<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 sec.240.14a-11(c) or sec.240.14a-12
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
LOGO
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
------------------------
NOTICE OF ANNUAL MEETING
The 1998 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 Monday, June 1, 1998 at La Costa Resort and Spa, Costa
Del Mar Road, Club House II, Carlsbad, California, for the following purposes:
1. To elect nine directors for the ensuing year.
2. To approve an Amendment to the Articles of Incorporation to effect a 3
for 1 reverse stock split.
3. To approve an Amendment to the Bylaws to provide that the authorized
number of directors shall not be less than seven (7) nor more than
thirteen (13) and to set the number of authorized directors at nine (9).
4. To approve an Amendment to the Articles of Incorporation limiting the
liability of directors to the Company and authorizing expanded
indemnification.
5. To approve an amendment to the Bylaws regarding indemnification of
directors, officers, employees and other agents.
6. To approve the Indemnification Agreements to be entered into by the
Company and its directors and officers.
7. To transact such other business as may properly come before the meeting
and any adjournment thereof.
Shareholders of record at the close of business on April 27, 1998 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 30, 1998.
By order of the Board of Directors,
/S/ M. MARK MICHALKO
M. Mark Michalko
President
April 30, 1998
Carlsbad, California
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE, SIGN AND MAIL
PROMPTLY THE ENCLOSED PROXY, FOR WHICH A RETURN ENVELOPE IS PROVIDED.
<PAGE> 3
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 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 June 1, 1998, 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
18,027,548 shares are outstanding as of April 27, 1998. Only holders of common
shares of record on the books of the Company at the close of business on April
27, 1998 (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 and for each of
the other proposals described in the Proxy Statement, 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 30, 1998.
ELECTION OF DIRECTORS
Nine 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.
1
<PAGE> 4
The following table sets forth certain information regarding the beneficial
ownership of the Company's common shares as of April 20, 1998 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 listed below have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED AS OF
APRIL 20, 1998
-----------------------------
PERCENT
NAME OF BENEFICIAL OWNER AMOUNT OF CLASS
------------------------ --------- --------
<S> <C> <C>
Nominees for Director
FREDERICK A. BRUNN, 53, Director since 1989. President from 120,701(A) *
February 1994 to May 1997. Prior thereto, Executive Vice
President since 1990. Chief Operating Officer, San Diego
Manufacturing Extension Center since April 20, 1998.
CHAN KIEN SING, 41, Director since June 1993. Group 35,000(B) *
Executive Director of Berjaya Group Berhad since 1990.
THEODORE A. JOHNSON, 57, Director since 1979. President, 60,825(B) *
Minnesota Cooperation Office for Small Business and Job
Creation, Inc. from 1980 to present. Director of
Surgidyne, Inc.
M. MARK MICHALKO, 43, Director since February 1994. 95,887(A) *
President since May, 1997, Executive Vice President, from
February 1994 to May 1997. President of Quantum Gaming
Corp., a gaming industry consulting firm for more than
five years prior to February 1994.
NG AIK CHIN, 43, Executive Assistant to the President since 10,465(A) *
1994. Senior Member of Beyaya Group Berhard's management
for more than five years prior to 1994.
NG FOO LEONG, 47, Director since June 1993. Executive 35,000(B) *
Director, Sports Toto Malaysia Sdn Bhd, a lottery gaming
company from 1985 to present.
MARTIN J. O'MEARA, JR., 69, Director since 1979. President, 326,226(B) *
The Budget Plan, Inc., a privately-owned company engaged
in the consumer loan business and has been so employed for
more than five years.
THE LORD SANDBERG OF PASSFIELD, 70, Director since 1987. 115,000(B) *
Private investor. Chairman and Chief Executive of the Hong
Kong and Shanghai Banking Corporation from 1977 to 1986.
Director of Broadstreet Inc. a bank holding company.
TAN SRI DATO SERI TAN CHEE YIOUN, 46, Group Chief Executive 6,600,000(C) 38%
Officer of Berjaya Group Berhad since prior to 1992.
Director, February, 1994 - May 1995.
Named Executive Officers (excluding those listed above)
TIMOTHY R. GROTH 23,047(A) *
DENNIS D. KLAHN 15,276(A) *
LAWRENCE E. LOGUE 8,819(A) *
ROBERT F. MCPHAIL 189,840(A) *
All directors and executive officers as a group (13 persons) 7,636,086(A)(B)(C) 4%
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED AS OF
APRIL 20, 1998
-----------------------------
PERCENT
NAME OF BENEFICIAL OWNER AMOUNT OF CLASS
------------------------ --------- --------
<S> <C> <C>
Significant Shareholder 6,600,000(C) 38%
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED ("BERJAYA"),
Level 28, Menara Shahzan Insas
Jalan Sultan Ismail
5020 Kuala Lumpur, Malaysia
</TABLE>
- ---------------
(A) Includes the number of shares of Common Stock subject to unexercised stock
options which were exercisable within 60 days under the Company's 1986, 1988
and 1990 Employee Stock Option Plans as follows: 82,000 for Mr. Brunn;
20,500 for Mr. Groth; 11,500 for Mr. Klahn; 4,750 for Mr. Logue; 82,500 for
Mr. McPhail; 83,250 for Mr. Michalko; 8,000 for Mr. Ng Aik Chin; and 272,500
for all executive officers as a group.
(B) Includes the number of shares of Common Stock subject to unexercised stock
options which were exercisable within 60 days under the Company's 1993
Directors' Stock Option Plan which for each such outside director is 35,000
and 175,000 for all such directors as a group.
(C) Mr. Vincent Tan is Chief Executive of the parent company of Berjaya; Mr.
Chan Kien Sing and Mr. Ng Foo Leong are employees of an affiliate of
Berjaya. Mr. Aik Chin Ng is also a designee of Berjaya to the Company's
Board of Directors. All four individuals disclaim beneficial ownership of
such shares.
* Less than one percent of the outstanding common shares.
During 1997, four meetings of the Board of Directors were held. Each
incumbent director attended all meetings of the Board of Directors held during
the year in which he was a director, except for both Mr. Chan Kien Sing and Mr.
Ng Foo Leong who each missed one meeting. The Company has an Executive Committee
which consists of Messrs. Chan, Johnson and Michalko. The Executive Committee
held no meetings during the year. The Executive Committee may exercise all the
authority of the Board in the management of the Company except for matters
expressly reserved by law for board action. The Board also has an Executive
Compensation Committee consisting of Messrs. Johnson, O'Meara, Sandberg, and
Chan. The Executive Compensation Committee met twice during the year. Its
function is to establish compensation for all executive officers of the Company
and administer the Company's 1986, 1988, and 1990 Employee Stock Option Plans.
The Company has an Audit Committee consisting of Messrs. Sandberg, O'Meara,
Johnson and Chan which held two meetings during the year. The Audit Committee
provides advice and assistance regarding accounting, auditing and financial
reporting practices of the Company. Each year it recommends to the Board a firm
of independent public accountants to serve as auditors. The Audit Committee
reviews with such auditors the scope and result of their audit, fees for
services and independence in servicing the Company. The Company also has a
Nominating Committee consisting of Messrs. Chan, O'Meara, Johnson and Michalko.
The Nominating Committee held one meeting during the year. The Nominating
Committee seeks out, evaluates and recommends to the Board qualified nominees
for election as directors of the Company and considers other matters pertaining
to the size and composition of the Board. The Nominating Committee will give
appropriate consideration to qualified persons recommended by shareholders for
nomination as directors provided that such recommendations are accompanied by
information sufficient to enable the Nominating Committee to evaluate the
qualifications of the nominee. During 1997, the Company established an
Affiliations Committee to review and approve the fairness to the Company of any
transactions between the Company and Berjaya. The members of the Committee are
Messrs. Brunn, Johnson and O'Meara. The Affiliations Committee held three
meetings in 1997.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives an annual
retainer of $4,000 plus $500 per board meeting and reimbursement for all related
expenses. The chairman of each committee who is not an
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<PAGE> 6
employee of the Company receives an additional annual retainer of $1,000. Each
committee member receives $500 per meeting and reimbursement of all related
expenses, only if a committee meeting is held at a time when it does not
coincide with a board meeting. Lord Sandberg is also a financial consultant to
the Company and received fees of $12,500 in 1997.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Berjaya Transactions
During 1997 the Company received $1,154,103 as payment from three different
affiliates of Berjaya which are lottery customers of the Company and as of
December 31, 1997 there was a balance outstanding owed to the Company by these
customers of $172,512. Payments were primarily from Philippine Gaming Management
Corporation in an amount of $161,840 related to a October, 1996 lottery terminal
contract and $462,787 for spare parts delivered in 1997. The Company has
software support agreements with Sports Toto Malaysia Sdn Bhd and Natural Avenue
Sdn Bhd of Malaysia ("Natural Avenue") each of which pays approximately $7,000
per month to the Company. In addition, during 1997 Natural Avenue paid the
Company $82,600 for software upgrades and modifications to its lottery system.
On December 2, 1997, the Company issued a Notice of Special Meeting and
Proxy Statement in connection with a shareholders special meeting held on
December 30, 1997 to approve a proposed amendment to the Company's Articles of
Incorporation to provide for the issuance of up to 20 million shares of
preferred stock. The Proxy Statement described a proposed purchase by Berjaya of
$5 million of Series A Preferred Stock and described the proposed terms of the
Series A Preferred Stock to be finally approved by the Company's Affiliations
Committee of the Board of Directors. The purchase by Berjaya of the $5 million
preferred stock has not been concluded.
Consulting Agreement with Mr. Brunn
In May 1996, Mr. Brunn and the Company entered into a Consulting Agreement
(the "Consulting Agreement") in connection with Mr. Brunn's resignation as
President of the Company.
Pursuant to the Consulting Agreement Mr. Brunn agreed to provide technical
consulting services to the Company through May 14, 1999 subject to earlier
termination under certain circumstances (the "Consulting Period"). In
compensation, the Company paid Mr. Brunn consulting fees of $89,600 in 1997, and
is obligated to pay in monthly installments $93,800 in 1998 and $28,000 in 1999,
whether or not the Company utilizes his services. In the event that Mr. Brunn
dies during the Consulting Period, the Company will pay his estate an amount
equal to 100% of the remaining payment due through April 10, 1998 and 50% of the
remaining payment due to be made through the Consulting Period. In addition, Mr.
Brunn agreed not to directly or indirectly compete with the Company during the
Consulting Period, except as otherwise provided in the Consulting Agreement.
The Company further agreed to continue Mr. Brunn's health benefits through
November, 1998 and to cause the stock options held by Mr. Brunn to become
immediately vested and exercisable and to remain exercisable through the earlier
of the original expiration date or May 16, 2001.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
Members of the Executive Compensation Committee (the "Committee") evaluate
the performance of senior management, including the president, and review and
approve the base compensation and lump sum distributions for the Company's
executive officers. The Committee also administers the Company's Executive Bonus
Plan and employee stock option plans. The Committee periodically reports to the
Board on its activities.
4
<PAGE> 7
Compensation Philosophy
The Committee bases its decisions on the Company's executive compensation
philosophy, which relates the level of compensation to the Company's success in
meeting its annual and long-term performance goals, rewards individual
achievement and seeks to attract and retain qualified executives. The Company's
executive compensation program consists of three principal components: (i) base
salary, (ii) potential for an annual lump-sum distribution based on individual
performance and (iii) potential for an annual bonus under the Company's
Executive Bonus Plan based upon the Company achieving a threshold level of
profitability as well as individual performance. The second and third elements
constitute "at-risk" portions of the compensation program. The Company positions
its overall executive compensation levels at or near the median of the range of
compensation levels for other companies comparable to the Company located in
Southern California and who are viewed as competitors for executive talent in
the overall labor market. This data is obtained from surveys conducted by
external compensation consultants and trade associations. In reviewing this
data, ILTS takes into account how its compensation policies and overall
performance compare to similar indices for comparable companies.
The Company employs a formal performance review system for all employees,
including the president and the other Named Executive Officers (as defined on
page 7). This process generates information that the Committee uses in making
decisions on base compensation, lump-sum distributions and awards under the
Company's Executive Bonus Plan. The president is responsible for preparing the
reviews on all executive officers other than himself. The Committee Chairman is
responsible for preparing the review on the president. All reviews are then
discussed and approved by the Committee. Executive performance is measured both
in terms of the performance of the Company as a whole and various individual
performance factors, including the performance of divisions for which such
officer had management responsibility and individual managerial accomplishments.
The Internal Revenue Code denies a deduction to any publicly held
corporation for compensation paid to any "covered employee" (which are defined
as the president and the Company's other four most highly compensated officers,
as of the end of a taxable year) to the extent that the compensation of any
individual "covered employee" exceeds $1 million in any taxable year of the
corporation beginning after 1993. Compensation which is payable pursuant to
written binding agreements entered into before February 18, 1993 and
compensation which constitutes "performance based compensation" is excludable in
applying the $1 million limit. It is the Company's policy to qualify the
compensation paid to its top executives for deductibility under the new law in
order to maximize the Company's income tax deductions. Based upon the Internal
Revenue Service's regulations and projected compensation payable to the
Company's "covered employees" for the 1998 taxable year, all compensation
payable by the Company in 1998 to such covered employees should be deductible by
the Company.
Base Salaries
In determining base salaries for executive officers, the Committee reviews
external comparative data and also receives recommendations from management. The
Committee bases its decisions on such data, as well as internal salary
comparisons and individual performance evaluations. Under this system, salary
increases have generally the same effect as a cost of living adjustment,
although increases are not expressly tied to any cost of living indicator.
Increases are awarded, however, only to those executives who are performing at a
satisfactory level or above. The Company's philosophy is that the base salary
taken alone is generally lower than salary levels at comparable companies. Thus,
executives are required to earn awards under the "at-risk" portions of the
compensation program described below in order to reach a competitive
compensation level.
Lump Sum Distributions
Under traditional compensation systems, merit compensation increases are
made through increases in base pay. Under such systems, once the merit component
has been earned it is included in base salary going forward and becomes a
permanent part of cash compensation. In 1990, the Company instituted a different
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<PAGE> 8
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 1997 and 1998. No bonus awards are
made for any year in which the Company does not meet the threshold profitability
level. The amount of the bonus pool is based on a percentage of the Company's
net after tax profits above the profitability thresholds and shall not cause the
net after tax profit to fall below the threshold after computation of the bonus
pool. During each year of the Executive Bonus Plan, the Company's research and
development budget must be sustained 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 utilized. The Committee retains discretion to adjust the bonus pool
and awards based upon extraordinary circumstances and other criteria as
determined by the Committee.
Individual awards under the Executive Bonus Plan are determined by the size
of the bonus pool and individual performance of the executive. The Committee has
structured the Executive Bonus Plan so that award potential is consistent with
competitive norms and potentially represents a significant percentage of the
executive's overall compensation in any given year. Awards are paid after
completion of the Company's audited financial statements for that year.
The Company did not meet the profitability threshold under the Executive
Bonus Plan for 1997. Accordingly, no awards were made with respect to 1997.
Stock Options
The Committee believes that grants of stock options serve to align the
interests of executive officers with shareholder value. The number of stock
options granted takes into account the recipient's position and is intended to
recognize different levels of responsibility. In determining the level of stock
option grants, the Committee also considers competitive practices. As a result,
grants may vary from year to year.
EXECUTIVE COMPENSATION COMMITTEE
<TABLE>
<S> <C>
Theodore A. Johnson, Chairman Michael G.R. Sandberg
Martin J. O'Meara, Jr. Chan Kien Sing
</TABLE>
April 30, 1998
6
<PAGE> 9
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table shows, for the years ended December 31, 1997, 1996 and
1995, the compensation earned by the president and the four most highly
compensated executive officers of the Company (the "Named Executive Officers")
in 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------
AWARDS PAYOUTS
NAME AND ANNUAL COMPENSATION ---------- ---------------
PRINCIPAL -------------------- NUMBER OF ALL OTHER
POSITION(S) YEAR SALARY(3) BONUS(4) OPTIONS(5) COMPENSATION(6)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
M. Mark Michalko 1997 $136,836 $11,917 80,000 $4,235
President & Chief Executive Officer 1996 120,810 4,896 23,000 3,461
and Director 1995 122,600 0 0 0
- ----------------------------------------------------------------------------------------------------
Robert F. McPhail 1997 125,988 11,785 10,000 0
Vice President, Sales & Marketing 1996 99,915 9,732 0 0
1995 109,775 0 0 0
- ----------------------------------------------------------------------------------------------------
Timothy R. Groth 1997 109,464 4,270 20,000 3,184
Vice President, 1996 93,769 3,672 12,000 2,565
Technical Operations 1995 94,115 0 0 0
- ----------------------------------------------------------------------------------------------------
Ng Aik Chin(1) 1997 144,901 7,804 0 4,187
Executive Assistant to the 1996 84,983 3,447 12,000 2,327
President and Director 1995 127,061 0 0 3,464
- ----------------------------------------------------------------------------------------------------
Frederick A. Brunn,(2) 1997 154,863 0 10,000 0
Director and former President 1996 142,680 5,824 33,000 4,141
1995 140,915 0 0 3,834
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Ng's Salary for each year included a $6,000 housing allowance and tax
equalization payments of $30,556 in 1997, $0 in 1996 and $14,191 in 1995.
(2) Mr. Brunn's, 1997 Salary includes $12,203 relating to his retirement and
$84,000 relating to his consulting agreement. (See Certain Relationships and
Related Transactions herein).
(3) Perquisites for each Named Executive Officer in 1997, 1996 and 1995 are
included under Salary and did not exceed the lesser of $50,000 or 10% of the
total salary and bonus for any such officer.
(4) Amounts reflect lump sum distributions paid in November 1997 and 1996.
(5) All awards are incentive stock options, granted pursuant to the Company's
1990 Employee Stock Option Plan, except in the case of Mr. Brunn in which
the option is pursuant to the 1997 Directors Option Plan.
(6) All amounts are Company matching contributions to the Employee Stock
Bonus(401(k) Plan.
7
<PAGE> 10
STOCK OPTION GRANTS
The following table sets forth information regarding the grant of stock
options during 1997 to the Named Executive Officers:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL OPTIONS STOCK PRICE APPRECIATION
NUMBER OF GRANTED TO FOR OPTION TERM(4)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION -------------------------
NAME GRANTED(2) IN 1997 PER SHARE DATE(3) 5% 10%
---- ---------- ------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark M. Michalko(1)...... 80,000 19% $1.28 5/15/07 $64,399 $163,199
Robert F. McPhail........ 10,000 2 1.28 5/15/07 8,050 20,400
Timothy R. Groth......... 20,000 5 1.28 5/15/07 16,100 40,800
Ng Aik Chin.............. 0 0 1.28 5/15/07 0 0
Frederick A. Brunn(A).... 10,000 0 1.56 9/24/02 9,811 24,862
</TABLE>
- ---------------
(1) Awarded to Mr. Michalko upon becoming President.
(2) No stock appreciation rights were granted to any of the Named Executive
Officers or other Company employees in 1997.
(3) The options were issued under the Company's 1990 Employee Stock Option Plan
and are exercisable starting one year after the grant date, with 25% of the
shares covered thereby becoming exercisable at that date and with an
additional 25% of the option shares becoming exercisable on each successive
anniversary date, with full vesting occurring on the fourth anniversary
date.
(4) The dollar amounts under these columns are the result of calculations at
the assumed compounded market appreciation rates of 5% and 10% as required
by the Securities and Exchange Commission over a ten-year term and,
therefore, are not intended to forecast possible future appreciation, if
any, of the stock price.
(A) This option is issued under the 1997 Director's Option Plan. The option is
exercisable starting one year after the date of grant with 50% of the shares
covered thereby becoming exercisable at that date and with the remaining 50%
of the option shares becoming exercisable on the second anniversary date.
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised stock options held as of December 31,
1997. There were no stock option exercises by executive officers in 1997 and
there were no unexercised, in-the-money stock options at December 31, 1997.
UNEXERCISED OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED OPTIONS
AT DECEMBER 31, 1997
----------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
M. Mark Michalko............................................ 35,750 107,250
Robert F. McPhail........................................... 80,000 10,000
Timothy R. Groth............................................ 14,225 32,775
Ng Aik Chin................................................. 8,000 9,000
Frederick A. Brunn.......................................... 83,250 41,000
</TABLE>
8
<PAGE> 11
PERFORMANCE GRAPH
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.,
THE S & P SMALLCAP 600 INDEX AND A PEER GROUP
<TABLE>
<CAPTION>
INTERNATIONAL
LOTTERY &
MEASUREMENT PERIOD TOTALIZATOR
(FISCAL YEAR COVERED) SYSTEMS, INC. PEER GROUP S&P SMALLCAP 600
<S> <C> <C> <C>
DEC-92 100 100 100
DEC-93 338 87 119
DEC-94 55 51 113
DEC-95 30 49 147
DEC-96 18 57 178
DEC-97 18 62 224
</TABLE>
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* $100 INVESTED ON 12/31/92 IN STOCK OR INDEX -- INCLUDING REINVESTMENT OF
DIVIDENDS, FISCAL YEAR ENDING DECEMBER 31.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Dennis D. Klahn, Lawrence E. Logue and Robert F. McPhail did not timely
file the initial Form 3 on becoming corporate officers in May, 1997. No stock
transactions occurred during the delinquent period.
Ng Aik Chin did not report Company shares held in his 401(k) savings plan
account on his Form 5.
The Company believes, based upon a review of reports furnished to the
Company and written representations that no other reports were required, and
that, except as noted above, during 1997 its officers and directors complied
with all filing requirements under Section 16(a) of the Securities Exchange Act
of 1934.
APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION
REGARDING A REVERSE STOCK SPLIT
PROPOSAL 1
NASDAQ ACTION
The Company's Common Stock is quoted on the NASDAQ National Market. In
order to maintain its NASDAQ National Market listing, the Company must, among
other rules, maintain net tangible assets of $4 million and a minimum bid price
of $1.00 per share. On April 16, 1998, the closing price was $0.66.
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<PAGE> 12
On April 3,1998 the Company received a letter from NASDAQ informing the
Company, pursuant to NASDAQ regulations that became effective in February 1998,
that because the Company's stock closing bid price had not exceeded $1.00 for a
30 consecutive day period ending on April 3, 1998, the Company's stock price
must comply with the NASDAQ $1.00 minimum bid price rule for 10 consecutive
trading days during a 90-day compliance period ending July 3, 1998. If the
Company's price does not meet the 10-day test, the Company's stock will be
removed from any NASDAQ listing on either its National or Small Cap Market at
the opening of business on July 7, 1998. If the Company's stock were so
delisted, any stock trading would be conducted on the OTC Bulletin Board or in
the over the counter market in what is commonly referred to as the "pink
sheets."
Even if the Reverse Split, as set out below occurs, and the Company's stock
price meets the $1.00 minimum bid price, there can be no assurance that the
Company will be able to maintain its NASDAQ listing. Specifically, the Company's
net tangible assets will likely fall below the $4 million NASDAQ National Market
minimum threshold as a result of any 1998 first quarter loss. As a result, the
Company will require an infusion of equity capital by late May 1998 to avoid
having NASDAQ move the Company's common stock from the NASDAQ National Market to
the NASDAQ Small Cap Market. Moreover, any further Company quarterly losses in
1998 may cause the Company to fall below the $2 million net tangible asset
threshold to maintain a listing on the NASDAQ Small Cap Market and the Company's
stock would be moved to the OTC trading market.
RECOMMENDED SHAREHOLDER APPROVAL
In order to increase the stock price of the Common Stock to a level that
will make it more likely that the Company will be able to meet the $1.00 minimum
bid price requirement for its NASDAQ listing, the Board of Directors of the
Company has unanimously approved, subject to shareholder approval, a proposed
amendment to the Company's Articles of Incorporation, (the "Amendment"), which
will effect a three for one reverse stock split (the "Reverse Split") of the
Company's outstanding shares of Common Stock. On April 17, 1998, the Company had
50,000,000 shares of authorized Common Stock and 20,000,000 shares of authorized
Preferred Stock, of which approximately 18,027,548 shares of common stock were
issued and outstanding and approximately 1,479,000 shares were reserved for
issuance pursuant to outstanding options. Had the Amendment to effect the
Reverse Split been approved and effective as of April 17, 1998, the Company
would have had 50,000,000 authorized shares of Common Stock, approximately
6,009,183 shares of Common Stock issued and outstanding, 493,000 shares reserved
for issuance pursuant to outstanding options and approximately 43,497,817
authorized shares of Common Stock unissued and not reserved for any purpose.
The Reverse Split will have the effect of reducing the number of shares
owned by each shareholder. By way of example, assuming the 3-for-1 Reverse
Split, a shareholder who owned 300 shares prior to the Reverse Split ("Old
Shares") would own 100 shares immediately upon completion of the Reverse Split
("New Shares"). Each shareholder's proportionate share ownership in the Company
remains undiluted by the Reverse Split. The Reverse Split will have the effect
of increasing the number of odd-lot shareholders and cause those holders to have
increased transaction costs in selling their shares.
While the proposed Amendment will reduce the number of outstanding shares,
the number of authorized shares of Common Stock will remain at 50,000,000.
Therefore, the Amendment will make available a substantial number of additional
shares for issuance in the future without the need for further shareholder
action. The Company does not have any current plans to issue such newly
available authorized shares, but could decide to do so in the future.
The complete text of the proposed Amendment is set forth in Appendix A to
this Proxy Statement. The final text of the Amendment is subject to change in
order to meet the requirements as to form that may be requested or required by
the California Secretary of State.
No fractional New Shares will be issued as a result of the Reverse Split.
In lieu thereof, each Shareholder whose Old Shares are not evenly divisible by
three will receive one additional New Share for the fractional New Share that
such shareholder would otherwise be entitled to receive as a result of the
Reverse Split.
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<PAGE> 13
EFFECTS OF SHAREHOLDER REJECTION OF THE REVERSE SPLIT PROPOSAL
In the event that the Company's securities are removed from the NASDAQ
National Market and moved to the OTC Bulletin Board, investors could find it
difficult to obtain accurate quotations as to the price of the Common Stock and
to buy or sell the Common Stock, and there may be reduced media coverage of the
Company. In addition, the Common Stock could become subject to the "penny stock"
regulations promulgated under the Securities Exchange Act of 1934, as amended,
which impose additional restrictions on broker-dealers who trade in such stock
and could severely limit the liquidity of the Common Stock. For all of the above
reasons, the Board believes that continuation by the Company of a NASDAQ listing
is in the best interests of the shareholders of the Company.
There can be no assurance, however, that any of the intended effects of the
Reverse Split will occur. Specifically there can be no assurance that the price
per share of New Shares will increase proportionately with the decrease in the
number of Old Shares; that the price of the New Shares will meet the minimum bid
price requirement by the end of the 90-day NASDAQ compliance period, or that any
stock price increase can be sustained for a prolonged period of time. There can
be no assurance that, upon completion of the Reverse Split, the adjusted stock
price will not drift down immediately or shortly thereafter. Also, there can be
no assurance that subsequent to the Reverse Split, the Company will be able to
maintain the NASDAQ National Market's continuing listing requirements or even
the NASDAQ Small Cap continuing listing requirements.
STOCK CERTIFICATES AND FRACTIONAL SHARES
The Reverse Split will automatically occur upon the filing of the
Certificate of Amendment with the California Secretary of State. No further
action is required by the shareholders. However, following consummation of the
Reverse Split, anticipated to be effected as promptly as practicable following
shareholder approval of the Reverse Split, the Company's Transfer Agent, Chase
Mellon Shareholder Services, will send to each shareholder of record on the
effective date of the Reverse Split a letter of transmittal regarding replacing
the Old Share certificates with New Share certificates that state the number of
shares on a Reverse Split basis. Shareholders will be asked to surrender
certificates representing Old Shares in accordance with the procedures set forth
in the letter of transmittal. Upon such surrender, a certificate representing
the New Shares will be issued and forwarded to the shareholders. However, until
a shareholder's certificate of Old Shares is replaced by New Shares each
certificate representing Old Shares will continue to be valid and represent New
Shares equal to one-third the number of Old Shares plus any additional New Share
resulting from a fractional New Share. Persons who hold their shares in
brokerage accounts or "street name" will not be required to take any further
actions to effect the exchange of their share certificates.
POSSIBLE BOARD ACTION
The Board reserves the right, notwithstanding shareholder approval, not to
proceed with the Reverse Split, if, at any time prior to filing the Amendment
with the California Secretary of State, the Board of Directors, in its sole
discretion, determines that the Reverse Split is no longer in the best interests
of the Company and its shareholders. The Board of Directors may consider a
variety of factors in determining whether or not to proceed with the Reverse
Split including, but not limited to, overall trends in the stock market, recent
changes and anticipated trends in the per share market price of the Company's
Common Stock, business developments and the Company's actual and projected
financial performance. However, it is the Board's present intention to effect
the Reverse Split as promptly as practicable following receipt of the requisite
shareholder approval unless prior to the filing of the Amendment in early June,
the Company's stock price equals or exceeds $1.00 per share for 10 consecutive
trading days as required by the NASDAQ regulations.
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<PAGE> 14
APPROVAL OF BYLAW AMENDMENT REGARDING NUMBER OF DIRECTORS
PROPOSAL 3
The Company's Board of Directors has adopted an amendment to Article III,
Section 2 of the Company's Bylaws (the "Bylaws Directors Amendment"), which
provides that the number of directors of the Company shall not be less than
seven (7) nor more than thirteen (13) and that the exact number of directors
shall initially be nine (9). The full text of Article III, Section 2 is attached
to this Proxy Statement as Appendix B.
EXISTING BYLAWS
The Company's current Bylaws provide that the number of directors shall be
not less than five (5) nor more than nine (9). The Board has currently set the
exact number of directors at nine (9).
BYLAWS DIRECTORS AMENDMENT
The Board of Directors believes that it is in the best interests of the
Company to provide the Board with flexibility to add additional knowledgeable
and experienced individuals to the Board if and when deemed appropriate and
advisable. Accordingly, the Board has adopted the Bylaws Directors Amendment
which provides that the number of directors shall not be less than seven (7) nor
more than thirteen (13). In addition, the Bylaws Directors Amendment provides
that the number of directors shall be nine (9). If the Bylaws Directors
Amendment is adopted by Company shareholders, the Board would have the power to
set the exact number of directors from time to time within the range set in the
Bylaws Directors Amendment.
VOTE REQUIRED
Approval of the Bylaws Directors Amendment will require the affirmative
vote of a majority of the shares of the Company's Common Stock outstanding as of
the record date.
The Company's Board of Directors has approved the proposed Bylaws Directors
Amendment and recommends that shareholders vote FOR the proposed Bylaws
Directors Amendment.
APPROVAL OF AN AMENDMENT TO THE ARTICLES OF INCORPORATION
REGARDING INDEMNIFICATION
PROPOSAL 4
INTRODUCTION
There has been a considerable amount of litigation in the United States
against corporate directors, officers or employees. The expense of such
litigation, whether it is well-founded or not, is considerable. Most
publicly-held corporations, including the Company, have obtained insurance
protecting the corporation, its directors and officers against the costs of such
litigation and related expenses. However, the insurance typically contains
significant exclusions from coverage. This has had the result of increasing the
personal exposure of directors and officers and has made it increasingly
difficult for corporations to attract or retain qualified directors.
The California Corporations Code ("Code") permits the elimination or
limitation of personal liability of directors for monetary damages and allows
corporations to provide for indemnification of officers, directors and other
corporate agents to a greater extent than expressly provided under California
law. The Company's Board of Directors has approved an amendment to the Company's
Articles of Incorporation (the "Company Article Amendment") which would
eliminate personal liability of directors for monetary damages for a breach of
such directors' fiduciary duty of care to the fullest extent permitted under
California law and would allow the Company to expand the scope of its
indemnification of directors, officers and employees. Attached to this Proxy
Statement as Appendix C is Article Five which will be added to the Company's
Articles of
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<PAGE> 15
Incorporation pursuant to the Company Article Amendment. See also "Approval of
Bylaw Amendment Regarding Indemnification" and "Approval of Indemnification
Agreements."
The limited liability provisions of the Company Article Amendment will not
apply retroactively, but will become effective when the Company Article
Amendment is accepted for filing by the California Secretary of State. Those
aspects of the Legislation which provide protection beyond that permitted by
prior law will be subject to judicial interpretation and therefore the validity
and scope of such protection may be uncertain.
PRINCIPAL REASONS FOR THE COMPANY ARTICLE AMENDMENT
The Code permits a California corporation to adopt a provision in its
articles of incorporation eliminating or limiting the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of the director's duties to the corporation and its shareholders, provided that
such liability does not arise from certain proscribed conduct. The Code provides
the foregoing described protection only with respect to actions brought by or in
the right of the corporation and does not apply to claims brought by outside
parties or a shareholder seeking to recover on such shareholder's own behalf.
The Code also permits a corporation to include a provision in its articles
of incorporation enabling the corporation to indemnify its directors, officers,
employees and other agents ("Agents") under a broader range of circumstances
than those expressly provided for under Section 317 of the Code. A corporation
that has enabling language in its articles of incorporation may include in its
bylaws, and in agreements between the corporation and its Agents, provisions
expanding the scope of indemnification beyond that specifically provided by
California law.
The Board of Directors of the Company has determined that it is in the best
interests of the Company and its shareholders to amend the Company's Articles of
Incorporation to take advantage of the additional protections afforded by the
Code. To date the Company has not experienced difficulty in attracting and
retaining qualified individuals to serve as directors. However, the Company
expects to continue to seek individuals to serve as directors of the Company and
believes that such persons will be less willing to serve as directors if they
are not afforded additional protection from liability. The Company's Board of
Directors believes that the ability to continue to attract and retain
experienced individuals to serve as directors will be enhanced by providing to
directors increased protection from the risk of litigation and personal
liability.
In order to provide further protection, the Board of Directors of the
Company has approved an amendment to the Bylaws of the Company and
indemnification agreements to be entered into between the Company and its
directors and the Company and its officers. The Bylaw amendment of the Company
is in the form attached as Appendix D. The Indemnification Agreement will be
substantially identical to the form of Indemnification Agreement attached hereto
as Appendix E. See "Approval of Bylaw Amendment Regarding Indemnification" and
"Approval of indemnification Agreements."
The Company Article Amendment will have no effect on the liability of a
director for acts or omissions which occur prior to the date when the Company
Article Amendment becomes effective. It should be noted, however, that the
indemnification agreements proposed to be approved at the Annual Meeting will
provide for certain indemnification against liabilities arising out of acts or
omissions that occurred prior to the effectiveness of the agreements, assuming
the required standard of conduct has been met. See "Approval of Indemnification
Agreements."
POSSIBLE DISADVANTAGES
If the Company Article Amendment is approved by the shareholders at the
Annual Meeting and filed with the California Secretary of State, a director will
not be liable for monetary damages in an action brought by or in the right of
the corporation for breach of such director's fiduciary duty of care, including
a breach that constitutes negligence or even gross negligence, provided such
breach does not involve certain proscribed conduct. See "Changes to be Effected
by the Amendment" below. Directors would remain liable, however, for the matters
enumerated under "Changes to be Effected by the Amendment" and the shareholders
and the Company would retain the right to pursue equitable remedies, such as
injunctions and rescission of contracts.
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<PAGE> 16
As a result of the broadening of the Company's obligation to indemnify its
directors and officers and the amendment to the Company's Bylaws and the
proposed Indemnification Agreements, it is more likely that a suit against
directors or officers will result in full or partial indemnification by the
Company than it would without such indemnification provisions in the Articles of
Incorporation and Bylaws or without the proposed Indemnification Agreements. In
addition, as a result of the Company Article Amendment, the shareholders of the
Company will be surrendering certain significant rights to claim damages from
the directors or officers. Accordingly, the Company Article Amendment may reduce
the likelihood of shareholders or management bringing a lawsuit against
directors or the shareholders bringing a lawsuit against the officers on behalf
of the Company for a breach of fiduciary duty even though such an action, if
successful, might otherwise have benefited the Company and its shareholders.
Finally, inasmuch as the directors may benefit from the limitation of liability
for monetary damages, there is an inherent conflict of interest in approval of
the Company Article Amendment as well as the proposed Bylaw amendment of the
Company and the proposed indemnification agreements. The shareholders should
recognize that the directors have a direct personal interest in the approval of
such actions, which could be considered potentially at variance with the
interests of the shareholders.
CHANGES TO BE EFFECTED BY THE AMENDMENT
The following discussion summarizes certain material differences between
the Company's Articles of Incorporation as proposed to be amended and its
Articles of Incorporation as currently in effect.
Limitation of Liability. The Company Article Amendment would eliminate the
personal liability of a director to the Company or its shareholders for monetary
damages in an action brought by or in the right of the corporation arising out
of a director's breach of his or her duty to care, to the fullest extent
permissible under California law. Liability for a breach of the duty of care
arises when directors have failed to exercise sufficient care in reaching
decisions or otherwise attending to their responsibilities as directors. The
Company Article Amendment does not eliminate the duty to care; it only
eliminates monetary damage awards occasioned by a breach of that duty.
Accordingly, if the Company Article Amendment is approved by the shareholders
and filed with the California Secretary of State, a breach of the duty of care
would remain a valid basis for a suit seeking to stop a proposed transaction
from occurring. It should be noted; however, that equitable remedies such as
rescission may not as a practical matter be available in many circumstances,
including, for example, after a transaction has already been consummated.
Notwithstanding the foregoing, the Code does not permit the Company to
limit or eliminate a director's personal liability for monetary damages based on
claims arising out of any of the following:
(1) Acts or omissions that involve intentional misconduct or a knowing
and culpable violation of the law;
(2) Acts or omissions that a director believes to be contrary to the
best interests of the Company or its shareholders or that involve the
absence of good faith on the part of the director;
(3) Any transaction from which the director derived an improper
personal benefit;
(4) Acts or omissions that show a reckless disregard for the
director's duty to the Company or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to
the Company or its shareholders;
(5) Acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Company or its shareholders;
(6) Transactions between the Company and a director or between
corporations that have a common director that do not comply with Section
310 of the Code; or
(7) The unlawful repurchase or redemption of stock, the payment of
unlawful dividends or the making of any distribution, loan or guarantee, in
violation of Section 316 of the Code.
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The limitations of liability of the proposed Company Article applies only
to directors and does not purport to eliminate or limit the liability of
officers of the Company, including officers who are also directors, for any act
or omission as an officer, notwithstanding that the officer's actions, if
negligent or improper, have been ratified by the Company's Board of Directors.
Indemnification of Directors and Officers. The Code also permits a
corporation to indemnify its directors and officers under a broader range of
circumstances than expressly provided under California law if the corporation
includes a provision in its articles of incorporation authorizing the
corporation to indemnify its directors and officers in excess of that provided
by Section 317 of the Code. The Code provides, however, that a corporation may
not indemnify its directors or officers for those acts, omissions or
transactions for which a director or officer cannot be relieved of liability
under the Code. See "Changes to be Effected by the Amendment -- Limitation of
Liability." In addition, the Code prohibits a corporation from indemnifying its
directors or officers as to circumstances in which indemnity is expressly
prohibited by Section 317.
The Company Article Amendment, together with the amended Bylaws of the
Company, if approved, will provide that (i) the Company is required to indemnify
its directors and officers to the fullest extent permitted by law, including
those circumstances in which indemnification would otherwise be discretionary
under Section 317; (ii) the Company is required to advance expenses to its
directors and officers as incurred, including expenses relating to obtaining a
determination that such directors or officers are entitled to indemnification,
provided that they undertake to repay the amount advanced if it is ultimately
determined that they are not entitled to indemnification; (iii) the Company is
authorized to enter into indemnification agreements with its directors and
officers; and (iv) the Company may not retroactively amend the Bylaw provision
in a way which is adverse to persons entitled to indemnity thereunder.
The Board of Directors has amended the Company's Bylaws to require
indemnification of directors and officers of the Company to the fullest extent
permitted under California law. For a detailed description of the Bylaw
amendment, see "Approval of Bylaw Amendment Regarding Indemnification." In
addition, if the Company Article Amendment becomes effective, the Company
intends to enter into indemnification agreements with directors and officers
substantially identical to the form of Indemnification Agreement attached hereto
as Appendix E. Each agreement would constitute a binding, legal obligation of
the Company and could not be amended without the consent of the individual who
is protected by such agreement. For a detailed description of the provisions of
such agreements, including material exclusions and/or limitations on the
indemnification permitted by the agreements, see "Approval of Indemnification
Agreements."
VOTE REQUIRED
Approval of the Company Article Amendment will require the affirmative vote
of a majority of the shares of the Company's Common Stock outstanding as of the
record date.
The Company's Board of Directors has approved the proposed Company Article
Amendment and recommends that shareholders vote FOR the proposed Company Article
Amendment.
APPROVAL OF BYLAW AMENDMENT REGARDING INDEMNIFICATION
PROPOSAL 5
The Company's Board of Directors has adopted an amendment to Article VI of
the Company's Bylaws (the "Company Bylaw Amendment"), which provides generally
that the Company shall, to the broadest and maximum extent permitted by law,
indemnify each director and officer with respect to liabilities and expenses
incurred in connection with derivative claims and third party claims. The text
of Article VI is attached to this Proxy Statement as Appendix D.
INDEMNIFICATION UNDER EXISTING BYLAWS
The Company's current Bylaws provide that the Company shall, to the maximum
extent permitted by the General Corporation Law of California, indemnify each of
its directors and officers against expenses,
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<PAGE> 18
judgements, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of the fact any
such person is or was a director or officer of the company and shall advance to
such director or officer expenses incurred in defending any such proceeding to
the maximum extent permitted by such law. Additionally, the Bylaws provide that
the Company will indemnify a director or officer of the Company who is or was
serving at the request of the Company as a director or officer of another
corporation, or other enterprise, or was a director or officer of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation. The Bylaws further provide that
the Board of Directors may, in its discretion, provide by resolution for such
indemnification of, or advance of expenses to, other agents of the Company, and
likewise may refuse to provide for such indemnification or advance of expenses
except to the extent such indemnification is mandatory under the California
General Corporation Law.
BYLAW AMENDMENT
The Company Bylaw Amendment provides that the Company will, to the broadest
and maximum extent permitted by law, indemnify each person who was or is a party
or is threatened to be made a party to any proceeding by reason of the fact that
such person is or was a director or officer of another corporation or other
enterprise, against expenses (including attorneys' fees), judgements, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding. In addition, the Company will, to the broadest and maximum
extent permitted by law, promptly upon demand advance to such person any and all
expenses (including attorneys' fees) incurred in defending or settling any such
proceeding so long as such person undertakes to repay such amount if it is
ultimately determined that such person is not entitled to such indemnification.
In the event that the Company fails to pay or advance such expenses to the
director or officer, the director or officer will be entitled to bring suit for
such expenses against the Company, and if successful, in whole or in part, shall
be entitled to recover the expenses (including attorneys' fees) of prosecuting
such claims against the Company. Notwithstanding the foregoing, it shall be a
defense to such an action (except for an action brought to enforce a claim for
expenses incurred in defending any claim for advancement of expenses where the
required undertaking has been tendered to the Company) that the claimant has not
met the standards of conduct required by the Code. See "California Law Regarding
Indemnification." The burden of proving such defense by clear and convincing
evidence shall be on the Company.
With respect to other employees or agents of the Company, the Board of
Directors of the Company may in its discretion provide by resolution for such
indemnification of or the advancement of expenses to such persons and likewise
may refuse to provide for such indemnification or advancement of expenses to the
extent such indemnification is mandatory under the California General
Corporation Law.
Any rights to indemnification under the Bylaws shall not be exclusive of
any other right to indemnification under any statute, the Company's Articles of
Incorporation or any other agreement or vote of the shareholders or
disinterested directors or otherwise. The right to indemnification shall
continue after a director's or officer's term of office with respect to acts or
omissions during such person's term of office. In addition, any amendment which
limits or otherwise adversely affects any such person entitled to
indemnification shall apply only to claims arising after such amendment and
delivery of notice of such amendment to the person affected.
CALIFORNIA LAW REGARDING INDEMNIFICATION
The Company is subject to the Code, which provides a detailed statutory
framework covering indemnification of any agent of the Company who is made or
threatened to be made a party to any legal proceeding by reason of his or her
service on behalf of the Company or its subsidiaries. California law provides
that indemnification against expenses actually and reasonably incurred in
connection with any such proceeding shall be made to any such person who has
been successful "on the merits" in the defense of any such proceeding, but does
not require indemnification in any other circumstance. For example, California
law provides that a corporation may indemnify any agent of the corporation
against expenses, judgements, fines
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<PAGE> 19
settlements and other amounts actually and reasonably incurred in a proceeding
against such person by reason of his or her service on behalf of the corporation
(other than a proceeding brought by or in the right of the corporation),
provided the person acted in good faith and in a manner he or she reasonably
believed to be in the best interests of the corporation (and, in a criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful).
California law further provides that in proceedings brought by or in the right
of the corporation, the corporation may indemnify such a person against expenses
actually and reasonably incurred in connection with the defense or settlement of
such a proceeding, provided such person acted in good faith and in a manner he
or she reasonably believed to be in the best interests of the corporation and
its shareholders. Indemnification is not available in proceedings brought by or
in the right of the corporation (i) for amounts paid or expenses incurred in
connection with a matter that is settled or otherwise disposed of without court
approval or (ii) with respect to matters for which the agent shall have been
adjudged to be liable to the corporation unless and only to the extent the court
shall determine that such person is entitled to indemnification.
California law permits the advancing of expenses incurred in defending any
proceeding against an Agent by reason of his or her service on behalf of a
corporation upon the agent undertaking to repay any such sums in the event it is
later determined that he or she is not entitled to be indemnified. California
law, further provides that the indemnification provided by Section 317 of the
Code is not exclusive of other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, to the extent additional rights are authorized in the
corporation's articles of incorporation. See "Approval of Amendment of Articles
of Incorporation Regarding Indemnification -- Changes to be Effected by the
Amendment." California law further permits the corporation to procure insurance
on behalf of its Agents against any liability incurred by any such person, even
if the corporation would not otherwise have the power under applicable law to
indemnify the Agent against such liability.
In view of the frequency and magnitude of claims asserted against directors
and officers and the risks of personal liability and expense to the Company's
directors and officers, the Company's Board of Directors believe that the
Company Bylaw Amendment is an appropriate measure toward ensuring that the
Company will be able to retain and attract capable persons to serve as directors
and officers. For a complete discussion of the advantages and disadvantages of
expanded indemnification, see "Approval of Amendment to Articles of
Incorporation -- Principal Reasons for the Company Article Amendment" and
"Approval of Amendment to Articles of Incorporation -- Possible Disadvantages."
VOTE REQUIRED
The Board of Directors of the Company is authorized by the Articles of
Incorporation of the Company to adopt amendments to the Company's Bylaws and
under this authority has adopted the Company Bylaw Amendment. Although
shareholder approval of the Company Bylaw Amendment is not required, the Board
of Directors is seeking this approval because each of the directors is
potentially benefited by the amendment and therefore might be considered to have
a personal interest in this matter. Approval of this proposal by the affirmative
vote of a majority of the shares of Common Stock voting on this proposal at the
meeting, with shares owned by the interested directors not entitled to vote
thereon, will therefore insulate the Company Bylaw Amendment against challenges
to legality in most instances. The Company Bylaw Amendment will become effective
upon such approval of the Company's shareholders.
The Company's Board of Directors has approved the proposed Company Bylaw
Amendment and recommends that shareholders vote FOR the proposed Company Bylaw
Amendment.
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APPROVAL OF INDEMNIFICATION AGREEMENTS
PROPOSAL 6
GENERAL
The shareholders are being asked to approve and ratify proposed
Indemnification Agreements (the "Indemnification Agreement") in substantially
the form attached hereto as Appendix E. Such Indemnification Agreements will be
entered into between the Company and its directors, including future directors
and between the Company and its officers, including future officers.
The Board of Directors believes that the Indemnification Agreements will
serve the best interests of the Company and its shareholders by strengthening
the Company's ability to attract and retain knowledgeable and experienced
persons to serve as directors and officers. See "Approval of Amendment to
Articles of Incorporation -- Principal Reasons for the Company Article
Amendment" and "Approval of Amendment to Articles of Incorporation -- Possible
Disadvantages."
INDEMNIFICATION AGREEMENTS
The proposed Indemnification Agreements attempt to provide to the directors
and officers of the Company the maximum indemnification allowed under applicable
law and under the Company's Articles of Incorporation, as proposed to be
amended. The Indemnification Agreements provide for indemnification under a
broader range of circumstances than those specifically provided by Section 317
Code. It has not yet been determined; however, to what extent the
indemnification expressly permitted by Section 317 may be expanded by agreement
or otherwise and, therefore, the scope of indemnification provided by the
Indemnification Agreements may be subject to future judicial interpretation.
Any award of indemnification would come directly from the assets of the
Company, thereby affecting a shareholder's investment. It should be noted that
if the Indemnification Agreements are approved by the shareholders, they will by
their terms apply to conduct occurring prior to the effective date of such
agreements. However, under California law, indemnification may not be
permissible for acts occurring prior to the filing of the Company Article
Amendment with the California Secretary of State if such indemnification exceeds
the scope of Section 317.
The Indemnification Agreements set forth a number of procedural and
substantive matters which are not addressed or are addressed in less detail in
Section 317, including the following:
1. The Indemnification Agreements in effect establish the presumption
that the indemnified party has met the applicable standard of conduct
required for indemnification. Section 317 requires a finding in each
specific case by the corporation that the applicable standard of conduct
has been met.
2. The Indemnification Agreements provide that litigation expense
shall be advanced to an indemnified party at his or her request provided
that he or she undertakes to repay the amount advanced if it is ultimately
determined that he or she is not entitled to indemnification for such
expenses. Section 317 provides that advancement of expenses by a
corporation is discretionary.
3. In the event the Company does not pay an indemnified party within
30 days of such person's written request, the Indemnification Agreements
allow the indemnified party to bring an action against the Company to
recover the unpaid amount of the claim. In such an action, the burden of
proving that the indemnified party did not meet the applicable standard of
conduct will be on the Company; if the Company fails to establish that the
applicable standard of conduct has not been met in such case, the
indemnified party will be entitled to indemnification, which will include
reimbursement for expenses incurred by the indemnified party in such
action. Section 317 does not set forth any procedure for contesting a
Company's determination of a party's right to indemnification or establish
which party bears the burden of proof with respect to a challenge to such a
determination.
4. The Indemnification Agreements explicitly provide for partial
indemnification of costs and expenses in the event that an indemnified
party is not entitled to full indemnification under the terms of
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the Indemnification Agreements. Section 317 does not specifically address
this issue. Section 317 does, however, provide that to the extent that an
indemnified party has been successful on the merits, he shall be entitled
to such indemnification.
5. The Indemnification Agreements automatically incorporate future
changes in the law which increase the protection available to the
indemnitee. Such changes will apply to the Company without further
shareholder approval and may further impair shareholders' rights or subject
the Company's assets to risk of loss in the event of large indemnification
claims.
6. The Indemnification Agreements explicitly provide that actions by
an indemnified party serving at the request of the Company as a director or
officer of a corporation, or other enterprise owned or controlled by the
Company, shall be covered by the indemnification. Section 317 provides that
a corporation may so indemnify such parties. It should be noted that by
agreeing by contract to indemnify such parties, the Company may be exposed
to liability for actions of an entity over which it may not exercise
control, which liability could adversely affect the Company's financial
position.
The proposed Indemnification Agreements together with the limitation on the
directors' liability to be provided by the Company Article Amendment and the
Company Bylaw Amendment, reduce significantly the number of instances in which
directors or officers might be held personally liable to the Company for
monetary damages for breach of their fiduciary duties. Therefore, it should be
noted that the current directors of the Company have a direct personal interest
in the approval of the Indemnification Agreements. See "Approval of Amendment to
Articles of Incorporation -- Possible Disadvantages."
THE FOREGOING DISCUSSION OF THE INDEMNIFICATION AGREEMENTS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FORM OF INDEMNIFICATION AGREEMENT ATTACHED TO
THIS PROXY STATEMENT AS APPENDIX E, WHICH YOU ARE URGED TO READ AND CONSIDER
CAREFULLY.
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT OF 1933
The Securities and Exchange Commission has expressed its opinion that
indemnification of directors, officers and controlling persons of the Company
against liabilities arising under the Securities Act of 1933, as amended (the
"Act"), is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director or officer of the Company in the successful defense of any such
action, suit or proceeding) is asserted by such director or officer in
connection with securities which have been registered, the Company will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court or appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
VOTE REQUIRED
Section 310 of the Code provides that no contract between a corporation and
one or more of its directors is either void or voidable because such director or
directors are parties to such contract if either (i) the material facts as to
the transaction and as to such director's interest are fully disclosed or known
to the shareholders and such contract is approved by the affirmative vote of a
majority of the shares of Common Stock entitled to vote, with the shares owned
by the interested directors not entitled to vote thereon, or (ii) the material
facts as to the transaction and as to such director's interest are fully
disclosed or known to the Board of Directors, or a committee of the Board of
Directors, and a disinterested majority of the Board or such committee approves
the contract in good faith and the contract is just and reasonable to the
corporation at the time it is approved. If the contract has not been approved as
set forth in either (i) or (ii) above, the contract is not void or voidable if
the person asserting the validity of the contract sustains the burden of proving
that the contract was just and reasonable to the corporation at the time it was
authorized.
Although the Company believes that the form of Indemnification Agreement is
just and reasonable to the Company, and that shareholder approval may not
therefore be required to validate the Indemnification
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Agreements, the Company believes that it is appropriate to submit the
Indemnification Agreements to the shareholders for their consideration. If the
Indemnification Agreements are approved by the shareholders in the manner set
forth in clause (i) of the preceding paragraph, they will not be void or
voidable and the Company's shareholders may not later assert a claim that the
Indemnification Agreements are invalid due to improper authorization; however,
the shareholders may challenge the validity of the Indemnification Agreements on
other grounds. If the Indemnification Agreements are not so approved by the
shareholders, the Company may reconsider the implementation of such agreements.
If such agreements were implemented in the absence of shareholder approval, the
invalidity of such agreements could thereafter be asserted by any shareholder.
In such an instance, the person asserting the validity on the contracts bears
the burden of proving that they were just and reasonable to the corporation at
the time they were authorized.
The Company's Board of Directors has approved the Indemnification
Agreements and recommends that shareholders vote FOR the approval of the
Indemnification Agreements.
OTHER MATTERS
All shareholders of record at the close of business on April 27, 1998, 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,
1997.
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. The Company has retained the services of ChaseMellon Shareholder
Services L.L.C. to assist in the solicitation of proxies at a cost not to exceed
$8,000. 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.
Management expects a representative from the Company's independent
auditors, Arthur Andersen LLP, to attend the meeting.
Shareholder proposals for presentation at the 1999 Annual Meeting must be
received by the Company no later than January 1, 1999 to be considered for
inclusion in the 1999 proxy and proxy statement.
By order of the Board of Directors,
/S/ M. MARK MICHALKO
M. Mark Michalko
President
Carlsbad, California
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<PAGE> 23
APPENDIX A
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
A CALIFORNIA CORPORATION
M. Mark Michalko and Lawrence E. Logue certify that:
1. They are the President and Secretary of International Lottery &
Totalizator Systems, Inc., a California corporation.
2. The Articles of Incorporation of said corporation shall be amended by
revising Article Four to read as follows:
"FOUR: This corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock," and referred
to either as Common Stock or Common shares and Preferred Stock or Preferred
shares, respectively. The authorized number of shares of Common Stock is
50,000,000. Upon the amendment of this Article, each outstanding share of
Common Stock is converted into 0.333 shares.
The authorized number of shares of Preferred Stock is 20,000,000. The
Preferred Stock may be issued from time to time in one or more series. The
Board of Directors is authorized to fix the number of shares of any series
of Preferred Stock and to determine the designation of any such series. The
Board of Directors is also authorized to determine or alter the rights,
privileges, designations, preferences and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and, within the
limits and restrictions stated in any resolution or resolutions of the
Board of Directors originally fixing the number shares constituting any
series, to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any such series subsequent
to the issue of shares of that series."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the California Corporations Code. The total number of outstanding shares is
18,027,548. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: June 1, 1998
--------------------------------------
M. Mark Michalko, President
--------------------------------------
Lawrence E. Logue, Secretary
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<PAGE> 24
APPENDIX B
Article III Section 2 of the Bylaws of the Corporation shall be amended as
follows:
SECTION 2. Number and Qualification of Directors. The number of directors
of the corporation shall be not less than seven (7) nor more than thirteen (13).
The exact number of directors shall be nine (9). The exact number of directors
may be changed, within the limits specified above by a by-law amending this
Section 2, duly adopted by the Board of Directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this by-law duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the number or
the minimum number of directors to a number less than five (5) cannot be adopted
if the votes cast against its adoption at a meeting of the shareholders, or the
shares not consenting in the case of action by written consent, are equal to
more than 16 2/3% of the outstanding shares entitled to vote. No amendment may
change the stated maximum number of authorized directors to a number greater
than two times the stated minimum number of directors minus one.
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<PAGE> 25
APPENDIX C
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
A CALIFORNIA CORPORATION
M. Mark Michalko and Lawrence E. Logue certify that:
1. They are the President and Secretary of International Lottery &
Totalizator Systems, Inc., a California corporation.
2. The Articles of Incorporation of the Corporation shall be amended to add
an Article Five to provide as follows:
"FIVE: (a) The liability of the directors of the corporation for
monetary damages shall be eliminated to the fullest extent permissible
under California law.
(b) The corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) through
bylaw provisions, agreements with agents, vote of shareholders or
disinterested directors or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations Code,
subject only to applicable limits set forth in Section 204 of the
California Corporations Code with respect to actions for breach of duty to
the corporation and its shareholders.
(c) Any repeal or modification of this Article Five shall be
prospective and shall not affect the rights of indemnification or
limitation of liability in effect at the time of the alleged occurrence of
any act or omission to act giving rise to liability or indemnification."
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of the Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the California Corporations Code. The total number of outstanding shares is
18,027,548. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: June 1, 1998
--------------------------------------
M. Mark Michalko, President
--------------------------------------
Lawrence E. Logue, Secretary
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APPENDIX D
Article VI of the Bylaws of the Corporation shall be amended as follows:
ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
SECTION 1. Scope of Indemnification. (a) The corporation shall, to the
broadest and maximum extent permitted by law, indemnify each person who was or
is a party or is threatened to be made a party to any proceeding by reason of
the fact that such person is or was a director or officer of the corporation, or
is or was serving at the request of the corporation as a director or officer of
another corporation or other enterprise, against expenses (including attorneys'
fees), judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with such proceeding. In addition, the corporation shall,
to the broadest and maximum extent permitted by law, promptly demand pay to such
person any and all expenses (including attorneys' fees) incurred in defending or
settling any such proceeding in advance of the final disposition of such
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount if it shall ultimately be determined by a final
judgment or other final adjudication that such person is not entitled to be
indemnified by the corporation as authorized in this Section 1.
(b) If a claim under paragraph (a) of this Section 1 is not paid in full by
the corporation within 45 days after a written claim has been received by the
corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall also be entitled to be paid the expenses of
prosecuting such claim, including attorneys' fees. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking has been tendered to the corporation) that the claimant
has not met the standards of conduct which make it permissible under the
California Corporations Code for the corporation to indemnify the claimant for
the amount claimed, but the burden of proving such defense by clear and
convincing evidence shall be on the corporation.
(c) The Board of Directors may in its discretion provide by resolution for
such indemnification of, or advance of expenses to, other employees or agents of
the corporation, and likewise may refuse to provide for such indemnification or
advance of expenses except to the extent such indemnification is mandatory under
the California General Corporation Law.
SECTION 2. Non-exclusivity of Rights. The rights to indemnification and to
the advancement of expenses conferred in this Article VI shall be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the corporation's articles of incorporation or any bylaw, agreement,
vote of shareholders or disinterested directors or otherwise.
SECTION 3. Terms and Heirs. The rights to indemnification and advancement
of expenses conferred in this Article VI shall continue as to any person who has
ceased to be a director or officer with respect to any acts or omissions that
occurred during the time such person was a director or officer and shall inure
to the benefit of the heirs, executors and administrators of each such person.
SECTION 4. Severability. If any provision of this Article VI shall be
found, in any proceeding or appeal therefrom or in any other circumstances or as
to any person entitled to indemnification hereunder to be unenforceable,
ineffective or invalid for any reason, the enforceability, effect and validity
of the remaining part or parts in other circumstances shall not be affected,
except as otherwise required by applicable law.
SECTION 5. Amendments. The provisions of this Article VI shall be deemed to
constitute an agreement between the corporation and each of the persons entitled
to indemnification hereunder, for as long as such provisions remain in effect.
Any amendment to the provisions of this Article VI which limits or otherwise
adversely affects the scope of indemnification or rights of any such persons
hereunder shall, as to such persons, apply only to claims or causes of action
based on actions or events occurring after such amendment and delivery of notice
of such amendment is given to the person or persons so affected. Until notice of
such amendment is given to the person or persons whose rights hereunder are
affected, such amendment shall have no effect on such rights of such persons
hereunder. Any person entitled to indemnification under the provisions of this
Article VI shall as to any act or omission occurring prior to the date of
receipt of such notice, be entitled to indemnification to the same extent as had
such provisions continued as Bylaws of the corporation without such amendment.
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APPENDIX E
INDEMNIFICATION AGREEMENT
The text of the Indemnification Agreement proposed is to be entered into
between the Company and each of its officers, directors and certain other agents
will provide as follows:
THIS AGREEMENT is entered into as of between International
Lottery & Totalizator Systems, Inc., a California corporation (the
"Corporation"), and ("Indemnitee").
RECITALS
A. The Corporation believes that it is essential to its best interests to
attract and retain highly capable persons to serve as directors, officers, and
agents.
B. Indemnitee is or has been selected to be a director, officer, or agent
of the Corporation.
C. The Corporation and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors, officers, and
other agents of the Corporation.
D. In recognition of Indemnitee's need for substantial protection against
personal liability in order to enhance Indemnitee's service to the Corporation,
and in order to induce Indemnitee to provide or continue to provide services to
the Corporation as a director, officer, or agent, the Corporation wishes to
provide in this Agreement for the indemnification and the advancing of expenses
to Indemnitee to the fullest extent permitted by law and as set forth in this
Agreement and, to the extent applicable, for the coverage of Indemnitee under
the Corporation's policies of directors' and officers' liability insurance.
IN CONSIDERATION of the foregoing and of Indemnitee's providing services to
the Corporation directly or, at its request, with another enterprise, the
parties agree as follows:
1. DEFINITIONS.
1.1. Board: The board of directors of the Corporation.
1.2. Change in Control: A state of affairs that shall be deemed to have
occurred if:
(i) Any person, other than Berjaya Lottery Management (H.K.) Limited
or its affiliates, is or becomes the "beneficial owner" (as that term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), directly or indirectly, of securities representing
twenty percent (20%) or more of the total voting power of the Corporation's
then-outstanding voting securities;
(ii) During any period of two consecutive years, individuals who, at
the beginning of such period constitute the board, together with any new
director whose election by the board or nomination for election by the
Corporation's shareholders was approved by a vote of at least two-thirds
( 2/3) of the directors then in office either who were directors at the
beginning of the two-year period, or whose election or nomination was
previously so approved, cease for any reason to constitute a majority of
the board;
(iii) The shareholders of the Corporation approve a merger or
consolidation of the Corporation with any other Corporation, other than a
merger or consolidation that would result in the voting securities of the
Corporation outstanding immediately before such merger or consolidation
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least eighty
percent (80%) of the total voting power represented by the voting
securities of the corporation or such surviving entity outstanding
immediately after such merger or consolidation; or
(iv) The shareholders of the Corporation approve a plan of complete
liquidation of the Corporation, or an agreement for the sale or disposition
by the Corporation (whether in one transaction or a series of transactions)
of all or substantially all of the Corporation's assets.
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1.3. Expenses:
(i) Any expense, liability, or loss, including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties, or amounts paid or to
be paid in settlement;
(ii) Any interest, assessments, or other charges imposed on any of the
items in subparagraph (i) above; and
(iii) Any federal, state, local, or foreign taxes imposed as a result
of the actual or deemed receipt of any payments under this Agreement paid
or incurred in connection with investigating, defending, being a witness
in, participating in (including on appeal), or preparing for any of the
foregoing in, any proceeding relating to any Indemnifiable Event.
1.4. Indemnifiable Event: Any event or occurrence that takes place either
before or after the execution of this Agreement, related to the fact that
Indemnitee is or was a director or an officer of the Corporation, or while a
director or officer is or was serving at the request of the Corporation as a
director, officer, employee, trustee, agent, or fiduciary of another foreign or
domestic corporation, partnership, joint venture, employee benefit plan, trust,
or other enterprise, or was a director, officer, employee, or agent of a foreign
or domestic corporation that was a predecessor corporation of the Corporation or
another enterprise at the request of such predecessor corporation, or related to
anything done or not done by Indemnitee in any such capacity, whether the basis
of the proceeding is an alleged action in an official capacity as a director,
officer, employee, or agent, or in any other capacity while serving as a
director, officer, employee, or agent of the Corporation, as described in this
paragraph.
1.5. Independent Counsel: The person or body appointed in connection with
Section 3.
1.6. Person: "person" (as that term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Corporation acting in such capacity or a
Corporation owned, directly or indirectly, by the shareholders of the
Corporation in substantially the same proportions as their ownership of shares
of the Corporation at the date of this Agreement.
1.7. Participant: A person who is a party to, or witness or participant
(including on appeal) in, a Proceeding.
1.8. Potential Change in Control: A state of affairs that shall be deemed
to exist if:
(i) The Corporation enters into an agreement or arrangement, the
consummation of which would result in the occurrence of a Change in
Control;
(ii) Any Person (including the Corporation) announces publicly an
intention to take or to consider taking actions that, if consummated, would
constitute a Change in Control;
(iii) Any Person who is or becomes the beneficial owner, directly or
indirectly, of securities of the Corporation representing 10 percent or
more of the combined voting power of the Corporation's then-outstanding
voting securities, increases his or her beneficial ownership of such
securities by five percent (5%) or more over the percentage owned by such
person on the date of this Agreement; or
(iv) The Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
1.9. Proceeding: Any threatened, pending, or completed action, suit, or
proceeding, or any inquiry, hearing or investigation, whether conducted by the
Corporation or any other party, that Indemnitee in good faith believes might
lead to the institution of any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
1.10. Reviewing Party: The person or body appointed in accordance with
Section 3.
1.11. Voting Securities: Any securities of the Corporation that have the
right to vote generally in the election of directors.
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2. AGREEMENT TO INDEMNIFY.
2.1. General Agreement. In the event Indemnitee was, is, or becomes a
participant in, or is threatened to be made a participant in, a Proceeding by
reason of (or arising in part out of) an Indemnifiable Event, the Corporation
shall indemnify the Indemnitee from and against any and all Expenses to the
fullest extent permitted by law, as the same exists or may hereafter be amended
or interpreted (but in the case of any such amendment or interpretation, only to
the extent that such amendment or interpretation permits the Corporation to
provide broader indemnification rights than were permitted before this
Agreement). The parties to this Agreement intend indemnification in excess of
that expressly permitted by statute, including, without limitation, any
indemnification provided by the Corporation's articles of incorporation, its
bylaws, a vote of its shareholders or disinterested directors, or applicable
law.
2.2. Initiation of Proceeding. Notwithstanding anything in this Agreement
to the contrary, Indemnitee shall not be entitled to indemnification under this
Agreement in connection with any Proceeding initiated by Indemnitee against the
Corporation or any director or officer of the Corporation unless (i) the
Corporation has joined in or the Board has consented to the initiation of such
Proceeding; (ii) the Proceeding is one to enforce indemnification rights under
Section 5; or (iii) the Proceeding is instituted after a Change in Control and
Independent Counsel has approved its initiation.
2.3. Expense Advances. If so requested by Indemnitee, the Corporation
shall within ten business days of such request, advance all Expenses to
Indemnitee (an "Expense Advance"). Notwithstanding the foregoing, to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Corporation shall be entitled to be
reimbursed by Indemnitee for all such amounts, and Indemnitee hereby agrees to
reimburse the Corporation promptly for the same. If Indemnitee has commenced
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law as provided in
Section 4, any determination made by the Reviewing Party that Indemnitee would
not be permitted to be indemnified under applicable law shall not be binding,
and Indemnitee shall not be required to reimburse the Corporation for any
Expense Advance until a final judicial determination is made (as to which all
rights of appeal have been exhausted or have lapsed). Indemnitee's obligation to
reimburse the Corporation for Expense Advances shall be unsecured and no
interest shall be charged thereon.
2.4. Mandatory Indemnification. Notwithstanding any other provision of
this Agreement, to the extent that Indemnitee has been successful on the merits
in defense of any Proceeding relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter in such Proceeding, Indemnitee shall
be indemnified against all Expenses incurred in connection with such issue,
matter, or event.
2.5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Corporation for a portion
of Expenses, but not for the total amount of Expenses, the Corporation shall
indemnify the Indemnitee for the portion to which Indemnitee is entitled.
2.6. Prohibited Indemnification. No indemnification under this Agreement
shall be paid by the Corporation on account of any Proceeding in which judgment
is rendered against Indemnitee for an accounting of profits made from the
purchase or sale by Indemnitee of securities of the Corporation under the
provisions of Section 16(b) of the Exchange Act or similar provisions of any
federal, state, or local laws.
3. REVIEWING PARTY.
Before any Change in Control, the Reviewing Party shall be any appropriate
person or body consisting of a member or members of the Board or any other
person or body appointed by the Board who is not a party to the Proceeding with
respect to which Indemnitee is seeking indemnification; after a Change in
Control, the reviewing party shall be the Independent Counsel. With respect to
all matters arising after a Change in Control concerning the rights of
Indemnitee to indemnity payments and Expense Advances under this Agreement or
any other agreement or under applicable law or the Corporation's articles of
incorporation or bylaws now or hereafter in effect relating to indemnification
for Indemnifiable Events, the Corporation shall seek legal advice only from
Independent Counsel selected by Indemnitee and approved by the Corporation,
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the approval of whom shall not be unreasonably withheld, and who has not
otherwise performed services for the Corporation or Indemnitee (other than in
connection with indemnification matters) within the last five years. The
Independent Counsel shall not include any person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Corporation or Indemnitee in an action to
determine Indemnitee's rights under this Agreement. The counsel, among other
things, shall render a written opinion to the Corporation and Indemnitee as to
whether and to what extent Indemnitee should be permitted to be indemnified
under applicable law. The Corporation agrees to pay the reasonable fees of the
Independent Counsel and to indemnify fully such counsel against any and all
expenses, including attorneys' fees, claims, liabilities, loss, and damages
arising out of or relating to this Agreement or the engagement of Independent
Counsel under this Agreement.
4. INDEMNIFICATION PROCESS AND APPEAL.
4.1. Indemnification Payment. Indemnitee shall receive indemnification of
Expenses from the Corporation in accordance with this Agreement as soon as
practicable after Indemnitee has made written demand on the Corporation for
indemnification, unless the Reviewing Party has given a written opinion to the
Corporation that Indemnitee is not entitled to indemnification under this
Agreement or applicable law.
4.2. Suit To Enforce Rights. Regardless of any action by the Reviewing
Party, if Indemnitee has not received full indemnification within 30 days after
making a demand in accordance with Section 4.1 above, Indemnitee shall have the
right to enforce its indemnification rights under this Agreement by commencing
litigation in any court in the State of California seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect of the Agreement. The Corporation hereby consents to service
of process and to appear in any such proceeding. Any determination by the
Reviewing Party not challenged by Indemnitee shall be binding on the Corporation
and Indemnitee. The remedy provided in this Section 4.2 shall be in addition to
any other remedies available to Indemnitee in law or equity.
4.3. Defense to Indemnification, Burden of Proof, and Presumptions. It
shall be a defense to any action brought by Indemnitee against the Corporation
to enforce this Agreement (other than an action brought to enforce a claim for
Expenses incurred in defending a proceeding in advance of its final disposition
when the required undertaking has been tendered to the Corporation) that it is
not permissible under this Agreement or applicable law for the Corporation to
indemnify the Indemnitee for the amount claimed. In connection with any such
action or any determination by the Reviewing Party or otherwise as to whether
Indemnitee is entitled to be indemnified under this Agreement, the burden of
proving such a defense or determination shall be on the Corporation. Neither the
failure of the Reviewing Party or the Corporation (including its Board,
Independent Counsel, or its shareholders) to have made a determination prior to
the commencement of such action by Indemnitee that indemnification is proper
under the circumstances because Indemnitee has met the standard of conduct set
forth in applicable law, nor an actual determination by the Reviewing Party or
Corporation (including its Board, Independent Counsel, or its shareholders) that
Indemnitee had not met such applicable standard of conduct shall be a defense to
the action or create a presumption that Indemnitee has not met the applicable
standard of conduct. For purposes of this Agreement, the termination of any
claim, action, suit, or proceeding, by judgment, order, settlement (whether with
or without court approval), conviction, or on a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief, or that a court
has determined that indemnification is not permitted by applicable law.
5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING RIGHTS.
The Corporation shall indemnify the Indemnitee against, and if requested by
Indemnitee, the Corporation shall, within ten business days of such request,
advance to Indemnitee, all Expenses as are incurred by Indemnitee in connection
with any claim asserted against or action brought by Indemnitee for:
(a) Indemnification of Expenses or an Expense Advance by the
Corporation under this Agreement or any other agreement or under applicable
law or the Corporation's articles of incorporation or bylaws now or
hereafter in effect relating to indemnification for Indemnifiable Events,
or
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(b) Recovery under directors' and officers' liability insurance
policies maintained by the Corporation for amounts paid in settlement if
the Independent Counsel has approved the settlement.
The Corporation shall not settle any Proceeding in any manner that would
impose any penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Corporation nor Indemnitee will unreasonably withhold its
consent to any proposed settlement. The Corporation shall not be liable to
indemnify the Indemnitee under this Agreement with regard to any judicial award
if the Corporation was not given a reasonable and timely opportunity, at its
expense, to participate in the defense of such action; however, the
Corporation's liability under this Agreement shall not be excused if its
participation in the Proceeding was barred by this Agreement.
6. ESTABLISHMENT OF TRUST.
In the event of a Change in Control or a Potential Change in Control, the
Corporation shall, upon written request by Indemnitee, create a trust for the
benefit of the Indemnitee ("the Trust") and from time to time, upon written
request of Indemnitee, shall fund the Trust in an amount sufficient to satisfy
any and all Expenses reasonably anticipated at the time of each such request to
be incurred in connection with investigating, preparing for, participating in,
and/or defending any Proceeding relating to an Indemnifiable Event. The amount
or amounts to be deposited in the Trust under the foregoing funding obligation
shall be determined by the Reviewing Party. The terms of the Trust shall provide
that on a Change in Control, (i) the Trust shall not be revoked or the principal
invaded without the written consent of the Indemnitee, (ii) the Trustee shall
advance, within ten business days of a request by the Indemnitee, all Expenses
to the Indemnitee (provided that the Indemnitee hereby agrees to reimburse the
Trust under the same circumstances for which the Indemnitee would be required to
reimburse the Corporation under Section 2.3 above), (iii) the Trust shall
continue to be funded by the Corporation in accordance with the funding
obligation set forth in this Section 6, (iv) the Trustee shall promptly pay to
the Indemnitee all amounts for which the Indemnitee shall be entitled to
indemnification under this Agreement or otherwise, and (v) all unexpended funds
in the Trust shall revert to the Corporation on a final determination by the
Reviewing Party or a court of competent jurisdiction, as the case may be, that
the Indemnitee has been fully indemnified under the terms of this Agreement. The
Trustee shall be chosen by the Indemnitee. Nothing in this Section 6 shall
relieve the Corporation of any of its obligations under this Agreement. All
income earned on the assets held in the Trust shall be reported as income by the
Corporation for federal, state, local, and foreign tax purposes. The Corporation
shall pay all costs of establishing and maintaining the Trust, and shall
indemnify the Trustee against any and all expenses (including attorneys' fees),
claims, liabilities, loss, and damages arising out of or relating to this
Agreement or the establishment and maintenance of the Trust.
7. NONEXCLUSIVITY.
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under the Corporation's articles of
incorporation, bylaws, applicable law, or otherwise. To the extent that a change
in applicable law (whether by statute or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the
Corporation's articles of incorporation, bylaws, applicable law, or this
Agreement, it is the intent of the parties that Indemnitee enjoy by this
Agreement the greater benefits afforded by such change.
8. LIABILITY INSURANCE.
To the extent the Corporation maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Corporation director or
officer.
9. PERIOD OF LIMITATIONS.
No legal action shall be brought and no cause of action shall be asserted
by or on behalf of the Corporation or any affiliate of the Corporation against
Indemnitee, Indemnitee's spouse, heirs, executors, or
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<PAGE> 32
personal or legal representatives after the expiration of two years from the
date of accrual of such cause of action, or such longer period as may be
required by state law under the circumstances. Any claim or cause of action of
the Corporation or its affiliate shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such period;
provided, however, that if any shorter period of limitations is otherwise
applicable to any such cause of action, the shorter period shall govern.
10. AMENDMENT OF THIS AGREEMENT.
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties to this Agreement. No
waiver of any of the provisions of this Agreement shall operate as a waiver of
any other provisions (whether or not similar), nor shall such waiver constitute
a continuing waiver. Except as specifically provided in this Agreement, no
failure to exercise or any delay in exercising any right or remedy shall
constitute a waiver.
11. SUBROGATION.
In the event of payment under this Agreement, the Corporation shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure such rights, including the execution of such
documents necessary to enable the Corporation effectively to bring suit to
enforce such rights.
12. NO DUPLICATION OF PAYMENTS.
The Corporation shall not be liable under this Agreement to make any
payment in connection with any claim made against Indemnitee to the extent
Indemnitee has otherwise received payment (under any insurance policy, bylaw, or
otherwise) of the amounts otherwise indemnifiable under this Agreement.
13. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the business and/or assets of the Corporation),
assigns, spouses, heirs, and personal and legal representatives. The Corporation
shall require and cause any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all, substantially all, or a substantial
part, of the business or assets of the Corporation or both, by written agreement
in form and substance satisfactory to Indemnitee, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent that the
Corporation would be required to perform if no such succession had taken place.
The indemnification provided under this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity pertaining to an Indemnifiable Event even though Indemnitee may have
ceased to serve in such capacity at the time of any proceeding.
14. SEVERABILITY.
If any portion of this Agreement shall be held by a court of competent
jurisdiction to be invalid, void, or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of this Agreement containing any
provision held to be invalid, void, or otherwise unenforceable, that is not
itself invalid, void, or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, void, or unenforceable.
15. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of California applicable to contracts made
and to be performed in this state without giving effect to the principles of
conflicts of laws.
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<PAGE> 33
16. NOTICES.
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand, against receipt, or mailed, postage prepaid,
certified or registered mail, return receipt requested, and addressed to the
Corporation at:
International Lottery & Totalizator Systems, Inc.
2131 Faraday Avenue
Carlsbad, CA 92008-7297
Attn: President
and to Indemnitee at:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Attn:
-----------------------------------------------------------------------------
Notice of change of address shall be effective only when given in
accordance with this agreement. All notices complying with this paragraph shall
be deemed to have been received on the date of delivery or on the third business
day after mailing.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day specified above.
INTERNATIONAL LOTTERY &
TOTALIZATOR SYSTEMS, INC.
By:
--------------------------------------
M. Mark Michalko
President
[NAME OF INDEMNITEE]
--------------------------------------
Name:
Title:
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<PAGE> 34
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
The undersigned hereby appoints M. Mark Michalko and Timothy R. Groth
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 June
1, 1998 or any adjournment thereof.
(Continued, and to be marked, dated and signed, on the other side)
- FOLD AND DETACH HERE -
AN INVITATION
Please join Management and the Board of Directors of
INTERNATIONAL LOTTERY &TOTALIZATOR SYSTEMS, INC.
for the 1998 Annual Meeting of Shareholders
DATE: Monday, June 1, 1998
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: La Costa Resort and Spa
Costa Del Mar Road, Club House II
Carlsbad, California
(760) 438-9111
Call for directions
R.S.V.P. Mary Anne Palmer: (760) 930-3630
<PAGE> 35
Please mark your votes
as indicated in this example
[X]
The Board of Directors recommends a vote FOR all items.
WITHHELD
1. - ELECTION OF DIRECTORS - Nominees FOR FOR ALL
[ ] [ ]
Frederick A. Brunn, Ng Aik Chin
Chan Kien Sing, Ng Foo Leong
Theodore A. Johnson, Martin J. O'Meara, Jr.
M. Mark Michalko, Michael G.R. Sandberg and
Tan Chee Yioun
WITHHELD (Write one or more nominee's name(s) below)
____________________________________
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Approval of amendment to Articles of
Incorporation to effect 3 for 1 reverse
stock split.
[ ] [ ] [ ]
3. Amend Bylaws to increase the range of
authorized directors and set the number
of authorized directors at nine.
[ ] [ ] [ ]
4. Amend Corporate Articles to limit
liability of directors and authorize
expanded directors/officers
indemnification.
[ ] [ ] [ ]
5. Approve Bylaw amendment for
directors/officers indemnification.
[ ] [ ] [ ]
6. Approve Indemnification Agreement
for directors/officers.
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.
