order. Services are based on 8-hour work day, 40-hour work week, 173-hour work month and 2076 hours in a work year.
Standard Description Price Per ----------- --------- Hardware and Software Engineering, Training and Documentation Hour $ 140 Day $ 1,120 Week $ 5,040 Month $ 20,160 Year $221,760
- -------------------------------------------------------------------------------- Pascal & Company Services and Supply Agreement Schedule 1 March 25, 1997 Customer:_________ Supplier:________ Page 1-7 21 Terms & Conditions, Prices & Payment - -------------------------------------------------------------------------------- Account Management Hour $ 170 Day $ 1,360 Week $ 6,120 Month $ 24,480 Year $269,280 Customer Service Hour $ 80 Day $ 640 Week $ 2,880 Month $ 11,520 Year $126,720
NOTE: SERVICES PRICES DO NOT INCLUDE TRAVEL AND PER DIEM COSTS. SUPPLIER RESERVES THE RIGHT TO MAKE CHANGES IN THESE CHARGES ANNUALLY DURING JANUARY OF EACH YEAR. 1.4 SOFTWARE DELIVERABLES The software systems are defined in Schedule 4 of this Agreement and will be delivered as defined. New game software will be provided by Supplier according to the procedure as defined in Schedule 6, Change Control Procedure at no charge to Customer up to a limit of $50,000 USD. Changes or modification to the software which have benefit only to Customer and are not related to new games will be charged to Customer according to the procedure as detailed in aforementioned Schedule 6.0. 1.5 ESCROW AGREEMENT As a security for Supplier's performance under this agreement, Customer and Supplier shall enter into a security agreement on or before Milestone 8, Schedule 2, whereby Supplier will provide all documentation for software products delivered as described in Schedule 4 as is -- to be updated -- in a sealed container, which shall be held in escrow by: Data Securities International, Inc. 6165 Greenwich Drive, Suite 220 San Diego, California 92122 United States of America Also, this security agreement shall detail the circumstances when the container can be released to Customer. When released to customer pursuant to above said security agreement the software products may be used only for customer's own lottery operation and such use may require a payment of a paid-up royalty or periodic royalties to the owner of the software. - -------------------------------------------------------------------------------- Schedule 1 Pascal & Company Services and Supply Agreement Page 1-8 Customer:_________ Supplier:________ March 25, 1997 EX-13 3 EXHIBIT 13 1 EXHIBIT 13 INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. ANNUAL REPORT 1996 2 CORPORATE PROFILE AND MISSION: International Lottery & Totalizator Systems, Inc. provides computerized wagering systems including computer equipment, system software, betting terminals, data communications, consulting, training, management services and maintenance support, to racing organizations and lotteries worldwide. We are committed to providing innovative gaming solutions through quality products and service to maximize the revenue of our customers and bring a fair return to our shareholders. ILTS is an ISO 9001 registered company. Dear shareholders 3 In 1996, we moved significantly closer to realizing our long-term strategic goals. Sales volume, however, fell short of our projections primarily because of delayed decisions by customers on several key procurements. In addition, we recorded an accounting charge for our lottery project in the United Kingdom that was primarily due to the customer's inability thus far to secure the additional funding needed for start-up. The combined result was a net loss for 1996. Nevertheless, we made solid progress in improving our product capabilities, and as we continue to strengthen our products, I believe we will win our share of new business. I expect 1997 to be a year of continued progress across the board. Although much remains to be done, we have laid the foundation for long-term growth and revenue stability. Our objective is to reposition the Company as a provider of management services for lotteries in order to reduce our reliance on sales of lottery and totalizator equipment and systems. We believe that this objective remains sound and is achievable in the near term. In 1996, the ILTS management team created and began implementing a plan to both prepare the Company for re-entry into the management services arena and simultaneously increase its market share of equipment sales. The plan integrates the objectives, strategies and tactics of the three primary functional areas of the Company: marketing, research and development (R&D), and production. In implementing the plan last year, we focused on R&D. We completed the first phase of development of DataTrak, a new lottery software system that incorporates a modern client/server architecture, open systems technology, an easy-to-use graphical user interface and a powerful relational database. This new system provides the comprehensive functionality our customers require to manage their lottery business more efficiently. DataTrak gives the Company a competitive base product that can be configured, or easily modified to meet the specific needs of each lottery organization. We released the first version of DataTrak in October of 1996. Additional features and functionality will be incorporated in 1997 to further enhance the system. To complement the DataTrak gaming system, the Company introduced a new lottery terminal, the DATAMARK XClaim. Designed and engineered specifically for the lottery industry, the XClaim combines the legendary reliability of previous DATAMARK terminal models with modern PC-compatible ILTS 1 4 electronics. The result is a full-featured terminal that is modular, easy to use and very cost-effective. Together, the new terminal and the DataTrak software system will improve our competitive position in the worldwide lottery marketplace. The lottery market consists of two segments, sales and management services. Our new products give us the capabilities we need to both increase our market share in the sales segment, and effectively enter the management segment. The sales segment is composed of those lottery jurisdictions that purchase computers and terminals and operate the system with their own staff. Most lotteries outside of the United States operate in this manner, including all of our present lottery customers. This segment of the lottery market is showing continued growth as mature lotteries replace old systems and terminals and as new on-line jurisdictions emerge. The geographic areas offering the greatest opportunities for lottery equipment sales are the Americas, the Pacific Rim and Africa. The management services segment of the lottery market consists of those jurisdictions that contract for the provision of equipment, software and management services. The supplier receives compensation as a percentage of gross lottery sales. The supplier retains ownership of the equipment and is typically responsible for system operation, system and terminal maintenance, warehousing and distribution of supplies and consumables, and other services as agreed with the lottery customer. Contracts for lottery management services usually extend for a period of 5-7 years. Most U.S. lotteries currently operate in this manner. Management contracts ensure that the supplier receives a continuing revenue stream throughout the contract term, which can offset the financial peaks and valleys associated with relying only on sales of lottery systems. Although this segment of the market is highly competitive, it represents a significant growth opportunity for ILTS, as many lotteries are seeking alternatives to the two existing suppliers of facilities management services. The totalizator, or racing systems, market is also divided into two distinct segments: sales and management services. Management services in this context refer to racetrack owners/operators who contract for the provision of equipment, software and tote service, with the supplier receiving compensation as a percentage of the total bets placed. This type of operating arrangement is common in the U.S., where racing tends to be seasonal. Because of this seasonality, it is economically ILTS 2 5 [PHOTOGRAPHS] Data trak integrates the entire spectrum of lottery operation and management into an open client/server system. It's truly modular and scalable, and enables addition of new functionality as required. The ILTS InterTote open systems totalizator is UNIX based and platform independent. It's scalable for flexibility to serve small tracks or large operations with on-track and off-track betting. ILTS 3 6 unfeasible for the racetrack operators to own the equipment. The management-services segment of the market remains highly price-competitive even though the racing industry in the U.S. has continued to decline and provides only a limited opportunity for profitability. ILTS has not been involved in this market segment and entering it is not part of our future plans. In international markets, where racetracks often operate year-round, or where the equipment can efficiently be moved from one racetrack to another, operators have traditionally purchased the computer system, terminals and related equipment. This is also the general business model for offtrack betting organizations that offer betting in a variety of venues year-round. ILTS has historically been successful in this market segment because of its ability to provide customized high-tech solutions for very demanding clients. While we still have the capability, this segment of the market offers fewer new business opportunities. Very few new racetracks are being built throughout the world and our current customers are finding ways to extend the life cycle of their present systems and terminals. There are, however, several specialized opportunities for totalizator system sales that we are pursuing in certain developing markets. Our goal is to establish a business base that will provide us with consistent profitability. To do so, we will devote significant resources to continued product development, while simultaneously making our manufacturing and other operations more efficient. However, it is important to note that several factors outside of our control -- such as delays in receiving new orders and foreign political uncertainties -- could affect our ability to accomplish this objective. I want to express my sincere gratitude and appreciation to our loyal shareholders and to our dedicated and enthusiastic employees. With the continued support of our share-holders, employees and valued customers, we will build a strong and profitable company. FREDERICK A. BRUNN President / Director ILTS 4 7 Selected Financial Data
YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 ======================================================================================================== Thousands of dollars, except per share amounts and non-monetary items Statement of operations data Revenue $ 16,594 $ 18,641 $ 24,089 $25,017 $ 19,837 Gross profit 3,441 1,185 4,527 9,038 6,796 Operating income (loss) (6,894) (14,221) (22,943) 302 (679) Net income (loss) (5,498) (13,869) (22,620) 605 (629) Earnings (loss) per share (0.31) (0.83) (1.35) 0.05 (0.06) Balance sheet data Total assets 13,883 21,352 31,888 54,924 19,883 Shareholders' equity 8,519 13,412 27,145 48,855 10,828 Key ratios and statistics Gross margin 20.7% 6.4% 18.8% 36.1% 34.3% Operating margin/(loss) (41.5%) (76.3 (95.2%) 1.2% (3.4%) Working capital 6,614 8,679 22,236 31,670 3,774 Book value per share(1) 0.47 0.80 1.62 2.94 1.10 Current ratio 2.23 2.12 5.69 6.22 1.42 Backlog 1,709 9,214 11,168 15,250 16,819 Employees 144 176 277 249 216 Shares outstanding (1) 18,016 16,816 16,804 16,574 9,782 - --------------------------------------------------------------------------------------------------------
(1) The 1996 amount includes 840 thousand shares reserved for issuance in 1997 to the shareholder class in settlement of a class action lawsuit. See Note 11 of Notes to Consolidated Financial Statements. ILTS 5 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 1996 VS. 1995 Contract Revenue and Sales: Revenue decreased by 11% to $16.6 million in 1996 from $18.6 million in 1995. The decrease is a result of lower levels of contract revenues caused by the booking by the Company of $3.0 million in new orders in 1996 compared to $12.6 million of new orders in 1995. Spares sales in 1996 increased 103% or $1,087 over 1995 sales. This increase in spares was due to the increased number of ILTS terminals in service and the timing of customer orders. Gross Margin: During 1996, the Company recognized a gross margin of 21% compared to a gross margin of 6% in 1995. The increase in gross margin is due to a more favorable sales mix in 1996, costs related to the winding down of the Russian lottery project in 1995 and the effect of cost-saving measures which were implemented late in 1995. Write-offs and Write-downs of Lottery Service Agreements: During 1996, the charge of $2.8 million relates entirely to the U.K. lottery. The reserve was established after an affiliate of the customer was unable to obtain the additional funding necessary for the project start-up and on-going operations. At this time, the customer has not indicated when a start-up may occur. The amount of the charge approximates the Company's tangible investment, previously carried on the balance sheet as "Investment in Lottery Service Contracts." The Company is pursuing recovery of its investment in this project through resumption of the United Kingdom project, other lottery service projects or the outright sale of the equipment. However, no assurance can be provided that the Company will be successful in these efforts. The 1995 charge related to the withdrawal by the Company from its Russian Lottery project. At December 31, 1996 the Company's net book value of its investment in Lottery Service agreements is zero. Engineering, Research & Development: Engineering, research and development expenses in 1996 increased $302 thousand or 22% compared to 1995. Of the $1.7 million expended in 1996, $1.0 million went toward development of DataTrak lottery software. The DataTrak software was completed for release in October 1996 and future research and development costs will be expended to provide additional features. The 1995 expenditures related to development of the Flipper terminal and the DataTrak software. Selling, General and Administrative: Selling, general and administrative expenses decreased $5.4 million in 1996 compared to 1995. The decrease was due to a $4.2 million accrual in 1995 for the estimated cost to settle ILTS 6 9 the shareholders class action litigation. The June 1996 settlement judgment fixed the cost at an amount approximately $1.2 million less than the 1995 estimate. This $1.2 million was recorded as a reduction to the 1996 second quarter selling, general and administrative costs. See Note 11 of Notes to Consolidated Financial Statements. Gain on Sales of Subsidiary and Lottery Service Agreement: During 1996, the Company recognized gains of $691 thousand and $624 thousand on the sales of its subsidiary McKinnie & Associates, and the Papua New Guinea lottery service agreement, respectively. These sales which occurred in 1993 and 1995, respectively, have been recorded under the cost recovery method and, as such, no income was recognized until the basis of these investments had been recovered. This occurred in 1996. No related gains were recognized prior to 1996. Provision for Income Taxes: The provision for income taxes in 1996 relates to income earned in the Company's Australian subsidiary. 1995 VS. 1994 1995 revenue decreased $5.4 million or 23% compared to 1994. This change mainly reflects a lower level of contract business in 1995. New orders received in 1995 were $12.6 million compared to $20.0 million in 1994. As part of its strategic plan, the Company has pursued long-term service contracts as a source of revenue. Service contracts pose capital investment risks for the Company that do not exist in its product sale business. Revenues are received only after a system becomes operational, based upon a percentage of the customer's gross receipts from the system. The Company, therefore, bears the risk that scheduling delays may occur, that a system may never become operational, or that revenue levels may not be sufficient to provide a return of costs invested. During 1992, the Company entered into a lottery service agreement in Papua New Guinea. A minimal amount of revenues was earned on this service contract in the first six months of 1995. In July 1995, the Company sold all interest in its Papua New Guinea lottery operations to the principal shareholders of the lottery licensee, The Lotto Pty. Ltd., in return for $175 thousand cash and a note receivable of $1.3 million to be paid in monthly installments of approximately $79 thousand per month for a period of 17 months commencing in September 1995. Additionally, the Company will receive a percentage of the annual gross lottery sales or an annual sum of $260 thousand, whichever is greater, for a period of five years, provided that the additional sums shall not exceed $3 million. The installment payments and the minimum percentage payments are secured by all lottery assets and certain personal guarantees and indemnifications of all of the shareholders of The Lotto Pty. Ltd. The Company's remaining investment in the Papua New Guinea lottery at December 31, 1995 is approximately $338 thousand and is included in other assets in the accompanying consolidated balance sheet. In August 1993, the Company entered into management and equipment lease agreements to operate an on-line lottery within the Russian Federation ("the Project") with Zodiac On-Line ("Zodiac"), a Russian lottery operating company. Under the terms of the agreements, the lottery was to be conducted under a non-exclusive license held by a Russian charitable organization (the "Foundation"). In 1994, the Company acquired Zodiac making ILTS 7 10 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) it a wholly-owned subsidiary. In December 1994, the Company recorded a provision with respect to its investment and subsequently has expensed all related costs as they were incurred. In June 1995, the Company became the lottery operator under a license granted to the Russian Federal Postal Service. In November 1995, the Company terminated the Project after exhausting numerous financing and joint venture possibilities. In 1995, project related expenses, including a provision for future costs to liquidate the operation totaled $2.8 million. In May 1995, the Company entered into an equipment lease agreement in the United Kingdom (U.K.) to operate a lottery to benefit the National Hospital System. The Company had invested $2.8 million in the project at the end of December 1995, which comprises the entire amount invested in lottery service agreements at that date. See Note 4 of Notes to Consolidated Financial Statements on page 16. Cost of sales as a percentage of revenue increased to 94% in 1995 from 81% in 1994 due mainly to unfavorable manufacturing variances in 1995, costs associated with a reduction in work force and operational costs in support of the Company's lottery service operations. Engineering, research and development expenses in 1995 decreased $258 thousand or 16% compared to 1994. Of the $1.4 million expended in 1995, $0.9 million went toward development of lottery software. Selling, general and administrative expenses increased $2.8 million in 1995 compared to 1994. The increase in selling, general and administrative expenses from 1994 is due to increased legal expenses and a proposed settlement of a shareholders' lawsuit, costs incurred for domestic lottery proposals, and costs associated with a reduction in work force. Net interest income was $407 thousand in 1995 compared to net interest income of $467 thousand in 1994. Interest income is generated from short term investments. LIQUIDITY AND CAPITAL RESOURCES During 1996, the Company generated positive cash flows from operations of $461 thousand on a net loss of $5.5 million. The major reconciling items between the net loss and cash provided from operations are the non-cash write-off of $2.8 million relating to the U.K. lottery which has been indefinitely postponed and reductions in the Company's accounts receivables, costs and earnings in excess of billings on uncompleted contracts and inventories of $0.6 million, $1.2 million and $3.8 million, respectively. These were offset by the gain on sales of subsidiary and the lottery ILTS 8 11 service operations of $1.3 million and a non-cash reduction to selling general and administrative costs of $1.2 million relating to the difference between the value of the shares of the Company's common stock at the time of the initial recording of the class action litigation settlement accrual in 1995 and the value of the respective shares of common stock on the date of final settlement in June 1996. During 1996, the Company generated cash flows from investing activities of $1.1 million primarily as a result of proceeds of $962 thousand and $740 thousand relating to the sale in previous years of McKinnie & Associates and of the Papua New Guinea lottery, respectively. During 1996, the Company spent $283 thousand on equipment and $211 thousand on capitalized software development costs. The Company's consolidated financial statements for the year ended December 31, 1996 have been prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred net losses of $22.6 million, $13.9 million and $5.5 million in 1994, 1995 and 1996, respectively, while revenues have decreased from $24.1 million in 1994 to $16.6 million in 1996. The Company is largely dependent on significant contracts for its revenue, which typically include a deposit upon contract signing and up to 3 months lead-time before delivery of hardware begins. Currently the Company has a backlog of $1.7 million compared to backlogs of $11.2 million and $9.2 million in 1994 and 1995, respectively. At December 31, 1996, the Company had working capital of $6.6 million. Management recognizes that the Company must generate additional contract sales to maintain its current level of operations. Additionally, management is currently seeking additional sources of funding through debt or equity financing and consideration of other business transactions which would generate sufficient resources to assure continuation of the Company's operations. Management anticipates that it will be successful in obtaining sufficient contracts to enable the Company to continue normal operations; however, no assurances can be given that the Company will be successful in realizing sufficient contract revenue or obtain additional funding. If the Company is unable to obtain sufficient contract revenue or funding, management will be required to reduce the Company's operations. On March 24, 1997, the Company's largest shareholder, Berjaya Lottery Management (Berjaya), had agreed to provide a line of credit of up to $2.0 million to meet the Company's cash needs through at least January 1998. In addition, Berjaya has agreed that if the Company is declared in default of its contract with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract with the New York State Thruway (NYSTA), and if TRMI collects the performance bond proceeds of $2.7 million (Note 3) from the surety and the surety obtains a judgment against the Company for such proceeds, Berjaya will make available to the Company the funds necessary to pay such judgment if such judgment would render the Company unable to continue its operations. The Company's ability to continue its on-going operations on a long-term basis is dependent upon its ability to recover its investment in existing contracts (Note 3), obtain additional financing, secure additional new contracts, and ultimately achieve a sustainable level of profit from operations. ILTS 9 12 Consolidated Statements of Operations
YEARS ENDED DECEMBER 31, 1996 1995 1994 ========================================================================================================= Thousands of dollars, except per share amounts Contract revenue and sales $ 16,594 $ 18,641 $ 24,089 - --------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 13,153 17,456 19,562 Write-offs and write-downs of lottery service agreements 2,793 2,807 17,444 Engineering, research and development 1,662 1,360 1,618 Selling, general and administrative 5,880 11,239 8,408 - --------------------------------------------------------------------------------------------------------- Total costs and expenses 23,488 32,862 47,032 Loss from operations (6,894) (14,221) (22,943) Other income: Interest income, net 173 352 467 Gains on sales of subsidiary and lottery service agreement 1,315 - - - --------------------------------------------------------------------------------------------------------- Loss before provision for income taxes (5,406) (13,869) (22,476) Provision for income taxes 92 - 144 - --------------------------------------------------------------------------------------------------------- Net loss $ (5,498) $(13,869) $(22,620) ========================================================================================================= Net loss per share $ (0.31) $ (0.83) $ (1.35) ========================================================================================================= Weighted average number of shares used in computation of net loss per share 17,465 16,812 16,760 - ---------------------------------------------------------------------------------------------------------
See accompanying notes. ILTS 10 13 Consolidated Balance Sheets
YEARS ENDED DECEMBER 31, 1996 1995 =========================================================================================================== Thousands of dollars, except share and per share amounts Assets Current Assets: Cash and cash equivalents $ 5,387 $ 3,904 Accounts receivable, net of allowance for doubtful accounts of $111 ($63 in 1995) 979 1,588 Costs and estimated earnings in excess of billings on uncompleted contracts 2,452 3,665 Inventories, at lower of cost (first-in, first-out method) or market: Finished goods - 150 Work in process 283 173 Raw materials 2,735 6,497 - ----------------------------------------------------------------------------------------------------------- Total inventories 3,018 6,820 Other current assets 142 642 - ----------------------------------------------------------------------------------------------------------- Total current assets 11,978 16,619 Investment in lottery service agreements, net - 2,759 Equipment, furniture and fixtures at cost, less accumulated depreciation of $3,737 ($3,222 in 1995) 1,128 1,361 Computer software costs, less accumulated amortization of $1,420 ($1,331 in 1995) 688 561 Other 89 52 - ----------------------------------------------------------------------------------------------------------- Total assets $ 13,883 $ 21,352 Liabilities and shareholders' equity Current Liabilities: Accounts payable $ 491 $ 231 Billings in excess of costs and estimated earnings on uncompleted contracts 161 115 Accrued payroll and related taxes 893 949 Accrued litigation settlement 1,680 4,200 Related party liability 366 - Other current liabilities 1,773 2,445 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 5,364 7,940 =========================================================================================================== Commitments and contingencies Shareholders' equity: Common shares; no par value, 50,000,000 shares authorized; 17,176,211 shares issued and outstanding (16,816,211 in 1995) 49,407 48,687 Accumulated deficit (40,721) (35,223) Foreign currency translation adjustment (167) (52) - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 8,519 13,412 - ----------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 13,883 $ 21,352 ===========================================================================================================
See accompanying notes. ILTS 11 14 Consolidated Statements of Cash Flows
Years Ended December 31, 1996 1995 1994 ============================================================================================================= Thousands of dollars Cash flows from operating activities: Net loss $(5,498) $(13,869) $(22,620) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 601 1,061 1,656 Gains on sales of subsidiary and lottery service agreements (1,315) - - Deferred income taxes - - 148 Stock option compensation - - 304 Provision (reduction) for settlement of shareholder class action litigation (1,200) 3,600 - Write-offs and write-downs of lottery service agreements 2,793 2,807 17,444 Changes in operating assets and liabilities: Accounts receivable 609 810 1,635 Costs and estimated earnings in excess of billings on uncompleted contracts 1,213 (283) (856) Inventories 3,802 3,679 (4,003) Accounts payable 260 (678) (633) Billings in excess of costs and estimated earnings on uncompleted contracts 46 (853) (1,432) Accrued payroll and related taxes (56) 354 (66) Accrued litigation costs (600) 600 - Related party payable 366 - - Other (560) 572 580 - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 461 (2,200) (7,843) - ------------------------------------------------------------------------------------------------------------- Cash flows provided by (used for) investing activities: Investment in lottery service agreements (34) (4,044) (5,934) Lottery service agreement sale proceeds and advance repayments 962 651 402 Proceeds from sale of subsidiary 740 525 325 Additions to equipment (283) (250) (1,209) Additions to computer software costs (211) (67) (413) Other (37) - 330 - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 1,137 (3,185) (6,499) Cash flows provided by (used for) financing activities: Additions to notes payable - - 300 Payments on notes payable - (300) - Proceeds from issuance of common stock and warrants - 23 614 - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities - (277) 914 - ------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (115) 99 (8) - ------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 1,483 (5,563) (13,436) - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 3,904 9,467 22,903 - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents of end of year $ 5,387 $ 3,904 $ 9,467 ============================================================================================================= Supplemental cash flow information: Cash paid during the year for interest 20 46 47 - ------------------------------------------------------------------------------------------------------------- Cash paid during the year for income taxes 46 7 8 - -------------------------------------------------------------------------------------------------------------
See accompanying notes. ILTS 12 15 Consolidated Statements of Shareholders' Equity
Retained Foreign Common stock earnings currency ------------------- (accumulated translation Shares Amount deficit) adjustment Total ============================================================================================================= Thousands of shares/dollars Balance at December 31, 1993 16,574 $47,732 $ 1,266 $(143) $ 48,855 - ------------------------------------------------------------------------------------------------------------- Proceeds from exercise of warrants 98 471 - - 471 Proceeds from exercise of stock options 132 143 - - 143 Accelerated vesting of stock options for terminated employees - 304 - - 304 Foreign currency translation adjustment - - - (8) (8) Net loss - 1994 - - (22,620) - (22,620) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 16,804 48,650 (21,354) (151) 27,145 - ------------------------------------------------------------------------------------------------------------- Proceeds from exercise of stock options 12 23 - - 23 Accelerated vesting of stock options for terminated employees - 14 - - 14 Foreign currency translation adjustment - - - 99 99 Net loss - 1995 - - (13,869) - (13,869) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 16,816 48,687 (35,223) (52) 13,412 - ------------------------------------------------------------------------------------------------------------- Issuance of shares in settlement of shareholders' class action lawsuit 360 720 - - 720 Foreign currency translation adjustment - - - (115) (115) Net loss - 1996 - - (5,498) - (5,498) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 17,176 $49,407 $(40,721) $(167) $ 8,519 - -------------------------------------------------------------------------------------------------------------
See accompanying notes. ILTS 13 16 Notes to Consolidated Financial Statements 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES International Lottery & Totalizator Systems, Inc. ("the Company") designs, manufactures, sells, leases, manages, supports and services computerized ticket issuing systems and terminals for global pari-mutuel and on-line lottery industries. The principal applications for the Company's products are in the automated pari-mutuel (horse racing) wagering and on-line government sponsored lottery industries. The principal proprietary component of the Company's systems is the DATAMARK terminal, a compact, reliable microprocessor-based ticketing terminal which can be modified to meet specific customer feature and configuration requirements. The Company sells its product principally in international markets. The Company's consolidated financial statements for the year ended December 31, 1996 have been prepared on a continuing operations basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred net losses of $22.6 million, $13.9 million and $5.5 million in 1994, 1995 and 1996, respectively, while revenues have decreased from $24.1 million in 1994 to $16.6 million in 1996. The Company is largely dependent upon significant contracts for its revenue, which typically include a deposit upon contract signing and up to 3 months lead-time before delivery of hardware begins. Currently, the Company has a backlog of $1.7 million compared to backlogs of $11.2 million and $9.2 million in 1994 and 1995, respectively. At December 31, 1996, the Company had working capital of $6.6 million. Management recognizes that the Company must recover its investment in existing contracts (Note 3) and generate additional contract sales to maintain its current level of operations. Additionally, management is currently seeking additional sources of funding through debt or equity financing and consideration of other business transactions which would generate sufficient resources to assure continuation of the Company's operations. Management anticipates that it will be successful in recovering its investment in existing contracts (Note 3) and obtaining sufficient contracts to enable the Company to continue normal operations; however, no assurances can be given that the Company will be successful in realizing sufficient new contract revenues or obtaining additional financing. If the Company is unable to recover its investment in existing contracts (Note 3), obtain sufficient new contract revenue or financing, management will be required to reduce the Company's operations. On March 24, 1997, the Company's largest shareholder, Berjaya Lottery Management (Berjaya), had agreed to provide a line of credit of up to $2.0 million to meet the Company's cash needs through at least January 1998. In addition, Berjaya has agreed that if the Company is declared in default of its contract with The Revenue Markets Inc. (TRMI), with respect to TRMI's contract with the New York State Thruway (NYSTA), and if TRMI collects the performance bond proceeds of $2.7 million (Note 3) from the surety and the surety obtains a judgment against the Company for such proceeds, Berjaya will make available to the Company the funds necessary to pay such judgment if such judgment would render the Company unable to continue its operations. The Company's ability to continue its on-going operations on a long-term basis is dependent upon its ability to recover its investment in existing contracts (Note 3), obtain additional financing, secure additional new contracts, and ultimately achieve a sustainable level of profit from operations. Principles of Consolidation - The accompanying financial statements consolidate the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany accounts and transactions are eliminated in consolidation. Revenue Recognition - The Company recognizes long-term contract revenue on the percentage-of-completion method, based on contract costs incurred to date compared to total estimated contract costs. The effects of changes in contract cost estimates are recognized in the period they are determined. Revenues relating to the sale of certain assets, when the ultimate total collection is not reasonably assured, are being recorded under the cost recovery method. All other revenue is recorded on the basis of shipments of products or performance of services. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Depreciation - Depreciation of equipment, furniture and fixtures is provided principally using the straight-line method over estimated useful lives of 3 - 7 years. Computer Software Costs - The Company capitalizes the costs of computer software incurred in the development of specific products, after technological feasibility has been established. The capitalized software costs are amortized using the greater of the amount computed using the ratio of current product revenue to estimated total product revenue or the straight-line method over the remaining estimated economic lives of the products (3 years). Amortization expense totaled $89 thousand, $510 thousand and $687 thousand for the years ended December 31, 1996, 1995, and 1994, respectively. Impairment of Long-Lived Assets - On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121). The adoption of SFAS 121 did not impact the financial position or results of operations of the Company in 1996. Warranty Reserves - Estimated expenses for warranty obligations are accrued as income is recognized on related contracts. The reserves are adjusted periodically to reflect actual experience. ILTS 14 17 Foreign Currency - The Company has contracts with certain customers that are denominated in foreign currencies and related transaction gains and losses are recognized as a component of current operations. The consolidated accounts of the Company's Australian subsidiary have been translated from its functional currency, the Australian dollar. The effect of the exchange rate fluctuations between the U.S. dollar and the Australian dollar is recorded as an increase (decrease) to a separate component of shareholders' equity. The Company's other foreign subsidiary uses the U.S. dollar as its functional currency and, accordingly, related translation gains and losses are recognized in current operations. Per Share Information - Net loss per share is based on the weighted average number of shares outstanding during the year. The 1996 computation includes 840 thousand shares of common stock to be issued in 1997, pursuant to a class action lawsuit settlement rendered by the court on June 17, 1996. (Note 11). Research and Development - Engineering, research and development costs are expensed as incurred. Substantially all engineering, research and development expenses are related to new product development and designing significant improvements. Concentration of Credit Risk - Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts are primarily related to contracts with a few major customers. These amounts are payable in accordance with the terms of individual contracts and generally collateral is not required. Credit losses are provided for in the financial statements and consistently have been within management's expectations. Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Included in cash and cash equivalents at December 31, 1996 and 1995 are investments in commercial paper and municipal bonds totaling $2.3 and $2.2 million, respectively, which mature in January 1997 and January 1996, respectively. The estimated fair value of these investments approximates the amortized cost; therefore, there are no unrealized gains or losses as of December 31, 1996 or 1995. Investment in Lottery Service Agreements - The investment in lottery service agreements included the direct costs of manufacture and installation of computerized electronic lotteries, including the terminals, central computer systems and start-up related implementation costs to the extent that recovery of such costs is determined to be reasonably assured. Stock Options - The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Reclassifications - Certain prior year balances have been reclassified to conform with the 1996 presentation. 2. RELATED PARTY TRANSACTIONS The Company has entered several sales agreements to supply terminals to entities in which the Company's largest shareholder, Berjaya Lottery Management (Berjaya), has a significant equity interest. These revenues totaled $2.0 million, $3.5 million and $5.2 million, in 1996, 1995, and in 1994, respectively. Included in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts were $0.5 million and $2.3 million at December 31, 1996 and 1995, respectively, relating to these customers. During 1996, the Company entered into an agreement with Berjaya to purchase specific inventory on behalf of Berjaya to enable the Company to satisfy certain future potential orders in a timely manner. Title to the inventory purchased resides with Berjaya, therefore, no amounts are reflected in the consolidated balance sheet for inventory purchased on their behalf. Advances received in excess of inventory purchased aggregated approximately $366 thousand and have been reflected as a related party liability in the accompanying consolidated balance sheet as of December 31, 1996. 3. CONTRACTS IN PROCESS The amounts by which total costs and estimated earnings exceeded or were less than billings on uncompleted contracts are as follows (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------------------------------- Costs incurred $ 13,449 $ 15,665 Estimated earnings 1,745 4,612 - -------------------------------------------------------------------------------------------------------- 15,194 20,277 - -------------------------------------------------------------------------------------------------------- Less: billings (12,903) (16,727) ======================================================================================================== $ 2,291 $ 3,550 - -------------------------------------------------------------------------------------------------------- Included in the accompanying consolidated balance sheets as follows: Costs and estimated earnings in excess of billings on uncompleted contracts $ 2,452 $ 3,665 Billings in excess of costs and estimated earnings on uncompleted contracts (161) (115) ======================================================================================================== $ 2,291 $ 3,550 - --------------------------------------------------------------------------------------------------------
ILTS 15 18 The Company is obligated under a $2.8 million contract with The Revenue Markets Inc. (TRMI) to supply ticket handling equipment for the New York Thruway. The Company has experienced difficulty in satisfying certain of the customer's requirements during three pilot testing periods and the terminals delivered by the Company have not been accepted. A fourth and final ninety-day pilot test period is expected to commence on February 28, 1997 and conclude on May 28, 1997. Management believes that all the requirements outlined in the final pilot test program plan will be met and that delivery of the production units will commence in September 1997. Payments under the contract are expected to be received from TRMI in 1997 and 1998 based on the timing of receipt of payments by TRMI from the New York Thruway. As of December 31, 1996, $1.4 million is recorded as costs and estimated earnings in excess of billings on uncompleted contracts and $548 thousand in inventory specific to this project. The Company has accrued and recognized the entire estimated loss of $924 thousand on the contract and does not expect to realize any losses beyond amounts accrued at December 31, 1996. In the event the Company is unable to fulfill its contractual obligations, the recovery of the related contract receivables and inventory, aggregating approximately $1.9 million, may be delayed or deferred indefinitely. In addition, the Company may be required to recognize certain performance bond obligations up to $2.7 million and certain other non-performance penalties. At this time, the Company expects to be able to fulfill its contractual obligations and collect all amounts owed under this contract. However, if the Company is unable to fulfill its contract obligations or negotiate or litigate a favorable resolution, the Company may recognize an additional loss that would be material in relation to the consolidated statements of financial position and results of operations. 4. LOTTERY SERVICE AGREEMENTS The Company entered into contracts to provide lottery equipment and management of on-line lottery systems on a long-term basis in Papua New Guinea and the Republic of Georgia in 1992, in the Dominican Republic and the Russian Federation in 1993 and entered into a contract to provide lottery equipment in the United Kingdom in 1995. The Company committed lottery equipment costing approximately $2.8 million to its United Kingdom lottery service agreement in 1995. The Company agreed to provide a complete lottery system for a percentage of lottery revenues. In September 1996, it became apparent that an affiliate of the customer was unable to obtain the additional funding necessary for the project start-up and on-going operations and the Company recorded a $2.8 million charge to reflect a reserve for the project. The amount of the charge approximates the Company's tangible investment, previously carried on the balance sheet as "Investment in Lottery Service Contracts." The Company is pursuing recovery of its investment in the project through resumption of the United Kingdom project, other service projects or the outright sale of the equipment. However, no assurance can be provided that the Company will be successful in these efforts. The Papua New Guinea lottery commenced operation in March 1993. Revenues from the lottery in Papua New Guinea did not meet expectations and, in June 1994, the Company wrote down its investment in Papua New Guinea by $3.0 million to its estimated future cash flows. In July 1995, the Company sold all interests in the Papua New Guinea lottery operation to the principal shareholders of the lottery licensee, for $175 thousand in cash and a note of $1.3 million to be paid in monthly installments of approximately $79 thousand per month for a period of 17 months commencing in September 1995. Additionally, the Company will receive a percentage of the annual gross lottery sales or an annual sum of $260 thousand, whichever is greater, for a period of five years, provided that the additional sums shall not exceed $3.0 million. The Company is accounting for the sale under the cost recovery method. The installment payments and the minimum percentage payments are secured by all lottery assets and certain personal guarantees. During 1996, the Company recognized approximately $624 thousand as a gain on the sale of the lottery service agreement. The amount reflects the aggregate amount of payments received under the sales agreement in excess of the Company's carrying amount of its investment in the lottery service agreement on the date of the sale. Under the cost recovery method, no amount of gain on the sale was recognized until the net investment in the lottery service agreement on the date of sale was recovered in 1996. At December 31, 1996, the Company has no investment remaining on its balance sheet as the proceeds from the sale have exceeded the net book value at the time of the sale. Due to uncertainties which arose in November 1994 regarding the Russian lottery license process and the continued economic, political and legal instability in Russia, the Company recorded a provision of $7.6 million to record the assets at estimated net realizable value with respect to the Russian lottery investment. In November 1995, the Company terminated its Russian project. In 1995, the Company incurred $2.8 million in costs toward its Russian lottery project, including the write-off of costs related to a reduction in its Russian work force and future costs to liquidate the operation. In June 1994, the Company wrote off its investment in two lottery service agreements which totaled $6.8 million, $1.2 million in the Republic of Georgia and $5.6 million in the Dominican Republic, as projected revenues indicated the Company would not be able to recover its investment. In January 1995, the Company ceased operations in the Dominican Republic and, in 1994, closed its office in the Republic of Georgia. 5. INDUSTRY SEGMENT AND GEOGRAPHIC DATA The Company operates in one industry segment which includes totalizator and lottery systems. The Company has an Australian subsidiary, International Lottery & Totalizator Systems Australia Pty., Ltd., and a United Kingdom subsidiary, International Lottery & Totalizator Systems (U.K.) Ltd. ILTS 16 19 Sales between geographic areas are generally priced to recover material costs plus an appropriate markup. Revenue from major customers is as follows (in thousands):
CUSTOMER LOCATION 1996 1995 1994 - ------------------------------------------------------------------------------------------ Sweden $ 4,300 $ 1,900 $ 400 Hong Kong 2,400 600 9,400 Australia* 2,000 4,400 2,400 Philippines 900 2,900 5,200 - ------------------------------------------------------------------------------------------
* different customer in 1996 as compared to 1995 and 1994 The following table summarizes information about the Company's operations in different geographic areas for the years ended December 31, 1996, 1995 and 1994 (in thousands). Sales, income and identifiable assets of the Dominican Republic are included in the U.S., Europe consists of the U.K. subsidiary, Russia and Georgia, and Pacific includes the Australian subsidiary and Papua New Guinea.
YEARS ENDED DECEMBER 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------- EASTERN EASTERN EUROPE/ CONSOLI- EUROPE/ CONSOLI- USA PACIFIC EUROPE DATED USA PACIFIC EUROPE DATED USA - ----------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers: Export $ 11,313 $ - $ - $ 11,313 $ 15,006 $ - $ - $ 15,006 $ 19,923 Domestic 293 4,482 506 5,281 513 2,614 508 3,635 946 - ----------------------------------------------------------------------------------------------------------------- Sales to: Australia subsidiary 1,738 - - 1,738 508 - - 508 423 - ----------------------------------------------------------------------------------------------------------------- 13,344 4,482 506 18,332 16,027 2,614 508 19,149 21,292 - ----------------------------------------------------------------------------------------------------------------- Elimination of intercompany sales (1,738) - - (1,738) (508) - - (508) (423) - ----------------------------------------------------------------------------------------------------------------- Total revenue 11,606 4,482 506 16,594 15,519 2,614 508 18,641 20,869 - ----------------------------------------------------------------------------------------------------------------- Write-offs and write-downs of lottery service agreements (2,793) - - (2,793) - - (2,807) (2,807) (5,663) - ----------------------------------------------------------------------------------------------------------------- Net income (loss) (5,865) 476 (109) (5,498) (13,561) (76) (232) (10,700) (3,084) - ----------------------------------------------------------------------------------------------------------------- Identifiable assets $ 11,638 $2,096 $ 149 $ 13,883 $ 19,572 $ 1,478 $ 302 $ 21,352 $ 27,952 =================================================================================================================
1994 ------------------------------- EASTERN EUROPE/ CONSOLI- PACIFIC EUROPE DATED ------------------------------ Sales to unaffiliated customers: Export $ - $ - $ 19,923 Domestic 2,612 608 4,166 - ------------------------------------------------------------- Sales to: Australia subsidiary - - 423 - ------------------------------------------------------------- 2,612 608 24,512 Elimination of intercompany sales - - (423) - ------------------------------------------------------------- Total revenue 2,612 608 24,089 - ------------------------------------------------------------- Write-offs and write-downs of lottery service agreements (3,000) (8,781) (17,444) - ------------------------------------------------------------- Net income (loss) (3,084) (8,836) (22,620) - ------------------------------------------------------------- Identifiable assets $ 2,322 $ 1,614 $ 31,888 =============================================================
6. LEASES The Company leases its facilities under operating lease agreements which expire at various dates through October 2000. Certain lease agreements provide for increases in minimum annual rent based on increases in various market indices. Also, the Company has the option to renew the lease on its U.S. facility for one additional ten year term. Rent expense for the years ended December 31, 1996, 1995, and 1994 was $605 thousand, $674 thousand and $551 thousand, respectively. Minimum future obligations for these leases are as follows (in thousands): 1997 - $632; 1998 - $533; 1999 - $524; 2000 - $271, and 2001 - $13. 7. INCOME TAXES The provision for income taxes of $92 thousand in 1996 and $144 thousand in 1994 relate to income earned by the Company's Australian subsidiary. The following is a reconciliation of the actual tax provision to the expected tax benefit computed by adding the statutory federal income tax rate to the loss before provision for income taxes (in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994 ======================================================================================================== Expected federal income tax (credit) at statutory rate $ (1,892) $ (4,715) $ (7,642) U.S. and foreign net operating losses - no benefit 1,892 4,715 7,642 Other, net 92 - 144 - -------------------------------------------------------------------------------------------------------- Total $ 92 - $ 144 ========================================================================================================
ILTS 17 20 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The components of the Company's deferred tax liabilities and assets are as follows (in thousands):
DECEMBER 31, 1996 1995 ======================================================================================================== Deferred tax liabilities: Computer software costs $ 310 $ 225 - -------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 310 225 Deferred tax assets: Installment sale PNG 1,209 1,575 Reserves against investment in lottery service agreements 1,401 235 Reserves and accruals 1,514 1,045 Rent expense 177 160 Employee benefits 88 130 Patent expense 31 35 Net operating loss and credit carryforwards 17,589 12,120 Other 29 18 - -------------------------------------------------------------------------------------------------------- Total deferred tax assets 22,038 15,318 Net deferred tax assets 21,728 15,093 Valuation allowance (21,728) (15,093) - -------------------------------------------------------------------------------------------------------- Net deferred taxes $ - $ - ========================================================================================================
The Company has Federal and California net operating losses of approximately $46 million and $21 million, respectively, which will begin to expire in 1998 unless previously utilized. The difference between the Federal and California net operating loss carryforwards relates primarily to California's statutory 50% annual reduction rule. The Company also has Federal general business credit carryforwards of approximately $588 thousand, which begin to expire in 2002. Pursuant to the Tax Reform Act of 1986, use of the Company's business credit and net operating loss carryforwards may be limited if a cumulative change in ownership of more than 50%, as defined, occurs within any three year period. Management believes such a change in ownership has not occurred. 8. EMPLOYEE STOCK BONUS PLAN The Company has an employee stock bonus plan, commonly referred to as a 401(k) plan, qualified under the Internal Revenue Code, in which all eligible employees, as defined in the Internal Revenue Code, may elect to participate. Under the Plan, employees may voluntarily make tax-deferred contributions of up to 15% of their compensation to a trust which provides the participant with various investment alternatives. In addition, the Company, at the discretion of the Board of Directors, may contribute an amount for each fiscal year which does not exceed 5% of the annual compensation of all participants in the Plan. Company contributions charged to operations were $82 thousand, $198 thousand and $272 thousand, in 1996, 1995 and 1994, respectively. 9. STOCK OPTION PLANS The Company has three current employee stock option plans and a directors option plan whereby options to purchase 2.6 million and 240 thousand shares, respectively, of the Company's common stock may be granted. Options granted have 5 to 10 year terms and vest and become fully exerciseable 4 to 5 years from the date of grant. Pro forma information regarding net loss and net loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1995 and 1996, respectively: risk-free interest rates of 5.8% - 6.8% and 5.4% - 6.0%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of 1.2; and a weighted-average life of the options of 7.2 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of applying Statement 123 for pro forma disclosure purposes are not likely to be representative of the effects on pro forma results of operations in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The Company's pro forma information follows (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31, 1996 1995 - -------------------------------------------------------------------------------------------------------- Pro forma net loss $ (5,645) $ (13,895) Pro forma net loss per share $ (0.32) $ (0.83) - --------------------------------------------------------------------------------------------------------
ILTS 18 21 A summary of the Company's stock option activity and related information follows (options in thousands):
YEARS ENDED DECEMBER 31, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE - ---------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 1,325 $ 7.28 1,351 $ 7.50 1,287 $ 7.87 Granted 320 $ 1.22 75 $ 2.28 291 $ 4.45 Exercised - - (12) $ 1.87 (132) $ 3.09 Cancelled (144) $ 9.86 (89) $ 7.16 (95) $ 9.24 - ----------------------------------------------------------------------------------------------------------- Outstanding - end of year 1,501 $ 5.74 1,325 $ 7.28 1,351 $ 7.50 Exercisable at end of year 1,007 $ 6.95 931 $ 7.35 710 $ 6.89 Weighted-average fair value of options granted during the year $ 1.22 $ 2.28 $ 4.45
Exercise prices for options outstanding as of December 31, 1996 ranged from $1.03 to $15.75. The weighted-average remaining contractual life of those options is approximately 5 years. At December 31, 1996, options for 1,073,095 shares were available for future grant and 1.8 million shares of the Company's common stock have been reserved for issuance under all of the Company's stock option plans. The following table summarizes information about stock options at December 31, 1996 (shares in thousands):
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS - --------------------------------------------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE - --------------------------------------------------------------------------------------------------------------------------- $ 1.0312 to $ 1.5000 355 8.82 years $ 1.24 34 $ 1.38 $ 2.2188 to $ 2.7500 375 2.74 years $ 2.58 343 $ 2.61 $ 2.8750 to $ 5.1250 317 4.73 years $ 3.58 245 $ 3.72 $ 6.1250 to $ 11.5000 168 5.32 years $ 9.34 140 $ 9.14 $ 15.7500 to $ 15.7500 286 4.50 years $ 15.75 245 $ 15.75 - --------------------------------------------------------------------------------------------------------------------------- $ 1.0312 to $ 15.7500 1501 5.22 years $ 5.74 1007 $ 6.95
10. McKinnie & Associates On March 31, 1993, the Company sold its subsidiary, McKinnie & Associates, Inc., to Shreveport Acquisition for cash and a note receivable. As the ultimate collection on the sale was in doubt at the time of the sale, it was recorded under the cost recovery method. During 1996, the remaining book value was received and the Company recorded $691 thousand of gain due to receipts in excess of the basis. Unrecorded gain and interest of $0.6 million will be recognized using the cost recovery method as payments are received. 11. LITIGATION In 1994, shareholders of the Company filed class action lawsuits against the Company and several of its officers and directors. Those actions were consolidated in the United States District Court for the Southern District of California. Plaintiffs contended that during the class period (June 22, 1993 through June 21, 1994) the Company and the individual defendants made a series of public statements that failed to disclose adverse information about the Company's lottery service contracts, that these purported nondisclosures artificially inflated the price of the Company's stock and that those purchasers who acquired their shares in reliance on the integrity of the market suffered damages as a result. On June 17, 1996, the court entered a judgment of a cash payment to the class shareholders and 1.2 million shares of authorized but unissued common stock of the Company, of which, 360 thousand shares were issued in September 1996 and 840 thousand shares will be issued in 1997. Such shares are reserved for issuance as of December 31, 1996 and were included in the calculation of earnings per share for the year ended December 31, 1996. The estimated settlement was accrued as of September 30, 1995 and an adjustment of approximately $1.2 million was recorded during the three months ended June 30, 1996 to reduce the accrual to the actual settlement amount, valued as of the judgment date. In November 1995, Mr. James Walters, the former chairman and president of the Company, filed an action in the San Diego County Superior Court against the Company, its current president, Frederick A. Brunn, a publishing company and an author alleging that certain statements in a magazine article were slander per se by ILTS and Brunn and libel by the publishing company and the author, and that Mr. Walters suffered an invasion of privacy by all defendants. In addition, Walters alleged that erroneous information in the Company's 1995 Proxy Statement resulted in two other magazine articles publishing allegedly incorrect information. Mr. Walters seeks general and special damages of $9 million and punitive damages. On November 1, 1996, the San Diego County Superior Court entered a summary judgment in favor of the Company. Mr. Walters has filed a notice of appeal with the California appellate court. Management, based on the advice of counsel, believes that the outcome of this case will not result in any liability to the Company. Accordingly, no provision for any liability that may result has been included in the consolidated financial statements. The Company is also subject to other legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. ILTS 19 22 Report of Ernst & Young, LLP, Independent Auditors THE BOARD OF DIRECTORS AND SHAREHOLDERS, INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. We have audited the accompanying consolidated balance sheets of International Lottery & Totalizator Systems, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Lottery & Totalizator Systems, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP San Diego, California February 21, 1997 except for Note 1, as to which the date is March 24, 1997 ILTS 20 23 Corporate and Common Share Information DIRECTORS Theodore A. Johnson Chairman of the Board Frederick A. Brunn President Chan Kien Sing Group Executive Director Berjaya Group Berhad M. Mark Michalko Executive Vice President Martin J. O'Meara Jr. President, The Budget Plan, Inc. Ng Foo Leong Executive Director, Sports Toto Malaysia Sir Michael G.R., Sandberg Private Investor Ng Aik Chin Executive Assistant to the President OFFICERS Frederick A. Brunn President Timothy R. Groth Vice President Technical Operations William A. Hainke Chief Financial Officer Corporate Secretary and Treasurer M. Mark Michalko Executive Vice President MARKET FOR COMMON STOCK The Company's Common Stock is traded under the symbol ITSI on the NASDAQ National Market system. As of December 31, 1996, there were 17,176,211 common shares outstanding and 896 shareholders of record. Berjaya Lottery Management owned 38% of the total outstanding shares and the Company's management owned 1%.
1996 HIGH LOW - ---------------------------------------------- First Quarter 1 25/32 1 1/16 Second Quarter 3 3/16 1 1/16 Third Quarter 2 1/2 1 1/8 Fourth Quarter 1 5/16 25/32 Average Daily Volume 42,045 Total Annual Trading Volume 10,679,305
1995 HIGH LOW - --------------------------------------------- First Quarter 4 7/8 1 15/16 Second Quarter 4 3/8 1 7/8 Third Quarter 3 3/8 2 1/8 Fourth Quarter 2 11/16 15/16 Average Daily Volume 52,267 Total Annual Trading Volume 13,171,342
DIVIDEND POLICY The Company retains earnings to support operations. FORM 10-K A Copy of Form 10-K as filed with the Securities and Exchange Commission can be obtained by contacting: Investor Relations ILTS 2131 Faraday Avenue Carlsbad, CA 92008-7297 USA (760) 931-4000 ANNUAL MEETING OF SHAREHOLDERS The 1997 Annual Meeting will be held at 3:00 p.m. PDT on Thursday, May 15, 1997, at Pea Soup Andersen's, 850 Palomar Airport Road, Carlsbad, California, (760) 438-0880. Shareholders and interested parties are invited to attend. TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services 85 Challenger Road Ridgefield Park, New Jersey USA 1-800-522-6645 (213) 553-9719 (213) 553-9735 Fax INDEPENDENT AUDITORS Ernst & Young LLP 501 West Broadway, Suite 1100 San Diego, CA 92101-3536 USA (619) 235-5000 To receive Company information via facsimile, call the Investor Relations Hotline: 1-800-859-5903. 24 HEADQUARTERS International Lottery & Totalizator Systems, Inc. 2131 Faraday Avenue Carlsbad, CA 92008-7297 USA (760) 931-4000 (760) 931-1789 Fax TECHNICAL AND MARKETING/SALES SUPPORT FACILITIES United Kingdom International Lottery & Totalizator Systems (UK) Ltd. 21 Horton Road Yiewsley, West Drayton Middlesex UB7 8HT England (44) (1895) 449550 (44) (1895) 420600 Fax Australia International Lottery & Totalizator Systems Australia Pty. Ltd. Unit 1A, 167 Prospect Highway Seven Hills, New South Wales 2147 Australia (61) (2) 9624-4300 (61) (2) 9674-6832 Fax SALES OFFICES Asia/Pacific Sales Office Christina Bldg. Unit 304 Herrera Corner Legaspi Sts. Legaspi Village, Makati, Philippines (63) (2) 816-6989 (63) (2) 815-3270 Europe ILTS Europe Vollsveien 168 N-1343 Eiksmarka Norway (47) (67) 14 73 76 (47) (67) 14 80 68 South Africa ILTS South Africa c/o Arbitration House P.O. Box 653007 Benmore 2110 Docex 25 Johannesburg Republic of South Africa (27) (11) 320-0550 (27) (11) 320-0695 Fax [LOGO] Visit the ILTS Home Page: http://www.ilts.com Registered to ISO 9001 Certificate No. A3960 International Lottery & Totalizator Systems, Inc.(R), ILTS(R), ILTSInterToteo, DataTrak(R) and DATAMARK XClaim(TM) are registered trademarks of International Lottery & Totalizator Systems, Inc. UNIXis a registered trademark of UNIXSystem Laboratories. EX-21 4 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Registrant had 3 wholly-owned subsidiaries as of December 31, 1996: ITS Virgin Islands, a Virgin Island corporation; International Lottery & Totalizator Systems Australia Pty. Ltd., an Australia corporation; International Lottery & Totalizator Systems (UK) Ltd., a United Kingdom corporation. 12 EX-23 5 FORM 23 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of International Lottery & Totalizator Systems, Inc. of our report dated February 21, 1997 except for Note 1, as to which the date is March 24, 1997 included in the 1996 Annual Report to Shareholders of International Lottery & Totalizator Systems, Inc. Our audits also included the financial statement schedule of International Lottery & Totalizator Systems, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8, No. 2-99618) pertaining to the 1982 Employee Stock Option Plan, (Form S-8, No. 33-34121) pertaining to the 1986 Employee Stock Option Plan, (Form S-8, No. 33-34123) pertaining to the 1988 Employee Stock Option Plan of International Lottery & Totalizator Systems, Inc., (Form S-8, No.33- 79938) pertaining to the 1990 Stock Incentive Plan, (Form S-8, No. 33-69008) pertaining to the 1993 Directors' Stock Option Plan and the Registration Statement (Form S-3, No. 33-78194) pertaining to the offer of Common Stock for certain Shareholders and in the related Prospectuses of our report dated February 21, 1997 except for Note 1, as to which the date is March 24, 1997, with respect to the consolidated financial statements and schedule ofInternational Lottery & Totalizator Systems, Inc. included or incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP San Diego, California March 26, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 5,387 0 979 0 3,018 11,978 1,128 0 13,883 5,364 0 49,407 0 0 (40,721) 13,883 16,594 16,594 15,946 23,488 0 60 20 (5,406) 92 (5,498) 0 0 0 (5,498) (0.31) 0
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