<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 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:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(5) Total fee paid:
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[ ] 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:
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<PAGE> 2
[ILTS LOGO]
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
------------------------
NOTICE OF ANNUAL MEETING
The 2000 Annual Meeting of Shareholders of International Lottery &
Totalizator Systems, Inc. (the "Company") will be held at 3:00 p.m., Pacific
Daylight Savings Time, on Thursday, June 22, 2000 at the Raintree Restaurant,
755 Raintree Drive, Carlsbad, California, for the following purpose:
(1) to elect nine directors for the ensuing year, and
(2) to consider and vote upon a proposal to approve the 2000 Equity
Participation Plan of International Lottery & Totalizator Systems, Inc.
Shareholders of record at the close of business on May 10, 2000 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 May 22, 2000.
By order of the Board of Directors,
/s/ M. MARK MICHALKO
M. Mark Michalko
President
May 22, 2000
Carlsbad, California
TO ENSURE YOUR REPRESENTATION AT THE MEETING, PLEASE DATE, SIGN AND MAIL
PROMPTLY THE ENCLOSED PROXY, FOR WHICH A RETURN ENVELOPE IS PROVIDED.
<PAGE> 3
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
2131 FARADAY AVENUE
CARLSBAD, CALIFORNIA 92008-7297
------------------------
PROXY STATEMENT
Proxies in the form enclosed with this statement are solicited by the Board
of Directors of the Company for use at the Annual Meeting of Shareholders to be
held in Carlsbad, California, on June 22, 2000, 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
12,943,000 shares are outstanding as of May 10, 2000. Only holders of common
shares of record on the books of the Company at the close of business on May 10,
2000, which is 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's 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 in favor of
the 2000 Equity Participation Plan, as indicated on the accompanying proxy card.
The approximate date on which this proxy statement and form of proxy are
first being sent or given to shareholders is May 22, 2000.
<PAGE> 4
PROPOSAL 1:
ELECTION OF DIRECTORS
The Board currently consists of the following nine directors: Frederick A.
Brunn, Chan Kien Sing, Theodore A. Johnson, M. Mark Michalko, Alain K. K. Lee,
Ng Foo Leong, Leonard G. Morrissey, Martin J. O'Meara, Jr., and Michael G.R.
Sandberg. The current directors will serve until the Annual Meeting and until
their respective successors have been duly elected and qualified. Each of the
current directors of the Company has been nominated and recommended for election
to serve as a director for a term of one year and until his successor has been
duly elected and qualified. Each of the director nominees has individually
advised the Board that he is able and willing to serve as a director of the
Company. If no contrary indication is made, proxies in the accompanying form are
to be voted for each of the nine nominees for director or, if for any reason any
of them become unavailable for election, the individuals named in the enclosed
proxy may exercise their discretion to vote for any substitute nominee or
nominees proposed by the Board of Directors.
The following table sets forth certain information regarding the beneficial
ownership of the Company's common shares as of May 1, 2000 by (i) each director
and nominee for director of the Company, (ii) an executive officer, (iii) the
executive officer 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 or nominee 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. With
respect to the executive officer who is not a director, the table sets forth his
age, position with the Company, and employment history for the past five years.
For purposes of this proxy statement, beneficial ownership of securities is
defined in accordance with the rules of the Securities and Exchange Commission
and means generally the power to vote or exercise investment discretion with
respect to securities, regardless of any economic interests therein. Except as
otherwise indicated, the Company believes that the beneficial owners of the
securities listed below have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER AMOUNT OF CLASS
------------------------ --------- --------
<S> <C> <C>
FREDERICK A. BRUNN, 55, Director since 1989. President from 37,002(A) *
February 1994 to May 1997. Chief Executive Officer, San
Diego Manufacturing Extension Center April 1998 to
September 1999. Principal, California Motorcycle Tours,
1999 to present.
CHAN KIEN SING, 43, Director since June 1993. Group 12,668(B) *
Executive Director of Berjaya Group Berhad since 1990.
THEODORE A. JOHNSON, 59, Director since 1979. President, 31,274(B) *
Minnesota Cooperation Office for Small Business and Job
Creation, Inc. from 1980 to present. Director of
Surgidyne, Inc. and Humanetics Corp. for at least the last
five years.
M. MARK MICHALKO, 45, Director since February 1994. 47,184(C) *
President since May 1997, Executive Vice President, from
February 1994 to May 1997.
ALAIN K. K. LEE, 44, Director since May 1999. Executive Vice 0 *
President, Roadhouse Grill, Inc. since July 1998 and
Director since January 1998. Director of several companies
in the food industry affiliated with Berjaya. Berjaya
Group Chief Financial Officer and General Manager of
several Berjaya Group subsidiary companies from 1990 to
1997.
NG FOO LEONG, 49, Director since June 1993. Executive 12,668(B) *
Director, Sports Toto Malaysia Sdn. Bhd., a lottery gaming
company, from 1985 to present.
LEONARD G. MORRISSEY, 65, Director since May 1999. 26,668(D) *
Consultant to the Company since November 1997. Senior Vice
President of Gtech Corporation, a lottery service company,
for more than five years prior to 1995.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER AMOUNT OF CLASS
------------------------ --------- --------
<S> <C> <C>
MARTIN J. O'MEARA, JR., 71, Director since 1979. President, 124,110(B) *
The Budget Plan, Inc., a privately owned company engaged
in the consumer loan business, and has been so employed
for more than five years.
MICHAEL G.R. SANDBERG, 72, Director since 1987. Private 40,335(B) *
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.
TIMOTHY R. GROTH, 51, Vice President, Technical Operations 19,421(E) *
since 1994.
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (10 PERSONS) 341,797(A)(B)(C)(D)(E) 2.5%
BERJAYA LOTTERY MANAGEMENT (H.K.) LIMITED (BERJAYA) 9,245,317(F) 71.4%
</TABLE>
- ---------------
(A) Includes 37,002 common shares issuable upon exercise of outstanding stock
options that are exercisable within 60 days of May 10, 2000.
(B) Includes 12,668 common shares issuable upon exercise of outstanding stock
options that are exercisable within 60 days of May 10, 2000.
(C) Includes 39,670 common shares issuable upon exercise of outstanding stock
options that are exercisable within 60 days of May 10, 2000.
(D) Includes 16,668 common shares issuable upon exercise of outstanding stock
options that are exercisable within 60 days of May 10, 2000.
(E) Includes 14,003 common shares issuable upon exercise of outstanding stock
options that are exercisable within 60 days of May 10, 2000.
(F) Chan Kien Sing, Alain K. K. Lee and Ng Foo Leong are employees of an
affiliate of Berjaya. All three individuals disclaim beneficial ownership of
such shares. Berjaya's business address is Level 28, Menara Shahzan Insas,
Jalan Sultan Ismail, 5020 Kuala Lumpur, Malaysia.
* Less than one percent of the outstanding common shares.
MEETINGS OF THE BOARD OF DIRECTORS
During 1999, four meetings of the Board of Directors were held. Each
incumbent director attended all meetings of the Board of Directors held during
the period of the year in which he was a director, except that Michael G. R.
Sandberg missed one meeting, Ng Foo Leong missed two meetings and Chan Kien Sing
missed two meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board 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 has an Executive Compensation Committee (the "Compensation
Committee") consisting of Messrs. Johnson and Chan. The Compensation Committee
met once during the year. Its function is to establish compensation for all
executive officers of the Company and administer the Company's stock option
plans.
The Board has an Audit Committee consisting of Messrs. Sandberg, Chan,
Johnson and Lee. The Audit Committee held one meeting during the year. The Audit
Committee reviews and evaluates internal auditing controls and 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.
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<PAGE> 6
The Board 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.
The Affiliations Committee reviews and approves the fairness to the Company
of any transactions between the Company and Berjaya. The members of the
Committee are Messrs. Johnson, Brunn and O'Meara. The Affiliations Committee
held two meetings in 1999.
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 committee meeting and reimbursement of all related expenses if such
committee meeting is held at a time when it does not coincide with a board
meeting.
VOTE REQUIRED; BOARD RECOMMENDATION
Individual directors will be elected by a favorable vote of a plurality of
the common shares represented and entitled to vote in person or by proxy at the
Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE NOMINEES SET
FORTH HEREIN. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED
UNLESS SHAREHOLDERS SPECIFY OTHERWISE ON THEIR PROXY CARDS.
4
<PAGE> 7
PROPOSAL 2:
APPROVAL OF THE 2000 EQUITY PARTICIPATION PLAN
At the Annual Meeting, the shareholders of the Company will be asked to
consider and vote upon a proposal to approve the 2000 Equity Participation Plan.
The 2000 Equity Participation Plan was initially adopted by the Board of
Directors on March 26, 2000.
DESCRIPTION OF THE 2000 EQUITY PARTICIPATION PLAN
General Nature and Purpose. The 2000 Equity Participation Plan was adopted
(i) to provide an additional incentive for directors, key employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock which
recognizes such growth, development and financial success and (ii) to enable the
Company to obtain and retain the services of directors, key employees and
consultants considered essential to the long range success of the Company by
offering them an opportunity to own stock in the Company which will reflect the
growth, development and financial success of the Company. The 2000 Equity
Participation Plan provides for the grant of non-qualified stock options,
incentive stock options and/or restricted stock to employees (including
officers), consultants and directors of the Company. The principal features of
the 2000 Equity Participation Plan are summarized below, but the summary is
qualified in its entirety by reference to the full text of the 2000 Equity
Participation Plan, which is set forth as Exhibit A to this proxy statement.
Administration. The 2000 Equity Participation Plan is administered by the
Compensation Committee of the Board of Directors. In addition to administering
the 2000 Equity Participation Plan, the Compensation Committee is also
authorized to adopt, interpret, amend and rescind rules relating to the
administration of the 2000 Equity Participation Plan. Notwithstanding the
foregoing, the Board of Directors conducts the general administration of the
2000 Equity Participation Plan with respect to options granted or restricted
stock awarded to independent directors.
Shares Subject to the 2000 Equity Participation Plan. Under the 2000 Equity
Participation Plan, the aggregate number of shares of Company common stock that
may be issued upon exercise of options or rights or upon any award shall not
exceed 200,000 increased on January 1 of each year the 2000 Equity Participation
Plan is in effect by a number of shares equal to three percent of the total
number of outstanding shares of Company common stock on that date.
Notwithstanding the foregoing, the total number of shares of Company common
stock subject to option under all plans of the Company shall not exceed ten
percent of the total number of outstanding shares of Company common stock on
that date. The maximum number of shares that may be subject to options granted
and restricted stock awarded under the 2000 Equity Participation Plan to any
individual in any calendar year may not exceed 100,000. As of May 10, 2000, the
closing price of a share of Company stock as reported on the over-the-counter
Bulletin Board was $1.53.
Eligibility. Any employee or consultant selected by the Compensation
Committee or independent director selected by the Board of Directors is eligible
to receive options or restricted stock under the 2000 Equity Participation Plan.
Consideration. In consideration of the granting of an option or restricted
stock, the holder shall agree to remain in the employ (or to consult for or to
serve as an independent director, as applicable) of the Company or any
subsidiary of the Company for a period of at least one year after the award is
granted (or, in the case of an independent director, until the next annual
meeting of shareholders of the Company).
Grant of Options. The Compensation Committee will from time to time, in its
absolute discretion, determine the number of shares to be subject to options
granted to selected employees and consultants, determine whether such options
are to be incentive stock options or non-qualified stock options and determine
the terms and conditions of such options, consistent with the 2000 Equity
Participation Plan.
The Board of Directors will from time to time, in its absolute discretion,
determine the number of shares to be subject to options granted to selected
independent directors and determine the terms and conditions of such options,
consistent with the 2000 Equity Participation Plan.
5
<PAGE> 8
Options may be granted under the 2000 Equity Participation Plan to
employees and consultants in lieu of cash bonuses that would otherwise be
payable to such employees and consultants and to independent directors in lieu
of directors' fees that would otherwise be payable to such independent
directors.
Purchase Price of Optioned Shares. The price per share of the shares
subject to each option granted to an employee or consultant shall be set by the
Compensation Committee; provided, however, that such price shall be no less than
100% of the fair market value of a share of Company common stock on the date the
option is granted. In the case of incentive stock options granted to an
individual then owning more than 10% of the total combined voting power of all
classes of stock of the Company or any subsidiary or parent corporation thereof,
such price shall not be less than 110% of the fair market value of a share of
Company common stock on the date the option is granted.
The price per share of the shares subject to each option granted to an
independent director shall equal 100% of the fair market value of a share of
Company common stock on the date the option is granted.
Terms of Options. Options granted under the 2000 Equity Participation Plan
to employees or consultants may not be exercised more than ten years after the
date of grant, although the Compensation Committee may grant options having
shorter terms. The term shall not exceed five years in the case of incentive
stock options granted to an individual then owning more than 10% of the total
combined voting power of all classes of stock of the Company. Except as limited
by the 2000 Equity Participation Plan or applicable law, the Compensation
Committee may extend the term of any outstanding option in connection with any
termination of employment or termination of consultancy of the holder, or amend
any other term or condition of such option relating to such a termination.
Options granted to independent directors shall become exercisable in
cumulative annual installments of 50% on each of the first and second
anniversaries of the date of the grant. The term of each option granted to an
independent director shall be five years from the date the option is granted,
except that any option granted to an independent director may by its terms
become immediately exercisable upon full retirement of such independent director
in accordance with the Company's retirement policy.
Exercise of Options. An exercisable option may be exercised in whole or in
part under the 2000 Equity Participation Plan. Upon the exercise of an option,
the holder must make full cash payment to the Secretary of the Company for the
shares with respect to which the option, or portion thereof, is exercised.
However, the Compensation Committee or the Board of Directors may allow various
forms of payment, which are described in detail in the 2000 Equity Participation
Plan.
Federal Tax Consequences. The current federal income tax consequences of
the grant of options under the 2000 Equity Participation Plan are summarized
below. The discussion is intended to provide only general information. Federal
alternative minimum tax and employment tax consequences and state, local and
foreign tax consequences are not discussed.
The holder will not recognize ordinary income by reason of the grant or
exercise of an incentive stock option. If a holder holds stock acquired through
exercise of an incentive stock option for at least two years from the date on
which the option is granted and at least one year from the date on which the
stock is transferred to the holder upon exercise of the option, any gain or loss
upon sale or other disposition of such stock will be capital gain or loss. The
Company will not be entitled to a deduction if the holder holds the stock for
these holding periods. Generally, if the holder sells or disposes of the stock
before the expiration of either of these holding periods (a "disqualifying
disposition"), at the time of sale or disposition, the holder will recognize
ordinary income equal to the lesser of (a) the excess of the stock's fair market
value on the date of exercise over the aggregate exercise price, or (b) the
holder's actual gain, if any, on the sale or disposition. The holder's
additional gain, if any, upon the disqualifying disposition will be capital
gain. To the extent the holder recognizes ordinary income by reason of a
disqualifying disposition, the Company generally will be entitled to a
corresponding business expense deduction in the tax year in which the
disqualifying disposition occurs, subject to the requirement of reasonableness,
Code Section 162(m) and the satisfaction of a tax reporting obligation.
6
<PAGE> 9
The holder will not recognize ordinary income by reason of the grant of a
non-qualified stock option. Upon exercise of a non-qualified stock option, the
holder will recognize ordinary income equal to the excess of the stock's fair
market value on the date of exercise over the aggregate exercise price paid.
Generally, with respect to employees, the Company is required to withhold taxes
in an amount based on the ordinary income recognized. Subject to the requirement
of reasonableness, Code Section 162(m) and the satisfaction of a tax-reporting
obligation, the Company generally will be entitled to a business expense
deduction equal to the taxable ordinary income realized by the holder. Upon sale
or disposition of the stock, the holder will recognize any gain or loss as
capital gain or loss.
Code Section 162(m) denies a deduction to any publicly held corporation for
compensation paid to certain executive officers in a taxable year to the extent
that compensation exceeds $1,000,000 for such an executive officer. Compensation
attributable to stock options, alone or when combined with all other types of
compensation received by such an executive officer from the Company, may cause
this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with applicable Treasury regulations issued under Section 162(m),
compensation attributable to stock options will qualify as performance-based
compensation, provided that: either (a) (i) the option plan contains a
per-employee limitation on the number of shares for which options may be granted
during a specified period, (ii) the per-employee limitation is approved by the
stockholders, (iii) the option is granted by a compensation committee comprised
solely of "outside directors" (as defined in Section 162(m)) and (iv) the
exercise price of the option is no less than the fair market value of the stock
on the date of grant; or (b) the option is granted by a compensation committee
comprised solely of "outside directors" and is granted (or exercisable) only
upon the achievement of an objective performance goal established by the
compensation committee while the outcome is substantially uncertain and approved
by the stockholders.
If a holder who receives options in lieu of cash compensation that would
otherwise have been payable to such holder, such holder generally will be taxed,
and the Company generally will be entitled to a deduction, in the manner
described above, unless the holder is in constructive receipt of the cash
compensation. Options generally will be granted a holder in accordance with
policies under which a holder will not be in constructive receipt of such cash
compensation.
The foregoing discussion is intended to be a general summary only of the
federal income tax aspects of options granted under the 2000 Equity
Participation Plan; tax consequences may vary depending on the particular
circumstances at hand. In addition, administrative and judicial interpretations
of the application of the federal income tax laws are subject to change.
Amendment of the 2000 Equity Participation Plan. The 2000 Equity
Participation Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board of
Directors or the Compensation Committee. However, without approval of the
shareholders of the Company, the 2000 Equity Participation Plan may not be
amended to increase the maximum number of shares issuable upon exercise of
options granted or restricted stock awarded under the 2000 Equity Participation
Plan.
VOTE REQUIRED; RECOMMENDATION OF THE BOARD OF DIRECTORS
The affirmative vote of a majority of the shares present in person or
represented by proxy and entitled to vote at the Annual Meeting is required to
approve and adopt the 2000 Equity Participation Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE 2000 EQUITY
PARTICIPATION PLAN. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE SO VOTED
UNLESS SHAREHOLDERS SPECIFY OTHERWISE ON THEIR PROXY CARDS.
7
<PAGE> 10
EXECUTIVE COMPENSATION AND OTHER INFORMATION
REPORT OF THE COMPENSATION COMMITTEE
Members of the Compensation Committee evaluate the performance of senior
management, including the president, and review and approve the base
compensation and bonuses for the Company's executive officers. The Compensation
Committee also administers the Company's Executive Bonus Plan and employee stock
option plans. The Compensation Committee periodically reports to the Board on
its activities.
Compensation Philosophy. The Compensation 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 two principal components: (i) base salary and, (ii) a 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 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 which 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, the Company 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 Officer (as defined on
page 9). This process generates information that the Compensation Committee uses
in making decisions on base compensation 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 Compensation Committee Chairman
is responsible for preparing the review on the president. All reviews are then
discussed and approved by the Compensation 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 is 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 that is payable pursuant to
written binding agreements entered into before February 18, 1993 and
compensation that 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 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 2000 taxable year, all compensation payable by the
Company in 2000 to such covered employees should be deductible by the Company.
Base Salaries. In determining base salaries for executive officers, the
Compensation Committee reviews external comparative data and also receives
recommendations from management. The Compensation 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 or above a satisfactory level.
Executive Bonus Plan. In addition to base compensation, executives are
eligible to participate in the Company's Executive Bonus Plan. Under the
Executive Bonus Plan, the Compensation Committee has set threshold levels of net
after tax profit, exclusive of extraordinary items, for 1999 and 2000. 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
8
<PAGE> 11
thresholds and shall not cause the net after tax profit to fall below the
threshold after computation of the bonus pool. During each year of the Executive
Bonus Plan, the Company's research and development budget must be maintained at
a level to ensure that the Company's new product development is sufficient to
keep it competitive in its marketplace, and continuation engineering sufficient
to maintain the Company's existing products is also required. The Compensation
Committee retains discretion to adjust the bonus pool and awards based upon
extraordinary circumstances and other criteria as determined by the Compensation
Committee.
Individual awards under the Executive Bonus Plan are determined by the size
of the bonus pool and individual performance of the executive. The Compensation
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 1999. Accordingly, no awards were made with respect to 1999.
Equity Participation. The Compensation Committee believes that equity
participation serves to align the interests of executive officers with
shareholder value. The number of stock options granted or restricted stock
awarded takes into account the recipient's position and is intended to recognize
different levels of responsibility. In determining the level of stock option
grants or restricted stock awarded, the Compensation Committee also considers
competitive practices. As a result, grants and awards may vary from year to
year.
The foregoing report has been furnished by the Compensation Committee.
Theodore A. Johnson, Chairman
Chan Kien Sing
May 10, 2000
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The following table shows, for the years ended December 31, 1999, 1998, and
1997, the compensation earned by the Chief Executive Officer and the only
executive officer of the Company earning in excess of $100,000 during 1999 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- ----------------------------
AWARDS
----------
NUMBER OF ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY(1) BONUS(2) OPTIONS(3) COMPENSATION(4)
------------------------------ ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
M. Mark Michalko............................ 1999 $151,421 -- 65,000 --
President, Chief Executive Officer 1998 $144,518 -- -- --
and Director 1997 $136,836 $11,917 80,000 $4,235
Timothy R. Groth............................ 1999 $122,762 -- 30,000 --
Vice President, 1998 $123,852 -- -- --
Technical Operations 1997 $109,464 $4,270 20,000 $3,184
</TABLE>
- ---------------
(1) Perquisites in 1999, 1998 and 1997 are included under salary and did not
exceed the lesser of $50,000 or 10% of the total salary and bonus for any
such officer.
(2) Amounts reflect lump sum distributions paid in November 1997 under a prior
compensation plan.
(3) All awards are incentive stock options granted pursuant to the Company's
1990 Employee Stock Option Plan.
(4) All amounts are Company matching contributions to the Employee Stock Bonus
401(k) Plan in 1997. There were no Company matching contributions in 1998
and 1999.
9
<PAGE> 12
STOCK OPTION GRANTS
The following table sets forth information regarding the grant of stock
options during 1999 to the Named Executive Officers:
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZATION
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
----------------------------------------------------------- PRICE APPRECIATION FOR
NUMBER OF PERCENT OF EXERCISE OPTION TERM(2)
OPTIONS TOTAL OPTIONS GRANTED PRICE EXPIRATION -----------------------
NAME GRANTED(1) TO EMPLOYEES IN 1999 PER SHARE DATE 5% 10%
---- ---------- --------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
M. Mark Michalko.... 65,000 14.0% $1.00 10/21/09 $28,172 $83,362
Timothy R. Groth.... 30,000 6.5% $1.00 10/21/09 $13,002 $38,475
</TABLE>
- ---------------
(1) No stock appreciation rights were granted to any of the Named Executive
Officers or any other Company employees in 1999.
(2) These amounts represent assumed rates of appreciation in the price of the
Company's common shares during the terms of the options in accordance with
rates specified in applicable federal securities regulations. Actual gains,
if any, on stock option exercises will depend on the future price of the
common shares and overall stock market conditions. There is no
representation that the rates of appreciation reflected in this table will
be achieved.
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,
1999. There were no stock options exercised by executive officers in 1999 and
there were no unexercised, in-the-money stock options at December 31, 1999.
UNEXERCISED OPTIONS
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
OPTIONS AT DECEMBER 31, 1999
----------------------------
NAME EXERCISABLE UNEXERCISABLE
---- ----------- -------------
<S> <C> <C>
M. Mark Michalko............................................ 33,354 79,315
Timothy R. Groth............................................ 11,709 33,960
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Berjaya Transactions. On October 5, 1999, the Company consummated the sale
of 6,933,817 shares of authorized, but unissued common shares of the Company to
Berjaya. The purchase price for the shares was $0.75 per share for an aggregate
purchase price of $5.2 million. Prior to the purchase, Berjaya owned 2,311,500
shares, or approximately 38.5% of the Company's outstanding common shares. As a
result of the purchase, Berjaya now owns 9,245,317 shares or approximately 71.4%
of the Company's outstanding common shares.
The Company also has entered into sales agreements to supply terminals,
spares and services to entities in which Berjaya has a significant equity
interest. Revenues related to these agreements totaled $0.5 million in 1999.
Payments received in 1999 were $0.75 million. Included in the above amounts are
software support agreements that the Company has with Natural Avenue Sdn Bhd of
Malaysia, which, during 1999 paid, and continues to pay, $4,700 per month to the
Company.
During 1996, the Company entered into an agreement with Berjaya to purchase
specific inventory on behalf of Berjaya to enable the Company to satisfy certain
future potential orders in a timely manner. Title to the inventory purchased
resides with Berjaya. Advances received from Berjaya in excess of inventory
purchased aggregated approximately $304,000 as of December 31, 1999.
10
<PAGE> 13
CONSULTING AGREEMENTS
Mr. Brunn. Pursuant to a consulting agreement in connection with Mr.
Brunn's resignation as President of the Company in 1996, the Company agreed to
continue Mr. Brunn's health benefits through November, 1999 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.
Mr. Morrissey. On November 16, 1998, the Company and Mr. Morrissey entered
into a consulting agreement pursuant to which Mr. Morrissey was paid $4,000 per
month. During 1999, the Company paid to Mr. Morrissey a total of $52,000 under
the consulting agreement, $4,000 of which was a payment for services rendered
under the consulting agreement in 1998. In addition, under the consulting
agreement, Mr. Morrissey was granted a non-qualified stock option for 16,667
shares at $3.57 per share. The shares subject to the grant vested in equal
quarterly installments during 1999 and are exercisable beginning one year after
the installment vesting date. The consulting agreement also provides that Mr.
Morrissey will be paid a commission from 1% to 3% of the contract value
(depending on the degree of contribution by Mr. Morrissey) of specific
prospective lottery contracts that are awarded to the Company. No amounts were
paid under this provision during 1999.
In October 1999, Mr. Morrissey received an option grant of 25,000 common
shares at $1.00 per share, which fully vests on October 22, 2000. Beginning
January 1, 2000, Mr. Morrissey's monthly compensation under the consulting
agreement changed from $4,000 to $2,500 per month.
11
<PAGE> 14
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.,
THE S&P SMALLCAP 600 INDEX AND A PEER GROUP
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
INTERNATIONAL LOTTERY &
TOTALIZATOR SYSTEMS, INC. PEER GROUP S&P SMALLCAP 600
------------------------- ---------- ----------------
<S> <C> <C> <C>
12/94 100.00 100.00 100.00
12/95 53.66 100.48 129.96
12/96 31.71 118.43 157.67
12/97 31.71 120.83 198.01
12/98 4.47 96.71 203.41
12/99 10.58 88.09 228.64
</TABLE>
- ---------------
* $100 INVESTED ON 12/31/94 IN STOCK OR INDEX --
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes, based upon a review of reports furnished to the
Company, that all reports were timely filed, and that, during 1999 its officers
and directors complied with all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934.
OTHER MATTERS
All shareholders of record at the close of business on May 10, 2000, 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,
1999.
The expense of preparing, printing and mailing the Notice of Annual Meeting
and proxy material and all other expenses of soliciting proxies will be borne by
the Company. In addition to the solicitation of proxies by use of the mails, the
directors, officers and regular employees of the Company, who will receive no
compensation in addition to regular salary, may solicit proxies by mail,
telegraph, telephone, or personal interview. The Company may also reimburse
brokerage firms, banks, trustees, nominees and other persons for their expenses
in forwarding proxy material to the beneficial owners of shares held by them of
record.
Management knows of no business that 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.
12
<PAGE> 15
Management expects a representative from the Company's independent
auditors, Arthur Andersen LLP, to attend the meeting.
SHAREHOLDER PROPOSALS
Shareholder proposals for presentation at the 2001 Annual Meeting must be
received by the Company no later than January 22, 2001 to be considered for
inclusion in the 2001 proxy and proxy statement. In addition, pursuant to a rule
of the SEC, if the Company has not received notice by April 7, 2001 of any
matter a shareholder intends to propose for a vote at the next annual meeting of
shareholders, then a proxy solicited by the Board may be voted on such matter in
the discretion of the proxy holder, without discussion of the matter in the
proxy statement soliciting such proxy and without such matter appearing as a
separate item on the proxy card.
By order of the Board of Directors,
/s/ M. MARK MICHALKO
M. Mark Michalko
President
May 22, 2000
Carlsbad, California
13
<PAGE> 16
THE 2000 EQUITY PARTICIPATION PLAN
OF
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS, INC.
International Lottery & Totalizator Systems, Inc., a California
corporation, has adopted The 2000 Equity Participation Plan of International
Lottery & Totalizator Systems, Inc. (the "Plan"), for the benefit of its
eligible employees, consultants and directors.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and Consultants (as such terms are defined below) to further the growth,
development and financial success of the Company by personally benefiting
through the ownership of Company stock which recognizes such growth,
development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and Consultants considered essential to the long
range success of the Company by offering them an opportunity to own stock
in the Company which will reflect the growth, development and financial
success of the Company.
ARTICLE I.
DEFINITIONS
1.1 General. Wherever the following terms are used in the Plan they shall
have the meanings specified below, unless the context clearly indicates
otherwise.
1.2 Administrator. "Administrator" shall mean the entity that conducts the
general administration of the Plan as provided herein. With reference to the
administration of the Plan with respect to Options granted or Restricted Stock
awarded to Independent Directors, the term "Administrator" shall refer to the
Board. With reference to the administration of the Plan with respect to any
other Award, the term "Administrator" shall refer to the Committee unless the
Board has assumed the authority for administration of the Plan generally as
provided in Section 10.2.
1.3 Award. "Award" shall mean an Option or a Restricted Stock award which
may be awarded or granted under the Plan (collectively, "Awards").
1.4 Award Agreement. "Award Agreement" shall mean a written agreement
executed by an authorized officer of the Company and the Holder which shall
contain such terms and conditions with respect to an Award as the Administrator
shall determine, consistent with the Plan.
1.5 Award Limit. "Award Limit" shall mean One Hundred Thousand (100,000)
shares of Common Stock, as adjusted pursuant to Section 9.3 of the Plan.
1.6 Board. "Board" shall mean the Board of Directors of the Company.
1.7 Change in Control. "Change in Control" shall mean a change in
ownership or control of the Company effected through any of the following
transactions:
(a) any person or related group of persons (other than the Company,
Berjaya Lottery Management (H.K.) Limited and its affiliates, or a person
that, prior to such transaction, directly or indirectly controls, is
controlled by, or is under common control with, the Company) directly or
indirectly acquires beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities pursuant to a tender or exchange offer made directly to the
Company's stockholders; or
(b) there is a change in the composition of the Board over a period of
thirty-six (36) consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be
comprised of
A-1
<PAGE> 17
individuals who either (i) have been Board members continuously since the
beginning of such period or (ii) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (i) who were still in office at the time
such election or nomination was approved by the Board; or
(c) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation (or other entity), other than (i)
a merger or consolidation with Berjaya Lottery Management (H.K.) Limited or
its affiliates or (ii) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 66 2/3%
of the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets to any
person other than Berjaya Lottery Management (H.K.) Limited or its
affiliates.
1.8 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.9 Committee. "Committee" shall mean the Compensation Committee of the
Board, or another committee or subcommittee of the Board, appointed as provided
in Section 10.1.
1.10 Common Stock. "Common Stock" shall mean the common stock of the
Company, no par value, and any equity security of the Company issued or
authorized to be issued in the future, but excluding any preferred stock and any
warrants, options or other rights to purchase Common Stock.
1.11 Company. "Company" shall mean International Lottery & Totalizator
Systems, Inc., a California corporation.
1.12 Consultant. "Consultant" shall mean any consultant or adviser if:
(a) the consultant or adviser renders bona fide services to the
Company;
(b) the services rendered by the consultant or adviser are not in
connection with the offer or sale of securities in a capital-raising
transaction and do not directly or indirectly promote or maintain a market
for the Company's securities; and
(c) the consultant or adviser is a natural person who has contracted
directly with the Company to render such services.
1.13 Director. "Director" shall mean a member of the Board.
1.14 Disability. "Disability" means total and permanent disability as
defined in Section 22(e)(3) of the Code.
1.15 Employee. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.16 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.17 Fair Market Value. "Fair Market Value" of a share of Common Stock as
of a given date shall be (a) the closing price of a share of Common Stock on the
principal exchange on which shares of Common Stock are then trading, if any (or
as reported on any composite index which includes such principal exchange), on
the trading day previous to such date, or if shares were not traded on the
trading day previous to such date, then on the next preceding date on which a
trade occurred, or (b) if Common Stock is not traded on an exchange but is
quoted on NASDAQ or if quotations are available in the over-the-counter market
("OTC"), the mean between the closing representative bid and asked prices for
the Common Stock on the trading day previous to such date as reported by NASDAQ
or on the OTC; or (c) if Common Stock is not publicly traded on an exchange and
not quoted on NASDAQ or on the OTC, the Fair Market Value of a share of Common
Stock as established by the Administrator acting in good faith.
A-2
<PAGE> 18
1.18 Holder. "Holder" shall mean a person who has been granted or awarded
an Award.
1.19 Incentive Stock Option. "Incentive Stock Option" shall mean an option
which conforms to the applicable provisions of Section 422 of the Code and which
is designated as an Incentive Stock Option by the Administrator.
1.20 Independent Director. "Independent Director" shall mean a member of
the Board who is not an Employee of the Company.
1.21 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean
an Option which is not designated as an Incentive Stock Option by the
Administrator.
1.22 Option. "Option" shall mean a stock option granted under Article IV
of the Plan. An Option granted under the Plan shall, as determined by the
Administrator, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to Independent Directors and
Consultants shall be Non-Qualified Stock Options.
1.23 Performance Criteria. "Performance Criteria" shall mean the following
business criteria with respect to the Company, any Subsidiary or any division or
operating unit: (a) net income, (b) pre-tax income, (c) operating income, (d)
cash flow, (e) earnings per share, (f) return on equity, (g) return on invested
capital or assets, (h) cost reductions or savings, (i) funds from operations,
(j) appreciation in the fair market value of Common Stock and (k) earnings
before any one or more of the following items: interest, taxes, depreciation or
amortization.
1.24 Plan. "Plan" shall mean The 2000 Equity Participation Plan of
International Lottery & Totalizator Systems, Inc.
1.25 Restricted Stock. "Restricted Stock" shall mean Common Stock awarded
under Article VII of the Plan.
1.26 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
1.27 Section 162(m) Participant. "Section 162(m) Participant" shall mean
any key Employee designated by the Administrator as a key Employee whose
compensation for the fiscal year in which the key Employee is so designated or a
future fiscal year may be subject to the limit on deductible compensation
imposed by Section 162(m) of the Code.
1.28 Securities Act. "Securities Act" shall mean the Securities Act of
1933, as amended.
1.29 Subsidiary. "Subsidiary" shall mean any corporation in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
1.30 Substitute Award. "Substitute Award" shall mean an Option granted
under this Plan upon the assumption of, or in substitution for, outstanding
equity awards previously granted by a company or other entity in connection with
a corporate transaction, such as a merger, combination, consolidation or
acquisition of property or stock; provided, however, that in no event shall the
term "Substitute Award" be construed to refer to an award made in connection
with the cancellation and repricing of an Option.
1.31 Termination of Consultancy. "Termination of Consultancy" shall mean
the time when the engagement of a Holder as a Consultant to the Company or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death or retirement; but
excluding terminations where there is a simultaneous commencement of employment
with the Company or any Subsidiary. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Consultancy, including, but not by way of limitation, the
question of whether a Termination of Consultancy resulted from a discharge for
good cause, and all questions of whether a particular leave of absence
constitutes a Termination of Consultancy. Notwithstanding any other provision of
A-3
<PAGE> 19
the Plan, the Company or any Subsidiary has an absolute and unrestricted right
to terminate a Consultant's service at any time for any reason whatsoever, with
or without cause, except to the extent expressly provided otherwise in writing.
1.32 Termination of Directorship. "Termination of Directorship" shall mean
the time when a Holder who is an Independent Director ceases to be a Director
for any reason, including, but not by way of limitation, a termination by
resignation, failure to be elected, death or retirement. The Board, in its sole
and absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
1.33 Termination of Employment. "Termination of Employment" shall mean the
time when the employee-employer relationship between a Holder and the Company or
any Subsidiary is terminated for any reason, with or without cause, including,
but not by way of limitation, a termination by resignation, discharge, death,
disability or retirement; but excluding (a) terminations where there is a
simultaneous reemployment or continuing employment of a Holder by the Company or
any Subsidiary, (b) at the discretion of the Administrator, terminations which
result in a temporary severance of the employee-employer relationship, and (c)
at the discretion of the Administrator, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Administrator, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for good cause,
and all questions of whether a particular leave of absence constitutes a
Termination of Employment; provided, however, that, with respect to Incentive
Stock Options, unless otherwise determined by the Administrator in its
discretion, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer relationship
shall constitute a Termination of Employment if, and to the extent that, such
leave of absence, change in status or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then applicable regulations
and revenue rulings under said Section.
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
(a) The shares of stock subject to Awards shall be Common Stock, initially
shares of the Company's Common Stock, no par value. The aggregate number of such
shares which may be issued upon exercise of such Options or rights or upon any
such awards under the Plan shall not exceed Two Hundred Thousand (200,000)
increased on January 1 of each year this Plan is in effect by a number of shares
equal to three percent (3%) of the total number of outstanding shares of Common
Stock on that date subject to the limitation that the total number of shares of
the Company's Common Stock subject to option under all plans of the Company
shall not exceed ten percent (10%) of the total number of outstanding shares of
Common Stock on that date, as calculated in accordance with the conditions and
exclusions of Title 10, Section 260.140.45 of the California Code of
Regulations. The shares of Common Stock issuable upon exercise of such Options
or rights or upon any such awards may be either previously authorized but
unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Awards, granted
under the Plan to any individual in any fiscal year shall not exceed the Award
Limit. To the extent required by Section 162(m) of the Code, shares subject to
Options which are canceled continue to be counted against the Award Limit.
2.2 Add-back of Options. If any Option expires or is canceled without
having been fully exercised, or is exercised in whole or in part for cash as
permitted by the Plan, the number of shares subject to such Option but as to
which such Option was not exercised prior to its expiration, cancellation or
exercise may again be optioned, granted or awarded hereunder, subject to the
limitations of Section 2.1. Furthermore, any shares subject to Awards which are
adjusted pursuant to Section 9.3 and become exercisable with respect to shares
of stock of another corporation shall be considered cancelled and may again be
optioned, granted or awarded
A-4
<PAGE> 20
hereunder, subject to the limitations of Section 2.1. If any shares of
Restricted Stock are surrendered by the Holder or repurchased by the Company
pursuant to Section 7.4 or 7.5 hereof, such shares may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this Section 2.2, no shares of Common Stock
may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
ARTICLE III.
GRANTING OF AWARDS
3.1 Award Agreement. Each Award shall be evidenced by an Award Agreement.
Award Agreements evidencing Awards intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
3.2 Provisions Applicable to Section 162(m) Participants.
(a) The Committee, in its discretion, may determine whether an Award is to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code.
(b) Notwithstanding anything in the Plan to the contrary, the Committee may
grant any Award to a Section 162(m) Participant, including Restricted Stock the
restrictions with respect to which lapse upon the attainment of performance
goals which are related to one or more of the Performance Criteria.
(c) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect to
any Award granted under Article VII which may be granted to one or more Section
162(m) Participants, no later than ninety (90) days following the commencement
of any fiscal year in question or any other designated fiscal period or period
of service (or such other time as may be required or permitted by Section 162(m)
of the Code), the Committee shall, in writing, (i) designate one or more Section
162(m) Participants, (ii) select the Performance Criteria applicable to the
fiscal year or other designated fiscal period or period of service, (iii)
establish the various performance targets, in terms of an objective formula or
standard, and amounts of such Awards, as applicable, which may be earned for
such fiscal year or other designated fiscal period or period of service and (iv)
specify the relationship between Performance Criteria and the performance
targets and the amounts of such Awards, as applicable, to be earned by each
Section 162(m) Participant for such fiscal year or other designated fiscal
period or period of service. Following the completion of each fiscal year or
other designated fiscal period or period of service, the Committee shall certify
in writing whether the applicable performance targets have been achieved for
such fiscal year or other designated fiscal period or period of service. In
determining the amount earned by a Section 162(m) Participant, the Committee
shall have the right to reduce (but not to increase) the amount payable at a
given level of performance to take into account additional factors that the
Committee may deem relevant to the assessment of individual or corporate
performance for the fiscal year or other designated fiscal period or period of
service.
(d) Furthermore, notwithstanding any other provision of the Plan, any Award
which is granted to a Section 162(m) Participant and is intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and the Plan shall be deemed amended to the extent necessary to conform to
such requirements.
3.3 Limitations Applicable to Section 16 Persons. Notwithstanding any
other provision of the Plan, the Plan, and any Award granted or awarded to any
individual who is then subject to Section 16 of the Exchange
A-5
<PAGE> 21
Act, shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan and
Awards granted or awarded hereunder shall be deemed amended to the extent
necessary to conform to such applicable exemptive rule.
3.4 Consideration. In consideration of the granting of an Award under the
Plan, the Holder shall agree, in the Award Agreement, to remain in the employ of
(or to consult for or to serve as an Independent Director of, as applicable) the
Company or any Subsidiary for a period of at least one year (or such shorter
period as may be fixed in the Award Agreement or by action of the Administrator
following grant of the Award) after the Award is granted (or, in the case of an
Independent Director, until the next annual meeting of stockholders of the
Company).
3.5 At-Will Employment. Nothing in the Plan or in any Award Agreement
hereunder shall confer upon any Holder any right to continue in the employ of,
or as a Consultant for, the Company or any Subsidiary, or as a director of the
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Holder at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in a written employment agreement
between the Holder and the Company and any Subsidiary.
ARTICLE IV.
GRANTING OF OPTIONS TO EMPLOYEES,
CONSULTANTS AND INDEPENDENT DIRECTORS
4.1 Eligibility. Any Employee or Consultant selected by the Committee
pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 4.5.
4.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3 Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted to any person who is not an Employee.
4.4 Granting of Options to Employees and Consultants.
(a) The Committee shall from time to time, in its absolute discretion, and
subject to applicable limitations of the Plan:
(i) Determine which Employees are key Employees and select from among
the key Employees or Consultants (including Employees or Consultants who
have previously received Awards under the Plan) such of them as in its
opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to the selected key Employees or
Consultants;
(iii) Subject to Section 4.3, determine whether such Options are to be
Incentive Stock Options or Non-Qualified Stock Options and whether such
Options are to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options, consistent
with the Plan; provided, however, that the terms and conditions of Options
intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall include, but not be limited to, such
terms and conditions as may be necessary to meet the applicable provisions
of Section 162(m) of the Code.
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(b) Upon the selection of a key Employee or Consultant to be granted an
Option, the Committee shall instruct the Secretary of the Company to issue the
Option and may impose such conditions on the grant of the Option as it deems
appropriate.
(c) Any Incentive Stock Option granted under the Plan may be modified by
the Committee, with the consent of the Holder, to disqualify such Option from
treatment as an "incentive stock option" under Section 422 of the Code.
4.5 Granting of Options to Independent Directors.
The Board shall from time to time, in its absolute discretion, and subject
to applicable limitations of the Plan:
(a) Select from among the Independent Directors (including Independent
Directors who have previously received Options under the Plan) such of them
as in its opinion should be granted Options;
(b) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to the selected Independent Directors;
(c) Subject to the provisions of Article 5, determine the terms and
conditions of such Options, consistent with the Plan.
All the foregoing Option grants authorized by this Section 4.5 are subject
to stockholder approval of the Plan.
4.6 Options in Lieu of Cash Compensation. Options may be granted under the
Plan to Employees and Consultants in lieu of cash bonuses which would otherwise
be payable to such Employees and Consultants and to Independent Directors in
lieu of directors' fees which would otherwise be payable to such Independent
Directors, pursuant to such policies which may be adopted by the Administrator
from time to time.
ARTICLE V.
TERMS OF OPTIONS
5.1 Option Price. (a) The price per share of the shares subject to each
Option granted to Employees and Consultants shall be set by the Committee;
provided, however, that such price shall be no less than 100% of the Fair Market
Value of a share of Common Stock on the date the Option is granted and in the
case of Incentive Stock Options granted to an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary or parent
corporation thereof (within the meaning of Section 422 of the Code), such price
shall not be less than 110% of the Fair Market Value of a share of Common Stock
on the date the Option is granted (or the date the Option is modified, extended
or renewed for purposes of Section 424(h) of the Code).
5.2 Option Term. The term of an Option granted to an Employee or
consultant shall be set by the Committee in its discretion; provided, however,
that the term shall not be more than ten (10) years from the date the Option is
granted, or in the case of Incentive Stock Options five (5) years from the date
the Incentive Stock Option is granted if the Incentive Stock Option is granted
to an individual then owning (within the meaning of Section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning of
Section 422 of the Code). Except as limited by requirements of Section 422 of
the Code and regulations and rulings thereunder applicable to Incentive Stock
Options, the Committee may extend the term of any outstanding Option in
connection with any Termination of Employment or Termination of Consultancy of
the Holder, or amend any other term or condition of such Option relating to such
a termination.
5.3 Option Vesting
(a) The period during which the right to exercise, in whole or in part, an
Option granted to an Employee or a Consultant vests in the Holder shall be set
by the Committee and the Committee may determine that an Option may not be
exercised in whole or in part for a specified period after it is granted;
provided, however,
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that, (i) each Option shall become exercisable no later than five (5) years
after such Option is granted and at least 20% of each Option shall become
exercisable on each anniversary of the date such Option is granted, and (ii)
unless the Committee otherwise provides in the terms of the Award Agreement or
otherwise, no Option shall be exercisable by any Holder who is then subject to
Section 16 of the Exchange Act within the period ending six months and one day
after the date the Option is granted. At any time after grant of an Option, the
Committee may, in its sole and absolute discretion and subject to whatever terms
and conditions it selects, accelerate the period during which an Option granted
to an Employee or Consultant vests.
(b) No portion of an Option granted to an Employee or Consultant which is
unexercisable at Termination of Employment or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee either in the Award Agreement or by action of the
Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by a Holder during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any parent or subsidiary
corporation, within the meaning of Section 422 of the Code) of the Company,
exceeds $100,000, such Options shall be treated as Non-Qualified Options to the
extent required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 5.3(c), the Fair Market Value of
stock shall be determined as of the time the Option with respect to such stock
is granted.
5.4 Terms of Options Granted to Independent Directors. The price per share
of the shares subject to each Option granted to an Independent Director shall
equal 100% of the Fair Market Value of a share of Common Stock on the date the
Option is granted. Options granted to Independent Directors shall become
exercisable in cumulative annual installments of 50% on each of the first and
second anniversaries of the date of Option grant and, subject to Section 6.6,
the term of each Option granted to an Independent Director shall be five (5)
years from the date the Option is granted, except that any Option granted to an
Independent Director may by its terms become immediately exercisable in full
upon the retirement of the Independent Director in accordance with the Company's
retirement policy applicable to directors. No portion of an Option which is
unexercisable at Termination of Directorship shall thereafter become
exercisable.
5.5 Termination of Employment, Directorship or Consultancy. In the event
of a Holder's Termination of Employment, Termination of Directorship or
Termination of Consultancy (other than for cause or upon the Holder's death or
Disability), the Optionee may exercise his or her Option, but only within such
period of time as is determined by the Administrator (which period shall not be
less than thirty (30) days from the date of such termination, nor in the case of
an Incentive Stock Option, more than three (3) months from and after the date of
termination), and only to the extent that the Holder was entitled to exercise it
at the date of termination (but in no event later than the expiration of the
term of such Option as set forth in the Award Agreement). In the event of a
Holder's Termination of Employment, Termination of Directorship or Termination
of Consultancy for cause (as defined in the applicable Award Agreement), then
the Option shall terminate immediately upon such termination for cause. If, at
the date of termination described in this Section 5.5, the Holder is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to the Plan. If, after
termination described in this Section 5.5, the Holder does not exercise his or
her Option within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to the Plan.
5.6 Disability of Holder. In the event of a Holder's Termination of
Employment, Termination of Directorship or Termination of Consultancy as a
result of the Optionee's Disability, the Holder may exercise his or her Option,
but only within such period of time as is determined by the Administrator (which
period shall not be less than six (6) months from the date of such termination,
nor more than one (1) year from and after such termination), and only to the
extent that the Holder was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Award Agreement). If, at the date of termination
described in this Section 5.6, the Holder is not entitled to exercise
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his or her entire Option, the shares covered by the unexercisable portion of the
Option shall revert to the Plan. If, after termination described in this Section
5.6, the Holder does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the shares covered by such Option shall
revert to the Plan.
5.7 Death of Holder. In the event of the death of a Holder, the Option may
be exercised, at any time within such period as is determined by the
Administrator (which period shall not be less than six (6) months following the
date of death) by the Holder's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, and only to the extent the Holder
was entitled to exercise the Option at the date of death (but in no event later
than the expiration of the term of such Option as set forth in the Award
Agreement). If, at the time of death, the Holder was not entitled to exercise
his or her entire Option, the shares covered by the unexercisable portion of the
Option shall revert to the Plan. If, after death, the Holder's estate or a
person who acquired the right to exercise the Option by bequest or inheritance
does not exercise the Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to the Plan.
5.8 Substitute Awards. Notwithstanding the foregoing provisions of this
Article V to the contrary, in the case of an Option that is a Substitute Award,
the price per share of the shares subject to such Option may be less than the
Fair Market Value per share on the date of grant, provided, that the excess of:
(a) the aggregate Fair Market Value (as of the date such Substitute
Award is granted) of the shares subject to the Substitute Award; over
(b) the aggregate exercise price thereof; does not exceed the excess
of;
(c) the aggregate fair market value (as of the time immediately
preceding the transaction giving rise to the Substitute Award, such fair
market value to be determined by the Committee) of the shares of the
predecessor entity that were subject to the grant assumed or substituted
for by the Company; over
(d) the aggregate exercise price of such shares.
ARTICLE VI.
EXERCISE OF OPTIONS
6.1 Partial Exercise. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Administrator may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
6.2 Manner of Exercise. All or a portion of an exercisable Option shall be
deemed exercised upon delivery of all of the following to the Secretary of the
Company or his office:
(a) A written notice complying with the applicable rules established
by the Administrator stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Holder or other person then
entitled to exercise the Option or such portion of the Option;
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or
state securities laws or regulations. The Administrator may, in its
absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation,
placing legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 9.1 by any person or persons other than the Holder, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised.
However, the Administrator, may in its discretion (i) allow a delay in
payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through the
delivery of shares of Common Stock which have been
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owned by the Holder for at least six months, duly endorsed for transfer to
the Company with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof; (iii)
allow payment, in whole or in part, through the delivery of property of any
kind which constitutes good and valuable consideration; (iv) allow payment,
in whole or in part, through the delivery of a full recourse promissory
note bearing interest (at no less than such rate as shall then preclude the
imputation of interest under the Code) and payable upon such terms as may
be prescribed by the Administrator; (v) allow payment, in whole or in part,
through the delivery of a notice that the Holder has placed a market sell
order with a broker with respect to shares of Common Stock then issuable
upon exercise of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price, provided that payment of such
proceeds is then made to the Company upon settlement of such sale; or (vi)
allow payment through any combination of the consideration provided in the
foregoing subparagraphs (ii), (iii), (iv) and (v). In the case of a
promissory note, the Administrator may also prescribe the form of such note
and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited
by law.
6.3 Conditions to Issuance of Stock Certificates. The Company shall not be
required to issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Administrator shall, in its absolute discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Administrator may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the
discretion of the Administrator may be in the form of consideration used by
the Holder to pay for such shares under Section 6.2(d).
6.4 Rights as Stockholders. Holders shall not be, nor have any of the
rights or privileges of, stockholders of the Company in respect of any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
Holders.
6.5 Ownership and Transfer Restrictions. The Administrator, in its
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Award Agreement and may be referred to on the certificates evidencing such
shares. The Holder shall give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(a) two years from the date of granting (including the date the Option is
modified, extended or renewed for purposes of Section 424(h) of the Code) such
Option to such Holder or (b) one year after the transfer of such shares to such
Holder.
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6.6 Limitations on Exercise of Options Granted to Independent
Directors. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) the expiration of twelve (12) months from the date of the Holder's
death;
(b) the expiration of twelve (12) months from the date of the Holder's
Termination of Directorship by reason of his permanent and total disability
(within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the Holder's
Termination of Directorship for any reason other than such Holder's death
or his permanent and total disability, unless the Holder dies within said
three-month period; or
(d) the expiration of five (5) years from the date the Option was
granted.
6.7 Additional Limitations on Exercise of Options. Holders may be required
to comply with any timing or other restrictions with respect to the settlement
or exercise of an Option, including a window-period limitation, as may be
imposed in the discretion of the Administrator.
ARTICLE VII.
AWARD OF RESTRICTED STOCK
7.1 Eligibility. Subject to the Award Limit, Restricted Stock may be
awarded to any Employee who the Administrator determines is a key Employee or
any Consultant or any Independent Director who the Administrator determines
should receive such an Award.
7.2 Award of Restricted Stock
(a) The Administrator may from time to time, in its absolute discretion:
(i) Determine which Employees are key Employees and select from among
the key Employees, Consultants (including Employees or Consultants who have
previously received other Awards under the Plan) or Independent Directors
such of them as in its opinion should be awarded Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with the Plan.
(b) The Administrator shall establish the purchase price, if any, and form
of payment for Restricted Stock. In all cases, legal consideration shall be
required for each issuance of Restricted Stock.
(c) Upon the selection of a key Employee, Consultant or Independent
Director to be awarded Restricted Stock, the Administrator shall instruct the
Secretary of the Company to issue such Restricted Stock and may impose such
conditions on the issuance of such Restricted Stock as it deems appropriate.
7.3 Rights as Stockholders. Subject to Section 7.4, upon delivery of the
shares of Restricted Stock to the escrow holder pursuant to Section 7.6, the
Holder shall have, unless otherwise provided by the Administrator, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Award Agreement, including the right to receive all dividends and other
distributions paid or made with respect to the shares; provided, however, that
in the discretion of the Administrator, any extraordinary distributions with
respect to the Common Stock shall be subject to the restrictions set forth in
Section 7.4.
7.4 Restriction. All shares of Restricted Stock issued under the Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Award Agreement, be
subject to such restrictions as the Administrator shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
that, unless the Administrator otherwise provides in the terms of the Award
Agreement or otherwise, no share of Restricted Stock granted to a person subject
to Section 16 of the Exchange Act shall be sold, assigned or otherwise
transferred until at least six months and one day have elapsed from the date on
which the Restricted Stock was issued,
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and provided, further, that, except with respect to shares of Restricted Stock
granted to Section 162(m) Participants, by action taken after the Restricted
Stock is issued, the Administrator may, on such terms and conditions as it may
determine to be appropriate, remove any or all of the restrictions imposed by
the terms of the Award Agreement. Restricted Stock may not be sold or encumbered
until all restrictions are terminated or expire. If no consideration was paid by
the Holder upon issuance, a Holder's rights in unvested Restricted Stock shall
lapse, and such Restricted Stock shall be surrendered to the Company without
consideration, upon Termination of Employment or, if applicable, upon
Termination of Consultancy with the Company; provided, however, that the
Administrator in its sole and absolute discretion may provide that such rights
shall not lapse in the event of a Termination of Employment following a "change
of ownership or control" (within the meaning of Treasury Regulation Section
1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or because
of the Holder's death or disability; provided, further, except with respect to
shares of Restricted Stock granted to Section 162(m) Participants, the
Administrator in its sole and absolute discretion may provide that no such lapse
or surrender shall occur in the event of a Termination of Employment, or a
Termination of Consultancy, without cause or following any Change in Control of
the Company or because of the Holder's retirement, or otherwise.
7.5 Repurchase of Restricted Stock. The Administrator shall provide in the
terms of each individual Award Agreement that the Company shall have the right
to repurchase from the Holder the Restricted Stock then subject to restrictions
under the Award Agreement immediately upon a Termination of Employment or, if
applicable, upon a Termination of Consultancy between the Holder and the
Company, at a cash price per share equal to the price paid by the Holder for
such Restricted Stock; provided, however, that the Administrator in its sole and
absolute discretion may provide that no such right of repurchase shall exist in
the event of a Termination of Employment following a "change of ownership or
control" (within the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or
any successor regulation thereto) of the Company or because of the Holder's
death or disability; provided, further, that, except with respect to shares of
Restricted Stock granted to Section 162(m) Participants, the Administrator in
its sole and absolute discretion may provide that no such right of repurchase
shall exist in the event of a Termination of Employment or a Termination of
Consultancy without cause or following any Change in Control of the Company or
because of the Holder's retirement, or otherwise.
7.6 Escrow. The Secretary of the Company or such other escrow holder as
the Administrator may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Award Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
7.7 Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Administrator shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Award Agreements, which legend or legends
shall make appropriate reference to the conditions imposed thereby.
7.8 Section 83(b) Election. If a Holder makes an election under Section
83(b) of the Code, or any successor section thereto, to be taxed with respect to
the Restricted Stock as of the date of transfer of the Restricted Stock rather
than as of the date or dates upon which the Holder would otherwise be taxable
under Section 83(a) of the Code, the Holder shall deliver a copy of such
election to the Company immediately after filing such election with the Internal
Revenue Service.
ARTICLE VIII.
ADMINISTRATION
8.1 Compensation Committee. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) shall consist of two or more Independent Directors appointed by
and holding office at the pleasure of the Board. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members may
resign at any time by delivering written notice to the Board. Vacancies in the
Committee may be filled by the Board.
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8.2 Duties and Powers of Committee. It shall be the duty of the Committee
to conduct the general administration of the Plan in accordance with its
provisions. The Committee shall have the power to interpret the Plan and the
Award Agreements, and to adopt such rules for the administration,
interpretation, and application of the Plan as are consistent therewith, to
interpret, amend or revoke any such rules and to amend any Award Agreement
provided that the rights or obligations of the Holder of the Award that is the
subject of any such Award Agreement are not affected adversely. Any such grant
or award under the Plan need not be the same with respect to each Holder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to Options granted
to Independent Directors.
8.3 Majority Rule; Unanimous Written Consent. The Committee shall act by a
majority of its members in attendance at a meeting at which a quorum is present
or by a memorandum or other written instrument signed by all members of the
Committee.
8.4 Compensation; Professional Assistance; Good Faith Actions. Members of
the Committee shall receive such compensation, if any, for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of the Plan
shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Holders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or Awards, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
8.5 Delegation of Authority to Grant Awards. The Committee may, but need
not, delegate from time to time some or all of its authority to grant Awards
under the Plan to a committee consisting of one or more members of the Committee
or of one or more officers of the Company; provided, however, that the Committee
may not delegate its authority to grant Awards to individuals (i) who are
subject on the date of the grant to the reporting rules under Section 16(a) of
the Exchange Act, (ii) who are Section 162(m) Participants or (iii) who are
officers of the Company who are delegated authority by the Committee hereunder.
Any delegation hereunder shall be subject to the restrictions and limits that
the Committee specifies at the time of such delegation of authority and may be
rescinded at any time by the Committee. At all times, any committee appointed
under this Section 8.5 shall serve in such capacity at the pleasure of the
Committee.
ARTICLE IX.
MISCELLANEOUS PROVISIONS
9.1 Not Transferable. No Award under the Plan may be sold, pledged,
assigned or transferred in any manner other than by will or the laws of descent
and distribution, by instrument to an inter vivos or testamentary trust in which
the Awards are to be passed to beneficiaries upon the death of the trustor (or
"settlor"); except that to the extent federal and state exemptions from
registration are available, Awards which are Non-Qualified Stock Options also
shall be transferable by gift to "immediate family" as that term is defined in
17 C.F.R. 240.16a-1(e), or as may otherwise be allowed by Title 10, Section
260.140.41 of the California Code of Regulations or any successor regulation. No
Award or interest or right therein shall be liable for the debts, contracts or
engagements of the Holder or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
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During the lifetime of the Holder, only he may exercise an Option or other
Award (or any portion thereof) granted to him under the Plan. After the death of
the Holder, any exercisable portion of an Option or other Award may, prior to
the time when such portion becomes unexercisable under the Plan or the
applicable Award Agreement, be exercised by his personal representative or by
any person empowered to do so under the deceased Holder's will or under the then
applicable laws of descent and distribution.
9.2 Amendment, Suspension or Termination of the Plan. Except as otherwise
provided in this Section 9.2, the Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time or from time to time by
the Administrator. However, without approval of the Company's stockholders given
within twelve months before or after the action by the Administrator, no action
of the Administrator may, except as provided in Section 9.3, increase the limits
imposed in Section 2.1 on the maximum number of shares which may be issued under
the Plan. No amendment, suspension or termination of the Plan shall, without the
consent of the Holder alter or impair any rights or obligations under any Award
theretofore granted or awarded, unless the Award itself otherwise expressly so
provides. No Awards may be granted or awarded during any period of suspension or
after termination of the Plan. Unless sooner terminated, the Plan shall
terminate ten years from the earlier of the date the Plan is adopted by the
Board and the date the Plan is approved by the shareholders of the Company.
9.3 Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 9.3(d), in the event that the Administrator
determines that any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Administrator's sole discretion, affects
the Common Stock such that an adjustment is determined by the Administrator to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Award, then the Administrator shall, in such manner as it may deem
equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other securities
or property) with respect to which Awards may be granted or awarded
(including, but not limited to, adjustments of the limitations in Section
2.1 on the maximum number and kind of shares which may be issued and
adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Awards, and
(iii) the grant or exercise price with respect to any Award.
(b) Subject to Sections 9.3(b)(vii) and 9.3(d), in the event of any
transaction or event described in Section 9.3(a) or any unusual or nonrecurring
transactions or events affecting the Company, any affiliate of the Company, or
the financial statements of the Company or any affiliate, or of changes in
applicable laws, regulations, or accounting principles, the Administrator, in
its sole and absolute discretion, and on such terms and conditions as it deems
appropriate, either by the terms of the Award or by action taken prior to the
occurrence of such transaction or event and either automatically or upon the
Holder's request, is hereby authorized to take any one or more of the following
actions whenever the Administrator determines that such action is appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan or with respect to any Award under
the Plan, to facilitate such transactions or events or to give effect to such
changes in laws, regulations or principles:
(i) To provide for either the purchase of any such Award for an amount
of cash equal to the amount that could have been attained upon the exercise
of such Award or realization of the Holder's rights had
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<PAGE> 30
such Award been currently exercisable or payable or fully vested or the
replacement of such Award with other rights or property selected by the
Administrator in its sole discretion;
(ii) To provide that the Award cannot vest, be exercised or become
payable after such event;
(iii) To provide that such Award shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in Section 5.3 or
5.4 or the provisions of such Award;
(iv) To provide that such Award be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options, rights or awards covering the stock of
the successor or survivor corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and
prices;
(v) To make adjustments in the number and type of shares of Common
Stock (or other securities or property) subject to outstanding Awards, and
in the number and kind of outstanding Restricted Stock and/or in the terms
and conditions of (including the grant or exercise price), and the criteria
included in, outstanding options, rights and awards and options, rights and
awards which may be granted in the future;
(vi) To provide that, for a specified period of time prior to such
event, the restrictions imposed under an Award Agreement upon some or all
shares of Restricted Stock may be terminated, and, in the case of
Restricted Stock, some or all shares of such Restricted Stock may cease to
be subject to repurchase under Section 7.5 or forfeiture under Section 7.4
after such event; and
(vii) Notwithstanding any other provision of the Plan, in the event of
a Change in Control, each outstanding Award shall, immediately prior to the
effective date of the Change in Control, automatically become fully
exercisable for all of the shares of Common Stock at the time subject to
such rights and may be exercised for any or all of those shares as
fully-vested shares of Common Stock.
(c) Subject to Sections 9.3(d), 3.2 and 3.3, the Administrator may, in its
discretion, include such further provisions and limitations in any Award,
agreement or certificate, as it may deem equitable and in the best interests of
the Company.
(d) With respect to Awards which are granted to Section 162(m) Participants
and are intended to qualify as performance-based compensation under Section
162(m)(4)(C), no adjustment or action described in this Section 9.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause such Award to fail to so qualify under Section
162(m)(4)(C), or any successor provisions thereto. No adjustment or action
described in this Section 9.3 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would cause the Plan to
violate Section 422(b)(1) of the Code. Furthermore, no such adjustment or action
shall be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the exemptive
conditions of Rule 16b-3 unless the Administrator determines that the Award is
not to comply with such exemptive conditions. The number of shares of Common
Stock subject to any Award shall always be rounded to the next whole number.
(e) Notwithstanding the foregoing, in the event that the Company becomes a
party to a transaction that is intended to qualify for "pooling of interests"
accounting treatment and, but for one or more of the provisions of this Plan or
any Award Agreement would so qualify, then this Plan and any Award Agreement
shall be interpreted so as to preserve such accounting treatment, and to the
extent that any provision of the Plan or any Award Agreement would disqualify
the transaction from pooling of interests accounting treatment (including, if
applicable, an entire Award Agreement), then such provision shall be null and
void. All determinations to be made in connection with the preceding sentence
shall be made by the independent accounting firm whose opinion with respect to
"pooling of interests" treatment is required as a condition to the Company's
consummation of such transaction.
(f) The existence of the Plan, the Award Agreement and the Awards granted
hereunder shall not affect or restrict in any way the right or power of the
Company or the shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of stock or of options, warrants or rights
A-15
<PAGE> 31
to purchase stock or of bonds, debentures, preferred or prior preference stocks
whose rights are superior to or affect the Common Stock or the rights thereof or
which are convertible into or exchangeable for Common Stock, or the dissolution
or liquidation of the company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
9.4 Approval of Plan by Stockholders. The Plan will be submitted for the
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of the Plan. Awards may be granted or awarded prior
to such stockholder approval, provided that such Awards shall not be exercisable
nor shall such Awards vest prior to the time when the Plan is approved by the
stockholders, and provided further that if such approval has not been obtained
at the end of said twelve-month period, all Awards previously granted or awarded
under the Plan shall thereupon be canceled and become null and void. In
addition, if the Board determines that Awards other than Options or Stock
Appreciation Rights which may be granted to Section 162(m) Participants should
continue to be eligible to qualify as performance-based compensation under
Section 162(m)(4)(C) of the Code, the Performance Criteria must be disclosed to
and approved by the Company's stockholders no later than the first stockholder
meeting that occurs in the fifth year following the year in which the Company's
stockholders previously approved the Performance Criteria.
9.5 Tax Withholding. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Holder of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting, exercise or payment of any Award. The Administrator may in
its discretion and in satisfaction of the foregoing requirement allow such
Holder to elect to have the Company withhold shares of Common Stock otherwise
issuable under such Award (or allow the return of shares of Common Stock) having
a Fair Market Value equal to the sums required to be withheld. Notwithstanding
any other provision of the Plan, the number of shares of Common Stock which may
be withheld with respect to the issuance, vesting, exercise or payment of any
Award (or which may be repurchased from the Holder of such Award within six
months after such shares of Common Stock were acquired by the Holder from the
Company) in order to satisfy the Holder's federal and state income and payroll
tax liabilities with respect to the issuance, vesting, exercise or payment of
the Award shall be limited to the number of shares which have a Fair Market
Value on the date of withholding or repurchase equal to the aggregate amount of
such liabilities based on the minimum statutory withholding rates for federal
and state tax income and payroll tax purposes that are applicable to such
supplemental taxable income.
9.6 Loans. The Committee may, in its discretion, extend one or more loans
to key Employees in connection with the exercise or receipt of an Award granted
or awarded under the Plan, or the issuance of Restricted Stock awarded under the
Plan. The terms and conditions of any such loan shall be set by the Committee.
9.7 Effect of Plan Upon Options and Compensation Plans. The adoption of
the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in the Plan shall be construed to
limit the right of the Company (a) to establish any other forms of incentives or
compensation for Employees, Directors or Consultants of the Company or any
Subsidiary or (b) to grant or assume options or other rights or awards otherwise
than under the Plan in connection with any proper corporate purpose including
but not by way of limitation, the grant or assumption of options in connection
with the acquisition by purchase, lease, merger, consolidation or otherwise, of
the business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
9.8 Compliance with Laws. The Plan, the granting and vesting of Awards
under the Plan and the issuance and delivery of shares of Common Stock and the
payment of money under the Plan or under Awards granted or awarded hereunder are
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
the Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable
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<PAGE> 32
law, the Plan and Awards granted or awarded hereunder shall be deemed amended to
the extent necessary to conform to such laws, rules and regulations.
9.9 Titles. Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of the Plan.
9.10 Governing Law. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
California without regard to conflicts of laws thereof.
9.11 Regulatory Approvals. No Options will be granted or be exercisable
under the Plan until there has been compliance with all applicable requirements
of the Securities Act, the California General Securities Act of 1968, as
amended, and any other requirement of law or of any regulatory body with
jurisdiction over such issuance and delivery.
9.12 Effective Date of Plan. The Plan shall become effective as determined
by the Board, but only after the date the shareholders of the Company approve
the Plan, by vote or written consent, which approval must be within twelve (12)
months after the Plan has been adopted by the Board. The Plan was adopted by the
Board on March 26, 2000.
9.13 Financial Statements. Throughout the term of any Option, the Company
shall deliver to the holder of such Option, not later than one hundred twenty
(120) days after the close of each of the Company's fiscal years during the term
of such Option, a balance sheet and an income statement for such fiscal year.
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<PAGE> 33
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS,INC.
The undersigned hereby appoints James E. Snow and Lawrence E. Logue proxies,
each with power to act without the other and with power of substitution, and
hereby authorizes each of 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 22, 2000 or any adjournment thereof.
(CONTINUED, AND TO BE MARKED, DATED AND SIGNED, ON THE OTHER SIDE)
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FOLD AND DETACH HERE
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AN INVITATION
Please join Management and the Board of Directors of
INTERNATIONAL LOTTERY & TOTALIZATOR SYSTEMS,INC.
for the year 2000 Annual Meeting of Shareholders
DATE: Thursday, June 22, 2000
TIME: 3 p.m.
PLACE: Raintree Restaurant
755 Raintree Drive
Carlsbad, California 92009
Call for directions if necessary (760) 438-7919
R.S.V.P. Jim Snow: Tel: (760) 760-3629
Fax: (760) 931-1789
E-Mail: [email protected]
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<PAGE> 34
Please mark
your votes as
indicated in [X]
this example
FOR WITHHELD
The Board of Directors recommends a vote FOR Item 1. ALL FROM ALL
NOMINEES NOMINEES
Item 1: ELECTION OF DIRECTORS [ ] [ ]
Nominees:
Frederick A. Brunn Ng Foo Leong
Chan Kien Sing Leonard G. Morrissey
Theodore A. Johnson Martin J. O'Meara, Jr.
Alain K. K. Lee Michael G. R. Sandberg
M. Mark Michalko
[ ]
--------------------------------------
For all nominees except as noted above
The Board of Directors recommends a vote FOR Item 2.
FOR AGAINST ABSTAIN
Item 2: To approve the 2000 Equity Participation [ ] [ ] [ ]
Plan, as described in the accompanying
proxy statement
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Signature(s) Date
------------------------------------------------ --------------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
