<PAGE> 1
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:
<TABLE>
<S> <C>
/ / 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 sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, 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:
(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:
<PAGE> 2
[INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC. LOGO]
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
NOTICE OF ANNUAL MEETING
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE, SIGN AND
MAIL PROMPTLY THE ENCLOSED PROXY, FOR WHICH A RETURN ENVELOPE IS
PROVIDED.
The 1997 Annual Meeting of Shareholders of International Lottery & Totalizator
Systems, Inc. (the "Company") will be held at 3:00 p.m., Pacific Daylight
Savings Time, on Thursday, May 15, 1997 at Pea Soup Andersen's, 850 Palomar
Airport Road, Carlsbad, California, for the following purposes:
1. To elect directors for the ensuing year.
2. To approve the 1997 Directors' Stock Option Plan
3 To transact such other business as may properly come before
the meeting.
Shareholders of record at the close of business on April 2, 1997 will be
entitled to vote at the meeting. The transfer books will not be closed. The
approximate date on which the proxy statement and form of proxy are first being
sent or given to shareholders is April 8, 1997.
By order of the Board of Directors,
/s/ M. Mark Michalko
M. Mark Michalko
Executive Vice President
April 8, 1997
Carlsbad, California
<PAGE> 3
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CA 92008-7297
PROXY STATEMENT
Proxies in the form enclosed with this statement are solicited by the
Board of Directors of the Company for use at the Annual Meeting of Shareholders
to be held in Carlsbad, California, on May 15, 1997, including any adjournments
or postponements thereof. Execution of a proxy will not in any way affect a
shareholder's right to attend the meeting and vote in person, and any holder
giving a proxy has the right to revoke it at any time before it is exercised by
filing with the Secretary of the Company a written revocation or duly executed
proxy bearing a later date. The proxy will be suspended if the holder is present
at the meeting and elects to vote in person.
VOTING SECURITIES
The voting securities of the Company consist of its common shares of
which 17,176,211 shares are outstanding as of April 2, 1997. Only holders of
common shares of record on the books of the Company at the close of business on
April 2, 1997 (the "Record Date") will be entitled to vote at the meeting. Each
such holder of common shares is entitled to one vote for each said share, and
has the right to cumulate his or her votes for directors if his or her candidate
or candidates' names have been placed in nomination prior to the voting and any
shareholder has given notice at the meeting prior to the voting of that
shareholder's intention to cumulate his or her votes. The persons named in the
enclosed proxy may or may not elect to give such notice and vote the shares they
represent in such a manner.
Votes cast by proxy or in person at the Annual Meeting will be counted
by the person appointed by the Company to act as Inspector of Election for the
Annual Meeting. The Inspector of Election will treat shares represented by
proxies that reflect abstentions or include "broker non-votes" as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum. Abstentions or "broker non-votes" do not constitute a vote "for" or
"against" any matter and thus will be disregarded in the calculation of "votes
cast." Any unmarked proxies, including those submitted by brokers or nominees,
will be voted in favor of the nominees of the Board of Directors, as indicated
in the accompanying proxy card.
The approximate date on which the proxy statement and form of proxy are
first being sent or given to shareholders is April 8, 1997.
ELECTION OF DIRECTORS
Eight directors are to be elected at the Annual Meeting, each to hold
office for the term of one year and until his successor is elected. Proxy
holders will, unless authorization to do so is withheld, vote the proxies
received by them for the election of the nominees listed in the following table,
reserving the right, however, to distribute their votes among the nominees
listed below in their discretion. All nominees have consented to serve as
directors if elected by the shareholders. Although it is not contemplated that
any nominee will be unable to serve as a director, in such event the proxies
will be voted by the proxy holder for such other persons as may be designated by
the Board of Directors.
The following table sets forth certain information regarding the
beneficial ownership of the Company's common shares as of April 1, 1997 by (i)
each director and nominee for director of the Company, (ii) certain executive
officers, (iii) executive officers and directors of the Company as a group and
(iv) each person or entity who is a beneficial owner of more than 5% of the
Company's outstanding common shares. With respect to each director of the
Company, the table also sets forth his age, the year he was first elected as a
director, employment history for the past five years, and other directorships.
For purposes of this proxy statement, beneficial ownership of securities is
defined in accordance with the rules of the Securities and Exchange Commission
and means generally the power to vote or exercise investment discretion with
respect to securities, regardless of any economic interests therein. Except as
otherwise indicated, the Company believes that the beneficial owners of the
securities
1
<PAGE> 4
listed below have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY OWNED
AS OF APRIL 1, 1997
-------------------
Percent
NAME OF BENEFICIAL OWNER Amount of Class
------ --------
<S> <C> <C>
Nominees for Director
FREDERICK A. BRUNN, 52, Director since 1989. 130,859 (A) *
President since February 1994.
Executive Vice President, Planning and
Development 1990 to February 1994.
CHAN KIEN SING, 40, Director since June 1993. 22,500 (B) *
Group Executive Director of Berjaya Group
Berhad since 1990.
THEODORE A. JOHNSON , 56, Director since 1979. 48,325 (B) *
President, Minnesota Cooperation Office
for Small Business and Job Creation, Inc.
from 1980 to present. Director of Surgidyne, Inc.
M. MARK MICHALKO, 42, Director since February 1994. 36,700 (A) *
Executive Vice President, since February 1994. President of Quantum
Gaming Corp., a gaming industry consulting firm for more than five
years prior to February 1994.
NG AIK CHIN, 42, Executive Assistant to the President 3,750 (A) *
since 1994. Senior member of Berjaya Group
Berhad's management for more than five years prior to 1994.
NG FOO LEONG, 46, Director since June 1993. 22,500 (B) *
Executive Director, Sports Toto Malaysia Sdn Bhd,
a lottery gaming company from 1985 to present.
MARTIN J. O'MEARA, JR., 68, Director since 1979. 213,726 (B) *
President, The Budget Plan, Inc., a privately-
owned company engaged in the consumer loan
business and has been so employed for more
than five years.
SIR MICHAEL G.R. SANDBERG, 70, Director since 102,500 (B) *
1987. Private investor. Chairman and
Chief Executive of the Hong Kong and Shanghai
Banking Corporation from 1977 to 1986.
Director of Broadstreet Inc. a bank holding company.
</TABLE>
2
<PAGE> 5
Named Executive Officers (excluding those listed above)
<TABLE>
<S> <C> <C>
TIMOTHY R. GROTH 8,750 (A) *
WILLIAM A. HAINKE 41,169 (A) *
LENNART K. SUNDIN 86,064 (A) *
All directors and executive officers as a group 716,843 (A)(B)(C) 4%
(11 persons)
Significant Shareholder
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED 6,600,000 (C) 38%
Level 28, Shahzan Prudential Tower
30 Jalan Sultan Ismail
5020 Kuala Lumpur, Malaysia
</TABLE>
- ---------------
(A) Includes the number of common shares subject to unexercised stock
options which were exercisable within 60 days under the Company's 1986,
1988 and 1990 Employee Stock Option Plans as follows: 75,000 for Mr.
Brunn; 36,250 for Mr. Hainke; 25,000 for Mr. Sundin; 27,500 for Mr.
Michalko; 3,750 for Mr. Aik Chin Ng; 8,750 for Mr. Groth; and 176,250
for all executive officers as a group.
(B) Includes the number of common shares subject to unexercised stock
options which were exercisable within 60 days under the Company's 1993
Directors' Stock Option Plan which for each such outside director is
22,500 and 90,000 for all such directors as a group.
(C) Mr. Chan Kien Sing and Mr. Ng Foo Leong are employees of an affiliate
of Berjaya Lottery Management (H.K.) Limited. Each disclaim beneficial
ownership of such shares.
* Less than one percent of the outstanding common shares.
During 1996, four meetings of the Board of Directors were held. Each
incumbent director attended all meetings of the Board of Directors held during
the year in which he was a director, except for both Mr. Chan Kien Sing and Mr.
Ng Foo Leong who each missed one meeting. The Company has an Executive Committee
which consists of Messrs. Chan, Johnson, Brunn and Michalko. The Executive
Committee held no meetings during the year. The Executive Committee may exercise
all the authority of the Board in management of the Company except for matters
expressly reserved by law for board action. The Board also has an Executive
Compensation Committee consisting of Messrs. Johnson, O'Meara, Sandberg, and
Chan. The Executive Compensation Committee met twice during the year. Its
function is to establish compensation for all executive officers of the Company
and administer the Company's 1986, 1988, and 1990 Employee Stock Option Plans.
The Company has an Audit Committee consisting of Messrs. Sandberg, O'Meara,
Johnson and Chan which held one meeting during the year. The Audit Committee
provides advice and assistance regarding accounting, auditing and financial
reporting practices of the Company. Each year it recommends to the Board a firm
of independent public accountants to serve as auditors. The Audit Committee
reviews with such auditors the scope and result of their audit, fees for
services and independence in servicing the Company. The Company also has a
Nominating Committee consisting of Messrs. Chan, O'Meara, Johnson and Brunn. The
Nominating Committee held one meeting during the year. The Nominating Committee
seeks out, evaluates and recommends to the Board qualified nominees for election
as directors of the Company and considers other matters pertaining to the size
and composition of the Board. The Nominating Committee will give appropriate
consideration to qualified persons recommended by shareholders for nomination as
directors provided that such recommendations are accompanied by information
sufficient to enable the Nominating Committee to evaluate the qualifications of
the nominee.
3
<PAGE> 6
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives an annual
retainer of $4,000 plus $500 and reimbursement for all related expenses per
board meeting. The chairman of each committee who is not an employee of the
Company receives an additional annual retainer of $1,000. Each committee member
receives $500 and reimbursement of all related expenses per meeting, only if a
committee meeting is held at a time when it does not coincide with a board
meeting. Mr. Sandberg is also a financial consultant to the Company and received
compensation of $43,750 in 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1994 and July 1995, the Company received orders for lottery
terminals totaling approximately $8.0 million from the Philippine Gaming
Management Corporation ("PGMC"), an affiliate of Berjaya Lottery Management
(U.K.) Limited ("Berjaya") which is a 39% shareholder of the Company. Pursuant
to these contracts, the Company was paid $5.2 million in 1994 and $2.6 million
in 1995 and the remaining terminals with a contract value of $200,000 were
shipped in the first quarter of 1996.
In October 1996, the Company received an order for lottery terminals
totaling $482,500 from PGMC. A receivable of $313,625 was recorded at 12/31/96
and an additional $168,875 will be invoiced in 1997.
In June 1996, the Company entered into an agreement with Berjaya
Lottery Management (U.K.) Limited ("Berjaya") to purchase certain long lead time
parts for the manufacture of terminals. The Company received $1,819,584 related
to this agreement in 1996.
In October 1995, the Company received an order for $2.2 million for
lottery terminals and a computer system from Natural Avenue Sdn Bhd of Malaysia
("Natural Avenue") , an affiliate of Berjaya, for an on-line lottery in the
state of Sarawak, in eastern Malaysia. In 1995, Natural Avenue made a down
payment of $0.5 million and paid equal monthly installments for the $1.7 million
balance through August 1996. A total of $1,399,000 was received by the Company
during 1996.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
As members of the Executive Compensation Committee (the "Committee"),
we evaluate the performance of senior management, including the president, and
review and approve the base compensation and lump sum distributions for the
Company's executive officers. The Committee also administers the Company's
Executive Bonus Plan and employee stock option plans. The Committee periodically
reports to the Board on its activities.
Compensation Philosophy
The Committee bases its decisions on the Company's executive
compensation philosophy, which relates the level of compensation to the
Company's success in meeting its annual and long-term performance goals, rewards
individual achievement and seeks to attract and retain qualified executives. The
Company's executive compensation program consists of three principal components:
(i) base salary, (ii) potential for an annual lump-sum distribution based on
individual performance and (iii) potential for an annual bonus under the
Company's Executive Bonus Plan based upon the Company achieving a threshold
level of profitability as well as individual performance. The second and third
elements constitute "at-risk" portions of the compensation program. The Company
positions its overall executive compensation levels at or near the median of the
range of compensation levels for other companies comparable to the Company
located in Southern California and who are viewed as competitors for executive
talent in the overall labor market. This data is obtained from surveys conducted
by external compensation consultants and trade associations. In reviewing this
data, ILTS takes into account how its compensation policies and overall
performance compare to similar indices for comparable companies.
The Company employs a formal performance review system for all
employees, including the president and the other Named Executive Officers (as
defined on page 7). This process generates information that the Committee uses
in making decisions on base compensation, lump-sum distributions and awards
under the Company's Executive Bonus Plan. The president is responsible for
preparing the reviews on all executive officers other than himself. The
4
<PAGE> 7
Committee Chairman is responsible for preparing the review on the president. All
reviews are then discussed and approved by the Committee. Executive performance
is measured both in terms of the performance of the Company as a whole and
various individual performance factors, including the performance of divisions
for which such officer had management responsibility and individual managerial
accomplishments.
The Internal Revenue Code of 1986 denies a deduction to any publicly
held corporation for compensation paid to any "covered employee" (which are
defined as the president and the Company's other four most highly compensated
officers, as of the end of a taxable year) to the extent that the compensation
of any individual "covered employee" exceeds $1 million in any taxable year of
the corporation beginning after 1993. Compensation which is payable pursuant to
written binding agreements entered into before February 18, 1993 and
compensation which constitutes "performance based compensation" is excludable in
applying the $1 million limit. It is the Company's policy to qualify the
compensation paid to its top executives for deductibility under the new law in
order to maximize the Company's income tax deductions. Based upon the Internal
Revenue Service's regulations and projected compensation payable to the
Company's "covered employees" for the 1997 taxable year, all compensation
payable by the Company in 1997 to such covered employees should be deductible by
the Company.
Base Salaries
In determining base salaries for executive officers, the Committee
reviews external comparative data and also receives recommendations from
management. The Committee bases its decisions on such data, as well as internal
salary comparisons and individual performance evaluations. Under this system,
salary increases have generally the same effect as a cost of living adjustment,
although increases are not expressly tied to any cost of living indicator.
Increases are awarded, however, only to those executives who are performing at a
satisfactory level or above. The Company's philosophy is that the base salary
taken alone is generally lower than salary levels at comparable companies. Thus,
executives are required to earn awards under the "at-risk" portions of the
compensation program described below in order to reach a competitive
compensation level.
Lump Sum Distributions
Under traditional compensation systems, merit compensation increases
are made through increases in base pay. Under such systems, once the merit
component has been earned it is included in base salary going forward and
becomes a permanent part of cash compensation. In 1990, the Company instituted a
different system in which the merit component of compensation for employees was
divided into a base salary increase (discussed above) and a lump sum
distribution awarded annually.
The lump sum distribution is delivered apart from base salary in a
separate annual check and must be re- earned by employees each year. The Company
believes that this lump sum distribution system emphasizes a performance culture
and provides a more direct link between employee compensation and performance.
The system also allows the Company to create greater differences in employee
compensation based upon performance. The relationship of pay to performance is
further strengthened by the high visibility of the lump sum distribution.
Lump sum distributions are paid in October of each year based upon the
employee performance reviews. Determinations as to whether an employee has
earned a lump sum distribution are not tied directly to Company performance.
Employees have no entitlement to receive a lump sum distribution. Accordingly,
the decision as to whether or not to make a lump sum distribution is impacted by
the overall performance of the Company.
Executive Bonus Plan
In addition to base compensation and lump sum distributions, executives
are eligible to participate in the Company's Executive Bonus Plan. Under the
Executive Bonus Plan, the Committee has set threshold levels of net after tax
profit, exclusive of extraordinary items, for 1996 and 1997. No bonus awards are
made for any year in which the Company does not meet the threshold profitability
level. The amount of the bonus pool is based on a percentage of the Company's
net after tax profits above the profitability thresholds and shall not cause the
net after tax profit to fall below the threshold after computation of the bonus
pool. During each year of the Executive Bonus Plan, the Company's research and
development budget must be maintained at a level to ensure that the Company's
new product development is sufficient to keep it competitive in its marketplace,
and continuation engineering sufficient to maintain the Company's existing
products must also be maintained. The Committee retains discretion to adjust the
bonus pool and awards based upon extraordinary circumstances and other criteria
as determined by the Committee.
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<PAGE> 8
Individual awards under the Executive Bonus Plan are determined by the
size of the bonus pool and individual performance of the executive. The
Committee has structured the Executive Bonus Plan so that award potential is
consistent with competitive norms and potentially represents a significant
percentage of the executive's overall compensation in any given year. Awards are
paid after completion of the Company's audited financial statements for that
year.
The Company did not meet the profitability threshold under the
Executive Bonus Plan for 1996. Accordingly, no awards were made with respect to
1996.
Stock Options
The Committee believes that grants of stock options serve to align the
interests of executive officers with shareholder value. The number of stock
options granted takes into account the recipient's position and is intended to
recognize different levels of responsibility. In determining the level of stock
option grants, the Committee also considers competitive practices. As a result,
grants may vary from year to year.
EXECUTIVE COMPENSATION COMMITTEE
Theodore A. Johnson, Martin J. O'Meara, Jr.
Chairman
Sir Michael G.R. Sandberg Chan Kien Sing
April 1, 1997
6
<PAGE> 9
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table shows, for the years ended December 31, 1996, 1995
and 1994, the compensation earned by the president and the four most highly
compensated executive officers of the Company (the "Named Executive Officers")
in 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
Name and
Principal Number of All Other
Position(s) Year Salary (1) Bonus (2) Options (3) Compensation (4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Frederick A. Brunn, 1996 $148,504 $ 5,824 33,000 $4,141
President 1995 $140,915 $ 0 0 $3,834
1994 $144,263 $17,161 25,000 $6,862
- ----------------------------------------------------------------------------------------------------------------------
M. Mark Michalko 1996 $125,706 $ 4,896 23,000 $3,461
Executive Vice President 1995 $122,600 $ 0 0 N/A
(5) 1994 $ 91,895 $ 4,017 40,000 N/A
- ----------------------------------------------------------------------------------------------------------------------
Lennart K. Sundin, 1996 $126,517 $ 4,802 12,000 $3,456
Senior Vice President, 1995 $120,140 $ 0 0 $3,334
Marketing and Sales 1994 $124,848 $12,698 5,000 $5,772
- ----------------------------------------------------------------------------------------------------------------------
William A. Hainke 1996 $103,450 $ 3,885 12,000 $2,832
Chief Financial Officer, 1995 $ 99,418 $ 0 0 $2,738
Corporate Secretary and 1994 $104,059 $ 5,713 0 $4,761
Treasurer
- ----------------------------------------------------------------------------------------------------------------------
Timothy R. Groth 1996 $ 97,441 $ 3,672 12,000 $2,565
Vice President, 1995 $ 94,115 $ 0 0 N/A
Technical Operations (5) 1994 $ 17,987 $ 0 15,000 N/A
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Perquisites for each Named Executive Officer in 1996, 1995, and 1994
are included under Salary and did not exceed the lesser of $50,000 or
10% of the total salary and bonus for any such officer.
(2) Amounts reflect lump sum distributions paid in November 1996 and
October 1994.
(3) All awards are incentive stock options, granted pursuant to the
Company's 1986, 1988 and 1990 Employee Stock Option Plans.
(4) All payouts are Company matching contributions to the Employee Stock
Bonus(401(k) Plan.
(5) Salaries shown for 1994 reflect partial-year salaries from date of
employment.
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<PAGE> 10
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised stock options held as of December 31,
1996. There were no stock option exercises in 1996 and there were no
unexercised, in-the-money stock options at December 31, 1996.
UNEXERCISED OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED
OPTIONS AT
DECEMBER 31, 1996
-----------------
Name Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frederick A. Brunn 71,250 50,500
- ---------------------------------------------------------------------------------------------------------------
M. Mark Michalko 20,000 43,000
- ---------------------------------------------------------------------------------------------------------------
Lennart K. Sundin 23,750 19,500
- ---------------------------------------------------------------------------------------------------------------
William A. Hainke 35,000 17,000
- ---------------------------------------------------------------------------------------------------------------
Timothy R. Groth 7,500 19,500
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Stock options were issued under the Company's employee stock option plans
and are exercisable starting one year after the grant date, with 25% of the
shares covered thereby becoming exercisable at that date and an additional 25%
of the shares becoming exercisable on each successive anniversary date, with
full vesting occurring on the fourth anniversary date.
1997 DIRECTORS' STOCK OPTION PLAN
In order to increase the Company's ability to attract and retain
outside directors of the highest caliber and experience, the Company's Board of
Directors has adopted the 1997 Directors' Stock Option Plan (the "1997
Directors' Plan") and is submitting it to the shareholders for their approval at
the Annual Meeting. Since 1993 the Company has granted stock options to outside
directors every year, pursuant to the 1993 Directors' Option Plan (the "1993
Directors' Plan") which expired on September 25, 1996. The affirmative vote of a
majority of the common shares represented and voting at the Annual Meeting will
be required for the approval of the 1997 Directors' Plan. The Board of Directors
recommends a vote "FOR" approval of the 1997 Directors' Plan.
The full text of the 1997 Directors' Plan is set forth as Appendix "A"
hereto. The following summary of the 1997 Directors' Plan is qualified by this
reference to that text.
Under the 1997 Directors' Plan options to purchase an aggregate 400,000
shares of the common stock of the Company would be available to be granted to
directors of the Company who are not employees of the Company or any of its
subsidiaries. An option for 10,000 shares will be granted to each outside
director on September 25, 1997; an option for an additional 10,000 shares will
be granted on September 25, 1998; an option for an additional 10,000 shares will
be granted on September 25, 1999; and an option for an additional 10,000 shares
will be granted on September 25, 2000. Additional options may be granted to new
or present outside directors at any time at the discretion of the Board of
Directors. The total number of shares that may be optioned under the 1997
Directors' Plan is 400,000 shares, subject to adjustment in certain
circumstances, including stock dividends, stock splits, reverse stock splits,
reorganizations, reclassifications, or recapitalizations of common stock.
The purchase price which must be paid for stock on exercise of an
option granted under the 1997 Directors' Plan is equal to the fair market value
of the stock on the date the option is granted. Under the terms of the 1997
Directors' Plan, each outside director of the Company (currently Messrs. Chan,
Johnson, O'Meara, Sandberg and Ng Foo Leong) would be granted an option to
purchase 10,000 common shares on September 25, 1997, 1998, 1999 and 2000 as
described above. Payment for stock upon exercise of an option must be in cash.
Each of Messrs. Chan, Johnson, O'Meara, Sandberg and Ng Foo Leong
presently hold options under the 1993 Directors' Plan to purchase 40,000 common
shares. Under the 1993 Directors' Plan all options are unexercised and begin to
expire yearly in 10,000 share increments beginning in September 25, 1998.
Options under the 1993 Directors' Plan have exercise prices ranging from $1.31
to $10.25 per share.
8
<PAGE> 11
Each option granted under the 1997 Directors' Plan shall become
exercisable in installments as follows: it may in the aggregate be exercised as
to 50% of the total number of shares optioned following the first anniversary
date of grant; and up to 100% of the total number of shares optioned may be
exercised following the second anniversary of the date of grant. If an
optionholder ceases to be a director of the Company, his option will terminate
ninety days thereafter and may thereafter no longer be exercised, except that
(1) if a director dies, any portion of an option held by him or her that was
exercisable at the date of death may be exercised within the option period but
not later than one year after the date of death by his or her legal
representatives or by those entitled to receive the option under applicable laws
of testate or intestate succession, and (ii) if a director ceases to be a
director because of disability, any portion of an option that was exercisable at
the date the option holder ceased to be a director may be exercised by the
option holder (or his or her guardian) within the option period but not later
than one year after the date the option holder ceased to be a director.
The 1997 Directors' Plan will terminate on December 31, 2000, after
which date no further options may be granted thereunder.
The Board of Directors' may alter, amend, suspend or terminate the 1997
Directors' Plan, provided that no holder of an outstanding option may thereby be
deprived of his rights. Moreover, stockholder approval would be required for any
amendment to the 1997 Directors' Plan as to which approval by stockholders is
required by applicable law.
The following discussion is a general summary of the material federal
income tax consequences to participants in the 1997 Directors' Plan. The
discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), regulations thereunder, rulings and decisions now in effect, all of
which are subject to change. The summary does not discuss all aspects of federal
income taxation that may be relevant to a particular participant in light of
such participant's personal investment circumstances. Also, state and local
income taxes are not discussed and may vary from locality to locality.
Holders of non-qualified stock options do not realize income as a
result of the grant of such options, but normally realize compensation income
taxable at ordinary income rates upon such options' exercise to the extent that
the fair market value of the common shares on the date of the exercise of such
options exceeds the option exercise price paid. The Company will be entitled to
a tax deduction in an amount equal to the amount that the optionee is required
to include in ordinary income at the time of such inclusion, and will be
required to withhold taxes on such ordinary income. The optionee's initial tax
basis for shares acquired upon the exercise of a non-qualified stock option will
be the option exercise price paid plus the amount of ordinary income realized by
the optionee. Any appreciation in the value of such shares may qualify for
capital gains treatment depending upon the applicable holding period.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
M. Mark Michalko, a nominee for director and who is also the Executive
Vice President of the Company was 55 days late in filing a Form 4 with respect
to the purchase by his wife of 9,200 shares of Company stock.
The Company believes, based upon a review of reports furnished to the
Company and written representations that no other reports were required and that
during 1996 its officers and directors complied with all filing requirements
under Section 16(a) of the Securities Exchange Act of 1934.
OTHER MATTERS
All shareholders of record at the close of business on April 2, 1997,
the record date for the determination of shareholders entitled to vote at the
Annual Meeting, have been sent or are currently being sent a copy of the
Company's Annual Report, including financial statements for the year ended
December 31, 1996.
The expense of preparing, printing and mailing the Notice of Annual
Meeting and proxy material and all other expenses of soliciting proxies will be
borne by the Company. In addition to the solicitation of proxies by use of the
mails, the directors, officers and regular employees of the Company, who will
receive no compensation in addition to regular salary, may solicit proxies by
mail, telegraph, telephone, or personal interview. The Company may also
reimburse brokerage firms, banks, trustees, nominees and other persons for their
expenses in forwarding proxy material to the beneficial owners of shares held by
them of record.
Management knows of no business which will be presented for
consideration at the Annual Meeting other than that stated in the Notice of
Annual Meeting. However, if any such matter shall properly come before the
meeting, the persons named in the enclosed proxy form will vote the same in
accordance with their best judgement.
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Shareholder proposals for presentation at the 1998 Annual Meeting must
be received by the Company no later than December 8, 1997 to be considered for
inclusion in the 1998 proxy and proxy statement.
By order of the Board of Directors,
/s/ M. Mark Michalko
M. Mark Michalko
Executive Vice President
Carlsbad, California
10
<PAGE> 13
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.,
THE S & P SMALLCAP 600 INDEX AND A PEER GROUP
12/91 12/92 12/93 12/94 12/95 12/96
----- ----- ----- ----- ----- -----
INTERNATIONAL LOTTERY
& TOTALIZATOR SYSTEMS, INC. $100 $218 $735 $121 $ 44 $ 38
S & P SMALLCAP 600 $100 $121 $144 $137 $178 $216
PEER GROUP $100 $ 91 $ 79 $ 46 $ 44 $ 51
* $100 INVESTED ON 12/31/91 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
11
<PAGE> 14
Appendix A
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
1997 DIRECTORS' STOCK OPTION PLAN
1. Purpose of the Plan. Under this 1997 Directors' Stock Option Plan
(the "Plan") of International Lottery & Totalizator Systems, Inc. (the
"Company"), options shall be granted to directors who are not employees of the
Company to purchase shares of the Company's capital stock. The Plan is designed
to enable the Company to attract and retain outside directors of the highest
caliber and experience.
2. Stock Subject to Plan. The maximum number of shares of stock for
which options granted hereunder may be exercised shall be 400,000 of the
Company's common shares, no par value per share, subject to the adjustments
provided in Section 6. Shares of stock subject to the unexercised portions of
any options granted under this Plan which expire or terminate or are cancelled
may again be subject to options under the Plan.
3. Participating Directors. The directors of the Company who shall
participate in this Plan are those directors who are not, as of the applicable
"date of grant" (as defined below), employees of the Company or any of its
subsidiaries.
4. Grant of Options. Each participating director shall be granted the
following options the date of each of which being a "date of grant":
(a) an option to purchase 10,000 common shares (subject to the adjustments
provided in Section 6) on September 25, 1997;
(b) an option to purchase 10,000 common shares (subject to the adjustments
provided in Section 6) on September 25, 1998;
(c) an option to purchase 10,000 common shares (subject to the adjustments
provided in Section 6) on September 25, 1999;
(d) an option to purchase 10,000 common shares (subject to the adjustments
provided in Section 6) on September 25, 2000;
In addition, the Board of Directors may grant participating directors
one or more additional options from time to time in its discretion.
Notwithstanding any other provision of this Plan, no option hereunder
shall be granted unless sufficient shares (subject to said adjustments) are then
available therefor under Section 2 and 7. In consideration of the granting of
the options, the option holder shall be deemed to have agreed to remain as a
director of the Company for a period of at least one year after each date of
grant. Nothing in this Plan shall, however, confer upon any option holder any
right to continue as a director of the Company or shall interfere with or
restrict in any way the rights of the Company or the Company's shareholders,
which are hereby expressly reserved, to remove any option holder at any time for
any reason whatsoever, with or without cause, to the extent permitted by the
Company's bylaws and applicable law.
5. Option Provisions. Each option granted under the Plan shall contain
the following terms and provisions:
(a) The exercise price of each option shall be equal to the aggregate fair
market value of the common shares optioned on the date of grant of such option.
For this purpose, such fair market value means the closing price of shares of
the same class on the day in question (or, if such day is not a trading day in
the U.S. securities markets or if no sales of shares of that class were made on
such day, on the nearest preceding trading day on which sales of shares of that
class were made), as reported with respect to the market (or the composite of
the markets, if more than one) in which such shares are then traded; or if no
such closing prices are reported the lowest independent offer quotation reported
for such day in Level 2 of NASDAQ, or if no such quotations are reported it
means the value established by what the Board of Directors of the Company in its
judgment then deems to be the most nearly comparable valuation method.
(b) Payment for shares purchased upon any exercise of the option shall be made
in full in cash concurrently with such exercise.
(c) The option shall become exercisable in installments as follows: It may be
exercised as to up to but no more than 50% of the total number of shares
optioned on and after the first anniversary of the date of grant; and up to 100%
of the total number of shares optioned on and after the second anniversary of
the date of grant; in each case to the nearest whole share.
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<PAGE> 15
(d) When the option holder ceases to be a director of the Company, whether
because of death, resignation, removal, expiration of his or her term of office
or any other reason, the option shall terminate ninety (90) days after the date
such option holder ceases to be a director of the Company and may thereafter no
longer be exercised; except that (i) upon the option holder's death his or her
legal representative(s) or the person(s) entitled to do so under the option
holder's last will and testament or under applicable intestate laws shall have
the right to exercise the option within one year after the date of death (but
not after the expiration date of the option), but only for the number of shares
as to which the option holder was entitled to exercise the option on the date of
his or her death and (ii) upon the option holder's ceasing to be a director by
reason of disability he or she (or his or her guardian) shall have the right to
exercise the option within one year after the date the option holder ceased to
be a director (but not after the expiration date of the option), but only for
the number of shares as to which the option holder was entitled to exercise the
option on the date of his or her ceasing to be a director.
(e) Notwithstanding any other provision herein, such option may not be
exercised prior to approval of this Plan by the Company's shareholders having a
majority of voting power of the outstanding common shares represented at a duly
held meeting at which a quorum is present, nor prior to the admission of the
shares issuable on exercise of the option to listing on notice of issuance on
any stock exchange on which shares of the same class are then listed; nor unless
and until, in the opinion of counsel for the Company, such securities may be
issued and delivered without causing the Company to be in violation of or incur
any liability under any federal, state or other securities law, any requirement
of any securities exchange listing agreement to which the Company may be a
party, or any other requirement of law or of any regulatory body having
jurisdiction over the Company.
6. Adjustments. If the Company's outstanding common shares are
increased or decreased, or are changed into or exchanged for a different number
or kind of shares or securities of the Company, as a result of one or more
reorganizations, recapitalizations, stock splits, reverse stock splits, stock
dividends or the like, appropriate adjustments shall be made in the number
and/or kind of shares or securities as to which options may thereafter be
granted under this Plan and for which options then outstanding under this Plan
may thereafter be exercised. Any such adjustment in outstanding options shall be
made without change in the aggregate purchase price applicable to the
unexercised portion of such options, but with a corresponding adjustment in the
purchase price for each share or other unit of any security covered by the
option. No fractional shares of stock shall be issuable under any option granted
under this Plan or as a result of any such adjustment.
7. Corporate Reorganizations. Upon the dissolution or liquidation of
the Company, or upon a reorganization, merger or consolidation of the Company as
a result of which the Company's outstanding common shares are changed or
exchanged for cash or property or securities not of the Company's issue, or upon
a sale of substantially all the property of the Company to another corporation
or person, the Plan shall terminate, and all options thereto granted hereunder
shall terminate, unless provisions shall be made in writing in connection with
such transaction for the continuance of the Plan and/or for the assumption of
options theretofore granted, or the substitution for such options of options
covering the stock of the successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kind of shares and
prices, in which event the Plan and options theretofore granted shall continue
in the manner and under the terms so provided. If the Plan and unexercised
options shall terminate pursuant to the foregoing sentence, all persons entitled
to exercise any unexercised portions of options then outstanding shall have the
right, at such time prior to the consummation of the transaction causing such
terminations as the Company shall designate, to exercise the unexercised
portions of their options, including the portions thereof which would, but for
this section entitled "Corporation Reorganizations," not yet be exercisable.
8. Duration, Termination and Amendment of the Plan. This Plan shall
become effective upon its adoption by the Board of Directors of the Company and
shall expire on December 31, 2000, so that no option may be granted hereunder
after that date although any option outstanding on that date may thereafter be
exercised in accordance with its terms. The Board of Directors of the Company
may alter, amend, suspend or terminate this Plan, provided that no such action
shall deprive an option holder, without his or her consent, of any option
previously granted pursuant to this Plan or of any of the option holder's rights
under such option. Except as herein provided, no such action of the Board,
unless taken with the approval of the stockholders of the Company, may make any
amendment to the Plan as to which approval by stockholders is required by
applicable law, regulation or rule.
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<PAGE> 16
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
The undersigned hereby appoints Frederick A. Brunn and M. Mark Michalko
proxies, with power to act without the other and with power of substitution,
and hereby authorizes them to represent and vote as designated on the other
side, all the shares of stock of International Lottery & Totalizator Systems,
Inc., standing in the name of the undersigned with all powers which the
undersigned would possess if present at the Annual Meeting of Shareholders to
be held May 15, 1997 or any adjournment thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
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- FOLD AND DETACH HERE -
AN INVITATION
Please join Management and the Board of Directors of
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
for the 1997 Annual Meeting of Shareholders
DATE: Thursday, May 15, 1997
TIME: 2:30 p.m. to 4:30 p.m.
2:30 - 3:00 Refreshments
3:00 - 4:00 Annual Meeting
4:00 - 4:30 Reception
PLACE: Pea Soup Andersen's, the Juliette Room
850 Palomar Airport Road
Carlsbad, California
(619) 438-7880
Call for directions
R.S.V.P. Mary Anne Driscoll: (619) 930-3630
<PAGE> 17
Please mark
your votes as
indicated in [X]
this sample
The Board of Directors recommends a vote FOR Item 1.
Item 1 -- ELECTION OF DIRECTORS
Nominees:
Frederick A. Brunn Ng Aik Ghin
Chan Kian Sing Ng Foo Leong
Theodore A. Johnson Martin. J. O'Meara, Jr.
M. Mark Michalko Sir Michael G.R. Sandberg
WITHHELD
FOR FOR ALL
[ ] [ ]
WITHHELD FOR: (Write that nominee's name in the space provided below).
- ----------------------------------------------------------------------
Item 2 -- Proposal to approve the 1997 Directors' Stock Option Plan
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 3 -- In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
Signature(s)________________________________________________ Date __________
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator trustee or guardian, please give
full title as such.
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- FOLD AND DETACH HERE -
