<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:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] 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
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE, SIGN AND
MAIL PROMPTLY THE ENCLOSED PROXY, FOR WHICH A RETURN ENVELOPE IS
PROVIDED.
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. Approval of 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,
M. Mark Michalko
President
April 30, 1998
Carlsbad, California
<PAGE> 3
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CA 92008-7297
PROXY STATEMENT
Proxies in the form enclosed with this statement are solicited by the
Board of Directors of the Company for use at the Annual Meeting of Shareholders
to be held in Carlsbad, California, on 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.
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.
1
<PAGE> 4
<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. 120,701 (A) *
President from 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. 35,000 (B) *
Group Executive Director of Berjaya Group
Berhad since 1990.
THEODORE A. JOHNSON , 57, Director since 1979. 60,825 (B) *
President, Minnesota Cooperation Office
for Small Business and Job Creation, Inc.
from 1980 to present. Director of Surgidyne, Inc.
M. MARK MICHALKO, 43, Director since February 1994. 75,887 (A) *
President since May, 1997, Executive Vice President,
from February 1994 to May 1997. President of Quantum
Gaming Corp., a gaming industry consulting firm for
more than five years prior to February 1994.
NG AIK CHIN, 43, 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. 35,000 (B) *
Executive Director, Sports Toto Malaysia Sdn Bhd,
a lottery gaming company from 1985 to present.
MARTIN J. O'MEARA, JR., 69, Director since 1979. 326,226 (B) *
President, The Budget Plan, Inc., a privately-
owned company engaged in the consumer loan
business and has been so employed for more
than five years.
THE LORD SANDBERG OF PASSFIELD, 70, Director since 115,000 (B) *
1987. Private investor. Chairman and
Chief Executive of the Hong Kong and Shanghai
Banking Corporation from 1977 to 1986.
Director of Broadstreet Inc. a bank holding company.
TAN SRI DATO SERI TAN CHEE YIOUN, 46 6,600,000 (C) 38%
Group Chief Executive Officer of Berjaya Group
Berhad since prior to 1992. Director, February, 1994
- May 1995.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
Named Executive Officers (excluding those listed above)
- -------------------------------------------------------
<S> <C> <C>
TIMOTHY R. GROTH 23,047 (A) *
DENNIS D. KLAHN 15,276 (A) *
LAWRENCE E. LOGUE 8,819 (A) *
ROBERT F. MCPHAIL 189,840 (A) *
All directors and executive officers as a group (13 persons) 1,038,615 (A)(B)(C) 4%
Significant Shareholder
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED ("BERJAYA") 6,600,000 (C) 38%
Level 28, Menara Shahzan Insas
Jalan Sultan Ismail
5020 Kuala Lumpur, Malaysia
</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; 63,250 for Mr. Michalko; 8,000 for Mr. Ng
Aik Chin; and 272,500 for all executive officers as a group.
(B) Includes the number of shares of Common Stock subject to unexercised
stock options which were exercisable within 60 days under the Company's
1993 Directors' Stock Option Plan which for each such outside director
is 35,000 and 175,000 for all such directors as a group.
(C) Mr. Vincent Tan is Chief Executive of the parent company of Berjaya; Mr.
Chan Kien Sing and Mr. Ng Foo Leong are employees of an affiliate of
Berjaya. Mr. Aik Chin Ng is also a designee of Berjaya to the Company's
Board of Directors. All four individuals disclaim beneficial ownership
of such shares.
* Less than one percent of the outstanding common shares.
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.
3
<PAGE> 6
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives an annual
retainer of $4,000 plus $500 per board meeting and reimbursement for all related
expenses. The chairman of each committee who is not an employee of the Company
receives an additional annual retainer of $1,000. Each committee member receives
$500 per meeting and reimbursement of all related expenses, only if a committee
meeting is held at a time when it does not coincide with a board meeting. Lord
Sandberg is also a financial consultant to the Company and received fees of
$12,500 in 1997.
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
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.
4
<PAGE> 7
EXECUTIVE COMPENSATION AND OTHER INFORMATION
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
Members of the Executive Compensation Committee (the "Committee")
evaluate the performance of senior management, including the president, and
review and approve the base compensation and lump sum distributions for the
Company's executive officers. The Committee also administers the Company's
Executive Bonus Plan and employee stock option plans. The Committee periodically
reports to the Board on its activities.
Compensation Philosophy
The Committee bases its decisions on the Company's executive
compensation philosophy, which relates the level of compensation to the
Company's success in meeting its annual and long-term performance goals, rewards
individual achievement and seeks to attract and retain qualified executives. The
Company's executive compensation program consists of three principal components:
(i) base salary, (ii) potential for an annual lump-sum distribution based on
individual performance and (iii) potential for an annual bonus under the
Company's Executive Bonus Plan based upon the Company achieving a threshold
level of profitability as well as individual performance. The second and third
elements constitute "at-risk" portions of the compensation program. The Company
positions its overall executive compensation levels at or near the median of the
range of compensation levels for other companies comparable to the Company
located in Southern California and who are viewed as competitors for executive
talent in the overall labor market. This data is obtained from surveys conducted
by external compensation consultants and trade associations. In reviewing this
data, ILTS takes into account how its compensation policies and overall
performance compare to similar indices for comparable companies.
The Company employs a formal performance review system for all
employees, including the president and the other Named Executive Officers (as
defined on page 7). This process generates information that the Committee uses
in making decisions on base compensation, lump-sum distributions and awards
under the Company's Executive Bonus Plan. The president is responsible for
preparing the reviews on all executive officers other than himself. The
Committee Chairman is responsible for preparing the review on the president. All
reviews are then discussed and approved by the Committee. Executive performance
is measured both in terms of the performance of the Company as a whole and
various individual performance factors, including the performance of divisions
for which such officer had management responsibility and individual managerial
accomplishments.
The Internal Revenue Code denies a deduction to any publicly held
corporation for compensation paid to any "covered employee" (which are defined
as the president and the Company's other four most highly compensated officers,
as of the end of a taxable year) to the extent that the compensation of any
individual "covered employee" exceeds $1 million in any taxable year of the
corporation beginning after 1993. Compensation which is payable pursuant to
written binding agreements entered into before February 18, 1993 and
compensation which constitutes "performance based compensation" is excludable in
applying the $1 million limit. It is the Company's policy to qualify the
compensation paid to its top executives for deductibility under the new law in
order to maximize the Company's income tax deductions. Based upon the Internal
Revenue Service's regulations and projected compensation payable to the
Company's "covered employees" for the 1998 taxable year, all compensation
payable by the Company in 1998 to such covered employees should be deductible by
the Company.
Base Salaries
In determining base salaries for executive officers, the Committee
reviews external comparative data and also receives recommendations from
management. The Committee bases its decisions on such data, as well as internal
salary comparisons and individual performance evaluations. Under this system,
salary increases have generally the same effect as a cost of living adjustment,
although increases are not expressly tied to any cost of living indicator.
Increases are awarded, however, only to those executives who are performing at a
satisfactory level or above. The Company's philosophy is that the base salary
taken alone is generally lower than salary levels at comparable companies. Thus,
executives are required to earn awards under the "at-risk" portions of the
compensation program described below in order to reach a competitive
compensation level.
Lump Sum Distributions
Under traditional compensation systems, merit compensation increases are
made through increases in base pay. Under such systems, once the merit component
has been earned it is included in base salary going forward and becomes
5
<PAGE> 8
a permanent part of cash compensation. In 1990, the Company instituted a
different system in which the merit component of compensation for employees was
divided into a base salary increase (discussed above) and a lump sum
distribution awarded annually.
The lump sum distribution is delivered apart from base salary in a
separate annual check and must be re-earned by employees each year. The Company
believes that this lump sum distribution system emphasizes a performance culture
and provides a more direct link between employee compensation and performance.
The system also allows the Company to create greater differences in employee
compensation based upon performance. The relationship of pay to performance is
further strengthened by the high visibility of the lump sum distribution.
Lump sum distributions are paid in October of each year based upon the
employee performance reviews. Determinations as to whether an employee has
earned a lump sum distribution are not tied directly to Company performance.
Employees have no entitlement to receive a lump sum distribution. Accordingly,
the decision as to whether or not to make a lump sum distribution is impacted by
the overall performance of the Company.
Executive Bonus Plan
In addition to base compensation and lump sum distributions, executives
are eligible to participate in the Company's Executive Bonus Plan. Under the
Executive Bonus Plan, the Committee has set threshold levels of net after tax
profit, exclusive of extraordinary items, for 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
Theodore A. Johnson, Martin J. O'Meara, Jr.
Chairman
Michael G.R. Sandberg Chan Kien Sing
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
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
Name and
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 1996 $120,810 $ 4,896 23,000 $ 3,461
Officer and Director 1995 $122,600 $ 0 0 $ 0
- ----------------------------------------------------------------------------------------------------------
Robert F. McPhail 1997 $125,988 $ 11,785 10,000 $ 0
Vice President, Sales & 1996 $ 99,915 $ 9,732 0 $ 0
Marketing 1995 $109,775 $ 0 0 $ 0
- ----------------------------------------------------------------------------------------------------------
Timothy R. Groth 1997 $109,464 $ 4,270 20,000 $ 3,184
Vice President, 1996 $ 93,769 $ 3,672 12,000 $ 2,565
Technical Operations 1995 $ 94,115 $ 0 0 $ 0
- ----------------------------------------------------------------------------------------------------------
Ng Aik Chin (1) 1997 $144,901 $ 7,804 0 $ 4,187
Executive Assistant to 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 1996 $142,680 $ 5,824 33,000 $ 4,141
President 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>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (4)
------------------------------------- ---------------------
Percent
of Total
Options
Number of Granted to Exercise
Options Employees Price Expiration
Name Granted (2) in 1997 Per Share Date (3) 5% 10%
- ---- ----------- -------- --------- -------- ---- ----
<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>
12/92 12/93 12/94 12/95 12/96 12/97
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL LOTTERY &
TOTALIZATOR SYSTEMS, INC. $ 100 $ 338 $ 55 $ 30 $ 18 $ 18
PEER GROUP $ 100 $ 87 $ 51 $ 49 $ 57 $ 62
S&P SMALLCAP 600 $ 100 $ 119 $ 113 $ 147 $ 178 $ 224
</TABLE>
* $100 INVESTED ON 12/31/92 IN STOCK OR INDEX- INCLUDING REINVESTMENT OF
DIVIDENDS, FISCAL YEAR ENDING DECEMBER 31.
9
<PAGE> 12
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.
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.
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.
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 Incorporation pursuant to the Company Article Amendment. See also
"Approval of Bylaw Amendment Regarding Indemnification" and "Approval of
Indemnification Agreements."
10
<PAGE> 13
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.
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.
11
<PAGE> 14
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.
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
12
<PAGE> 15
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, 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.
13
<PAGE> 16
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 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.
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."
14
<PAGE> 17
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 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
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<PAGE> 18
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 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,
M. Mark Michalko
President
Carlsbad, California
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<PAGE> 19
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> 20
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> 21
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
C-1
<PAGE> 22
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
D-1
<PAGE> 23
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;
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<PAGE> 25
(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.
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;
E-2
<PAGE> 26
(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.
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
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<PAGE> 27
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, 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.
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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
(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.
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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
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
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<PAGE> 30
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.
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
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<PAGE> 31
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> 32
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
The undersigned hereby appoints Dennis D. Klahn and Lawrence E. Logue
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> 33
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.
