<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Silicon Gaming, Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF SILICON GAMING APPEARS HERE]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 20, 1997
To the Shareholders of Silicon Gaming, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Silicon
Gaming, Inc., a California corporation (the "Company"), will be held on
Tuesday, May 20, 1997, at 2:30 p.m., local time, at the Red Lion Inn, 2050
Gateway Place, San Jose, CA 95110, for the following purposes:
1. To elect seven directors to serve for the ensuing year or until their
successors are elected.
2. To approve amendments increasing the number of shares of Common Stock
available for issuance under the Company's 1994 Stock Option Plan by
500,000 shares; increasing the limit of shares available for issuance upon
exercise of incentive stock options by 500,000; and limiting the number of
shares for which options may be granted to any employee within any fiscal
year to 500,000.
3. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December 31, 1997.
4. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on March 31, 1997 are
entitled to notice of and to vote at the meeting. All shareholders are
cordially invited to attend the meeting in person. However, to assure your
representation at the meeting, you are urged to sign and return the enclosed
Proxy as promptly as possible in the envelope enclosed. Any shareholder
attending the meeting may vote in person even if he or she has previously
returned a Proxy.
Sincerely,
Donald J. Massaro
Chairman of the Board, President
and Chief Executive Officer
Palo Alto, California
April 17, 1997
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
PLEASE READ THE ATTACHED PROXY STATEMENT CAREFULLY, AND COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE
ENCLOSED ENVELOPE.
<PAGE>
[LOGO OF SILICON GAMING APPEARS HERE]
2800 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
----------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1997
----------------
GENERAL INFORMATION
The enclosed proxy is solicited on behalf of the Board of Directors of
Silicon Gaming, Inc., a California corporation ("SGI" or the "Company"), for
use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held on
May 20, 1997 at 2:30 p.m. at the Red Lion Inn, 2050 Gateway Place, San Jose,
CA 95110. The Company's principal executive offices are located at 2800 West
Bayshore Road, Palo Alto, CA 94303. Its telephone number at that address is
(415) 842-9000.
These proxy solicitation materials were mailed on or about April 17, 1997 to
all shareholders entitled to vote at the Annual Meeting.
SOLICITATION
The cost of soliciting proxies will be borne by the Company. The Company has
retained the services of Beacon Hill Partners to assist in the solicitation of
proxies for which it will receive a fee from the Company of approximately
$1,500 plus out-of-pocket expenses. In addition, the Company may reimburse
brokerage houses and other persons representing beneficial owners of shares
for their expenses in forwarding solicitation material to such beneficial
owners. The Company will furnish copies of solicitation material to such
brokerage houses and other representatives. Proxies may also be solicited by
certain of the Company's directors, officers and employees, without additional
compensation, personally or by telephone or telecopy. Except as described
above, the Company does not presently intend to solicit proxies other than by
mail.
REVOCABILITY OF PROXIES
Any person giving a Proxy has the power to revoke it at any time before its
use by delivering to the Company's principal executive offices a written
notice of revocation or a duly executed Proxy bearing a later date. The Proxy
may also be revoked by attending the Annual Meeting and voting in person.
RECORD DATE, VOTING AND SHARE OWNERSHIP
Shareholders of record on March 31, 1997 are entitled to notice of and to
vote at the Annual Meeting. As of the record date, 10,673,397 shares of the
Company's common stock, $.001 par value ("Common Stock"), were issued and
outstanding. For information regarding holders of 5% or more of the Company's
Common Stock, see "Security Ownership of Certain Beneficial Owners and
Management."
Each shareholder is entitled to one vote for each share of Common Stock held
by such shareholder. A shareholder who abstains from voting on any or all
matters will be deemed present at the meeting for quorum purposes, but will be
deemed not to have voted in favor of the particular matter (or matters) as to
which the shareholder has abstained. In the event a nominee (such as a
brokerage firm) that is holding shares for beneficial owners does not receive
instructions from such beneficial owners as to how to vote those shares on
certain matters and does not have discretionary authority to vote on those
matters, then the shares held by the nominee will be deemed present at the
meeting for quorum purposes but will not be deemed to have voted on such
matters (a so-called "broker non-vote").
<PAGE>
MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL ONE--ELECTION OF DIRECTORS
The Bylaws of the Company provide that the Board of Directors (the "Board")
shall consist of between four and seven directors. The number of directors is
currently fixed at seven. At the Annual Meeting, seven directors are to be
elected to serve until the Company's next Annual Meeting or until their
successors are elected and qualified. Each person nominated for election has
agreed to serve if elected, and management has no reason to believe that any
nominee will be unavailable to serve. Unless otherwise instructed, the proxy
holders will vote the Proxies received by them FOR the nominees named below.
The seven candidates receiving the highest number of affirmative votes of the
shares represented and voting on this proposal at the Annual Meeting will be
elected directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
ELECTION OF EACH OF THE FOLLOWING NOMINEES TO SERVE AS DIRECTORS OF THE
COMPANY UNTIL THE NEXT ANNUAL MEETING OR UNTIL THEIR SUCCESSORS HAVE BEEN
ELECTED AND QUALIFIED.
NOMINEES
Set forth below is information regarding the nominees, including information
furnished by them as to principal occupations, certain other directorships
held by them, any arrangements pursuant to which they were selected as
directors or nominees and their ages as of March 1, 1997.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<S> <C> <C> <C>
Donald J. Massaro....... 53 Chairman, President, and Chief Executive 1995
Officer, Silicon Gaming, Inc.
Robert M. Fell.......... 54 General Partner, Interactive Partners 1993
William Hart............ 57 General Partner, Technology Partners 1994
Kevin R. Harvey......... 32 General Partner, Benchmark Capital Management 1995
David S. Morse.......... 54 Chairman, LBE Technologies, Inc. 1993
Joseph T. Piemont....... 73 Management Consultant, Bluestone Management 1997
Thomas J. Volpe......... 61 Sr. Vice President, Financial Operations, 1997
Interpublic Group of Companies
</TABLE>
Donald J. Massaro has served as Chairman of the Board of the company since
October 1996. From May 1995 to September 1996 he was a director of the
Company. In addition, Mr. Massaro has served as President and Chief Executive
Officer since June 1995. Mr. Massaro has over 20 years of general management
experience and has been a director and/or chairman of the board of directors
for a number of public and private Silicon Valley based technology companies.
Prior to joining SGI, Mr. Massaro was Executive Vice President and General
Manager of Worldwide Sales and Marketing for Conner Peripherals Inc.
("Conner"), a disk drive manufacturer, from July 1994 to May 1995. From
January 1991 to June 1994, Mr. Massaro was Chief Executive Officer of Sjoberg
Industries ("Sjoberg"), and Inversion Development Corporation ("Inversion"),
manufacturers of environmental products. Sjoberg filed for protection under
federal bankruptcy statutes in December 1992 and was acquired by Inversion in
March 1993. Prior thereto, he served as President and Chief Executive Officer
of Metaphor Computer Systems ("Metaphor"), a company he co-founded in 1982 to
develop and manufacture client-server based management information systems.
Mr. Massaro's other prior experience includes positions as Corporate Vice
President and President of Xerox Corporation's Office Products Division and
President and Chief Executive Officer of Shugart Associates, a computer
peripherals company he co-founded in 1972.
Robert M. Fell is a founder of the Company and has served as a director of
the company since its inception. In addition, Mr. Fell is a founding General
Partner of Interactive Partners. Mr. Fell has also served as the Chairman,
President and Chief Executive Officer of Archon Capital Partners L.P., a
merchant banking firm, and
2
<PAGE>
Chairman of the Board of Archon Communications, Inc. from June 1994 to the
present. Since 1978, Mr. Fell has also served as President and Chief Executive
Officer of Fell & Company, Inc., and since 1982 as General Partner of Fell &
Nicholson Technology Resources, both management consulting firms. Mr. Fell is
also a director of Premiere Radio Networks, Inc., a radio programming
syndicator, and several private companies.
William Hart has served as a director of the Company since May 1994. In
addition, Mr. Hart is a general partner of Technology Partners, a venture
capital investment firm founded by Mr. Hart in 1980, which currently manages
$100 million in funds for early stage venture capital investments. Prior to
founding Technology Partners, Mr. Hart held positions with Cresap, McCormick
and Paget, a management consulting firm, and with IBM Corporation. Mr. Hart
serves as a director of Cellnet Data Systems, Inc., Qualix Group Inc., Trimble
Navigation Ltd. and several private companies.
Kevin R. Harvey has served as a director of the Company since August 1995.
In addition, Mr. Harvey is a General Partner of Benchmark Capital Management
LLC ("Benchmark"), a Silicon Valley venture capital firm which currently
manages a $90 million fund. Prior to joining Benchmark in 1995, Mr. Harvey
successfully started two software companies. The first, Styleware, a provider
of integrated software for the Apple II personal computer, was founded in 1985
and subsequently sold to Claris Corporation. His second startup, Approach
Software, provided the first, easy-to-use client server database software for
Windows and was sold to Lotus Development in 1993.
David S. Morse is a founder and current director of the Company. In
addition, Mr. Morse served as Chairman of the Board of Directors from the
Company's inception to September 1996. Mr. Morse also currently serves as
Chairman of the Board for LBE Technologies, Inc., a company he founded to
develop virtual reality based auto racing simulations. Mr. Morse is a founder
and has served as Chief Executive Officer of Crystal Dynamics, Inc., an
interactive video game developer and publisher, from July 1992 to June 1993
and from December 1994 to May 1995. Mr. Morse was founder, President and Chief
Executive Officer of New Technologies Group, Inc., ("NTG"), the company which
developed the original video game technology employed in games developed by
The 3DO Company ("3DO"). NTG was one of the founding partners of 3DO and was
subsequently acquired by 3DO. Mr. Morse served with NTG from July 1989 to June
1993. Prior to founding NTG, Mr. Morse was Chairman of Epyx, Inc. ("Epyx"), a
video game developer, where he led the development of the Lynx portable game
platform, now marketed by Atari. Epyx filed for protection under federal
bankruptcy statutes in October 1989. Mr. Morse was also the founder, President
and Chief Executive Officer of Amiga Computer, Inc., prior to its acquisition
by Commodore Business Machines, Inc. in 1984. Mr. Morse was a founding general
partner of Interactive Partners, a firm specializing in the creation of
interactive media companies.
Joseph T. Piemont has been a director of the Company since March 1997. In
addition, Mr. Piemont has served as a management consultant for Bluestone
Management Company, a performance management company, for over five years. Mr.
Piemont also serves as a director of Crown Vantage, Inc., a manufacturer of
specialty paper products, and he is a retired director of James River
Corporation, a manufacturer of consumer paper products.
Thomas J. Volpe has been a director of the Company since March 1997. In
addition, Mr. Volpe has served as Senior Vice President, Financial Operations
for The Interpublic Group of Companies, Inc., an advertising agency holding
company, from March 1986 to present. Mr. Volpe is also a director of Atlantis
Corporation, a film production company, and Amivest Corporation, a registered
investment company. Additionally, Mr. Volpe serves as a trustee of St. Francis
College, Brooklyn, New York, as a member of the Board of Directors of the New
York City Chapter of the National Multiple Sclerosis Society and as a trustee
of the Business Council of the United Nations.
There are no family relationships among executive officers or directors of
the Company.
BOARD COMMITTEES AND MEETINGS
During fiscal year 1996, the Board of directors held seven meetings and
acted by unanimous written consent on three occasions. The Board of Directors
has an Audit Committee and a Compensation Committee.
3
<PAGE>
The Audit Committee currently consists of Messrs. Fell and Hart. The Audit
Committee is primarily responsible for approving the services performed by the
Company's independent auditors and reviewing their reports regarding the
Company's accounting practices and systems of internal accounting controls.
The Audit Committee held one meeting during the last fiscal year.
The Compensation Committee currently consists of Messrs. Harvey and Morse.
The Compensation Committee is primarily responsible for reviewing and
approving the Company's general compensation policies and setting compensation
levels for the Company's executive officers and administering the Company's
1994 Stock Option Plan and the Employee Stock Purchase Plan. The Compensation
Committee held two meetings during the last fiscal year.
The Company currently has no standing Nominating Committee. Nominations for
election of directors at the Annual Meeting were made by the full Board of
Directors of the Company.
During fiscal year 1996, no director attended fewer than 70% of the meetings
of the Board of Directors and Committees of the Board on which such director
served.
DIRECTORS' COMPENSATION
Non-employee directors receive no cash compensation for attending meetings
of the Board or Board Committees, with the exception of Mr. Joseph Piemont,
who receives $2,000 per Board meeting attended and an annual retainer of
$25,000. In connection with consulting services rendered by Mr. Piemont to the
Company prior to his becoming elected to the Board, the Company paid Mr.
Piemont consulting fees totaling $4,000 during 1996 and $8,000 during 1997.
Non-employee directors are reimbursed for out-of-pocket expenses in connection
with attendance at meetings of the Board or Board Committees.
Non-employee directors receive automatic option grants under the 1996
Outside Directors Stock Option Plan (the "Directors Plan"). As of the date of
this Proxy Statement, there were six non-employee directors eligible to
participate in the Directors Plan. Under the Directors Plan, each non-employee
Board member who (i) was a non-employee director prior to the effective date
of the Company's initial public offering ("Effective Date") or (ii) first
became a non-employee director after the Effective Date received a non-
statutory option to purchase 15,000 shares of Common Stock (unless such member
was previously an employee of the Company). On the date of each annual
shareholders' meeting each individual re-elected as a non-employee director at
such meeting is automatically granted a non-statutory option to purchase 5,000
shares of Common Stock. A total of 200,000 shares were initially reserved for
issuance under the Directors Plan. The exercise price per share of Common
Stock subject to each automatic option grant is equal to one hundred percent
(100%) of the fair market value per share on the automatic grant date. The
options have a maximum term of 10 years, measured from the grant date, subject
to earlier termination upon cessation of service as a director.
Options granted under the Directors Plan are exercisable according to the
vested ratio of shares. The initial automatic grant for 15,000 shares and each
subsequent annual 5,000-share automatic grant made to each non-employee Board
member vests in a series of 36 equal monthly installments beginning one month
after the grant date, provided the Board member continues in Board service
through each such vesting date. Notwithstanding the foregoing, options granted
under the Directors Plan shall automatically vest upon the occurrence of
certain corporate transactions, including certain mergers or changes in
control of the Company or the sale of all or substantially all of the
Company's assets.
During fiscal year 1996 initial grants of options to purchase 15,000 shares
of Common Stock were made to Messrs. Fell, Hart, Harvey and Morse on July 31,
1996 at an exercise price of $10.50 per share. Initial grants of options to
purchase 15,000 shares of Common Stock were made to Messrs. Piemont and Volpe
on March 6, 1997 at an exercise price of $18.75 per share. In connection with
the 1997 Annual Meeting, Messrs. Fell, Hart, Harvey and Morse each will
receive automatic grants of options to purchase 5,000 shares of Common Stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 1, 1997 by (i) each person
known by the Company to own beneficially more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the
4
<PAGE>
executive officers named in the "Executive Compensation--Summary Compensation
Table" on page 7 and (iv) all directors and current executive officers as a
group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED(1)
---------------------------
FIVE PERCENT SHAREHOLDERS, DIRECTORS AND PERCENTAGE
EXECUTIVE OFFICERS NUMBER OWNERSHIP
---------------------------------------- ------------- -------------
<S> <C> <C>
Robert M. Fell(2)................................ 1,137,082 10.6
15260 Ventura Boulevard, Suite 300
Sherman Oaks, CA 91403
David S. Morse(3)................................ 637,082 6.0
P.O. Box 7119
Incline Village, NV 89450
Donald J. Massaro................................ 418,938 3.9
c/o Silicon Gaming, Inc.
2800 West Bayshore Road
Palo Alto, CA 94303
Kevin R. Harvey(4)............................... 412,638 3.9
2480 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Kleiner Perkins Caufield & Byers(5).............. 408,888 3.8
2750 Sand Hill Road
Menlo Park, CA 94025
Andrew S. Pascal................................. 288,704 2.7
William Hart(6).................................. 189,305 1.8
1550 Tiburon Blvd., Suite A
Belvedere, CA 94920
Thomas J. Volpe(7)............................... 137,082 1.3
1271 Avenue of the Americas
Rockefeller Center
New York, NY 10020
Thomas E. Carlson................................ 134,911 1.3
Karen M. Katz.................................... 101,578 *
Jeffrey D. Friedberg(8).......................... 70,178 *
Joseph T. Piemont................................ 416 *
5311 Winged Foot Rd.
Charlotte, NC 28226
All executive officers and directors as a group
(13 persons)(9)................................. 3,663,898 33.8
</TABLE>
- - --------
* less than one percent
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60
days after March 1, 1997 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any
other person. In general, options granted under the 1994 Stock Option Plan
are fully exercisable from the date of grant, subject to the Company's
right to repurchase any unvested shares at the original exercise price
upon termination of employment. See "Proposal Two--Amendment to the 1994
Stock Option Plan--Summary of Stock Plan as Amended." The information set
forth in this table does not include among shares beneficially owned or
outstanding shares of Common Stock issuable upon conversion of Nonvoting
Redeemable Convertible Preferred Stock (the "Nonvoting Preferred"), which
is convertible only upon 75
5
<PAGE>
days' prior notice to the Company. Unless otherwise indicated in the
footnotes below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
(2) Includes 1,133,332 shares held by Mr. Fell as Trustee of the Robert M.
Fell Living Trust, dated 6/14/95.
(3) Includes 600,000 shares held by Mr. Morse and his spouse as Trustees of
the Morse Family Trust dated 12/20/84 and 33,332 shares of Common Stock
held by Mr. Morse's children, and of which Mr. Morse disclaims beneficial
ownership.
(4) Includes 399,616 shares held by Benchmark Capital Partners, L.P., and
9,272 shares held by Benchmark Founders' Fund, L.P. Mr. Harvey is a member
of Benchmark Capital Management LLC ("BCM"), the general partner of each
of these entities. Mr. Harvey disclaims beneficial ownership of these
shares except to the extent of his proportionate interest therein.
Excludes 1,141,986 shares of Common Stock issuable upon conversion
Nonvoting Preferred. Assuming conversion of all outstanding shares of
Nonvoting Preferred, BCM would be the beneficial owner of 13.1% of the
Company's outstanding Common Stock.
(5) Includes 398,133 shares held by Kleiner Perkins Caulfield & Byers VII,
8,533 shares held by KPCB VII Founders Fund and 2,222 shares held by KPCB
Information Sciences Zaibatsu Fund II. KPCB VII Associates, an affiliate
of Kleiner Perkins Caufield & Byers, is general partner of each of these
entities. Excludes 1,141,987 shares of Common Stock issuable upon
conversion of Nonvoting Preferred. Assuming conversion of all outstanding
shares of Nonvoting Preferred, Kleiner Perkins Caufield & Byers would be
the beneficial owner of 13.1% of the Company's outstanding Common Stock.
(6) Includes 185,555 shares held by Technology Partners Fund V, L.P., of which
TPW Management V, L.P. ("TPW") is the general partner. Mr. Hart is the
Managing Partner of TPW. Mr. Hart disclaims beneficial ownership of these
shares except to the extent of his proportionate interest therein.
Excludes 1,972,339 shares of Common Stock issuable upon conversion of
Nonvoting Preferred. Assuming conversion of all outstanding shares of
Nonvoting Preferred, Technology Partners Fund V, L.P. would be the
beneficial owner of 17% of the Company's outstanding Common Stock.
(7) Includes 133,333 shares held by Interpublic Benefit Protection Trust, of
which Mr. Volpe is a trustee.
(8) Includes 1,333 shares held by Mr. Friedberg as custodian for his minor
child.
(9) Includes 169,536 shares issuable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days after
March 1, 1997. Also includes 1,133,332 shares held by Mr. Fell as Trustee
of the Robert M. Fell Living Trust; 600,000 shares held by Mr. Morse and
his spouse as Trustees of the Morse Family Trust; 33,332 shares held by
Mr. Morse's children, of which Mr. Morse disclaims
beneficial ownership; 399,616 shares and 9,272 shares beneficially owned by
BCM, of which Mr. Harvey, a member of BCM, disclaims beneficial ownership
except to the extent of his proportionate interest therein; 185,555 shares
held by Technology Partners Fund V, L.P., of which Mr. Hart, the general
partner, disclaims beneficial ownership except to the extent of his
proportionate interest therein; 1,333 shares held by Mr. Friedberg as
custodian for his minor child; and 133,333 shares held by Interpublic
Benefit Protection Trust, of which Mr. Volpe is a trustee. Excludes
1,141,986 shares and 1,972,339 shares, respectively, of Nonvoting Preferred
beneficially owned by BCM and Technology Partners Fund V, L.P. Assuming
conversion of all outstanding shares of Nonvoting Preferred, the Company's
executive officers and directors as a group would be deemed to be the
beneficial owner of 48.6% of the Company's outstanding Common Stock.
6
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the other four most highly compensated
executive officers whose compensation for the fiscal year ended December 31,
1996 exceeded $100,000, for services rendered in all capacities to the Company
during the last two fiscal years (the "Named Executive Officers"). Due to a
change in the Company's fiscal year end, the fiscal year ended December 31,
1995 was a nine-month period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------
FISCAL SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS OPTIONS GRANTED COMPENSATION(2)
- - --------------------------- ------ ------------ ---------------------------- ---------------
<S> <C> <C> <C> <C> <C>
Donald J. Massaro........ 1996 $250,000 $ 15,000 -- $1,728
Chairman of the Board, 1995 $139,262(3) $ -- 416,666(4) $ 913
President and Chief Ex-
ecutive Officer
Andrew S. Pascal......... 1996 $135,129 $ 15,000 100,000 $ 324
Executive Vice Presi- 1995 $ 93,570(5) $ -- 49,999(4) $ 991
dent--Marketing and Game
Development
Jeffrey D. Friedberg(6).. 1996 $ 140,834 $ 15,000 33,333 $ 370
Vice President--Engi-
neering
Thomas E. Carlson........ 1996 $128,115 $ 15,000 33,333 $ 571
Vice President--Chief 1995 $ 72,000(7) $ -- 99,999(4) $ --
Financial Officer
Karen M. Katz............ 1996 $128,115 $ 15,000 -- $ 302
Vice President--Sales 1995 $ 50,000(8) $ -- 99,999(4) $ --
and Support
</TABLE>
- - --------
(1) Salary includes any compensation deferred under Company's 401(k) plan.
(2) Represents life insurance premiums paid by the Company for the benefit of
the Named Executive Officer. Amounts shown for 1995 represent amounts paid
during the 12 months ended December 31, 1995.
(3) Mr. Massaro became an executive officer of the Company in June 1995. Mr.
Massaro's compensation reflects an annual salary of $250,000.
(4) The amount of options granted during the nine-month period ended December
31, 1995 is equal to the amount of options granted during the 12 months
then ended.
(5) The salary earned by Mr. Pascal during the 12 months ended December 31,
1995 was $125,000.
(6) Mr. Friedberg became an executive officer of the Company in May 1996. All
compensation disclosed for the year ended December 31, 1996 includes
compensation earned in other capacities prior to his becoming an officer.
(7) Mr. Carlson became an executive officer of the Company in July 1995. Mr.
Carlson's 1995 compensation reflects an annual salary of $120,000. The
salary reported in the table also includes $17,000 earned by Mr. Carlson
in his capacity as a consultant prior to his becoming an officer of the
Company.
(8) Ms. Katz became an executive officer of the Company in July 1995. Ms.
Katz' 1995 compensation reflects an annual salary of $120,000.
STOCK OPTION GRANTS
The following table sets forth further information regarding individual
grants of options for the Company's Common Stock during the year ended
December 31, 1996 for each Named Executive Officer. Such grants were made
pursuant to the Company's 1994 Stock Option Plan. In accordance with the rules
of the Securities and Exchange Commission ("SEC"), the table sets forth the
hypothetical gains or "option spreads" that would exist
7
<PAGE>
for the options at the end of their respective ten-year terms based on assumed
annualized rates of compound stock price appreciation of 5% and 10% from the
dates the options were granted to the end of the respective option terms.
Actual gains, if any, are dependent on the future performance of the Company's
Common Stock and overall market conditions. There can be no assurance that the
potential realizable values shown in this table will be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SHARES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(1)(2) 1996 PER SHARE DATE 5% 10%
---- ------------- ------------ --------- ---------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Massaro....... -- -- -- -- -- --
Andrew S. Pascal........ 100,000 10.928% $10.125(4) 10/9/06 $ 636,756 $ 1,613,664
Jeffrey D. Friedberg.... 33,333 3.643% $ 4.50(5) 5/28/06 $ 94,333 $ 239,059
Thomas E. Carlson....... 33,333 3.643% $ 4.50(5) 5/28/06 $ 94,333 $ 239,059
Karen M. Katz........... -- -- -- -- -- --
</TABLE>
- - --------
(1) All options granted in 1996 were granted under the 1994 Stock Option Plan.
The Board of Directors has discretion, subject to plan limits, to modify
the terms of outstanding options. See "Proposal Two--Amendment to the 1994
Stock Option Plan--Summary of Option Plan as Amended."
(2) Each option is fully exercisable from the time of grant, subject to the
Company's right to repurchase any unvested shares at the original exercise
price in the event of the optionee's termination. Shares vest at the rate
of 1/4 of the shares after one year and then 1/48 of the total number of
shares each month thereafter. Each option expires ten years from the date
of grant.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price appreciation are provided pursuant to the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price.
(4) The per-share exercise price of options granted represents the fair market
value of the underlying shares of Common Stock on the dates the respective
options were granted as reported on the Nasdaq Stock Market.
(5) The Company's Common Stock was not traded publicly at the time of the
option grants to the Named Executive Officers.
8
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information regarding the exercise of
options by the Named Executive Officers during 1996 and unexercised stock
options held by each of the Named Executive Officers as of December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1996(#) DECEMBER 31, 1996(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
EXERCISE REALIZED(2) EXERCISABLE(3) UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
----------- ----------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Massaro....... 133,333 -- -- -- -- --
Andrew S. Pascal........ 33,333 -- 60,496 39,504(/4/) $362,976 $237,024(/4/)
Jeffrey D. Friedberg.... 6,666 -- 33,333 -- $387,496 --
Thomas E. Carlson....... 99,999 $4,000 33,333 -- $387,496 --
Karen M. Katz........... 33,333 -- -- -- -- --
</TABLE>
- - --------
(1) Market value of underlying securities at year end ($16.125) minus the
exercise price.
(2) Fair market value at time of exercise less exercise price. The Company's
stock was not traded publicly at the time of exercise.
(3) With certain exceptions, all options are fully exercisable, subject to the
Company's right to repurchase any unvested shares at the original exercise
price in the event of the optionee's termination.
(4) Option shares not exercisable during fiscal 1996 pursuant to limitations
on the number of shares that may be exercisable as incentive stock options
during any fiscal year.
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
In May 1995, the Company entered into an employment agreement with Donald J.
Massaro pursuant to which Mr. Massaro is employed as the Company's President
and Chief Executive Officer. The agreement entitles Mr. Massaro to a salary of
$20,833.33 per month. Under the agreement, Mr. Massaro has agreed to serve on
the Board of Directors while serving as Chief Executive Officer and to resign
from the Board at such time as his employment is terminated. In October 1996,
Mr. Massaro was appointed Chairman of the Board of Directors. The agreement
also provides for loans to Mr. Massaro from the Company for living expenses.
See "Certain Relationships and Related Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Harvey and Morse. In August
1995, Benchmark Capital Partners, L.P. ("Benchmark") and related entities
purchased 2,192,982 shares of Series B Preferred Stock for an aggregate
consideration of $2,499,999. In March 1996, Benchmark and related entities
purchased 133,332 shares of Series C Preferred Stock for an aggregate
consideration of $666,660. Mr. Harvey is a general partner of Benchmark
Capital Management LLC ("BCM"), the general partner of Benchmark.
The company has granted to the purchasers of its Series A, Series B and
Series C Preferred Stock and certain other securities of the Company (the
"Holders"), including Benchmark and related entities and Mr. Morse,
registration rights with respect to the shares of Common Stock issued or
issuable, directly or indirectly, upon conversion of such Preferred Stock
("Registrable Shares"). Accordingly, the Holders of at least 30% of the
Registrable Shares then outstanding have the right to require the Company, on
not more than two occasions, to file a registration statement under the
Securities Act of 1933 (the "Securities Act") covering such Registrable
Shares, subject to certain requirements as to the minimum amount of shares to
be registered. In addition, the Holders of an aggregate of at least 30% of the
Registrable Shares not already registered may require the Company to file a
registration statement on Form S-3 covering such Registrable Shares, at any
time when the Company is entitled to use such form, subject to certain
requirements as to the minimum amount of shares to be registered. Any
requested registration is subject to the Company's right to defer the
registration under certain circumstances. In the event the Company proposes to
register any of its securities under the Securities Act, the
9
<PAGE>
Holders are entitled to include their Registrable Shares in such registration
at the Company expense, subject to the underwriters' right, for marketing
purposes, to limit the amount of Registrable Shares included in such
registration to no fewer than 20% of the shares included in such registration.
REPORT OF THE COMPENSATION COMMITTEE
The following is the Report of the Compensation Committee of the Board of
Directors, describing the compensation policies applicable to the Company's
executive officers in connection with the compensation paid to such executive
officers for the year ended December 31, 1996.
Purpose of the Compensation Committee
The Compensation Committee of the Board of Directors (the "Committee") has
the exclusive authority to establish the level of base salary payable to the
Chief Executive Officer ("CEO") and certain other executive officers of the
Company and to administer the Company's 1994 Stock Option Plan, under which
grants may be made to such officers and other key employees, and the Employee
Stock Purchase Plan. In addition, the Committee has the responsibility for
approving individual bonuses for the CEO and certain other executive officers
and other key employees each fiscal year. The Committee is composed entirely
of nonemployee directors.
Compensation Philosophy
Recognizing the need to respond to the competitive high technology business
environment, the process utilized by the Committee in determining executive
officer compensation levels is based upon the Committee's subjective judgment,
with the goal of establishing compensation policies that enable the Company to
attract, retain and reward employees who contribute to its long-term success.
Competitive Frame of Reference
The Committee evaluated compensation levels for executives in comparable
positions to establish base salary, bonus awards and total compensation for
the executive officers.
In preparing the performance graph for this Proxy Statement, the Company has
selected a representative peer group (the "Gaming Index"). Most companies in
the Gaming Index may not have been included in the Committee's compensation
evaluation process, because they were determined not to be competitive with
the Company for executive talent.
General Compensation Components
The Committee's fundamental policy is to offer the Company's executive
officers competitive compensation opportunities based upon overall achievement
of Company milestones, their individual contribution to the success of the
Company, and their personal performance. It is the Committee's objective to
have each officer's compensation contingent upon the Company's performance, as
well as upon his or her own level of performance. Accordingly, each executive
officer's compensation comprises three elements: (i) base salary, which is
established primarily on the basis of individual performance and market
considerations; (ii) annual bonus awards payable in cash and tied to the
Company's achievement of pre-determined milestones and the executive's
achievement of objectives within those milestones; and (iii) long-term stock-
based incentive awards, typically in the form of stock options, for the
purpose of aligning the interests of executive officers and the Company's
shareholders.
Base Salary. The base salary for each executive officer is set on the basis
of personal performance and a review of salaries paid to persons in comparable
positions within the area.
10
<PAGE>
Annual Bonus Award. Each executive officer has specific objectives as part
of the Company milestones established at the start of the fiscal year. For
example, the Company set target dates for such milestones as completion of its
IPO, submission of product for regulatory approval and initial installation of
its product. Each executive officer was then given target dates for completion
of objectives in support of each milestone. For the 1996 fiscal year, the
Company achieved its milestones and paid bonuses to these executive officers
to honor that achievement as well as the individuals' achievement of
functional objectives within those milestones. The Committee held the bonus
awards to a level that, while acknowledging the executives' contributions,
recognized the Company's status as a development stage Company and reflected
its continuing efforts to control costs. Each year, the annual plan is
reevaluated with new milestones and objectives.
Long-Term Incentive Compensation. During fiscal 1996, the Committee, in its
discretion, made option grants to Messrs. Carlson, Friedberg, and Pascal under
the 1994 Stock Option Plan. Generally, the size of each grant is set at a
level which the Committee deems appropriate to create a meaningful opportunity
for stock ownership based upon the individual's current position with the
Company, the individual's potential for future responsibility and promotion,
the individual's performance in the recent period, and the number of unvested
options held by the individual at the time of the new grant. The relative
weight given by the Committee to each of these factors varies from individual
to individual.
The grants are designed to align the interests of the executive officer with
those of the shareholders and provide each individual with a significant
incentive to manage the Company from the perspective of an owner with an
equity stake in the business. Each grant allows the officer to acquire shares
of the Company's Common Stock at a fixed price per share (the market price on
the grant date) over a specified period of time. The option generally vests in
periodic installments over a four-year period, contingent upon the executive
officer's continued employment with the Company. Accordingly, the option will
provide a return to the executive officer only if he or she remains employed
by the Company, and then only if the market price of the Company's Common
Stock appreciates over the option term.
Compensation of the Chief Executive Officer
The annual base salary for Mr. Massaro, the Company's Chairman of the Board,
Chief Executive Officer and President, was negotiated and established in June
1995 upon Mr. Massaro's joining the Company and is fixed by Mr. Masaro's
employment agreement. See "Executive Compensation--Employment, Severance and
Change of Control Agreements."
Mr. Massaro's bonus award for 1996 was dependent upon achievement of the
Company's pre-determined milestones and Mr. Massaro's personal objectives
within those milestones. The bonus paid to Mr. Massaro for the fiscal year was
based on the same plan as the bonuses paid to other officers.
Tax Limitation
As a result of federal tax legislation enacted in 1993, a publicly held
company such as Silicon Gaming will not be allowed a federal income tax
deduction for compensation paid to certain executive officers to the extent
that compensation exceeds $1 million per officer in any year. It is not
expected that the compensation to be paid to the Company's executive officers
for the 1997 fiscal year will exceed the $1 million limit per officer. In
addition, the Company has amended the 1994 Stock Option Plan, subject to
shareholder approval, to provide for a per employee limit of 500,000 shares
and believes that any compensation expense incurred in connection with the
exercise of stock options granted under the 1994 Stock Option Plan will
continue to be deductible as performance-based compensation.
COMPENSATION COMMITTEE
Kevin R. Harvey
David S. Morse
11
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative return, including
reinvestment of dividends, at December 31, 1996 on $100 invested,
alternatively, in the Company's Common Stock, the S&P 500 index, and a group
of peer companies selected by the Company, on July 31, 1996 (the date of the
Company's initial public offering).
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG SILICON GAMING INC., S&P 500 INDEX AND PEER GROUP
<TABLE>
<CAPTION>
Measurement Period SILICON S&P
(Fiscal Year Covered) GAMING, INC. 500 INDEX Peer Group
- - ------------------- ------------ --------- ----------
<S> <C> <C> <C>
Measurement Pt-12/96 $100 $100 $100
FYE 7/96 $154 $117 $103
</TABLE>
12
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1996, Technology Partners Fund V, L.P. ("Technology Partners"), of
which William Hart is a general partner, purchased 133,334 shares of Series C
Preferred Stock for an aggregate consideration of $666,670, Benchmark Capital
Partners, L.P., and related entities controlled by Benchmark Capital
Management LLC, of which Kevin Harvey is a member, purchased 133,332 shares of
Series C Preferred Stock for an aggregate consideration of $666,660, and
Interpublic Benefit Protection Trust, of which Thomas Volpe is a trustee,
purchased 200,000 shares of Series C Preferred Stock for an aggregate
consideration of $1,000,000.
The Company has granted to the purchasers of Series A, Series B and Series C
Preferred Stock registration rights with respect to the shares of Common Stock
issued or issuable, directly or indirectly, upon conversion of such Preferred
Stock. See "Executive Compensation--Compensation Committee Interlocks and
Insider Participation."
Pursuant to Mr. Massaro's employment agreement, the Company has agreed to
loan Mr. Massaro up to $75,000 per year for living expenses, to a maximum of
$150,000, secured by Common Stock of the Company owned by Mr. Massaro. As of
March 1, 1997, $150,000 in principal was outstanding. The loan bears interest
at 8% per annum. See "Executive Compensation--Employment, Severance and Change
of Control Agreements."
In connection with the sale of Series C Preferred Stock to Interpublic, the
Company and Interpublic entered into a letter agreement dated March 11, 1996
pursuant to which the Company agreed, among other things, not to enter into
strategic alliances with Interpublic's competitors without its written
consent, to provide Interpublic with periodic data regarding customer
installations, and to provide Interpublic with preferred access with respect
to placement of advertisements on the Company's products or integrating
advertisements into promotional offerings of the Company's customers on behalf
of Interpublic's advertising clients.
PLAN BENEFITS TABLE
The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table and the various indicated individuals and
groups, the number of shares of Common Stock of the Company subject to options
granted during the fiscal year ended December 31, 1996 under the 1994 Stock
Option Plan, together with the weighted average exercise price payable per
share.
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS ($) WEIGHTED AVERAGE
GRANTED EXERCISE PRICE
--------- --------------------
<S> <C> <C>
Donald J. Massaro...................... -- $ --
Andrew S. Pascal....................... 100,000 $10.125
Jeffrey D. Friedberg................... 33,333 $ 4.50
Thomas E. Carlson...................... 33,333 $ 4.50
Karen M. Katz.......................... -- $ --
Executive Officers as a group (7
persons).............................. 199,998 $ 7.06
Non-employee directors as a group (6
persons).............................. -- (1) $ --
Non-executive officer employees as a
group(2).............................. 715,066 $ 4.55
</TABLE>
- - --------
(1) Non-employee directors are not eligible to participate in the 1994 Stock
Option Plan.
(2) Represents all employees other than the executive officers of the Company.
13
<PAGE>
PROPOSAL TWO--AMENDMENT TO THE 1994 STOCK OPTION PLAN
The Company's 1994 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors of the Company in May 1994 and approved by Shareholders in
June 1994. In May 1996, the Board of Directors adopted, and in June 1996 the
shareholders approved, an amendment to and restatement of the Option Plan
which increased the maximum number of shares of Common Stock of the Company
issuable under the Option Plan to 2,866,666, subject to an automatic increase
on the first day of each calendar year beginning January 1, 1998 by a number
of shares equal to 4% of the number of shares of Common Stock outstanding on
the last day of trading of the immediately preceding calendar year. This
maximum number of shares is also subject to adjustment in the event of stock
dividends, stock splits, reverse stock splits, recapitalizations,
combinations, reclassifications, or like changes in the capital structure of
the Company.
On December 31, 1996, a total of 540,908 shares remained available for
future grants under the Option Plan. Historically, the Company has granted
options to all new employees of the Company with an exercise price equal to
the fair market value of the Company's Common Stock on the date of grant. The
Board believes that this practice has been of significant benefit to the
Company and its shareholders by helping to align employees' economic interests
with those of shareholders. Since July 1996, when the share reserve under the
Option Plan was last increased, the Company has accelerated its planned
product roll-out and accompanying hiring plans. As a result, the Company
anticipates that the number of employees will increase by approximately 80%
during 1997. The Board of Directors has determined that, in the event hiring
does accelerate at this rate or greater, the number of shares currently
available for grant under the Option Plan will not permit the Company to offer
its employees a meaningful equity-based performance incentive. Therefore, on
March 6, 1997, the Board adopted, subject to shareholder approval, an
amendment to the Option Plan to increase the maximum number of shares of
Common Stock of the Company issuable under the Option Plan to 3,366,666, an
increase of 500,000 shares. Further, the amendment provides that no more than
3,366,666 shares may be available cumulatively for issuance upon exercise of
ISOs (the "ISO Share Limit"), including ISOs that have been granted
previously. The Board of Directors believes that this increase is in the best
interests of the Company and its shareholders, as the availability of an
adequate number of shares for issuance under the Option Plan and the ability
to grant stock options is essential to the success of the Company not only in
attracting qualified personnel, but also in retaining and motivating those
employees.
Under section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), the allowable deduction for compensation paid or accrued with respect
to the chief executive officer and each of the four most highly compensated
executive officers of a publicly-held corporation is limited to no more than
$1,000,000 per year. To enable the Company to preserve the benefit of
receiving a tax deduction for the full amount of income recognized by the
Company's executive officers upon exercise of stock options granted under the
Option Plan, the Board has amended the Option Plan, subject to shareholder
approval, to limit the number of shares for which options may be granted to
any employee within any fiscal year of the Company to 500,000 (the "Per
Employee Limit").
VOTE REQUIRED
Approval of the amendments to the Option Plan requires the affirmative vote
of a majority of the votes present and voting on the proposal.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE
INCREASE IN THE MAXIMUM AGGREGATE NUMBER OF SHARES ISSUABLE UNDER THE OPTION
PLAN TO 3,366,666, SUBJECT TO AN AUTOMATIC INCREASE OF 4% ON THE FIRST DAY OF
EACH CALENDAR YEAR AS DESCRIBED ABOVE; THE INCREASE IN THE ISO SHARE LIMIT TO
3,366,666 SHARES; AND THE PER EMPLOYEE LIMIT.
14
<PAGE>
SUMMARY OF THE OPTION PLAN AS AMENDED
The following summary of the Option Plan is qualified in its entirety by the
specific language of the Option Plan, a copy of which is available to any
shareholder upon request.
General. Currently, a total of 2,866,666 of Common Stock is reserved for
issuance under the Option Plan, which amount will automatically be increased
on the first day of each fiscal year of the Company beginning on and after
January 1, 1998 by a number of shares equal to 4% of the number of shares of
the Company's Common Stock issued and outstanding on the last day of the
preceding fiscal year. The Option Plan permits the grant to employees of
options intended to qualify as "incentive stock options" ("ISOs") within the
meaning of section 422 of the Internal Revenue Code of 1986, as amended, as
well as nonstatutory stock options to employees and consultants. As of
December 31, 1996, 965,638 shares subject to repurchase by the Company had
been issued upon the exercise of options granted under the Option Plan,
775,403 shares were subject to outstanding options granted under the Option
Plan at a weighted average exercise price of $9.60 and 540,908 shares remained
available for future grant under the Option Plan. On March 6, 1997, the Board
of Directors approved an amendment, subject to shareholder approval, to
increase to 3,366,666 shares the maximum number of shares issuable thereunder;
to increase the ISO Share Limit to 3,366,666; and to fix the Per Employee
Limit at 500,000 shares. Appropriate adjustments will be made to the shares
subject to the Option Plan, the ISO Share Limit, the Per Employee Limit and
outstanding options in the event of any stock dividend, stock split, reverse
stock split, recapitalization, combination, reclassification or similar change
in the Company's capital structure. To the extent that any outstanding option
expires or terminates prior to exercise in full or if shares issued upon
exercise of an option are repurchased by the Company, the shares subject to
any unexercised portion of such option or the repurchased shares are returned
to the Option Plan and become available for future grants.
Administration. The Option Plan is administered by the Board or a duly
appointed committee of the Board. With respect to the participation of
individuals who are subject to Section 16 of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), the Option Plan must be administered
in compliance with the requirements of Rule 16b-3 under the Exchange Act.
Subject to the provisions of the Option Plan, the Board or the committee
determines the persons to whom grants of options are to be made, the number of
shares to be covered by each option, the terms of vesting and exercisability
of each option, the type of consideration to be paid to the Company upon
exercise of an option, the term of each option, and all other terms and
conditions of the options. The Board or committee will interpret the Option
Plan and options granted under the plan, and all determinations of the Board
or committee will be final and binding on all persons having an interest in
the Option Plan or any option.
Eligibility. All employees (including officers and directors who are also
employees), consultants, advisors or other independent contractors of the
Company are eligible to participate in the Option Plan. In addition, options
may also be granted to prospective employees, consultants or advisors in
connection with written offers of employment or engagement. Subject to
shareholder approval, the Board has amended the Option Plan to provide that no
employee may be granted options for more than 500,000 shares during any fiscal
year. As of December 31, 1996, the Company had approximately 98 employees,
including 8 executive officers.
Exercisability and Vesting. Each option granted under the Option Plan is
evidenced by a written agreement between the Company and the optionee
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the Option Plan.
The exercise price per share in the case of a non-statutory stock option must
equal at least 85% of the fair market value of a share of Common Stock on the
date of grant, and in the case of ISOs must be no less than the fair market
value of a share of Common Stock on the date of grant, or 110% of such fair
market value in the case of an ISO granted to any person who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any parent or subsidiary (a "10% Shareholder"). As of
March 1, 1997 the closing price of a share of the Company's Common Stock was
$18.1875. Generally, options granted under the Option Plan are immediately
exercisable and must be exercised within ten years (or five years in the case
of an ISO granted to a 10% Shareholder), and shares subject to an option
generally vest over four years from the date of grant. In the
15
<PAGE>
event the optionee's Service with the Company is terminated, the Company shall
have the right to repurchase any shares acquired upon exercise of the Option
which exceed the number of shares vested pursuant to such Option. Options are
nontransferable by the optionee other than by will or by the laws of descent
and distribution, and are exercisable during the optionee's lifetime only by
the optionee.
Generally, options may be exercised by payment of the exercise price in
cash, by check, or in cash equivalent, by tender of shares of the Company's
Common Stock owned by the optionee having a fair market value not less than
the exercise price, by the assignment of the proceeds of a sale of, or loan
with respect to, some or all of the shares of Common Stock being acquired upon
the exercise of the option, by a recourse promissory note in a form approved
by the Company, or by any combination of these.
Transfer of Control. A "Transfer of Control" will be deemed to occur upon
any of the following "Ownership Change Events" wherein the shareholders of the
Company immediately before the transaction do not retain immediately after the
transaction, in substantially the same proportions as their ownership of
shares of the Company's voting stock immediately before the Transaction,
direct or indirect beneficial ownership of more than fifty percent (50%) of
the total combined voting power of the outstanding voting stock of the Company
or the corporation or corporations to which the assets of the Company were
transferred: (i) the direct or indirect sale or exchange in a single or series
of related transactions by the shareholders of the Company of more than fifty
percent (50%) of the voting stock of the Company; (ii) a merger or
consolidation in which the Company is a party; (iii) the sale, exchange, or
transfer of all or substantially all of the assets of the Company; or (iv) a
liquidation or dissolution of the Company. In the event of a Transfer of
Control, the surviving, continuing, successor, or purchasing corporation or
parent corporation thereof as the case may be (the "Acquiring Corporation"),
may either assume the Company's rights and obligations under the Option or
substitute for the Option a substantially equivalent option for the Acquiring
Corporation's stock. The Option shall terminate and cease to be outstanding
effective as of the date of the Transfer of Control to the extent that the
Option is neither assumed or substituted for by the Acquiring Corporation in
connection with the Transfer of Control nor exercised as of the date of the
Transfer of Control.
In the event an optionee's service is involuntarily or constructively
terminated within 12 months after a Transfer of Control (other than for cause
or as a result of death or disability), all shares subject to his or her
option will become fully vested unless such acceleration of vesting would make
"pooling of interests" accounting treatment unavailable in connection with the
Transfer of Control.
Termination or Amendment. The Option Plan does not have an expiration date,
except that ISOs may not be granted under the Option Plan later than May 28,
2006, which date will automatically be extended for 10 years from each date
when the Company's shareholders approve an increase in the share reserve.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE OPTION PLAN
The following summary is intended only as a general guide as to the United
States federal income tax consequences under current law of participation in
the Option Plan and does not attempt to describe all possible federal or other
tax consequences of such participation or tax consequences based on particular
circumstances.
Incentive Stock Options. An optionee recognizes no taxable income for
regular income tax purposes as the result of the grant or exercise of an ISO
qualifying under section 422 of the Code. Optionees who do not dispose of
their shares for two years following the date the option was granted or within
one year following the exercise of the option will normally recognize a long-
term capital gain or loss equal to the difference, if any, between the sale
price and the purchase price of the shares. If an optionee satisfies such
holding periods upon a sale of the shares, the Company will not be entitled to
any deduction for federal income tax purposes. If an optionee disposes of
shares within two years after the date of grant or within one year from the
date of exercise (a "disqualifying disposition"), the difference between the
fair market value of the shares on the determination date (as discussed under
"Nonstatutory Stock Options" below) and the option exercise price (not to
exceed the
16
<PAGE>
gain realized on the sale if the disposition is a transaction with respect to
which a loss, if sustained, would be recognized) will be taxed as ordinary
income at the time of disposition. Any gain in excess of that amount will be a
capital gain. If a loss is recognized, there will be no ordinary income, and
such loss will be a capital loss. A capital gain or loss will be long-term if
the optionee's holding period is more than 12 months. Any ordinary income
recognized by the optionee upon the disqualifying disposition of the shares
generally should be deductible by the Company for federal income tax purposes,
except to the extent such deduction is limited by applicable provisions of the
Code or the regulations thereunder.
The difference between the option exercise price and the fair market value
of the shares on the determination date of an ISO (as discussed below) is an
adjustment in computing the optionee's alternative minimum taxable income and
may be subject to an alternative minimum tax which is paid if such tax exceeds
the regular tax for the year. Special rules may apply with respect to certain
subsequent sales of the shares in a disqualifying disposition, certain basis
adjustments for purposes of computing the alternative minimum taxable income
on a subsequent sale of the shares and certain tax credits which may arise
with respect to optionees subject to the alternative minimum tax.
Nonstatutory Stock Options. Options not designated or qualifying as ISOs
will be nonstatutory stock options. Nonstatutory stock options have no special
tax status. An optionee generally recognizes no taxable income as the result
of the grant of such an option. Upon exercise of a nonstatutory stock option,
the optionee normally recognizes ordinary income in an amount equal to the
difference between the option exercise price and the fair market value of the
shares on the determination date (as defined below). If the optionee is an
employee, such ordinary income generally is subject to withholding of income
and employment taxes. The "determination date" is the date on which the option
is exercised unless the shares are subject to a substantial risk of forfeiture
and are not transferable, in which case the determination date is the earlier
of (i) the date on which the shares are transferable or (ii) the date on which
the shares are not subject to a substantial risk of forfeiture. If the
determination date is after the exercise date, the optionee may elect,
pursuant to section 83(b) of the Code, to have the exercise date be the
determination date by filing an election with the Internal Revenue Service not
later than 30 days after the date the option is exercised. Upon the sale of
stock acquired by the exercise of a nonstatutory stock option, any gain or
loss, based on the difference between the sale price and the fair market value
on the determination date, will be taxed as capital gain or loss. A capital
gain or loss will be long-term if the optionee's holding period is more than
12 months. No tax deduction is available to the Company with respect to the
grant of a nonstatutory option or the sale of the stock acquired pursuant to
such grant. The Company generally should be entitled to a deduction equal to
the amount of ordinary income recognized by the optionee as a result of the
exercise of a nonstatutory option, except to the extent such deduction is
limited by applicable provisions of the Code or the regulations thereunder.
PROPOSAL THREE--RATIFICATION OF INDEPENDENT AUDITORS
In November 1995, the Company engaged Deloitte & Touche LLP ("Deloitte") as
its independent auditor and dismissed its former auditor, Coopers & Lybrand
L.L.P. ("Coopers"). The decision to change auditors was approved by the
Company's Board of Directors. Since the Company's inception, there has been no
auditors' report on the Company's financial statements containing an adverse
opinion or disclaimer of opinion or that was qualified or modified as to
uncertainty, audit scope or accounting principles. During such period, there
were no disagreements with Coopers on any matter of accounting principles or
practices, financial statements disclosure or auditing scope or procedure,
which disagreements, if not resolved to Coopers' satisfaction, would have
caused it to make reference to the subject matter of the disagreements in
connection with its report. Further, during this period, there were no events
of the type required to be reported pursuant to Item 304(a)(1)(v) of
Regulation S-K. During the period from inception through November 1, 1995, the
Company did not consult Deloitte on items that involved either the Company's
accounting principles or the form of audit opinion or concerned the subject
matter of a disagreement or reportable event with the former auditor.
17
<PAGE>
The Board of Directors has appointed Deloitte to audit the consolidated
financial statements of the Company for the fiscal year ending December 31,
1997. Deloitte has audited the Company's consolidated financial statements
since the fiscal year ended March 31, 1995.
In the event the shareholders fail to ratify the appointment, the Board of
Directors will reconsider its selection.
A representative of Deloitte is expected to be present at the Annual
Meeting, will have the opportunity to make a statement if he or she desires to
do so, and will be available to respond to appropriate questions.
VOTE REQUIRED
Approval of the appointment of Deloitte & Touche LLP as independent auditors
requires the affirmative vote of a majority of the votes present and voting on
the proposal.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP TO SERVE AS THE
COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1997.
ADDITIONAL INFORMATION
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, officers and ten percent beneficial owners to file reports of
ownership and changes in ownership with the SEC. Directors, officers and
greater than ten percent beneficial owners are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of the Forms 3, 4 and 5 received by
the Company and/or written representations from certain reporting persons that
no Form 5s were required for such persons, the Company believes that each of
its directors, officers and greater than ten percent beneficial owners during
the fiscal year ended December 31, 1996 have complied with all filing
requirements applicable to such person.
ANNUAL REPORT
A copy of the Annual Report of the Company for the fiscal year ended
December 31, 1996 has been mailed concurrently with this Proxy Statement to
all shareholders entitled to notice of and to vote at the Annual Meeting. The
Annual Report is not incorporated into this Proxy Statement and is not
considered proxy solicitation material.
FORM 10-K
The Company filed an Annual Report on Form 10-K with the Securities and
Exchange Commission. Shareholders may obtain a copy of this report, without
charge, by writing to Investor Relations at the Company.
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Shareholder proposals that are intended to be presented at the 1998 Annual
Meeting must be received by the Company not later than December 18, 1997 in
order to be included. Such proposals may be included on next year's proxy
statement if they comply with certain rules and regulations promulgated by the
Securities and
18
<PAGE>
Exchange Commission. Such proposals should be addressed to Silicon Gaming,
Inc., 2800 West Bayshore Road, Palo Alto, California 94303, Att'n: Investor
Relations.
OTHER MATTERS
The Company knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters properly come before
the Annual Meeting, it is the intention of the persons named in the enclosed
form of Proxy to vote the shares they represent as the Board of Directors may
recommend. Discretionary authority with respect to such other matters is
granted by the execution of the enclosed Proxy.
THE BOARD OF DIRECTORS
Dated: April 17, 1997
19
<PAGE>
1547-PS-97
<PAGE>
April 17, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders to be
held at 2:30 p.m. on Tuesday, May 20, 1997 at the Red Lion Hotel, 2050 Gateway
Place, San Jose, California 95110. Detailed information as to the business to be
transacted at the meeting is contained in the accompanying Notice of Annual
Meeting and Proxy Statement.
Regardless of whether you plan to attend the meeting, it is important that
your shares be voted. Accordingly, we ask that you sign and return your proxy
as soon as possible in the envelope provided. If you do plan to attend the
meeting, please mark the appropriate box on the proxy.
Sincerely,
Donald J. Massaro
Chairman of the Board,
President and Chief Executive Officer
DETACH HERE SGM F
SILICON GAMING, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS, MAY 20, 1997
P KNOW ALL MEN BY THESE PRESENTS that the undersigned, shareholder(s) of
SILICON GAMING, INC. do(es) hereby appoint DONALD J. MASSARO and THOMAS E.
R CARLSON, and each of them, proxies, each with full power of substitution,
for and in the name and stead of the undersigned at the Annual Meeting of
O Shareholders of SILICON GAMING, INC., to be held on May 20, 1997, and at
any and all adjournments thereof, to vote all shares of capital stock held
X by the undersigned, with all powers that the undersigned would possess if
personally present, on each of the matters referred to herein.
Y
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
BY THE UNDERSIGNED SHAREHOLDER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTOR NAMED IN ITEM 1 AND
FOR ITEMS 2 AND 3. IT WILL ALSO BE VOTED IN THE DISCRETION OF THE
PROXYHOLDERS ON ANY OTHER MATTER OF BUSINESS PROPERLY COMING BEFORE THE
MEETING. IN THE EVENT THAT ANY NOMINEE FOR DIRECTOR IS UNABLE OR DECLINES TO
SERVE AS A DIRECTOR, THIS PROXY WILL BE VOTED FOR ANY NOMINEE WHICH SHALL BE
DESIGNATED BY THE BOARD OF DIRECTORS.
(Continued and to be signed on reverse side) ------------
|SEE REVERSE|
| SIDE |
------------
<PAGE>
DETACH HERE SGM F
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE.
1. Election of Directors
NOMINEES: Donald J. Massaro, Robert M. Fell, William Hart, Kevin R. Harvey,
David S. Morse, Joseph T. Piemont and Thomas J. Volpe
FOR WITHHELD MARK HERE
[ ] [ ] IF YOU PLAN [ ]
TO ATTEND
THE MEETING
MARK HERE
IF YOU PLAN [ ]
TO ATTEND
[ ]________________________________________ THE MEETING
To withhold authority to vote for any
individual Nominee, write that Nominee's
name in the space provided above.
2. To approve amendments increasing the number of shares of Common Stock
available for issuance under the Company's 1994 Stock Option Plan by
500,000 shares; increasing the limit of shares available for issuance upon
exercise of incentive stock options by 500,000; and limiting the number of
shares for which options may be granted to any employee within any fiscal
year to 500,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. To ratify the appointment of Deloitte & Touche LLP as independent auditors
of the Company for the fiscal year ending December 31, 1997.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
This proxy revokes any and all other proxies heretofore given by the
undersigned.
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ENVELOPE
PROVIDED.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee, guardian or in a fiduciary capacity, please give full title as such.
If a corporation, please sign in full corporate name by President or
authorized person. If a partnership, please sign in partnership's name by
authorized person.
Signature:____________________________ Date:______________________
Signature:____________________________ Date:______________________
