<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)
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:
(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.:
(3) Filing Party:
(4) Date Filed:
Notes:
<PAGE>
[LOGO OF SILICON GAMING APPEARS HERE]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 26, 1998
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 26, 1998, at 2:30 p.m., local time, at the Doubletree Hotel, 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 adopt the Silicon Gaming, Inc. 1998 Employee Stock Purchase Plan with
an initial reserve of 450,000 shares.
3. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998.
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, 1998 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,
/s/ Donald J. Massaro
Donald J. Massaro
Chairman of the Board, President and
Chief Executive Officer
Palo Alto, California
April 20, 1998
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 W. BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
----------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 26, 1998
----------------
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 26, 1998 at 2:30 p.m. at the Doubletree Hotel, 2050 Gateway Place, San
Jose, CA 95110. The Company's principal executive offices are located at 2800
W. Bayshore Road, Palo Alto, CA 94303. Its telephone number at that address is
(650) 842-9000.
These proxy solicitation materials were mailed on or about April 20, 1998 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
$3,000 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 materials 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, 1998 are entitled to notice of and to
vote at the Annual Meeting. As of the record date, 14,147,641 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").
1
<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, 1998.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
---- --- -------------------- --------------
<C> <C> <S> <C>
Donald J. Massaro 54 Chairman, President and Chief
Executive Officer, Silicon Gaming,
Inc. 1995
Andrew S. Pascal 32 Executive Vice President -- Marketing
and Game Development, Silicon
Gaming, Inc. --
William Hart 57 General Partner, Technology Partners 1994
Kevin R. Harvey 33 General Partner, Benchmark Capital
Management 1995
David S. Morse 54 Chairman, LBE Technologies, Inc. 1993
Joseph T. Piemont 74 Management Consultant, Bluestone
Management 1997
Thomas J. Volpe 62 Sr. Vice President, Financial
Operations, Interpublic Group of
Companies 1997
</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. 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.
Andrew S. Pascal has served as Executive Vice President -- Marketing and
Game Development of the Company since October 1994. He has over 10 years of
gaming industry experience with an emphasis in slot marketing, slot
merchandising and slot operations. He joined SGI in October 1994 from Mirage
Resorts,
2
<PAGE>
Incorporated, where he worked from June 1985 to October 1994. Mr. Pascal held
the position of Director of Slot Operations and Marketing at The Mirage Hotel
and Casino ("The Mirage"). Mr. Pascal also served on The Mirage's eight-member
Operating Committee, which set operating policy and established the strategic
direction for The Mirage and its employees, from September 1992 to October
1994. Prior to the opening of The Mirage, Mr. Pascal served as the Director of
Slot Marketing for the Golden Nugget Casino-Hotel.
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., APX, LBE Technologies, Mobex and St. Helena Wine Co.
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. 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.
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 1997, the Board of directors held five meetings and acted
by unanimous written consent on three occasions. The Board of Directors has an
Audit Committee and a Compensation Committee.
3
<PAGE>
During fiscal 1997, the Audit Committee consisted 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 for the 1997 fiscal year consisted 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 for
administering the Company's stock option plans and the Employee Stock Purchase
Plan. The Compensation Committee held one meeting during the last fiscal year.
The Company has no standing Nominating Committee. Nominations for election
of directors at the Annual Meeting were made by a majority of the Board of
Directors of the Company.
During fiscal year 1997, 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 1997 initial grants of options to purchase 15,000 shares of
Common Stock were made to Messrs. Piemont and Volpe at an exercise price of
$18.75 per share. Pursuant to the 1997 Annual Meeting, Messrs. Fell, Hart,
Harvey and Morse each received automatic grants of options to purchase 5,000
shares of Common Stock on May 21, 1997 at an exercise price of $12.25 per
share. In connection with the 1998 Annual Meeting, Messrs. Hart, Harvey,
Morse, Piemont and Volpe will each receive automatic grants of options to
purchase an additional 5,000 shares of Common Stock.
4
<PAGE>
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, 1998 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 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)............................... 1,144,742 8.1
10550 Wilshire Blvd., Suite 1105
Los Angeles, CA 90024
FMR Corp.(3).................................... 967,500 6.8
82 Devonshire Street
Boston, MA 02109
David S. Morse(4)............................... 644,591 4.6
P.O. Box 9049
Incline Village, NV 89452
Kevin R. Harvey(5).............................. 607,959 4.3
2480 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Kleiner Perkins Caufield & Byers(6)............. 512,622 3.6
2750 Sand Hill Road
Menlo Park, CA 94025
Donald J. Massaro............................... 426,044 3.0
c/o Silicon Gaming, Inc.
2800 West Bayshore Road
Palo Alto, CA 94303
Andrew S. Pascal................................ 328,717 2.3
William Hart(7)................................. 222,213 1.6
1550 Tiburon Blvd., Suite A
Belvedere, CA 94920
Thomas E. Carlson............................... 153,178 1.1
Thomas J. Volpe(8).............................. 142,082 1.0
1271 Avenue of the Americas
Rockefeller Center
New York, NY 10020
Karen M. Katz................................... 118,350 *
Jeffrey D. Friedberg(9)......................... 88,431 *
Joseph T. Piemont............................... 5,416 *
5311 Winged Foot Rd.
Charlotte, NC 28226
All directors and current executive officers as
a group (12 persons)(10)....................... 3,986,369 27.6
</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, 1998 are deemed outstanding, while such
shares are not deemed outstanding for purposes of computing percentage
5
<PAGE>
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. 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 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 1,133,974 shares held by Mr. Fell as Trustee of the Robert M.
Fell Living Trust, dated 6/14/95.
(3) Based on information provided in Schedule 13G as filed 2/14/98.
(4) 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.
(5) Includes 520,400 shares held by Benchmark Capital Partners, L.P., and
60,600 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 450,987 shares of Common Stock issuable upon conversion of
Nonvoting Preferred. Assuming conversion of all outstanding shares of
Nonvoting Preferred, BCM would be the beneficial owner of 6.8% of the
Company's outstanding Common Stock.
(6) Includes 501,867 shares held by Kleiner Perkins Caufield & 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 241,987 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 4.8% of the Company's outstanding Common Stock.
(7) Includes 109,850 shares held by Technology Partners Fund V, L.P., of
which TPW Management V, L.P. ("TPW") is the general partner, and 24,002
shares held by TPW. 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 753,307 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 6.3% of the
Company's outstanding Common Stock.
(8) Includes 133,333 shares held by Interpublic Benefit Protection Trust, of
which Mr. Volpe is a trustee.
(9) Includes 1,333 shares held by Mr. Friedberg as custodian for his minor
child. Mr. Friedberg resigned as an officer of the Company in February
1998.
(10) Includes 315,702 shares issuable upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days after
March 1, 1998. Also includes 1,133,974 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;
520,400 shares and 60,600 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; 109,850 shares held by
Technology Partners Fund V, L.P. and 24,002 shares held by TPW, of which
Mr. Hart, the Managing Partner of TPW, the general partner of Technology
Partners Fund V, L.P., disclaims beneficial ownership except to the
extent of his proportionate interest therein; and 133,333 shares held by
Interpublic Benefit Protection Trust, of which Mr. Volpe is a trustee.
Excludes 450,987 shares and 753,307 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 32.6% 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,
1997 exceeded $100,000 for services rendered in all capacities to the Company
during the last three 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>
ANNUAL LONG TERM
COMPENSATION COMPENSATION AWARDS
--------------------- -------------------
NAME AND PRINCIPAL FISCAL SHARES UNDERLYING ALL OTHER
POSITION YEAR SALARY(1) BONUS OPTIONS GRANTED COMPENSATION(2)
------------------ ------ --------- ------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Donald J. Massaro....... 1997 $250,000 $37,250 45,000 $1,771
Chairman of the Board, 1996 $250,000 $15,000 -- $1,728
President 1995 $139,262(3) $ -- 416,666(4) $ 913
and Chief Executive
Officer
Andrew S. Pascal........ 1997 $162,500 $35,003 30,000 $ 332
Executive Vice 1996 $135,129 $15,000 100,000 $ 324
President -- Marketing 1995 $ 93,570(5) $ -- 49,000(4) $ 991
and Game Development
Karen M. Katz........... 1997 $148,333 $39,991 30,000 $ 332
Vice President -- Sales 1996 $128,115 $15,000 -- $ 302
and Support 1995 $ 50,000(6) $ -- 99,999(4) $ --
Thomas E. Carlson....... 1997 $148,333 $25,157 30,000 $ 627
Vice President -- Chief 1996 $128,115 $15,000 33,333 $ 571
Financial Officer 1995 $ 72,000(7) $ -- 99,999(4) $ --
Jeffrey D.
Friedberg(8)........... 1997 $148,333 $24,267 30,000 $ 406
Vice President -- 1996 $140,834 $15,000 33,333 $ 370
Engineering
</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) Ms. Katz became an executive officer of the Company in July 1995. Ms.
Katz's 1995 compensation reflects an annual salary of $120,000.
(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) 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.
Mr. Friedberg resigned as an officer in February 1998 and continues to
provide consulting services to the Company.
7
<PAGE>
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, 1997 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 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
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES
SHARES OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(1)(2) IN 1997 PER SHARE(3) DATE 5% 10%
---- ------------- ---------- ------------ ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Massaro....... 45,000 4.068% $ 14.50 4/16/07 $ 410,354 $ 1,039,917
Andrew S. Pascal........ 30,000 2.712% $ 14.50 4/16/07 $ 273,569 $ 693,278
Karen M. Katz........... 30,000 2.712% $ 14.50 4/16/07 $ 273,569 $ 693,278
Thomas E. Carlson ...... 30,000 2.712% $ 14.50 4/16/07 $ 273,569 $ 693,278
Jeffrey D. Friedberg.... 30,000 2.712% $ 14.50 4/16/07 $ 273,569 $ 693,278
</TABLE>
- --------
(1) All options granted in 1997 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.
(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) 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.
(4) 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.
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 1997 and unexercised stock
options held by each of the Named Executive Officers as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
EXERCISE REALIZED(2) EXERCISABLE(3) UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
----------- ----------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Massaro....... 0 -- 21,804 23,196(4) 0 0
Andrew S. Pascal........ 0 -- 100,372 29,628(4) $ 21,991 $9,259
Karen M. Katz........... 0 -- 6,896 23,104(4) 0 0
Thomas E. Carlson....... 0 -- 41,956 21,377(4) $197,915 0
Jeffrey D. Friedberg.... 0 -- 41,956 21,377(4) $197,915 0
</TABLE>
- --------
(1) Market value of underlying securities at year end ($10.4375) minus the
exercise price.
(2) Fair market value at time of exercise less exercise price.
(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 1997 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, as amended, (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 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.
9
<PAGE>
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, 1997.
Purpose of the Compensation Committee
The Compensation Committee of the Board of Directors (the "Committee") has
been authorized 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 non-
employee 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 "Peer Group Index"). Most companies
in the Peer Group 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.
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 securing
jurisdictional approvals in selected states, submitting new game releases for
approval, establishing corporate information systems and processes and
reducing product costs. Each executive officer was then given
10
<PAGE>
target dates for completion of objectives in support of each milestone. For
the 1997 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. Each year, the
annual plan is reevaluated with new milestones and objectives.
Long-Term Incentive Compensation. During fiscal 1997, the Committee made
option grants to Messrs. Carlson, Friedberg, Kurth, Massaro, Mathews and
Pascal and to Ms. Katz 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 officers
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. Massaro's
employment agreement. See "Executive Compensation -- Employment, Severance and
Change of Control Agreements."
Mr. Massaro's bonus award for 1997 was dependent upon overall Company
performance and achievement of the Company's pre-determined 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 1998 fiscal year will exceed the $1 million limit per officer.
Accordingly, the Company has not adopted any limitations under its option plan
in response to Section 162(m) provisions. In addition, the Company believes
that any compensation expense incurred in connection with the exercise of
stock options granted under its 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, 1997 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).
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period SILCON PEER S&P
(Fiscal Year Covered) GAMING GROUP 500
- ------------------- ---------- --------- ----------
<S> <C> <C> <C>
FYE 7/96 $100 $100 $100
FYE 12/96 $154 $103 $117
FYE 12/97 $ 99 $128 $156
</TABLE>
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, secured by Common
Stock of the Company owned by Mr. Massaro. As of March 31, 1998, $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.
12
<PAGE>
PROPOSAL TWO -- ADOPTION OF THE SILICON GAMING, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
GENERAL.
The Company currently maintains the Silicon Gaming, Inc. 1996 Employee Stock
Purchase Plan (the "1996 Purchase Plan"), pursuant to which eligible employees
may purchase shares of the Company's Common Stock at a discount through
payroll deductions. As of March 1, 1998, only 131,256 shares remained
available for issuance under the 1996 Purchase Plan. The 1996 Purchase Plan is
implemented through offerings of approximately 24 months in duration, and the
Board of Directors has determined that the number of shares available for
issuance under the 1996 Purchase Plan will not be sufficient to cover
anticipated share requirements for the offerings which are currently in
progress. Because of a recent change in generally accepted accounting
principles applicable to employee stock purchase plans, the Company could be
required to recognize a compensation expense if the share reserve of the 1996
Purchase Plan were increased and such additional shares were issued pursuant
to offerings which began prior to the date on which the shareholders approved
the share reserve increase. However, adoption of a new employee stock purchase
plan under which offerings would not begin until after the date that the
shareholders approve the plan would not cause the recognition of a
compensation expense under current generally accepted accounting principles.
Accordingly, on March 31, 1998, the Board of Directors adopted the Silicon
Gaming, Inc. 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"),
subject to shareholder approval, to become effective on August 3, 1998 (the
"Effective Date"). The 1998 Purchase Plan will be implemented through six-
month offerings in order to minimize any future impact of the change in the
accounting rules described above, and to make the plan easier to administer. A
total of 450,000 shares of Common Stock will be reserved for issuance under
the 1998 Purchase Plan.
The Board of Directors believes that adopting the 1998 Purchase Plan will
benefit the Company since providing employees of the Company with an
opportunity to purchase shares of Common Stock pursuant to the 1998 Purchase
Plan should prove helpful in attracting, retaining, and motivating valued
employees.
DESCRIPTION OF THE 1998 PURCHASE PLAN.
The following summary of the 1998 Purchase Plan is qualified in its entirety
by the specific language of the 1998 Purchase Plan, a copy of which is
available to any shareholder upon request.
General. The 1998 Purchase Plan is intended to qualify as an "employee stock
purchase plan" under section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"). Each participant in the 1998 Purchase Plan is granted at
the beginning of each offering under the plan (an "Offering") the right to
purchase through accumulated payroll deductions up to a number of shares of
the Common Stock of the Company (a "Purchase Right") determined on the first
day of the Offering. The Purchase Right is automatically exercised on the last
day of each Offering unless the participant has withdrawn from participation
in the 1998 Purchase Plan prior to such date.
Shares Subject to Plan. A maximum of 450,000 of the Company's authorized but
unissued or reacquired shares of Common Stock may be issued under the 1998
Purchase Plan, subject to appropriate adjustment in the event of a stock
dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the Company's capital structure or in
the event of any merger, sale of assets or other reorganization of the
company. If any Purchase Right expires or terminates, the shares subject to
the unexercised portion of such Purchase Right will again be available for
issuance under the 1998 Purchase Plan.
Administration. The 1998 Purchase Plan is administered by the Board of
Directors or a duly appointed committee of the Board (hereinafter referred to
as the "Board"). Subject to the provisions of the 1998 Purchase Plan, the
Board determines the terms and conditions of Purchase Rights granted under the
plan. The Board will
13
<PAGE>
interpret the 1998 Purchase Plan and Purchase Rights granted thereunder, and
all determinations of the Board will be final and binding on all persons
having an interest in the 1998 Purchase Plan or any Purchase Rights. The 1998
Purchase Plan provides, subject to certain limitations, for indemnification by
the Company of any director, officer or employee against all reasonable
expenses, including attorneys' fees, incurred in connection with any legal
action arising from such person's action or failure to act in administering
the plan.
Eligibility. Any employee of the Company or of any present or future parent
or subsidiary corporation of the Company designated by the Board for inclusion
in the 1998 Purchase Plan is eligible to participate in an Offering under the
1998 Purchase Plan. However, no employee who owns or holds options to
purchase, or as a result of participation in the 1998 Purchase Plan would own
or hold options to purchase, five percent or more of the total combined voting
power or value of all classes of stock of the Company or of any parent or
subsidiary corporation of the Company is entitled to participate in the 1998
Purchase Plan. As of March 1, 1998, approximately 193 employees would be
eligible to participate in the 1998 Purchase Plan.
Offerings. Generally, each Offering of Common Stock under the 1998 Purchase
Plan is for a period of six months (an "Offering Period"). Offering Periods
under the 1998 Purchase Plan are sequential, with a new Offering Period
beginning every six months. Offering Periods will generally commence on the
first days of February and August of each year and end on the last days of the
following July and January, respectively. The first Offering Period will
commence on the Effective Date and will end on the last day of January 1999.
Shares are purchased on the last day of each Offering Period (a "Purchase
Date"). The Board may establish a different term for one or more Offerings or
different commencement or ending dates for an Offering.
Participation and Purchase of Shares. Participation in the 1998 Purchase
Plan is limited to eligible employees who authorize payroll deductions prior
to the start of an Offering Period. Payroll deductions may not exceed 10% (or
such other rate as the Board determines) of an employee's compensation for any
pay period during the Offering Period. Once an employee becomes a participant
in the 1998 Purchase Plan, that employee will automatically participate in
each successive Offering Period until such time as that employee withdraws
from the 1998 Purchase Plan, becomes ineligible to participate in the 1998
Purchase Plan, or terminates employment.
Subject to certain limitations, each participant in an Offering has a
Purchase Right equal to the lesser of (i) that number of whole shares
determined by dividing $12,500 by the fair market value of a share of Common
Stock on the first day of the Offering Period or (ii) 1,250 shares, provided
that these dollar and share amounts will be prorated for any Offering Period
that is other than six months in duration. No participant may purchase under
the 1998 Purchase Plan shares of the Company's Common Stock having a fair
market value exceeding $25,000 in any calendar year (measured by the fair
market value of the Company's Common Stock on the first day of the Offering
Period in which the shares are purchased).
At the end of each Purchase Period, the Company issues to each participant
in the Offering the number of shares of the Company's Common Stock determined
by dividing the amount of payroll deductions accumulated for the participant
during that Offering Period by the purchase price, limited in any case by the
number of shares subject to the participant's Purchase Right for that
Offering. The price per share at which shares are sold at the end of an
Offering Period generally equals 85% of the lesser of the fair market value
per share of the Company's Common Stock on the first day of the Offering
Period or the Purchase Date. On March 1, 1998, the closing price of a share of
the Company's Common Stock was $9.625, as reported on the Nasdaq Stock Market.
Any payroll deductions under the 1998 Purchase Plan not applied to the
purchase of shares will be returned to the participant, unless the amount
remaining is less than the amount necessary to purchase a whole share of
Common Stock, in which case the remaining amount may be applied to the next
Offering Period.
A participant may withdraw from an Offering at any time without affecting
his or her eligibility to participate in future Offerings. However, once a
participant withdraws from an Offering, that participant may not again
participate in the same Offering.
14
<PAGE>
Change in Control. The 1998 Purchase Plan provides that, in the event of (i)
a sale or exchange by the shareholders of more than 50% of the company's
voting stock, (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 wherein,
upon any such event, the shareholders of the Company immediately before such
event do not retain direct or indirect beneficial ownership of at least 50% of
the total combined voting power of the voting stock of the Company, its
successor, or the corporation to which the assets of the Company were
transferred (a "Change in Control"), the acquiring or successor corporation
may assume the Company's rights and obligations under the 1998 Purchase Plan
or substitute substantially equivalent Purchase Rights for such corporation's
stock. If the acquiring or successor corporation elects not to assume or
substitute for the outstanding Purchase Rights, the Board may adjust the last
day of the Offering Period to a date on or before the date of the Change in
Control. Any Purchase Rights that are not assumed, substituted for, or
exercised prior to the Change in Control will terminate.
Termination or Amendment. The 1998 Purchase Plan will continue until
terminated by the Board or until all of the shares reserved for issuance under
the plan have been issued. The Board may at any time amend or terminate the
1998 Purchase Plan, except that the approval of the Company's shareholders is
required within twelve months of the adoption of any amendment increasing the
number of shares authorized for issuance under the 1998 Purchase Plan, or
changing the definition of the corporations which may be designated by the
Board as corporations the employees of which may participate in the 1998
Purchase Plan.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE 1998 PURCHASE 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 1998 Purchase Plan and does not attempt to describe all possible federal
or other tax consequences of such participation or tax consequences based on
particular circumstances.
A participant recognizes no taxable income either as a result of commencing
to participate in the 1998 Purchase Plan or purchasing shares of the Company's
Common Stock under the terms of the 1998 Purchase Plan.
If a participant disposes of shares purchased under the 1998 Purchase Plan
within two years from the first day of the applicable Offering Period or
within one year from the purchase date (a "disqualifying disposition"), the
participant will realize ordinary income in the year of such disposition equal
to the amount by which the fair market value of the shares on the purchase
date exceeds the purchase price. The amount of the ordinary income will be
added to the participant's basis in the shares, and any additional gain or
resulting loss recognized on the disposition of the shares will be a capital
gain or loss. A capital gain or loss will be mid-term or long-term if the
participant's holding period is more than twelve months.
If the participant disposes of shares purchased under the 1998 Purchase Plan
at least two years after the first day of the applicable Offering Period and
at least one year after the purchase date, the participant will realize
ordinary income in the year of disposition equal to the lesser of (i) the
excess of the fair market value of the shares on the date of disposition over
the purchase price or (ii) 15% of the fair market value of the shares on the
first day of the applicable Offering Period. The amount of any ordinary income
will be added to the participant's basis in the shares, and any additional
gain recognized upon the disposition after such basis adjustment will be a
mid-term or long-term capital gain. If the fair market value of the shares on
the date of disposition is less than the purchase price, there will be no
ordinary income and any loss recognized will be as mid-term or long-term
capital loss.
If the participant still owns the shares at the time of death, the lesser of
(i) the excess of the fair market value of the shares on the date of death
over the purchase price or (ii) 15% of the fair market value of the shares on
the first day of the Offering Period in which the shares were purchased will
constitute ordinary income in the year of death.
15
<PAGE>
The Company should be entitled to a deduction in the year of a disqualifying
disposition equal to the amount of ordinary income recognized by the
participant as a result of the disposition, except to the extent such
deduction is limited by applicable provisions of the Code or the regulations
thereunder. In all other cases, no deduction is allowed to the Company.
VOTE REQUIRED AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast on the proposal at the
Annual Meeting of Shareholders, at which a quorum representing a majority of
all outstanding shares of Common Stock of the Company is present either in
person or by proxy, is required for approval of this proposal. Votes for and
against, abstentions and broker non-votes will each be counted as present for
purposes of determining the presence of a quorum. Abstentions will have the
same effect as a negative vote on this proposal. Broker non-votes will have no
effect on the outcome of this vote.
THE BOARD OF DIRECTORS BELIEVES THAT THE ADOPTION OF THE 1998 PURCHASE PLAN
IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS FOR THE REASONS
STATED ABOVE. THEREFORE, THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR"
APPROVAL OF THIS PROPOSAL TO ADOPT THE 1998 PURCHASE PLAN WITH AN INITIAL
RESERVE OF 450,000 SHARES.
PROPOSAL THREE -- RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Deloitte & Touche LLP,
independent auditors, to audit the consolidated financial statements of the
Company for the fiscal year ending December 31, 1998. Deloitte & Touche LLP
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 & Touche LLP 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 AND BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of a majority of the votes cast on the proposal at the
Annual Meeting of Shareholders, at which a quorum representing a majority of
all outstanding shares of Common Stock of the Company is present, either in
person or by proxy, is required for approval of this proposal. Votes for and
against, abstentions and broker non-votes will each be counted as present for
purposes of determining the presence of a quorum. Abstentions will have the
same effect as a negative vote on this proposal. Broker non-votes will have no
effect on the outcome of this vote.
THE BOARD OF DIRECTORS RECOMMENDS A 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, 1998.
16
<PAGE>
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 such forms received by it, 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, 1997 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, 1997 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 1999 ANNUAL MEETING
Shareholder proposals that are intended to be presented at the 1999 Annual
Meeting must be received by the Company not later than December 21, 1998 in
order to be included. Such proposals may be included in next year's proxy
statement if they comply with certain rules and regulations promulgated by the
Securities and 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 20, 1998
17
<PAGE>
1547-PS-98
<PAGE>
PROXY
SILICON GAMING, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS, MAY 26, 1998
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.
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
Shareholders of SILICON GAMING, INC., to be held on May 26, 1998, and at any and
all adjournments thereof, to vote all shares of capital stock held by the
undersigned, with all powers that the undersigned would possess if personally
present, on each of the matters referred to herein.
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 WHO SHALL BE DESIGNATED BY THE BOARD OF
DIRECTORS.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
April 20, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders to be
held at 2:30 p.m. on Tuesday, May 26, 1998 at the Doubletree Hotel, 2050 Gateway
Place, San Jose, CA, 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.
Sincerely,
Donald J. Massaro
Secretary
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
This proxy revokes any and all other proxies heretofore given by the
undersigned.
1. Election of Directors
NOMINEES: Donald J. Massaro, Andrew S. Pascal, William Hart, Kevin R. Harvey,
David S. Morse, Joseph T. Piemont and Thomas J. Volpe.
[_] FOR [_] WITHHELD
[_]_________________________________________
For all nominees except as noted above
2. To adopt the Silicon Gaming, Inc. 1998 Employee Stock Purchase Plan with an
initial reserve of 450,000 shares.
[_] 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, 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
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:________________
