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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report
April 30, 1998
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California 0-10294 95-3276269
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
2131 Faraday Avenue, Carlsbad, CA 92008
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (760) 931-4000
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This annual report on Form 10-K/A is filed by International Lottery &
Totalizator Systems, Inc., a California corporation (the "Registrant"), as an
amendment to that certain annual report on Form 10-K filed by the Registrant on
March 31, 1997.
The information required by Part III of Form 10-K Items 10, 11, 12 and 13 are
provided below:
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table shows, for the years ended December 31, 1997, 1996
and 1995, the compensation earned by the president and the four most highly
compensated executive officers of the Company (the "Named Executive Officers")
in 1997:
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENSATION COMPENSATION
--------------------------------- -------------------------
AWARDS PAYOUTS
-------- ------------
Number
Name and of All Other
Principal Options Compensation
Position(s) Year Salary (3) Bonus(4) (5) (6)
- - - ---------------------------------------------------------------------------------------------
M. Mark Michalko 1997 $136,836 $ 11,917 80,000 $ 4,235
President & Chief 1996 $120,810 $ 4,896 23,000 $ 3,461
Executive 1995 $122,600 $ 0 0 $ 0
Officer and Director
- - - ---------------------------------------------------------------------------------------------
Robert F. McPhail 1997 $125,988 $ 11,785 10,000 $ 0
Vice President, Sales 1996 $ 99,915 $ 9,732 0 $ 0
& Marketing 1995 $109,775 $ 0 0 $ 0
- - - ---------------------------------------------------------------------------------------------
Timothy R. Groth 1997 $109,464 $ 4,270 20,000 $ 3,184
Vice President, 1996 $ 93,769 $ 3,672 12,000 $ 2,565
Technical Operations 1995 $ 94,115 $ 0 0 $ 0
- - - ---------------------------------------------------------------------------------------------
Ng Aik Chin (1) 1997 $144,901 $ 7,804 0 $ 4,187
Executive Assistant to 1996 $ 84,983 $ 3,447 12,000 $ 2,327
the President and 1995 $127,061 $ 0 0 $ 3,464
Director
- - - ---------------------------------------------------------------------------------------------
Frederick A. Brunn, (2) 1997 $154,863 $ 0 10,000 $ 0
Director and former 1996 $142,680 $ 5,824 33,000 $ 4,141
President 1995 $140,915 $ 0 0 $ 3,834
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(1) Mr. Ng's Salary for each year included a $6,000 housing allowance and
tax equalization payments of $30,556 in 1997, $0 in 1996 and $14,191 in
1995.
(2) Mr. Brunn's, 1997 Salary includes $12,203 relating to his retirement and
$84,000 relating to his consulting agreement. (See Certain Relationships
and Related Transactions herein).
(3) Perquisites for each Named Executive Officer in 1997, 1996 and 1995 are
included under Salary and did not exceed the lesser of $50,000 or 10% of
the total salary and bonus for any such officer.
(4) Amounts reflect lump sum distributions paid in November 1997 and 1996.
(5) All awards are incentive stock options, granted pursuant to the
Company's 1990 Employee Stock Option Plan, except in the case of Mr.
Brunn in which the option is pursuant to the 1997 Directors Option Plan.
(6) All amounts are Company matching contributions to the Employee Stock
Bonus(401(k) Plan.
STOCK OPTION GRANTS
The following table sets forth information regarding the grant of stock
options during 1997 to the Named Executive Officers:
OPTION GRANTS IN 1997
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (4)
---------------------------------------------------------- ------------------------
Percent
of Total
Options
Number of Granted to Exercise
Options Employees Price Expiration
Name Granted (2) in 1997 Per Share Date (3) 5% 10%
- - - -----------------------------------------------------------------------------------------------------------------------
Mark M. Michalko (1) 80,000 19% $ 1.28 5/15/07 $ 64,399 $163,199
- - - -----------------------------------------------------------------------------------------------------------------------
Robert F. McPhail 10,000 2% $ 1.28 5/15/07 $ 8,050 $ 20,400
- - - -----------------------------------------------------------------------------------------------------------------------
Timothy R. Groth 20,000 5% $ 1.28 5/15/07 $ 16,100 $ 40,800
- - - -----------------------------------------------------------------------------------------------------------------------
Ng Aik Chin 0 0% $ 1.28 5/15/07 $ 0 $ 0
- - - -----------------------------------------------------------------------------------------------------------------------
Frederick A. Brunn (A) 10,000 0% $ 1.56 9/24/02 $ 9,811 $ 24,862
- - - -----------------------------------------------------------------------------------------------------------------------
(1) Awarded to Mr. Michalko upon becoming President.
(2) No stock appreciation rights were granted to any of the Named Executive
Officers or other Company employees in 1997.
(3) The options were issued under the Company's 1990 Employee Stock Option
Plan and are exercisable starting one year after the grant date, with
25% of the shares covered thereby becoming exercisable at that date and
with an additional 25% of the option shares becoming exercisable on each
successive anniversary date, with full vesting occurring on the fourth
anniversary date.
(4) The dollar amounts under these columns are the result of calculations at
the assumed compounded market appreciation rates of 5% and 10% as
required by the Securities and Exchange Commission over a ten-year term
and, therefore, are not intended to forecast possible future
appreciation, if any, of the stock price.
(A) This option is issued under the 1997 Director's Option Plan. The option
is exercisable starting one year after the date of grant with 50% of the
shares covered thereby becoming exercisable at that date and with the
remaining 50% of the option shares becoming exercisable on the second
anniversary date.
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised stock options held as of December 31,
1997. There were no stock option exercises by executive officers in 1997 and
there were no unexercised, in-the-money stock options at December 31, 1997.
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UNEXERCISED OPTIONS
NUMBER OF
UNEXERCISED
OPTIONS AT
DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------------------
Name Exercisable Unexercisable
- - - -------------------------------------------------------------- -------------- --------------
M. Mark Michalko 35,750 107,250
- - - -------------------------------------------------------------- -------------- --------------
Robert F. McPhail 80,000 10,000
- - - -------------------------------------------------------------- -------------- --------------
Timothy R. Groth 14,225 32,775
- - - -------------------------------------------------------------- -------------- --------------
Ng Aik Chin 8,000 9,000
- - - -------------------------------------------------------------- -------------- --------------
Frederick A. Brunn 83,250 41,000
- - - --------------------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
Shares of
Common Stock
Beneficially Owned
As of April 20, 1998
--------------------
Percent
NAME OF BENEFICIAL OWNER Amount of Class
- - - ------------------------ -------------------- --------
Nominees for Director
FREDERICK A. BRUNN, 53, Director since 1989. 120,701 (A) *
President from February 1994 to May 1997.
Executive Vice President, Planning and
Development 1990 to February 1994.
CHAN KIEN SING, 41, Director since June 1993. 35,000 (B) *
Group Executive Director of Berjaya Group
Berhad since 1990.
THEODORE A. JOHNSON , 57, Director since 1979. 60,825 (B) *
President, Minnesota Cooperation Office
for Small Business and Job Creation, Inc.
from 1980 to present. Director of
Surgidyne, Inc.
M. MARK MICHALKO, 43, Director since February 1994. 75,887 (A) *
President since May, 1997, Executive Vice
President, from February 1994 to May 1997.
President of Quantum Gaming Corp., a
gaming industry consulting firm for more
than five years prior to February 1994.
NG AIK CHIN, 43, Director since May 1997. Executive 10,465 (A) *
Assistant to the President since 1994.
Senior member of Berjaya Group Berhad's
management for more than five years prior
to 1994.
NG FOO LEONG, 47, Director since June 1993. 35,000 (B) *
Executive Director, Sports Toto Malaysia
Sdn Bhd, a lottery gaming company from
1985 to present.
MARTIN J. O'MEARA, JR., 69, Director since 1979. 326,226 (B) *
President, The Budget Plan, Inc., a
privately- owned company engaged in the
consumer loan business and has been so
employed for more than five years.
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THE LORD SANDBERG OF PASSFIELD, 70, Director since 115,000 (B) *
1987. Private investor. Chairman and Chief
Executive of the Hong Kong and Shanghai
Banking Corporation from 1977 to 1986.
Director of Broadstreet Inc. a bank
holding company.
TAN SRI DATO VINCENT TAN CHEE YIOUN, 46 6,600,000 (C) 38%
Group Chief Executive Officer of Berjaya
Group Berhad since prior to 1992.
Director, February, 1994 - May 1995.
TIMOTHY R. GROTH 23,047 (A) *
DENNIS D. KLAHN 15,276 (A) *
LAWRENCE E. LOGUE 8,819 (A) *
ROBERT F. MCPHAIL 189,840 (A) *
All directors and executive officers as a group (13 persons) 1,038,615 (A)(B)(C) 4%
Significant Shareholder
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED ("BERJAYA") 6,600,000 (C) 38%
Level 28, Menara Shahzan Insas
Jalan Sultan Ismail
5020 Kuala Lumpur, Malaysia
- - - ------
(A) Includes the number of shares of Common Stock subject to unexercised
stock options which were exercisable within 60 days under the Company's
1986, 1988 and 1990 Employee Stock Option Plans as follows: 82,000 for
Mr. Brunn; 20,500 for Mr. Groth; 11,500 for Mr. Klahn; 4,750 for Mr.
Logue; 82,500 for Mr. McPhail; 63,250 for Mr. Michalko; 8,000 for Mr. Ng
Aik Chin; and 272,500 for all executive officers as a group.
(B) Includes the number of shares of Common Stock subject to unexercised
stock options which were exercisable within 60 days under the Company's
1993 Directors' Stock Option Plan which for each such outside director
is 35,000 and 175,000 for all such directors as a group.
(C) Mr. Vincent Tan is Chief Executive of the parent company of Berjaya; Mr.
Chan Kien Sing and Mr. Ng Foo Leong are employees of an affiliate of
Berjaya. Mr. Aik Chin Ng is also a designee of Berjaya to the Company's
Board of Directors. All four individuals disclaim beneficial ownership
of such shares.
* Less than one percent of the outstanding common shares.
Each director who is not an employee of the Company receives an annual
retainer of $4,000 plus $500 per board meeting and reimbursement for all related
expenses. The chairman of each committee who is not an employee of the Company
receives an additional annual retainer of $1,000. Each committee member receives
$500 per meeting and reimbursement of all related expenses, only if a committee
meeting is held at a time when it does not coincide with a board meeting. Lord
Sandberg is also a financial consultant to the Company and received fees of
$12,500 in 1997.
During 1997, four meetings of the Board of Directors were held. Each incumbent
director attended all meetings of the Board of Directors held during the year in
which he was a director, except for both Mr. Chan Kien Sing and Mr. Ng Foo Leong
who each missed one meeting. The Company has an Executive Committee which
consists of Messrs. Chan, Johnson and Michalko. The Executive Committee held no
meetings during the year. The Executive Committee may exercise all the authority
of the Board in the management of the Company except for matters expressly
reserved by law for board action. The Board also has an Executive Compensation
Committee consisting of Messrs. Johnson, O'Meara, Sandberg, and Chan. The
Executive Compensation Committee met twice during the year. Its function is to
establish compensation for all executive officers of the Company and administer
the Company's 1986, 1988, and 1990 Employee Stock Option Plans. The Company has
an Audit Committee consisting of Messrs. Sandberg, O'Meara, Johnson and Chan
which held two meetings during the year. The Audit Committee provides advice and
assistance regarding accounting, auditing and financial reporting practices of
the Company. Each year it recommends to the Board a firm of independent public
accountants to serve as auditors. The Audit Committee reviews with such auditors
the scope and result of their audit, fees for services and independence in
servicing the Company. The Company also has a Nominating Committee consisting of
Messrs. Chan, O'Meara, Johnson and Michalko. The Nominating Committee held one
meeting during the year. The Nominating Committee seeks out, evaluates and
recommends to the Board qualified nominees for election as directors of the
Company and considers other matters pertaining to the size and composition of
the Board. The Nominating Committee will give appropriate consideration to
qualified persons recommended by shareholders for nomination as directors
provided that such recommendations are accompanied by information sufficient to
enable the Nominating Committee to evaluate the qualifications of the nominee.
During 1997, the Company established an Affiliations Committee to review and
approve the
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fairness to the Company of any transactions between the Company and Berjaya. The
members of the Committee are Messrs. Brunn, Johnson and O'Meara. The
Affiliations Committee held three meetings in 1997.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
Members of the Executive Compensation Committee (the "Committee")
evaluate the performance of senior management, including the president, and
review and approve the base compensation and lump sum distributions for the
Company's executive officers. The Committee also administers the Company's
Executive Bonus Plan and employee stock option plans. The Committee periodically
reports to the Board on its activities.
Compensation Philosophy
The Committee bases its decisions on the Company's executive
compensation philosophy, which relates the level of compensation to the
Company's success in meeting its annual and long-term performance goals, rewards
individual achievement and seeks to attract and retain qualified executives. The
Company's executive compensation program consists of three principal components:
(i) base salary, (ii) potential for an annual lump-sum distribution based on
individual performance and (iii) potential for an annual bonus under the
Company's Executive Bonus Plan based upon the Company achieving a threshold
level of profitability as well as individual performance. The second and third
elements constitute "at-risk" portions of the compensation program. The Company
positions its overall executive compensation levels at or near the median of the
range of compensation levels for other companies comparable to the Company
located in Southern California and who are viewed as competitors for executive
talent in the overall labor market. This data is obtained from surveys conducted
by external compensation consultants and trade associations. In reviewing this
data, ILTS takes into account how its compensation policies and overall
performance compare to similar indices for comparable companies.
The Company employs a formal performance review system for all
employees, including the president and the other Named Executive Officers (as
defined on page 7). This process generates information that the Committee uses
in making decisions on base compensation, lump-sum distributions and awards
under the Company's Executive Bonus Plan. The president is responsible for
preparing the reviews on all executive officers other than himself. The
Committee Chairman is responsible for preparing the review on the president. All
reviews are then discussed and approved by the Committee. Executive performance
is measured both in terms of the performance of the Company as a whole and
various individual performance factors, including the performance of divisions
for which such officer had management responsibility and individual managerial
accomplishments.
The Internal Revenue Code denies a deduction to any publicly held
corporation for compensation paid to any "covered employee" (which are defined
as the president and the Company's other four most highly compensated officers,
as of the end of a taxable year) to the extent that the compensation of any
individual "covered employee" exceeds $1 million in any taxable year of the
corporation beginning after 1993. Compensation which is payable pursuant to
written binding agreements entered into before February 18, 1993 and
compensation which constitutes "performance based compensation" is excludable in
applying the $1 million limit. It is the Company's policy to qualify the
compensation paid to its top executives for deductibility under the new law in
order to maximize the Company's income tax deductions. Based upon the Internal
Revenue Service's regulations and projected compensation payable to the
Company's "covered employees" for the 1998 taxable year, all compensation
payable by the Company in 1998 to such covered employees should be deductible by
the Company.
Base Salaries
In determining base salaries for executive officers, the Committee
reviews external comparative data and also receives recommendations from
management. The Committee bases its decisions on such data, as well as internal
salary comparisons and individual performance evaluations. Under this system,
salary increases have generally the same effect as a cost of living adjustment,
although increases are not expressly tied to any cost of living indicator.
Increases are awarded, however, only to those executives who are performing at a
satisfactory level or above. The Company's philosophy is that the base salary
taken alone is generally lower than salary levels at comparable companies. Thus,
executives are required to earn awards under the "at-risk" portions of the
compensation program described below in order to reach a competitive
compensation level.
Lump Sum Distributions
Under traditional compensation systems, merit compensation increases are
made through increases in base pay. Under such systems, once the merit component
has been earned it is included in base salary going forward and becomes a
permanent part of cash compensation. In 1990, the Company instituted a different
system in which the merit component of compensation for employees was divided
into a base salary increase (discussed above) and a lump sum distribution
awarded annually.
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The lump sum distribution is delivered apart from base salary in a
separate annual check and must be re-earned by employees each year. The Company
believes that this lump sum distribution system emphasizes a performance culture
and provides a more direct link between employee compensation and performance.
The system also allows the Company to create greater differences in employee
compensation based upon performance. The relationship of pay to performance is
further strengthened by the high visibility of the lump sum distribution.
Lump sum distributions are paid in October of each year based upon the
employee performance reviews. Determinations as to whether an employee has
earned a lump sum distribution are not tied directly to Company performance.
Employees have no entitlement to receive a lump sum distribution. Accordingly,
the decision as to whether or not to make a lump sum distribution is impacted by
the overall performance of the Company.
Executive Bonus Plan
In addition to base compensation and lump sum distributions, executives
are eligible to participate in the Company's Executive Bonus Plan. Under the
Executive Bonus Plan, the Committee has set threshold levels of net after tax
profit, exclusive of extraordinary items, for 1997 and 1998. No bonus awards are
made for any year in which the Company does not meet the threshold profitability
level. The amount of the bonus pool is based on a percentage of the Company's
net after tax profits above the profitability thresholds and shall not cause the
net after tax profit to fall below the threshold after computation of the bonus
pool. During each year of the Executive Bonus Plan, the Company's research and
development budget must be maintained at a level to ensure that the Company's
new product development is sufficient to keep it competitive in its marketplace,
and continuation engineering sufficient to maintain the Company's existing
products must also be maintained. The Committee retains discretion to adjust the
bonus pool and awards based upon extraordinary circumstances and other criteria
as determined by the Committee.
Individual awards under the Executive Bonus Plan are determined by the
size of the bonus pool and individual performance of the executive. The
Committee has structured the Executive Bonus Plan so that award potential is
consistent with competitive norms and potentially represents a significant
percentage of the executive's overall compensation in any given year. Awards are
paid after completion of the Company's audited financial statements for that
year.
The Company did not meet the profitability threshold under the Executive
Bonus Plan for 1997. Accordingly, no awards were made with respect to 1997.
Stock Options
The Committee believes that grants of stock options serve to align the
interests of executive officers with shareholder value. The number of stock
options granted takes into account the recipient's position and is intended to
recognize different levels of responsibility. In determining the level of stock
option grants, the Committee also considers competitive practices. As a result,
grants may vary from year to year.
EXECUTIVE COMPENSATION COMMITTEE
Theodore A. Johnson, Martin J. O'Meara, Jr.
Chairman
Michael G.R. Sandberg Chan Kien Sing
April 30, 1998
Item 13. Certain Relationships and Related Transactions
Berjaya Transactions
During 1997 the Company received $1,154,103 as payment from three
different affiliates of Berjaya which are lottery customers of the Company and
as of December 31, 1997 there was a balance outstanding owed to the Company by
these customers of $172,512. Payments were primarily from Philippine Gaming
Management Corporation in an amount of $161,840 related to a October, 1996
lottery terminal contract and $462,787 for spare parts delivered in 1997. The
Company has software support agreements with Sports Toto Malaysia Sdn Bhd and
Natural Avenue Sdn Bhd of Malaysia ("Natural Avenue") each of which pays
approximately $7,000 per month to the Company. In addition, during 1997 Natural
Avenue paid the Company $82,600 for software upgrades and modifications to its
lottery system.
On December 2, 1997, the Company issued a Notice of Special Meeting and
Proxy Statement in connection with a shareholders special meeting held on
December 30, 1997 to approve a proposed amendment to the Company's Articles of
Incorporation to provide for the issuance of up to 20 million shares of
preferred stock. The Proxy Statement described a proposed purchase by Berjaya of
$5 million of Series A Preferred Stock and described the proposed terms of the
Series A
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Preferred Stock to be finally approved by the Company's Affiliations Committee
of the Board of Directors. The purchase by Berjaya of the $5 million preferred
stock has not been concluded.
Consulting Agreements
Mr. Brunn
In May 1996, Mr. Brunn and the Company entered into a Consulting
Agreement (the "Consulting Agreement") in connection with Mr. Brunn's
resignation as President of the Company.
Pursuant to the Consulting Agreement Mr. Brunn agreed to provide
technical consulting services to the Company through May 14, 1999 subject to
earlier termination under certain circumstances (the "Consulting Period"). In
compensation, the Company paid Mr. Brunn consulting fees of $89,600 in 1997, and
is obligated to pay in monthly installments $93,800 in 1998 and $28,000 in 1999,
whether or not the Company utilizes his services. In the event that Mr. Brunn
dies during the Consulting Period, the Company will pay his estate an amount
equal to 100% of the remaining payment due through April 10, 1998 and 50% of the
remaining payment due to be made through the Consulting Period. In addition, Mr.
Brunn agreed not to directly or indirectly compete with the Company during the
Consulting Period, except as otherwise provided in the Consulting Agreement.
The Company further agreed to continue Mr. Brunn's health benefits
through November, 1998 and to cause the stock options held by Mr. Brunn to
become immediately vested and exercisable and to remain exercisable through the
earlier of the original expiration date or May 16, 2001.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Dennis D. Klahn, Lawrence E. Logue and Robert F. McPhail did not timely
file the initial Form 3 on becoming corporate officers in May, 1997. No stock
transactions occurred during the delinquent period.
Ng Aik Chin did not report Company shares held in his 401(k) savings
plan account on his Form 5.
The Company believes, based upon a review of reports furnished to the
Company and written representations that no other reports were required, and
that, except as noted above, during 1997 its officers and directors complied
with all filing requirements under Section 16(a) of the Securities Exchange Act
of 1934.
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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/ Dennis D. Klahn
------------------------------------
Dennis D. Klahn
Chief Financial Officer
Dated: April 30, 1998
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 April 30, 1998
- - - ---------------------------
Theodore A. Johnson
/s/M. Mark Michalko President April 30, 1998
- - - ---------------------------
M. Mark Michalko
/s/Dennis D. Klahn Chief Financial Officer April 30, 1998
- - - ---------------------------
Dennis D. Klahn
/s/Frederick A. Brunn Director April 30, 1998
- - - ---------------------------
Frederick A. Brunn
- - - --------------------------- Director April , 1998
Ng Foo Leong
/s/Martin J. O'Meara, Jr. Director April 30, 1998
- - - ---------------------------
Martin J. O'Meara, Jr.
- - - --------------------------- Director April , 1998
Michael G.R. Sandberg
- - - --------------------------- Director April , 1998
Chan Kien Sing
/s/ Ng Aik Chin Director April 30, 1998
- - - ---------------------------
Ng Aik Chin
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EXHIBIT INDEX
Exhibit No. Exhibit
- - - ----------- -------
3 Certificate of Amendment of Articles of Incorporation
10(g) 1997 Directors' Stock Option Plan