- - - --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: July 30, 1997
(Date of earliest event reported)
--------------------------------
VIDEO LOTTERY TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-19322 81-0470853
(State or other (Commission (I.R.S. Employer
jurisdiction file number) Identification No.)
of incorporation
or organization)
--------------------------------
2311 South 7th Avenue
Bozeman, Montana 59715
(Address of principal executive office)
(406) 585-6600
(Registrant's telephone number, including area code)
Page 1
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Item 6. Resignation of Registrant's Director.
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(a) On June 18, 1997, the Board of Directors of Video Lottery Technologies,
Inc. ("VLT" or the "Company") determined not to nominate William P. Lyons for
re-election to the Board of Directors ("Board") at the Company's next annual
stockholders meeting, which had been tentatively scheduled for August 21, 1997.
Subsequently, in a letter to the Board dated July 30, 1997 ("Lyons Letter"), Mr.
Lyons informed the Board of his decision to resign as a director, effective
immediately. Mr. Lyons indicated that he was resigning as a result of his
disagreement with certain policies and actions of the Board. The following
summary of Mr. Lyons' description of his disagreement is qualified in its
entirety by reference to the Lyons Letter, a copy of which is attached hereto as
Exhibit 17. As more fully discussed in Item 6 (b), below, the Company believes
that the Lyons Letter contains numerous statements that are inaccurate,
incorrect and/or incomplete. The summary of the Company's views set forth in
Item 6 (b), below, is qualified in its entirety by reference to the Company's
letter to Mr. Lyons dated August 6, 1997, a copy of which is attached hereto as
Exhibit 99.
In advising the Board of his resignation, Mr. Lyons alleged that the Board,
in his view, had ignored certain principles of corporate governance and had
failed to conduct itself in a manner consistent with the obligations of
directors of a publicly-owned company. Mr. Lyons further expressed his
disagreement with certain alleged policies and practices of the Board that, in
his view, resulted "... in the entrenchment and enrichment of management and
certain Board members at the expense of stockholders, and subvert[ed] the
independent supervisory role of a board of directors."
Specifically, Mr. Lyons disagreed with: (1) the Board's handling of certain
payments made by the Company to International Equity Partners ("IEP"), a firm of
which the Company's Chairman, Richard Burt, is a principal; and (2) the Board's
appointment of John Hardesty as a director, effective December 18, 1996, and its
decision to nominate Mr. Hardesty for re-election as a director at the Company's
next annual meeting of stockholders. In addition, as more particularly described
in the Lyons Letter, Mr. Lyons criticized the Board for its alleged "systematic
quashing of independent review and supervision of management actions."
(b) The Company believes that numerous statements included in Lyons Letter
are inaccurate, incorrect and/or incomplete and therefore provides the following
statement of its views regarding matters raised in the Lyons Letter. The
following statement is qualified in its entirety by reference to the Company's
letter to Mr. Lyons, dated August 6, 1997, a copy of which is attached hereto as
Exhibit 99.
1 Page 2
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The Company categorically denies that the Board ignored principles of
responsible corporate governance and maintains that the Board has conducted
itself at all times in a manner entirely consistent with the obligations of a
Board of Directors of a publicly owned company. Furthermore, the Company
categorically denies that any policy or practice of the Board resulted in the
entrenchment or improper enrichment of management or any Board member at the
expense of stockholders. In the Company's view, the Board has played an
appropriate independent supervisory role with respect to the business affairs of
the Company and has fully and faithfully executed its fiduciary duties.
Mr. Lyons served on the Board as a designee of director and stockholder
William Spier, pursuant to a stockholders agreement between the Company and Mr.
Spier's investor group. In August of 1996, Mr. Spier, with Mr. Lyons' support,
asked the Board to name him Chief Executive Officer of the Company. After
careful consideration by the Board, which included input from management and
other key stockholders, the Board declined to name Mr. Spier CEO. Subsequently,
Messrs. Spier and Lyons have disagreed with the Board on most matters and have,
from time to time, raised many of the issues outlined in the Lyons Letter.
The Company believes that Mr. Lyons' concerns regarding certain payments by
the Company to IEP (which were first expressed at the time the Board declined to
name Mr. Spier as CEO) were thoroughly investigated by the Company's independent
auditors, the Company's Director of Internal Audit, and disinterested board
members, all of which concluded that the matter had been satisfactorily
resolved. This issue, including the views of Messrs. Lyons and Spier, was fully
discussed in the Company's Proxy Statement dated December 31, 1996, relating to
its most recent annual stockholder's meeting.
The December 31, 1996 Proxy Statement also encompasses certain of the
concerns expressed by Mr. Lyons concerning Director John Hardesty. With respect
to the Board's appointment of Mr. Hardesty, the Board (except for Messrs. Lyons
and Spier) disagreed, and continues to disagree, with the view of Messrs. Lyons
and Spier regarding Mr. Hardesty's experience and qualifications to serve as a
member of the Board of Directors. The Board (except for Messrs. Lyons and Spier)
believes that Mr. Hardesty is an experienced businessman who brings distinction
and talent to the Board. Moreover, with respect to allegations made by Messrs.
Lyons and Spier regarding certain of Mr. Hardesty's securities trading activity,
the Board requested and then carefully reviewed reports prepared by an
independent board member and independent outside securities counsel regarding
the legality of Mr. Hardesty's trading. Both reports concluded that Mr. Hardesty
had acted entirely legally.
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Finally, the Company also vigorously denies Mr. Lyons allegation that the
Board has in any way quashed independent review and supervision of management
actions. None of the examples cited in the Lyons letter supports his conclusion,
first, under the Company's bylaws, appropriate responsibility for compensation
decisions lies with the Board. Second, the Board followed all recommendations
made by the director of internal audit and its independent outside auditors with
respect to effective internal controls. Third, the Board's reconstitution of the
Audit and Compensation Committees was consistent with the Company's bylaws and
entirely proper. Fourth, the Company's 1996 Proxy Statement complied fully with
all federal securities law requirements. Finally, the Board was under no
obligation to nominate Mr. Lyons for re-election as a director and its decision
not to do so was based on a number of legitimate factors. The Board (except for
Messrs. Lyons and Spier) believes in good faith that it is in the Company's and
its stockholders' best interest that Mr. Lyons not continue as a member of the
Board.
Further, the Company believes that Mr. Lyons' suggestion that he was an
independent director is also misleading. Mr. Lyons was a designee of Mr. Spier
and a representative of Mr. Spier's investor group which owns approximately 14
1/2% of the Company's common stock, and Mr. Lyon played a role in various
matters of interest to Mr. Spier, including the Spier group's offer to purchase
the Company in late 1996 and Mr. Spier's unsuccessful attempt to be appointed
CEO earlier that year.
The Company believes that it is important to note the context in which Mr.
Lyons makes the statements contained in the Lyons Letter. He did not decide to
resign and to submit that letter until after the Board had decided not to
nominate him for re-election as a director. In that light, the Board views as
pretextual his asserted reasons for resigning.
In addition, while many of the allegations made in the Lyons Letter repeat
statements made earlier by either Mr. Lyons or Mr. Spier, the Company also
believes it important to note that none of these complaints surfaced until after
the Board had declined Mr. Spier's request to become Chief Operationg Officer.
In sum, the Board believes that Mr. Lyons has attempted to use his
resignation as a vehicle to harass the Company, which the Board views as
inconsistent with Mr. Lyons' responsibility as a director.
3 Page 4
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Item 7. Financial Statements and Exhibits.
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(c) Exhibits.
Exhibit 17 Letter to the Company from Mr. William P. Lyons,
dated July 30, 1997.
Exhibit 99 Letter from the Company to Mr. William P. Lyons,
dated August 6, 1997
4 Page 5
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEO LOTTERY TECHNOLOGIES, INC.
By: /s/ Dennis Gallagher
-----------------------------
Dennis Gallagher
General Counsel and Secretary
(authorized to sign on behalf of Registrant)
Dated: August 6, 1997
5 Page 6
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EXHIBIT INDEX
Exhibit Page
Number Description Number
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Exhibit 17 Letter to the Company from Mr. William P. Lyons, 8
dated July 30, 1997.
Exhibit 99 Letter from the Company to Mr. William P. Lyons, 19
dated August 6, 1997.
6 Page 7
WILLIAM P. LYONS
444 Madison Avenue, 38th Floor
New York, NY 10022
212/751-2300
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July 30, 1997
The Board of Directors
Video Lottery Technologies, Inc.
115 Perimeter Center Place
Suite 911
Atlanta, GA 30346 Via Facsimile
Fellow Directors:
Despite repeated requests by William Spier and myself over the past year,
the Board of Directors of Video Lottery Technologies has failed to conduct
itself in a manner consistent with the obligations incumbent upon those serving
as directors of a publicly-owned company. Basic principles of responsible
corporate governance have been ignored. The oversight responsibility of the
Board has been subordinated to expediency. In order to avoid any possible
suggestion that I condone, or am complicit in, the policies and actions of the
VLT Board, I am compelled to resign as a director, effective immediately.
My persistent efforts to require the VLT Board and its senior executive
officers to conform their conduct to accepted norms of corporate governance and
to avoid conflicts of interest have been disparaged by management and ignored by
a majority of the Board. Recent actions relating to compensation, composition of
the Board, and management intrusion into a purportedly independent investigation
of director misconduct have confirmed my suspicion that a majority of the Board
has no inclination to behave in conformity with applicable legal and business
standards or, equally important, to demonstrate common sense. Nevertheless, I am
hopeful that public awareness of VLT's egregious departures from appropriate
conduct will result in much needed reform. Therefore, pursuant to Item 6(a) of
Form 8-K, I formally request that VLT publicly and promptly disclose that I am
resigning because of my disagreement with VLT's policies and practices which
result in the entrenchment and enrichment of management and certain Board
members at the expense of stockholders, and subvert the independent supervisory
role of a board of directors. A copy of this letter, which describes my
disagreement, must be filed as an exhibit to the Form 8-K and with NASDAQ. It
should also be made a part of the Company's upcoming proxy statement.
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The Board of Directors
July 30, 1997
To begin, I need not repeat the objections Mr. Spier and I raised in 1996
regarding unauthorized payments made to International Equity Partners, the firm
of which the Company's Chairman, Richard Burt, is a principal, or the related
actions of the Company's President, Richard Haddrill, and the Board, which have
never been satisfactorily resolved, and which are highlighted in the dissent
filed as part of the Company's proxy statement, dated December 31, 1996. ( A
copy of the dissent is attached for reference.) These objections still stand.
Since then, further misconduct by the Board and management provide
indisputable evidence of violation of the trust placed in VLT's management and
directors by VLT's stockholders. Among other things, such actions include:
1. Appointment and Renomination of an Unsuitable Director. A majority of
-------------------------------------------------------
the Board, with Mr. Spier and myself objecting, appointed John Hardesty to the
Board of Directors effective December 18, 1996. In addition to noting that Mr.
Hardesty's appointment would result in violation of the Company's agreement with
Mr. Spier's investor group, we questioned whether Mr. Hardesty's experience,
other than his friendship with VLT's President, was such as to justify his
appointment. Since that time, there has been a development which makes manifest
that Mr. Hardesty is not an acceptable director for either a publicly-owned or
regulated company. Mr. Hardesty, without clearing the activity in advance with
VLT's counsel as required by VLT corporate policy, purchased shares of VLT
common stock shortly before VLT issued a favorable earnings release and at a
time when he was aware of at least two different material but non-public
corporate opportunities being considered by VLT's Strategic Planning Committee.
By nominating Mr. Hardesty for election as a director at the Annual Meeting
of Stockholders scheduled for August, a majority of the Board has the audacity
to suggest that VLT stockholders suffer the continued presence of an individual
who, at best, has exhibited grievous deficiencies in judgment and, at worst, has
committed violations of ethics and corporate policy and may well have violated
the federal securities laws and his fiduciary duties.
Only after Mr. Spier and I demanded that the Board take action did any of
the other VLT directors even consider investigating Mr. Hardesty's conduct and
suitability to serve on the Board. After more than ten weeks, Ms. Becker, a
Board member and Chair of the Company's Compliance Committee, at the behest of
the Company's Chairman, apparently issued a written report, which the Chairman
has improperly withheld from Mr. Spier and myself. In purportedly summarizing
the report to the Board, Ms, Becker raised more questions than answers. Only at
this point did the Board then seek an opinion of newly retained counsel as to
the legality of Mr. Hardesty's actions. This counsel rendered an opinion, which
Mr. Spier and I, in a letter to that counsel, William Speer, Esq., dated July
23, 1997, have challenged as being seriously flawed. (A copy of the letter is
attached for reference.) As of this writing, we have received no response from
counsel or the Board to our challenge. In any event, the legal technicalities
and contorted reasoning employed by this new lawyer and a majority of the Board
do not address the wisdom of Mr. Hardesty proceeding as he did. No one can argue
that this director's trading is evidence of
2 Page 9
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The Board of Directors
July 30, 1997
the judgment and sensitivity to actual and possible questions of integrity
and fair dealing required of a director of VLT.
Moreover, one would have thought VLT's Compliance Committee has the
authority and duty to review any questionable conduct by officers and directors.
In the case of VLT, however, one would be wrong - the Compliance Committee has
been advised that it does not have jurisdiction to act in this matter. How is
this Committee to act as an effective sentinel over corporate ethics and
misconduct if it cannot independently identify and investigate potential areas
of concern?
2. The Systematic Quashing of Independent Review and Supervision of
------------------------------------------------------------------------
Management Actions.
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Oversight of corporate conduct in respect of both business operations and
compliance with legal and ethical obligations is the most critical aspect of
director responsibility. Obviously, the most efficacious way to avoid problems
is to instill in all corporate citizens a clear understanding that any unlawful,
unethical, or questionable conduct will not be condoned or ignored and will lead
to serious adverse consequences. Senior management and a majority of the Board
have communicated just the opposite message. The Corporate Code of Conduct and
procedures intended to eliminate questions of conflicts and self-dealing have
not been respected by the most senior executives and certain Directors. Equally
distressing, employees and directors have been discouraged from raising
questions regarding suspicious conduct of others. Once inquiries have been made,
they are treated as obstacles to the conduct of business rather than a crucial
element of protecting VLT.
Examples of senior management and certain Board members disregarding or
punishing those seeking to fulfill their oversight function include:
o The failure to honor the recommendations of the Compensation Committee.
o The abandonment of a Compensation Committee to review compensation practices.
o The failure to honor the recommendations of the Audit Committee with
respect to the need for more effective internal controls regarding the
making of payments to insiders.
o The reconstitution of the Audit and Compensation Committees in order to
prematurely conclude investigations into compensation arrangements with an
affiliate of the Chairman of VLT (which investigation questioned the
adequacy of the process by which payments were made to this affiliate and
whether VLT has received any services of value in exchange for these
payments).
o Efforts to avoid disclosure of the concerns of the Audit and Compensation
Committee, including the failure to include the requisite report of the
relevant Compensation Committee in
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The Board of Directors
July 30, 1997
the 1996 proxy statement in complete disregard of the requirements of
the federal securities laws.
o The failure to renominate me as a director purportedly because of my poor
attendance at Board meetings and claimed divisive actions. Both allegations
are, on their face, absurd; they are totally fallacious and pretextual. I
attended 21 of 25 Board meetings in 1996, a very respectable record. More
significantly, you consider disruptive the very qualities which should be
required of, and admired in, outside directors - the willingness to
independently scrutinize management conduct and question inappropriate
arrangements while supporting those business actions which make sense for
the Company and its stockholders (such as the recent settlement with EDS).
Taking such action, especially when compared to the Board's unqualified
support of Mr. Hardesty, makes a mockery of the entire nominating process.
Indeed, in failing to renominate me, the Board denies shareholders the
right to choose a director whose place on the ballot has been improperly
withheld by the Board in violation of the Company's agreement with a
majority shareholder, Mr. Spier. (This action is the second breach by VLT
of its agreement with Mr. Spier's investor group in under one year.)
In view of the upcoming Annual Meeting of Stockholders in August, Mr. Spier
and I submitted our objections to the proxy statement being prepared by the
Company in connection with that meeting, in a letter to VLT's outside counsel,
Michael Rosenzweig, Esq., dated July 14, 1997. (A copy of that letter is
attached for reference.) It strenuously protested the inadequate and misleading
nature of the proxy statement as then drafted, in failing to properly report on
the issues outlined in this letter of resignation. To date, our letter to Mr.
Rosenzweig has not been acknowledged, nor has any updated draft of the proxy
statement been presented to us for review. It is feared that the Board may
actually submit a proxy statement to stockholders without such review or
consideration of our position. To that extent, my resignation is further
dictated by such arbitrary and capricious action.
Very truly yours,
/s/ William P. Lyons
William P. Lyons
Enclosures: Dissent to 1996 Proxy Statement
July 14, 1997 Letter to Michael Rosenzweig, Esq.
July 23, 1997 Letter to William Speer, Esq.
4 Page 11
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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.
24 Page 13
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WILLIAM SPIER
WILLIAM P. LYONS
444 Madison Avenue, 38th Floor
New York, NY 10022
212/751-2300
----------
July 23, 1997
William Speer, Esq,
Powell, Goldstein, Frazer & Murphy LLP
101 Peachtree Street, N.E.
Atlanta, GA 30303 Via Facsimile: (404) 572-6999
Dear Mr. Speer:
As directors of Video Lottery Technologies, Inc. (the "Company"), we have your
letter of July 18, 1997 (received from Mr. Gallagher's office late on Monday,
July 21, 1997), in which you render your opinion, at the request of the Company,
regarding certain purchases of the Company's common stock by one of its
directors, John Hardesty.
With all due respect, your opinion is seriously flawed in several material
respects. Among other things, in the list of documents furnished to you by the
Company, there is a glaring omission: the Company's first quarter earnings
release, dated April 22, 1997 (issued within the day following Mr. Hardesty's
last purchase.) Significantly, it was not provided by the Company, nor reviewed
by you; but it bears directly on the issues involved here. Additionally, we
question how you could render an opinion in this matter without, as you yourself
acknowledge, having conducted any interviews "of Hardesty or other individuals
and have relied solely on the information contained in the foregoing documents
[the list of which did not include the April 22nd earnings release, but did
include a letter from Ms. Becker to Chairman Burt, dated June 25, 1997, which
neither of us has seen, despite repeated demands] and as provided to me by Mr.
Gallagher."
In your analysis of the facts, you should have at least inquired of Mr. Spier as
to the basis or reasons for this having made such a serious accusation against
Mr. Hardesty. Had you spoken to Mr. Spier, you would have learned, among other
things, that Mr. Haddrill had told him on April 8, 1997 that Mr. Haddrill had
advised a potential purchaser of the Company (Mr. A. Cohen), who was then
prepared to make an offer and at a specific price per share for the entire
Company, to hold off making that offer until after the Nevada licensing process
was completed; and that Mr. Cohen and his investment banker, in consultation
with the Company's investment banker, had
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William Speer
July 23, 1997
had, during the relevant period when inside information was being transmitted
among Board members, certain concrete discussions about possible transactions.
Presumably, Mr. Haddrill may have similarly advised other potential suitors to
refrain from presenting an offer until the licensing process was over. In this
regard, if, as your letter states, other Board members (presumably including Mr.
Haddrill) were aware that Mr. Hardesty was looking to buy shares, wouldn't Mr.
Haddrill have had to tell him that, in light of Mr. Cohen's anticipated offer,
Mr. Hardesty should refrain from any purchases? Certainly, the general counsel
would have warned him, if he consulted him, as be should have. We assume Mr.
Gallagher has provided you with a copy of his letter to Mr. Spier, dated May 15,
1997, regarding Mr. Gallagher's conversation with Mr. Hardesty on the subject of
trading in company stock. Incidentally, the inside information to which we
believe Mr. Hardesty was privy during this critical period is not only material,
but the nature and patten of Mr. Hardesty's purchases, under these
circumstances, raise a question of possible stock manipulation as well when
juxtaposed against the prospective offer at a specific price per share.
As noted above, Ms. Becker's letter of June 25th, purportedly reflecting her
investigation of all the facts surrounding this matter, and which took over two
months to be finished, has never been shown to us. Aside from the fact that we
are entitled to see that so-called report, to assess its accuracy and
thoroughness, we have been told that it cannot be shown to us because it
contains confidential, "special committee" information. As directors not
presently involved in any purchase prospects, we are entitled to that report
without question. More precisely, however, is the notion that there is something
in that information which is of a material nonpublic nature. If that is the
case, doesn't that bear on the very issues you were asked to opine on?
Separate and apart from the Special Committee matters (which, of course, you
have only the draft of Minutes of meetings to rely upon, since you conducted no
interviews), the trading by Mr. Hardesty for a significant period of time
leading up to the issuance of the "upbeat" earnings release reporting on the
Company's first quarter 1997 results should, without more, require his
disqualification as a director. Any public company director knows, or should
know, without any need even to consult with counsel, that the buying or selling
of his or her company's securities after the close of a quarter and in advance
of the release of that quarter's results is wrong. Unquestionably, on top of the
other "insider trading" issues that have been raised, Mr. Hardesty is condemned
by his own admission: that during the period when the "trading window" for
directors was closed, he was buying.
Furthermore, you contend that the Company's Code of Conduct "does not mandate"
consultation with the General Counsel's office before trading in the Company's
securities. If the Code is an enunciation and embodiment of the Company's policy
in matters of this importance, then it cannot be said that directors have the
discretion whether or not to comply with it. It is either a policy or it isn't.
The point is a simple one: The Company's Code of Conduct provides that directors
"should consult" with the Company's general counsel before trading in the
Company's stock, and Mr. Hardesty failed to do so. If the policy is anything but
meaningless words, Mr. Hardesty plainly violated it, and it is incomprehensible
that you could reach a different result.
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William Speer
July 23, 1997
We leave to our legal counsel the validity of your position, in support of your
opinion, "that the ongoing matters being considered by the Special Committee,
which had not been publicly disclosed, were not probable of occurrence during
the period Hardesty purchased the Shares" or "that it was not probable that a
transaction would be concluded during the time or shortly after the time of
Hardesty's purchase of the shares and, in fact, no such transaction did occur
within such 60-day period." However, it seems clear to us that Mr. Hardesty
traded at a time when he should not have, and it begs the question whether a
transaction was likely to occur during the period of his purchases or shortly
thereafter. The simple fact is that he knew there were nonpublic, pending
prospects when he traded and, without complying with the Company's Code of
Conduct, and its underlying policy, he traded while in possession of that
information.
Finally, you have rendered an opinion in a vacuum, relying solely on the
selective facts provided to you by Company management, and purposefully choosing
not to inform yourself further. Under the circumstances, which assumedly Mr.
Gallagher has described to you, it was incumbent upon you, acting on behalf of
the Company, to examine the entire canvas not just a selective corner of the
picture before rendering an opinion which has far-reaching consequences for your
client and its shareholders. With the Board's and its Chairman's cavalier
treatment of this critical issue raising suspicions of a cover-up, and in light
of Ms. Becker's apparently taking over eight weeks to conduct a review that is
being withheld from the board members not associated with management, we find it
distressing that you would render an opinion in such a cursory manner, without
even attempting to make that opinion meaningful. Your opinion, in short, far
from dispelling doubt and negating inferences of wrongdoing, does exactly the
opposite.
Very truly yours,
/s/ William Spier /s/ William P. Lyons
William Spier William P. Lyons
cc: All Members of the Board of Directors
Michael Rosenzweig, Esq.
Dennis Gallagher, Esq.
Alan Rassaby, Esq.
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WILLIAM SPIER
WILLIAM P. LYONS
444 Madison Avenue, 38th Floor
New York, NY 10022
212/751-2300
---------
July 14, 1997
Michael Rosenzweig, Esq.
Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.W.
Atlanta, GA 30303 Via Facsimile: (404) 525-2224
Dear Michael:
This letter is in response to the request of Video Lottery Technologies, Inc,
(the "Company"), that we inform you no later than July 14, 1997 of our
objections to various portions of the Company's draft proxy statement, dated
July 9, 1997, being prepared in connection with the Annual Meeting of
Stockholders, presently scheduled for August 21, 1997. Such objections were
voiced at the Board of Directors' meeting on July 11, 1997.
The proxy statement, as presently drafted, fails to record directly, in clear
and accurate language, our objections, and the bases thereof, to the several
aspects of "Proposal 1 - Election of Director."
First, not only is the "Dissent of Messrs. Spier and Lyons" misleading and
inadequate in describing correctly our position on this item, but the conclusion
is inescapable that by placing it on the back page of the proxy statement, the
Board intended to accomplish the obvious: that stockholders will not likely see
or read this important information.
More specifically, Proposal 1 in its present form, which simply recites that the
Board "did not nominate Mr. Lyons for re-election as a Class 3 Director,"
misrepresents the facts and is fraudulent. Stockholders can only assume, by
reading the Board's statement, that no controversy exists regarding the Board's
failure to nominate Mr. Lyons and that the Board, without any qualification or
objection, simply approved such action. The Board of Directors knows that to be
untrue and failing to correct such calculated misimpression is fraudulent and
actionable.
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Michael Rosenzweig, Esq
July 14, 1997
The facts, simply put, are that Mr. Spier objected to the Board's action in not
nominating Mr. Lyons as being a violation of Mr. Spier's right under his
stockholder agreement to nominate a person reasonably acceptable to a majority
of the Board, and that the grounds asserted by the Board in denying Mr. Spier
the right to nominate a "reasonably acceptable" person of his choice are
pretextual. The Board based its refusal to nominate Mr. Lyons on the express
grounds that (i) he has failed to attend meetings of the Board; and (ii) he is a
divisive factor on the Board. These are not objectively supported grounds, which
is legally required under Mr. Spier's agreement, and violate the principles of
corporate governance and the rights of all shareholders under Delaware law in
the selection of directors to manage the Company's affairs. Indeed, the proxy
statement itself belies the first ground asserted: On page 5, under "Certain
Additional Information Concerning the Board of Directors," it is stated that the
"Board ... held 25 meetings during 1996. All directors attended all meetings of
the Board ... and each of the committees ... on which he or she served, except
four board meetings that Mr. Lyons did not attend in 1996 . . . ." In other
words, Mr. Lyons attended 21 of 25 meetings in 1996, or 84% of such meetings.
Even without regard to the reasons which may have kept Mr. Lyons from attending
some meetings, the record speaks loudly for itself on this fallacious claim by
the Board.
As for W. Lyons' purported "divisiveness," the simple point to be made is that
the record clearly reflects Mr. Lyons' legitimate dissent and objections to
actions of the Board in the sincere exercise of his fiduciary duties and
responsibilities as a member of the Board. For the Board to refuse to nominate
Mr. Lyons on this spurious basis is to punish him for his rightful challenges to
the conduct of members of the Board and to suppress his views on critical
matters affecting the interests of the Company and its shareholders, and denies
shareholders their right to choose directors on a fully informed basis.
Mr. Lyons joined Mr. Spier in these objections.
Accordingly, their position regarding Mr. Lyons' nomination should be
prominently and accurately placed under Proposal 1, to enable shareholders to
receive all necessary and material information to make informed judgments, as
required by the rules governing proxy statements.
Separately, with respect to Mr, Hardesty's nomination, the reference to Messrs.
Spier's and Lyons' "Dissent" is also inadequate and misleading. The "Dissent"
itself fails to accurately describe the situation involving Mr. Spier's
accusations against Mr. Hardesty as not only being violations of company policy,
but of the securities laws as well. These are serious charges. The Board, in its
draft proxy statement, under Proposal 1, in connection with its discussion of
Mr. Hardesty's nomination, misleadingly fails to inform shareholders directly of
the serious nature of the charges raised against him. It also fails, in any
respect, to inform shareholders that an investigation was demanded by Messrs.
Spier and Lyons; that, after two months, a written report was finally prepared
by one of the Board members who, incidentally, is also the chairperson of the
Company's Compliance Committee, in response to the charges against Mr. Hardesty;
that the report is not yet complete and awaits review by special securities
counsel -- but at least indicates
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Michael Rosenzweig, Esq,
July 14, 1997
that the Company's Code of Conduct may have been violated; and that, in the face
of these serious, unresolved issues, a slim majority of the Board (by a 3-2
vote) still saw fit to nominate Mr. Hardesty as a director and place him before
the stockholders for their approval, without any expressed reservation.
Under these circumstances, the proxy statement, under Proposal 1, should
accurately and fully state all the facts and objections surrounding Mr. Hardesty
and his proposed nomination; and that failure to do so is misleading and
fraudulent, in violation of the rules governing proxy statements.
Finally, the "Dissent" itself should be corrected to accurately and completely
record the facts and the specific objections raised by Messrs. Spier and Lyons,
as outlined above. And, the "Dissent," once. corrected, must be prominently and
appropriately placed in the proxy statement to receive the requisite attention.
In addition, to make such "Dissent" not misleading, it must incorporate
specifically the Dissent as recorded in the proxy statement issued by the
Company, dated December 31, 1996, in connection with the Company's January 1997
Annual Meeting of Stockholders. All stockholders, especially those who became
stockholders after the applicable record date for that last meeting, are
entitled to review this information which related to 1996 matters (the period
covered by the present proxy statement) and which is particularly relevant to
the issues before the shareholders.
It should also be noted, in regard to the proper placement of our objections to
the Board's recommendations, in order that stockholders are specifically made
aware of those objections, and that the proxy statement not be misleading, is to
record our objections to Proposals 3 and 4 directly in juxtaposition to the
reference to the Board's recommendations on these proposals. Otherwise, again,
stockholders are understandably left with the mistaken impression that the
Board, without any qualifications or reservations, is fully in support of these
proposals.
After all, since the proxy statement is designed, under the rules, to inform
shareholders accurately regarding the Company's affairs and the matters they are
being asked to vote upon, that objective cannot be achieved by obfuscation and
disingenuous placement of the record of dissenting voices among the Board of
Directors.
Very truly yours,
/s/ William Spier /s/ William P. Lyons
William Spier William P. Lyons
cc: Dennis Gallagher, Esq.
3 Page 19
VIDEO LOTTERY TECHNOLOGIES, INC. [LOGO]
2311 South 7th Avenue
Bozeman, MT 59715
_______________________
August 6, 1997
Mr. William P. Lyons
444 Madison Avenue, 38th Fl.
New York, NY 10022
Mr. Lyons:
On behalf of Video Lottery Technologies, Inc. ("VLT" or the "Company") and
its Board of Directors, I am writing in response to your letter dated July 30,
1997, in which you informed the Board of your resignation as a director of VLT.
First, it is important to note the context in which you make the statements
set forth in your letter. You did not decide to resign, and to submit your
letter setting forth certain disagreements with Company policy (thereby
requiring that the Company disclose those disagreements in a Current Report on
Form 8-K), until after the Board had decided not to nominate you for re-election
as a director. In that light, your asserted reasons for resigning are clearly
pretextual; had you really felt the need to resign as a matter of principle
because of disagreements between you and the Board, you would have resigned
before the Board decided not to nominate you for re-election.
In addition, while many of the allegations in your letter repeat statements
made earlier by either you or Mr. Spier, it is important to note that none of
those complaints surfaced until after the Board rebuffed Mr. Spier's attempt, in
August of 1996, to become Chief Executive Officer of the Company. Under the
circumstances, one can legitimately question the good faith of the many
statements of disagreement set forth in your July 30 letter and in earlier
communications.
Many of the statements in your letter are also incorrect, incomplete or
both, and many are quite seriously misleading. For example, it is utterly
irresponsible for you to suggest that the VLT Board and management do not
conform their conduct to accepted norms of corporate governance. Moreover, given
your role as a Board designee of Bill Spier in approving the 1994 transaction
that produced a $38 million profit for Mr. Spier and his investment group, it is
not only reckless but highly ironic for you to accuse the Board and management
of entrenchment and self- enrichment. In this respect, I remind you that the
transaction that produced this private profit for Mr. Spier also resulted in the
issuance of 19% of VLT's common stock to Electronic Data Systems Corporation
("EDS") and a long-term agreement between VLT
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August 6, 1997
Page 2
and EDS that had near-disastrous consequences for VLT. You, of course, played a
lead role in negotiating that disastrous transaction and, indeed, received
special compensation of $25,000 for doing so.
I would also like to address some of the particular statements included in
your letter. First, you reiterate your concerns regarding certain payments
previously made by the Company to International Equity Partners. What you do not
acknowledge, however, is that your concerns were thoroughly investigated by
independent board members, the Company's director of internal audit and the
Company's independent auditors, all of which regarded the matter as
satisfactorily resolved. Nor do you note the Board's careful consideration and
review of those reports and its agreement with the conclusions therein.
Second, your characterization of the Board's appointment and renomination
of Mr. Hardesty is simply wrong. In no way did Mr. Hardesty's appointment
violate any agreement between the Company and Mr. Spier's investor group, nor
has Mr. Spier seriously so claimed. In addition, every member of the Board
except for you and Mr. Spier recognized the talent and distinction that Mr.
Hardesty brought to the VLT Board. Finally, with respect to the allegations made
by you and Mr. Spier regarding certain of Mr. Hardesty's trading activity, all
of the exaggerated invective in your letter does not alter the basic facts: The
Board requested and then carefully reviewed reports prepared by Board member
Patricia Becker and independent outside securities counsel regarding the
legality of Mr. Hardesty's trading, and both reports concluded that Mr. Hardesty
had acted entirely legally. Neither Ms. Becker nor such counsel had any bias or
incentive to reach that conclusion.
Finally, it is absurd to accuse the Board of the "systematic quashing of
independent review and supervision of management actions." None of the examples
you cite in support of your review supports your conclusion. First, under the
Company's bylaws, appropriate responsibility for compensation decisions lies
with the Board. Second, the Board followed all recommendations made by the
director of internal audit and its independent outside auditors with respect to
effective internal controls. Third, the Board's reconstitution of the Audit and
Compensation Committees was consistent with the Company's bylaws and entirely
proper. Fourth, the Company's 1996 proxy statement complied fully with all
federal securities law requirements. Finally, the Board was under no obligation
whatsoever to nominate you for re-election as a director and its decision not to
do so was based on a number of legitimate factors, many of which are illustrated
by your reckless and intemperate letter. The Board,
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August 6, 1997
Page 3
with the exception of you and Mr. Spier, firmly believes in good faith that it
is in the Company's and its stockholders' best interest that you not continue as
a member of the Board.
Your letter of July 30, 1997 closes by indicating that your previous letter
noting certain comments on the Company's draft proxy statement was never
acknowledged, nor was an updated draft of the proxy statement presented to you
for review. Please be advised that management and counsel carefully considered
the comments set forth in your earlier letter and appropriately reflected those
comments in a revised draft of the proxy statement. As you may recall, the Board
at its July 11 meeting authorized management to revise and file the Company's
proxy statement without further circulation in draft form. Such action is
utterly routine and did not preclude any Board member from commenting
meaningfully on the proxy statement prior to its dissemination.
Noticeably absent from your letter was any reference to your and Mr.
Spier's most recent irresponsible and potentially most damaging actions. As you
know, last month you and Mr. Spier refused to sign the standard representation
letter the Company officers and directors are required to submit to the Victoria
(Australia) Casino and Gaming Authority every six months. The pretext which you
offered for your behavior was your "concerns" about certain payments made to
International Equity Partners and certain stock transactions involving another
board member.
As previously stated, your allegation concerning the payments have been
reviewed and investigated by numerous parties including independent Board
members, the Company's Director of Internal Audit and the Company's outside
auditor, not to mention the various gaming regulatory agencies which have
licensed the Company since this matter was raised and subsequently discussed in
the Company's Proxy Statement dated December 31, 1996 relating to its most
recent annual stockholders meeting. Likewise your allegations concerning the
stock trading by a board member have been reviewed and investigated. Again there
was no basis for your spurious allegations.
Under these circumstances your actions were completely unwarranted. Your
motives can be characterized as questionable at best. Your actions again have
proved disruptive to the Company. As you intended, your actions have caused
gaming regulators to re-examine the underlying matters. While I do understand
that the various regulators have a duty to investigate, I do not understand why
you and Mr. Spier are attempting to use the regulators in this fashion. You are
causing these agencies and their investigators to expend their resources on
non-issues. As you are well aware, the Company pays the costs and expenses
associated with these types of investigations. In addition, you have caused the
Company additional undue expense in the form of management and director
resources associated with repeatedly responding to inquiries caused by your
irresponsible action. In a word, you have wasted corporate assets.
Furthermore, you may have unnecessarily jeopardized future opportunities
for the Company by reporting baseless allegations which may damage the Company's
reputation.
These recent actions by you and Mr. Spier demonstrate a pattern of
harassment of the Company, interference with its' operations and business
opportunities and a disregard of the interests of a majority of the
stockholders. Your actions evidence a pattern of conduct in callous disregard of
your duties as a director and contrary to your duty of loyalty to the Company.
I regret that you have attempted to use your resignation from the VLT Board
as a vehicle to harass, and possibly damage, the Company. I view that behavior
as inconsistent with your responsibility as a director. I would also note that,
despite your efforts and those of Mr. Spier, the Company's financial performance
continues to improve, and the stock market continues to recognize that
improvement, as evidenced by the recent 52-week high for the Company's stock
price. I assure you that the Board and management of VLT will continue to work
vigorously in the best interest of the Company's stockholders.
Very truly yours,
/s/ Richard Burt
Richard Burt
Chairman of the Board of Directors
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