<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-11919
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MIDWAY GAMES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3999 22-2906244
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3401 NORTH CALIFORNIA AVENUE
CHICAGO, ILLINOIS 60618
(312) 961-2222
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
NEIL D. NICASTRO
CHAIRMAN OF THE BOARD
MIDWAY GAMES INC.
3401 NORTH CALIFORNIA AVENUE
CHICAGO, ILLINOIS 60618
(312) 961-2222
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
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PAUL S. GOODMAN, ESQ. HOWARD L. SHECTER, ESQ.
SHACK & SIEGEL, P.C. MORGAN, LEWIS & BOCKIUS LLP
530 FIFTH AVENUE 101 PARK AVENUE
NEW YORK, NEW YORK 10036 NEW YORK, NEW YORK 10178
(212) 782-0700 (212) 309-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996
5,100,000 SHARES
MIDWAY GAMES INC.
COMMON STOCK
------------------------
All of the shares of the Company's Common Stock offered hereby (the
"Shares") are being sold by Midway Games Inc. (the "Company"). Immediately
following the offering (the "Offering"), WMS Industries Inc. ("WMS") will own
approximately 86.8% of the outstanding shares of Common Stock (85.1% if the
Underwriters' over-allotment option is exercised in full).
Prior to the Offering, there has been no public market for the Company's
Common Stock. It is anticipated that the initial public offering price will be
between $20.00 and $22.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved for listing on the New York Stock Exchange under
the trading symbol "MWY," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO PUBLIC DISCOUNT(1) TO COMPANY(2)
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Per Share...................... $ $ $
Total(3)....................... $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $ .
(3) The Underwriters have been granted an option, exercisable within 30 days
from the date hereof, to purchase up to 765,000 additional shares of Common
Stock at the Price to Public per share, less the Underwriting Discount, for
the purpose of covering over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ , and
$ , respectively. See "Underwriting."
------------------------
The Shares are offered severally by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the Shares will be made
against payment on or about , 1996 at the office of Oppenheimer &
Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281.
------------------------
OPPENHEIMER & CO., INC.
HAMBRECHT & QUIST
UBS SECURITIES
WASSERSTEIN PERELLA SECURITIES, INC.
The date of this Prospectus is , 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
<PAGE> 3
[COLOR PICTURES]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OF THE
COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements, certified by its independent certified
public accountants, and to make available to its stockholders quarterly reports
containing unaudited interim financial information for each of the first three
quarters of each fiscal year.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all financial
information, share and per share data (i) assume no exercise of the
Underwriters' over-allotment option, (ii) assume no exercise of currently
outstanding stock options and (iii) give effect to a 33,400 for one stock split
in the Company's Common Stock, par value $.01 per share (the "Common Stock") to
be effected immediately prior to the Offering. As used in this Prospectus, the
terms "Company" and "Midway" refer collectively to Midway Games Inc. and its
subsidiaries, unless the context otherwise requires. Pro forma financial
information used in this Prospectus gives effect to the acquisition of Atari
Games Corporation ("Atari Games") as if it had occurred on July 1, 1995.
THE COMPANY
Midway is a leading designer, publisher and marketer of interactive
entertainment software played in both the coin-operated and home markets. Since
the late 1970s, Midway has released many of the industry's leading games
including Mortal Kombat (which line of games has sold over 10 million copies in
the home market), Cruis'n USA, NBA Jam, Joust, Defender, Pacman and Space
Invaders, and, through its recently acquired Atari Games subsidiary, such
leading games as Area 51, Gauntlet, Centipede, Asteroids and Pong. Midway's
games are available for play on all major dedicated home video game platforms,
including Nintendo, Sony and Sega, and personal computers.
Midway began to publish home video games based on its own coin-operated
video games in September 1995 with the introduction of Mortal Kombat 3, the best
selling home video game in the United States in 1995. Prior to that time, Midway
had granted Acclaim Entertainment the right to publish home versions of most
coin-operated video games released by Midway for a modest royalty. In
preparation for the end of this arrangement and to maximize profitability,
Midway developed and implemented a new strategy to begin to publish home
versions of its coin-operated video games and expand the number of its
coin-operated and home video game releases. As part of this strategy, in April
1994 Midway acquired Tradewest, a home video game development and distribution
business, and in March 1996 Midway acquired Atari Games, a leading designer,
publisher and marketer of interactive entertainment software. Midway also
significantly increased its research and development expenditures to $32.5
million in fiscal 1996, up from $14.7 million in fiscal 1995. As a result of
these efforts, in fiscal 1997 Midway expects to release approximately 12
coin-operated video games and publish approximately 20 home video games compared
to four coin-operated video games and five home video games in fiscal 1996.
Midway's business strategy is based upon the following:
- CREATE PORTFOLIO OF EXCITING GAMES -- The key to success in the video
game business is to produce games that are fun and exciting to play,
which requires the creative talents of experienced game designers. Midway
employs over 250 game design personnel organized in teams comprised of
programmers, artists, mechanical and electrical engineers, musicians and
actors. The design teams are supported by state-of-the-art design
technology that allows for the creation of cutting-edge three-dimensional
graphics and advanced audio effects. Midway produces games in the action,
simulation, adventure and sports categories.
- EXPLOIT COIN-OPERATED PROVING GROUND -- Midway generally develops its
video games for initial release in the coin-operated market. To be
successful, a coin-operated video game must be action packed and fun, and
provide enough excitement to encourage players to spend 50c almost every
two minutes. Midway considers coin-operated games that sell at least
5,000 units and home games that sell at least 100,000 units per dedicated
platform to be successful games. Midway's experience has been that a
successful coin-operated video game is almost always a success in the
home market. Each of the coin-operated video games released by Midway in
the past four years which has sold at least 5,000 units has then sold at
least 100,000 units for each major dedicated platform on which it was
released in the home market. The significant benefits realized by Midway
from this strategic approach are that (i) the results achieved in the
initial coin-operated release are a meaningful indicator of the success
the game might realize in the home market and help to determine the
strategy which Midway will follow in releasing the game in the home
market, (ii) the knowledge that a particular coin-operated video game is
popular with consumers allows Midway to maximize profitability through
simultaneous publication across multiple home platforms
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<PAGE> 5
thereby spreading developmental, advertising and promotional costs over a
greater number of units and (iii) a successful coin-operated game promotes sales
for the subsequent home version of the game among the players exposed to the
game in arcades and other coin-operated venues.
- MAINTAIN PLATFORM INDEPENDENCE -- Midway develops games for all major
dedicated home platforms (Nintendo, Sony and Sega) as well as for the
personal computer. Midway is a leading developer of video games for the
32- and 64-bit game platforms, commonly referred to as "next generation"
platforms, which are currently being marketed by hardware manufacturers.
In fiscal 1997, Midway expects to release more games on the new Nintendo
64 platform than any developer other than Nintendo itself. Because it
produces video games for multiple platforms, Midway is not dependent on
any particular game platform. Midway believes it is well positioned for
the rapid technological evolution that characterizes the home video game
market.
- EXPLOIT FRANCHISE AND LIBRARY VALUE -- Midway seeks to exploit its
franchise properties such as Mortal Kombat. In fiscal 1997, Midway plans
to release a new coin-operated game, Mortal Kombat 4, and three
additional home games, Ultimate Mortal Kombat 3, Mortal Kombat Trilogy
and an adventure game tentatively entitled Mortal Kombat Mythologies. An
animated television series based on Mortal Kombat is scheduled to air in
the fall of 1996, and a sequel to the movie version of Mortal Kombat is
scheduled to be released in the summer of 1997. Midway also seeks to
utilize its large library of video games to release "arcade classics" and
updated versions of such classics. For the home market in fiscal 1997,
Midway plans to release three collections of arcade classic games and
Robotron X, a new version of a classic arcade game.
- DEVELOP MULTI-SITE GAME PLAYING NETWORK -- Midway is testing its own
proprietary multi-player interactive video game playing network
technology known as Wavenet, allowing players to play against others
located at remote coin-operated locations. This technology has
consistently resulted in greater player utilization and profitability of
games. As new on-line interactive formats develop for game playing, such
as over the Internet or other networks, Midway intends to create a
competitive advantage by exploiting its developing multi-player network
technology.
Midway's revenue increased to $245.4 million in fiscal 1996, from $180.5
million in fiscal 1995 and $121.9 million in fiscal 1994. Such growth resulted
from the growth in Midway's revenue from home games which increased to $154.1
million in fiscal 1996 (63% of revenues), from $60.8 million in fiscal 1995 (34%
of revenues) and $24.0 million in fiscal 1994 (20% of revenues). In fiscal 1997,
Midway plans to release approximately 12 coin-operated video games, including
Mortal Kombat 4, Cruis'n World and War Gods, and approximately 20 home video
games, including Ultimate Mortal Kombat 3, Mortal Kombat Trilogy, Mortal Kombat
Mythologies, Doom 64, Final Doom, War Gods, Area 51, The NHLPA & NHL Present
Wayne Gretzky's 3D Hockey and NBA Hangtime.
Midway's coin-operated video games are primarily sold through a worldwide
network of distributors who in turn sell or lease such games directly to arcades
and route operators. The Company currently markets and sells dedicated platform
versions of its home video games in North America through a combination of
direct sales by Midway's internal sales staff and independent sales
representatives. Midway's principal customers for its home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Best Buy, national and regional
retailers, discount store chains, video rental retailers and entertainment
software distributors.
Prior to the Offering, Midway was a wholly-owned subsidiary of WMS
Industries Inc. WMS is a leading designer, manufacturer and marketer of
coin-operated pinball and novelty games and gaming equipment. WMS also owns
interests in hotels and casinos in Puerto Rico which WMS has announced it
intends to spin off to its stockholders in early 1997. After the Offering, WMS
will continue to provide certain management, administrative, sales, marketing
and accounting and information services to Midway and will act as a contract
manufacturer for Midway's coin-operated games. Immediately following the
Offering, WMS will own approximately 86.8% of the outstanding shares of Common
Stock (85.1% if the Underwriters' over-allotment option is exercised in full).
4
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THE OFFERING
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Common Stock offered............. 5,100,000 shares.
Common Stock to be outstanding
after the Offering(1).......... 38,500,000 shares.
Use of proceeds.................. For working capital and general corporate
purposes, to pay dividend notes to WMS in
the aggregate amount of $50.0 million and to
repay other seasonal working capital
borrowings from WMS. See "Use of Proceeds."
Proposed New York Stock Exchange
symbol......................... MWY
</TABLE>
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(1) Excludes 765,000 shares issuable upon exercise of the Underwriters'
over-allotment option and 1,455,000 shares of Common Stock issuable upon the
exercise of options which have been or will be granted prior to the Offering
under the Company's Stock Option Plan exercisable at the initial offering
price per share.
------------------------
Midway(R) is a registered trademark of the Company. With the exception of
trademarks licensed from third parties, titles to all of the Company's games
referred to in this Prospectus are either registered trademarks of the Company
or the subject of pending trademark applications. Nintendo(R), Super Nintendo
Entertainment System(R), Game Boy(R) and Nintendo 64(R) are registered
trademarks of Nintendo of America, Inc. Sega(R), Genesis(R), Game Gear(R) and
Saturn(R) are registered trademarks of Sega of America, Inc. Sony PlayStation(R)
is a registered trademark of Sony Computer Entertainment Inc. This Prospectus
includes trademarks other than those identified in this Paragraph. The use of
any such trademark herein is in an editorial form only, and to the benefit of
the owner thereof, with no intention of infringement of the trademark.
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<PAGE> 7
SUMMARY FINANCIAL DATA
The summary financial data set forth below for the fiscal years ended June
30, 1994, 1995 and 1996 have been derived from the audited combined financial
statements of the Company for such periods. The combined financial statements
for the fiscal years ended June 30, 1992 and 1993 have not been audited, but, in
the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of the
results for such periods. The pro forma statement of income data gives effect to
the acquisition of Atari Games as if it had occurred on July 1, 1995 and
includes certain pro forma adjustments relating to the implementation of the
Company's integration plan. The adjusted balance sheet data reflect the effect
of the Offering and intended use of proceeds as if the Offering had been
completed on June 30, 1996. The data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," the Combined Financial Statements of the Company and related notes
thereto, the Unaudited Pro Forma Condensed Combined Statement of Income of the
Company and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
--------------------------------------------------------------
PRO
FORMA
1992 1993 1994(1) 1995 1996(2) 1996
------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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SELECTED STATEMENT OF INCOME DATA:
Revenues
Home video........................ $ 1,960 $ 1,806 $ 23,959 $ 60,839 $154,102 $206,651
Coin-operated video............... 36,370 83,825 97,923 119,640 91,321 122,798
------- -------- -------- -------- ------- -------
Total revenues............ 38,330 85,631 121,882 180,479 245,423 329,449
Cost of sales....................... 22,967 51,753 62,679 101,752 140,056 192,527
------- -------- -------- -------- ------- -------
Gross profit........................ 15,363 33,878 59,203 78,727 105,367 136,922
Research and development expense.... 3,148 4,787 8,418 14,661 32,495 48,066
Selling expense..................... 654 975 1,603 9,692 22,815 34,785
Administrative expense.............. 1,450 2,362 3,945 7,238 9,563 13,444
------- -------- -------- -------- ------- -------
Operating income.................... 10,111 25,754 45,237 47,136 40,494 40,627
Interest income (expense), net...... 54 -- 221 (143) 271 (732)
------- -------- -------- -------- ------- -------
Income before tax provision......... 10,165 25,754 45,458 46,993 40,765 39,895
Provision for income taxes.......... (3,928) (9,915) (17,435) (17,854) (15,536) (15,188)
------- -------- -------- -------- ------- -------
Net income.......................... $ 6,237 $ 15,839 $ 28,023 $ 29,139 $ 25,229 $ 24,707
======= ======== ======== ======== ======= =======
Earnings per share.................. $ .19 $ .47 $ .84 $ .87 $ .76 $ .74
======= ======== ======== ======== ======= =======
Shares outstanding.................. 33,400 33,400 33,400 33,400 33,400 33,400
======= ======== ======== ======== ======= =======
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<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
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SELECTED BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 9,199 $ 58,002
Working capital..................................................... (11,618) 87,185
Total assets........................................................ 118,262 167,065
Dividend notes(3)................................................... 50,000 --
Long-term debt(4)................................................... 7,863 7,863
Stockholders' equity................................................ 5,488(5) 104,291
</TABLE>
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(1) The operating assets and business of Tradewest were acquired on April 29,
1994 and are being accounted for by the purchase method of accounting. See
Note 4 to the Notes to Combined Financial Statements of the Company.
(2) Atari Games was acquired on March 29, 1996 and is being accounted for by the
purchase method of accounting. See Note 4 to the Notes to Combined Financial
Statements of the Company.
(3) The Dividend Notes (as defined) were distributed to WMS as sole stockholder
during fiscal 1996.
(4) Long-term debt consists of a portion of the purchase price for Atari Games.
(5) Represents WMS' net investment as sole stockholder of the Company prior to
the Offering.
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RISK FACTORS
An investment in the Shares being offered by this Prospectus involves a
high degree of risk. In addition, this Prospectus contains forward-looking
statements that involve risks and uncertainties. Discussions containing such
forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Industry Overview,"
"Business -- General," "Business -- Strategy," "Business -- New Product
Development," "Business -- Products," "Business -- Marketing and Distribution"
and "Business -- Platform Licenses," as well as in the Prospectus generally. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in the Prospectus.
Accordingly, prospective investors should consider carefully the following risk
factors, in addition to the other information concerning the Company and its
business contained in this Prospectus, before purchasing the Shares.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS
The Company's success depends on generating revenue from new products and
enhancements of existing products. The process of developing software products
such as those offered by the Company is extremely complex and is expected to
become more complex and expensive in the future as new platforms and
technologies are introduced. See "Business -- New Product Development." In
addition, consumer preferences for video games are difficult to predict, and few
video game products achieve sustained market acceptance. There can be no
assurance that new products introduced by the Company will achieve any
significant degree of market acceptance, or that such acceptance will be
sustained for any meaningful period. A significant delay in the introduction of
one or more new products or enhancements or the failure of new products to
achieve or sustain market acceptance would have a material adverse effect on the
Company's business, operating results and financial condition.
TECHNOLOGICAL CHANGE
The video game market, both in the coin-operated and home segments, is
characterized by rapidly changing technology. The Company must continually
anticipate and adapt its products to emerging technologies, including new
hardware platforms. When the Company chooses to incorporate a new technology in
its products or to publish or develop a product for a new platform, it may be
required to make a substantial development investment one to two years in
advance of initial shipment of such products. There can be no assurance that the
Company will be able to identify accurately which emerging technologies will
gain widespread acceptance. If the Company invests in the development of a video
game that does not achieve significant commercial success, the Company's
revenues from that product will be adversely affected and it may not recover its
development costs. If the Company does not choose to pursue the development of
products incorporating new technology or for new platforms that achieve
significant commercial success, the Company's revenue growth may be adversely
affected. In addition, consumers may defer purchasing software for use on
existing platforms following the announcement of an introduction date for
hardware platforms incorporating new technologies. Accordingly, sales of the
Company's existing software products could be adversely affected by such
announcements. There can be no assurance that the Company will be able to
develop or acquire the expertise necessary to enable it to develop or market
products for emerging technologies. See "Industry Overview -- Home Games."
RELIANCE ON MORTAL KOMBAT PRODUCTS
On a pro forma basis, revenues from Mortal Kombat products accounted for
approximately 34.9% and 17.1% of the Company's total revenues during fiscal 1996
and 1995, respectively. If Mortal Kombat products fail to continue to sell or if
the Company fails to replace the Mortal Kombat products with additional products
generating significant revenues, the Company's business, operating results and
financial condition could be materially and adversely affected.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience
significant quarterly fluctuations in net sales and operating results due to a
variety of factors, including fluctuations in the mix of products with varying
profit margins sold by the Company, the size and rate of growth of the consumer
software market,
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market acceptance of the Company's products and those of its competitors and
dedicated platform manufacturers, development and promotional expenses relating
to the introduction of new products or enhancements of existing products, the
timing and success of product introductions, changes in pricing policies by the
Company and its competitors, the accuracy of the Company's and retailers'
forecasts of consumer demand, the timing of orders from major customers, order
cancellations and delays in shipment. The Company's expense levels are based, in
part, on its expectations regarding future sales and, as a result, operating
results would be adversely affected by a decrease in sales or a failure to meet
the Company's sales expectations.
While the coin-operated game business is not generally seasonal in nature,
the home video game business is highly seasonal. Sales of home video games are
typically significantly higher during the September and December quarters due to
the year-end holiday buying season. Sales in other quarters are generally lower
and vary significantly as a result of new product introductions and other
factors. There can be no assurance that the Company will achieve consistent
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITION
The video game business is intensely competitive and is characterized by
the continuous introduction of new titles and the development of new
technologies. The ability of the Company to compete successfully in this market
is based, in large part, upon its ability to select and develop popular titles,
to identify and obtain rights to commercially marketable intellectual properties
and to adapt its products for use with new technologies. In addition, successful
competition is also based upon price, access to retail shelf space in the case
of home games, product enhancements, new product introductions, marketing
support and distribution channels. The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of the
Company.
In the coin-operated market, the Company competes principally with foreign
manufacturers such as Capcom, Konami, Namco, Sega and Taito.
In the home market, the Company competes with Nintendo, Sony and Sega, the
largest publishers of software for their respective systems. Due to their
dominant position in the industry as primary manufacturers of dedicated platform
hardware and software, Nintendo, Sony and Sega have a competitive advantage with
respect to retail pricing, acquiring intellectual property licenses and securing
shelf space. There can be no assurance that Nintendo, Sony or Sega will not
increase their own software development efforts. The Company also currently
competes in the United States and Canada with numerous companies licensed by
Nintendo, Sony and Sega to develop software products for use with their
respective hardware systems. These competitors include Acclaim, Activision,
Capcom, Disney Interactive, Electronic Arts, Konami, Lucas Arts, Namco and
Viacom New Media. Additionally, the Company's games which are sold for use on
personal computers compete with entertainment software sold by companies such as
Broderbund Software, CUC International, Electronic Arts, GT Interactive, Maxis
and Spectrum Holobyte, among others. The entry and participation of new
industries and companies, including diversified entertainment companies, in
markets in which the Company competes may adversely affect the Company's
performance in such markets.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, are increasing their focus on the interactive entertainment market,
which will result in greater competition for the Company. In particular, many of
the Company's competitors are developing on-line interactive games and
interactive networks that will be competitive with the Company's interactive
products. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially and adversely affect its business,
operating results and financial condition.
PRODUCT RETURNS AND PRICE ADJUSTMENTS
In its home video game business, the Company accepts product returns for
defective products and provides markdowns or other credits on varying terms in
the event that the customer holds slow-moving inventory of the Company's home
games. At the time of product shipment, the Company establishes reserves,
including reserves under the Company's policies for price protection and returns
of defective products, which
8
<PAGE> 10
estimate the potential for future returns of products based on historical return
rates, seasonality of sales, retailer inventories of the Company's products and
other factors. Product returns, markdowns and credits that exceed the Company's
reserves could have a material adverse effect on the Company's business,
operating results and financial condition. Although the Company maintains
reserves which it believes to be adequate with respect to product returns and
price reductions, there can be no assurance that the reserves established will
not be exceeded.
DEPENDENCE ON DEDICATED PLATFORM MANUFACTURERS
In fiscal 1996, sales of software products for use on the 16-bit Super
Nintendo Entertainment System and Sega Genesis platforms represented
approximately 47.5% and 31.0% respectively, of home video revenues. The Company
has also developed games for the next generation 32- and 64-bit game platforms
(Nintendo 64 platform, the Sony PlayStation platform and the Sega Saturn
platform), which the Company expects will comprise a significant and increasing
portion of its revenues in the coming years. If the popularity of home video
games on dedicated hardware platforms materially declines, or if the Company
were to lose its license to publish software from any of these companies, the
Company's business would be materially and adversely affected.
The Company is generally obligated to submit new games to the dedicated
platform manufacturers for approval prior to development and/or manufacturing.
Rejection or substantial delay in approval of a product by a dedicated platform
manufacturer could have a material adverse effect on the Company's financial
condition and results of operations. The Company has not experienced any
significant delays in the approval process for any of its games in the past.
However, there can be no assurance that the Company will not experience such
delays in the future. The dedicated platform manufacturers may also limit the
number of titles that the Company can release in any year, which may limit any
future growth in sales.
The Company depends on Nintendo, Sony and Sega for the protection of the
intellectual property rights to their respective hardware platforms and
technology, their ability to control the proliferation of new titles by
licensees and others and their ability to discourage unauthorized persons from
producing software for the Nintendo, Sony and Sega platforms. The Company also
relies upon the dedicated platform manufacturers for the manufacturing of
software cartridges and CD-ROMs for the next generation platforms. See
"-- Manufacturing Risks," "Business -- Platform Licenses" and "-- Competition."
MANUFACTURING RISKS
The manufacturing of the Company's home games is performed for the Company
by third parties in accordance with the Company's specifications. While the
Company has not to date experienced any material delays or interruptions in the
manufacture of the Company's products, there can be no assurance that such
delays or interruptions will not occur or, if any do occur, that they could be
remedied without further delay and without materially and adversely affecting
the Company's business, operating results or financial condition. Unanticipated
delays in receipt of shipments or price increases from any of the Company's
contract manufacturing sources could adversely affect the Company's business.
See "Business -- Platform Licenses" and "-- Competition."
INTELLECTUAL PROPERTY LICENSES AND APPROVALS
While the Company primarily seeks to develop original proprietary games,
certain of the Company's games are based on properties or trademarks owned by
third parties, such as the NBA, NFL, NHL or their respective players'
associations, and licensed to the Company. The Company's future success may also
be dependent upon its ability to procure licenses for additional popular
intellectual properties. There is competition for such licenses, and there can
be no assurance that the Company will be successful in acquiring additional
intellectual property rights with significant commercial value. See
"Business -- Intellectual Property Licenses," "-- Patent, Trademark, Copyright
and Product Protection," and "-- Competition."
The Company's intellectual property licenses generally require that new
products developed under such licenses be submitted to the licensor for approval
prior to release. Such approval is generally discretionary. Rejection or delay
in approval of a product by a licensor could have a material adverse effect on
the Company's business, operating results and financial condition. While the
Company has not experienced any significant delays in obtaining new product
approvals from its licensors in the past, there can be no assurance
9
<PAGE> 11
that the Company will not experience delays in the future. The owners of
intellectual property licensed by the Company generally reserve the right to
protect such intellectual property against infringement. See
"Business -- Intellectual Property Licenses."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends to a significant extent upon the
performance of senior management and on its ability to continue to attract,
motivate and retain highly qualified software developers. The loss of services
of senior management, highly-qualified software developers or other key
personnel could have a material adverse effect on the Company. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Specifically, the Company may experience increased costs in order to
attract and retain skilled employees.
VOTING CONTROL BY WMS
Upon completion of the Offering, WMS will beneficially own approximately
86.8% (85.1% if the Underwriters' over-allotment option is exercised in full) of
the outstanding Common Stock. Accordingly, WMS will have the ability to elect
and remove the entire Board of Directors of the Company and to determine the
outcome of all matters submitted to the Company's stockholders for approval.
Voting control of the Company by WMS will have the effect of making it
impossible for a third party to acquire a majority of the outstanding voting
stock of the Company without the approval of WMS. See "Principal Stockholders,"
"Arrangements With WMS" and "Shares Eligible for Future Sale."
CONFLICTS OF INTEREST WITH WMS
Certain of the Company's officers and directors are also officers,
directors and stockholders of WMS, and may be subject to various conflicts of
interest including, among others, the performance by the two companies under
their existing agreements as well as the negotiation of any agreements required
to be entered into in the future between these two parties. Additionally, the
Company may be subject to various conflicts of interest arising from the
relationship among it and WMS and their respective affiliates. The Negotiating
Committee of the Company's Board of Directors will be responsible for the review
and authorization of any agreement to be entered into in the future, and of any
modification to any existing agreement, between the Company and WMS. The
Negotiating Committee will be comprised of two independent directors not
otherwise affiliated with WMS or the Company. See "Arrangements With WMS" and
"Management -- Committees of the Board of Directors."
The Chief Executive Officer of the Company is also Chief Executive Officer
of WMS, and other officers of the Company are full-time employees of WMS and
various of its affiliates. Each of these key employees will devote such time to
the business and affairs of the Company as the Board of Directors deems
appropriate. However, each such person has other duties and responsibilities
with WMS that may conflict with time which might otherwise be devoted to his
duties with the Company. See "Management" and "Arrangements With WMS."
ARRANGEMENTS WITH WMS
After the Offering, WMS will continue to provide certain management,
administrative, sales, marketing, accounting and information services to the
Company and will act as a contract manufacturer for the Company's coin-operated
games. The cost of certain of these services will be a portion of the aggregate
cost incurred by WMS allocated to the Company based upon the relative revenues
of and/or units produced for the Company and the other amusement games
businesses of WMS and other factors. As a result, the cost allocated to the
Company will in part be dependent upon the performance of such other businesses.
These arrangements are terminable by either the Company or WMS upon 180 days'
notice. In the event the arrangements with WMS are terminated, the Company will
need to create its own management infrastructure. There can be no assurance that
the Company will be able to establish such an infrastructure promptly or without
adverse effect. See "Arrangements with WMS -- Manufacturing and Services
Agreement."
The Company has been a member since 1988 of the consolidated group of
corporations of which WMS was the common parent for federal income tax purposes
(the "WMS Group"). Therefore, the Company is jointly and severally liable for
any federal tax liability incurred by the WMS Group. The Company and WMS
10
<PAGE> 12
have entered into a sharing agreement with respect to tax matters (the "Tax
Sharing Agreement"). The Tax Sharing Agreement is not binding on the Internal
Revenue Service (the "IRS") or upon state, local or foreign taxing authorities.
The effectiveness of the Tax Sharing Agreement is therefore dependent on each
member of the WMS Group having the ability to pay its relative share of taxes.
Because the IRS or other taxing authorities can be expected to seek payment from
WMS prior to seeking payment from the individual group members, it is likely
that the Company would seek to enforce any rights it may have against WMS for
sharing at a time when WMS was unable to pay its proportionate share of taxes.
See "Arrangements With WMS -- Tax Sharing Agreement."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiations between the Company and the Representatives of the
Underwriters and may not be indicative of the market price for the Common Stock
after the Offering. See "Underwriting" for a discussion of the factors to be
considered in the determination of the initial public offering price. Although
the Common Stock has been approved for listing on the New York Stock Exchange,
subject to official notice of issuance, there can be no assurance that an active
trading market in the Common Stock will develop or, if it does develop, that it
will be sustained after the completion of the Offering. There has been a history
of significant volatility in the market prices of companies engaged in the
entertainment software industry. It is possible that the market price of the
Common Stock will be highly volatile. Factors such as the timing and market
acceptance of new product introductions by the Company, the introduction of new
products by the Company's competitors, loss of key personnel of the Company,
variations in quarterly operating results or changes in market conditions in the
interactive entertainment software industry may have a significant impact on the
market price of the Common Stock. In the past, the Company has experienced
fluctuations in its operating results, and it is likely that in some future
quarter the Company's revenue or operating results will be below the
expectations of, and certain new products will not be introduced when
anticipated by, market analysts and investors. In such event, the price of the
Common Stock would likely be materially adversely affected. Market prices for
the Common Stock following the Offering will be influenced by a number of
factors, including quarterly variations in the financial results of the Company
and its competitors, changes in earnings estimates by analysts, conditions in
the interactive entertainment software industry, the financial markets and the
overall economy.
DILUTION
Purchasers of the Shares will experience immediate and substantial dilution
in the net tangible book value per share of Common Stock. See "Dilution."
DIVIDEND POLICY
The Company expects that it will retain all available earnings, if any,
generated by its operations for the development and growth of its business and,
except for payment of a previously declared dividend to WMS out of the proceeds
of the Offering, does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. In addition, the payment of cash dividends may
be limited by financing agreements entered into by the Company in the future.
See "Dividend Policy."
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue shares of
Preferred Stock and to determine the designations, preferences and rights and
the qualifications or restrictions of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate actions, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company will, upon consummation of the
Offering, be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, this statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved
11
<PAGE> 13
in a prescribed manner. Furthermore, certain other provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of discouraging,
delaying or preventing a merger, tender offer or proxy contest, which could
adversely affect the market price of the Company's Common Stock. See
"Description of Capital Stock."
In addition, the preferred stock purchase rights to be issued pursuant to
the Rights Agreement (as defined) will provide discount purchase rights to
stockholders of the Company upon certain acquisitions of beneficial ownership of
10 percent or more of the outstanding shares of Common Stock. The effect of the
foregoing may be to inhibit a change in control of the Company that may be
beneficial to the Company's stockholders. See "Description of Capital
Stock -- Stockholder Rights Agreement."
SHARES ELIGIBLE FOR FUTURE SALE
There will be 38,500,000 shares of Common Stock outstanding immediately
following the Offering (39,265,000 shares if the Underwriters' over-allotment
option is exercised in full). WMS owns 33,400,000 shares of Common Stock
representing all of the outstanding shares of Common Stock prior to the
Offering. All of such shares will be "restricted shares" for purposes of the
Securities Act of 1933, as amended (the "Securities Act"). In general, under
Rule 144 as currently in effect, a person who has beneficially owned
shares of Common Stock that have been outstanding and not held by an "affiliate"
of the Company for a period of two years is entitled to sell such shares,
subject to certain volume limitations and other restrictions, without
registration under the Securities Act. The Company's officers and directors and
WMS, the Company's sole stockholder prior to the Offering, have agreed not to
offer, sell, contract to sell, pledge or grant any option to purchase or
otherwise dispose of such securities for 180 days after the date of this
Prospectus, without the prior written consent of Oppenheimer & Co., Inc. The
Company has also agreed not to offer, sell, contract to sell, or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock (other than shares issuable upon exercise of outstanding options) for a
period of 180 days after the date of this Prospectus, without the prior written
consent of Oppenheimer & Co., Inc., subject to certain limited exceptions. Such
shares may thereafter be sold in the public market pursuant to Rule 144 under
the Securities Act or pursuant to an effective registration statement. The
Company has entered into a registration rights agreement with WMS pursuant to
which the Company has agreed to file registration statements under certain
circumstances and take other steps requested by WMS in order to enable WMS to
sell its shares of Common Stock. See "Arrangements With WMS -- Registration
Rights Agreement." Sales of a substantial number of shares of Common Stock in
the public market could adversely affect the market price of the Common Stock.
An additional 2,000,000 shares of Common Stock are reserved for issuance under
the Company's Stock Option Plan, of which options for approximately 1,455,000
shares have been or will be granted prior to the Offering, subject to the
consummation of the Offering. It is the Company's intention to register the
shares underlying options granted under the Company's Stock Option Plan under
the Securities Act shortly after the date of this Prospectus, and such shares
may be sold in the public market at any time thereafter, subject to certain
restrictions under Rule 144 with respect to shares held by affiliates of the
Company and subject to certain vesting schedules applicable to such options and
the aforementioned agreements restricting the ability of the Company's officers
and directors and WMS to sell such shares for 180 days. See "Shares Eligible for
Future Sale."
12
<PAGE> 14
THE COMPANY
Prior to the Offering, the Company was a wholly-owned subsidiary of WMS
Industries Inc. WMS is a leading designer, manufacturer and marketer of
coin-operated pinball and novelty games and gaming equipment. WMS also owns
interests in hotels and casinos in Puerto Rico which WMS has announced it
intends to spin off to its stockholders in early 1997. After the Offering, WMS
will continue to provide certain management, administrative, sales, marketing,
accounting and information services to the Company and will act as a contract
manufacturer for the Company's coin-operated games. See "Arrangements With WMS."
Prior to the Offering, the Company also conducted certain aspects of the pinball
operations of WMS' amusement games business, which operations were transferred
to another subsidiary of WMS and the results of which are not included in the
Company's results of operations.
Immediately following the Offering, WMS will own approximately 86.8% of the
outstanding shares of Common Stock (85.1% if the Underwriters' over-allotment
option is exercised in full). As a result, WMS will have the ability to elect
and remove the entire Board of Directors of the Company and to determine the
outcome of all matters submitted to the Company's stockholders for approval.
The Company is a Delaware corporation formed in July 1988. Its address is
3401 North California Avenue, Chicago, Illinois 60618, and its telephone number
is 312-961-2222.
RECENT ACQUISITIONS
In preparation for the end of the arrangements with Acclaim, the Company
developed and implemented a new strategy to begin to publish home versions of
its coin-operated video games and expand the number of coin-operated and home
video game releases. As part of this strategy, in April 1994 Midway acquired
Tradewest, a home video game development and distribution business, and in March
1996 Midway acquired Atari Games, a leading designer, publisher and marketer of
interactive entertainment software.
Tradewest. In April 1994, the Company acquired the operating assets and
business of three commonly owned companies ("Tradewest"): Tradewest, Inc.,
Tradewest International, Inc., and The Leland Corporation. Tradewest was engaged
in the business of developing, publishing and distributing home games for use on
all major dedicated platform hardware systems and on personal computers. The
purchase price for the assets acquired was set at five times the average annual
pre-tax income of the acquired business during the four year period commencing
May 1, 1994 with a minimum purchase price of $14.1 million, which was paid at
the closing, and a maximum additional payment of $36.0 million during the
four-year earn-out period. Over the first two years of the earn-out period, the
Company has paid an aggregate sum of $14.4 million as additional purchase price.
Atari Games. In March 1996, the Company expanded its game development
capacity and library of video games through the acquisition by the Company's
wholly-owned subsidiary, Midway Interactive Inc. ("Midway Interactive"), of all
of the outstanding capital stock of Atari Games Corporation from Warner
Communications Inc. ("Warner"), a subsidiary of Time Warner Inc. Atari Games,
based in Milpitas, California, is also engaged in the business of developing,
manufacturing, licensing, publishing and distributing coin-operated video games
and interactive entertainment software for use in the home on all major
dedicated platform hardware systems and on personal computers. The Company is in
the process of integrating parts of the Atari Games business into the Company's
coin-operated video game and home game business and eliminating redundancies to
reduce Atari Games' operating costs. The integration plan in progress includes,
among other things, closing certain domestic and international facilities,
commencing coin-operated video game manufacturing under arrangements with WMS,
and eliminating operations no longer conducted by Atari Games. In addition,
sales, marketing and distribution of home games will be combined with the
Company's home games operation. The pro forma financial information included
elsewhere in this Prospectus gives effect to the acquisition of Atari Games as
if it had occurred on July 1, 1995 and includes certain pro forma adjustments
based on the Company's assimilation activities.
The preliminary purchase price for the stock of Atari Games was $24.1
million, representing the net asset value of Atari Games as of the closing date
including $19.0 million of working capital Warner was required to
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<PAGE> 15
provide Atari Games. The purchase price is subject to adjustment based upon the
balance sheet of Atari Games at March 29, 1996. The balance sheet of the Company
at June 30, 1996 includes a receivable in the amount of $3.2 million
representing the balance of the cash payment required to be made by Warner to
increase the working capital of Atari Games to the agreed amount. Warner has not
yet accepted the calculation of the final purchase price. The purchase price for
Atari Games is payable as follows: (i) $2.0 million was paid in cash at the
closing, (ii) Midway Interactive delivered a non-recourse promissory note in the
principal amount of $7.9 million (the "Two Year Note") in favor of Warner
payable on March 29, 1998 and (iii) Atari Games delivered a non-recourse
promissory note in the principal amount of $14.2 million (the "Four Year Note")
in favor of Warner payable in semi-annual installments over four years
(extendable by Atari Games for an additional three years under certain
conditions) but payable only from 50% of any cash gross profit from the sale or
distribution of certain products and intellectual property with respect thereto
owned by Atari Games as of the closing date. The Two Year Note is secured by the
capital stock of Atari Games. The obligations of Midway Interactive under the
Two Year Note and related security agreement may be satisfied by relinquishing
the capital stock of Atari Games to Warner. The Four Year Note is secured by the
products and intellectual property owned by Atari Games as of the closing date.
The obligations of Atari Games under the Four Year Note and related security
agreement may be satisfied after the fourth anniversary of the closing by
transferring such products and intellectual property to Warner. As a result of
the foregoing arrangements, Midway has the right under certain circumstances to
transfer the Atari Games business back to Warner without any further obligation
to pay the balance of the purchase price. The purchase of Atari Games included
the right to use the Atari name in connection with coin-operated games, but not
home games. The right to use the Atari name for home games is held by Atari
Corp., a corporation unrelated to Warner or the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered hereby,
after deduction of the underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be approximately
$98.8 million ($113.7 million if the Underwriters' over-allotment option is
exercised in full). The Company will use the proceeds of the Offering for
working capital and general corporate purposes, to pay promissory notes in the
aggregate amount of $50.0 million (the "Dividend Notes"), which Dividend Notes
were distributed as a dividend to WMS as sole stockholder during fiscal 1996,
and to repay seasonal working capital borrowings from WMS. A portion of the net
proceeds may also be used to fund acquisitions related to the Company's
business. The Company is not currently negotiating, nor does it have any
commitments or understandings with respect to, any acquisitions. Pending the use
of the net proceeds for such purposes, the Company will invest such net proceeds
in short-term, interest bearing securities.
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<PAGE> 16
DILUTION
The net tangible book value (deficit) of the Company's Common Stock as of
June 30, 1996 (after giving effect to a 33,400 for one stock split to be
effected immediately prior to the Offering) was approximately $(17.3 million) or
$(.52) per share of Common Stock. "Net tangible book value" represents the total
amount of the Company's tangible assets less the total amount of the Company's
liabilities; "net tangible book value per share" means such amount divided by
the number of shares of Common Stock outstanding. After giving effect to the
sale by the Company of the Shares in the Offering assuming an initial public
offering price of $21.00 per share, and the application of the estimated net
proceeds therefrom, the net tangible book value as adjusted of the Common Stock
as of June 30, 1996 would have been approximately $81.5 million, or $2.12 per
share. This represents an immediate increase in net tangible book value of $2.64
per share to the Company's current sole stockholder and an immediate dilution of
$18.88 per share to new investors purchasing Shares in the Offering.
The following table illustrates the dilution per share described above:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $21.00
-------
-
Net tangible book value (deficit) before the Offering............. $(.52)
Increase in net tangible book value per share attributable to new
investors...................................................... $2.64
------
--
Net tangible book value as adjusted after the Offering.............. $ 2.12
-------
-
Dilution to new investors........................................... $18.88
========
</TABLE>
DIVIDEND POLICY
The Company currently intends to retain any earnings for the development
and expansion of its business. Accordingly, except for payment of the Dividend
Notes to WMS out of the net proceeds of the Offering, the Company does not
anticipate paying dividends on its Common Stock in the foreseeable future. Any
future determination as to the payment of dividends will be at the discretion of
the Board of Directors of the Company and will be dependent upon the Company's
results of operations, financial condition, contractual restrictions, if any,
and other factors deemed relevant by the Board. The Company expects that the
bank line of credit it intends to enter into prior to completion of the Offering
will contain limitations on the ability of the Company to pay dividends.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and such capitalization as adjusted to give effect to the Offering and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Combined
Financial Statements of the Company, the Unaudited Pro Forma Condensed Combined
Statement of Income of the Company, the Unaudited Condensed Consolidated
Financial Statements of Atari Games and the Consolidated Financial Statements of
Atari Games included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
------- --------------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Short-term debt:
Atari Games accrued payment......................................... $ 3,286 $ 3,286
Dividend notes...................................................... 50,000 --
-------
Long-term debt:
Atari Games purchase note........................................... $ 7,863 $ 7,863
------- --------
Total debt....................................................... $61,149 $ 11,149
STOCKHOLDERS' EQUITY:
Stockholder's net investment........................................ $ 5,488
Preferred stock, $.01 par value, 5,000,000 shares authorized........ -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
33,400,000 shares outstanding and 38,500,000 shares outstanding
as adjusted, respectively........................................ 385
Additional paid-in capital.......................................... 103,906
Retained earnings...................................................
------- --------
Total stockholders' equity....................................... $ 5,488 $104,291
------- --------
Total capitalization............................................. $66,637 $115,440
======= ========
</TABLE>
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<PAGE> 18
SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended June
30, 1994, 1995 and 1996 have been derived from the audited combined financial
statements of the Company for such periods. The combined financial statements
for the fiscal years ended June 30, 1992 and 1993 have not been audited, but, in
the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of the
results for such periods. The pro forma statement of income data gives effect to
the acquisition of Atari Games as if it had occurred on July 1, 1995 and
includes certain pro forma adjustments relating to the implementation of the
Company's integration plan. The adjusted balance sheet data reflect the effect
of the Offering and intended use of proceeds as if the Offering had been
completed on June 30, 1996. The data should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," the Combined Financial Statements of the Company and related notes
thereto, the Unaudited Pro Forma Condensed Combined Statement of Income of the
Company and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
------------------------------------------------------------------------
PRO
FORMA
1992 1993 1994(1) 1995 1996(2) 1996
------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME
DATA:
Revenues
Home video.............. $ 1,960 $ 1,806 $ 23,959 $ 60,839 $154,102 $206,651
Coin-operated video..... 36,370 83,825 97,923 119,640 91,321 122,798
------- -------- -------- -------- ------- -------
Total
revenues...... 38,330 85,631 121,882 180,479 245,423 329,449
Cost of sales............. 22,967 51,753 62,679 101,752 140,056 192,527
------- -------- -------- -------- ------- -------
Gross profit.............. 15,363 33,878 59,203 78,727 105,367 136,922
Research and development
expense................. 3,148 4,787 8,418 14,661 32,495 48,066
Selling expense........... 654 975 1,603 9,692 22,815 34,785
Administrative expense.... 1,450 2,362 3,945 7,238 9,563 13,444
------- -------- -------- -------- ------- -------
Operating income.......... 10,111 25,754 45,237 47,136 40,494 40,627
Interest income (expense),
net..................... 54 -- 221 (143) 271 (732)
------- -------- -------- -------- ------- -------
Income before tax
provision............... 10,165 25,754 45,458 46,993 40,765 39,895
Provision for income
taxes................... (3,928) (9,915) (17,435) (17,854) (15,536) (15,188)
------- -------- -------- -------- ------- -------
Net income................ $ 6,237 $ 15,839 $ 28,023 $ 29,139 $ 25,229 $ 24,707
======= ======== ======== ======== ======= =======
Earnings per share........ $ .19 $ .47 $ .84 $ .87 $ .76 $ .74
======= ======== ======== ======== ======= =======
Shares outstanding........ 33,400 33,400 33,400 33,400 33,400 33,400
======= ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS
ADJUSTED
--------
<S> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Cash and cash
equivalents............. $ -- $ -- $ -- $ -- $ 9,199 $ 58,002
Working capital........... 3,116 15,140 24,407 27,327 (11,618) 87,185
Total assets.............. 6,649 21,010 50,993 81,106 118,262 167,065
Dividend notes(3)......... -- -- -- -- 50,000 --
Long-term debt(4)......... -- -- -- -- 7,863 7,863
Stockholders' equity...... 3,317(5) 15,580(5) 37,677(5) 49,752(5) 5,488(5) 104,291
</TABLE>
- ---------------
(1) The operating assets and business of Tradewest were acquired on April 29,
1994 and are being accounted for by the purchase method of accounting. See
Note 4 to the Notes to Combined Financial Statements of the Company.
(2) Atari Games was acquired on March 29, 1996 and is being accounted for by the
purchase method of accounting. See Note 4 to the Notes to Combined Financial
Statements of the Company.
(3) The Dividend Notes were distributed to WMS as sole stockholder during fiscal
1996.
(4) Long-term debt consists of a portion of the purchase price for Atari Games.
(5) Represents WMS' net investment as sole stockholder of the Company prior to
the Offering.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company has been in the coin-operated video game business for a number
of years. The Company began to publish home video games based on its
coin-operated video games in September 1995. Prior to that time, home video game
revenues were derived from royalties received by the Company primarily from
Acclaim Entertainment under an exclusive licensing agreement that expired in
March 1995. In anticipation of the end of this arrangement, in April 1994 the
Company acquired the operating assets and business of Tradewest, a home video
game development and distribution business. The historical financial statements
of the Company include the results of operations of the Tradewest business for
two months of fiscal 1994 and for the full 1995 and 1996 fiscal years.
Accordingly, comparisons of results of operations for such years may not be
meaningful.
As part of the Company's strategy to increase the number of its
coin-operated and home video game releases, in March 1996 the Company acquired
Atari Games, a publisher and distributor of home video games and coin-operated
video games. The historical financial statements of the Company include the
results of operations of Atari Games only for the period since its acquisition
by the Company. The pro forma financial information included in this Prospectus
gives effect to the acquisition of Atari Games as if it had occurred on July 1,
1995 and includes certain pro forma adjustments relating to the implementation
of the Company's integration plan. The integration plan in progress includes,
among other things, closing certain domestic and international facilities,
commencing coin-operated video game manufacturing under arrangements with WMS,
and eliminating operations no longer conducted by Atari Games. In addition,
sales, marketing and distribution of home games will be combined with the
Company's home games operation. Neither the historical financial statements of
Atari Games nor the pro forma financial information included in this Prospectus
are necessarily indicative of future results of operations of Atari Games given
the business plan the Company is in the process of implementing for Atari Games
including, among other things, substantial additional cost savings resulting
primarily from personnel reductions completed by the Company which are not
reflected in the pro forma financial information.
The Company believes the fluctuation in coin-operated revenues during the
last three fiscal years relates primarily to the number of units of hit games
sold rather than changes in the size of the overall market. The Company believes
that the market for coin-operated video games, particularly in the United
States, is mature and stable and does not offer the potential for significant
future growth. During the last three fiscal years, the Company sold a
significant number of units of three coin-operated video games, Mortal Kombat
II, Mortal Kombat 3 and Cruis'n USA.
The Company intends to exploit the significant benefits it obtains selling
home video games based on its own coin-operated video games. In September 1995
the Company published on several dedicated platforms its first home video game
based on its own coin-operated game, Mortal Kombat 3. This game was the best
selling home video game in the United States for 1995 and significantly
increased home video revenues for the year ended June 30, 1996. The Company
believes that its growth opportunities are largely in the home video game side
of its business where the Company has significantly increased the number of
scheduled game releases for fiscal 1997 and the number of games under
development for future years.
The Company sells home video games for dedicated platforms primarily in
North America and licenses foreign distribution to others. The worldwide
distribution of home video games for personal computers, as well as the
distribution outside of North America for certain next generation home video
platforms, were licensed to GT Interactive. Significant non-refundable licensing
revenue was recorded when the distribution agreements were entered into
($25,000,000 in fiscal 1995 and $10,000,000 in fiscal 1996). Such license fees
are recoupable by GT Interactive from the Company's share of future royalties
which would otherwise be earned under these agreements. Therefore, the Company
does not expect to generate significant, if any, further revenue from these
arrangements in the next two years.
18
<PAGE> 20
In recent years, the home video game business has been based predominantly
upon sales for the two leading dedicated platforms (Nintendo's Super Nintendo
Entertainment System and Sega's Genesis system), both of which are based on
16-bit processors. In fiscal 1996, 78.5% of the Company's home revenues were
derived from sales based on these two platforms. The Company believes that the
home video game business is in a period of transition to the next generation of
dedicated platforms based on 32- and 64-bit processors. While the installed base
of 16-bit processor platforms continues to substantially exceed the installed
base of next generation platforms, the Company anticipates that more than 50% of
its fiscal 1997 home video revenues will be derived from the sale of games for
these next generation platforms. The Company intends to continue to release
games on each platform that becomes or remains a significant component of the
home game business.
The Company is dependent on WMS for the manufacture of coin-operated games
as well as for certain other services including selling and administrative
activities. The allocation by WMS of the cost of certain services to the Company
is based in part on the relative revenues of and/or units produced for the
Company and the other amusement games businesses of WMS and other factors. As a
result, the cost allocated to the Company will in part be dependent upon the
performance of such other businesses. Selling expenses for coin-operated video
games (other than advertising and certain other expenses directly attributable
to the Company) are also based on an allocation to the Company of a portion of
sales and marketing expenses of WMS' amusement games business. Administrative
expenses include management, legal and accounting expenses of WMS allocated to
the Company based in part upon estimates of the percentage of time devoted to
the Company by the personnel involved.
The development of a new coin-operated video game generally takes 18 months
or longer, and typically involves the expenditure of substantial funds,
including development, testing and sampling costs. The conversion of a
coin-operated video game to a home video game usually takes six to 12 months. In
contrast, the majority of sales for both coin-operated and home versions of a
game generally occur within the first few months after release. As a result, the
Company must continually develop and release new games to generate additional
revenues.
The Company significantly increased its research and development expenses
in each year since fiscal 1994 primarily to expand the number of coin-operated
video games being introduced and the number of subsequent releases of home video
game versions. Research and development expenses are expensed as incurred and
include payments made to the game's designers after a game has been released
based on revenues derived from such game.
Revenues reflect reductions from gross sales due to returns, discounts and
allowances. The Company generally establishes reserves at the time of shipment
to provide for potential returns and price adjustments.
The gross profit margin associated with home video games is generally
higher than that realized by the Company for its coin-operated video games and,
as a result, a shift in the Company's product mix will affect the Company's
overall gross profit margin. The sale of home video games generally requires a
higher level of advertising and marketing expenses than that required for
coin-operated video games and, as a result, a shift in the Company's product mix
should also affect the level of selling expense as a percentage of total
revenues.
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain items in or
derived from the Company's combined statements of income expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1994 1995 1996
-------- ----- -----
<S> <C> <C> <C>
Revenues
Home video....................................................... 19.7% 33.7% 62.8%
Coin-operated video.............................................. 80.3% 66.3% 37.2%
---- ---- ----
Total revenues........................................... 100.0% 100.0% 100.0%
Cost of sales...................................................... 51.5% 56.4% 57.1%
---- ---- ----
Gross profit....................................................... 48.5% 43.6% 42.9%
Research and development expense................................... 6.9% 8.1% 13.2%
Selling expense.................................................... 1.3% 5.4% 9.3%
Administrative expense............................................. 3.2% 4.0% 3.9%
---- ---- ----
Operating income................................................... 37.1% 26.1% 16.5%
Interest income (expense), net..................................... 0.2% (0.1)% 0.1%
---- ---- ----
Income before tax provision........................................ 37.3% 26.0% 16.6%
Provision for income taxes......................................... 14.3% 9.9% 6.3%
---- ---- ----
Net income......................................................... 23.0% 16.1% 10.3%
==== ==== ====
</TABLE>
FISCAL 1996 COMPARED WITH FISCAL 1995
Revenues increased $64,944,000 or 36.0% from $180,479,000 in fiscal 1995 to
$245,423,000 in fiscal 1996. Home video revenues include $10,000,000 in fiscal
1996 and $27,000,000 in fiscal 1995 from licensing the distribution of home
video games for use on personal computers, licensing certain foreign
distribution of home video games and certain other licensing revenues (such
licensing revenues, together with those described below with respect to fiscal
1994, are referred to herein as "Licensing Revenues"). Excluding Licensing
Revenues, home video game revenues increased $110,263,000 or 326% from
$33,839,000 in fiscal 1995 to $144,102,000 in fiscal 1996. The increase in home
video game revenues was due to the fact that the Company only began to publish
home video games based on its coin-operated video games in fiscal 1996. Fiscal
1995 home video game revenues principally included revenue from those games that
were in process of development by Tradewest at the time it was acquired by the
Company in April 1994. Coin-operated video revenues decreased by 23.7% from
$119,640,000 in fiscal 1995 to $91,321,000 in fiscal 1996. The decrease in
coin-operated video revenues was primarily due to delays in the development of
certain video games in fiscal 1996 and higher unit sales of certain
coin-operated video games introduced in fiscal 1995 in comparison to unit sales
in fiscal 1996.
Gross profit increased $26,640,000 or 33.8% from $78,727,000 (43.6% of
revenues) in fiscal 1995 to $105,367,000 (42.9% of revenues) in fiscal 1996.
Excluding the effects of Licensing Revenues, gross profit increased $43,131,000
or 79.1% from $54,538,000 (35.6% of related revenues) in fiscal 1995 to
$97,669,000 (41.5% of related revenues) in fiscal 1996. This increase in gross
profit margin was primarily due to a shift in the Company's product mix to home
video games.
Research and development expenses increased $17,834,000 or 122% from
$14,661,000 (8.1% of revenues) in fiscal 1995 to $32,495,000 (13.2% of revenues)
in fiscal 1996. The increase is primarily due to an increased number of games
under development, including those of Atari Games in the three months ended June
30, 1996 and in part due to royalties paid to game designers as part of their
compensation.
Selling expense increased $13,123,000 or 135% from $9,692,000 in fiscal
1995 to $22,815,000 in fiscal 1996 primarily due to the shift in the Company's
revenues from coin-operated video games to home video games.
20
<PAGE> 22
Administrative expense increased $2,325,000 or 32.1% from $7,238,000 (4.0%
of revenues) in fiscal 1995 to $9,563,000 (3.9% of revenues) in fiscal 1996. The
increase was primarily due to increased incentive based compensation in the home
video game business resulting from increased sales of those games.
Operating income decreased $6,642,000 or 14.1% from $47,136,000 (26.1% of
revenues) in fiscal 1995 to $40,494,000 (16.5% of revenues) in fiscal 1996.
Operating income includes $7,135,000 in fiscal 1996 and $23,239,000 in fiscal
1995 from Licensing Revenues. Excluding the effects of Licensing Revenues and,
notwithstanding the $17,834,000 increase in research and development expense,
operating income increased $9,462,000 or 39.6% from fiscal 1995 to fiscal 1996,
primarily due to the increased sales of home video games.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38.1% in fiscal 1996 and 38% in fiscal 1995.
Net income decreased $3,910,000 or 13.4% from $29,139,000 in fiscal 1995 to
$25,229,000 in fiscal 1996. Net income includes $4,318,000 in fiscal 1996 and
$14,562,000 in fiscal 1995 relating to Licensing Revenues. Excluding the effects
of Licensing Revenues, net income increased $6,334,000 or 43.5% from $14,577,000
in fiscal 1995 to $20,911,000 in fiscal 1996. This increase in net income was
primarily the result of the sizable increase in the sale of home video games
based on the coin-operated version. The Company achieved this result
notwithstanding the increase in research and development expense.
FISCAL 1995 COMPARED WITH FISCAL 1994
Revenues increased $58,597,000 or 48.1% from $121,882,000 in fiscal 1994 to
$180,479,000 in fiscal 1995. Home video revenues in fiscal 1995 include
$27,000,000 of Licensing Revenues the distribution of home video games for use
on personal computers, licensing certain foreign distribution of home video
games and certain other licensing revenues. Home video revenues in fiscal 1994
include Licensing Revenues received from the Company's arrangements with
Nintendo and certain other Licensing Revenues totaling $13,000,000. Excluding
Licensing Revenues, home video revenues increased $22,880,000 or 209% from
$10,959,000 in fiscal 1994 to $33,839,000 in fiscal 1995, primarily as a result
of the acquisition of Tradewest. Coin-operated revenue increased $21,717,000 or
22.2% from $97,923,000 in fiscal 1994 to $119,640,000 in fiscal 1995 due to
strong sales of three coin-operated video games introduced in fiscal 1995.
Gross profit increased $19,524,000 or 33.0% from $59,203,000 (48.5% of
revenues) in fiscal 1994 to $78,727,000 (43.6% of revenues) in fiscal 1995.
Excluding the effects of Licensing Revenues, gross profit would have increased
$8,335,000 or 18.0% from $46,203,000 (42.4% of related revenue) in fiscal 1994
to $54,538,000 (35.6% of related revenue) in fiscal 1995 as a result of
increased sales. As a percentage of revenue, however, gross profit (excluding
Licensing Revenues) decreased from 42.4% of related revenue in fiscal 1994 to
35.6% of related revenue in fiscal 1995 primarily as a result of significant
royalty payments to the developer of one particular coin-operated video game
sold in fiscal 1995.
Research and development expense increased $6,243,000 or 74.2% from
$8,418,000 (6.9% of revenues) in fiscal 1994 to $14,661,000 (8.1% of revenues)
in fiscal 1995. The increase was primarily due to the increased number of games
under development which resulted in part from the acquisition of Tradewest.
Selling expense increased $8,089,000 or 505% from $1,603,000 (1.3% of
revenues) in fiscal 1994 to $9,692,000 (5.4% of revenues) in fiscal 1995. The
increase in selling expense as a percentage of revenue was primarily the result
of a shift in the Company's product mix to home video games (19.7% of revenues
in fiscal 1994 and 33.7% of revenues in fiscal 1995).
Administrative expense increased $3,293,000 or 83.5% from $3,945,000 (3.2%
of revenues) in fiscal 1994 to $7,238,000 (4.0% of revenues) in fiscal 1995
primarily as a result of increased administrative expenses of the Company's
Tradewest home video game business which was owned by the Company for the full
year of fiscal 1995 and for only two months of fiscal 1994.
21
<PAGE> 23
Operating income increased $1,899,000 or 4.2% from $45,237,000 (37.1% of
revenues) in fiscal 1994 to $47,136,000 (26.1% of revenues) in fiscal 1995.
Operating income in fiscal 1995 includes $23,239,000 from the effects of
Licensing Revenues. Operating income in fiscal 1994 includes $13,000,000 from
the effects of Licensing Revenues. Excluding the effects of Licensing Revenues,
operating income decreased by $8,340,000 or 25.9% from $32,237,000 in fiscal
1994 to $23,897,000 in fiscal 1995. This decrease was primarily from the fact
that the home video game business operated at a loss in fiscal 1995 and, as
mentioned above, the lower gross profit on one coin-operated video game in
fiscal 1995 requiring significant royalty payments.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38% in fiscal 1995 and 38.4% in fiscal 1994.
Net income increased $1,116,000 or 4.0% from $28,023,000 in fiscal 1994 to
$29,139,000 in fiscal 1995. Net income in fiscal 1995 includes $14,562,000
relating to Licensing Revenues and net income in fiscal 1994 includes $8,320,000
from Licensing Revenues. Excluding the effects of Licensing Revenues, net income
decreased $5,126,000 or 26.0% from $19,703,000 in fiscal 1994 to $14,577,000 in
fiscal 1995. The primary reasons for this decrease were the facts that the home
video game business operated at a loss in fiscal 1995 and that there was lower
gross profit on one licensed coin-operated video game sold in fiscal 1995.
22
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth the Company's combined statement of income
data for each of the quarters in the years ended June 30, 1996 and June 30,
1995. The historical financial information of the Company include the results of
operations of Atari Games only for the period since its acquisition by the
Company. This unaudited quarterly information has been prepared on the same
basis as the Company's year end combined financial statements and, in the
opinion of management, reflects all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the information for
the periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
-------------------------------------------
9/30/95 12/31/95 3/31/96 6/30/96
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Home video........................................ $46,717 $72,173 $22,092 $13,120
Coin-operated video............................... 21,221 16,989 20,983 32,128
------- ------- ------- -------
Total revenues................................. 67,938 89,162 43,075 45,248
Cost of sales....................................... 40,622 48,547 23,516 27,371
------- ------- ------- -------
Gross profit........................................ 27,316 40,615 19,559 17,877
Research and development expense.................... 5,851 9,541 5,459 11,644
Selling expense..................................... 7,562 9,723 2,115 3,415
Administrative expense.............................. 2,272 2,243 2,176 2,872
------- ------- ------- -------
Operating income.................................... 11,631 19,108 9,809 (54)
Interest income (expense), net...................... (47) (372) 286 404
------- ------- ------- -------
Income before tax provision......................... 11,584 18,736 10,095 350
Provision for income taxes.......................... (4,414) (7,138) (3,846) (138)
------- ------- ------- -------
Net income.......................................... $ 7,170 $11,598 $ 6,249 $ 212
======= ======= ======= =======
Earnings per share.................................. $ .21 $ .35 $ .19 $ .01
======= ======= ======= =======
Shares outstanding.................................. 33,400 33,400 33,400 33,400
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995 QUARTER ENDED
-------------------------------------------
9/30/94 12/31/94 3/31/95 6/30/95
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Home video........................................ $25,597 $12,869 $18,909 $ 3,464
Coin-operated video............................... 8,656 42,932 22,678 45,374
------- ------- ------- -------
Total revenues................................. 34,253 55,801 41,587 48,838
Cost of sales....................................... 20,985 35,265 17,795 27,707
------- ------- ------- -------
Gross profit........................................ 13,268 20,536 23,792 21,131
Research and development expense.................... 2,938 4,223 3,184 4,316
Selling expense..................................... 4,166 2,085 1,536 1,905
Administrative expense.............................. 1,273 1,551 1,952 2,462
------- ------- ------- -------
Operating income.................................... 4,891 12,677 17,120 12,448
Interest income (expense), net...................... (89) (31) 37 (60)
------- ------- ------- -------
Income before tax provision......................... 4,802 12,646 17,157 12,388
Provision for income taxes.......................... (1,825) (4,805) (6,520) (4,704)
------- ------- ------- -------
Net income.......................................... $ 2,977 $ 7,841 $10,637 $ 7,684
======= ======= ======= =======
Earnings per share.................................. $ .09 $ .23 $ .32 $ .23
======= ======= ======= =======
Shares outstanding.................................. 33,400 33,400 33,400 33,400
======= ======= ======= =======
</TABLE>
23
<PAGE> 25
Revenues for the quarters ended December 31, 1994, March 31, 1995, June 30,
1995 and March 31, 1996 included certain licensing revenues of $10,000,000,
$15,000,000, $2,000,000 and $10,000,000, respectively, that increased net income
by $5,184,000, $8,130,000, $1,248,000, and $4,318,000, respectively.
The June 30, 1996 quarter included the operations of Atari Games after its
acquisition on March 29, 1996. Research and development expense increased to
$11,644,000 in the June 30, 1996 quarter in comparison to $5,459,000 in the
March 31, 1996 quarter due primarily to inclusion of Atari Games.
LIQUIDITY AND CAPITAL RESOURCES
The Company, except for its Atari Games subsidiary, has participated in the
WMS central cash management system, pursuant to which all cash receipts are
transferred to WMS and all cash disbursements are made by WMS. Seasonal cash
needs have been provided by WMS. After completion of the Offering, the Company
will conduct its own treasury activities.
During fiscal 1996 and 1995, cash provided by operating activities, less
cash used for investing activities, was $28,692,000 and $17,064,000,
respectively, of which, $19,493,000 and $17,064,000, respectively, was retained
by WMS. The $9,199,000 of cash at June 30, 1996 is cash at Atari Games.
Cash provided by operating activities before changes in operating assets
and liabilities, was $29,117,000 in fiscal 1996 and $39,151,000 in fiscal 1995.
The decrease was primarily the result of a $7,664,000 decrease in deferred
taxes, and to a lesser extent, lower net income.
The changes in the operating assets and liabilities, as shown in the
combined statements of cash flows, resulted in $6,162,000 of cash inflow in
fiscal 1996, primarily due to a reduced receivables balance at June 30, 1996,
compared with a cash outflow of $15,204,000 in fiscal 1995, which outflow was
primarily due to an increased receivables balance at June 30, 1995, in part
offset by higher accounts payable and accruals.
Cash used by investing activities was $6,587,000 in fiscal 1996 and
$6,883,000 in fiscal 1995. Cash used for the purchase of property and equipment
was approximately the same in fiscal 1996 and 1995. Cash used for the additional
purchase price of Tradewest was $11,476,000 in fiscal 1996 and $3,024,000 in
fiscal 1995. On the date of acquisition Atari Games had cash in excess of the
amount used for its acquisition resulting in a $7,996,000 increase in cash
during fiscal 1996.
During fiscal 1996 the Board of Directors of the Company declared a
dividend and the Company issued $50,000,000 of Dividend Notes payable to WMS
which bear interest at 6%. The net proceeds of the Offering are expected to be
approximately $98,800,000 and will be used in part to pay the previously
declared $50,000,000 Dividend Notes and all other amounts, if any, payable to
WMS. The balance of the proceeds will be used for working capital.
The home video business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a purchase order is accepted.
The Company has been dependent upon WMS for its cash requirements. The
Company has received a commitment letter from a bank, subject to certain
conditions including completion of the Offering, for the establishment of a line
of credit for $50,000,000 and an additional letter of credit line of up to
$30,000,000. The line of credit is expected to be finalized prior to the
completion of the Offering and after the negotiation of a lending agreement
containing usual bank line of credit terms. Management believes that cash and
cash equivalents, cash flow from operations, cash from the Offering added to
working capital and amounts available under the line of credit will be adequate
to fund the Company's presently anticipated needs as well as pay any amounts due
under the Tradewest and Atari Games acquisitions.
The Company anticipates that capital expenditures in fiscal 1997 for
property and equipment will not exceed $4,500,000. Such expenditures will be
primarily for equipment used in research and development activities. Since WMS
manufactures coin-operated video games for the Company in WMS' own facilities,
the
24
<PAGE> 26
Company does not expect to make significant capital expenditures for
manufacturing equipment or facilities in the immediate future.
IMPACT OF INFLATION
During the past three years, the level of inflation affecting the Company
has been relatively low. The ability of the Company to pass on future cost
increases in the form of higher sales prices will continue to be dependent on
the prevailing competitive environment and the acceptance of the Company's
products in the market place.
SEASONALITY
The home video game business is highly seasonal and historically has
resulted in higher revenues and net income in the first and second quarters of
the June 30 fiscal year due to customer purchases preceding the year-end retail
holiday selling season. The coin-operated video game business has not
historically been seasonal but quarterly revenues and net income usually
increase when a coin-operated video game that achieves significant player appeal
is introduced. See "Risk Factors -- Fluctuations in Operating Results;
Seasonality."
25
<PAGE> 27
INDUSTRY OVERVIEW
Video games are sold in two primary formats -- coin-operated games
distributed to arcades and route operators and home games for dedicated hardware
platforms (Nintendo, Sony and Sega), portable game systems (Nintendo's Game Boy
and Sega's Game Gear), and personal computers distributed to mass merchandisers,
national and regional retailers, discount store chains, video rental retailers
and entertainment software distributors. A successful video game may present the
opportunity to exploit ancillary rights such as film, television and
merchandising rights. The primary groups that play video games are male
teenagers and young adults.
The video game business has undergone significant consolidation in recent
years, and the Company believes that significant barriers to entry into the
video game business exist that make it difficult for new entrants to succeed.
The video game business requires specialized creative talent capable of
utilizing the sophisticated technological tools required to design the complex
video games that characterize the business today. The cost of developing video
games is high and likely to increase as technology continues to evolve. In the
home video game business, distribution channels are dominated by a select group
of companies, and access to retail shelf space is a significant competitive
factor.
COIN-OPERATED GAMES
Coin-operated video games utilize specialized technology and hardware
platforms that permit greater design flexibility than dedicated home platforms
which are limited by the design specifications of the particular platform.
Coin-operated video games are manufactured in self-contained cabinetry
containing large video screens that display the game. Multiple players can play
the same game simultaneously, and games are generally designed to permit the
players to play against each other, in addition to being able to play against
the game itself. Most coin-operated video games cost 50c to play a game of
approximately two minutes in duration. New technologies employed in the
manufacturing of coin-operated video games utilize advanced video platforms in
which digital images are mapped to computer generated polygons that allow for
the creation of three-dimensional graphic images.
Coin-operated games are sold through distributors to two primary
customers -- arcades and route operators. The distributors typically provide
product warranties to their customers and receive a price allowance from the
manufacturer to cover warranty claims. A typical arcade is located in a shopping
mall and operates numerous types of games, including video, pinball, novelty and
redemption games. An arcade will often purchase multiple units of the most
popular games. Route operators purchase coin-operated video games and provide
the games on a revenue sharing basis to various establishments, such as
restaurants, taverns, convenience stores and movie theaters, which typically
install only a few games and only rarely lease multiple units of the same games
for a particular location. The Company estimates that sales to route operators
generally comprise between 45% and 50% of the coin-operated video game market.
After introduction, a coin-operated video game will generally experience a
product life cycle for a manufacturer of one to two years, although sales are
generally concentrated in the first six to eight months after introduction.
Coin-operated games are distributed throughout North America, Europe, and
to a lesser extent to Australia and countries in Asia and South America. The
Company believes that the market for coin-operated video games, particularly in
the United States, is mature and stable and is unlikely to experience
significant growth in the near-term. Growth in international markets may occur,
if at all, in emerging markets rather than developed countries where the
coin-operated video game market is also mature. The Company believes that Japan
is the second largest market for coin-operated video games after the United
States. However, United States manufacturers of coin-operated games have not as
yet achieved meaningful sales in the Japanese market.
26
<PAGE> 28
HOME GAMES
Like coin-operated video games, interactive software programs for the home
allow the consumer to participate actively in the outcome of the game. The
interactive software publishing business involves the creation or acquisition of
titles or intellectual property rights, the development of interactive software
products based on these titles or rights, and the publication, marketing,
merchandising, distribution and licensing of the resulting software products.
This process in general involves converting software created for the
coin-operated version of a game into software for use on the multiple platforms
on which home games are released. The business is highly dependent on consumer
tastes and preferences and on the commercial success of the hardware platforms
for which the software is produced. The principal types of interactive hardware
platforms are dedicated game systems, such as those manufactured by Nintendo,
Sony and Sega, portable game systems and personal computers.
According to a market study entitled U.S. and European Markets for Video
Games and PC Entertainment Software conducted by Packaged Facts, in 1995
consumers spent approximately $4.1 billion in the United States and $733.9
million in Europe on video games for dedicated hardware platforms.
Dedicated Platforms. Historically, no hardware platform or system has
achieved long-term dominance in the interactive entertainment market. In 1986
and 1987 Nintendo and Sega, respectively, introduced 8-bit video game systems
that, compared to existing personal computers available at the time, were low in
price, easy to use and had sophisticated audio-video capabilities. In late 1989,
Sega began shipping its Genesis system, a more-powerful 16-bit video game
system. In August 1991, Nintendo introduced its 16-bit Super Nintendo
Entertainment System. The aggregate installed base of the Super Nintendo
Entertainment System and the Genesis system in the United States at the end of
1995 was approximately 39.7 million units. Today, the competition in the market
for hardware platforms has intensified, with the introduction of 32-bit video
game systems, planned introduction in the United States of the new 64-bit video
game systems and the rising installed base of multimedia-enabled home computers.
Sega and Sony each began distribution of their next generation 32-bit and
64-bit hardware systems (named Saturn and PlayStation, respectively) in Japan
during the quarter ended December 1994. Sega began limited shipment of the
Saturn in North America in May 1995, and Sony commenced shipping the PlayStation
in North America in September 1995. The installed base of the Saturn system and
the PlayStation system in the United States as of May 1996 was approximately
700,000 units and 1.4 million units, respectively. Nintendo shipped the Nintendo
64 system in Japan in June 1996 and in North America in September 1996. The
Company believes that content providers with demonstrated capability for
developing successful games will be in a position to develop games for whatever
platforms achieve significant consumer acceptance.
Most software products for dedicated platforms are currently sold in
cartridge form. However, compact discs have recently become increasingly popular
because they have substantially greater data storage capacity and substantially
lower manufacturing costs than games in cartridge form. The newer Sony
PlayStation and Sega Saturn platforms are based on CD-ROM technology.
As the 16-bit cartridge market has matured, related hardware and software
sales have declined and are expected to decline significantly further in fiscal
1997. The Company expects that the transition from 16-bit cartridge-based game
machines to the advanced systems described above will continue.
Portable Game Systems. Nintendo's release in 1989 of the Game Boy, a
battery-operated, hand-held interactive entertainment system incorporating an
8-bit microprocessor, revolutionized the hand-held game machine market.
Previously, the only hand-held games available were dedicated to a single game.
Sega's color Game Gear hand-held system, released in 1991, competes directly
with the Nintendo Game Boy. It is estimated that at the end of 1995, the
installed base of hand held game systems was approximately 13 million and the
number of software titles available for use with the Game Boy and the Game Gear
were over 320 and 100, respectively. The market for video games on these
platforms has declined in recent years and today does not comprise a material
component of the video game business.
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<PAGE> 29
Personal Computer Software. The introduction of faster microprocessors,
graphics accelerator chips, high density disk drives, enhanced operating
systems, and increases in memory and processing power have facilitated the
development of more cost-effective, graphically oriented and user-friendly
personal computer software. As personal computers have become more powerful,
less expensive and easier to use, their use in both the home and business
environments has expanded, resulting in increased demand for a wide variety of
software products, including video games.
New Technologies. Recent advances in digital processing, data storage,
graphics, data compression and communications technologies have made possible a
new range of interactive software products and services. A number of companies
are developing technologies to permit the broadcast of interactive entertainment
services directly via satellite, fiber optic cables, and telephone and cable
television lines. Many companies are also developing on-line interactive games
and interactive networks for playing video games.
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<PAGE> 30
BUSINESS
GENERAL
Midway is a leading designer, publisher and marketer of interactive
entertainment software played in both the coin-operated and home markets. Since
the late 1970s, Midway has released many of the industry's leading games
including Mortal Kombat (which line of games has sold over 10 million copies in
the home market), Cruis'n USA, NBA Jam, Joust, Defender, Pacman and Space
Invaders, and, through its recently acquired Atari Games subsidiary, such
leading games as Area 51, Gauntlet, Centipede, Asteroids and Pong. Midway's
games are available for play on all major dedicated home video game platforms,
including Nintendo, Sony and Sega, and personal computers.
Midway began to publish home video games based on its own coin-operated
video games in September 1995 with the introduction of Mortal Kombat 3, the best
selling home video game in the United States in 1995. Prior to that time, Midway
had granted Acclaim Entertainment the right to publish home versions of most
coin-operated video games released by Midway for a modest royalty. In
preparation for the end of this arrangement and to maximize profitability,
Midway developed and implemented a new strategy to begin to publish home
versions of its coin-operated video games and expand the number of its
coin-operated and home video game releases. As part of this strategy, in April
1994 Midway acquired Tradewest, a home video game development and distribution
business, and in March 1996 Midway acquired Atari Games, a leading designer,
publisher and marketer of interactive entertainment software. Midway also
significantly increased its research and development expenditures to $32.5
million in fiscal 1996, up from $14.7 million in fiscal 1995. As a result of
these efforts, in fiscal 1997 Midway expects to release approximately 12
coin-operated video games and publish approximately 20 home video games compared
to four new coin-operated video games and five new video home games in fiscal
1996.
Midway's revenue increased to $245.4 million in fiscal 1996, from $180.5
million in fiscal 1995 and $121.9 million in fiscal 1994. Such growth resulted
from the growth in Midway's revenue from home games which increased to $154.1
million in fiscal 1996 (63% of revenues), from $60.8 million in fiscal 1995 (34%
of revenues) and $24.0 million in fiscal 1994 (20% of revenues). In fiscal 1997,
Midway plans to release approximately 12 coin-operated video games, including
Mortal Kombat 4, Cruis'n World and War Gods, and approximately 20 home video
games, including Ultimate Mortal Kombat 3, Mortal Kombat Trilogy, Mortal Kombat
Mythologies, Doom 64, Final Doom, War Gods, Area 51, The NHLPA & NHL Present
Wayne Gretzky's 3D Hockey and NBA Hangtime.
Midway's coin-operated video games are primarily sold through a worldwide
network of distributors who in turn sell or lease such games directly to arcades
and route operators. The Company currently markets and sells dedicated platform
versions of its home video games in North America through a combination of
direct sales by Midway's internal sales staff and independent sales
representatives. Midway's principal customers for its home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Best Buy, national and regional
retailers, discount store chains, video rental retailers and entertainment
software distributors.
STRATEGY
Midway's business strategy is based upon the following:
- CREATE PORTFOLIO OF EXCITING GAMES -- The key to success in the video
game business is to produce games that are the most fun and exciting to
play, which requires the creative talents of experienced game designers.
Midway employs over 250 game design personnel organized in teams
comprised of programmers, artists, mechanical and electrical engineers,
musicians and actors. The game design teams operate in a studio
environment that encourages creativity, productivity and cooperation
among design teams. Midway believes that this environment, together with
a compensation structure that rewards design teams for the success of
their games and a policy of providing design teams substantial
independence and flexibility, enables Midway to attract and retain the
best game designers in the industry. The design teams are supported by
state-of-the-art design technology that allows for the creation of
cutting-edge three-dimensional graphics and advanced audio effects.
Midway produces games in the action, simulation, adventure and sports
categories.
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<PAGE> 31
- EXPLOIT COIN-OPERATED PROVING GROUND -- Midway generally develops its
video games for initial release in the coin-operated market. To be
successful, a coin-operated video game must be action packed and fun, and
provide enough excitement to encourage players to spend 50c almost every
two minutes. Midway considers coin-operated video games that sell at
least 5,000 units and home games that sell at least 100,000 units per
dedicated platform to be successful games. Midway's experience has been
that a successful coin-operated game is almost always a success in the
home market. Each of the coin-operated video games released by Midway in
the past four years which has sold at least 5,000 units has then sold at
least 100,000 units for each major dedicated platform on which it was
released in the home market. The significant benefits realized by Midway
from this strategic approach are that (i) the results achieved in the
initial coin-operated release are a meaningful indicator of the success
the game might realize in the home market and help to determine the
strategy which Midway will follow in releasing the game in the home
market, (ii) the knowledge that a particular coin-operated video game is
popular with consumers allows Midway to maximize profitability through
simultaneous publication across multiple home platforms thereby spreading
developmental, advertising and promotional costs over a greater number of
units and (iii) a successful coin-operated game promotes sales for
subsequent home versions of the game among the players exposed to the
game in arcades and other coin-operated venues.
- MAINTAIN PLATFORM INDEPENDENCE -- Midway develops games for all major
dedicated home platforms (Nintendo, Sony and Sega) as well as for the
personal computer. Midway is a leading developer of video games for the
next generation of 32- and 64-bit game platforms which are currently
being marketed by hardware manufacturers. In fiscal 1997, Midway expects
to release more games on the new Nintendo 64 platform than any developer
other than Nintendo itself. Because it produces video games for multiple
platforms, Midway is not dependent on any particular game platform.
Midway believes it is well positioned for the rapid technological
evolution that characterizes the home video game market.
- EXPLOIT FRANCHISE AND LIBRARY VALUE -- Midway seeks to exploit its
franchise properties such as Mortal Kombat. Midway has released four
different coin-operated games under the Mortal Kombat title and published
or licensed home versions of each of those games. Midway has also
licensed a film adaptation of Mortal Kombat and granted merchandising
licenses in the toy, clothing, comic book, strategy guides and other
product lines. In fiscal 1997, Midway plans to release a new
coin-operated game, Mortal Kombat 4, and three additional home games,
Ultimate Mortal Kombat 3, Mortal Kombat Trilogy and an adventure game
tentatively entitled Mortal Kombat Mythologies. An animated television
series based on Mortal Kombat is scheduled to air in the fall of 1996,
and a sequel to the movie version of Mortal Kombat is scheduled to be
released in the summer of 1997. Midway also seeks to utilize its large
library of video games to release "arcade classics" and updated versions
of such classics. For the home market in fiscal 1997, Midway plans to
release three collections of arcade classic games and Robotron X, a new
version of a classic arcade game.
- DEVELOP MULTI-SITE GAME PLAYING NETWORK -- Midway is testing its own
proprietary multi-player interactive video game playing network
technology known as Wavenet, allowing players to play against others
located at remote coin-operated locations. This technology has
consistently resulted in greater player utilization and profitability of
games. As new on-line interactive formats develop for game playing, such
as over the Internet or other networks, Midway intends to create a
competitive advantage by exploiting its developing multi-player network
technology.
- INVEST IN ADVANCED TECHNOLOGY -- Midway has developed its own proprietary
hardware and software for creating digitally texture mapped polygon
images, which enable it to produce games with state-of-the-art visual
simulations at cost levels that are attractive to Midway's customers.
Midway has also created proprietary tools to facilitate the development
of new products, the transfer of game features from one product to
another and the transfer of existing products to additional hardware
platforms. Midway believes its proprietary hardware and software have
helped it to achieve and sustain a reputation for developing high quality
products and to position itself for involvement in evolving technologies.
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<PAGE> 32
NEW PRODUCT DEVELOPMENT
The Company's goal is to produce video games that are action packed and
fun, and provide enough excitement to encourage players of a coin-operated
version to spend 50c almost every two minutes. The Company's game design
personnel are organized in teams comprised of programmers, artists, mechanical
and electrical engineers, musicians and actors. The lead designers manage the
work of the other team members and are responsible for the overall design of the
game. Ideas for new games generally originate with the Company's lead designers.
The Company also evaluates coin-operated games designed by others with a view
toward obtaining licenses authorizing it to manufacture and sell such games.
Each concept, whether from the Company's designers or from third parties, is
reviewed initially for technical feasibility and evaluated relative to several
factors, including whether the proposed product fits in the Company's general
strategy and profitability objectives. The Company produces games in the action,
simulation, adventure and sports categories.
The game design teams operate in a studio environment that encourages
creativity, productivity and cooperation among design teams. The Company
believes that this environment, together with a compensation structure that
rewards design teams for the success of their games and a policy of providing
design teams substantial independence and flexibility, enables the Company to
attract and retain game designers that are among the best in the industry.
The designers are supported by state-of-the-art design technology that
allows for the creation of cutting-edge three-dimensional graphics and advanced
audio effects. The Company has developed and maintains a substantial library of
proprietary software and development tools, including animation and digitally
texture mapped polygon images that are used primarily in game products. Use of
these tools streamlines the development process, allowing members of the
development team to focus their efforts on the play and simulation aspects of
the product under development. The Company has also developed software tools to
expedite conversion of software from one hardware format to another and provide
sound and special visual effects. The Company continually creates new software
and development tools and refines and upgrades its existing tools.
Development of a new coin-operated video game generally takes 18 months or
longer, and typically involves the expenditure of substantial funds, including
development, testing and sampling costs. The Company believes that the basic
development costs of a coin-operated game can exceed $1.0 million and, depending
on the specific hardware and software requirements, may cost up to $3.5 million
per game. Because of changing technology during the past few years, both the
time and cost to develop games have increased during the same period. Conversion
of a coin-operated game to a home game usually takes six to 12 months, which
period may overlap with the development period of the coin-operated version of
the game. The Company utilizes both independent third parties and its own
personnel to convert coin-operated games to home games. Converters are
compensated in a variety of methods, including through participation in the
success of the particular game. The Company is generally obligated to submit new
games to the dedicated platform manufacturers for approval prior to development
and/or manufacturing. Additionally, prior to release, each product undergoes
careful quality assurance testing which involves technical review of each
component of the final product and testing on the applicable dedicated
platforms.
The Company is testing its own proprietary multi-player interactive video
game playing network known as Wavenet, allowing players to play against others
located at remote coin-operated locations. This technology has consistently
resulted in greater player utilization and profitability of games.
During the fiscal years ended June 30, 1996, 1995 and 1994, approximately
$32.5 million ($48.1 million on a pro forma basis), $14.7 million and $8.4
million, respectively, were expended on research and development. Certain
features of the Company's products are protected by patents, trademarks and
copyrights. The Company is both a licensor and licensee of these proprietary
rights.
Under the Company's arrangements with GT Interactive, the Company and GT
Interactive share equally the cost to develop personal computer CD-ROM versions
of those of the Company's video games that GT Interactive elects to release to
the home market.
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The Company endeavors to comply with the rules established by a domestic
ratings board voluntarily established by the home game industry and certain
foreign countries' ratings boards and properly displays the ratings received for
its products. The Company believes that ratings as to the violence contained in
home games will not have an adverse effect upon the Company so long as such
ratings are consistently applied throughout the industry.
PRODUCTS
Coin-operated Games. The Company is one of the leading developers and
marketers of coin-operated video games, having released since the late 1970s
such titles as Mortal Kombat, Cruis'n USA, NBA Jam, Terminator 2, Joust,
Robotron:2084, Ms. Pacman, Defender, Pacman and Space Invaders, and, through its
recently acquired Atari Games subsidiary, such titles as Area 51, Hard Drivin,
Gauntlet, Centipede, Missile Command, Break Out, Asteroids and Pong. In fiscal
1997, the Company plans to release approximately 12 new coin-operated video
games, including Mortal Kombat 4, Cruis'n World and War Gods. During fiscal
1996, four coin-operated video games were introduced under the Midway
name -- NBA Hangtime, Killer Instinct 2, Wrestlemania and Open Ice, and Atari
Games released one coin-operated video game called Area 51. Also during fiscal
1996, the Company introduced TouchMaster, a touchscreen countertop game
containing multiple game options. During fiscal 1995, three coin-operated video
games were introduced under the Midway name -- Mortal Kombat 3, Cruis'n USA and
Killer Instinct.
At the March 1996 Amusement Operators Expo, Play Meter Magazine named
Cruis'n USA the Best Dedicated Video Game and Mortal Kombat 3 the Best Video
Game Conversion Kit. Additionally, the American Amusement Machine Association
("AAMA") named the Company its 1996 Manufacturer of the Year. Midway's Mortal
Kombat 3 coin-operated video game conversion kit was awarded the AAMA 1996
Diamond Sales Achievement Award -- the highest category of award presented in
any given year -- and several of the Company's other games won Platinum and Gold
sales awards in 1996. At the September 1995 Amusement and Music Operators
Association ("AMOA") trade show, Cruis'n USA was named Most Played Dedicated
Video Game and Mortal Kombat 3 was named Most Played Conversion Kit.
Additionally, the Company's Cruis'n USA and Area 51 have been nominated for the
Most Innovative Video Game Award and its Mortal Kombat 3 and Area 51 have been
nominated for the Most Innovative Conversion Kit Award, which awards will be
presented at the Fall 1996 AMOA trade show. All three coin-operated video games
introduced in fiscal 1995 received the AAMA 1995 Diamond Sales Achievement
Award. Platinum and Gold awards went to two other Midway games.
Coin-operated games are sold to distributors at prices ranging from $3,000
to $15,000. The Company also manufactures kits which can be used by the operator
to convert an existing coin-operated cabinet to a new release. The kits are sold
at prices ranging from $1,000 to $3,000.
Home Games. The fiscal 1997 home game product line features approximately
20 titles, including Ultimate Mortal Kombat 3, Mortal Kombat Trilogy, Mortal
Kombat Mythologies, NBA Hangtime, Doom 64, Final Doom, War Gods, Robotron X, The
NHLPA & NHL Present Wayne Gretzky's 3D Hockey, Area 51 and several collections
of arcade classics. During fiscal 1996, the Company published eight video games
for the home market, including Mortal Kombat 3 and two games developed by Atari
Games and released after its acquisition by the Company. During fiscal 1995, the
Company published four video games for the home market which video games were
developed for Tradewest and released after the acquisition of the Tradewest
business by the Company. Most titles are published in multiple versions, each of
which is designed for a specific dedicated platform. However, certain new games
featuring advanced three-dimensional graphics can only be played on the next
generation platforms.
Most of the Company's home games have suggested retail prices ranging from
$49.95 to $79.95.
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1996 MIDWAY HOME GAME RELEASES
The following table sets forth the games that were released by the Company
(including games released by Atari Games after its acquisition by the Company)
for the home market, directly or under licensing arrangements, during fiscal
1996, and the platforms on which each title may currently be used:
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
--------------------------------- ---------- -------------------------------------------
<S> <C> <C>
Arcades Greatest Hits* Classic PlayStation
Doom Action Super Nintendo Entertainment System
</TABLE>
<TABLE>
<S> <C> <C>
Doom Special PlayStation Edition Action PlayStation
The Getaway* Action Game Boy
Island Casino Simulation Personal Computer
Mortal Kombat 3* Action Super Nintendo Entertainment System
Game Boy
PlayStation
Genesis
Personal Computer
Primal Rage* Action Saturn
Return Fire Action PlayStation
Ultimate Mortal Kombat 3* Action Saturn
Williams Arcade Classics* Classic Personal Computer
</TABLE>
- ---------------
* Based upon one or more previously released coin-operated games.
In fiscal 1996, Atari Games released five home video games prior to its
acquisition by the Company.
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1997 MIDWAY HOME GAME SCHEDULED RELEASES
The following table sets forth the games that are scheduled to be released
by the Company for the home market, directly or under licensing arrangements,
during fiscal 1997, and the platforms on which each title are intended for
initial release:
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
--------------------------------- ---------- -------------------------------------------
<S> <C> <C>
Arcades Greatest Hits* Classic Super Nintendo Entertainment System
Saturn
Genesis
</TABLE>
<TABLE>
<S> <C> <C>
Arcades Greatest Hits II* Classic PlayStation
Arcades Greatest Hits III* Classic PlayStation
Area 51* Action PlayStation
Saturn
Personal Computer
Doom 64 Action Nintendo 64
Final Doom Action PlayStation
The NHLPA & NHL Present Sports Nintendo 64
Wayne Gretzky's 3D Hockey*
Mortal Kombat Mythologies Adventure PlayStation
Mortal Kombat Trilogy* Action Nintendo 64
PlayStation
Personal Computer
Ms. Pacman* Classic Super Nintendo Entertainment System
NBA Hangtime* Sports Nintendo 64
Super Nintendo Entertainment System
PlayStation
Saturn
Genesis
Personal Computer
Open Ice* Sports PlayStation
Personal Computer
Robotron X* Action Nintendo 64
PlayStation
Personal Computer
Ultimate Mortal Kombat 3* Action Super Nintendo Entertainment System
Genesis
War Gods* Action Nintendo 64
PlayStation
Personal Computer
</TABLE>
- ---------------
* Based upon one or more previously released coin-operated games.
MARKETING AND DISTRIBUTION
Coin-operated Games. Coin-operated video games are sold under the Midway
and Atari trademarks. Coin-operated video games are marketed primarily through
approximately 40 independent distributors worldwide. Distributors sell these
products to operators who own and operate the machines and place them in
amusement arcades, restaurants, taverns, convenience stores and movie theaters.
Distributors are primarily responsible for the sale and distribution of these
products in designated territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. It is
customary for distributors of the Company's coin-operated video games also to
distribute games produced by other manufacturers.
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Coin-operated games are marketed through trade shows, promotional
videotapes and advertising in trade publications. The Company maintains separate
sales and marketing teams for its Midway and Atari product lines.
Export sales of coin-operated games, primarily to Western Europe, were
approximately $25.3 million (10.3% of revenues) for the fiscal year ended June
30, 1996 compared with $40.0 million (22.2% of revenues) for the fiscal year
ended June 30, 1995 and $29.9 million (25.5% of revenues) for the fiscal year
ended June 30, 1994. Substantially all foreign sales are made in United States
dollars and, therefore, the Company is not generally subject to the risk of
fluctuation of the value of foreign currencies in relation to the dollar. The
Company believes that while the loss of a single distributor could temporarily
affect the distribution of a particular model, it would not have a material
adverse effect on the business of the Company. In any such event, the Company
believes it could make arrangements with alternate distributors for the
distribution of the Company's coin-operated games.
Home Games. The Company's home video games have been marketed under the
Williams and Tradewest trademarks and Atari Games home games have been marketed
under the Tengen and Time Warner Interactive trademarks. Commencing with the
Company's fall 1996 product line, all home video games will be marketed under
the Midway trademark.
The Company began to publish home video games based on its own
coin-operated video games in September 1995 with the introduction of Mortal
Kombat 3, the best selling home video game in the United States in 1995. Prior
to that time, the Company had granted Acclaim Entertainment the right to publish
home video game versions of most coin-operated video games released by the
Company. In fiscal 1997 Midway plans to release approximately 20 home video
games.
Home games are marketed in the United States through the Company's internal
sales staff and through independent sales representatives to approximately
15,000 stores domestically, including mass merchandisers, national and regional
retailers, discount store chains, video rental retailers and entertainment
software distributors.
The Company's marketing activities include television and print
advertising, retail store promotions, direct mailings and user support programs.
The Company also utilizes a store-oriented marketing approach which includes
point-of-purchase promotions, use of display cards and other forms of
merchandise displays. The Company's sales literature, which features advance
information on new products, encourages potential users to purchase the
Company's products at their local retail outlets, creating retail demand for new
products before their release. The Company provides technical support for its
home products through its customer support department, which is staffed by
personnel trained to respond to customer inquiries.
The Company's principal customers for its home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Best Buy. Sales to Toys-R-Us in
fiscal 1996 represented 12.6% of total revenues. It is customary for the sales
representatives and the distributors of the Company's home games who are
assigned specific territories to also distribute games produced by other
manufacturers. The Company exploits the worldwide markets for these games
through direct distribution channels and market licensing agreements. These
distribution efforts are supported by marketing programs which emphasize product
awareness, brand recognition, dealer merchandising opportunities and established
personality endorsements.
The Company has also entered into strategic relationships for the
distribution of home games. In December 1994, the Company appointed GT
Interactive as distributor of certain of its games as adapted for personal
computers worldwide. In March 1995, the Company also appointed GT Interactive as
an international distributor (excluding the U.S., Canada and Mexico) of certain
of the Company's domestically distributed home video games on several of the
next generation platforms now being introduced, such as Sega Saturn and Sony
PlayStation. The Company's personal computer and platform game distribution
agreements with GT Interactive expire in March 2000 and June 2001, respectively,
subject to various conditions under which each agreement may be extended if
advances remain unrecouped. Games optioned under these agreements are licensed
for varying terms. In March 1996, the Company entered into agreements with GT
Interactive with respect to games developed by Atari Games, which agreements
contain similar expiration and
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<PAGE> 37
renewal provisions as the other agreements. Advances under the Atari Games
agreements are recoupable in certain circumstances from royalties payable under
the other agreements.
Pursuant to the agreements with GT Interactive described above, GT
Interactive is required to pay non-refundable license fees in the aggregate
amount of $35.0 million, of which $21.7 million has previously been paid. Such
license fees are recoupable by GT Interactive from the Company's share of future
royalties under these agreements. At June 30, 1996, GT Interactive had recouped
approximately $2.8 million of the license fees. All of the license fees were
recognized as revenue by the Company in the year in which the applicable
agreement was entered into ($25.0 million in fiscal 1995 and $10.0 million in
fiscal 1996). As a result, the Company does not expect that it will recognize
significant further revenue from the exploitation of its games in the
territories or on the platforms licensed to GT Interactive during at least the
next two years. The royalties are contracted in United States dollars and,
therefore, the Company is not generally subject to the risk of fluctuation of
the value of foreign currencies in relation to the dollar. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In March 1994, the Company formed a joint venture with Nintendo to develop
video games on certain platforms being developed by Nintendo. The joint venture
is owned 50% by each of the Company and Nintendo. In connection with the
formation of the joint venture, the Company also entered into arrangements with
Nintendo for the development of a version of Cruis'n USA for Nintendo 64. The
joint venture has the right to distribute home versions of any coin-operated
sequels of Cruis'n USA developed by the Company and the right of first
negotiation with respect to distribution of home versions of any coin-operated
video games developed by the Company on a new coin-operated platform being
developed by Nintendo. To date, no home video games have been released through
this joint venture.
In September 1996, the Company entered into a master license agreement with
Tiger Electronics, Inc. pursuant to which the Company granted Tiger the right to
manufacture and distribute throughout the world certain liquid crystal display
("LCD") games based on certain of the Company's coin-operated video games and
home games. The product categories licensed to Tiger include certain LCD game
systems, including cartridges for Tiger's proprietary hand-held dot matrix LCD
game system, and certain other electronic products. The initial term of the
agreement with Tiger expires in December 2001, subject to certain renewal
rights. The license agreements for specific products optioned under the master
license agreement expire upon the later of the expiration of the master license
agreement or 24 months after the prescribed release date.
MANUFACTURING
Coin-operated Games. The Company's coin-operated games are manufactured by
WMS at WMS' factories in Illinois pursuant to the Manufacturing and Services
Agreement. See "Arrangements With WMS." The Company believes such arrangements
and facilities are adequate for its current and planned production needs. Game
production is generally based on advance purchase orders from distributors with
respect to coin-operated games and no significant inventory of finished goods is
customarily maintained.
Coin-operated games had a backlog of orders at fiscal year end June 30,
1996, valued at approximately $7.9 million. Since the amount of backlog orders
varies from the beginning to the end of a normal two-to three-month production
process of a game, meaningful comparison of backlog orders can only be made at
the same period during a production cycle and not at the end of fiscal years.
The Company does not consider order backlog to be a meaningful indicator of
future sales.
Most coin-operated games are warranted for a period of 60 days, and home
games are warranted for a period of 90 days. The costs incurred by the Company
in connection with these warranties have been insignificant.
The raw materials used in manufacturing coin-operated games include various
metals, plastics, wood and glass obtained from numerous sources of supply. In
addition, numerous component parts, including electronic subassemblies and video
monitors, are purchased from suppliers. Wood cabinets for coin-operated games
are manufactured by WMS' subsidiary Lenc-Smith Inc. pursuant to the
Manufacturing and Services Agreement (See "Arrangements With WMS"), as well as
by other outside suppliers. The Company believes that the
36
<PAGE> 38
sources of supply of component parts and raw materials are adequate and that
substitute sources of materials are available.
Software Products for Home Games. Manufacturing of home games for next
generation platforms is performed for the Company by the developer of the game
platform (i.e., Nintendo, Sony or Sega), as required by the applicable platform
license. The Company is one of only a limited number of software publishers who
have been granted the right by Nintendo and Sega to self-manufacture cartridges
for their 16-bit platforms. For such platforms, the Company generally employs
contract manufacturing sources in Mexico. Platform manufacturers typically
retain the right to limit the number of games and approve timing of release
under manufacturing and licensing arrangements. Home game production is based
upon estimated demand for each specific title and the level of the inventory of
finished goods depends upon the variance in market demand during the life of a
specific game title. At the time a product is approved for manufacturing, the
Company must provide certain of the platform manufacturers with a purchase order
for that product and an irrevocable letter of credit for 100% of the purchase
price. Most products manufactured by the dedicated platform manufacturers for
the Company are purchased by the Company on an "as is" and "where is" basis and
are delivered to the Company FOB place of manufacture and shipped at the
Company's own expense and risk. Initial orders generally require 50 to 75 days
to manufacture. Reorders generally require 50 days to manufacture although
reorders of CD-ROM based platforms generally require only 14 days. Shipping of
orders requires an additional three to 10 days, depending on the mode of
transport and location of manufacturer.
Upon arrival in the United States, products are inspected by customs agents
and transferred to a bonded public warehouse facility where they are unpacked
and shipped to the Company's customers. Products ordered for inventory are
stored at the warehouse facility and used to fill additional orders as received.
The Company is in the process of establishing its own leased warehouse facility
from which to distribute its home games.
The Company participates in the electronic data interchange program
maintained by most of its largest customers for home games. This program allows
the Company to monitor store inventory and schedule production to meet
anticipated re-orders. Re-orders are generally filled by the Company within two
days. As a result, home games traditionally have no backlog of orders.
CD-ROM Based Software Products for Personal Computers. Under the Company's
arrangements with GT Interactive, the Company and GT Interactive share equally
the cost to develop personal computer CD-ROM versions of those of the Company's
coin-operated video games that GT Interactive elects to release to the home
market. Once GT Interactive so elects, it is responsible for and bears the cost
of the manufacture of the CD-ROMs as well as all other costs related to the sale
of these CD-ROMs.
PLATFORM LICENSES
Under non-exclusive license arrangements with Nintendo, Sony and Sega, the
Company has the right to develop and market software products for (i) Nintendo's
Super Nintendo Entertainment System, Nintendo 64 and Game Boy platforms, (ii)
Sony's PlayStation, and (iii) Sega's Genesis, Saturn and Game Gear platforms.
Generally, no specific hardware license is required for the development and
marketing of personal computer software. Certain of the platform license
agreements or renewals of existing agreements are in the process of being
finalized with the platform manufacturers. However, the Company and the platform
manufacturers have proceeded as if the formal agreements were in place by
approving new game concepts, manufacturing new home games and otherwise. The
Company believes such informal arrangements are not uncommon in the home video
game business. The Company does not believe there is any significant risk that
the definitive platform license agreements will not be finalized on terms
acceptable to the Company.
Each dedicated platform manufacturer requires that the software and a
prototype of each title, together with all related artwork and documentation, be
submitted to such dedicated platform manufacturer, as applicable, for
pre-publication approval. Such approval is generally discretionary. The Company
bears all costs and expenses in connection with its development of games
developed under its agreements with each of the
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<PAGE> 39
dedicated platform manufacturers. Dedicated platform manufacturers charge the
Company a fixed amount for each software cartridge or CD-ROM manufactured by
such dedicated platform manufacturer. This charge includes a manufacturing,
printing and packaging fee, as well as a royalty for the use of the
manufacturer's name and proprietary information and technology, and may be
subject to adjustment by such dedicated platform manufacturer in its discretion.
The Company is responsible in most cases for resolving, at its own expense, any
software warranty or repair claim. To date, the Company has not experienced any
material software warranty claims.
Certain platform license arrangements require that the Company bear the
risk that the information and technology licensed from the dedicated platform
manufacturers and incorporated into the Company's software may infringe the
rights of third parties. The Company must indemnify the dedicated platform
manufacturers against certain claims resulting from the development, marketing,
sale or use of the Company's software products, including certain claims for
copyright, patent or trademark infringement that may be brought against a
dedicated platform manufacturer. To date, no dedicated platform manufacturer has
sought indemnity for any liabilities incurred as a result of such lawsuits or
for any legal expenses incurred in defending such lawsuits. No assurance can be
given, however, that the Company's indemnification obligations under its license
arrangements with the dedicated platform manufacturers will not have a material
adverse effect on the Company's future results of operations or financial
condition.
The Company's licenses from dedicated platform manufacturers may be
terminated by the manufacturer upon a breach or default by the Company, the
Company's bankruptcy or insolvency, or upon the occurrence of certain other
specified events. Generally, if a dedicated platform license is terminated by
reason of breach by the Company, the Company will be required to destroy all of
its inventory for use on such dedicated platform. Additionally, upon expiration
of a dedicated platform license, the Company usually is provided a period of
limited duration to sell off all its inventory subject to such license, after
which time any remaining inventory is generally required to be destroyed.
There can be no assurance that the Company's licenses with any of the
dedicated platform manufacturers will be renewed upon expiration. Furthermore,
there is no limit on the number of licenses that dedicated platform
manufacturers may grant to others or on the number of titles that they may
permit their licensees to publish or that they themselves may release in the
future. Nintendo, Sony and Sega are the largest publishers of software for use
on their respective systems and are direct competitors of the Company. See "Risk
Factors -- Dependence on Dedicated Platform Manufacturers" and "-- Competition."
INTELLECTUAL PROPERTY LICENSES
Certain of the Company's products relate to properties licensed from third
parties, such as the NBA, NFL and NHL and their respective players'
associations. Typically, the Company is obligated to make certain minimum
guaranteed royalty payments over the term of the license and to advance payment
against such guarantees. License agreements generally extend for a term of two
to three years, are terminable in the event of material breach (including
failure to pay any amounts owing to the licensor in a timely manner) by, or
bankruptcy or insolvency of, the Company and certain other events, and, in some
cases, are renewable upon payment of certain minimum guarantees or the
attainment of specified sales levels during the term of the license. Certain
licenses are limited to specific territories or platforms. Each license
typically provides that the licensor retains the right to exploit the licensed
property for all other purposes, including the right to license the property for
use with other products and, in some cases, software for other interactive
hardware platforms.
PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
Each software title may embody a number of separately protected
intellectual property rights, including: (i) trademarks associated with elements
of the game (e.g., the NBA team logos in NBA Hangtime); (ii) the trademarks
under which the game is marketed (e.g., Mortal Kombat); (iii) the copyrights for
the game software (including the game's audiovisual elements); (iv) copyrights
for the software associated with the hardware platform and (v) the patents for
inventions in the game software and hardware platforms.
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<PAGE> 40
Each dedicated home game includes patents, copyrights and trademarks
licensed from the platform manufacturer. Elements of certain of the Company's
titles are owned by third parties and licensed to the Company. The Company
relies on such third parties for protection of such intellectual property
rights. Their failure to adequately protect such rights could have a material
adverse effect on the Company.
The Company has over 300 trademark registrations worldwide for its games
and applies for trademark protection for all of its game titles, other than
those licensed from third parties.
The Company has registered the copyrights in the video game software for
most of its owned coin-operated titles. Notwithstanding such copyright
protection, preventing unauthorized duplication of software products is
difficult and costly and, in the case of personal computer software, such
unauthorized duplication is relatively common. The Company uses certain
precautions to discourage unauthorized copying of its personal computer software
products, including internal copy protection, which prevents or hinders normal
copy routines. In addition, certain of the Company's personal computer products
require the user to refer to materials shipped with the software in order to use
the product. Despite these protections, the Company believes that these
techniques can be, and in certain instances have been circumvented.
The dedicated platform manufacturers have procured patents for certain of
the technology utilized in connection with their respective home game systems.
The dedicated platform manufacturers incorporate security devices in their
cartridges, CD-ROMs and platforms which seek to prevent unlicensed software
products from being played on their platforms. The Company does not own the
trademarks, copyrights or patents, if any, covering the proprietary information
and technology utilized in the dedicated platform manufacturers' cartridges or
CD-ROMs. Accordingly, the Company relies upon each dedicated platform
manufacturer for protection of such intellectual property from infringement and
bears the risk of claims of infringement brought by third parties arising from
the sale of software with respect to intellectual property supplied by third
party developers and embodied in the Company's software products. The Company's
agreements with these outside developers generally require the developers to
indemnify the Company for costs and damages incurred in connection with such
claims. No assurance can be given, however, that such software developers will
have sufficient resources to indemnify the Company fully in respect of any such
claims that may arise.
COMPETITION
The video game business is intensely competitive and is characterized by
the continuous introduction of new titles and the development of new
technologies. The ability of the Company to compete successfully in this market
is based, in large part, upon its ability to select and develop popular titles,
to identify and obtain rights to commercially marketable intellectual properties
and to adapt its products for use with new technologies. In addition, successful
competition is also based upon price, access to retail shelf space in the case
of home games, product enhancements, new product introductions, marketing
support and distribution systems. The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of the
Company.
In the coin-operated market, the Company competes principally with foreign
manufacturers such as Capcom, Konami, Namco, Sega and Taito.
In the home market, the Company competes with Nintendo, Sony and Sega, the
largest publishers of software for their respective systems. Due to their
dominant position in the industry as primary manufacturers of dedicated platform
hardware and software, Nintendo, Sony and Sega have a competitive advantage with
respect to retail pricing, acquiring intellectual property licenses and securing
shelf space. There can be no assurance that Nintendo, Sony or Sega will not
increase their own software development efforts. The Company also currently
competes in the United States and Canada with numerous companies licensed by
Nintendo, Sony and Sega to develop software products for use with their
respective systems. These competitors include Acclaim, Activision, Capcom,
Disney Interactive, Electronic Arts, Konami, Lucas Arts, Namco and Viacom New
Media. Additionally, the Company's games which are sold for use on personal
computers compete with entertainment software sold by companies such as
Broderbund Software, CUC
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<PAGE> 41
International, Electronic Arts, GT Interactive, Maxis and Spectrum Holobyte,
among others. The entry and participation of new industries and companies,
including diversified entertainment companies, in markets in which the Company
competes may adversely affect the Company's performance in such markets.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, are increasing their focus on the interactive entertainment market,
which will result in greater competition for the Company. In particular, many of
the Company's competitors are developing on-line interactive games and
interactive networks that will be competitive with the Company's interactive
products. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially and adversely affect its business,
operating results and financial condition.
EMPLOYEES
At June 30, 1996, the Company had approximately 326 non-union employees.
PROPERTIES
The Company's principal office is located at 3401 North California Avenue,
Chicago, Illinois in premises owned by WMS. The following table contains certain
information describing the general character of the Company's other properties,
all of which are leased facilities.
<TABLE>
<CAPTION>
APPROXIMATE LEASE
PRINCIPAL SQUARE EXPIRATION
LOCATION USE FOOTAGE ANNUAL RENT($) DATE
- -------------------------------------- ------------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
2727 W. Roscoe Street................. Game Design and 47,500 136,000 06/30/98
Chicago, IL Development
675 Sycamore Drive.................... Game Design and 84,501 593,196 07/31/05
Milpitas, CA Development and
Sales and Marketing
10110 Mesa Rim Road................... Game Design and 27,512 250,664 06/01/02
San Diego, CA Development
2400 S. Business 45................... Office/Warehouse 5,000 30,000 05/01/99
Corsicana, TX
1800 S. Business 45................... Sales and Marketing 6,000 38,400 09/01/97
Corsicana, TX
2820 Merrell Road..................... Warehouse 28,234 84,702 07/31/99
Dallas, TX
</TABLE>
The Company believes that its facilities and equipment will be suitable for
the purposes for which they are employed, are adequately maintained and will be
adequate for current requirements and projected normal growth.
LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business. The Company is not currently a party
to any lawsuit or proceeding which, in the opinion of the Company, is likely to
have a material adverse effect on the Company.
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<PAGE> 42
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each
director and executive officer of the Company. Mr. Neil D. Nicastro is the son
of Mr. Louis J. Nicastro; otherwise, there is no family relationship between any
of the directors or executive officers of the Company. Prior to the completion
of the Offering, WMS intends to elect additional directors, at least two of whom
will be independent and not otherwise affiliated with WMS or the Company.
Information given relates to calendar years.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ----------------------------------------------------
<S> <C> <C>
Neil D. Nicastro........... 39 Chairman of the Board of Directors, President, Chief
Executive Officer and Chief Operating Officer
Harold H. Bach, Jr. ....... 64 Executive Vice President -- Finance, Treasurer and
Chief Financial Officer and Director
Byron C. Cook.............. 42 Executive Vice President -- Home Video and Director
Kenneth J. Fedesna......... 46 Executive Vice President -- Coin-Op Video and
Director
Barbara M. Norman.......... 58 Vice President, Secretary and General Counsel
Louis J. Nicastro.......... 68 Director
</TABLE>
Neil D. Nicastro has been the President and Chief Operating Officer of the
Company since July 1, 1991 and a director since July 29, 1988. On July 26, 1996,
Mr. Nicastro became Chairman of the Board of Directors and Chief Executive
Officer of the Company, having served as Co-Chief Executive Officer and Chief
Operating Officer since December 1, 1994. Mr. Nicastro served as President, and
Chief Operating Officer (1991-1995), Treasurer (1991-1994), Executive Vice
President and Treasurer (1989-1991) and Senior Vice President and Treasurer
(1988-1989). Mr. Nicastro is also the President, Chief Executive Officer and
Chief Operating Officer and a Director of WMS. Mr. Nicastro was elected
President of WMS June 18, 1991 and Co-Chief Executive Officer August 29, 1994.
He has also served as Chief Operating Officer of WMS since September 1990 and
has been a Director of WMS since 1986. Additionally, Mr. Nicastro has served WMS
as Treasurer (1986-1994), Executive Vice President (1988-1991), Senior Vice
President (1987-1988), Vice President (1986-1987) and Director of Stockholder
Relations (1981-1986).
Harold H. Bach, Jr. became a Director, Executive Vice President -- Finance
and Chief Financial Officer of the Company on August 30, 1996. Previously, Mr.
Bach served as Senior Vice President -- Finance and Chief Financial Officer of
the Company from September 17, 1990 to August 30, 1996, and he has served as
Treasurer continuously since December 1, 1994. Additionally, Mr. Bach has served
as Secretary of WMS from July 5, 1990 to June 15, 1992. He also assumed the
positions of Treasurer of WMS effective September 13, 1994 and Vice
President -- Finance, Chief Financial and Chief Accounting Officer of WMS
effective September 30, 1990. Prior to joining WMS, Mr. Bach was a partner in
the accounting firms of Ernst & Young (1989-1990) and Arthur Young & Company
(1967-1989).
Byron C. Cook became a Director and Executive Vice President -- Home Video
of the Company on August 30, 1996. Mr. Cook is also the President and Chief
Operating Officer of Midway Home Entertainment Inc., a wholly-owned subsidiary
of the Company, positions he assumed upon the acquisition of Tradewest in April
1994. Prior to the acquisition, Mr. Cook was President of Tradewest (1988-1994)
as well as a co-founder thereof.
Kenneth J. Fedesna became a Director and Executive Vice
President -- Coin-Op Video of the Company on August 30, 1996. Mr. Fedesna served
as Vice President and General Manager of the Company from July 29, 1988 to
August 30, 1996. He has also been a Director of WMS since 1993 as well as Vice
President and General Manager of Williams Electronics Games, Inc., a
wholly-owned subsidiary of WMS, for in excess of five years.
Barbara M. Norman has served as Vice President, Secretary and General
Counsel to the Company since June 15, 1992, and she has also served as Vice
President, Secretary and General Counsel of WMS since June 15, 1992. Prior
thereto she was associated with the law firm of Whitman & Ransom, New York, New
41
<PAGE> 43
York (1990-1992) and served the Company and WMS as Vice President, Secretary and
General Counsel during the periods 1988-1990 and 1986-1990, respectively.
Louis J. Nicastro became a Director of the Company on August 30, 1996. Mr.
Nicastro also served as a Director of the Company from 1988 until June 26, 1996.
Mr. Nicastro also served as Chairman of the Board and Co-Chief Executive Officer
of the Company from December 1, 1994 to June 26, 1996, Chairman of the Board and
Chief Executive Officer of the Company (1988-1994) and President of the Company
(1988-1989 and 1990-1991). He has served as Chairman of the Board of Directors
of WMS since its incorporation in 1974. Mr. Nicastro served as Co-Chief
Executive Officer of WMS (1994-1996), Chief Executive Officer (1974-1994),
President (1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986).
WMS has designated the following directors whose election to the Board of
Directors of the Company will be effective upon completion of the Offering:
William C. Bartholomay (68) is President of Near North National Group,
Chicago, Illinois (insurance brokers) and Chairman of the Board of the Atlanta
Braves (National League Baseball). He has served as Vice Chairman of Turner
Broadcasting System, Inc., Atlanta, Georgia since April 1994 having also held
that office during the period 1976-1992 and having served as a director
(1976-1994). He also served as Vice Chairman of the Board of Directors of Frank
B. Hall & Co. Inc. (1974-1990). Mr. Bartholomay has also served as a director of
WMS since 1981.
William E. McKenna (77) has served as a General Partner of MCK Investment
Company, Beverly Hills, California for in excess of five years. He also is a
director of California Amplifier, Inc., Calprop Corporation, Drexler Technology
Corporation and Safeguard Health Enterprises, Inc. Mr. McKenna has also served
as a director of WMS since 1981.
Norman J. Menell (64) has been Vice Chairman of the Board of Directors of
WMS since 1990 and a director of WMS since 1980. He also served as President
(1988-1990), Chief Operating Officer (1986-1990) and Executive Vice President
(1981-1988) of WMS.
Harvey Reich (67) has been a member of the law firm of Robinson Brog
Leinwand Greene Genovese & Gluck, P.C., New York, New York and its predecessor
firms for in excess of five years. He has also served as a director of WMS since
1983.
Ira S. Sheinfeld (58) has been a member of the law firm of Squadron,
Ellenoff, Plesent & Sheinfeld LLP, New York, New York, for in excess of five
years. He has also served as a director of WMS since 1993.
Richard D. White (42) has been a Managing Director of Oppenheimer & Co.,
Inc. for in excess of five years.
WMS intends to designate one additional independent director, not otherwise
affiliated with WMS or the Company, whose election to the Board of Directors of
the Company will be effective upon completion of the Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established, effective upon
consummation of the Offering, two standing committees: an Audit Committee and a
Compensation and Stock Option Committee.
The Audit Committee is charged with meeting periodically with the
independent auditors and Company personnel with respect to the adequacy of
internal accounting controls, receiving and reviewing the recommendations of the
independent auditors, recommending the appointment of auditors and reviewing the
scope of the audit and the compensation of the independent auditors, reviewing
consolidated financial statements and, generally, reviewing the Company's
accounting policies and resolving potential conflicts of interest. The initial
members of the Audit Committee will be Messrs. McKenna, Bartholomay, Sheinfeld
and White.
The Negotiating Committee of the Company's Board of Directors will be
responsible for the review and authorization of any agreement to be entered into
in the future, and any modification to any existing
42
<PAGE> 44
agreement, between the Company and WMS. See "Arrangements With WMS." The initial
members of the Negotiating Committee will be Mr. White and the additional
independent director to be named prior to completion of the Offering.
The Compensation and Stock Option Committee has general responsibility for
determining the compensation and benefit policies and procedures of the Company
and administers the Stock Option Plan, including the grant of awards under such
plan. The initial members of the Compensation and Stock Option Committee will be
Messrs. Reich and McKenna.
COMPENSATION OF DIRECTORS
Upon consummation of the Offering, the Company will pay a fee of $22,500
per annum to each director who is not also an employee of the Company or any of
its subsidiaries. Each such director who serves as the chairman of any committee
of the Board of Directors will receive a further fee of $2,500 per annum for his
services in such capacity and each other member of the Company's Audit Committee
will receive an additional fee of $2,500 per annum.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Harvey Reich will serve as Chairman of the Company's Compensation and
Stock Option Committee and Mr. William E. McKenna will serve as the sole
additional member, neither of whom are employees or officers of the Company or
any of its subsidiaries or had any relationship requiring disclosure herein by
the Company other than that both serve on the Board of Directors of WMS.
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<PAGE> 45
EXECUTIVE COMPENSATION
The executive officers of the Company (other than Mr. Byron C. Cook)
received no compensation from the Company during the fiscal years ended June 30,
1996, 1995 or 1994. The Summary Compensation Table below sets forth the cash
compensation paid by WMS (or in the case of Mr. Cook, by the Company) for
service in all capacities (including on behalf of the Company) during the fiscal
years ended June 30, 1996, 1995 and 1994 to each of the Company's executive
officers who served during such period and whose compensation from WMS or the
Company exceeded $100,000. After the Offering, compensation to Mr. Neil D.
Nicastro for services on behalf of the Company will be paid directly by the
Company. See "Employment Agreements" for a discussion of the employment
agreement between the Company and Mr. Nicastro that will take effect upon the
completion of the Offering. Pursuant to the Manufacturing and Services
Agreement, after the Offering the compensation paid by WMS to the executive
officers of the Company (other than Messrs. Nicastro and Cook) will be allocated
to the Company based upon estimates by management of WMS of the percentage of
time devoted to the Company. Management of the Company estimates that such
executive officers will devote approximately 50% of their time to the Company.
The results of operations for each of the fiscal years ended June 30, 1996, 1995
and 1994 include an allocation of the compensation of the Company's executive
officers based on estimates by management of WMS. See "Arrangements With WMS."
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
OTHER
ANNUAL COMPENSATION ANNUAL ALL OTHER
NAME AND PRINCIPAL --------------------------------- COMPENSATION COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) ($)
- ------------------------------------ ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Neil D. Nicastro.................... 1996 532,500 267,600 -- 35,791(4)
Chairman of the Board, 1995 532,500 489,100 -- 35,762(4)
Chief Executive Officer, 1994 532,500 741,600 -- 35,742(4)
President and Chief Operating
Officer
Harold H. Bach, Jr.................. 1996 262,500 67,800 -- --
Executive Vice President -- 1995 250,000 67,800 -- --
Finance, Treasurer and 1994 250,000 100,000 -- --
Chief Financial Officer
Byron C. Cook....................... 1996 250,000 150,000 -- --
Executive Vice 1995 250,000 -- -- --
President -- Home Video 1994 41,667 -- -- --
Kenneth J. Fedesna.................. 1996 267,500 66,000 -- 2,500(5)
Executive Vice 1995 250,000 66,000 -- 2,500(5)
President -- Coin-Op Video 1994 250,000 100,000 -- --
Barbara M. Norman................... 1996 157,500 27,200 -- --
Vice President, Secretary 1995 150,000 27,200 -- --
and General Counsel 1994 150,000 40,000 -- --
Louis J. Nicastro................... 1996 832,500 -- 6,127(3) 629,971(6)
Director(2) 1995 682,500 300,000 4,775(3) 409,784(6)
1994 682,500 600,000 4,173(3) 327,252(6)
</TABLE>
- ---------------
(1) Does not include options to purchase shares of WMS granted in fiscal 1994
and held by Mr. Neil D. Nicastro (700,000 shares), Mr. Bach (75,000 shares),
Mr. Cook (200,000 shares), Mr. Fedesna (100,000 shares), Ms. Norman (75,000
shares) and Mr. Louis J. Nicastro (500,000). See "-- Stock Option Plan" for
a discussion of options to acquire shares of Common Stock of the Company
that will become effective upon the completion of the Offering.
(2) Mr. Louis J. Nicastro served as Chairman of the Board and Co-Chief Executive
Officer of the Company until June 26, 1996.
(3) Amount shown is for tax gross-up payments.
(4) Amount shown for Mr. Neil D. Nicastro includes for fiscal 1996, 1995 and
1994 insurance premiums of $691, $662 and $642, respectively, and $35,100
each for fiscal 1996, 1995 and 1994 accrual for contractual retirement
benefits.
(5) Amount shown for Mr. Fedesna includes insurance premiums.
(6) Amount shown is the accrual for contractual retirement benefits for Mr.
Louis J. Nicastro.
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<PAGE> 46
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Neil D.
Nicastro which will become effective July 1, 1996, subject to the completion of
the Offering. Pursuant to the employment agreement, Mr. Nicastro will be
employed as the Company's President and Chief Executive Officer. The employment
agreement provides for salaried compensation at the rate of $300,000 per annum,
or such greater amount as may be determined by the Board of Directors, plus
bonus compensation in an amount equal to two percent of the pre-tax income of
the Company multiplied by the percentage of Common Stock outstanding which is
not owned by WMS. The portion of Mr. Nicastro's bonus from WMS that is
attributable to the pre-tax income of the Company will be charged to the Company
pursuant to the Manufacturing and Services Agreement. The employment agreement
will expire five years from the closing of the Offering, subject to automatic
extensions in order that the term of Mr. Nicastro's employment shall at no time
be less than three years. Upon Mr. Nicastro's retirement or death and for a
period of seven years thereafter, the Company is required to pay to Mr. Nicastro
or his designee, or if no designation is made, to his estate, for a period equal
to the greater of the balance of the remaining term of the agreement or seven
years, an annual benefit equal to one-half of the annual base salary being paid
to him on such retirement or death, as the case may be, but in no event less
than $150,000 per annum. Such benefits are payable notwithstanding Mr.
Nicastro's termination of employment for any reason.
The employment agreement provides that Mr. Nicastro shall devote such time
to the business and affairs of the Company as is reasonably necessary to perform
the duties of his position, except that he is not required to perform any duties
or responsibilities which would be likely to result in non-compliance with or
breach or violation of his employment agreement with WMS. Mr. Nicastro currently
spends approximately 50% of his working time on the affairs of the Company and
approximately 50% of his working time on the affairs of WMS.
Mr. Nicastro is employed by WMS pursuant to an employment agreement which
provides for, among other things, full participation in all benefit plans
available to senior executives of WMS and for reimbursement of all medical and
dental expenses incurred by him or his spouse and incurred by his children under
the age of twenty-one. Mr. Nicastro's employment agreement with the Company
provides that should WMS fail for any reason to provide the aforementioned
benefits to Mr. Nicastro, the Company will provide such benefits to him at its
expense. Additionally, the Company will provide Mr. Nicastro with $1,000,000 of
life insurance coverage in addition to the standard amount provided to Company
employees. The agreement further provides for full compensation during periods
of illness or incapacity; however, the Company may give 30 days' notice of
termination if such illness or incapacity disables Mr. Nicastro from performing
his duties for a period of more than six months. Such termination notice becomes
effective if full performance is not resumed within 30 days after such notice
and maintained for a period of two months thereafter. The employment agreement
may be terminated at the election of Mr. Nicastro upon the occurrence without
his consent or acquiescence of any one or more of the following events: (i) the
placement of Mr. Nicastro in a position of lesser stature or the assignment to
Mr. Nicastro of duties, performance requirements or working conditions
significantly different from or at variance with those presently in effect; (ii)
the treatment of Mr. Nicastro in a manner which is in derogation of his status
as a senior executive; (iii) the cessation of service of Mr. Nicastro as a
member of the Board of Directors of the Company; (iv) the discontinuance or
reduction of amounts payable or personal benefits available to Mr. Nicastro
pursuant to such agreement; or (v) the requirement that Mr. Nicastro work
outside his agreed upon metropolitan area. In any such event, and in the event
the Company is deemed to have wrongfully terminated Mr. Nicastro's employment
agreement under the terms thereof, the Company is obligated (a) to make a lump
sum payment to Mr. Nicastro equal in amount to the sum of the aggregate base
salary during the remaining term of his employment agreement (but in no event
less than three times the highest base salary payable to him during the one-year
period prior to such event), the bonus (assuming pre-tax income of the Company
during the remainder of the term of the employment agreement is earned at the
highest level achieved in either of the last two full fiscal years prior to such
termination) and the retirement benefit (assuming the date of termination is his
retirement date) otherwise payable under the terms of the employment agreement
and (b) to purchase at the election of Mr. Nicastro all stock options held by
him with respect to the Company's Common Stock at a price equal to the spread
between the option price and the fair market price of such stock as defined in
the agreement. The
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<PAGE> 47
employment agreement may also be terminated at the election of Mr. Nicastro if
individuals who presently constitute the Board of Directors, or successors
approved by such Board members, cease for any reason to constitute at least a
majority of the Board. Upon such an event, the Company may be required to
purchase the stock options held by Mr. Nicastro and make payments similar to
those described above.
If payments made to Mr. Nicastro pursuant to the employment agreement after
a change of control are considered "excess parachute payments" under the
Internal Revenue Code Section 280G, additional compensation is required to be
paid to Mr. Nicastro to the extent necessary to eliminate the economic effect on
him of the resulting excise tax. Pursuant to Section 280G, in addition to income
taxes, the recipient is subject to a 20% nondeductible excise tax on excess
parachute payments. An excess parachute payment is a payment in the nature of
compensation which is contingent on a change of ownership or effective control
and which exceeds the portion of the base amount (i.e., the average compensation
for the five-year period prior to the change of control) allocable to the
payment. These rules apply only if the present value of all payments of
compensation (including non-taxable fringe benefits) at the time of a change of
control is at least equal to three times the base amount. Excess parachute
payments are not deductible by the Company.
Midway Home Entertainment Inc. ("Midway Home"), a wholly-owned subsidiary
of the Company, has entered into an employment agreement with Mr. Byron C. Cook,
pursuant to which Mr. Cook serves as President and Chief Operating Officer of
Midway Home. The agreement expires May 1, 1998 and was entered into in
connection with the Company's acquisition of Tradewest. Mr. Cook's current base
salary is $300,000 per annum. During fiscal 1996, Mr. Cook also received a bonus
of $150,000. Mr. Cook is entitled to participate in the Company's employee
benefit plans generally available to executives of the Company. In addition,
pursuant to the agreement on May 2, 1994, Mr. Cook was awarded non-qualified
stock options to purchase 200,000 shares of WMS common stock. Mr. Cook has
agreed not to engage in any competitive business with the Company in North
America until May 2, 1999 so long as the Company continues to make salary
payments pursuant to the agreement.
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Stock Option Plan") provides for the
granting of stock options to directors, officers and employees and consultants
and advisors of the Company and its subsidiaries. The Stock Option Plan is
intended to encourage stock ownership by directors, officers, employees,
consultants and advisors of the Company and its subsidiaries and thereby enhance
their proprietary interest in the Company. The Stock Option Plan will be
administered by the Compensation and Stock Option Committee of the Board of
Directors. Subject to the provisions of the Stock Option Plan, the Compensation
and Stock Option Committee shall have sole authority to determine which of the
eligible directors, officers, employees consultants and advisors of the Company
shall receive stock options, the terms, including applicable vesting periods, of
such options, and the number of shares for which such options shall be granted.
The total number of shares of the Company's Common Stock that may be
purchased pursuant to stock options under the Stock Option Plan shall not exceed
in the aggregate 2,000,000 shares. The option price per share with respect to
each such option shall be determined by the Compensation and Stock Option
Committee but shall not be less than 100% of the fair market value of the
Company's Common Stock on the date such option is granted as determined by the
Committee. The Stock Option Plan terminates in 2006 unless terminated earlier.
Prior to the Offering, WMS, as sole stockholder of the Company, approved
the adoption of the Stock Option Plan following approval by WMS' Stock Option
Committee (the "WMS Committee") and Board of Directors.
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<PAGE> 48
The following table summarizes options granted by the Company immediately
prior to the Offering to the executive officers and directors of the Company.
All the options set forth below were granted pursuant to the Company's Stock
Option Plan and are exercisable at the initial public offering price.
OPTIONS GRANTED PRIOR TO OFFERING
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK
SUBJECT TO
NAME OPTIONS
--------------------------------------------------------------------- ----------------
<S> <C>
Neil D. Nicastro..................................................... 500,000
Harold H. Bach, Jr................................................... 100,000
Byron C. Cook........................................................ 100,000
Kenneth J. Fedesna................................................... 100,000
Barbara M. Norman.................................................... 25,000
Louis J. Nicastro.................................................... 25,000
</TABLE>
Each of the non-employee directors of the Company will be granted options
pursuant to the Stock Option Plan to acquire 25,000 shares of the Company's
Common Stock at an exercise price equal to the initial public offering price.
The total number of options granted or to be granted prior to the Offering
pursuant to the Stock Option Plan is 1,455,000.
CERTAIN TRANSACTIONS
Mr. Byron C. Cook, Executive Vice President -- Home Video and a Director of
the Company, owns a one-third interest in each of the three commonly owned
companies which constitute Tradewest, the operating assets and business of which
were acquired by the Company in April 1994.
The purchase price for the assets acquired from Tradewest was set at five
times the average annual pre-tax income of the acquired business during the four
year period commencing May 1, 1994 with a minimum purchase price of $14.1
million, which was paid at the closing, and a maximum additional payment of
$36.0 million to be paid during the four-year earn-out period. Over the first
two years of the earn-out period, the Company has paid an aggregate sum of $14.4
million as additional purchase price. Over the remaining two years of the
contract, the Company may be required to pay up to an additional $21.6 million
in additional payments.
Mr. Ira S. Sheinfeld is a member of the law firm of Squadron, Ellenoff,
Plesent & Sheinfeld LLP which the Company and WMS retained to provide tax
services during the 1996 fiscal year and which each proposes to retain for such
services during the current fiscal year.
Mr. Richard D. White, a nominee for election to the Board of Directors of
the Company, is a Managing Director of Oppenheimer & Co., Inc., which is one of
the Representatives of the Underwriters of the Offering and which will receive
compensation in connection therewith. See "Underwriting."
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<PAGE> 49
PRINCIPAL STOCKHOLDERS
CAPITAL STOCK OF THE COMPANY
The following table sets forth certain information with respect to the
ownership of Common Stock as of the date hereof, and as adjusted to reflect the
sale of the Shares, for each of (i) WMS, (ii) each Director of the Company and
each person intended to become a Director of the Company upon completion of the
Offering and (iii) such Directors and Executive Officers of the Company as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------------- ----------------------------
BENEFICIAL OWNER NUMBER(1) PERCENTAGE(1) NUMBER(1) PERCENTAGE(1)
- ------------------------------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
WMS Industries Inc................... 33,400,000 100.0% 33,400,000 86.8%(5)
3401 N. California Avenue
Chicago, IL 60618
Neil D. Nicastro..................... -- -- 200,000(2) *
Harold H. Bach, Jr. ................. -- -- 40,000(2) *
Byron C. Cook........................ -- -- 40,000(2) *
Kenneth J. Fedesna................... -- -- 40,000(2) *
Louis J. Nicastro.................... -- -- 25,000(3) *
William C. Bartholomay............... -- -- 25,000(4) *
William E. McKenna................... -- -- 25,000(4) *
Norman J. Menell..................... -- -- 25,000(4) *
Harvey Reich......................... -- -- 25,000(4) *
Ira S. Sheinfeld..................... -- -- 25,000(4) *
Richard D. White..................... -- -- 25,000(4) *
Directors and Executive Officers as a
Group (12 persons)................. -- -- 505,000 1.4%(6)
</TABLE>
- ---------------
* Less than 1% of the number of outstanding shares of Common Stock on the date
hereof.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days.
(2) Prior to and subject to the completion of the Offering, Messrs. Neil D.
Nicastro, Bach, Cook and Fedesna were granted 500,000, 100,000, 100,000 and
100,000 options to purchase shares of Common Stock, respectively, of which
40% are immediately exercisable and the balance of which become exercisable
in the future. See "Management -- Stock Option Plan."
(3) Prior to and subject to the completion of the Offering, Mr. Louis J.
Nicastro was granted 25,000 options to purchase shares of Common Stock, all
of which are immediately exercisable.
(4) Represents options to acquire 25,000 shares of Common Stock to be granted
upon completion of the Offering.
(5) 85.1% if the Underwriters' over-allotment option is exercised in full.
(6) 1.3% if the Underwriters' over-allotment option is exercised in full.
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<PAGE> 50
CAPITAL STOCK OF WMS
The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of WMS owned by persons known to be
the beneficial owner of more than five percent of such stock, and each Director
and Executive Officer of the Company or WMS as of June 30, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK OF WMS PERCENT OF
NAME BENEFICIALLY OWNED(1) CLASS(2)
- ----------------------------------------------------------- --------------------- ----------
<S> <C> <C>
Sumner M. Redstone and
National Amusements, Inc................................. 5,929,100(3) 24.5%
200 Elm Street
Dedham, MA 02026
FMR Corp................................................... 2,439,579(4) 10.1%
82 Devonshire St.
Boston, MA 02109
The Capital Group Companies, Inc.
and Capital Research and Management Company.............. 1,902,000(5) 7.9%
333 South Hope Street
Los Angeles, CA 90071
State of Wisconsin Investment Board........................ 1,329,200(6) 5.5%
P.O. Box 7842
Madison, WI 53707
Neil D. Nicastro........................................... 6,791,100(7) 27.2%
Louis J. Nicastro.......................................... 6,433,732(8) 25.8%
Harold H. Bach, Jr. ....................................... 77,000(9) *
Byron C. Cook.............................................. 127,285(10) *
Kenneth J. Fedesna......................................... 130,058(11) *
Barbara M. Norman.......................................... 90,000(9) *
William C. Bartholomay..................................... 68,800(12) *
William E. McKenna......................................... 52,594(12) *
Norman J. Menell........................................... 52,216(12) *
Harvey Reich............................................... 51,190(12) *
Ira S. Sheinfeld........................................... 62,000(13) *
Richard D. White........................................... -- --
George R. Baker............................................ 50,800(12) *
</TABLE>
- ---------------
* Less than 1% of the number of outstanding shares of WMS common stock on
June 30, 1996.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days. Certain of such options as reported herein also
require that WMS' common stock attain a market price of $35.00 per share
prior to exercise (herein referred to as "Target Price Options").
(2) For purposes of calculating the percentage of shares of WMS common stock
owned by each director or officer, shares beneficially owned and issuable
upon the exercise of his or her options exercisable within 60 days have
been deemed to be outstanding.
(3) The number of shares reported is based upon information contained in
Amendment No. 19, dated September 21, 1995, to the Schedule 13D filed by
Mr. Sumner M. Redstone with the Securities and Exchange Commission.
Pursuant to such Schedule as amended, Mr. Redstone and National Amusements,
Inc., a Maryland corporation, reported beneficial ownership of and sole
investment power with respect to 3,033,800 and 2,895,300 shares,
respectively, of the common stock of WMS and shared voting power with
respect to such shares pursuant to a voting proxy agreement entered into
with WMS and Messrs. Louis J. and Neil D. Nicastro. Mr. Redstone is the
beneficial owner of 66 2/3% of the issued and outstanding shares of the
common stock of National Amusements, Inc. In order for WMS to be permitted
to manufacture and sell slot machines in Nevada, WMS and certain of its
subsidiaries and Mr. Louis J. Nicastro and Mr. Neil D. Nicastro were
required to be licensed or found suitable and were licensed or found
suitable by the Nevada gaming regulators. Under applicable Nevada law and
administrative procedure, as a greater than 10% stockholder of WMS, Mr.
Sumner M. Redstone was required to apply and has an application pending
with the Nevada gaming regulators for a finding of suitability as a
stockholder of WMS. Pending completion of the processing of Mr. Redstone's
application,
49
<PAGE> 51
Mr. Redstone and National Amusements, Inc. have granted to Mr. Louis J.
Nicastro and, if he is unable to perform his duties, Mr. Neil D. Nicastro,
a voting proxy for all of the shares of WMS common stock which they
beneficially own.
(4) The number of shares reported is based upon information contained in a
Schedule 13G/A dated August 9, 1996 filed with the Securities and Exchange
Commission by FMR Corp. Pursuant to such Schedule, FMR Corp. reported that
Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp. and an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, as amended, is the beneficial owner of
2,439,579 shares or 10.1% of WMS common stock as a result of acting as
investment adviser to various investment companies registered under Section
8 of the Investment Company Act of 1940. FMR Corp. reported it has sole
power to dispose of or direct the disposition of all of such shares but no
power to vote such shares.
(5) The number of shares reported is based upon information contained in a
Schedule 13G dated February 9, 1996 filed with the Securities and Exchange
Commission by The Capital Group Companies, Inc. ("CGC"). Pursuant to such
Schedule 13G and accompanying documentation, CGC reported that Capital
Research and Management Company, an Investment Adviser registered under
Section 203 of the Investment Advisers Act of 1940, and Capital Guardian
Trust Company, a bank as defined in Section 3(a)(6) of the Securities
Exchange Act of 1934, as amended, operating subsidiaries of CGC, exercised
as of December 31, 1995, investment discretion with respect to 1,300,000
and 602,000 shares, respectively, or a combined total of 7.9% of the WMS'
common stock which was owned by various institutional investors at that
time.
(6) The number of shares reported is based upon information contained in a
Schedule 13G dated February 3, 1996 filed with the Securities and Exchange
Commission by the State of Wisconsin Investment Board ("SWIB"), a
governmental agency which manages public pension funds subject to
provisions comparable to ERISA. The SWIB reported it had sole voting and
dispositive power with respect to 1,329,200 shares of the WMS' common
stock.
(7) The number of shares reported as beneficially owned includes 5,929,100
shares owned by Sumner M. Redstone and National Amusements, Inc. for which
the reporting person has shared voting power but no dispositive power.
Additionally, the number of shares reported as beneficially owned includes
862,000 shares for which the reporting person has sole voting and sole
dispositive power, 800,000 of which may be acquired pursuant to stock
options, 500,000 of such options being Target Price Options.
(8) The number of shares reported as beneficially owned includes 5,929,100
shares owned by Sumner M. Redstone and National Amusements, Inc. for which
the reporting person has shared voting power but no dispositive power.
Additionally, the number of shares reported as beneficially owned includes
500,000 shares for which the reporting person has sole voting and sole
dispositive power, all of which may be acquired pursuant to Target Price
Options.
(9) Includes 75,000 shares of Target Price Options.
(10) Includes 100,000 shares of common stock which Mr. Cook has the right to
acquire upon the exercise of stock options.
(11) Includes 130,000 shares of common stock which Mr. Fedesna has the right to
acquire upon the exercise of stock options, 100,000 of which are Target
Price Options.
(12) Includes 50,000 shares of Target Price Options.
(13) Includes 62,000 shares of common stock which Mr. Sheinfeld has the right to
acquire upon the exercise of stock options, 50,000 of which are Target
Price Options.
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<PAGE> 52
ARRANGEMENTS WITH WMS
Prior to the Offering, the Company was a wholly-owned subsidiary of WMS. As
a result of the Offering, WMS' beneficial ownership of Common Stock will be
reduced from 100.0% to 86.8% (85.1% if the Underwriters' over-allotment option
is exercised in full). A majority of the Company's directors are directors
and/or officers of WMS. Additionally, several of the executive officers of the
Company are officers and/or directors of WMS and will maintain such
relationships with WMS after the closing of the Offering. See
"Management -- Directors and Executive Officers of the Company."
In contemplation of the Offering, the Company and WMS entered into the
following agreements.
MANUFACTURING AND SERVICES AGREEMENT
The Company and WMS have entered into a Manufacturing and Services
Agreement (the "Manufacturing and Services Agreement") with respect to various
aspects of their future relationship. The Manufacturing and Services Agreement
became effective as of July 1, 1996 and will continue in effect unless
terminated (a) by either party for any reason upon 180 days' notice or (b) in
the event of a material default, immediately at the election of the
non-defaulting party. The Company also has the right, upon 180 days' notice, to
terminate the manufacturing and related services provided by WMS while retaining
WMS' other services. The Manufacturing and Services Agreement provides, among
other things, that WMS will provide the Company with management, legal and
administrative services and certain services for its coin-operated video games
including, without limitation, (i) manufacturing; (ii) engineering support;
(iii) sales and marketing; (iv) warranty and field services; and (v) creative
services. The aforementioned services will be provided to the Company upon terms
which the Company believes are fair and reasonable. The parties have agreed that
with respect to matters not specifically covered in the Manufacturing and
Services Agreement, or if changes in business circumstances should cause the
method of handling matters specifically covered to be unfair to either party,
such matters will be referred to a negotiating committee consisting of two
designees of each party.
All of the Company's coin-operated video games will be manufactured and
assembled by WMS at its facilities in Cicero and Waukegan, Illinois. Materials
used in the manufacture of coin-operated video games will be purchased by Midway
at its expense. Certain other manufacturing costs will be allocated based upon
units produced for the Company and the other amusement games businesses of WMS.
All labor costs associated with the manufacturing of coin-operated video games
will be charged to the Company at actual cost to WMS. Certain management, legal
and administrative expenses and sales and marketing expenses will be allocated
based upon the revenues of and/or units produced for the Company and the other
amusement games businesses of WMS or other methods appropriate for the
allocation of the particular expense.
For so long as the Manufacturing and Services Agreement remains in effect
and for a period of five years thereafter, (i) WMS is precluded from engaging,
directly or indirectly, in the business of designing, developing, manufacturing,
marketing or distributing coin-operated or home video games (except for its
activities on behalf of the Company) and (ii) the Company is precluded from
engaging, directly or indirectly, in the business of designing, developing,
manufacturing, marketing or distributing coin-operated pinball games, novelty
games, video lottery terminals or gaming machines such as slot machines.
The foregoing description of the Management and Services Agreement is
qualified by reference to the Management and Services Agreement, a copy of which
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
TAX SHARING AGREEMENT
The Company has been a member since 1988 of the WMS Group. Therefore, the
Company is jointly and severally liable for any federal tax liability incurred
by the WMS Group. The Company and WMS have entered into the Tax Sharing
Agreement whereby WMS and the Company have agreed upon a method for (i)
determining the amount which the Company must pay to WMS in respect of federal
income taxes; (ii) compensating any member of the WMS Group for use of its net
operating losses, tax credits and other tax benefits in arriving at the WMS
Group tax liability as determined under the federal consolidated return
51
<PAGE> 53
regulations; and (iii) providing for the receipt of any refund arising from a
carryback of net operating losses or tax credits from subsequent taxable years
and for payments upon subsequent adjustments. If any two or more members of the
WMS Group are required to elect, or WMS elects to cause two or more members of
the WMS Group to file combined or consolidated income tax returns under state or
local income tax law, the financial consequences of such filings among such
members shall be determined in a manner as similar as practicable to those
provided for under the Tax Sharing Agreement for federal taxes. The Tax Sharing
Agreement is not binding on the IRS or upon state, local or foreign taxing
authorities. The effectiveness of the Tax Sharing Agreement is therefore
dependent on each member of the WMS Group having the ability to pay its relative
share of taxes. Because the IRS or other taxing authorities can be expected to
seek payment from WMS prior to seeking payment from the individual group
members, it is likely that the Company would seek to enforce any rights it may
have against WMS for sharing at a time when WMS was unable to pay its
proportionate share of taxes. The foregoing description of the Tax Sharing
Agreement is qualified by reference to the Tax Sharing Agreement, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the Offering, the Company entered into a
registration rights agreement (the "Registration Rights Agreement") with WMS,
pursuant to which the Company has agreed, upon the request of WMS, to file up to
two registration statements under the Securities Act in order to permit WMS to
offer and sell shares of Common Stock that WMS or its affiliates may
beneficially own. The Company will pay all registration fees and expenses in
connection with any requested registration, except that WMS will pay any
underwriting discounts or commissions relating to shares owned by it and
included in any such registration. WMS may not exercise these rights until 180
days after the closing of the Offering. The Company will not be required to
comply with any request for registration unless the request involves at least 5%
of the total number of the then outstanding shares of Common Stock. The
Registration Rights Agreement also provides WMS the right to include its Common
Stock holdings in certain Registration Statements covering offerings by the
Company and the Company will pay all fees and expenses of such offerings other
than underwriting discounts or commissions as they relate to WMS' shares. The
Company will indemnify WMS and its officers, directors and controlling persons
against certain liabilities in respect of any registrations or other offerings
covered by the Registration Rights Agreement. WMS will indemnify the Company
against any liability arising as a result of information provided by WMS and
included in any offering document covered by the Registration Rights Agreement.
The Company has the right to request WMS to delay any exercise by WMS of its
rights to require registration and other actions for a period of up to 60 days
under certain circumstances. WMS has further agreed that it will not include any
Common Stock in any Registration Statement of the Company which, in the judgment
of the underwriters for such offering, would adversely affect such offering by
the Company. The rights of WMS under the Registration Rights Agreement are
transferable to an assignee of WMS at its option. The foregoing description of
the Registration Rights Agreement is qualified by reference to the Registration
Rights Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
PATENT LICENSE AGREEMENT
The Company and WMS have entered into a patent license agreement pursuant
to which the Company and WMS each licensed to the other, on a perpetual,
royalty-free basis, certain patents used in the development and manufacture of
both coin-operated video games and video lottery terminals and other gaming
machines.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Immediately prior to the consummation of the Offering, the Company will
amend and restate its Certificate of Incorporation (the "Certificate of
Incorporation") to, among other things, change its authorized capital stock to
100,000,000 shares of Common Stock, $.01 par value per share, of which
38,500,000 shares will be outstanding upon completion of the Offering
(39,265,000 if the Underwriters' over-allotment option is exercised in full),
and 5,000,000 shares of preferred stock, $.01 par value per share (the
"Preferred Stock"), of which no shares will be outstanding upon completion of
the Offering, although shares of Series A Preferred Stock will be designated and
reserved for issuance in connection with the Rights Agreement between the
Company and The Bank of New York (the "Rights Agreement").
The following summary description of the capital stock of the Company is
qualified by reference to the Certificate of Incorporation and the Company's
Bylaws (the "Bylaws"), a copy of each of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Holders of shares of Common Stock vote as a single class on all matters
submitted to a vote of the stockholders, including the election of directors,
with each share of Common Stock entitled to one vote. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. Immediately following the Offering, WMS will have
approximately 86.8% of the voting power of the outstanding shares of Common
Stock (85.1% if the Underwriters' over-allotment is exercised in full). As a
result, WMS will retain the voting power required to elect and remove all
directors and approve all other matters required to be voted upon by the
stockholders of the Company. See "Risk Factors -- Voting Control by WMS" and
"Arrangements With WMS." Under the DGCL, so long as it owns a majority of the
outstanding shares of Common Stock, WMS is permitted to effectuate any
stockholder action by its written consent only, followed by written notice
thereof to other stockholders. See "-- Certain Provisions of the Delaware
General Corporation Law."
Holders of Common Stock on the applicable record date are entitled to share
ratably in such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor, subject to the
rights of the holders of any series of Preferred Stock. See "Dividend Policy."
Upon the liquidation, dissolution or winding up of the Company, each holder of
Common Stock will be entitled to share ratably in any distribution of the
Company's assets after the payment of all debts and other liabilities, subject
to any superior rights of the holders of any outstanding shares of Preferred
Stock.
Other than the Rights Plan, holders of the shares of Common Stock do not
have preemptive or other subscription rights and there are no conversion rights
or redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and non-assessable.
Special meetings of stockholders may be called by the Company's Board of
Directors, the Chairman of the Board of Directors or the President. Except as
otherwise required by law, stockholders, in their capacity as such, are not
entitled to request or call a special meeting of stockholders.
Stockholders of the Company are required to provide advance notice of
nominations of directors to be made at, and of business proposed to be brought
before, a meeting of stockholders. The failure to deliver proper notice within
the period specified in the Bylaws will result in the denial to the stockholder
of the right to make such nominations or propose such action at the meeting.
PREFERRED STOCK
The Company's Board of Directors has authority (without action by the
stockholders) to issue up to 5,000,000 authorized and unissued shares of
Preferred Stock in one or more series, to designate the number of shares
constituting any series, and to fix, by resolution, the voting powers,
designations, preferences and relative, optional or other special rights
thereof, including liquidation preferences and the dividend, conversion and
redemption rights of each such series. If the resolutions establishing the
series so provide, holders of any
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<PAGE> 55
series of Preferred Stock may have the right to receive a liquidating
distribution before any distribution is made to holders of Common Stock upon
liquidation, and holders of Preferred Stock may be entitled to receive all
dividends to which they are entitled before any dividends may be paid to holders
of Common Stock. Holders of each series of Preferred Stock will have such voting
rights (which may include special rights regarding election of directors) as may
be provided in the resolutions establishing such series. The proposed Preferred
Stock will not be set aside for any specified purpose, but will be subject to
issuance at the discretion of the Board from time to time for any proper
corporate purposes and without any further stockholder approval. Any Preferred
Stock which is issued will rank senior to the Common Stock.
In addition, a new class of Preferred Stock can be used to make more
difficult a change in control of the Company. Under certain circumstances the
Board could create impediments to, or frustrate persons seeking to effect, a
takeover or transfer of control of the Company by causing such shares to be
issued to a holder or holders who might side with the Board in opposing a
takeover bid that the Board determines is not in the best interest of the
Company and its stockholders. Such action may have an adverse impact on
stockholders who may want to accept such takeover bid. In this connection, the
Board could, publicly or privately issue shares of Preferred Stock with full
voting rights to a holder that would thereby have sufficient voting power to
insure that certain types of proposals (including any proposal to remove
directors, to accomplish certain business combinations opposed by the Board, or
to alter, amend or repeal provisions in the Certificate of Incorporation or
Bylaws relating to any such action) would not receive the requisite stockholder
vote. Furthermore, the existence of such shares might have the effect of
discouraging any attempt by a person or entity to acquire control of the Company
since the issuance of such shares could dilute the ownership of such person or
entity. Other than the preferred stock issuable pursuant to the Rights
Agreement, the Company is not contemplating the issuance of any Preferred Stock
which may make more difficult a change in control of the Company, nor is the
Company aware of any proposals relating to a possible change in control of the
Company.
STOCKHOLDER RIGHTS AGREEMENT
The following description of the Company's rights agreement (the "Rights
Agreement") is qualified in its entirety by reference to the Rights Agreement, a
copy of which is filed as an Exhibit to the Registration Statement of which this
Prospectus is a part.
The Board of Directors of the Company plans to adopt the Rights Agreement
prior to the Offering. The Rights Agreement provides that one Right will be
issued with each share of the Common Stock issued (whether originally issued or
from the Company's treasury) on or after the effective date of the Offering and
prior to the Rights Distribution Date (as defined). The Rights are not
exercisable until the Rights Distribution Date and will expire at the close of
business on December 31, 2006 (the "Final Expiration Date") unless previously
redeemed by the Company as described below. When exercisable, each right
entitles the owner to purchase from the Company one one-hundredth ( 1/100) of a
share of the Company's Series A Preferred Stock at an exercise price of $100.00,
subject to certain antidilution adjustments. The Rights will not, however, be
exercisable, transferable separately or trade separately from the shares of
Common Stock, until (a) the tenth business day after the "Stock Acquisition
Date" (i.e., the date of a public announcement that a person or group is an
"Acquiring Person") or (b) the tenth business day (or such later day as the
Company's Board of Directors, with the concurrence of a majority of Continuing
Directors, determines) after a person or group announces a tender or exchange
offer, which, if consummated, would result in such person or group beneficially
owning 10% or more of the Company's Common Stock (the earlier of such dates
being the "Rights Distribution Date").
In general, any person or group of affiliated persons (other than the
Company, any of its subsidiaries, WMS, certain of the Company's benefit plans
and any person or group of affiliated persons whose acquisition of 10% or more
is approved by the Board in advance) who, after the date of adoption of the
Rights Agreement, acquires beneficial ownership of 10% or more of the
outstanding shares of Common Stock will be considered an "Acquiring Person."
If a person or group of affiliated persons becomes an Acquiring Person,
then each Right (other than Rights owned by such Acquiring Person and its
affiliates and associates, which will be null and void) will
54
<PAGE> 56
entitle the holder thereof to purchase, for the exercise price, a number of
shares of the Company's Common Stock having a then current market value of twice
the exercise price. Accordingly, at the original exercise price, each Right
would entitle its registered holder to purchase $200.00 worth of Common Stock
for $100.00.
If at any time after the Stock Acquisition Date, (a) the Company merges
into another entity, (b) an acquiring entity merges into the Company and the
Common Stock of the Company is changed into or exchanged for other securities or
assets of the acquiring entity or (c) the Company sells more than 50% of its
assets or earning power, then each Right will entitle the holder thereof to
purchase, for the exercise price, the number of shares of common stock of such
other entity having a current market value of twice the exercise price. The
foregoing will not apply to (i) a transaction approved by a majority of the
Board of Directors (or from and after the Stock Acquisition Date, a majority of
the Continuing Directors) or (ii) a merger which follows a cash tender offer
approved by the Board of Directors (or after the Stock Acquisition Date, a
majority of Continuing Directors) for all outstanding shares of Common Stock so
long as the consideration payable in the merger is the same in form and not less
than the amount as was paid in the tender offer. A Continuing Director is a
director in office prior to the distribution of the Rights and any director
recommended or approved for election by such directors but does not include any
representative of an Acquiring Person.
Subject to the limitations summarized below, the Rights are redeemable at
the Company's option, at any time prior to the earlier of the Stock Acquisition
Date or the Final Expiration Date, for $.01 per Right, payable in cash or shares
of Common Stock. Under certain circumstances, the decision to redeem requires
the concurrence of a majority of the Continuing Directors. In the event a
majority of the Board of Directors of the Company is changed by vote of the
Company's stockholders, the Rights shall not be redeemable for a period of ten
business days after the date that the new directors so elected take office and
it shall be a condition to such redemption that any tender or exchange offer
then outstanding be kept open within such ten business day period. At any time
after any person becomes an Acquiring Person, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by the Acquiring Person
and associates, which will be null and void), in whole or in part, for Common
Stock on the basis of an exchange ratio of one share of Common Stock for each
Right (subject to adjustment).
As long as the Rights are attached to the Common Stock, each share of
Common Stock issued by the Company will also evidence one Right. Until the
Rights Distribution Date, the Rights will be represented by the Common Stock
certificates and will be transferred only with the Common Stock certificates;
separate certificates representing the Rights will be mailed, however, to
holders of the Common Stock as of the Rights Distribution Date. The holders of
Rights will not have any voting rights or be entitled to dividends until the
Rights are exercised.
The purchase price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution in the event of certain
stock dividends on, or subdivisions, combinations or reclassification of, the
shares of Common Stock prior to the Rights Distribution Date, and in certain
other events.
The Board of Directors of the Company may amend the Rights Agreement in any
manner prior to the Rights Distribution Date. After the Rights Distribution
Date, the Board may amend the Rights Agreement only to cure ambiguities, to
shorten or lengthen any time period (subject to certain limitations) or if such
amendment does not adversely affect the interests of the Rights Holders and does
not relate to any principal economic term of the Rights.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% of more of a
corporation's outstanding voting stock) for three years following the time such
person became an interested stockholder unless (i) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation; (ii) upon consummation of the transaction which
55
<PAGE> 57
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock of the corporation
(excluding shares owned by directors who are also officers of the corporation or
shares held by employee stock plans that do not provide employees with the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender offer or exchange offer); or (iii) at or subsequent to such
time the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock excluding shares owned by the interested stockholders.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the Common Stock that often result from takeover attempts.
Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The
Certificate of Incorporation contains no such provision, and therefore
stockholders holding a majority of the voting power of the Common Stock will be
able to approve a broad range of corporate actions requiring stockholder
approval without the necessity of holding a meeting of stockholders.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
The Certificate of Incorporation limits personal liability for directors to
the fullest extent permitted under the DGCL. Section 102(b)(7) of the DGCL
permits a corporation to eliminate or limit the personal liability of a
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of laws,
(iii) under Section 174 of the DGCL relating to unlawful payment of dividends,
stock purchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit.
Section 102(b)(7) of the DGCL is designed, among other things, to encourage
qualified individuals to serve as directors of Delaware corporations. The
Company believes this provision will assist it in maintaining and securing the
services of qualified directors who are not employees of the Company. This
provision has no effect on the availability of equitable remedies, such as
injunction or rescission. If equitable remedies are found not to be available to
stockholders in any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence or gross
negligence.
Section 145 of the DGCL permits the Company to, and the Certificate of
Incorporation provides that the Company shall, indemnify and hold harmless any
director, officer or incorporator of the Company and any person serving at the
request of the Company as a director, officer, incorporator, employee, partner,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including an employee benefit plan) from and against any and
all expenses (including counsel fees and disbursements), judgments, fines
(including excise taxes assessed on a person with respect to an employee benefit
plan) and amounts paid in settlement that may be imposed upon or incurred by him
or her in connection with, or as a result of, any proceeding, whether civil,
criminal, administrative or investigative (whether or not by or in the right of
the Company), in which he or she may become involved, as a party or otherwise,
by reason of the fact that he or she is or was such a director, officer or
incorporator of the Company or is or was serving at the request of the Company
as a director, officer, incorporator, employee, partner, trustee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan), whether or not he or she continues to be
such at the time such expenses and judgments, fines and amounts paid in
settlement shall have been imposed or incurred, to the fullest extent permitted
by the laws of the State of Delaware, as they may be amended from time to time.
Such right of indemnification shall inure whether or not the claim
56
<PAGE> 58
asserted is based on matters which antedate the adoption of the Certificate of
Incorporation. Such right of indemnification shall continue as to a person who
has ceased to be a director, officer or incorporator and shall inure to the
benefit of the heirs and personal representatives of such a person. The
indemnification provided by the Certificate of Incorporation shall not be deemed
exclusive of any other rights which may be provided now or in the future under
any provision currently in effect or hereafter adopted of the Certificate of
Incorporation, by any agreement, by vote of stockholders, by resolution of
directors, by provision of law or otherwise. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors of
the Company pursuant to the foregoing provision, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company has entered into indemnity agreements with each of its
directors and executive officers whereby the Company will, in general, indemnify
such directors and executive officers, to the extent permitted by the laws of
the State of Delaware, against any expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement incurred in connection with any
actual or threatened action or proceeding to which such director or officer is
made or threatened to be made a party by reason of the fact that such person is
or was a director or officer of the Company. The foregoing description of the
indemnity agreements is qualified in its entirety by reference to the Company's
form of indemnity agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York, with an address at 101 Barclay Street, 22W, New York, New York 10286.
57
<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
38,500,000 shares of Common Stock (39,265,000 shares if the Underwriters'
over-allotment option is exercised in full), of which all of the 5,100,000
shares of Common Stock (5,865,000 shares if the Underwriters' over-allotment
option is exercised in full) sold in the Offering will be freely tradable
without restriction under the Securities Act, unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 promulgated under the
Securities Act. WMS owns 33,400,000 shares of Common Stock, all of which will be
"restricted shares" for purposes of the Securities Act and may not be sold in
the absence of registration other than through Rule 144 or another exemption
from registration under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares of
Common Stock that have been outstanding and not held by an "affiliate" of the
Company for a period of two years is entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent
(approximately 385,000 shares immediately after completion of the Offering) of
the then outstanding shares of Common Stock or the average weekly reported
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of such sales is given, provided certain manner of sale and
notice requirements and requirements as to the availability of current public
information concerning the Company are satisfied (which requirements, as to the
availability of current public information, are expected to be satisfied
commencing 90 days after the date of this Prospectus). Affiliates of the Company
must comply with the restrictions and requirements of Rule 144, other than the
two-year holding period requirement, in order to sell shares of Common Stock
that are not "restricted securities" (such as shares acquired by affiliates in
the Offering). Under Rule 144(k), a person who is not deemed an "affiliate" of
the Company at any time during the three months preceding a sale by him, and who
has beneficially owned shares of Common Stock that were not acquired from the
Company or an "affiliate" of the Company within the previous three years, would
be entitled to sell such shares without regard to volume limitations, manner of
sale provisions, notification requirements or the availability of current public
information concerning the Company. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer. The Commission has recently proposed an amendment to Rule 144
which, if adopted, would shorten the general two-year holding period under Rule
144 to one year and shorten the three year holding period under Rule 144(k) to
two years.
WMS has agreed not to offer, sell or otherwise dispose of shares of Common
Stock in the public market for a period of 180 days after the date of this
Prospectus without the written consent of Oppenheimer & Co., Inc., but such
shares thereafter may be sold in the public market pursuant to Rule 144 under
the Securities Act or pursuant to an effective registration statement. The
Company has entered into the Registration Rights Agreement with WMS pursuant to
which the Company has agreed to file registration statements under certain
circumstances and take other steps requested by WMS in order to enable WMS to
sell its shares of Common Stock. See "Arrangements With WMS -- Registration
Rights Agreement." Sales of a substantial number of shares of Common Stock in
the public market could adversely affect the market price of the Common Stock.
An additional 2,000,000 shares of Common Stock are reserved for issuance under
the Company's Stock Option Plan, of which options for approximately 1,455,000
shares have been or will be granted prior to the Offering, subject to
consummation of the Offering. It is the Company's intention to register the
shares underlying options granted under the Company's Stock Option Plan under
the Securities Act shortly after the date of this Prospectus, and such shares
may be sold in the public market at any time thereafter, subject to certain
restrictions under Rule 144 with respect to shares held by affiliates of the
Company.
58
<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters, for whom Oppenheimer & Co., Inc., Hambrecht & Quist LLC, UBS
Securities LLC and Wasserstein Perella Securities, Inc., are acting as
Representatives, has severally agreed to purchase from the Company, the
respective number of, shares of Common Stock set forth opposite the name of such
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------------------------------------------------------------------- ------------
<S> <C>
Oppenheimer & Co., Inc.................................................
Hambrecht & Quist LLC..................................................
UBS Securities LLC.....................................................
Wasserstein Perella Securities, Inc....................................
-------
Total................................................................ 5,100,000
=======
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
changed by the Representatives. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken. Mr. Clark
Schubach, a Managing Director of Bear, Stearns & Co. Inc., acting on his own
behalf and not as a representative of Bear, Stearns & Co. Inc., will be paid a
finder's fee by the Representatives of the Underwriters.
The Company has granted the Underwriters an option, exercisable for up to
30 days after the date of this Prospectus, to purchase up to an aggregate of
765,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them as shown in
the foregoing table bears to the 5,100,000 shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover over-allotments
made in connection with the sale of the shares of Common Stock offered hereby.
The Representatives have advised the Company that the Underwriters do not intend
to confirm sales in excess of 5% of the shares offered hereby to any account
over which they exercise discretionary authority.
The Company has agreed to indemnify the Representatives of the Underwriters
and the several Underwriters against certain liabilities, including, without
limitation liabilities under the Securities Act.
The Company's officers and directors and WMS, the Company's sole
stockholder prior to the Offering, have agreed not to offer, sell, contract to
sell, pledge or grant any option to purchase or otherwise dispose of such
securities for 180 days after the date of this Prospectus, without the prior
written consent of Oppenheimer & Co., Inc. The Company has also agreed not to
offer, sell, contract to sell, or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or any rights to acquire Common Stock (other than shares issuable
upon exercise of outstanding options) for a period of 180 days after the date of
this Prospectus, without the prior written consent of Oppenheimer & Co., Inc.,
subject to certain limited exceptions. See "Shares Eligible for Future Sale."
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<PAGE> 61
Oppenheimer & Co., Inc. is currently rendering financial advisory services
to WMS in connection with its corporate restructuring, of which this Offering is
a part, and is receiving customary compensation in connection therewith.
Additionally, Oppenheimer & Co., Inc. has rendered financial advisory services
to WMS in the past and received customary compensation in connection therewith.
In connection with his service to the Company as a director, Mr. Richard D.
White, a Managing Director of Oppenheimer & Co., Inc., will be granted 25,000
options to purchase shares of Common Stock of the Company, exercisable at the
initial public offering price, and will also receive directors' compensation on
the same basis as other directors of the Company who are not also employees of
the Company or any of its subsidiaries.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price was determined by negotiations among
the Company and the Representatives. The principal factors considered in such
negotiations were prevailing market conditions, the results of operations of the
Company in recent periods, market valuations of companies that the Company and
the Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the history of and prospects for the industry
in which the Company competes, and such other factors as the Company and the
Representatives deemed relevant.
LEGAL MATTERS
The legality of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Shack & Siegel, P.C., New York, New York.
Certain legal matters will be passed upon for the Underwriters by Morgan, Lewis
& Bockius LLP, New York, New York. Stockholders of Shack & Siegel, P.C. hold
Target Price Options to purchase 50,000 shares of WMS common stock at an
exercise price per share of $26 7/8 and, subject to the completion of the
Offering, options to purchase 25,000 shares of the Company's Common Stock at an
exercise price per share equal to the initial public offering price.
EXPERTS
The combined financial statements of the Company at June 30, 1995 and 1996
and for each of the three years in the period ended June 30, 1996 and the
consolidated financial statements of Atari Games at December 31, 1995 and 1994
and for the year ended December 31, 1995, the nine month period ended December
31, 1994 and the year ended March 31, 1994 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendment thereto) on Form S-1 under the Securities Act
with respect to the Shares offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain items of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Shares, reference is made to the Registration Statement, including the exhibits
and schedules to such Registration Statement, copies of which may be obtained as
noted below. Any statements contained herein concerning the provisions of any
document are not necessarily complete, and, in each instance, reference is made
to the copy of such document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified by such
reference.
The Registration Statement and the exhibits and schedules to such
Registration Statement filed by the Company with the Commission, as well as
reports and other information submitted by the Company to the Commission, may be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at Seven World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or part of such
materials can be obtained from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
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<PAGE> 62
Following consummation of the sale of the Shares, the Company will be
subject to the informational reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange
Act, the Company will file with the Commission the reports and other information
required to be filed under the Exchange Act.
61
<PAGE> 63
MIDWAY GAMES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Midway Games Inc.
Report of Independent Auditors...................................................... F-2
Combined Balance Sheets as of June 30, 1996 and 1995................................ F-3
Combined Statements of Income for the years ended June 30, 1996, 1995 and 1994...... F-4
Combined Statements of Changes in Stockholder's Net Investment for the years ended
June 30, 1996, 1995 and 1994..................................................... F-5
Combined Statements of Cash Flows for the years ended June 30, 1996, 1995 and
1994............................................................................. F-6
Notes to Combined Financial Statements.............................................. F-7
Midway Games Inc.
Unaudited Pro Forma Condensed Combined Statement of Income for the year
ended June 30, 1996.............................................................. F-16
Notes to Unaudited Pro Forma Condensed Combined Statement of Income................. F-17
Atari Games Corporation
Unaudited Condensed Consolidated Statements of Operations for the three months ended
March 29, 1996 and March 31, 1995................................................ F-19
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended
March 29, 1996 and March 31, 1995................................................ F-20
Notes to Unaudited Condensed Consolidated Financial Statements...................... F-21
Atari Games Corporation
Report of Independent Auditors...................................................... F-22
Consolidated Balance Sheets as of December 31, 1995 and 1994........................ F-23
Consolidated Statements of Operations for the year ended December 31, 1995, nine
months ended December 31, 1994 and year ended March 31, 1994..................... F-24
Consolidated Statements of Shareholders' Equity (Deficit)........................... F-25
Consolidated Statements of Cash Flows for the year ended December 31, 1995, nine
months ended December 31, 1994 and year ended March 31, 1994..................... F-26
Notes to Consolidated Financial Statements.......................................... F-27
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and Board of Directors
Midway Games Inc.
We have audited the accompanying combined balance sheets of Midway Games
Inc. as of June 30, 1996 and 1995, and the related combined statements of
income, changes in stockholder's net investment and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Midway
Games Inc. at June 30, 1996 and 1995, and the combined results of its operations
and its cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
September 12, 1996
F-2
<PAGE> 65
MIDWAY GAMES INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 9,199 $ --
Receivables, less allowances of $995 in 1996 and $1,078 in 1995......... 48,951 33,641
Inventories
Raw materials and work in progress.................................... 16,835 14,317
Finished goods........................................................ 8,187 2,850
-------- -------
25,022 17,167
Other current assets.................................................... 5,407 3,598
-------- -------
Total current assets.................................................... 88,579 54,406
Property and equipment, net............................................. 5,927 4,794
Excess of purchase cost over amount assigned to net assets acquired,
net................................................................... 22,765 9,599
Other assets............................................................ 991 12,307
-------- -------
Total assets............................................................ $118,262 $ 81,106
======== =======
LIABILITIES AND STOCKHOLDER'S NET INVESTMENT
Current liabilities:
Accounts payable........................................................ $ 17,686 $ 17,466
Accrued compensation and related benefits............................... 4,849 1,439
Deferred income taxes................................................... 1,400 3,098
Accrued payment on 1996 purchase of Atari Games Corporation............. 3,286 --
Dividend notes.......................................................... 50,000 --
Accrued royalties....................................................... 6,088 1,956
Other accrued liabilities............................................... 16,888 3,120
-------- -------
Total current liabilities............................................... 100,197 27,079
Long term debt.......................................................... 7,863 --
Deferred income taxes................................................... 2,794 3,127
Other noncurrent liabilities............................................ 1,920 1,148
Stockholder's net investment............................................ 5,488 49,752
-------- -------
Total liabilities and stockholder's net investment...................... $118,262 $ 81,106
======== =======
</TABLE>
See notes to combined financial statements
F-3
<PAGE> 66
MIDWAY GAMES INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues
Home video............................................... $154,102 $ 60,839 $ 23,959
Coin-operated video...................................... 91,321 119,640 97,923
-------- -------- --------
Total revenues............................................. 245,423 180,479 121,882
Cost of sales.............................................. 140,056 101,752 62,679
-------- -------- --------
Gross profit............................................... 105,367 78,727 59,203
Research and development expense........................... 32,495 14,661 8,418
Selling expense............................................ 22,815 9,692 1,603
Administrative expense..................................... 9,563 7,238 3,945
-------- -------- --------
Operating income........................................... 40,494 47,136 45,237
Interest and other income.................................. 1,079 52 224
Interest expense........................................... (808) (195) (3)
-------- -------- --------
Income before tax provision................................ 40,765 46,993 45,458
Provision for income taxes................................. (15,536) (17,854) (17,435)
-------- -------- --------
Net income................................................. $ 25,229 $ 29,139 $ 28,023
======== ======== ========
</TABLE>
See notes to combined financial statements
F-4
<PAGE> 67
MIDWAY GAMES INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S NET INVESTMENT
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at June 30, 1993.......................................................... $ 15,580
Net income........................................................................ 28,023
Net transactions with WMS......................................................... (5,926)
--------
Balance at June 30, 1994.......................................................... 37,677
Net income........................................................................ 29,139
Net transactions with WMS......................................................... (17,064)
--------
Balance at June 30, 1995.......................................................... 49,752
Net income........................................................................ 25,229
Dividends declared................................................................ (50,000)
Net transactions with WMS......................................................... (19,493)
--------
Balance at June 30, 1996.......................................................... $ 5,488
========
</TABLE>
See notes to combined financial statements
F-5
<PAGE> 68
MIDWAY GAMES INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 25,229 $ 29,139 $ 28,023
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 3,208 1,808 401
Receivables provision.................................... 3,358 3,218 --
Deferred income taxes.................................... (2,678) 4,986 1,544
Increase (decrease) resulting from changes in operating
assets and liabilities:
Receivables........................................... 8,089 (20,939) (6,493)
Inventories........................................... (1,072) (4,660) (3,722)
Other current assets.................................. (1,253) (1,625) (1,403)
Accounts payable and accruals......................... (479) 13,052 2,761
Other assets and liabilities not reflected
elsewhere........................................... 877 (1,032) --
-------- -------- --------
Net cash provided by operating activities.................. 35,279 23,947 21,111
-------- -------- --------
INVESTING ACTIVITIES
Purchase of property and equipment......................... (3,107) (3,859) (754)
Acquisition of Tradewest operating assets.................. (11,476) (3,024) (14,431)
Cash acquired in acquisition of Atari Games Corporation,
net of cash used......................................... 7,996 -- --
-------- -------- --------
Net cash used by investing activities...................... (6,587) (6,883) (15,185)
-------- -------- --------
Net transactions with WMS.................................. (19,493) (17,064) (5,926)
-------- -------- --------
Increase in cash and cash equivalents...................... 9,199 -- --
Cash and cash equivalents at beginning of year............. -- -- --
-------- -------- --------
Cash and cash equivalents at end of year................... $ 9,199 $ -- $ --
======== ======== ========
</TABLE>
See notes to combined financial statements
F-6
<PAGE> 69
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS
Midway Games Inc. ("Midway") and its subsidiaries combined (the "Company")
operates in one business segment, the design and distribution of coin-operated
video games and publishing, licensing and distribution of home video games (the
"Video Game Business"). Coin-operated video games are sold to distributors
worldwide who sell them to operators and arcades. Home video games are sold to
mass merchants, video rental retailers, and entertainment software distributors
in North America. The Company exploits the other worldwide markets through
licensing and distribution agreements with third parties. Consumers buy or rent
the home video games to use on game systems (Nintendo, Sony and Sega) and on
personal computers.
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Relationship with WMS Industries Inc.
Since its inception in 1988, Midway has been a wholly-owned subsidiary of
WMS Industries Inc.("WMS") and is the primary subsidiary in which WMS conducts
the coin-operated video games business.
On July 1, 1996 (the "Transfer Date") WMS transferred out of Midway all of
the operating assets and liabilities relating to the "Bally(R)" pinball business
previously conducted by Midway. On the Transfer Date WMS transferred the
coin-operated video game operating assets and liabilities not previously part of
Midway from other WMS subsidiaries to Midway. Also on the Transfer Date WMS
transferred 100% of the stock of Midway Home Entertainment Inc. (formerly
Williams Entertainment Inc.) and Midway Interactive Inc. (formerly Williams
Interactive Inc.) to Midway. The aforementioned transfers resulted in WMS
concentrating its Video Game Business into Midway and its wholly-owned
subsidiaries. WMS's net investment has been reflected as Stockholder's Net
Investment in the combined financial statements. Historical earnings per share
are not presented as the Company is wholly owned by WMS.
The financial statements reflect the historical combined financial position
and results of operations of the Video Game Business as if the Company operated
the Video Games Business under the structure implemented on the Transfer Date.
All significant intercompany accounts among the combined companies have been
eliminated in the combination. The results of the Video Game Business include
the results of Midway Home Entertainment Inc., subsequent to its purchase of
Tradewest on April 29, 1994 and the results of Midway Interactive Inc.,
subsequent to its purchase of Atari Games Corporation ("Atari Games") on March
29, 1996.
The combined financial statements include transfers and allocations of
costs and expenses from WMS or other WMS subsidiaries primarily for activities
relating to the Midway coin-operated video games business. Cost of sales
includes material, labor and labor fringes transferred from the other WMS
subsidiaries at cost based on the standard cost of material adjusted to
estimated actual using engineered bills of material and actual labor with
standard labor fringes applied. Cost of sales also includes allocations of
manufacturing overhead cost incurred in the production of coin-operated video
games for Midway. Research and development expenses includes allocations for
certain shared facilities and personnel. Selling and administrative expenses
include certain allocations relating to general management, treasury,
accounting, human resources, insurance and selling and marketing. These
allocations were determined by using various factors such as dollar amount of
sales, number of personnel, square feet of building space, estimates of time
spent to provide services and other appropriate costing measures. In the opinion
of management these transfers of cost of sales and allocations are made on a
reasonable basis to properly reflect the share of costs incurred by WMS on
behalf of the Company.
These combined financial statements may not necessarily be representative
of results that would have been attained if the Company operated as a separate
independent entity.
F-7
<PAGE> 70
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost and depreciated by the
straight-line method over their estimated useful lives.
Excess of Purchase Cost Over Amount Assigned to Net Assets Acquired (Goodwill)
Goodwill of $22,765,000 (net of accumulated amortization of $2,035,000) at
June 30, 1996 arising from acquisitions is being amortized by the straight-line
method over 15 years.
Intellectual Properties Licenses
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed. Unit royalties on sales that exceed the guarantee are
recognized as revenue as earned. License and royalty revenues primarily from
home video activities, for fiscal 1996, 1995 and 1994 was $18,985,000,
$37,555,000, and $22,922,000, respectively.
Home Video Game Revenues
Home video game revenues are recorded when products are shipped to
customers. An allowance for returns and discounts is also recorded based upon
management's evaluation of historical experience as well as current industry
trends.
Advertising Expense
The cost of advertising is charged to earnings as incurred and for fiscal
1996, 1995 and 1994 was $13,338,000, $5,695,000 and $542,000, respectively.
Export Sales and Sales to a Major Customer
Export sales primarily to Western Europe were $34,945,000, $40,940,000 and
$29,882,000 for fiscal 1996, 1995 and 1994, respectively. Sale of home video
games to one mass merchant during fiscal 1996 were $30,898,000.
Recent Accounting Pronouncement
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
on Financial Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which the Company
must adopt in fiscal 1997. SFAS 121 standardizes the accounting practices for
recognition and measurement of impairment losses on certain long-lived assets.
The Company anticipates the adoption of the standard will have no material
impact on the financial statements.
F-8
<PAGE> 71
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 3: TRANSACTIONS WITH WMS
The Company, except for Atari Games, for the years included in the combined
financial statements participates in the WMS central cash management system,
pursuant to which all cash receipts were transferred to WMS and all cash
disbursements were made by WMS. Seasonal cash needs were provided by WMS. After
the completion of the Offering the treasury activities of the Video Games
Business will be conducted by the Company.
During the fiscal years ended June 30, 1996, 1995 and 1994 a subsidiary
that has seasonal cash needs was charged interest at prime and was paid interest
at short-term treasury bill rates on the balance of the intercompany amount with
WMS. The maximum intercompany payable to WMS during the three years was
$25,700,000. Interest income accrued from WMS and interest expense accrued to
WMS was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income............................................... $771 $ 45 $0
Interest expense.............................................. 442 195 3
</TABLE>
The Company has been charged for the specific production costs, excluding
manufacturing overhead, of the coin-operated video games produced by a
subsidiary of WMS that totaled $51,961,000, $73,564,000 and $58,468,000 in the
years ended June 30, 1996, 1995 and 1994, respectively. In addition, certain
other costs have been allocated to the Company based on the various factors
noted in Note 2. Charges to the Company from WMS and WMS subsidiaries for the
allocations in the years ended June 30, 1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Manufacturing overhead................................... $3,947 $2,965 $1,996
Research and development expense......................... 1,352 1,477 1,140
Selling expense.......................................... 1,933 2,247 1,292
Administrative expense................................... 3,433 3,167 2,571
</TABLE>
The Company has entered into a Manufacturing and Services Agreement with
WMS under which WMS and its subsidiaries agree to continue performing contract
manufacturing for coin-operated video games for Midway and Atari Games as well
as providing general management, financial reporting, and treasury services to
the Company and general management, accounting, human resources and selling and
marketing services to Midway. The Company intends to purchase materials and WMS
subsidiaries will manufacture the coin-operated video games charging actual
labor with labor fringes and manufacturing overhead allocated. The labor
fringes, manufacturing overhead and other services provided will be allocated
based on the various factors noted in Note 2 that were used in the combined
financial statements.
See Note 6 for income tax allocations.
NOTE 4: ACQUISITIONS
On March 29, 1996, a wholly-owned subsidiary of the Company acquired all
the capital stock of Atari Games Corporation ("Atari Games") from Warner
Communications Inc.("Warner"), a subsidiary of Time Warner Inc. The acquisition
is being accounted for by the purchase method of accounting. The results of
operations of Atari Games subsequent to the acquisition date have been included
in the Combined Statement
F-9
<PAGE> 72
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of Income of the Company. Headquartered in Milpitas, California, Atari Games is
engaged in the business of developing, manufacturing, licensing, publishing and
distributing coin-operated video games and home video games.
The Company is in the process of assimilating parts of the Atari Games
business into the Company's similar activities and exiting certain activities
that include closing the leased manufacturing plant in California and
transferring production of future coin-operated video games to WMS's existing
Chicago plants; combining the sales, marketing and distribution of home video
games with the Company's home video operations; the sale of an Irish subsidiary
that produces coin-operated video games; the sale of a subsidiary in Japan that
develops and markets home video games; and downsizing certain elements of the
coin-operated video product development activities that are duplicative of
similar activities of Midway. A $4,500,000 liability for exit activities was
established and includes provisions for employee severance and relocation,
contractual liabilities, direct exit costs and estimated losses of the two
foreign subsidiaries until disposition. Any significant change in the exit
liability or purchase price would result in an adjustment to negative goodwill.
As of June 30, 1996 costs of $1,612,000 for assimilation and exit
activities related to the acquisition of Atari Games have been incurred.
Additional costs will continue to be incurred until the sale of the subsidiaries
in Ireland and Japan have been completed and the building used for manufacturing
in California has been subleased. The timing and outcome of these events will
determine the adjustment required, if any, to the liability for exit activities.
The preliminary purchase price for Atari Games is a minimum of $9,863,000
and a maximum of $24,015,000. The preliminary purchase price was computed based
upon the book net assets of Atari Games as of March 29, 1996 with a portion of
the purchase price contingent upon future gross profits, as defined, of Atari
Games.
The preliminary minimum purchase price included cash of $2,000,000 and a
two year non-recourse promissory note (the "Two Year Note") payable on March 29,
1998 for $7,863,000, or 10/28 of the balance of the final maximum purchase
price. Additional purchase price in the form of a four year non-recourse
promissory note (the "Four Year Note") payable in semi-annual installments is
contingent on any cash gross profits, as defined, of Atari Games over the next
four years and will be recorded incrementally as gross profits are realized. The
preliminary maximum amount of the Four Year Note is $14,152,000, or 18/28 of the
balance of the maximum final purchase price. Semi-annual installments are to be
made on the Four Year Note equal to 50% of any cash gross profit from the sale
or distribution of certain products defined in the purchase agreement and
intellectual property with respect thereto owned by Atari Games (the
"Products"). As of June 30, 1996, $3,286,000 was recorded as accrued additional
purchase price under the Four Year Note.
The Two Year Note is collateralized by the capital stock of Atari Games.
The Company's obligations under the Two Year Note may be satisfied by
relinquishing the capital stock of Atari Games to Warner. The Four Year Note is
secured by the Products. Atari Game's unpaid obligations under the Four Year
Note may be satisfied by transferring the Products to Warner.
Under the terms of the purchase agreement, Warner is required to make an
additional cash payment of $3,247,000 to Atari Games in order to increase net
current assets to the required amount based upon the Atari Games final March 29,
1996 balance sheet. A receivable for this amount is included in receivables in
the June 30, 1996 Combined Balance Sheet. The final purchase price has not as
yet been accepted by Warner.
The unaudited pro forma combined statement of income data of the Company
for fiscal 1996 and 1995 included below was prepared as if Atari Games was
acquired as of July 1, 1995 and July 1, 1994, respectively, and assimilation and
exit activities occurred on that date. The summary does not purport to be
indicative of
F-10
<PAGE> 73
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
what would have occurred had the acquisition occurred as of the dates indicated
or of the results which may occur in the future.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues....................................................... $329,449 $235,369
Net income..................................................... 24,707 16,661
====== ======
</TABLE>
On April 29, 1994, a wholly-owned subsidiary of Midway acquired
substantially all of the operating assets and business of three commonly owned
companies ("Tradewest"): Tradewest, Inc., Tradewest International, Inc. and The
Leland Corporation. The assets acquired are utilized in the Midway Video Game
Business of developing, publishing and distributing home video games in various
formats including game cartridges. The acquisition is being accounted for by the
purchase method of accounting.
The final purchase price will be equal to five times average annual pre-tax
income of the acquired business during the four year period commencing May 1,
1994 subject to a minimum and a maximum. The minimum purchase price is
$14,131,000 and the maximum purchase price is $50,131,000.
Based upon the pre-tax income generated by the acquired business through
May 1996, the Company accrued and paid an additional purchase price of
$14,400,000. The additional purchase price has been recorded as goodwill in the
Combined Balance Sheet and is amortized over the remainder of the 15 year
period. The cumulative amount accrued and paid for the purchase of Tradewest as
of June 30, 1996 is $28,531,000. Midway's obligation for additional payments
under the Tradewest acquisition are guaranteed by WMS.
The unaudited pro forma revenues and net income of the Company for fiscal
1994 assuming the Tradewest acquisition occurred July 1, 1993 were $144,044,000
and $25,571,000, respectively. This information does not purport to be
indicative of what would have occurred had the acquisition occurred as of the
date indicated or of the results which may occur in the future.
NOTE 5: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements........................................... $ 458 $ 305
Furniture, fixtures and engineering equipment.................... 9,033 6,079
----- -----
9,491 6,384
Less accumulated depreciation.................................... (3,564) (1,590)
----- -----
Net property and equipment....................................... $ 5,927 $ 4,794
===== =====
</TABLE>
NOTE 6: INCOME TAXES
The results of the Company have been included in the consolidated income
tax returns of WMS for all years presented; however income taxes have been
recorded based on a calculation of the income taxes that would have been
incurred if the Company operated as an independent combined entity. WMS and the
Company entered into a tax sharing agreement effective July 1, 1996 that
requires a tax calculation, accrual and payment by the Company as if the Company
was filing a separate tax return.
F-11
<PAGE> 74
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes for the years
ended June 30, 1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................. $15,423 $10,685 $13,068
State............................................... 2,791 2,183 2,823
------ ------ ------
Total current............................... 18,214 12,868 15,891
Deferred:
Federal............................................. (2,156) 4,141 1,263
State............................................... (522) 845 281
------ ------ ------
Total deferred.............................. (2,678) 4,986 1,544
------ ------ ------
Provision for income taxes............................ $15,536 $17,854 $17,435
====== ====== ======
</TABLE>
The provision for income taxes differs from the amount computed using the
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.............................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit..................... 3.6 4.2 4.4
Foreign sales corporation benefits............................. (.6) (1.2) (1.1)
Other, net..................................................... .1 -- .1
---- ---- ----
38.1% 38.0% 38.4%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes.
Significant components of the Company's deferred tax assets and liabilities
at June 30 were:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets resulting from:
Inventory valuation............................................ $ 656 $ 629
Accrued items not currently deductible......................... 3,131 1,110
Receivable allowance........................................... 408 450
Purchased assets cost basis difference......................... 1,853 --
Other.......................................................... 227 377
------ ------
Total deferred tax assets.............................. 6,275 2,566
------ ------
Deferred tax liabilities resulting from:
Tax over book depreciation..................................... 342 315
Revenues deferred in tax reporting............................. 5,672 8,476
Purchase liability basis difference............................ 4,455 --
------ ------
Total deferred tax liabilities................................. 10,469 8,791
------ ------
Net deferred tax liabilities..................................... $(4,194) $(6,225)
====== ======
</TABLE>
During fiscal 1996, 1995 and 1994 income taxes paid to WMS were
$18,214,000, $12,868,000 and $15,891,000, respectively.
F-12
<PAGE> 75
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: LINE OF CREDIT AND LONG-TERM DEBT
The Company has received a commitment letter from a bank, subject to
certain conditions, including completion of a proposed public offering, for the
establishment of a line of credit for $50,000,000 and an additional letter of
credit line of $30,000,000. The line of credit is expected to be finalized prior
to the completion of the public offering and after the negotiation of a lending
agreement containing usual bank line of credit terms.
Long-term debt at June 30, 1996 consists of the Atari Games Two Year Note
due March 1998 with interest at 6%, as described in Note 4.
The amount of interest paid during fiscal 1996, 1995 and 1994 was $442,000,
$195,000 and $3,000, respectively.
NOTE 8: AUTHORIZED SHARES
At June 30, 1996 the authorized common stock of the Company consists of
3,000 shares of no par value of which 1,000 shares were issued and outstanding.
Immediately prior to the public offering, the Company intends to recapitalize
and authorize the issuance of 100,000,000 shares of common stock, $.01 par
value, and 5,000,000 shares of preferred stock. The preferred stock will be
issuable in series, and the elective rights and preferences and number of shares
in each series are to be established by the Board of Directors.
NOTE 9: STOCK OPTION PLAN
Under the stock option plan the Company may grant both incentive stock
options and nonqualified options on shares of common stock through the year
2006. Options may be granted on 2,000,000 shares of common stock to employees
and under certain conditions to non-employee directors. The stock option
committee has the authority to fix the terms and conditions upon which each
employee option is granted, but in no event shall the term exceed ten years or
be granted at less than 100% of the fair market value of the stock at the date
of grant. The Company granted, subject to the completion of the Offering,
options on 1,280,000 shares to officers and employees of the Company exercisable
at the initial offering price.
The Company intends to account for stock options for purposes of
determining net income in accordance with APB Opinion No. 25 "Accounting for
Stock Issued to Employees." SFAS No. 123 regarding stock option plans permits
the use of APB Opinion No. 25 but requires the inclusion of certain pro forma
disclosures in the footnotes starting in fiscal 1997.
NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to
concentrations of credit and market risk consist primarily of cash equivalents
and trade accounts receivable from the sale of games. By policy, the Company
places its cash equivalents only in high credit quality securities and limits
the amounts invested in any one security. At June 30, 1996, 46% of trade
accounts receivable are from sale of coin-operated video games to the Company's
distributors located primarily throughout the United States and Western Europe
and because of the number and geographic distribution, concentration is limited.
Foreign sales are typically made in U.S. dollars and typically on the basis of a
letter of credit. At times during the fiscal year accounts receivable from
certain major home video customers represent a significant amount of the
accounts receivable then outstanding.
The amounts reported for cash equivalents of $8,785,000 (which are
available for sale), dividend notes and long-term debt at June 30, 1996 are
considered by management to be the fair value of these financial instruments.
F-13
<PAGE> 76
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: LEASE COMMITMENTS
The Company leases certain office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 1996 as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997........................................... $ 2,309
1998........................................... 2,207
1999........................................... 2,216
2000........................................... 2,158
2001........................................... 2,283
Thereafter..................................... 7,635
-------
18,808
Less sublease income........................... (6,070)
-------
$ 12,738
=======
</TABLE>
Rent expense for fiscal 1996, 1995 and 1994 was $603,000, $307,000, and
$20,000, respectively, and was offset by sublease income of $134,000 for fiscal
1996. Aggregate future gross lease commitments of $16,619,000 were guaranteed by
Warner prior to the acquisition of Atari Games from Warner. One facility with a
gross lease commitment of $3,953,000 is listed with a realtor to be sublet. See
Note 4.
NOTE 12: EMPLOYEE RETIREMENT PLANS
The Company has two defined contribution employee retirement savings plans
and certain salaried employees participate in a WMS defined contribution plan.
These defined contribution plans cover certain hourly and salaried employees.
The Company's contribution to these plans are based on employee participation
with certain limitations. The Company or WMS may change any of the factors which
determine the Company's contribution to their respective plans. Contributions to
the defined contribution plans for fiscal 1996, 1995 and 1994 were $302,000,
$202,000 and $124,000, respectively.
NOTE 13: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal 1996 Quarters:
Revenues........................... 67,938 89,162 43,075 45,248
Gross Profit....................... 27,316 40,615 19,559 17,877
Research and development expense... 5,851 9,541 5,459 11,644
Net income......................... 7,170 11,598 6,249 212
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995
------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal 1995 Quarters:
Revenues........................... $34,253 $ 55,801 $41,587 $ 48,838
Gross Profit....................... 13,268 20,536 23,792 21,131
Research and development expense... 2,938 4,223 3,184 4,316
Net income......................... 2,977 7,841 10,637 7,684
</TABLE>
F-14
<PAGE> 77
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues for the quarters ended December 31, 1994, March 31, 1995, June 30,
1995 and March 31, 1996 included certain licensing revenues of $10,000,000,
$15,000,000, $2,000,000 and $10,000,000, respectively, that increased net income
by $5,184,000, $8,130,000, and $1,248,000, and $4,318,000, respectively.
The June 30, 1996 quarter included the operations of Atari Games after its
acquisition on March 29, 1996. Research and development expense increased to
$11,644,000 in the June 30, 1996 quarter in comparison to $5,459,00 in the March
31, 1996 quarter due primarily to inclusion of Atari Games.
NOTE 14: PROPOSED PUBLIC OFFERING
Midway has proposed an initial public offering of up to 15% of its total
common stock to be outstanding after the sale. The net proceeds are expected to
be approximately $98,800,000 and Midway intends to pay the previously declared
$50,000,000 dividend notes with interest at 6% and all other amounts, if any,
payable to WMS. The balance of the proceeds will be used for working capital.
F-15
<PAGE> 78
MIDWAY GAMES INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED JUNE 30, 1996
On March 29, 1996, a wholly-owned subsidiary of Midway Games Inc.
("Midway") acquired all the capital stock of Atari Games Corporation ("Atari
Games"). The acquisition is being accounted for by the purchase method of
accounting. See Note 4 to the Midway combined financial statements included
elsewhere in the prospectus for a description of the acquisition.
The unaudited pro forma condensed combined statement of income for the year
ended June 30, 1996 was prepared as if Atari Games was acquired as of July 1,
1995 and assimilation and exit activities occurred on that date and using the
unaudited statement of income of Atari Games for the nine months ended March 29,
1996 and the audited combined statement of income of Midway Games Inc. for the
year ended June 30, 1996, which includes the results of operations of Atari
Games for the three months ended June 30, 1996.
The unaudited pro forma combined financial information does not purport to
present the combined results of operations of Midway had the acquisition of
Atari Games actually occurred on the date indicated; nor does it purport to be
indicative of results that will be attained in the future.
The pro forma financial information should be read in conjunction with
Midway's historical combined financial statements and notes thereto for the year
ended June 30, 1996 included elsewhere in the prospectus.
<TABLE>
<CAPTION>
ATARI GAMES
MIDWAY CORPORATION
GAMES INC. NINE MONTHS PRO FORMA
YEAR ENDED ENDED YEAR ENDED
JUNE 30, MARCH 29, PRO FORMA JUNE 30,
1996 1996 ADJUSTMENTS 1996
----------- ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Home video.............................. $ 154,102 $ 57,389 $(4,840)(a) $ 206,651
Coin-operated video..................... 91,321 34,918 (3,441)(b) 122,798
------ ------ ------ ------
Total revenues............................ 245,423 92,307 (8,281) 329,449
Cost of sales............................. 140,056 60,835 (8,364)(c) 192,527
------ ------ ------ ------
Gross profit.............................. 105,367 31,472 83 136,922
Research and development expense.......... 32,495 17,747 (2,176)(d) 48,066
Selling expense........................... 22,815 14,012 (2,042)(e) 34,785
Administrative expense.................... 9,563 6,204 (2,323)(f) 13,444
Depreciation expense...................... -- 1,596 (1,596)(g) --
------ ------ ------ ------
Operating income.......................... 40,494 (8,087) 8,220 40,627
Interest and other income................. 1,079 961 (867)(h) 1,173
Interest expense.......................... (808) (306) (791)(i) (1,905)
------ ------ ------ ------
Income before tax provision............... 40,765 (7,432) 6,562 39,895
Provision for income taxes................ (15,536) (151) 499(j) (15,188)
------ ------ ------ ------
Net income................................ $ 25,229 $ (7,583) $ 7,061 $ 24,707
====== ====== ====== ======
</TABLE>
See notes to unaudited pro forma condensed combined statement of income
F-16
<PAGE> 79
MIDWAY GAMES INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME
The pro forma adjustments to the unaudited pro forma condensed combined
statement of income for the year ended June 30, 1996 includes adjustments for
the Atari Games nine months ended March 29, 1996 to reflect the exit activities
and assimilation activities to eliminate redundancies as well as adjustments
resulting from the allocation of the purchase price and the pro forma
combination of the two companies. The principal exit and assimilation activities
include: (1) the sale of the Irish subsidiary that manufactures video arcade
products which in the future will be manufactured in the Chicago plants of WMS
Industries Inc. ("WMS"), (2) the sale of the subsidiary in Japan that develops
and markets home video games which sales activity has been licensed to a
distributor, (3) elimination of the Simulation division that was not acquired by
Midway, (4) elimination of video platform development activity that was
discontinued, (5) eliminating plant costs by closing the leased manufacturing
plant in California and transferring production of coin-operated video games to
the existing Chicago plants of WMS and (6) eliminating duplicative sales and
administration costs by combining the sales, marketing and distribution of home
video games with Midway's home video operations.
(a) Home video revenues
<TABLE>
<S> <C>
Japan subsidiary sales net of royalty income.................... $(2,908,000)
California contract manufacturing sales......................... (1,932,000)
-----------
$(4,840,000)
===========
</TABLE>
(b) Coin-operated video revenues
<TABLE>
<S> <C>
Ireland subsidiary contract manufacturing sales................. $(2,911,000)
Simulation division sales....................................... (530,000)
-----------
$(3,441,000)
===========
</TABLE>
(c) Cost of sales
<TABLE>
<S> <C>
Japan subsidiary, net of intercompany royalty................... $(1,015,000)
Ireland subsidiary.............................................. (3,885,000)
Simulation division............................................. (184,000)
California contract manufacturing............................... (1,472,000)
California manufacturing plant closing net of incremental
Chicago plant costs........................................... (1,808,000)
-----------
$(8,364,000)
===========
</TABLE>
(d) Research and development expense
<TABLE>
<S> <C>
Japan subsidiary................................................ $ (484,000)
Simulation division............................................. (502,000)
Video platform development...................................... (733,000)
Home video games................................................ (457,000)
-----------
$(2,176,000)
===========
</TABLE>
F-17
<PAGE> 80
MIDWAY GAMES INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF INCOME -- (CONTINUED)
(e) Selling expense
<TABLE>
<S> <C>
Japan subsidiary................................................ $ (408,000)
Ireland subsidiary.............................................. (167,000)
Simulation division............................................. (594,000)
Home video games combination net of incremental Midway home
video operations costs........................................ (873,000)
-----------
$(2,042,000)
===========
</TABLE>
(f) Administrative expense
<TABLE>
<S> <C>
Japan subsidiary................................................ $ (256,000)
Ireland subsidiary.............................................. (461,000)
Simulation division............................................. (102,000)
Home video games combination net of incremental Midway home
video operations costs........................................ (1,504,000)
-----------
$(2,323,000)
===========
</TABLE>
(g) Elimination of Atari Games depreciation and amortization because its
property, plant and equipment is not included in the allocation of the
preliminary minimum purchase price.
(h) Interest and other income
<TABLE>
<S> <C>
Japan subsidiary................................................ $ (375,000)
Ireland subsidiary.............................................. (492,000)
-----------
$ (867,000)
===========
</TABLE>
(i) Reflects the interest expense of $1,097,000 on two notes issued as part of
the purchase price in part reduced by $306,000 of interest expense of Atari
Games. The interest rate on the Two Year Note was 6% and on the Four Year
Note was 7%.
(j) Reflects the additional tax benefit at statutory rates on the loss before
tax of Atari Games offset by the total of the pro forma adjustments.
F-18
<PAGE> 81
ATARI GAMES CORPORATION
(DBA TIME WARNER INTERACTIVE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, MARCH 31,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net revenues...................................................... $ 15,350 $ 6,288
Costs and expenses:
Cost of revenues................................................ 12,568 7,450
Sales and marketing............................................. 3,012 2,629
Research and development........................................ 6,022 8,059
General and administrative...................................... 693 2,009
Interest and other.............................................. (450) 322
------- --------
Total costs and expenses.......................................... 21,845 20,469
------- --------
Net loss.......................................................... $ (6,495) $(14,181)
======= ========
</TABLE>
See accompanying notes
F-19
<PAGE> 82
ATARI GAMES CORPORATION
(DBA TIME WARNER INTERACTIVE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, MARCH 31,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES............................. $ (3,448) $ (1,587)
INVESTING ACTIVITIES
Purchases of property and equipment............................... (95) (1,246)
------- -------
Net cash used in investing activities............................. (95) (1,246)
------- -------
FINANCING ACTIVITIES
Net cash advances from Parent Company............................. 8,537 1,295
------- -------
Net cash provided by financing activities......................... 8,537 1,295
------- -------
Net increase (decrease) in cash................................... 4,994 (1,538)
Cash at beginning of period....................................... 5,973 6,837
------- -------
Cash at end of period............................................. $ 10,967 $ 5,299
======= =======
</TABLE>
See accompanying notes
F-20
<PAGE> 83
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 29, 1996 AND MARCH 31, 1995
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals except for Note 2) considered necessary for a fair
presentation have been included. Due to the seasonality of the Atari Games
Corporation ("Atari Games") businesses, operating results for the three month
period ended March 29, 1996 are not necessarily indicative of the results that
may be expected for a twelve month period. For further information, refer to
Atari Games' audited consolidated financial statements as of December 31, 1995
and footnotes thereto included in Item 7 on Form 8-K filed by WMS Industries on
April 12, 1996.
2. INVENTORY VALUATION
In the months subsequent to the 1995 holiday selling season Atari Games
home video products did not sell through at the retail level in the quantities
anticipated. Management learned that the inventory of Atari Games products held
by its customers were in excess of previous estimates. In assessing the impact
of this condition, Atari Games management determined that the combined customer
and warehouse home video game inventories of certain product releases were in
excess of the potential sales of these products. In response to this condition
management recorded additional allowances for home video game returns and price
protection issues and additional inventory provisions which had a significant
negative impact on Atari Games operating results for the three month period
March 29, 1996.
3. SALE OF BUSINESS
On March 29, 1996, Atari Games was acquired by a wholly owned subsidiary of
WMS Industries Inc. from Warner Communications Inc., a wholly owned subsidiary
of Time Warner Inc.
F-21
<PAGE> 84
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Atari Games Corporation
(dba Time Warner Interactive)
We have audited the accompanying consolidated balance sheets of Atari Games
Corporation (dba Time Warner Interactive) as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the year ended December 31, 1995, the nine months
ended December 31, 1994 and the year ended March 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Atari Games
Corporation (dba Time Warner Interactive) at December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1995, the nine months ended December 31, 1994 and the year ended
March 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company has
incurred recurring operating losses and at December 31, 1995 had a working
capital deficiency and net capital deficiency. Their conditions raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 13 to the financial statements, effective April 1,
1994 the Company changed its method of accounting for prepaid royalties.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
March 22, 1996
F-22
<PAGE> 85
ATARI GAMES CORPORATION
(DBA TIME WARNER INTERACTIVE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,973 $ 6,837
Trade receivables, less allowance for doubtful accounts and returns
($8,152 in 1995 and $2,992 in 1994)............................... 25,646 18,861
Inventories.......................................................... 7,601 7,294
Prepaid expenses and other........................................... 1,458 --
-------- --------
Total current assets................................................... 40,678 32,992
Property and equipment, net............................................ 5,159 6,094
Other assets........................................................... 300 537
-------- --------
Total assets........................................................... $ 46,137 $ 39,623
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under bank line of credit................................. $ -- $ 28,000
Accounts payable..................................................... 10,855 4,411
Accrued liabilities.................................................. 16,543 12,037
Payable to Parent.................................................... 67,166 17,431
-------- --------
Total current liabilities.............................................. 94,564 61,879
Commitments and contingencies
Shareholders'equity (deficit):
Common stock, $.10 par value:
Authorized shares -- 200 in 1995 and 1994
Outstanding shares -- 100 in 1995 and 1994........................ 6,855 6,855
Accumulated deficit.................................................. (55,282) (29,111)
-------- --------
Total shareholders' equity (deficit)................................... (48,427) (22,256)
-------- --------
Total liabilities and sharesholders' equity (deficit).................. $ 46,137 $ 39,623
======== ========
</TABLE>
See accompanying notes
F-23
<PAGE> 86
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1994 1994
------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues........................................... $ 90,613 $ 55,313 $ 52,450
Costs and expenses:
Cost of revenues..................................... 61,640 42,790 38,211
Sales and marketing.................................. 17,983 10,825 8,516
Research and development............................. 25,050 14,942 14,167
General and administrative........................... 10,173 5,775 9,044
Interest and other................................... 1,837 120 6,663
-------- ------- -------
Total costs and expenses............................... 116,683 74,452 76,601
-------- ------- -------
Loss before (provision) benefit for income taxes....... 26,070 19,139 24,151
(Provision) benefit for income taxes................... (101) 1,787 (1,856)
-------- ------- -------
Net loss before cumulative effect of change in
accounting principle................................. 26,171 17,352 26,007
Cumulative effect of change in accounting for prepaid
royalty costs........................................ -- (1,368) --
-------- ------- -------
Net loss............................................... $ 26,171 $ 18,720 $ 26,007
======== ======= =======
</TABLE>
See accompanying notes
F-24
<PAGE> 87
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS SHAREHOLDERS'
----------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at March 31, 1993...................... 4,862 $6,855 $ 15,616 $ 22,471
Net loss for year ended March 31, 1994........ (26,007) (26,007)
------ ------ -------- --------
Balances at March 31, 1994...................... 4,862 6,855 (10,391) (3,536)
Purchase of all outstanding shares of common
stock by Time Warner Inc. and conversion to
100 shares................................. (4,762) -- -- --
Net loss for nine months ended
December 31, 1994.......................... -- -- (18,720) (18,720)
------ ------ -------- --------
Balances at December 31, 1994................... 100 6,855 (29,111) (22,256)
Net loss for year ended December 31, 1995..... (26,171) (26,171)
------ ------ -------- --------
Balances at December 31, 1995................... 100 $6,855 $(55,282) $ (48,427)
====== ====== ======== ========
</TABLE>
See accompanying notes
F-25
<PAGE> 88
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1994 1994
------------ ------------ ---------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss................................................ $(26,171) $(18,720) $ (26,007)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 1,885 1,761 1,848
Provision for doubtful accounts.................... 6,255 3,178 2,058
Gain on sale of equipment.......................... -- -- (558)
Changes in current assets and liabilities:
Trade receivables................................ (13,040) (16,608) (722)
Inventories...................................... (307) (1,971) 1
Tax refund receivable............................ -- -- 3,103
Deferred income taxes............................ -- -- 2,091
Prepaid expenses and other....................... (1,221) 1,743 (782)
Accounts payable................................. 6,444 1,533 (111)
Other accrued liabilities........................ 4,506 (1,927) 2,411
-------- -------- --------
Net cash used in operating activities................... (21,649) (31,011) (16,668)
INVESTING ACTIVITIES
Purchases of property and equipment..................... (950) (3,199) (2,080)
Proceeds from sale of property and equipment............ -- -- 334
-------- -------- --------
Net cash used in investing activities................... (950) (3,199) (1,746)
FINANCING ACTIVITIES
Proceeds from bank line of credit....................... -- 20,000 8,000
Cash advances from Parent Company....................... 49,735 12,681 4,750
Repayment of borrowings under bank line of credit....... (28,000) -- --
-------- -------- --------
Net cash provided by financing activities............... 21,735 32,681 12,750
-------- -------- --------
Net decrease in cash.................................... (864) (1,529) (5,664)
Cash at beginning of period............................. 6,837 8,366 14,030
-------- -------- --------
Cash at end of period................................... $ 5,973 $ 6,837 $ 8,366
======== ======== ========
</TABLE>
See accompanying notes
F-26
<PAGE> 89
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES
OPERATIONS
Atari Games Corporation (dba Time Warner Interactive) (the "Company")
develops, manufactures, markets and distributes video games for the arcade and
consumer market. The Company is a wholly-owned subsidiary of Warner
Communications Inc. ("Parent Company") which is a wholly-owned subsidiary of
Time Warner Inc.
BASIS OF PRESENTATION
The Company has incurred recurring operating losses and at December 31,
1995, has working capital and shareholders' equity deficiencies. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. The Company has historically relied on advances by its
parent to fund its cash needs. Management has reduced operating expenses as
exemplified by the June 1995 headcount reduction and the elimination of several
sales offices. In addition, the Company has re-engineered the product
development process while reducing costs. The Company's Parent signed an
agreement on February 23, 1996, to sell all of the outstanding common stock of
the Company to Williams Interactive Inc. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Time Warner Interactive and
its wholly-owned subsidiaries. The Company has export sales from the United
States and also has operations in Ireland and Japan. Revenues from these foreign
sources have not been significant. Intercompany accounts and transactions are
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Statement is effective for years beginning after December 15,
1995. Management has not determined what impact, if any, there will be on the
financial statements as a result of adopting FAS 121.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Provisions are made in each period for the estimated effect of inventory
obsolescence. The actual effect of inventory obsolescence may differ from the
Company's estimates, and such differences could be material to the financial
statements.
F-27
<PAGE> 90
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided over the estimated
useful lives of the assets (two to five years) using both straight-line and
accelerated methods. Leasehold improvements are amortized over the lesser of the
estimated useful life or the lease term.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of product, net of allowances
for returns. Revenue derived from variable royalties pursuant to license
agreements is recognized as cash is received.
The Company sells video software games through distributors and retailers
and sells coin-operated video games through distributors and direct to arcade
operators. The Company provides allowances for estimated credit losses and price
protection adjustments. Actual credit losses, returns and price protection
adjustments may differ from the Company's estimates, and such differences could
be material to the financial statements.
FOREIGN CURRENCY TRANSLATION
Generally, the assets and liabilities of the Company's wholly-owned foreign
subsidiaries, denominated in the local currency, are remeasured in U.S. dollars
(the functional currency) at the year end exchange rate, except for certain
nonmonetary assets, which are remeasured at the approximate average exchange
rates prevailing when acquired. Income and expense items are remeasured at
average exchange rates prevailing during the year, except that expenses relating
to certain nonmonetary assets are translated at approximate historical rates.
Foreign currency translation gains and losses have not been material.
Transaction gains and losses, which have also not been material, are included in
net loss in the period incurred.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------ ------
<S> <C> <C>
Raw materials.......................................... $3,183 $4,305
Work in process........................................ 1,456 1,294
Finished goods......................................... 2,962 1,695
------ ------
$7,601 $7,294
====== ======
</TABLE>
F-28
<PAGE> 91
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Machinery and equipment........................................ $15,331 $14,488
Furniture and fixtures......................................... 1,200 1,131
Leasehold improvements......................................... 1,128 1,112
Land and buildings............................................. 1,081 1,059
-------- --------
18,740 17,790
Accumulated depreciation and amortization...................... (13,581) (11,696)
-------- --------
$ 5,159 $ 6,094
======== ========
</TABLE>
4. BANK LINE OF CREDIT
The Company had a $30,000,000 line of credit with a bank that expired
December 31, 1995. Borrowings were guaranteed by the Parent Company and bore
interest at the London Interbank Offering Rate or the bank's reference rate plus
the applicable margin of 1% or 0%, respectively. The Company borrowed on the
line of credit during 1994 with interest rates ranging from 6.625% to 7.187%. At
December 31, 1994, the Company had outstanding borrowings of $28,000,000 under
the line of credit which was paid in July 1995.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
------- -------
<S> <C> <C>
Payroll and related benefits................................... $ 1,941 $ 1,125
Accrued royalties.............................................. 2,268 999
Nintendo surcharge (Note 11)................................... 3,750 4,000
Marketing development funds.................................... 1,503 760
Price protection accrual....................................... 3,659 1,704
Other.......................................................... 3,422 3,449
-------- --------
$16,543 $12,037
======== ========
</TABLE>
6. PAYABLE TO PARENT COMPANY
The Company has received cash from its Parent Company from time to time to
fund operations. For the year ended December 31, 1995 and the nine months ended
December 31, 1994, the Company paid $300,000 and $279,000, respectively, in
interest to its Parent Company. Effective September 1995, the arrangement was
amended so that no interest would be charged on amounts advanced by the Parent
Company.
7. INCOME TAXES
In the fiscal year ended March 31, 1994, the Company retroactively adopted
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), and has restated all prior years. The Company previously
accounted for income taxes under Accounting Principles Board Opinion No. 11. FAS
109 requires the recognition of deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
F-29
<PAGE> 92
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and their respective tax bases. In addition, FAS 109 requires the recognition of
future tax benefits, such as net operating loss and credit carryforwards, to the
extent that realization of such benefits is more likely than not.
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Federal:
Current...................................... $(50) $ (1,842) $ (462)
Deferred..................................... -- -- 2,091
---- ------- ------
(50) (1,842) 1,629
Foreign:
Current...................................... 151 55 227
---- ------- ------
Provision (benefit) for income taxes........... $101 $ (1,787) $1,856
==== ======= ======
</TABLE>
For the year ended December 31, 1995 and the nine months ended December 31,
1994, the current federal benefit provision reflects the reversal of previously
accrued taxes. For the year ended March 31, 1994, the federal provision for
income taxes reflects the reversal of previously recorded deferred tax assets
for which realization was deemed not probable because of the Company's operating
loss. Foreign taxes represent taxes paid by the Company's European subsidiary.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1994 1994
------------ ------------ ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.............. $ 2,743 $ 2,743 $ 3,310
R & D credit carryforward.................... 500 500 --
Depreciation and amortization................ 668 681 1,321
Inventory obsolescence provisions............ 3,438 4,453 1,229
Accrued liabilities.......................... 6,744 3,835 1,816
Others....................................... 160 160 551
-------- -------- -------
Total deferred tax assets...................... 14,253 12,372 8,227
Valuation allowance............................ (14,253) (12,372) (8,227)
-------- -------- -------
Total net deferred tax assets.................. $ -- $ -- $ --
======== ======== =======
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets
based on an assessment of realization as a separate company, taking into
consideration the Company's history of operating losses.
The net change in the valuation allowance for the year ended March 31,
1994, was a net increase of $5,693,000.
The Company is included in the consolidated federal income tax return of
Time Warner Inc. As a result, losses for income tax purposes of approximately
$20,000,000 and $6,000,000 generated in 1995 and 1994,
F-30
<PAGE> 93
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, have been used in the consolidated returns to offset the
consolidated income and are not available as carryforwards.
At December 31, 1995, the Company has federal net operating loss
carryforwards for federal income tax purposes of approximately $7,800,000,
expiring in 2008, and research and development credit carryforwards of
approximately $500,000, expiring in 1998 through 1999. The credit and loss
carryforwards are available only to offset the separate income and tax
liabilities of Time Warner Interactive.
8. COMMON STOCK
On September 23, 1994, the Company's majority shareholder, Warner
Communications Inc., purchased the 21% of the Company's common stock that it did
not already own. In connection with this transaction, the entire amount of the
then outstanding common stock was converted into 100 shares of outstanding
common stock.
9. COMMITMENTS
The Company leases certain facilities under operating leases. Future
operating lease commitments are due as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1996..................................... $ 2,490
1997..................................... 2,560
1998..................................... 2,678
1999..................................... 2,678
2000..................................... 2,174
2001 and thereafter...................... 8,349
-------
20,929
Less sublease income..................... (6,416)
-------
$14,513
=======
</TABLE>
Rent expense was $1,274,000, $1,126,000 and $1,914,000 for the year ended
December 31, 1995, the nine months ended December 31, 1994 and the year ended
March 31, 1994, respectively.
10. EMPLOYEE BONUS AND RETIREMENT PLANS
The Company maintains the Atari Games Corporation 401(k) Plan, which is a
tax-deferred savings and retirement plan covering all domestic employees. The
Company's contribution to the plan is based on matching employee deferred
contributions up to a certain specified level. Amounts contributed by the
Company to the plan were approximately $394,000, $204,000 and $309,000 for the
year ended December 31, 1995, the nine months ended December 31, 1994 and the
year ended March 31, 1995, respectively.
The Company's subsidiary in Ireland maintains a noncontributory defined
benefit pension plan covering substantially all of its employees. The plan
provides pension benefits based on each employee's years of credited service and
average earnings. The subsidiary's funding policy is to contribute amounts to
the plan sufficient to meet the minimum funding requirements under Irish law.
The plan assets are invested primarily
F-31
<PAGE> 94
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in equity and fixed income securities. The pension cost for the Irish pension
plan includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during the year... $ 65,000 $ 45,000 $ 25,000
Interest cost on projected benefit obligation...... 83,000 58,000 32,000
Actual return on plan assets....................... (89,000) (64,000) (35,000)
-------- -------- --------
Net pension cost................................... $ 59,000 $ 39,000 $ 22,000
======== ======== ========
</TABLE>
The funded status of the pension plan at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995
----------
<S> <C>
Actuarial present value of accumulated benefit obligation:
Vested................................................................. $ 475,000
Nonvested.............................................................. 90,000
----------
$ 565,000
==========
Plan assets at fair value................................................ $1,140,000
Actuarial present value of projected benefit obligation.................. (989,000)
----------
Plan assets in excess of projected benefit obligation.................... 151,000
Unamortized balance of net pension transition asset...................... (6,000)
Unrecognized net gain (loss)............................................. (100,000)
----------
Prepaid pension costs included in payroll-related accruals............... $ 45,000
==========
</TABLE>
The expected long-term rate of return on plan assets, the discount rate and
the rate of compensation increase, which are used in the accounting for defined
benefit plans, were 8.5%, 8% and 6% in 1995 and 8%, 8% and 6% in 1994.
11. LITIGATION
On March 24, 1994, the Company settled certain litigation with Nintendo of
America Inc. and its parent company, Nintendo Co., Ltd. ("Nintendo").
As part of the settlement, the Company paid $2.5 million to Nintendo
representing compensation for costs and expenses incurred in litigation. The
Company must also pay Nintendo $4 million, representing compensation for its
costs and expenses incurred in litigation, through a $1 surcharge on each
Nintendo platform product sold through December 31, 1998, subject to certain
minimum annual amounts. The Company accrued the future $4 million in other
accrued liabilities and other expense in the year ended March 31, 1994. The
parties also entered into a licensing agreement under which the Company may sell
video games that operate on the Nintendo video game platforms.
In addition, the Company paid $2.25 million to Atari Corporation, a related
company through minority ownership by the Parent Company, as an inducement for
executing a general release of Nintendo and the Company from future claims and
litigation. Both payments were funded by the Parent Company in exchange for a
promissory note from the Company. This promissory note was reclassified to
payable to the Parent Company in September 1995.
The Company is involved from time to time in other disputes and litigation
in the ordinary course of business. In the opinion of management, resolution of
these matters is not expected to have a material adverse effect on the financial
position of the Company. However, depending on the amount and timing, an
F-32
<PAGE> 95
ATARI GAMES CORPORATION
(dba TIME WARNER INTERACTIVE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unfavorable resolution of a matter could materially affect the Company's future
results of operations or cash flows in a particular period.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes was $17,000 in 1995, $211,000 for the nine
months ended December 31, 1994 and $158,000 for the year ended March 31, 1994.
Cash paid for interest was $1,028,000 in 1995, $721,000 for the nine months
ended December 31, 1994 and $100,000 for the year ended March 31, 1994.
13. CHANGE IN ACCOUNTING PRINCIPLE
Effective April 1, 1994, the Company changed its accounting policy for the
treatment of prepaid royalty costs. The Company previously capitalized prepaid
royalties and expensed them as units were shipped. Under the new policy, the
Company expenses all prepaid royalties when paid. In the opinion of management,
the expensing of prepaid royalties when paid is a preferable method as it
increases the focus on controlling costs associated with the outside development
of titles and is a prevalent method in the Company's industry. The cumulative
effect of this change in accounting policy resulted in a charge to earnings of
$1,368,000 in the nine months ended December 31, 1994.
14. SUBSEQUENT EVENT
On February 23, 1996, the Parent Company signed a Stock Purchase Agreement
under which it will sell all of the Company's outstanding common stock to
Williams Interactive Inc.
F-33
<PAGE> 96
[COLOR PHOTOS]
<PAGE> 97
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH AN OFFER IN
SUCH JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR IN ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CURRENT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................... 3
Risk Factors.......................................... 7
The Company........................................... 13
Recent Acquisitions................................... 13
Use of Proceeds....................................... 14
Dilution.............................................. 15
Dividend Policy....................................... 15
Capitalization........................................ 16
Selected Financial Data............................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 18
Industry Overview..................................... 26
Business.............................................. 29
Management............................................ 41
Certain Transactions.................................. 47
Principal Stockholders................................ 48
Arrangements With WMS................................. 51
Description of Capital Stock.......................... 53
Shares Eligible for Future Sale....................... 58
Underwriting.......................................... 59
Legal Matters......................................... 60
Experts............................................... 60
Additional Information................................ 60
Index to Financial Statements......................... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
5,100,000 SHARES
MIDWAY GAMES INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
OPPENHEIMER & CO., INC.
HAMBRECHT & QUIST
UBS SECURITIES
WASSERSTEIN PERELLA SECURITIES, INC.
, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering, all of which shall
be borne by the Registrant, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission fee................................... $44,493.10
NASD filing fee.......................................................... *
New York Stock Exchange filing fee....................................... *
Blue Sky fees and expenses............................................... *
Transfer Agent fees...................................................... *
Printing and engraving expenses.......................................... *
Legal fees and expenses.................................................. *
Accountants' fees and expenses........................................... *
Miscellaneous............................................................ *
--------
Total.......................................................... $ *
========
</TABLE>
- ---------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's authority to indemnify its officers and directors is
governed by the provisions of Section 145 of the General Corporation Law of the
State of Delaware (the "DGCL") and by the Certificate of Incorporation of the
Registrant. The Certificate of Incorporation of the Registrant provides that the
Registrant shall, to the fullest extent permitted by Section 145 of the DGCL,
(i) indemnify any and all persons whom it shall have power to indemnify under
said section from and against any and all of the expenses, liabilities or other
matters referred to in or covered by said section, and (ii) advance expenses to
any and all said persons, and that such indemnification and advances shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in their official capacities and as to
action in another capacity while holding such offices, and shall continue as to
persons who have ceased to be directors, officers, employees or agents and shall
inure to the benefit of the heirs, executors and administrators of such person.
In addition, the Certificate of Incorporation of the Registrant provides for the
elimination of personal liability of directors of the Registrant to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, to the fullest extent permitted by the DGCL, as amended and
supplemented.
The Registrant has entered into indemnity agreements with each of its
directors and executive officers whereby the Registrant will, in general,
indemnify such directors and executive officers, to the extent permitted by the
Registrant's Certificate of Incorporation and the laws of the State of Delaware,
against any expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement incurred in connection with any actual or threatened action
or proceeding to which such director or officer is made or threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the Registrant.
Reference is made to the Underwriting Agreement filed as Exhibit 1 hereto
which contains provisions for the indemnification of officers, directors and
controlling persons of the Registrant under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable
II-1
<PAGE> 99
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
*1 Form of Underwriting Agreement.
*2.1 Rights Agreement dated as of , 1996 between the Registrant and The Bank
of New York.
*2.2 Form of Certificate of Designations of Series A Preferred Stock (included as Exhibit
A to Exhibit 2.1 hereof).
*2.3 Specimen Form of Rights Certificate (included as Exhibit B to Exhibit 2.1 hereof).
*2.4 Summary of Rights Plan (included as Exhibit C to Exhibit 2.1 hereof).
*3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant.
*3.2 Form of Amended and Restated By-laws of the Registrant.
*4.1 Specimen of Common Stock Certificate.
*5 Opinion of Shack & Siegel, P.C., counsel for the Registrant.
*10.1 Manufacturing and Services Agreement dated as of July 1, 1996 between WMS Industries
Inc. and the Registrant.
*10.2 Tax Sharing Agreement dated as of July 1, 1996 among WMS Industries Inc., Midway
Games Inc., Midway Home Entertainment Inc., Midway Interactive Inc., Atari Games
Corporation and Tengen Inc.
*10.3 Registration Rights Agreement dated as of July 1, 1996 between WMS Industries Inc.
and the Registrant.
*10.4 Patent License Agreement dated as of July 1, 1996 between the Registrant and
Williams Electronics Games, Inc.
</TABLE>
<TABLE>
<S> <C>
*10.5 Employment Agreement dated as of July 1, 1996 between Mr. Neil D. Nicastro and the
Registrant.
*10.6 Employment Agreement dated April 29, 1994 between Byron C. Cook and Midway Home
Entertainment Inc.
*10.7 Stock Option Plan of the Registrant.
*10.8 Form of Indemnity Agreement authorized to be entered into between the Registrant and
each Officer and Director of the Registrant.
+*10.9 GTIS Master Option and License Agreement by and among WMS Industries, Inc., Williams
Electronics Games, Inc., the Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated December 28, 1994.
+*10.10 Amendment to GTIS Master Option and License Agreement by and among WMS Industries
Inc., Williams Electronics Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT Interactive Software Corp. dated March 31, 1995.
+*10.11 Second Amendment to GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated March 27, 1996.
+*10.12 GTIS Master Option and License Agreement (Home Video Games) by and among WMS
Industries Inc., Williams Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated March 31, 1995.
+*10.13 Amendment to GTIS Master Option and License Agreement (Home Video Games) by and
among WMS Industries Inc., Williams Electronics Games, Inc., the Registrant and
Midway Home Entertainment Inc., and GT Interactive Software Corp. dated March 27,
1996.
+*10.14 Master Option and License Agreement for Atari Home Video Games dated March 27, 1996,
between WMS Industries Inc. and GT Interactive Software Corp.
+*10.15 Master Option and License Agreement for Atari PC Games dated March 27, 1996, between
WMS Industries Inc. and GT Interactive Software Corp.
#21 Subsidiaries of the Registrant.
*23.1 Consent of Shack & Siegel, P.C. (included in Exhibit 5 hereof).
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
23.2 Consent of Ernst & Young LLP.
#24 Power of Attorney.
#27 Financial Data Schedule (filed with EDGAR version only).
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment requested.
# Previously filed.
(b) Financial Statement Schedules
The following combined financial statement schedules are included in Part
II of this Registration Statement and should be read in conjunction with the
combined financial statements and notes thereto:
Report of Independent Auditors........................................ F-2
Schedule VIII -- Valuation and Qualifying Accounts.................... S-2
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denomination and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement (333-11919)
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on October 4, 1996.
MIDWAY GAMES INC.
(Registrant)
By: /s/ NEIL D. NICASTRO
------------------------------------
Neil D. Nicastro,
Chairman of the Board, President,
Chief Executive Officer
and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement (333-11919) has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ NEIL D. NICASTRO Chairman of the Board, President, October 4, 1996
- ------------------------------------------ Chief Executive Officer and
Neil D. Nicastro Chief Operating Officer
(Principal Executive Officer)
and Director
/s/ HAROLD H. BACH, JR.* Executive Vice President -- October 4, 1996
- ------------------------------------------ Finance, Treasurer and
Harold H. Bach, Jr. Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
and Director
/s/ BYRON C. COOK* Executive Vice President -- October 4, 1996
- ------------------------------------------ Home Video and Director
Byron C. Cook
/s/ KENNETH J. FEDESNA* Executive Vice President -- October 4, 1996
- ------------------------------------------ Coin-Op Video and Director
Kenneth J. Fedesna
/s/ LOUIS J. NICASTRO* Director October 4, 1996
- ------------------------------------------
Louis J. Nicastro
* By: /s/ NEIL D. NICASTRO October 4, 1996
- ------------------------------------------
Neil D. Nicastro
Attorney-In-Fact
</TABLE>
II-4
<PAGE> 102
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS...........................S-2
S-1
<PAGE> 103
MIDWAY GAMES INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1995, 1994
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- ---------------------------- ---------- ------------------------- ---------- ----------
BALANCE AT DEDUCTIONS-
BEGINNING CHARGED TO CHARGED TO AMOUNTS BALANCE AT
OF COSTS AND OTHER WRITTEN END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS OFF PERIOD
- ---------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for receivables:
1996...................... $1,078,000 $3,358,000 $ -- $3,441,000 $ 995,000
1995...................... $ -- $3,218,000 $ -- $2,140,000 $1,078,000
1994...................... $ 143,000 $ -- $ -- $ 143,000 $ --
</TABLE>
S-2
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------- ------------------------------------------------------------------------ -----------
<S> <C> <C>
*1 Form of Underwriting Agreement..........................................
*2.1 Rights Agreement dated as of , 1996 between the Registrant
and The Bank of New York................................................
*2.2 Form of Certificate of Designations of Series A Preferred Stock
(included as Exhibit A to Exhibit 2.1 hereof)...........................
*2.3 Specimen Form of Rights Certificate (included as Exhibit B to Exhibit
2.1 hereof).............................................................
*2.4 Summary of Rights Plan (included as Exhibit C to Exhibit 2.1 hereof)....
*3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant..............................................................
*3.2 Form of Amended and Restated By-laws of the Registrant..................
*4.1 Specimen of Common Stock Certificate....................................
*5 Opinion of Shack & Siegel, P.C., counsel for the Registrant.............
*10.1 Manufacturing and Services Agreement dated as of July 1, 1996 between
WMS Industries Inc. and the Registrant..................................
*10.2 Tax Sharing Agreement dated as of July 1, 1996 among WMS Industries
Inc., Midway Games Inc., Midway Home Entertainment Inc., Midway
Interactive Inc., Atari Games Corporation and Tengen Inc. ..............
*10.3 Registration Rights Agreement dated as of July 1, 1996 between WMS
Industries Inc. and the Registrant......................................
*10.4 Patent License Agreement dated as of July 1, 1996 between the Registrant
and Williams Electronics Games, Inc. ...................................
</TABLE>
<TABLE>
<S> <C> <C>
*10.5 Employment Agreement dated as of July 1, 1996 between Mr. Neil D.
Nicastro and the Registrant.............................................
*10.6 Employment Agreement dated April 29, 1994 between Byron C. Cook and
Midway Home Entertainment Inc. .........................................
*10.7 Stock Option Plan of the Registrant.....................................
*10.8 Form of Indemnity Agreement authorized to be entered into between the
Registrant and each Officer and Director of the Registrant..............
+*10.9 GTIS Master Option and License Agreement by and among WMS Industries,
Inc., Williams Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated December 28,
1994....................................................................
+*10.10 Amendment to GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., the Registrant and
Midway Home Entertainment Inc., and GT Interactive Software Corp. dated
March 31, 1995..........................................................
+*10.11 Second Amendment to GTIS Master Option and License Agreement by and
among WMS Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT Interactive
Software Corp. dated March 27, 1996.....................................
+*10.12 GTIS Master Option and License Agreement (Home Video Games) by and among
WMS Industries Inc., Williams Electronics Games, Inc., the Registrant
and Midway Home Entertainment Inc., and GT Interactive Software Corp.
dated March 31, 1995....................................................
+*10.13 Amendment to GTIS Master Option and License Agreement (Home Video Games)
by and among WMS Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT Interactive
Software Corp. dated March 27, 1996.....................................
+*10.14 Master Option and License Agreement for Atari Home Video Games dated
March 27, 1996, between WMS Industries Inc. and GT Interactive Software
Corp. ..................................................................
+*10.15 Master Option and License Agreement for Atari PC Games dated March 27,
1996, between WMS Industries Inc. and GT Interactive Software Corp. ....
#21 Subsidiaries of the Registrant..........................................
*23.1 Consent of Shack & Siegel, P.C. (included in Exhibit 5 hereof)..........
23.2 Consent of Ernst & Young LLP............................................
#24 Power of Attorney.......................................................
#27 Financial Data Schedule (filed with EDGAR version only).................
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment requested.
# Previously filed.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the combined financial statements of Midway Games Inc.
dated September 12, 1996 and our report on the consolidated financial statements
of Atari Games Corporation dated March 22, 1996, in Amendment No. 1 to the
Registration Statement on Form S-1 (333-11919) and related Prospectus of Midway
Games Inc. for the registration of 5,865,000 shares of its common stock.
We also consent to the incorporation by reference herein of our report
dated September 12, 1996 with respect to the financial statement schedule of
Midway Games Inc. for the years ended June 30, 1996, 1995 and 1994 included in
Amendment No. 1 to the Registration Statement on Form S-1 (333-11919) filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
October 3, 1996
