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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
[ ] 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.
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CALIFORNIA 95-3276269
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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
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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, 1998 was approximately $7,584,336
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Number of common shares outstanding at March 24, 1998 was 18,027,548
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Stockholders of the Registrant: Parts II
and IV
Portions of the Proxy Statement for Annual Meeting of Stockholders, June 1,
1998: Part III
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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 [ ]
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TABLE OF CONTENTS
PART I
PAGE
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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................................................. 4
Employees................................................... 5
Patents, Trademarks and Licenses............................ 5
Regulation.................................................. 5
Dependence Upon a Few Customers............................. 5
Year 2000................................................... 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
Special Shareholders Meeting................................ 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..................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 8
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...................................... 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 8
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 8
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K......................................... 9
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PART I
ITEM 1. BUSINESS
General
The Registrant designs, manufactures, sells, manages, supports and services
computerized ticket issuing systems and terminals for the global pari-mutuel and
on-line lottery industries. The Registrant has also bid for long-term service
contracts under which it intends to operate on-line lottery systems. The
Registrant's technology can be used 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 Registrant has
recently developed a product called the DMNXT(TM) which allows a simple and
inexpensive means for existing DATAMARK(R) customers to upgrade their older
generation terminals to an Intel PC platform with improved features. The
features include faster processing, higher resolution printing, and the ability
to utilize cost effective, commercial off-the-shelf PC peripherals. Most
DATAMARK(R) terminals are approximately 12" deep, 12" wide, 10" high, weigh
approximately 27 pounds, and are accompanied by a built-in or external display
and keyboards.
The latest DATAMARK(R) models utilize a compact ticket path which allows
the terminal to print on either 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. The
terminals can also be configured to use impact printing on plain paper. Some
models will sequentially read and print 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. As the data
is being printed, the intelligent terminal verifies the readability of the bar
code prior to ejecting the ticket to the player. 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 win, place or show betting, as well as for any feature pool
currently being used in pari-mutuel wagering. The terminals are designed to
facilitate multiple bets on one ticket and multiple selections for each bet. In
addition, the bettor is able to mark bets on
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a pre-printed playslip, which is then read optically by the terminal, the amount
wagered is calculated and the bet details printed on the back of the same
ticket. Because the ticket is prepared away from the pari-mutuel clerk's window,
betting transaction time is reduced, efficiency of the operation is improved and
the bettor obtains more privacy in the betting transaction.
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 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) and others.
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.
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.
Chief among them is the migration of the system to a client-server architecture,
the incorporation of Sybase relational database software, and the utilization of
a Windows operating system for the management information subsystem called
DataTrak(TM). These enhancements allow the system to be scaled to meet each
customer's unique requirements and enables the customer to process data within a
familiar software user interface environment. The Registrant has also added
numerous new features to the base software, including instant ticket validation
and player registration. In the Registrant's DataTrak lottery system, tickets
are processed on DATAMARK(R) terminals which are connected to a central computer
installation, usually by telephone lines. The central
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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.
In July 1995, the Registrant 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."). The
Registrant has recognized revenues in 1996 and 1997 from this sale and will
continue to receive a percentage of Lotto Pty.'s sales over the next three
years.
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,
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1997 1996 1995 1994 1993
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(DOLLARS IN THOUSANDS)
Racing Products and Services... $ 2,443 $11,183 $10,448 $13,932 $14,680
Lottery Products and
Services..................... 7,729 5,105 7,680 9,231 10,322
Other.......................... 654 305 513 926 15
------- ------- ------- ------- -------
Total.......................... $10,826 $16,594 $18,641 $24,089 $25,017
======= ======= ======= ======= =======
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 1997 the Registrant spent approximately $1.7 million on
engineering, research and development, as compared to $1.7 million and $1.4
million in 1996 and 1995, respectively.
The Registrant developed the single roller DATAMARK Flipper(R) terminal
(Flipper(TM)) 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 DATAMARK(R) XClaim(TM). This terminal can be
configured to print tickets using thermal or impact printing.
The Registrant has recently developed a product called the DMNXT(TM) which
allows for a simple and inexpensive means for existing DATAMARK(R) customers to
upgrade their older generation terminals to an Intel PC platform with improved
features which include faster processing, higher resolution printing, and the
ability to utilize cost effective, commercial off-the-shelf PC peripherals.
The Registrant has been certified since February 1996 under ISO 9001
registration. This certification demonstrates quality in design development and
manufacturing under ISO standards.
Backlog
The backlog of orders for its products and services believed by the
Registrant to be firm, amounted to approximately $5.0 million as of December 31,
1997, as compared to a backlog of approximately $1.7 million as of December 31,
1996. Of such backlog at December 31, 1997, approximately $3.3 million is
expected to be filled during 1998. See BUSINESS-Dependence Upon A Few Customers.
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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 negotiate and enter into a contract on agreed
terms.
The Registrant's marketing efforts are carried out by the Registrant's
professional marketing and engineering staff and frequently involve other
executive officers of the Registrant. Marketing of the Registrant's products and
services throughout the world is often performed in conjunction with consultants
with whom the Registrant contracts, from time to time, for representation in
specific market areas.
The Registrant's success depends in large part on its ability to obtain new
contracts to replace its existing contracts. The Registrant currently has
proposals outstanding to supply systems, terminals or components for use in the
pari-mutuel wagering industry and for lotteries in various foreign countries. In
addition to contract sales for terminals and systems, the Registrant has had
discussions with both new and existing customers regarding supplying products
for their operations and expects to bid for additional contracts in the future.
Because the realization of revenue from these prospects is dependent upon a
number of factors, including the bidding process and product development, there
can be no assurance that the Registrant will be successful in realizing revenue
from any of these activities.
Olympic Gold Holdings Limited, of the British Virgin Islands, a new
customer of the Registrant placed a $2.6 million order for DATAMARK(R) lottery
terminals and a computer operations system in May 1997. Olympic Gold operates an
on-line lottery in the Ukraine, which began operations in December 1997.
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, 1997 no vendor accounted for 10% or more of the
Registrant's raw material purchases.
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,
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Essnet, a Swedish company, International Des Jeux, the French national lottery
company, and four United States companies; GTECH Holdings Corporation, Autotote
Limited, Video Lottery Technologies, and Scientific Games Holding Corporation.
Management believes that the Registrant has been a substantial factor in the
international marketplace. The Registrant's sales or leases in the United States
have been insignificant. In general the Registrant's competitors have
significantly greater resources than the Registrant. Competition for on-line
lottery system contracts is intense.
Employees
As of December 31, 1997, the Registrant employs 116 people worldwide on a
full-time equivalent basis. Of this total, 54 were engaged in manufacturing and
operations support, 30 in engineering and software development and 32 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 five U.S. patents issued on its products. 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 non-exclusive 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
1997, the Registrant's revenues were derived primarily from contracts with
Olympic Gold Holding ($2.56 million), New South Wales Lotteries Corporation
($1.7 million); Leisure Management Berhad ($1.67 million); AB Travoch Galopp
(ATG) of Sweden ($0.76 million); and The Revenue Markets, Inc. ($0.64 million).
Year 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the year 2000. The Company
expects to incur internal staff costs as well as other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the year 2000. The Company is still evaluating the effort required and the
related costs will be expensed as incurred.
Forward Looking Statement
The statements in this filing which are not historical facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth or implied
by
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forward-looking statements. These risks and uncertainties include the absence of
significant contract backlog, the dependence on business from foreign customers
sometimes in politically unstable regions, political and governmental decisions
as to the establishment of lotteries and other wagering industries in which the
Company's products are marketed, fluctuations in quarter-by-quarter operating
results and other factors described in this Annual Report.
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
previous years in attempting to establish viable operations in these
investments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" incorporated by reference herein.
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, 1997 the Registrant's equipment has been
delivered and installed in Sweden, Norway, Hong Kong, Singapore, Ukraine,
Australia, Finland, England, the Netherlands, Malaysia, Macau, China, Papua New
Guinea, Belgium and the Philippines. The companies with which the Registrant
contracts are normally sizeable organizations with substantial assets and are
capable of meeting the financial obligations undertaken. The Registrant has
entered into a few contracts specifying payment in currencies other than the
U.S. dollar, thereby assuming the risk associated with fluctuations in value of
foreign currencies. The majority of the Company's sales are denominated in U.S.
dollars and thus not subject to foreign currency fluctuations. However, the
ultimate cost of the Company's products to its customers have increased due to
recent fluctuations in the foreign exchange rates of many southeast Asian
countries. At this point the Company does not believe that these fluctuations in
exchange rates have had a material impact on any potential sales. However, any
further significant decline in the economies of such Asian countries or in the
value of their currencies could have a material adverse impact on the Company.
The Registrant operates a wholly-owned subsidiary in Australia. 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 2001. The Registrant's United Kingdom subsidiary
occupies an office-technical support facility in West Drayton, England of
approximately 2,400 square feet, under a lease expiring in March, 1998, which
will not be renewed. See Note 6 of Notes to Consolidated Financial Statements,
incorporated by reference in Part II, Item 8.
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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, in favor of
the class shareholders, a judgment of a cash payment and 1.2 million shares of
authorized but unissued common stock of the Registrant. In 1997, the final
shares were distributed to the class shareholders.
WALTERS V ILTS, ET AL
In November, 1995, Mr. James Walters, the former chairman and president of
the Registrant, filed an action in the San Diego County Superior Court against
the Registrant and its then current president, Frederick A. Brunn, alleging that
certain statements in a magazine article were slander per se by the Registrant
and Brunn 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 an appeal with the California Fourth District Court of Appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Special Shareholders Meeting
On December 30,1997 the Registrant's shareholders approved an amendment to
the Corporation's Articles of Incorporation authorizing the issuance of up to
20,000,000 shares of preferred stock, no par value, in one or more classes or
series having such rights, privileges, designations and preferences as may be
determined from time to time by the Board of Directors.
The shareholder vote was as follows:
PERCENTAGE OF
VOTE (IN SHARES) OUTSTANDING SHARES
---------------- ------------------
For the amendment.......................... 10,411,499 57.75
Against the amendment...................... 965,346 5.35
Abstain.................................... 131,370 0.73
Broker Non-Vote............................ 6,520,950 36.17
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE V POSITION
---- --- ----------
M. Mark Michalko........ 43 President
Robert F. McPhail....... 64 Vice President, International Sales & Marketing
Timothy R. Groth........ 48 Vice President, Technical Operations
Dennis D. Klahn......... 39 Chief Financial Officer
Lawrence E. Logue....... 61 Corporate Secretary
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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 year ended December 31, 1997 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, 1998, of
$.7187 per share.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included on page 6 of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1997
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 7 through 10 of
the Registrant's Annual Report to Shareholders for the year ended December 31,
1997 under the same caption and is incorporated herein by reference to such
Annual Report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The information required by this item is included on pages 11 through 21 of
the Registrant's Annual Report to Shareholders for the year ended December 31,
1997 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 1998 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 1998 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 1998 Annual Meeting of
Shareholders.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by reference to the
Registrant's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, 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 Schedule:
(i) Report of Arthur Andersen LLP, Independent Public Accountants
Report of Ernst & Young LLP, Independent Auditors
(ii) Consolidated Balance Sheets at December 31, 1997 and 1996*
(iii) Consolidated Statements of Operations for each of the three years in
the period ended
December 31, 1997*IM
(iv) Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 1997*
(v) Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1997*
(vi) Notes to Consolidated Financial Statements*
*incorporated by reference to the Annual Report to Shareholders for
the year ended December 31, 1997.
(vii) Schedule II -- Valuation and Qualifying Accounts (Form 10-K, page 10)
All other schedules are omitted since the required information is not
applicable.
3. EXHIBITS
(3) Articles of Incorporation, as amended September 13, 1994,
reflecting corporate name change, and as amended January 7, 1998,
reflecting authorization for 20 million shares of preferred stock
and By-laws (incorporated by reference to Form 10-K for the year
ended December 31, 1994, File No. 0-10294).
(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 1986 Employee Stock Option Plan (incorporated by
reference to Exhibit 4(b) to the Form S-8 Registration Statement,
File No. 33-34123, as filed on April 4, 1990).
(d) 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).
(e) The Registrant's 1990 Stock Incentive Plan (incorporated by
reference to Form 10-K for the year ended December 31, 1990, File
No. 0-10294 and File No. 33-79938).
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(f) Agreement with The Hong Kong Jockey Club dated May 11, 1989 and
amended on January 13, 1992 (incorporated by reference to Form
10-K for the year ended December 31, 1991, File No. 0-10294).
(g) The Registrant's 1997 Directors' Stock Option Plan.
(13) Annual Report to Shareholders for the year ended December 31,
1997. With the exception of the information incorporated by
reference into items 5, 6, 7, and 8 of this Form 10-K, the 1997
Annual Report to Shareholders is not deemed filed as part of this
report.
(21) Subsidiaries of the Registrant.
(23A) Consent of Arthur Andersen LLP, Independent Public Accountants
(23B) Report of Arthur Andersen LLP, Independent Public Accountants
(23C) Consent of Ernst & Young LLP, Independent Auditors
(23D) Report of Ernst & Young LLP, Independent Auditors
(b) A report on Form 8-K was filed during the last quarter of the
period covered by this report reflecting a change in Registrant's
Independent Accountants.
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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, 1997
-- Warranty Reserves.......................... $257,921 $75,258 $ 88,558 $244,621
-- Allowance for Doubtful Accounts............ $111,112 $64,596 $ 2,410 173,298
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
Warranty reserve deductions primarily reflect actual warranty costs
incurred by the Registrant.
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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)
/s/ DENNIS D. KLAHN
By:
--------------------------------------
Dennis D. Klahn
Chief Financial Officer
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 March 26, 1998
- ---------------------------------------------
Theodore A. Johnson
/s/ M. MARK MICHALKO President March 26, 1998
- ---------------------------------------------
M. Mark Michalko
/s/ DENNIS D. KLAHN Chief Financial Officer March 26, 1998
- ---------------------------------------------
Dennis D. Klahn
/s/ FREDERICK A. BRUNN Director March 26, 1998
- ---------------------------------------------
Frederick A. Brunn
Director March 26, 1998
- ---------------------------------------------
Ng Foo Leong
/s/ MARTIN J. O'MEARA, JR. Director March 26, 1998
- ---------------------------------------------
Martin J. O'Meara, Jr.
Director March 26, 1998
- ---------------------------------------------
Michael G.R. Sandberg
Director March 26, 1998
- ---------------------------------------------
Chan Kien Sing
/s/ NG AIK CHIN Director March 26, 1998
- ---------------------------------------------
Ng Aik Chin
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