<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
VIDEO LOTTERY TECHNOLOGIES, 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)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
Video Lottery Technologies [Logo]
115 PERIMETER CENTER PLACE, SUITE 911
ATLANTA, GEORGIA 30346
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 10, 1997
---------------------
To the Stockholders of Video Lottery Technologies, Inc.:
NOTICE IS HEREBY GIVEN THAT the Annual Meeting of the Stockholders
(together with any adjournments or postponements thereof, the "Meeting") of
Video Lottery Technologies, Inc. (the "Company"), will be held on January 10,
1997 at the offices of the Company's subsidiary, VLC of Nevada, Inc., located at
751 Pilot Road, Suite D, Las Vegas, Nevada 89119, at 10:00 a.m. local time, for
the purpose of considering and voting on the following matters:
(1) Election of two Class 2 directors to serve on the Board of
Directors;
(2) Ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors for the Company for the fiscal year ending December
31, 1996; and
(3) Such other business as may properly come before the Meeting.
These items are described more fully in the accompanying Proxy Statement,
which is hereby made a part of this Notice of Annual Meeting of Stockholders.
The Board of Directors has fixed November 12, 1996 as the record date for
determining the stockholders of the Company entitled to notice of, and to vote
at, the Meeting, and only holders of record of the Company's Common Stock at the
close of business on such date will be entitled to notice of, and to vote at,
the Meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO
BE PERSONALLY PRESENT AT THE MEETING, YOU ARE REQUESTED TO SIGN, DATE AND RETURN
YOUR PROXY AS PROMPTLY AS POSSIBLE. AN ENVELOPE WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES IS ENCLOSED FOR THIS PURPOSE. IF YOU LATER DESIRE TO
REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS EXERCISED.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ RICHARD BURT
Richard R. Burt,
Chairman
Atlanta, Georgia December 31, 1996
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT
<PAGE> 3
VIDEO LOTTERY TECHNOLOGIES [LOGO]
115 PERIMETER CENTER PLACE, SUITE 911
ATLANTA, GEORGIA 30346
---------------------
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JANUARY 10, 1997
---------------------
GENERAL INFORMATION
Solicitation of Proxies. This Proxy Statement (the "Proxy Statement") and
the accompanying form of proxy are being furnished to stockholders of Video
Lottery Technologies, Inc. ("VLT" or the "Company") in connection with the
solicitation of proxies by the Board of Directors (the "Board of Directors") of
the Company from holders of its outstanding common stock, $.01 par value per
share (the "Common Stock"), for use at the 1996 Annual Meeting of Stockholders
(together with any adjournments or postponements thereof, the "Meeting") for the
purposes set forth in the accompanying Notice of Annual Meeting of Stockholders.
The Meeting will be held on Friday, January 10, 1997, at the offices of the
Company's subsidiary, VLC of Nevada, Inc., located at 751 Pilot Road, Suite D,
Las Vegas, Nevada 89119, at 10:00 a.m. local time.
Expenses in connection with the solicitation of proxies will be paid by the
Company. Proxies are being solicited primarily by mail, but, in addition,
officers and regular employees of the Company who will receive no extra
compensation for their services may solicit proxies by telephone, facsimile or
in person. The Company has also retained Georgeson & Company Inc. to solicit
proxies in the enclosed form and will pay such firm a fee of approximately
$8,000 plus reasonable expenses for so acting. Brokerage houses and other
nominees, fiduciaries and custodians who are holders of record of shares of
Common Stock will be requested to forward proxy soliciting material to the
beneficial owners of such shares and will be reimbursed by the Company for their
charges and expenses in connection therewith at customary and reasonable rates.
Proxies. A stockholder giving the enclosed proxy may revoke it at any time
before the vote is cast at the Meeting by giving written notice to the secretary
of the Company, by filing with the secretary another proxy bearing a later date,
or by voting in person at the Meeting. Shares represented by a properly signed
and returned proxy card, unless revoked, will be voted in the manner directed by
the stockholder on the card. If no direction is made on the card, the proxy will
be voted (i) for the election of the nominees for director named in this Proxy
Statement; (ii) in favor of the selection of KPMG Peat Marwick LLP as
independent auditors of the Company for the year ending December 31, 1996; and
(iii) in accordance with the judgment of the persons named in the proxy as to
such other matters as may properly come before the Meeting. This Proxy Statement
and the form of proxy are being mailed to stockholders commencing on or about
December 31, 1996.
Record Date. Only holders of record of shares of Common Stock as of the
close of business on November 12, 1996 (the "Record Date") are entitled to
notice of, and to vote at, the Meeting. Each share of Common Stock entitles the
holder to one vote upon each matter to be voted upon. As of the Record Date,
there were 10,682,109 shares of Common Stock outstanding and entitled to vote.
The only outstanding voting securities of the Company are shares of its Common
Stock.
Quorum and Required Vote. The presence, in person or by proxy, of a
majority of the shares entitled to vote will constitute a quorum for the Meeting
(a "Quorum"). In the event that a Quorum is not present at the Meeting, the
persons named as proxies may propose one or more adjournments of the Meeting to
permit further solicitation of proxies, without notice other than announcement
at the Meeting. Any such adjournment will require the affirmative vote of a
majority of those shares that are represented at the Meeting in person or by
proxy.
<PAGE> 4
An automated system administered by the Company's transfer agent tabulates
the proxy votes in combination with a manual update and confirmation by
employees of the Company. The accuracy and final tabulation will be verified by
the inspector of elections. Although there is no definitive statutory or case
law authority in Delaware as to the proper treatment of abstentions, the Company
believes that abstentions should be counted for purposes of determining the
presence of a Quorum at the Meeting and the total number of votes cast with
respect to a particular matter. In the absence of controlling authority to the
contrary, the Company will treat abstentions in this manner. Based on relevant
authority, broker non-votes will be counted for the purpose of determining the
presence of a Quorum at the Meeting, but will not be counted for the purpose of
determining the number of votes cast with respect to the particular proposal on
which the broker has expressly not voted and, therefore, will not affect the
determination as to whether the requisite majority of votes cast has been
obtained with respect to a particular matter. Consequently, broker non-votes
will have the effect of reducing the number of affirmative votes required to
achieve a majority of the votes cast.
In order to be elected, a nominee for director must receive an affirmative
vote of a plurality of the shares of Common Stock voted, in person or by proxy,
at the Meeting. Ratification of the appointment of KPMG Peat Marwick LLP
requires the affirmative vote of a majority of the shares of Common Stock
present, in person or by proxy, at the Meeting.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company has a classified Board of Directors consisting of three Class 1
directors (Ms. Becker and Messrs. Burt and Haddrill) (see "Certain Recent
Developments"), two Class 2 directors (Messrs. Spier and Davey), and two Class 3
directors (Messrs. Lyons and Hardesty). See "Certain Recent Developments." The
Class 1, Class 2 and Class 3 directors currently serve until the annual meetings
of stockholders to be held in 1998, 1996 and 1997, respectively, and after the
Meeting, until 1998, 1999 and 1997, respectively, and until their respective
successors are elected and qualified. At each annual meeting of stockholders,
directors are elected for a full term of three years to succeed those whose
terms are expiring. Vacancies on the Board of Directors and newly created
directorships can generally be filled by vote of a majority of the directors
then in office. Executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors.
At the Meeting, stockholders are being asked to elect two directors to
serve as Class 2 directors until the 1999 annual meeting of stockholders and
until their successors are duly elected and qualified.
In order to be elected, a nominee for director must receive an affirmative
vote of a plurality of the shares of Common Stock voted, in person or by proxy,
at the Meeting.
Unless otherwise directed, the persons named in the enclosed form of proxy
intend to vote for the election of the nominees listed below as directors for
the ensuing term and until their successors are elected and qualified. In the
event any such nominee for any reason should not be available as a candidate for
director, votes will be cast pursuant to authority granted by the enclosed proxy
for such other candidate or candidates as may be nominated by management. The
Board of Directors knows of no reason to anticipate that the nominees will not
be candidates. Except as set forth below, each of the nominees has been engaged
in his principal occupation during the past five years. There is no family
relationship between any of the directors and executive officers of the Company.
The following sets forth certain information as of December 20, 1996,
concerning the nominees for election as directors of the Company and the other
directors whose terms of office will continue after the Meeting.
NOMINEES FOR ELECTION AS CLASS 2 DIRECTORS WITH TERMS EXPIRING IN 1999
William Spier (age 62) became a director of the Company in July 1991. Mr.
Spier was chairman of DeSoto, Inc., a detergent manufacturer, from May 1991 to
September 27, 1996 and chief executive officer of DeSoto, Inc., from May 1991 to
January 1994 and from September 1995 to September 27, 1996. He has been
president and chairman of Sutton Holding Corp., a New York based investment
company, since 1989. From
2
<PAGE> 5
1982 to 1989, Mr. Spier was a private investor. Prior to that time, he was vice
chairman of Phibro-Salomon Inc., an investment banking firm. Mr. Spier is also a
director of Holmes Protection Group, Inc., a security and alarm systems company,
Keystone Consolidated Industries, Inc., a manufacturer of various steel and
other construction products, and Geotek Communications, Inc., a
telecommunications company.
James J. Davey (age 55) was elected as a director of the Company effective
February 25, 1993, and was elected as vice chairman on May 31, 1994. He first
joined the Company as chief operating officer in October 1992. Mr. Davey served
as chief executive officer from February 25, 1993 until May 31, 1994, and from
February 24, 1994 until May 31, 1994, he also served as president. From October
1992 until February 1993, Mr. Davey served as president of the Company's on-line
lottery services subsidiary, Automated Wagering International, Inc. ("AWI").
From 1986 to October 1992, Mr. Davey was the director for the Oregon State
Lottery. From 1985 to 1986, Mr. Davey was deputy director and assistant director
of Administration for the Oregon State Lottery. From 1980 through 1984, Mr.
Davey served as administrator for the Oregon Department of Revenue.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ELECTION OF EACH OF THE
NOMINEES, EXCEPT THAT MESSRS. SPIER AND LYONS DO NOT RECOMMEND A VOTE FOR MR.
DAVEY. SEE "DISSENT OF MESSRS. SPIER AND LYONS."
3
<PAGE> 6
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
Directors with Terms Expiring in 1997
William P. Lyons, Jr. (age 55) became a director of the Company in February
1993, in connection with the Stockholders' Agreement between the Company and
William Spier. Mr. Lyons is president of William P. Lyons and Company, Inc., a
New York headquartered investment company, and since May 1995, has served as
chairman of the board of Holmes Protection Group, Inc., a security and alarm
systems company. Since 1992 Mr. Lyons has been chairman of JVL Corporation, a
holding company which formerly owned a pharmaceutical manufacturing operation.
In 1988, a company affiliated with Mr. Lyons acquired Duro-Test Corporation and
Mr. Lyons served for four years as that New Jersey specialty lighting
manufacturer's chairman and chief executive officer. Mr. Lyons previously was a
professor (adjunct) of Law and an associate professor (adjunct) of Management at
Yale University, where he taught courses on corporate financial reporting,
corporate valuation and entrepreneurship for more than six years. Mr. Lyons is
also a director of Keystone Consolidated Industries, Inc., a manufacturer of
various steel and other construction products, Lydall, Inc., a specialty fiber
materials manufacturer, and Holmes Protection Group, Inc.
John R. Hardesty (age 56) was appointed to the Board of Directors effective
December 18, 1996 to fill a vacancy thereon created by the resignation of
Jeffrey D. Cushman. See "Certain Recent Developments." Mr. Hardesty is chairman
of Electro Dynamics Crystal Corporation, a manufacturer of electronic components
for the communication industry. Mr. Hardesty also owns 100% of Thermo Dynamics,
Inc., a manufacturer of synthetic quartz for the electronics industry, and is a
director of Reno Air, Inc., a commercial airline, and LeTeko, Inc., a gold
exploration company. From 1988 until its sale in 1995, Mr. Hardesty was the
owner and chairman of Dixson Inc., a manufacturer of electronic instruments for
the heavy duty truck market and process control market.
Directors with Terms Expiring in 1998
Richard R. Burt (age 49) became a director and chairman of the Company on
December 15, 1994. Mr. Burt is a founder and the chairman of International
Equity Partners, L.P. ("IEP") in Washington D.C., a merchant banking firm. From
1991 to 1994, Mr. Burt was a partner in McKinsey & Co., a world-wide management
consulting firm. During the period from 1989 to 1991, Mr. Burt served as the
Chief Negotiator in the Strategic Arms Reduction Talks (START) with the former
Soviet Union. He was the U.S. Ambassador to the Federal Republic of Germany from
1985 to 1989. Mr. Burt was the Assistant Secretary of State for European and
Canadian Affairs from 1983 to 1985, and served as Director of Politico-Military
Affairs from 1981 to 1983. Mr. Burt also serves as the Chairman of the Board of
Weirton Steel, Inc., a tin-plate manufacturer, and serves on the Board of
Directors of the Paine Webber Mutual Funds, Hollinger International, a company
owning newspapers in Europe, Canada, Australia and the United States, and Archer
Daniels Midland, an agri-business company. In addition, Mr. Burt is a member of
the Textron Corporation's International Advisory Council and the Bank of
Montreal's International Advisory Board.
Patricia W. Becker (age 45) was appointed to the Board of Directors
effective January 18, 1995 to fill a newly created position thereon. Ms. Becker
is a consultant to the Company and serves as chair of its Compliance Committee.
Ms. Becker served as the chief of staff to Bob Miller, Governor of Nevada, from
October 1993 to January 1995. Prior to that, she was senior vice president,
general counsel and secretary of Harrah's Casino Hotels from June 1989 to July
1993 and vice president, general counsel and secretary from 1984 to 1989. Ms.
Becker was deputy and chief deputy attorney general assigned to the Nevada
Gaming Division from 1979 until she was appointed to the State Gaming Control
Board, where she served until September 1984. Ms. Becker is a vice chair for the
Gaming Law Section of the American Bar Association, a past president of the
Nevada Trial Lawyers Association and a trustee of the International Association
of Gaming Attorneys. Ms. Becker currently serves on the Board of Directors of
Fitzgeralds Gaming Company, a Nevada based company which owns casinos.
4
<PAGE> 7
Richard M. Haddrill (age 43) was appointed to the Board of Directors on
August 21, 1996. He filled a vacancy created by the resignation of Stephen
Vanderwoude. At that time he was also appointed president of the Company. In
addition, on September 9, 1996, Mr. Haddrill was elected as a director of AWI.
Mr. Haddrill joined the Company in December 1994 as the Company's executive vice
president -- operations and chief financial officer. In December 1994, Mr.
Haddrill was also appointed treasurer of the Company. In August 1995, Mr.
Haddrill also assumed the position of chief executive officer of United Wagering
Systems International, Inc. ("UWS"). On August 2, 1996, he was appointed as
chief operating officer of the Company. From July 1992 until November 1994, Mr.
Haddrill served as executive vice president -- corporate and president of
international subsidiaries for Knowledgeware, Inc., a provider of application
development software and services worldwide. Prior to joining Knowledgeware,
Inc. in 1991 as an executive vice president and chief financial officer, Mr.
Haddrill was a managing partner of the Colorado and New Mexico offices of the
accounting firm of Ernst & Young from August 1989 to October 1991 and held
various positions as a partner or employee with Ernst & Young from January 1975
to September 1989.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a compensation committee (the
"Compensation Committee"), an audit committee (the "Audit Committee"), a
strategic planning committee (the "Strategic Planning Committee") and a special
committee (the "Special Committee"). In August 1995, the Board of Directors
abolished the executive committee, which did not meet in 1995. The members of
these committees serve at the pleasure of the Board of Directors, and such
committees provide such support and assistance to the Board of Directors as it
so directs. The Board of Directors does not have a nominating committee. On
November 7, 1996, the Board of Directors reconstituted the Compensation
Committee and Audit Committee in order that such committees would more closely
represent the composition of the entire Board of Directors.
The Compensation Committee is currently comprised of Messrs. Burt, Davey
and Spier and Ms. Becker with Mr. Burt serving as chairperson. During all of
1995 and during 1996 until November 7, 1996, the Compensation Committee was
comprised of Messrs. Lyons and Spier, with Mr. Lyons serving as chairperson, and
Ms. Becker became a member of this committee in June 1995. The Compensation
Committee considers and recommends to the Board of Directors the compensation to
be paid to executive officers, makes decisions regarding grants under the
Company's stock incentive plan, makes recommendations to the Board of Directors
with respect to the Company's compensation policies, and performs such other
duties as the Board of Directors may from time to time request. The Compensation
Committee met once during 1995 and did not meet during 1996.
The Audit Committee is currently comprised of Messrs. Davey and Spier and
Ms. Becker with Ms. Becker serving as chairperson. During all of 1995 and during
1996 until November 7, 1996, the Audit Committee was comprised of Messrs. Lyons
and Spier, with Mr. Lyons serving as chairperson, and prior to his resignation
on April 4, 1996, Jeffrey D. Cushman also served on the Audit Committee. The
Audit Committee reviews the Company's financial and accounting controls,
practices and procedures, evaluates and recommends an independent public
accounting firm to audit the financial statements of the Company and evaluates
its performance. The Audit Committee also determines the duties and
responsibilities of the internal accounting and auditing staff of the Company.
The Audit Committee met five times during 1995 and two times during 1996.
The Strategic Planning Committee is currently comprised of Ms. Becker and
Messrs. Burt, Davey, Spier and Lyons with Mr. Burt serving as the chairperson.
The Strategic Planning Committee considers the various strategic and financial
alternatives and opportunities which may be available to the Company and
formulates an overall long-term strategic plan for the Company designed to
enhance shareholder values. The Strategic Planning Committee met 17 times in
1995 and 10 times during 1996.
In connection with the recent proposal by Mr. Spier to acquire the Company,
the Board of Directors has also established the Special Committee to consider
Mr. Spier's proposal (described elsewhere herein) and otherwise discharge the
duties of the Strategic Planning Committee of which Messrs. Spier and Lyons are
members. See "Compensation Committee Interlocks and Insider Participation." The
Special Committee is
5
<PAGE> 8
currently comprised of Ms. Becker and Messrs. Burt, Davey and Hardesty, with Mr.
Burt serving as the chairperson. The Special Committee met three times during
1996.
CERTAIN ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS
The Board of Directors held 23 meetings during 1995 and held 25 meetings
during 1996. All directors attended all meetings of the Board of Directors and
each of the committees of the Board of Directors on which he or she served,
except four board meetings that Mr. Lyons did not attend in 1995, and four board
meetings that he did not attend in 1996, two meetings of the Audit Committee
that Mr. Cushman did not attend in 1996 while he was a director and a member of
such committee, and one meeting of the Audit Committee that Mr. Spier did not
attend in 1996, four board meetings that Mr. Davey did not attend in 1995 and
two board meetings that Mr. Cushman did not attend in 1995.
During fiscal years 1995 and 1996, directors who were not employees of the
Company received $15,000 annually for serving on the Board of Directors, plus
$1,000 for each Board meeting and $1,000 for each Audit or Compensation
Committee meeting attended. A non-employee director serving as chairperson of
the Company's Board of Directors receives $30,000 annually for serving in such
capacity. Each non-employee director who serves as the chairperson of any
committee of the Board of Directors receives a further fee of $7,500 per annum
for his or her services in such capacity. In consideration of the extensive work
and time required of the members of the Strategic Planning Committee, effective
April 1, 1995, the Board approved compensation to the chairperson of the
Strategic Planning Committee of $10,000 per month, to non-employee directors
serving on the subcommittee of the Strategic Planning Committee of $5,000 per
month and to non-employee directors serving on the Strategic Planning Committee
of $2,500 per month. Effective August 1, 1995, the Board approved adjusting the
Strategic Planning Committee fees to: Chairperson, $5,000 per month, and
Committee members, $2,500 per month. Directors are also reimbursed for
out-of-pocket expenses incurred in attending Board of Directors and committee
meetings. As non-employee directors, Mr. Spier was granted an option under the
Company's 1991 Stock Option Plan to purchase 10,000 shares of Common Stock at an
exercise price of $14.00 per share; Mr. Lyons was granted an option to purchase
10,000 shares of Common Stock at an exercise price of $14.50 per share pursuant
to the Company's 1992 Stock Incentive Plan, and an option to purchase 20,000
shares at an exercise price of $11.25 per share pursuant to the Company's 1993
Stock Incentive Plan for Non-Employee Directors; Mr. Burt was granted an option
to purchase 10,000 shares of Common Stock pursuant to the Company's 1994 Stock
Incentive Plan, and an option to purchase 20,000 shares pursuant to the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $8.25 per share; and Ms. Becker was granted
an option to purchase 10,000 shares of Common Stock pursuant to the Company's
1994 Stock Incentive Plan and an option to purchase 20,000 shares pursuant to
the Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $9.28 per share. During 1995, Mr. Cushman
received an option to purchase 10,000 shares of Common Stock pursuant to the
Company's 1994 Stock Incentive Plan and an option to purchase 20,000 shares
pursuant to the Company's 1993 Stock Incentive Plan for Non-Employee Directors,
with both options having an exercise price of $7.19 per share. Pursuant to the
terms of the stock option agreements with Mr. Cushman, the exercisable options
terminated three months following the date of his resignation. On August 12,
1996, concurrent with his becoming a non-employee director as a result of the
expiration of his employment agreement in August 1996, Mr. Davey received an
option to purchase 10,000 shares of Common Stock pursuant to the Company's 1994
Stock Incentive Plan and an option to purchase 20,000 shares pursuant to the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $3.41 per share. On December 18, 1996,
concurrent with his becoming a non-employee director, Mr. Hardesty received an
option to purchase 10,000 shares of Common Stock pursuant to the Company's 1994
Stock Incentive Plan and an option to purchase 20,000 shares pursuant to the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, with both
options having an exercise price of $4.13 per share. Directors who are employees
of the Company receive no additional compensation for serving as a director,
except that all directors receive up to $10,000 in reimbursement of their
expenses in connection with the initial preparation of financial information
required in answer to various regulatory disclosure requirements and up to
$1,500 per quarter thereafter to keep such financial information current.
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<PAGE> 9
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and positions held in the Company and
certain other information are as follows:
<TABLE>
<CAPTION>
NAME POSITION
----------------------------------------- -----------------------------------------
<S> <C>
Richard M. Haddrill...................... President, Treasurer and Chief Financial
Officer
Dena J. Rosenzweig....................... General Counsel
Susan J. Carstensen...................... Vice President, Finance
Michael L. Eide.......................... President, Video Lottery Consultants,
Inc.
</TABLE>
Mr. Haddrill's background is summarized above.
Dena J. Rosenzweig (age 39) was appointed general counsel of the Company on
September 18, 1996. From February 1995 until September 1996 she was deputy
general counsel of the Company. Since February 1995 she has been assistant
secretary of the Company and general counsel of AWI. From February 1995 until
March 1996 she was assistant secretary of AWI. She has served as secretary of
AWI since March 1, 1996. From September 1993 until February 1995 Ms. Rosenzweig
was general counsel of Republic Waste Industries, Inc., a waste management and
environmental services company located in Atlanta, Georgia. From July 1992 until
September 1993 she served as associate counsel of Healthdyne, Inc. of Atlanta,
Georgia, a provider of home health care services. From July 1989 through June
1992 Ms. Rosenzweig was a corporate associate of Alston & Bird, Attorneys at
Law, in Atlanta, Georgia.
Susan J. Carstensen (age 34) was appointed vice president, finance of the
Company on November 7, 1996. From June 1995 to November 1996 she was corporate
controller for the Company. From February 1995 to June 1995 she was the director
of internal audit for the Company. Ms. Carstensen was manager, cost and
financial accounting for Martin Marietta Astronautics Group in Denver, Colorado
from May 1991 through February 1995. From August 1985 through May 1991 Ms.
Carstensen was with the accounting firm of Ernst & Young in Denver, Colorado.
Michael L. Eide (age 46) has served as president and a director of the
Company's wholly-owned subsidiary, Video Lottery Consultants, Inc. ("VLC"),
since December 1, 1994. Prior to that time he served as treasurer and chief
financial officer of the Company from May 1991 until December 1994 and assistant
secretary from October 1992 through December 1994. He has also held the
positions of secretary, treasurer and assistant secretary with VLC during the
period November 1990 through December 1994. From 1977 to December 1988, Mr. Eide
was a principal in the accounting firm of Neil, Williamson, Eide and Staker in
Bozeman, Montana.
CERTAIN RECENT DEVELOPMENTS
Jeffrey D. Cushman was appointed to the Board of Directors on June 26,
1995. He filled a vacancy created by the resignation of Mark F. Spagnolo.
Pursuant to a Stockholders' Agreement with Electronic Data Systems Corporation
("EDS"), the Company agreed to appoint to the Board of Directors a person
nominated by EDS, and reasonably acceptable to the Company, upon purchase by EDS
of 545,454 shares of the Common Stock and 1,912,728 shares of the Company's
Series A Preferred Stock. This purchase was completed on February 25, 1994 and,
at that time, Mr. Spagnolo was designated as the EDS nominee to the Board of
Directors. EDS will continue to have the right to nominate one of the Company's
directors as long as its ownership of equity securities of the Company
represents at least 5% of the total combined number of outstanding shares of
Common Stock and Series A Preferred Stock. Mr. Spagnolo relinquished his seat on
the Board of Directors as EDS' designee to assume the role of acting chief
executive officer of the Company, and Mr. Cushman was designated as the EDS
nominee. See "Employment and Certain Other Contracts." Mr. Cushman resigned as a
director of the Company on April 4, 1996 and EDS has not exercised its right to
nominate a replacement.
7
<PAGE> 10
Mark L. Cushing, president of the Company's AWI subsidiary, resigned
effective September 9, 1996.
In July 1996, Mr. Spier requested that the Board of Directors appoint him
as the Company's interim chief executive officer (without compensation) and that
Mr. Haddrill be appointed the Company's chief operating officer. However, after
careful consideration and discussions with certain significant stockholders of
the Company and certain of the Company's key managers, the Board of Directors
declined to accede to Mr. Spier's request. At that time, Mr. Lyons (who is Mr.
Spier's nominee to the Board of Directors by virtue of a Stockholders' Agreement
between the Company and Mr. Spier) began to investigate the payments made by the
Company to IEP (see "Compensation Committee Interlocks and Insider
Participation"), and Messrs. Spier and Lyons began to express their
disagreements with the other members of the Board of Directors in regard to
certain matters. See "Dissent of Messrs. Spier and Lyons."
On August 21, 1996, the Board of Directors appointed Richard M. Haddrill to
the Board of Directors to fill the vacancy created by the resignation of Stephen
Vanderwoude. At that time, the Board of Directors also appointed Mr. Haddrill
president of the Company, in addition to his positions as chief financial
officer and treasurer. Messrs. Spier and Lyons opposed Mr. Haddrill's
appointment to the Board of Directors and his appointment as president. See
"Dissent of Messrs. Spier and Lyons." On September 9, 1996, Mr. Haddrill was
elected a director of AWI.
On December 18, 1996, the Board of Directors appointed John R. Hardesty to
the Board of Directors to fill the vacancy created by the resignation of Mr.
Cushman. Messrs. Spier and Lyons opposed the appointment of Mr. Hardesty. See
"Dissent of Messrs. Spier and Lyons."
CERTAIN LITIGATION
On December 9, 1996, a purported class action complaint, Richard Abrons vs.
Video Lottery Technologies, Inc., et al. C.A. No. 15414, was filed against the
Company, Messrs. Haddrill, Spagnolo, Davey, Cushman and Lyons and Ms. Becker in
the Court of Chancery of the State of Delaware in and for New Castle County. The
complaint alleges, among other things, breach of fiduciary duty by the
individual defendants for failing to take certain steps in connection with the
transaction proposed by Mr. Spier. See "Compensation Committee Interlocks and
Insider Participation." The plaintiff is seeking the following relief: (i) an
order that the action be maintained as a class action and that plaintiff be made
the class representative; (ii) an order directing the defendants to comply with
their fiduciary duties by taking all steps reasonably necessary to effect a
value-maximizing transaction; (iii) an order directing the defendants to account
to plaintiff and all members of the alleged class for their damages in an amount
to be determined; and (iv) an award of plaintiff's costs and expenses incurred
in connection with this matter. The Company and the named individual defendants
currently serving as directors (other than Mr. Lyons) believe that the complaint
is without merit and intend to contest the lawsuit vigorously.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information for the partial year
ending December 8, 1996 and for the years ended December 31, 1995, 1994 and 1993
concerning the compensation of the chief executive officer and each of the four
most highly compensated executive officers of the Company (other than the chief
executive officer) who were serving as executive officers as of December 31,
1995 or as of December 8, 1996. The table also sets forth the compensation paid
during the year ended December 31, 1995 or the partial year ending December 8,
1996 to any person who served as chief executive officer during either such
period regardless of compensation level.
8
<PAGE> 11
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION --------------------------
NAME AND ------------------ OTHER ANNUAL RESTRICTED STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY $ BONUS $ COMPENSATION $ STOCK $(1) (SHARES) COMPENSATION $
- --------------------------- ---- -------- ------- -------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark F. Spagnolo(2) 1996 N/A N/A N/A N/A N/A N/A
1995 123,333 120,000 4,116 -- -- 39,500
J. Stephen Vanderwoude(3) 1996 N/A N/A N/A N/A N/A N/A
Chief Executive Officer 1995 134,616 -- 390,000 -- -- --
and President 1994 143,269 100,000 -- 1,075,000 200,000 --
James J. Davey 1996 161,491 -- -- -- 30,000 --
Vice Chairman 1995 232,995 -- -- -- -- --
1994 222,114 101 -- -- -- --
1993 200,000 -- -- -- 50,000 --
Richard M. Haddrill 1996 196,893 -- -- 133,200 140,000 --
President, Chief 1995 200,000 150,000 -- -- -- --
Financial Officer and 1994 13,076 82,500 -- 621,250 140,000 --
Treasurer
Michael L. Eide 1996 199,966 -- -- -- 20,000 --
President -- VLC 1995 207,620 -- -- -- -- --
1994 180,433 -- -- -- 50,000 --
1993 151,742 -- -- -- -- --
Mark A. Cushing 1996 142,308 -- -- -- 10,000 --
President -- AWI 1995 200,000 100,000 -- -- -- --
1994 144,001 90,000 -- -- 50,000 --
1993 107,884 15,167 -- -- 40,000 --
Dena J. Rosenzweig 1996 133,232 10,000 -- -- 5,000 --
General Counsel
</TABLE>
- ---------------
(1) Restricted stock holdings at December 31, 1995, with respect to Mr.
Vanderwoude, numbered 25,000 shares with a market value of $118,750 and
such restrictions lapsed on these shares in June 1996. The initial grant
was 100,000 shares. The restrictions with respect to 25,000 shares lapsed
in June 1995, and the other 50,000 shares, with restrictions to lapse in
1997 and 1998, were forfeited pursuant to the terms of a Consulting and
Separation Agreement with Mr. Vanderwoude. See "Employment and Certain
Other Contracts." With respect to Mr. Haddrill's restricted stock holdings,
of the initial grant of 70,000 shares, 52,500 remained restricted as of
December 31, 1995, with a market value of approximately $249,000. The
restrictions on 17,500 shares lapsed in November 1996, and the restrictions
on 17,500 of the remaining shares will lapse in each of November 1997 and
1998. Mr. Haddrill was also awarded 30,000 shares of restricted Common
Stock which vest at a rate of one-third annually over the next three years
beginning on September 9, 1997. See "Employment and Other Contracts." All
dividends declared and paid by the Company, if any, on the restricted
stock, shall be held by the Company until such restrictions thereon lapse
at which time the dividends, without interest thereon, shall be paid.
(2) Mr. Spagnolo performed the duties of acting chief executive officer as an
independent contractor. See "Employment and Certain Other Contracts." Other
annual compensation represents a leased vehicle paid for by the Company.
All other compensation reflects $39,500 paid to Mr. Spagnolo with respect
to director fees for this fiscal year until his resignation and appointment
as acting chief executive officer on June 26, 1995. See "Management."
(3) Other annual compensation represents amounts paid pursuant to a Consulting
and Separation Agreement effective with Mr. Vanderwoude's resignation on
June 23, 1995. See "Employment and Certain Other Contracts."
(4) Mr. Cushing resigned effective as of September 9, 1996 and, as a result, all
of the options held by him have expired.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1995 AND DURING 1996
No options were granted during the fiscal year ended December 31, 1995 to
the named executives.
9
<PAGE> 12
The following table sets forth information with respect to options granted
under the Company's 1994 Stock Incentive Plan (other than 20,000 options granted
to Mr. Davey which were granted under the Company's 1993 Stock Incentive Plan
for Non-employee Directors) to each of the executive officers named in the
Summary Compensation Table above during 1996 through December 20, 1996.
OPTION GRANTS DURING 1996
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
------------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED(1) IN 1996 (PER SHARE) DATE 5% 10%
- -------------------------- ---------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mark F. Spagnolo.......... -- -- -- -- -- --
J. Stephen Vanderwoude.... -- -- -- -- -- --
James J. Davey............ 30,000(3) 11.0% $3.41 8/12/06 $ 64,336 $163,040
Richard M. Haddrill....... 140,000(3) 51.4% $4.44 9/09/06 $390,921 $990,670
Michael L. Eide........... 20,000(3) 7.3% $5.49 1/22/06 $ 69,053 $174,993
Mark A. Cushing........... 10,000(3) 3.7% $5.49 1/22/06 $ 34,526 $ 87,496
Dena J. Rosenzweig........ 5,000(3) 1.8% $5.49 1/22/06 $ 17,263 $ 43,748
</TABLE>
- ---------------
(1) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant. Such options may not be exercised
later than 10 years, or earlier than six months, after the date of grant.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock and overall market conditions. The amounts
reflected in this table may not necessarily be achieved.
(3) These options vest over a period of three years.
STOCK OPTION EXERCISES AND YEAR-END VALUES
The following table provides certain information with respect to the number
and value of unexercised options outstanding as of December 31, 1995. No options
were exercised by the named executives during the fiscal year ended December 31,
1995.
AGGREGATED 1995 OPTION EXERCISES
AND DECEMBER 31, 1995 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS
(IN COMMON SHARES) VALUE OF UNEXERCISED IN-THE-MONEY(1)
AT DECEMBER 31, 1995 OPTIONS AT DECEMBER 31, 1995
------------------------------- -------------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ------------------------------- -------------------------------------
<S> <C> <C>
J. Stephen
Vanderwoude(2)......... --/-- --/--
James J. Davey........... 50,000/-- --/--
Richard M. Haddrill...... 35,000/105,000 --/--
Michael L. Eide.......... 18,666/33,334 --/--
Mark A. Cushing.......... 43,332/46,668 --/--
Dena J. Rosenzweig....... --/-- --/--
</TABLE>
- ---------------
(1) Options are in the money if the fair market value of the underlying
securities exceeds the exercise or base price of the option. Fair market
value of the Common Stock underlying the options on December 31, 1995 was
$4.75, the last reported sales price on the National Market System of
NASDAQ on that date, which does not exceed the base price.
(2) The options granted to Mr. Vanderwoude were cancelled pursuant to the terms
of a Consulting and Separation Agreement dated June 23, 1995. See
"Employment and Certain Other Contracts."
10
<PAGE> 13
The following table provides certain information with respect to the number
and value of unexercised options outstanding as of December 20, 1996. No options
were exercised by the named executives during the partial year ended December
20, 1996.
AGGREGATED 1996 OPTION EXERCISES
AND DECEMBER 20, 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS
(IN COMMON SHARES) VALUE OF UNEXERCISED IN-THE-MONEY(1)
AT DECEMBER 20, 1996 OPTIONS AT DECEMBER 20, 1996
------------------------------- -------------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------- ------------------------------- -------------------------------------
<S> <C> <C>
J. Stephen Vanderwoude(2)............ --/-- --/--
James J. Davey(3).................... 13,333/16,667 $4,533/$5,667
Richard M. Haddrill.................. 140,000/140,000 --/--
Michael L. Eide...................... 36,667/35,333 --/--
Mark A. Cushing(4)................... --/-- --/--
Dena J. Rosenzweig................... --/5,000 --/--
</TABLE>
- ---------------
(1) Options are in the money if the fair market value of the underlying
securities exceeds the exercise or base price of the option. Fair market
value of the Common Stock underlying the options on December 20, 1996 was
$3.75, the last reported sales price on the National Market System of
NASDAQ on that date, which does not exceed the base price.
(2) The options granted to Mr. Vanderwoude were cancelled pursuant to the terms
of a Consulting and Separation Agreement dated June 23, 1995. See
"Employment and Certain Other Contracts."
(3) The options to acquire 50,000 shares of Common Stock granted to Mr. Davey in
February 1993 expired unexercised pursuant to the option agreement relating
thereto three months following the expiration of his employment agreement.
(4) The options granted to Mr. Cushing expired unexercised pursuant to the
option agreement relating thereto three months following his resignation.
EMPLOYMENT AND CERTAIN OTHER CONTRACTS
Separation Agreement with Daniel W. Bower. In September 1994, Daniel W.
Bower resigned as chairman of the Board of Directors and from his other
positions with the Company and its subsidiaries. The Company accepted Mr.
Bower's resignation in light of concerns initially raised during the Company's
gaming license application hearing before the Nevada State Gaming Control Board
relating to Mr. Bower's non-compliance with a former employer's internal policy
governing the entertainment of government officials during his tenure with that
firm. In connection with such resignation, the Company entered into an agreement
with Mr. Bower dated May 15, 1995, which agreement provided for a payment of
$187,500 by the Company to Mr. Bower upon its execution and $262,500 to be paid
in five quarterly installments of $52,500 each commencing July 1, 1995 and
ending July 1, 1996, with the final payment to include the period July 1, 1996
through September 1, 1996. The agreement further provided that the exercisable
stock options previously granted to Mr. Bower under the Company's 1992 Stock
Incentive Plan would continue to be exercisable for 90 days from the date of the
agreement and that certain medical benefits would continue until September 2,
1996. Mr. Bower agreed to certain confidentiality, non-interference and similar
provisions, and to restrictions on his ability to compete with the Company for a
two-year period.
Consulting and Separation Agreement with J. Stephen Vanderwoude. On June
23, 1995, J. Stephen Vanderwoude resigned as chief executive officer, president
and director of the Company and from his other positions with the Company and
its subsidiaries. On that date, the Company entered into a Consulting and
Separation Agreement with Mr. Vanderwoude that provided for payment of $250,000
cash and 25,000 shares of restricted stock which vested immediately. The Company
also agreed to pay Mr. Vanderwoude an additional $600,000 in 30 equal monthly
installments and to issue to Mr. Vanderwoude an additional 25,000 shares of
restricted stock which vested in 1996. Under the terms of the Consulting and
Separation Agreement, Mr. Vanderwoude has agreed to provide consulting services
to the Company at its request, relating to the
11
<PAGE> 14
management and supervision of the Company's operations, regulatory or strategic
planning until January 1, 1998, unless terminated earlier as mutually agreed by
the Company and Mr. Vanderwoude. Such consulting services shall not exceed 20
hours per month. In consideration for Mr. Vanderwoude's services, the Company
will pay him $1,000 per day for each day that he is requested to provide
consulting services. As of December 31, 1996, no amounts have been paid to Mr.
Vanderwoude under this agreement. Mr. Vanderwoude agreed to certain
confidentiality, non-interference and similar provisions, and to restrictions on
his ability to compete with the Company for an eighteen-month period. In
connection with the employment of Mr. Vanderwoude in 1994, the Company entered
into an employment contract with Mr. Vanderwoude effective May 31, 1994, which
agreement terminated upon the effective date of the Consulting and Separation
Agreement.
Compensation Arrangement with Mark F. Spagnolo and EDS. Mark F. Spagnolo
was appointed acting chief executive officer of the Company replacing J. Stephen
Vanderwoude, effective June 26, 1995. Mr. Spagnolo went on a temporary leave of
absence from his position of division vice president of EDS at the Company's
request. In connection with Mr. Spagnolo's appointment, the Company and EDS
entered into an agreement under which Mr. Spagnolo relinquished all EDS duties
during this temporary leave of absence, including all duties and
responsibilities for EDS with respect to the Company. While serving the Company
in this capacity, Mr. Spagnolo did not sign or approve any filing or other
matter under the securities acts (including approvals or reviews of public
disclosures of information). Mr. Spagnolo performed his duties of acting chief
executive officer as an independent contractor for which the Company paid Mr.
Spagnolo a fee of $20,000 per month together with medical benefits, life
insurance and automobile use comparable to those previously provided to him by
EDS. Mr. Spagnolo agreed to certain confidentiality, non-interference and
similar provisions, and was entitled to cash bonuses in the same manner as such
bonuses were available to other executive officers of the Company. Effective
April 5, 1996, Mr. Spagnolo's temporary leave of absence terminated and he
returned to EDS. Mr. Spagnolo was paid a bonus of $120,000 for the period from
June 26, 1995 to December 31, 1995.
Employment Agreement with Richard M. Haddrill. On September 9, 1996 the
Board of Directors approved the terms of an employment agreement with Mr.
Haddrill executed as of December 2, 1996. Pursuant to this agreement, Mr.
Haddrill serves the Company as its president. Unless sooner terminated pursuant
to its terms, the employment agreement terminates on January 1, 1999. The
employment agreement provides for a base salary of $240,000 and a cash bonus of
$150,000 payable on January 2, 1997. For the years ending December 31, 1997 and
1998, Mr. Haddrill is eligible to receive bonuses of up to $450,000 and
$504,000, respectively, if certain performance criteria are satisfied for such
year. In addition, under the employment agreement, Mr. Haddrill was awarded
30,000 shares of restricted Common Stock that vest at the rate of one-third
annually over the next three years beginning on September 9, 1997, and Mr.
Haddrill was awarded options to purchase 140,000 shares of Common Stock at an
exercise price of $4.44 per share, the fair market value of the Common Stock as
of December 2, 1996, 70,000 shares of which vested immediately and 35,000 shares
of which vest upon each of the first and second anniversaries of the date of
grant. The employment agreement further provides that if Mr. Haddrill's
employment is terminated for any reason, then all unvested restricted shares
lapse. In addition, the employment agreement provides that if Mr. Haddrill's
employment is terminated for "cause" (as defined in the employment agreement) or
by him other than for "good reason" (as defined in the employment agreement),
then all unvested options shall be forfeited. If Mr. Haddrill's employment is
terminated for any other reason, then certain of the options become exercisable,
and all such options become immediately exercisable upon a "change of control"
(as defined in the employment agreement) of the Company. The employment
agreement further provides that Mr. Haddrill's existing options to acquire
140,000 shares Common Stock, all of which are out-of-the-money, will not be
repriced. In addition, if Mr. Haddrill's employment is terminated for any reason
other than "cause" or if he terminates his employment for "good reason," then he
is entitled to receive all accrued but unpaid salary and bonus and to receive a
lump sum equal to the greater of the aggregate amount of the base salary
remaining to be paid under the terms of the employment agreement and $420,000
(except in certain cases this amount is reduced to $350,000). Mr. Haddrill is
entitled to the reimbursement of relocation expenses and other business
expenses. Finally, the employment agreement provides that Mr. Haddrill will not
compete with the Company
12
<PAGE> 15
for a period of 18 months following his termination. Messrs. Spier and Lyons
voted against the approval of this agreement. See "Dissent of Messrs. Spier and
Lyons."
Agreement with Dena J. Rosenzweig. Ms. Rosenzweig currently provides legal
services to the Company as its general counsel and as the general counsel and
secretary of AWI, and has an agreement with the Company to continue in those
positions through January 31, 1997. That agreement provides that for the months
of February and March 1997, Ms. Rosenzweig will provide certain such services to
the Company upon reasonable notice and at mutually agreed upon times for up to
ten days per month. In consideration of such services, Ms. Rosenzweig shall
receive, for the four-month period beginning October 1, 1996 and ending January
31, 1997, the sum of $16,667 per month. From February 1, 1997 through July 31,
1997, Ms. Rosenzweig shall receive the sum of $22,237 per month.
Agreement with Michael L. Eide. On January 17, 1995, the Company entered
into an agreement with Mr. Eide to provide for the continuance of his position
as president of VLC. If Mr. Eide is removed from his position with the Company
without cause, he will receive his then current salary for a period of six
months following termination. In the event there is a change of control of the
Company and Mr. Eide's employment is terminated by the Company without good
cause, or by Mr. Eide for certain reasons set forth in the agreement, then Mr.
Eide is entitled to an amount equal to twice his annual salary. Mr. Eide also
agreed to certain confidentiality, non-competition and similar provisions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As described earlier in this Proxy Statement, the Company has a
Compensation Committee currently comprised of Ms. Becker and Messrs. Burt, Davey
and Spier. However, in 1995 and 1996, executive officer compensation was
established by the Board of Directors. Mr. Haddrill became a member of the Board
of Directors in August 1996 and is an executive officer of the Company, but he
did not participate in the deliberations of the Board of Directors with respect
to the setting of his own compensation.
Richard R. Burt, who became the Chairman of the Board of Directors in
December 1994, is the chairman and a founder of IEP, which has been retained by
the Company to provide consulting services and to assist the Company in
connection with its international activities since October 1994 at a rate of
$15,000 per month plus expenses. The Company paid IEP an aggregate of
approximately $206,680 during the year ended December 31, 1995 and an aggregate
of $202,095 for 1996 (through December 20, 1996). Although the formal agreement
with IEP expired as of September 30, 1995, the Company continued to utilize the
services of IEP throughout the year and, accordingly, continued to make payments
to IEP for such services. The Board of Directors has ratified the payment of
these amounts and extended the agreement until October 1997 unless earlier
terminated upon 30 days notice. Messrs. Spier and Lyons, however, objected to
this ratification and extension and have raised certain questions with respect
to this matter. See "Dissent of Messrs. Spier and Lyons."
In addition, Mr. Burt and the Company entered into a consulting agreement
in November 1994, under which Mr. Burt is to provide advice and assistance
relating to the promotion of the Company's business and to assist in the
development of business opportunities for the Company. The agreement provides
for a per day rate of $1,000 for each day such services are performed and
reimbursement of out-of-pocket expenses. The agreement is separate and distinct
from Mr. Burt's duties and responsibilities as a director of the Company. The
agreement further provides for termination of the agreement by Mr. Burt or the
Company, without penalty, upon 90 days' prior written notice. The Company paid
to Mr. Burt an aggregate amount of approximately $1,000 as fees and
approximately $900 as out-of-pocket expenses during the fiscal year ended
December 31, 1995 and no fees or expenses were paid for 1996 (through December
20, 1996) pursuant to the agreement.
In January 1995, the Company entered into a consulting agreement with
Patricia W. Becker, a director of the Company, for a period of two years
commencing January 16, 1995. The agreement provides that Ms. Becker shall serve
as the chairperson of the Compliance Committee of the Company, and otherwise
provide advice and assistance to the Company on matters of regulatory compliance
and such other matters as requested by the Company. The agreement provides for
an annual retainer fee of $75,000 plus a per day rate of
13
<PAGE> 16
$1,000 for each day such services are performed and reimbursement of
out-of-pocket expenses. The agreement is separate and distinct from Ms. Becker's
duties and responsibilities as a director of the Company. The agreement further
provides for termination of the agreement by Ms. Becker or the Company, without
penalty, upon 90 days' prior written notice. The Company paid Ms. Becker an
aggregate amount of approximately $140,000 during the fiscal year ended December
31, 1995 and an aggregate amount of approximately $114,000 for 1996 (through
December 20, 1996) pursuant to the agreement. This agreement was extended for an
additional one year in December 1996.
On February 23, 1993, William Spier, on behalf of himself and an investor
group (see Note 2 to the "Stock Ownership of Certain Beneficial Owners and
Management" table), executed a Stockholders' Agreement with the Company. The
Stockholders' Agreement, among other things, limits the manner of disposition of
shares of Common Stock held by these parties, prohibits them from soliciting
proxies in opposition to the Board of Directors, subjects certain proposals by
these persons of merger or similar transactions to consent by unaffiliated
directors and stockholders, limits the right of these persons to acquire
additional shares (other than pursuant to certain options granted by Larry
Lippon, the Company's former chief executive officer, or the Company), grants
these persons the right to require the Company to register their shares under
the Securities Act of 1933, provides for the reimbursement of certain of the
expenses of these persons (estimated to be approximately $85,000), and grants
these persons the right to appoint one person in addition to Mr. Spier to the
Board of Directors. In connection with this Agreement, William P. Lyons was
appointed to the Board of Directors. In addition, the Stockholders' Agreement
fixed the size of the Board of Directors at six members, although the Board of
Directors (including Mr. Spier) subsequently increased the size of the Board to
seven members by a unanimous vote.
In February 1994, EDS, through a wholly owned subsidiary, purchased from
the Company 545,454 shares of Common Stock and 1,912,728 shares of the Company's
Series A Junior Preferred Stock for an aggregate of $67,600,005 or $27.50 per
share. The Company used $38,101,821 of the proceeds from this transaction to
purchase from an investor group represented by Mr. Spier options to acquire
2,458,182 shares of Common Stock, which shares were owned by Larry Lippon, the
Company's former chief executive officer. Mr. Lippon granted these options to
the investor group represented by Mr. Spier pursuant to a Purchase and Option
Agreement between the investor group and Mr. Lippon dated as of October 1992.
The Company exercised these options for $27,040,002 or $11.00 per share and
retired the shares of Common Stock acquired thereby. As part of this agreement,
the investor group exercised its remaining options to acquire 119,412 shares of
Common Stock.
In 1994, Mr. Spier entered into an agreement with a subsidiary of EDS
(PremiTech), which is a limited partner of HP Partners L.P. (in which Mr. Spier
is also a partner), to acquire the partnership interest in HP Partners L.P. held
by EDS for approximately $2,000,000, at the option of EDS, in the event that EDS
did not enter into an agreement for the provision of information technology
services to Holmes Protection Group, Inc.
HP Partners L.P. holds approximately 35% of the common stock of Holmes
Protection Group, Inc. and has the right to appoint three directors. Mr. Spier
serves as a director of Holmes Protection Group, Inc. EDS and Holmes Protection
Group, Inc. entered into an information technology services agreement, similar
to the agreement between EDS and the Company described below, in April 1995.
On September 18, 1996, Mr. Spier filed with the Securities and Exchange
Commission (the "SEC") a Schedule 13D indicating that he, on behalf of himself
and possibly other parties, including Mr. Lyons, had expressed to the Board of
Directors an interest in exploring a possible acquisition of AWI or the business
of the Company. See "Security Ownership of Certain Beneficial Owners and
Management." On November 14, 1996, Mr. Spier delivered a letter to the Board of
Directors proposing an acquisition of the Company by an investor group Mr. Spier
is forming (the "Spier Proposal"). The Spier Proposal contemplates the payment
of $6.00 per share in cash and is subject to a number of conditions, including
obtaining financing and regulatory approval. On November 26, 1996, Mr. Spier
delivered a letter to the Board of Directors relating to the Spier Proposal. On
December 4, 1996, Mr. Spier's counsel delivered a letter to Board of Directors
including proposed terms for the Spier Proposal. On December 6, 1996, the Board
constituted a Special Committee (consisting of Messrs. Burt and Davey and Ms.
Becker) to consider the Spier Proposal and any other such proposals that may be
forthcoming. Mr. Hardesty was added as a member of the Special Committee upon
his
14
<PAGE> 17
election to the Board of Directors on December 18, 1996. The Special Committee
offered to enter into negotiations with Mr. Spier and his investor group if
certain concerns (including concerns about the feasibility of the transaction,
the availability of financing and the need for regulatory approval) were
satisfied. On December 17, 1996, Mr. Spier delivered a letter to the Board of
Directors which, among other things, restated the Spier Proposal and offered to
purchase up to twenty percent (20%) of the Company's Common Stock at prices up
to $6.00 per share after entering into a Merger Agreement. On December 18, 1996,
Mr. Spier filed an amendment to his Schedule 13D which, among other things,
encouraged stockholders to communicate their support for the Spier Proposal to
the Board of Directors. By letter dated December 23, 1996, the Special Committee
notified Mr. Spier that his December 17, 1996 letter did not satisfy the Special
Committee's concerns. The Special Committee again requested that Mr. Spier
provide information regarding his proposed financing and the likelihood of
regulatory approval and requested that Mr. Spier agree to certain conditions to
assure that, as a director, Mr. Spier not be afforded any unfair advantage in
connection with any potential transaction. Mr. Spier has not agreed to the
Special Committee's conditions nor satisfied its concerns. The Special Committee
has not begun negotiations with Mr. Spier and there can be no assurance that any
transaction will result from the Spier Proposal. Copies of the letters
comprising the Spier Proposal have been filed as exhibits to Mr. Spier's
Schedule 13D.
The Company entered into a number of agreements with EDS starting in 1994.
Mark F. Spagnolo was an officer of EDS and was appointed a director of the
Company in accordance with one of the agreements. Mr. Spagnolo resigned as
director on June 23, 1995, and on June 26, 1995, Mr. Jeffrey D. Cushman, an
officer of EDS, was appointed to fill this position. Pursuant to a management
services agreement (the "MSA") with EDS dated as of January 1994, which became
effective as of March 1, 1994, EDS provided information and technology
management services to the Company's on-line lottery services subsidiary, AWI,
as part of a strategic technology partnership between the Company and EDS.
Pursuant to the agreement, the Company paid or accrued approximately $70,300,000
and $69,400,000 to EDS for costs and expenses in 1995 and 1994, respectively. Of
those costs and expenses, approximately $2,675,000 and $4,406,000 were
capitalized in conjunction with software development in 1995 and 1994,
respectively. At December 31, 1995 and 1996, the Company had a net payable to
EDS in the amount of approximately $10.7 million and $38.0 million,
respectively.
As a result of various disputes between the Company and EDS, the Company
has withheld certain payments from EDS. In July 1996, the MSA was terminated and
an interim operating arrangement has been implemented while the parties continue
efforts to resolve the disputes. The ultimate outcome of these efforts,
including whether or not EDS will continue to provide services, cannot be
predicted. The interim operating arrangement provides for the continuation of
certain services by EDS on a week-to-week basis. The current arrangement calls
for weekly payments in advance of services. The weekly payments are allocated by
the Company primarily to costs of on-line lottery revenues, research and
development (including capitalized software development, selling, general and
administrative expenses and deferred start-up costs) based on pre-
MSA-termination allocations and other information available. The allocations
represent management's best estimate of the fees attributable to services being
provided by EDS. At December 31, 1996, and December 31, 1995, the Company had
recorded a net payable to EDS of approximately $38.0 million and $10.7 million,
respectively, representing outstanding amounts billed by EDS for services. The
repayment (if any) of the outstanding balance due EDS recorded at December 31,
1996, could not be made in the near term from current working capital and
available amounts under the Company's loan agreement with its primary lender,
First Bank, NA.
On August 6 and August 7, 1996, respectively, AWI and the Company received
notice of a complaint filed by EDS in state court in Collin County, Texas,
against the Company and AWI alleging breach of the MSA. EDS is seeking payment
of charges totaling in excess of $33 million and has requested an injunction to
bar the Company and AWI from diverting any further proceeds received from
on-line lottery contracts until total payment of the disputed amounts has been
made, and a declaration that EDS has properly terminated the MSA and is,
therefore, not subject to the mandatory arbitration provisions of the MSA. The
Company has been withholding amounts payable under the MSA because of EDS
performance issues. The Company continues to evaluate the strategic direction of
its on-line lottery segment in light of the disputes with EDS and
15
<PAGE> 18
other disputes with certain customers and to enhance shareholder value. Should
the Company fail to resolve and settle the disputes satisfactorily or change its
strategic plan, the Company's consolidated financial position and results of
operations could experience a material adverse change.
None of the executive officers of the Company has served on the board of
directors of any other entity that has had any of such entity's officers serve
either on the Board of Directors or the Compensation Committee.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
General. Although the Board of Directors has established a compensation
committee (see "Committees of the Board of Directors"), the Board of Directors
has established, and has been responsible for, the Company's executive
compensation program for 1995 and 1996. While the Compensation Committee has met
once during such time, the Board of Directors has during that period set
compensation for the Company's executives.
The basic compensation philosophy of the Board of Directors is to formulate
policies and programs intended to attract, retain and motivate qualified
employees, including executive officers. In this regard, the Board of Directors
believes that it is important to pay reasonable and competitive salaries and
base compensation to executive officers that reflect their level of experience
and responsibility. In light of the Company's efforts to maintain its reputation
for integrity among its customers, regulatory authorities and licensing
agencies, a significant factor in the review of executive officer performance is
their strict adherence to the Company's code of conduct and their avoidance of
even the appearance of questionable conduct.
The Board of Directors also believes that officers of the Company should
view their interests and those of the Company's stockholders to be closely
aligned. Accordingly, the Board of Directors carefully considers the Company's
performance and that of the Common Stock in reviewing executive compensation and
may employ grants under the Company's stock option plan as an important part of
incentive compensation. In addition, the Board of Directors believes that grants
under the Company's stock option plan are an important means of attracting and
retaining qualified employees to the Company while at the same time instilling a
commitment to the long-term growth and success of the Company.
During 1995, no awards of stock options to employees of the Company were
made. The Board of Directors awarded options in 1996 to purchase an aggregate of
272,500 shares of Common Stock to 13 employees. Of these awards, options
covering an aggregate of 30,000 shares were granted to the presidents of the
Company's AWI and VLC subsidiaries. The exercise price of options typically is
the average between the high and low sales price of a share of Common Stock on
the date of grant and vesting of the options ranges over a period of two to
three years. By seeking to motivate employees through a stock option plan, the
Board of Directors has sought to focus employee attention on managing the
Company as an owner with an equity position with interests similar to those of
stockholders.
Chief Executive Officer Compensation. During 1995, the Board of Directors
approved a compensation package for acting chief executive officer Mark F.
Spagnolo which provided for a consulting fee of $20,000 per month, reimbursement
of expenses in accordance with Company policy and medical benefits, life
insurance and automobile use comparable to those provided to him by EDS. See
"Compensation of Executive Officers -- Employment and Certain Other Contracts."
Pursuant to the agreement entered into at the time of his appointment, Mr.
Spagnolo was entitled to cash bonuses in the same manner as such bonuses were
available to other executive officers of the Company. Based on its objective
evaluation of Mr. Spagnolo's performance, the Board of Directors approved a cash
bonus award of $120,000 to Mr. Spagnolo under the Company's 1995 management
compensation program. His temporary leave of absence from EDS terminated on
April 5, 1996. See "Compensation of Executive Officers -- Employment and Certain
Other Contracts."
On September 9, 1996, the Board of Directors approved the terms of an
employment agreement for Mr. Haddrill pursuant to which he became the Company's
president. Mr. Haddrill's compensation for 1996 will be paid pursuant to that
agreement. This employment agreement is substantially similar to Mr. Haddrill's
previous employment agreement which had not yet expired, except that the new
agreement provides for increased compensation commensurate with the additional
duties associated with the presidency of the Company. The new employment
agreement terminates on the same day as Mr. Haddrill's previous agreement.
16
<PAGE> 19
See "Compensation of Executive Officers -- Employment and Certain Other
Contracts." Although not the Company's chief executive officer, Mr. Haddrill is
currently the Company's highest ranking executive officer. In approving this
agreement, the Board of Directors considered a number of factors, including the
current market for senior executive compensation, the improved performance of
UWS under Mr. Haddrill's leadership, the lower overhead costs achieved by Mr.
Haddrill as the Company's chief financial officer, the fact that options and
restricted stock granted to Mr. Haddrill under this agreement have a value that
is significantly less than that of the options and restricted stock granted to
him under his original employment agreement, the significant responsibilities
and challenges he would face as president of the Company and the current discord
among the members of the Board of Directors. In addition, the Board of Directors
considered the expense associated with searching for a new president. Messrs.
Spier and Lyons objected to the appointment of Mr. Haddrill to the position of
president and voted against the approval his employment agreement. See "Dissent
of Messrs. Spier and Lyons."
Executive Officer Compensation. Generally, base salaries are reviewed
annually and adjusted as appropriate to reward performance and maintain the
Company's competitive position.
For 1995, cash bonuses were awarded after evaluating each individual's
combination of personal business unit and total Company performance. Cash
bonuses aggregating $370,000 were paid to three (3) executive officers.
Executive officers also participate in benefit plans available to employees
generally, including a qualified profit sharing 401(k) plan and employee stock
purchase plan.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code of 1986, as amended, generally disallows a federal tax
deduction to publicly held corporations for compensation paid in excess of $1
million in any taxable year to the chief executive officer and certain other
offices unless it is qualified "performance-based compensation," the material
terms of which are disclosed to and approved by stockholders. The Board of
Directors does not believe this provision currently impacts the Company, but
will continue to consider the tax deductibility of compensation in the future.
Dissent of Messrs. Spier and Lyons. Messrs. Spier and Lyons have dissented
from the inclusion of the foregoing report of the Board of Directors in this
Proxy Statement. See "Dissent of Messrs. Spier and Lyons."
MEMBERS OF THE BOARD OF DIRECTORS*
Patricia Becker
Richard R. Burt
James J. Davey
Richard M. Haddrill
John R. Hardesty
- ---------------
* Messrs. Spier and Lyons respectfully decline to join in the foregoing
report.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1995 and 1996 (through December 20, 1996), the Company and its
subsidiaries have had no transactions in which any director of the Company, or
any member of the immediate family of any such director, had a material direct
or indirect interest reportable under the applicable rules of the SEC except as
described under the caption "Compensation Committee Interlocks and Insider
Participation."
During 1995 and 1996 (through December 20, 1996), the Company and its
subsidiaries have had no transactions in which any executive officer of the
Company, or any member of the immediate family of any such execution officer,
had a material direct or indirect interest reportable under the applicable rules
of the SEC except as follows.
The brother of Dena J. Rosenzweig, the Company's general counsel, is a
partner in the law firm of Rogers & Hardin, which has served as legal counsel to
the Company since February 1993. The Company has paid fees to Rogers & Hardin
totalling approximately $121,200 from December 31, 1995 to November 30, 1996.
17
<PAGE> 20
COMPARATIVE STOCK PRICE PERFORMANCE GRAPH
The following graph compares the cumulative total return from December 1991
to September 30, 1996 on the Company's Common Stock with the Standard and Poor's
500 Stock Index and an industry peer group which is comprised of International
Game Technology (IGT) and WMS Industries, Inc. The industry peer group has been
changed from the peer group presented in the Company's last proxy statement by
removing therefrom Bally Gaming International, Inc. which was acquired by
another company in 1996. The return assumes reinvestment of dividends. The graph
assumes an investment of $100 on December 31, 1991 in the common stock of each
of the subject companies.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
OF COMPANY, PEER GROUP AND BROAD MARKET
<TABLE>
<CAPTION>
- ---------------------------------------------------------
VIDEO LOTTERY PEER GROUP BROAD MARKET
<S> <C> <C> <C>
BASE 100.00 100.00 100.00
- ---------------------------------------------------------
9/91 140.28 112.14 100.66
- ---------------------------------------------------------
12/91 130.56 195.76 109.10
- ---------------------------------------------------------
3/92 209.72 278.14 106.36
- ---------------------------------------------------------
6/92 151.39 226.22 108.37
- ---------------------------------------------------------
9/92 75.00 326.03 111.79
- ---------------------------------------------------------
12/92 77.78 406.18 117.44
- ---------------------------------------------------------
3/93 73.61 493.36 122.57
- ---------------------------------------------------------
6/93 54.17 609.16 123.16
- ---------------------------------------------------------
9/93 77.06 604.64 126.34
- ---------------------------------------------------------
12/93 94.44 478.67 129.28
- ---------------------------------------------------------
3/94 86.11 445.67 124.37
- ---------------------------------------------------------
6/94 61.11 308.93 124.90
- ---------------------------------------------------------
9/94 49.31 327.00 131.00
- ---------------------------------------------------------
12/94 52.78 268.13 130.98
- ---------------------------------------------------------
3/95 47.92 246.96 143.74
- ---------------------------------------------------------
6/95 36.11 267.69 157.46
- ---------------------------------------------------------
9/95 32.29 249.04 169.97
- ---------------------------------------------------------
12/95 26.39 197.11 180.21
- ---------------------------------------------------------
3/96 36.81 238.45 189.88
- ---------------------------------------------------------
6/96 25.00 306.67 198.14
- ---------------------------------------------------------
9/96 20.83 362.78 204.54
- ---------------------------------------------------------
</TABLE>
The stock price performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended (together, the "Acts"), except
to the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
18
<PAGE> 21
PROPOSAL 2 -- RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP as independent
auditors for the Company for the fiscal year ending December 31, 1996, and
proposes that the stockholders ratify this appointment at the Meeting. KPMG Peat
Marwick LLP has examined the Company's financial statements since its inception
and has no relationship with the Company other than that arising from its
appointment as independent auditors. Representatives of KPMG Peat Marwick LLP
are expected to be present at the Meeting, will have an opportunity to make a
statement if they desire to do so and will be available to respond to
appropriate questions from stockholders.
The Board of Directors appointed KPMG Peat Marwick LLP to serve as the
Company's auditors for the fiscal year ending December 31, 1996 over the
objections of Messrs. Spier and Lyons primarily relating to KPMG Peat Marwick
LLP's advice regarding review procedures described in the report of the
independent members of the Board of Directors and the report of the Company's
director of internal audit relating to certain payments made by the Company to
IEP. The objections of Messrs. Spier and Lyons are summarized in this Proxy
Statement under the caption "Dissent of Messrs. Spier and Lyons." The Board of
Directors, however, upon reviewing the advice of KPMG Peat Marwick LLP regarding
the reports of the independent members of the Board of Directors and the
Company's director of internal audit prepared in connection with this matter,
concluded that KPMG Peat Marwick LLP had properly discharged its duties to the
Company with respect to the IEP payments. Therefore, the Board of Directors
declined to accept the recommendation of Messrs. Spier and Lyons with respect to
the appointment of KPMG Peat Marwick LLP.
Ratification of the appointment of KPMG Peat Marwick LLP requires the
affirmative vote of a majority of the shares of Common Stock present, in person
or by proxy, at the Meeting.
THE BOARD OF DIRECTORS (WITH MESSRS. SPIER AND LYONS DISSENTING) RECOMMENDS
A VOTE FOR THIS PROPOSAL.
19
<PAGE> 22
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of November 12, 1996 by (i) each person owning
beneficially more than five percent of the outstanding shares of the Common
Stock, (ii) each director and director nominee of the Company, (iii) each person
named in the Summary Compensation Table appearing elsewhere herein and (iv) all
executive officers and directors of the Company as a group. The information
under this caption is based on representations made to the Company by individual
directors or nominees and/or filings made with the SEC. Each person has sole
investment and voting power with respect to the shares indicated except as
otherwise shown.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED(1) PERCENT OF CLASS(1)
--------------------- -------------------
<S> <C> <C>
William Spier+........................................ 1,496,574(2) 14.0%
101 East 52nd St., New York, NY 10022
R.B. Haave Associates, Inc............................ 861,600(3) 8.2%
36 Grove St., New Canaan, CT 06840
Fir Tree Partners (Fir Tree, Inc. d/b/a Fir Tree
Partners)........................................... 781,900(4) 7.3%
1211 Ave of the Americas, 29th Floor New York, NY
10036
EDS VLT Holdings, Inc................................. 545,454(5) 5.1%
5400 Legacy Drive, Plano, TX 75024
Richard M. Haddrill+++................................ 240,000(6)(7) 2.3%
Michael L. Eide++..................................... 163,727(8)(9) 1.5%
William P. Lyons+..................................... 62,000(10) *
James Davey+.......................................... 18,743(11) *
Mark L. Cushing....................................... 40,000(12)(13) *
J. Stephen Vanderwoude................................ 50,000(14) *
Mark F. Spagnolo...................................... 0(15) *
Patricia W. Becker+................................... 22,500(16) *
Richard R. Burt+...................................... 30,000(17) *
John R. Hardesty+..................................... 0(18) *
Dena J. Rosenzweig++.................................. 0 *
All directors and executive officers as a group....... 2,033,544(2)(6)(7)(8) 19.0%
(9)(10)(11)
(16)(17)
</TABLE>
- ---------------
+ Director of the Company
++ Executive Officer of the Company
* Denotes less than 1%
(1) Based on 10,682,109 shares of Common Stock outstanding as of the close of
business on the Record Date. The share holdings in this table do not
include rights to receive stock or options granted under various Company
plans to directors and executive officers that do not vest or become
exercisable within 60 days of November 12, 1996.
(2) Included in Mr. Spier's beneficial ownership are 1,197,659 shares of Common
Stock purchased by various parties in an investor group who have granted
Mr. Spier sole voting and investment power in respect of such shares. In
addition to Mr. Spier, the parties who hold these shares are Asgard Ltd., a
Guernsey corporation ("Asgard"), Parkway M&A Capital Corporation, a British
Virgin Islands corporation ("Parkway"), Video Investment Partners, a
Delaware limited partnership ("VIP"), Gabriel Capital L.P., a Delaware
limited partnership ("Gabriel"), Alpine Associates, Ltd., a New Jersey
limited partnership ("Alpine"), LBN Investment Associates, L.P., a Delaware
limited partnership ("LBN"), and Homer Noble, an individual ("Noble").
Asgard holds 148,307 shares; Parkway holds
20
<PAGE> 23
7,500 shares (not including 7,500 shares previously owned by Parkway which
are not controlled by Mr. Spier); VIP holds 226,167 shares; Alpine holds
370,766 shares; Gabriel holds 222,459 shares; LBN holds 148,307 shares; and
Noble holds 74,153 shares. Mr. Spier holds 285,405 shares acquired as part
of the investor group. These holdings represent approximately 1.39%, .07%,
2.12%, 3.47%, 2.10%, 1.4% and .7%, respectively, of the 10,682,109 shares
outstanding as of the Record Date. Each of Asgard, Parkway, VIP, Alpine,
Gabriel, LBN and Noble disclaims beneficial ownership of these securities
for purposes of Schedule 13D because each has granted to Mr. Spier sole
investment and voting power in respect of the shares. Also included in Mr.
Spier's beneficial ownership are 3,500 shares of Common Stock owned prior
to the purchases by the investor group and 10,000 shares of Common Stock
which may be acquired pursuant to options currently exercisable under the
Company's 1991 Stock Option Plan.
(3) R. B. Haave Associates, Inc. is an Investment Advisor registered under
Section 203 of the Investment Advisors Act of 1940, with sole power to vote
or to direct the vote and sole power to dispose or to direct the
disposition of the shares. R.B. Haave Associates, Inc.'s holdings are
reported pursuant to amendment to Schedule 13G dated August 6, 1996, as an
amendment to the initial Schedule 13D, as filed on March 22, 1996.
(4) Fir Tree, Inc. is a New York corporation doing business as Fir Tree
Partners ("Fir Tree Partners"), of which Mr. Jeffrey Tannenbaum is the sole
shareholder, executive officer, director and principal. Mr. Tannenbaum
acquired the shares through his position as principal of Fir Tree Partners
for an institutional account for which Fir Tree Partners serves as trading
advisor and for the account of the Fir Tree Value Fund, L.P. ("Fir Tree
Value Fund") of which Mr. Tannenbaum is the general partner. Fir Tree
Partner's holdings are reported pursuant to amendment to Form 13D dated
August 4, 1995, as an amendment to the initial Form 13D, as filed on
October 12, 1994. Fir Tree Partners is the beneficial owner of 781,900
shares of Common Stock of which 498,930 shares are beneficially owned by
Fir Tree Partners in its capacity as investment advisor to Fir Tree LDC, a
Cayman Islands limited duration company ("Fir Tree LDC"). Jeffrey
Tannenbaum is the investment advisor of Fir Tree LDC and, as such, retains
voting and dispositive power over the shares, and 282,970 shares are
beneficially owned by Fir Tree Partners for the account of the Fir Tree
Value Fund.
(5) EDS VLT Holdings Inc., a wholly-owned subsidiary of EDS, purchased 545,454
shares of Common Stock and 1,912,758 shares of Series A Junior Preferred
Stock from the Company, representing approximately 5.2% of the outstanding
shares of Common Stock and 100% of the outstanding shares of Series A
Junior Preferred Stock. Shares of Series A Junior Preferred Stock are
convertible on a share-for-share basis into shares of Common Stock after
the holder gives the Company at least 90 days prior written notice of such
conversion. In connection with the purchase of these securities, EDS
entered into an agreement with the Company, which, among other things,
limits the manner of disposition of these securities, prohibits EDS for six
years from soliciting proxies in opposition to the Company's Board of
Directors, subjects certain proposals by EDS for a merger or similar
transaction to certain consents by unaffiliated directors and stockholders,
limits the right to acquire additional shares, grants EDS the right to
nominate one person to serve on the Board of Directors, and grants certain
rights to require the Company to register the shares of Common Stock under
the Securities Act of 1933.
(6) Includes 70,000 shares of restricted stock of the Company vesting in equal
installments on each of November 1, 1995, 1996, 1997 and 1998 and 30,000
shares of restricted stock of the Company vesting in equal installments on
each of September 9, 1997, 1998 and 1999.
(7) Includes options to purchase 140,000 shares of Common Stock, currently
exercisable or which will be exercisable within 60 days, granted pursuant
to the Company's 1994 Stock Incentive Plan.
(8) Includes options to purchase 2,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1991 Stock Option Plan and
33,333 currently exercisable under the Company's 1994 Stock Option Plan.
(9) Includes 12,318 shares held by Mr. Eide's son as to which Mr. Eide
disclaims beneficial ownership.
(10) Includes options to purchase 10,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1992 Stock Incentive Plan and
options to purchase 20,000 shares of Common Stock currently exercisable
granted pursuant to the Company's 1993 Stock Incentive Plan for
Non-Employee Directors.
21
<PAGE> 24
(11) Includes options to purchase 5,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1994 Stock Incentive Plan and
options to purchase 10,000 shares of Common Stock currently exercisable
pursuant to the Company's 1993 Stock Incentive Plan for Non-Employee
Directors.
(12) Includes options to purchase 40,000 shares of Common Stock currently
exercisable granted pursuant to the Company's 1992 Stock Option Plan and
options to purchase 16,666 shares of Common Stock currently exercisable
granted pursuant to the Company's 1994 Stock Incentive Plan. Mr. Cushing
resigned effective September 9, 1996. Unvested options were forfeited on
that date and those then exercisable terminated three months following the
date of his resignation.
(13) Includes options to purchase 33,333 shares of Common Stock, currently
exercisable, granted pursuant to the Company's 1994 Stock Incentive Plan.
Mr. Cushing resigned effective September 9, 1996. Unvested options were
forfeited on that date and those then exercisable terminated three months
following the date of his resignation.
(14) Includes 25,000 shares of restricted stock of the Company vesting in 1996.
See "Employment and Certain Other Contracts."
(15) Mr. Spagnolo resigned as a director of the Company on June 23, 1995 and,
pursuant to the terms of the Company's 1992 Stock Incentive Plan and the
Company's 1993 Stock Incentive Plan for Non-Employee Directors, those
unvested options were forfeited on that date and those then exercisable
terminated three months from the date of his resignation. See "Employment
and Certain Other Contracts." Mr. Spagnolo was an officer of EDS and one of
its wholly-owned subsidiaries which owns 545,454 shares of Common Stock and
1,912,728 shares of Series A Junior Preferred Stock of the Company. Mr.
Spagnolo disclaims beneficial ownership of these securities.
(16) Includes options to purchase 7,500 shares of Common Stock currently
exercisable granted pursuant to the Company's 1994 Stock Incentive Plan and
options to purchase 15,000 shares of Common Stock pursuant to the Company's
1993 Stock Incentive Plan for Non-Employee Directors.
(17) Includes options to purchase 10,000 shares of Common Stock currently
exercisable or which will be exercisable within 60 days, granted pursuant
to the Company's 1994 Stock Incentive Plan and options to purchase 20,000
shares of Common Stock currently exercisable or which will be exercisable
within 60 days, pursuant to the Company's 1993 Stock Incentive Plan for
Non-Employee Directors.
(18) Does not include options to purchase 10,000 shares of Common Stock granted
under the Company's 1993 Stock Incentive Plan for Non-Employee Directors
and 5,000 shares pursuant to the Company's 1994 Incentive Stock Plan on
December 18, 1996, which options were exercisable upon the date of grant.
22
<PAGE> 25
DISSENT OF MESSRS. SPIER AND LYONS
Since July 1996, Messrs. Spier and Lyons have expressed disagreement with
certain actions of the Board of Directors and concerns with respect to certain
transactions involving the Company. See "Certain Recent Developments."
Messrs. Spier and Lyons, who constituted a majority of the members of the
Compensation Committee prior to its reconstitution on November 7, 1996, have
objected beginning in August 1996 to the Board of Directors taking action on
compensation matters without prior consideration of such matters by the
Compensation Committee. In this regard, Messrs. Spier and Lyons believe that the
Board of Directors has usurped the power of the Compensation Committee and, by
disregarding established corporate procedures, has created conflicts of interest
of a sort that the existence and proper use of the Compensation Committee were
intended to avoid.
The full Board of Directors met 23 times during 1995 and 25 times during
1996, and during 1995 and 1996 has directly dealt with matters of executive
compensation. However, Messrs. Spier and Lyons believe that Board action with
respect to the setting of the compensation of the president of the Company, Mr.
Haddrill, represents a serious threat to established corporate procedures
intended to produce objective compensation decisions by independent directors.
At a September 9, 1996 meeting, the Board approved an employment agreement to
replace Mr. Haddrill's then existing contract providing for a 20% increase in
his base salary and maximum bonus, with a $150,000 minimum assured bonus in 1996
regardless of the Company's performance. The Company has historically granted
awards of restricted stock and stock options that vest without regard to
performance targets, but Messrs. Spier and Lyons have expressed concern that the
agreement provides for grants of restricted stock and stock options unrelated to
the achievement of performance targets. Messrs. Spier and Lyons have also
expressed concern that the terms of this contract were negotiated with Mr.
Haddrill by Mr. Burt at a time when Mr. Haddrill's conduct regarding the
authorization of payments to Mr. Burt's affiliate, IEP, was being investigated
and Mr. Haddrill was negotiating and recommending a new consulting arrangement
with IEP. (See Proposal 2 for a description of the action taken by the Board of
Directors with respect to its review and approval of the payments made to IEP.)
Messrs. Spier and Lyons have also expressed concern that the Compensation
Committee was neither advised in advance nor consulted prior to the September 9
Board meeting. Messrs. Spier and Lyons believe that senior executive officers
should not negotiate the terms of their compensation arrangements with other
insiders because such conduct unavoidably creates a potential for serious
conflicts of interest and, in this instance, did not adequately take into
account the Company's disappointing recent performance. Finally, Messrs. Spier
and Lyons believe that the actions taken by Messrs. Burt and Haddrill created at
least the appearance of impropriety and may have violated the Company's code of
conduct. In addition, Messrs. Spier and Lyons have advised the Company of their
view that this Proxy Statement is materially misleading in that its omits the
factual background regarding the reconstitution of the Audit and Compensation
Committees.
Messrs. Spier and Lyons have prepared a report captioned "Compensation
Committee Report on Executive Compensation" and have demanded that the Company
include the report in this Proxy Statement, which, in their view, is required by
the federal securities laws. This report, which the Company has declined to set
forth in this Proxy Statement, also includes, among other things, a discussion
of the following matters: (i) that Messrs. Spier and Lyons view performance as
an important criterion to determine appropriate executive compensation and,
based on the Company's performance, recommended to the Board of Directors that
the compensation of executive officers should not be increased and cash bonuses
should not be awarded to the Company's senior executive officers in 1996; (ii)
that, in their view, appropriate mechanisms to avoid conflicts of interest in
considering payments to corporate insiders and their affiliates, including IEP,
cannot be established outside the Compensation Committee structure; and (iii)
that, in their view, the reconstitution of the Compensation and Audit Committees
will chill the exercise of independent judgment by outside directors and
represses the reports of these Committees, which were critical of management
conduct.
In addition, Messrs. Spier and Lyons have asserted that this Proxy
Statement contains numerous misstatements or omits to state material facts and,
as such, is misleading. Specifically, Messrs. Spier and Lyons assert that this
Proxy Statement does not include information regarding (i) meetings of the Audit
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Committee and the Compensation Committee; (ii) the setting of executive
compensation by the Board of Directors instead of the Compensation Committee and
the objections of Messrs. Spier and Lyons relating thereto; (iii) the
independence of Ms. Becker and Mr. Burt as directors in light of their
consulting agreements with the Company; and (iv) the belief of Messrs. Spier and
Lyons that this Proxy Statement does not contain all required information and is
misleading.
In their capacity as a majority of the then members of the Audit Committee,
Messrs. Spier and Lyons submitted a report to the Board recommending that the
Board (i) authorize the Audit Committee to retain independent counsel to
investigate thoroughly the payments made to IEP following expiration of its
consulting agreement with the Company, (ii) not appoint KPMG Peat Marwick LLP as
the Company's independent auditors for the year ending December 31, 1996, and
(iii) appoint another "Big Six" accounting firm as the Company's independent
auditors for the year ending December 31, 1996. The basis for the recommendation
to change auditors was the belief that the existing auditors should have
recommended that the Board of Directors conduct additional procedures to
independently verify that services were actually provided to the Company by IEP
and that they had not promptly acted to recommend remedies to deficiencies they
had identified in the Company's system of internal controls regarding payments
to insiders. See "Proposal 2 -- Ratification of Appointment of Auditors."
Messrs. Spier and Lyons opposed the appointment of Mr. Hardesty to the
Board of Directors and have stated that such appointment may violate certain
agreements to which the Company is a party, including the Stockholders'
Agreement by and between Mr. Spier and the Company.
Finally, Messrs. Spier and Lyons have advised the Company that they do not
recommend a vote in favor of the election of Mr. Davey to the Board of Directors
because they disagree with Mr. Davey's views as to the appropriate management
and strategic direction of the Company, although they recommend a vote in favor
of Mr. Spier's election.
For the foregoing reasons, Messrs. Spier and Lyons have respectfully
declined to join in the report of the Board of Directors with respect to
executive compensation and have objected to the dissemination of this Proxy
Statement.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers, and
persons who own more than ten percent of a registered class of the Company's
equity securities, to file by specific dates with the SEC initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company on Forms 3, 4 and 5. Officers, directors and greater
than ten-percent stockholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. The Company is
required to report any failure to file by the relevant due date any of these
reports based solely on the Company's review of copies of such reports furnished
to it and written representations received by the Company that the filing of a
Form 5 was not required. Based upon this review, the Company is not aware of any
person, except as indicated below, who at any time during 1995, was a director,
officer or a beneficial owner of ten percent or more of any class of equity
securities of the Company registered pursuant to the Exchange Act who failed to
file on a timely basis reports required by Section 16(a) of the Exchange Act
during 1995. James J. Davey, vice chairman and a director of the Company, filed
a Form 4 with respect to his purchase of 1,237 shares of the Company's Common
Stock under the Video Lottery Technologies, Inc. Employee Stock Purchase Plan,
after the due date for filing the Form 4. Michael L. Eide, president of VLC,
filed a Form 4 with respect to his purchase of 991 shares of the Company's
Common Stock under the Video Lottery Technologies, Inc. Employee Stock Purchase
Plan, after the due date for filing the Form 4.
OTHER MATTERS
The Board of Directors knows of no other matters to come before the Meeting
other than those described in this Proxy Statement. However, if any matters
should properly come before the Meeting calling for a vote of
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the stockholders, it is the intention of the persons named in the enclosed proxy
to vote such proxy with respect to those other matters in accordance with their
best judgment.
ANNUAL REPORT AND FORM 10-K
A copy of the Company's 1995 Annual Report to Stockholders, consisting of
the Company's Form 10-K for the year ended December 31, 1995, as filed with the
SEC (including financial statements and schedules but without exhibits), is
being mailed with this Proxy Statement. It is not intended for consideration as
proxy solicitation material. Copies of exhibits to the Form 10-K will be
furnished to record and beneficial holders of the Common Stock upon request for
a nominal charge. All requests should be directed to: Video Lottery
Technologies, Inc., 2311 South 7th Avenue, Bozeman, Montana 59715, Attention:
Shareholder Relations.
PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a stockholder to be included in the Company's proxy
statement for its 1997 Annual Meeting must be received at the Company's
principal executive offices, 115 Perimeter Center Place, Suite 911, Atlanta,
Georgia 30346, not later than the close of business on the date which is 120
calendar days in advance of the first anniversary of the date of this Proxy
Statement unless the date of the 1997 Annual Meeting changes by more than 30
days from the date of the 1996 Annual Meeting, in which case proposals must be
received by the Company a reasonable time before the release of the proxy
statement.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ RICHARD BURT
Chairman of the Board
December 31, 1996
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APPENDIX A
PROXY VIDEO LOTTERY TECHNOLOGIES, INC. COMMON STOCK
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION
FOR THE ANNUAL MEETING OF STOCKHOLDERS JANUARY 10, 1997
The undersigned hereby appoints Richard R. Burt and Patricia Becker and each of
them, proxies with power of substitution, to act as attorneys and proxies for
the undersigned to vote all shares of the capital stock of Video Lottery
Technologies, Inc. which the undersigned is entitled to vote at the Annual
Meeting of Stockholders of Video Lottery Technologies, Inc., to be held at VLC
of Nevada, Inc., 751 Pilot Road, Suite D, Las Vegas, NV 89119 on January 10,
1997 and at any and all adjournments thereof, with all powers the undersigned
would possess if personally present, as follows:
1. Election of Directors - Nominees WILLIAM SPIER and JAMES J. DAVEY
/ / VOTE FOR nominees listed above, except vote withheld from following
nominee (if any)
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or / / VOTE WITHHELD from both nominees listed above
2. To ratify the appointment of KPMG Peat Marwick LLP as auditors for the year
ending December 31, 1996
/ / FOR / / AGAINST / / ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THE PROXY WILL BE
VOTED "FOR" ITEMS 1 AND 2.
(continued, and to be signed, on other side)
Please sign, exactly as name appears below. When shares are held by joint
tenants in common or as community property, both should sign. When signing as
attorney, executor, administrator, trustee, guardian or custodian, please give
full title as such. If a corporation, please sign corporate name by president
or other authorized officer. If a partnership, please sign in partnership name
by authorized person. Receipt is hereby acknowledged of notice of annual
meeting and the proxy statement attached thereto, and the 1995 Annual Report of
the Company on Form 10K sent under the same cover.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. This proxy may be revoked at any time prior to the voting thereof.
Dated:
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Signature(s) of Shareholder
Signature(s) should correspond to name or names shown above.
