<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
REGISTRATION NO. 333-11919
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 18, 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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</TABLE>
(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 NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<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 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 eight 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
3
<PAGE> 5
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 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 revenues 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
<PAGE> 6
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>
- ---------------
(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.
RISK FACTORS
An investment in the Shares being offered by this Prospectus involves
certain risks associated with the Company's business, including the following:
(i) the Company's dependence on new product introductions and the possibility of
delays in the introduction of new products; (ii) the Company's ability to
anticipate and adapt to emerging technologies for its products; (iii) reliance
by the Company on certain of its products; (iv) fluctuations in operating
results and seasonality; (v) competition; (vi) product returns and price
adjustments; (vii) the Company's dependence on dedicated platform manufacturers;
(viii) certain manufacturing risks; (ix) the Company's ability to procure
intellectual property licenses and approvals; (x) dependence on key personnel;
(xii) voting control of the Company by WMS; (xiii) various conflicts of interest
between the Company and WMS which could arise following the Offering; (xiv) the
Company's lack of operating history as a stand-alone company; (xv) the Company's
various continuing arrangements with WMS; (xvi) the absence of a public market
and the possible volatility of the price of the Common Stock; (xvii) the
immediate dilution in the tangible net book value per share of Common Stock;
(xviii) the Company's dividend policy; (xix) various anti-takeover provisions;
and (xx) the number of shares of Common Stock eligible for future sale. For a
fuller discussion of these risk factors, see "Risk Factors."
------------------------
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.
------------------------
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.
5
<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 historical financial statements of the Company for
the foregoing periods give effect as of July 1, 1996 to certain transfers of the
portions of the pinball operations of WMS that were conducted by the Company and
the transfer to the Company of the stock of certain subsidiaries of WMS that
conduct the home video games business and the Atari Games business. See Note 2
to the Combined Financial Statements of the Company. 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 Financial Condition
and Results of Operations," 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.
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<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
======= ======== ======== ======== ======= =======
Pro forma earnings per share(3)..... $ .19 $ .47 $ .84 $ .87 $ .76 $ .74
======= ======== ======== ======== ======= =======
Pro forma shares outstanding(3)..... 33,400 33,400 33,400 33,400 33,400 33,400
======= ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<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(4)................................................... 50,000 --
Long-term debt(5)................................................... 7,863 7,863
Stockholders' equity................................................ 5,488(6) 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) Pro forma earnings per share and shares outstanding give effect to a 33,400
for one stock split in the Company's Common Stock to be effected immediately
prior to the Offering.
(4) The Dividend Notes (as defined) were distributed to WMS as sole stockholder
during fiscal 1996.
(5) Long-term debt consists of a portion of the purchase price for Atari Games.
(6) 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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<PAGE> 9
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.
The acquisition agreements with respect to Atari Games and Tradewest both
provide that a portion of each respective purchase price is payable in the
future based on certain contingencies. If the maximum contingent purchase prices
of Atari Games and Tradewest are paid, annual goodwill amortization charged to
operations would increase by approximately $2,641,000 ($1,587,000 on an after
tax basis) as compared to the amount charged to operations in fiscal 1996. See
"Recent Acquisitions."
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.
8
<PAGE> 10
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 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."
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<PAGE> 11
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 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.
The Company has entered into a five year employment agreement with Neil D.
Nicastro effective July 1, 1996, subject to the completion of the Offering,
pursuant to which Mr. Nicastro will be employed as the Company's President and
Chief Executive Officer. In addition, the Company has entered into an employment
agreement expiring May 1, 1998 with Byron C. Cook, pursuant to which Mr. Cook
serves as President and Chief Operating Officer of the Company's home video
games subsidiary. See "Management -- Employment Agreements."
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 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."
Mr. Neil D. Nicastro, the Chairman of the Board, President, Chief Executive
Officer and Chief Operating Officer of the Company is also the President, Chief
Executive Officer and Chief Operating Officer of WMS. Mr. Harold H. Bach, Jr.,
Mr. Kenneth J. Fedesna and Ms. Barbara M. Norman are officers of the Company and
are full-time employees of WMS and various of its affiliates. Mr. Bach and Mr.
Fedesna are also directors of the Company. 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. WMS has designated, among others, the
following additional persons intended to become
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<PAGE> 12
directors of the Company upon completion of the offering: Messrs. William C.
Bartholomay, William E. McKenna, Norman J. Menell, Harvey Reich and Ira
Sheinfeld. Each of the foregoing persons is also a director of WMS. See
"Management" and "Arrangements With WMS."
LACK OF OPERATING HISTORY AS A STAND-ALONE COMPANY
The Company has been a wholly-owned subsidiary of WMS since 1988, and prior
to the Offering has not operated as a stand-alone business. Although the Company
believes that cash flow from operations, net cash proceeds of the Offering
(after deducting expenses and payment of the Dividend Notes) and amounts
available under the bank line of credit into which the Company intends to enter
prior to completion of the Offering will be adequate to fund the Company's
present anticipated needs, there can be no assurance that the Company's
financial resources will be adequate for its continuing operations.
Additionally, although WMS will continue to own approximately 86.8% (85.1% if
the Underwriters' over-allotment option is exercised in full) of the outstanding
Common Stock after the Offering, WMS is not contractually obligated to provide
the Company with any financial support in the future.
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 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
interactive 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
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<PAGE> 13
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 dilution of $18.88 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. 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. 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 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
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<PAGE> 14
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."
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<PAGE> 15
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 cost of integrating the operations of Atari
Games with the Company are included within an aggregate liability of $4.5
million which was recorded as part of the purchase price of Atari Games.
Revenues from discontinued operations of Atari Games have been eliminated in the
pro forma financial statements included elsewhere in this Prospectus. The
integration activities described above are intended primarily to eliminate
duplication with the Company's existing facilities and operations, and the
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<PAGE> 16
Company does not believe that its future revenues will be affected in any
material respect as a result of the termination of these operations. The pro
forma financial information 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 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. In the event that Warner and the
Company cannot agree on the balance sheet of Atari Games at March 29, 1996, the
purchase agreement provides for mandatory arbitration of this matter. If the
outcome of the arbitration is unfavorable to the Company and the loss provisions
included in the March 29, 1996 balance sheet (as to which Warner has requested
additional information which the Company is in the process of preparing) are not
appropriate, then the amount of goodwill recognized in the purchase may
increase.
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, after such fourth anniversary, to either (i) transfer such products and
intellectual property to Warner if the obligations under the Four Year Note have
not been discharged out of the specific sources from which it is payable or (ii)
transfer the capital stock of Atari Games back to Warner if the Company elects
not to pay the Two Year Note. 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 to support seasonal increases in accounts receivable and
inventory and for 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. The Divided Notes
bear interest at a rate of 6% per annum and are payable on demand. 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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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.
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<PAGE> 18
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>
17
<PAGE> 19
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 historical financial statements of the Company for
the foregoing periods give effect as of July 1, 1996 to certain transfers of the
portions of the pinball operations of WMS that were conducted by the Company and
the transfer to the Company of the stock of certain subsidiaries of WMS that
conduct the home video games business and the Atari Games business. See Note 2
to the Combined Financial Statements of the Company. 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 Financial Condition
and Results of Operations," 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
======= ======== ======== ======== ======= =======
Pro forma earnings per
share(3)................ $ .19 $ .47 $ .84 $ .87 $ .76 $ .74
======= ======== ======== ======== ======= =======
Pro forma shares
outstanding(3).......... 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(4)......... -- -- -- -- 50,000 --
Long-term debt(5)......... -- -- -- -- 7,863 7,863
Stockholders' equity...... 3,317(6) 15,580(6) 37,677(6) 49,752(6) 5,488(6) 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) Pro forma earnings per share and shares outstanding give effect to a 33,400
for one stock split in the Company's Common Stock to be effected immediately
prior to the Offering.
(4) The Dividend Notes were distributed to WMS as sole stockholder during fiscal
1996.
(5) Long-term debt consists of a portion of the purchase price for Atari Games.
(6) Represents WMS' net investment as sole stockholder of the Company prior to
the Offering.
18
<PAGE> 20
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 or price increases.
During fiscal 1994, 1995 and 1996, unit prices for the Company's coin-operated
video games did not change materially. 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.
19
<PAGE> 21
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. According to reports by
the Toy Retail Sales Tracking Service ("TRSTS"), sales of home video games for
32- and 64-bit platforms in the United States increased from 8.9% of total home
video game sales for the first half of 1995 to 40.0% for the first half of 1996
and 50.9% for the month of June 1996. Sales of home video games for 16-bit
platforms decreased from 72.6% of total home video game sales for the first half
of 1995 to 48.1% for the first half of 1996 and 37.0% during the month of June
1996. 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. A shift in the Company's product mix to home video games will
generally have a positive impact on operating income, notwithstanding an
increase in selling expense as a percentage of revenues, due to the concomitant
increase in gross profit margin.
20
<PAGE> 22
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.
21
<PAGE> 23
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.
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
22
<PAGE> 24
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.
23
<PAGE> 25
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
======= ======= ======= =======
Pro forma earnings per share........................ $ .21 $ .35 $ .19 $ .01
======= ======= ======= =======
Pro forma 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
======= ======= ======= =======
Pro forma earnings per share........................ $ .09 $ .23 $ .32 $ .23
======= ======= ======= =======
Pro forma shares outstanding........................ 33,400 33,400 33,400 33,400
======= ======= ======= =======
</TABLE>
24
<PAGE> 26
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 anticipated levels of inventories and accounts receivable required
in the operation of the business and the Company's other presently anticipated
needs, as well as pay any amounts due under the Tradewest and Atari Games
acquisition agreements.
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
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<PAGE> 27
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."
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<PAGE> 28
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.
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<PAGE> 29
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> 30
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> 31
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 according to TRSTS reports.
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
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 eight 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 revenues 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> 32
- 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. According to TRSTS reports, the
Company was ranked sixth among 52 companies in sales of 32- and 64- bit
home video games for each month during the period April 1996 through July
1996 (except for May 1996 when the Company ranked eighth). In August
1996, the Company ranked seventh in sales for these platforms. In fiscal
1997, based on publicly announced release date schedules, 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 that, as a result of its relationships with the major
home platform manufacturers, its game development expertise and its
strategy of investing in advanced technology, 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
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<PAGE> 33
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.
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.
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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.
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
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
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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<PAGE> 37
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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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. GT
Interactive will not be required to pay additional license fees to the Company
unless certain sales levels are achieved. 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 sources of supply of
component parts and raw materials are adequate and that substitute sources of
materials are available.
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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 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
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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.
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.
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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 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.
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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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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 and each person intended to become
a director of the Company upon completion of the Offering other than the
additional independent director the Company intends to designate. 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.
Each director serves, and each person intended to become a director upon
completion of the Offering will serve, as a director until the Company's next
annual meeting of stockholders and until their respective successors are duly
elected and qualify. Each officer of the Company serves at the pleasure of the
Board of Directors and until their respective successors are duly elected and
qualify. 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
William C. Bartholomay..... 68 Director
William E. McKenna......... 77 Director
Norman J. Menell........... 64 Director
Louis J. Nicastro.......... 68 Director
Harvey Reich............... 67 Director
Ira S. Sheinfeld........... 58 Director
Richard D. White........... 42 Director
</TABLE>
The following directors comprise the Company's current Board of Directors:
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.
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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
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 has also served WMS as
Co-Chief Executive Officer (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 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 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 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 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 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 has been a Managing Director of Oppenheimer & Co., Inc.,
one of the Representatives of the Underwriters of the Offering, 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.
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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 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.
44
<PAGE> 46
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.
45
<PAGE> 47
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
46
<PAGE> 48
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.
47
<PAGE> 49
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."
48
<PAGE> 50
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 (other than the additional independent Director the Company intends to
designate) 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.
49
<PAGE> 51
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 each person intended to become a Director of the Company upon completion of
the Offering other than the additional independent Director the Company intends
to designate) 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
50
<PAGE> 52
regulators for a finding of suitability as a stockholder of WMS. Pending
completion of the processing of Mr. Redstone's application, 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.
51
<PAGE> 53
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
52
<PAGE> 54
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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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> 56
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
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<PAGE> 57
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
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of
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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 asserted is
based on matters which antedate the adoption of the Certificate of
Incorporation. Such right of
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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.
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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.
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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 Common Stock has been approved for listing on the New York Stock
Exchange under the symbol MWY, subject to official notice of issuance. In order
to meet one of the requirements for listing the Common Stock on the New York
Stock Exchange, the Underwriters will undertake to sell lots of 100 or more
shares to a minimum of 2,000 beneficial holders.
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.
See "Shares Eligible for Future Sale."
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
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WMS in the past and received customary compensation in connection therewith. Mr.
Richard D. White, a Managing Director of Oppenheimer & Co., Inc., will become a
director of the Company upon completion of the Offering. See "Management."
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. Such material may also be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov.
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 aforementioned
transfers have been reflected in these financial statements for all periods
presented, and the related revenues and expenses have been excluded from these
financial statements.
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 one 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. Due to the seasonal cash flows of this subsidiary, the intercompany account
with WMS alternated between intercompany accounts payable and receivable. This
subsidiary is charged and/or paid interest in accordance with the terms of the
Tradewest purchase agreement in order to calculate the earn-out portion of the
purchase price. The maximum intercompany amount due to WMS during the three
years was $25,700,000. No other subsidiaries of the Company had intercompany
amounts due to WMS. 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.
F-9
<PAGE> 72
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, the major component of which was $2,500,000 of employee severance
costs. The liability also 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 and negative goodwill totaled $285,000.
The recorded value of property and equipment of Atari Games at June 30, 1996 is
zero having been reduced by approximately $5,000,000 due to the negative
goodwill being recorded. Increases in the amounts payable under the Four Year
Note would, to the extent thereof: first, reduce negative goodwill to zero;
second, require the recognition of the value of property and equipment not
disposed of during the exit activities; and finally, record goodwill.
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.
F-10
<PAGE> 73
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 March 29, 1996 Atari Games balance sheet was
provided to Warner in July 1996 and Warner has requested additional information
regarding activity in certain balance sheet accounts subsequent to March 29,
1996, and the Company is currently preparing this information.
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 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>
F-11
<PAGE> 74
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-12
<PAGE> 75
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. In addition, immediately prior
to the public offering, the Company intends to effect a 33,400 for one stock
split resulting in 33,400,000 shares of common stock being issued and
outstanding. 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
F-13
<PAGE> 76
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-14
<PAGE> 77
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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 and equipment have been recorded at zero in the allocation of the
preliminary minimum purchase price as a result of the negative goodwill
recorded.
(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. The additional inventory provision in the three month period
March 29, 1996 was approximately $795,000.
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 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 TO 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........................................... 14
Recent Acquisitions................................... 14
Use of Proceeds....................................... 15
Dilution.............................................. 16
Dividend Policy....................................... 16
Capitalization........................................ 17
Selected Financial Data............................... 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 19
Industry Overview..................................... 27
Business.............................................. 30
Management............................................ 42
Certain Transactions.................................. 48
Principal Stockholders................................ 49
Arrangements With WMS................................. 52
Description of Capital Stock.......................... 54
Shares Eligible for Future Sale....................... 59
Underwriting.......................................... 60
Legal Matters......................................... 61
Experts............................................... 61
Additional Information................................ 61
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......................................................... 13,403.00
New York Stock Exchange filing fee...................................... $211,000.00
Blue Sky fees and expenses.............................................. 20,000.00
Transfer Agent fees..................................................... 1,000.00
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.
*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.
10.16 Stock Purchase Agreement dated as of February 23, 1996 between Warner
Communications, Inc. and Williams Interactive Inc.
#21 Subsidiaries of the Registrant.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
*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.
(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 II -- 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. 2 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 18, 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. 2 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/ Chairman of the Board, October 18, 1996
NEIL D. NICASTRO President, Chief Executive
- ------------------------------------------ Officer and Chief Operating
Neil D. Nicastro Officer (Principal Executive
Officer) and Director
/s/ Executive Vice October 18, 1996
HAROLD H. BACH, JR.* President -- Finance,
- ------------------------------------------ Treasurer and Chief Financial
Harold H. Bach, Jr. Officer (Principal Financial
and Principal Accounting
Officer) and Director
/s/ Executive Vice President -- October 18, 1996
BYRON C. COOK* Home Video and Director
- ------------------------------------------
Byron C. Cook
/s/ Executive Vice President -- October 18, 1996
KENNETH J. FEDESNA* Coin-Op Video and Director
- ------------------------------------------
Kenneth J. Fedesna
/s/ Director October 18, 1996
LOUIS J. NICASTRO*
- ------------------------------------------
Louis J. Nicastro
* By: /s/ NEIL D. October 18, 1996
NICASTRO
- ------------------------------------------
Neil D. Nicastro
Attorney-In-Fact
</TABLE>
II-4
<PAGE> 102
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.............................S-2
S-1
<PAGE> 103
MIDWAY GAMES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1995, 1994
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D
---------- ADDITIONS ---------- COLUMN E
BALANCE AT ------------------------- DEDUCTIONS- ----------
COLUMN A 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. .....................................
*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. ......
10.16 Stock Purchase Agreement dated as of February 23, 1996 between Warner
Communications, Inc. and Williams Interactive Inc. .......................
#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 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MIDWAY GAMES INC.
Midway Games Inc., a corporation organized and existing under the laws
of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is Midway Games Inc. and the name under
which the corporation was originally organized is WMS Games, Inc. The date of
filing of its original Certificate of Incorporation with the Secretary of State
was July 9, 1988.
2. This Amended and Restated Certificate of Incorporation restates,
integrates and further amends the Certificate of Incorporation, as amended, of
the corporation by amending and restating in its entirety such Certificate of
Incorporation, as amended.
3. This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the corporation and by the sole stockholder
of the corporation in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
4. The Certificate of Incorporation, as amended, of the corporation, as
amended and restated herein, shall at the effective time of this Amended and
Restated Certificate of Incorporation read as follows:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is: MIDWAY GAMES INC.
SECOND: The address, including street, number, city and county, of the
registered office of the Corporation in the State of Delaware is 1209 Orange
Street, City of Wilmington, County of New Castle and the name of the registered
agent of the Corporation in the State of Delaware is The Corporation Trust
Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is: To engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of all classes of stock which the Corporation
shall have authority to issue shall be 105,000,000, of which 100,000,000 shares
shall be Common Stock, having a par value of $.01 per share; and 5,000,000
shares shall be Preferred Stock, having a par value of $.01 per share.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of each class of stock of the
Corporation shall be the same in all respects, as though shares of one class,
except as follows:
<PAGE> 2
(i) Issuance
a. Authority is hereby expressly granted to and vested in the
Board of Directors of the Corporation to provide for the issue of the Preferred
Stock in one or more series and in connection therewith to fix by resolutions
providing for the issue of such series of the number of shares to be included in
such series and the designations and such voting powers, full or limited, or no
voting powers, and such of the preferences and relative, participating,
operational or other special rights, and the qualifications, limitations or
restrictions thereof, of such series of the Preferred Stock which are not fixed
by this Amended and Restated Certificate of Incorporation, to the full extent
now or hereafter permitted by the laws of the State of Delaware. Without
limiting the generality of the grant of authority contained in the preceding
sentence, the Board of Directors is authorized to determine any or all of the
following, and the shares of each series may vary from the shares of any other
series in any or all of the following aspects:
(1) The number of shares of such series (which may
subsequently be increased, except as otherwise provided by the
resolutions of the Board of Directors providing for the issue of such
series, or decreased to a number not less than the number of shares
then outstanding) and the distinctive designation thereof;
(2) The dividend rights, if any, of such series, the
dividend preferences, if any, as between such series and any other
class or series of stock, whether and the extent to which shares of
such series shall be entitled to participate in dividends with shares
of any other series or class of stock, whether and the extent to which
dividends on such series shall be cumulative, and any limitations,
restrictions or conditions on the payment of such dividends;
(3) The time or times during which, the price or prices at
which, and any other terms or conditions on which the shares of such
series may be redeemed, if redeemable;
(4) The rights of such series, and the preferences, if
any, as between such series and any other class or series of stock, in
the event of any voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation and whether and the extent to which
shares of any such series shall be entitled to participate in such
event with any other class or series of stock;
(5) The voting powers, if any, in addition to the voting
powers prescribed by law of shares of such series, and the terms of
exercise of such voting powers;
(6) Whether shares of such series shall be convertible
into or exchangeable for shares of any other series or class of stock,
or any other securities, and the terms and conditions, if any,
applicable to such right; and
2
<PAGE> 3
(7) The terms and conditions, if any, of any purchase,
retirement or sinking fund which may be provided for the shares of such
series.
b. Except as otherwise provided by law, the Board of Directors
shall have full authority to issue, at any time and from time to time, shares of
the Corporation's Common Stock in any manner and amount and for such
consideration as it, in its absolute discretion, shall determine.
(ii) Voting Rights
Except as otherwise expressly required by law, in all matters as
to which the vote or consent of stockholders of the Corporation shall be
required to be taken, the holders of the shares of the Common Stock shall be
entitled to one vote for each share of such stock held by them. Except as
otherwise expressly required by law, in all matters as to which the vote or
consent of stockholders of the Corporation shall be required to be taken, the
holders of the Preferred Stock shall have such voting rights as may be
determined from time to time by the Board of Directors, by resolution or
resolutions providing for the issuance of such Preferred Stock or any series
thereof.
(iii) Conversion
a. The Board of Directors of the Corporation, by the resolution
adopted for the purpose of establishing any series of Preferred Stock, may fix
and determine the ratios and the terms and conditions under which such series of
Preferred Stock may or shall be converted into shares of another series of
Preferred Stock or shares of any other class of stock of the Corporation.
b. No fractional shares shall be issued upon any conversion
pursuant to this Article FOURTH. In lieu thereof, the Corporation shall (1) pay
to the holders otherwise entitled to fractional shares cash, equal to the market
value thereof as at the date of conversion, such market value to be determined
in good faith by the Board of Directors of the Corporation; or (2) issue and
deliver to them scrip or warrants which shall entitle the holder thereof to
receive a certificate for a full share upon surrender of such scrip or warrants
aggregating a full share, such scrip or warrants to be in such form and to
contain such provisions as shall be determined by the Board of Directors of the
Corporation. Upon conversion, no allowance or adjustment shall be made with
respect to shares of Preferred Stock for cash dividends declared but unpaid on
such stock.
(iv) Dividends
a. The holders of the Preferred Stock shall be entitled to fixed
dividends when and as declared and at the rates determined by the resolution of
the Board of Directors which establishes the series to which the rates shall
apply. Said resolution may determine whether the said dividends shall be
cumulative, the time fixed for payment thereof, whether the said
3
<PAGE> 4
dividends shall be set aside or paid before, on a par with, or only after, the
dividends shall be set aside or paid on the Common Stock.
b. The holders of Common Stock shall be entitled to receive, as
and when declared and made payable by the Board of Directors, and after all
dividends, current and accrued, shall have been paid or declared and set apart
for payment upon the Preferred Stock, to the extent the Board of Directors shall
have directed the dividends on Preferred Stock to be paid, or declared and set
apart for payment before the payment or setting apart of dividends on the Common
Stock, such dividend as may be declared by the Board of Directors from time to
time. Each share of Common Stock shall in all ways be treated equally in respect
of dividends.
(v) Liquidation or Dissolution
a. The Board of Directors, by the resolution which establishes a
series of Preferred Stock, shall determine a fixed liquidation amount applicable
to said series. Said resolution may determine (1) that said series shall
participate in any distribution on liquidation, dissolution or winding-up of the
affairs of the Corporation before the payment, in full or in part, of the fixed
liquidation amounts payable with respect to the Common Stock; (2) that said
series shall participate in any distribution on liquidation, dissolution or
winding-up of the affairs of the Corporation, ratably with the Common Stock (or
any other series of Preferred Stock having liquidation rights on a par with the
Common Stock) in proportion to amounts equal to the fixed liquidation amounts of
the shares as participating plus dividends thereon which have been declared and
are unpaid; or (3) that said shares shall participate in any distribution on
liquidation, dissolution or winding-up of the affairs of the Corporation only
after the payment, in full or in part, of the fixed liquidation amounts plus
dividends thereon which have been declared and are unpaid on the Common Stock
(and any series of Preferred Stock having liquidation rights on a par with the
Common Stock). Said shares shall have liquidation preferences and rights as
determined in said resolution or resolutions.
b. In the event of liquidation or dissolution the holders of the
Common Stock shall be entitled to receive out of the assets of the Corporation,
after payment of debts and liabilities, a pro rata distribution in proportion to
the respective number of shares of Common Stock held by each of them; provided,
however, (1) in the event the Board of Directors of the Corporation establishes
one or more series of Preferred Stock entitled to a distribution on liquidation,
dissolution or winding-up of the affairs of the Corporation before any such
distribution shall be made with respect to the Common Stock; such liquidation
preference in favor of the Preferred Stock shall be paid before the liquidation
amount payable to the holders of Common Stock pursuant to this subparagraph b.
shall be paid; and (2) in the event the Board of Directors of the Corporation
establishes one or more series of Preferred Stock entitled to participate
ratably with holders of shares of the Common Stock in any distribution on
liquidation, dissolution or winding-up of the affairs of the Corporation, the
holders of the Common Stock shall participate ratably with each said series of
Preferred Stock so entitled as set forth in subparagraph a. (2) above.
4
<PAGE> 5
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
SEVENTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, or
repeal the by-laws, and to adopt any new by-law, of the Corporation.
EIGHTH: To the fullest extent permitted by the General Corporation Law
of the State of Delaware, as the same may be amended and supplemented, no
director shall be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
NINTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, (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. The
indemnification and advancement of expenses provided for herein 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 persons.
TENTH: From time to time any of the provisions of this Amended and
Restated Certificate of Incorporation may be amended, altered or repealed, and
other provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted
5
<PAGE> 6
in the manner and at the time prescribed by said law, and all rights at any time
conferred upon the stockholders of the Corporation by this Amended and Restated
Certificate of Incorporation are granted subject to the provisions of this
Article TENTH.
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by its President, this ___
day of _____, 1996.
MIDWAY GAMES INC.
------------------------------
Name: Neil D. Nicastro
Title: President
6
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
OF
MIDWAY GAMES INC.
(Formed under the laws of the State of Delaware)
--------------------
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting. A meeting of the stockholders shall be held
annually for the election of directors and the transaction of other business on
such date in each year as may be determined by the Board of Directors.
Section 2. Special Meetings. Special meetings of the stockholders may
be called by the Board of Directors, the Chairman of the Board or by the
President and shall be called by the Board upon the written request of the
holders of record of a majority of the outstanding shares of the Corporation
entitled to vote at the meeting requested to be called. Such request shall state
the purpose or purposes of the proposed meeting.
Section 3. Place of Meetings. Meetings of stockholders shall be held at
such place, within or without the State of Delaware, as may be fixed by the
Board of Directors. If no place is so fixed, such meetings shall be held at the
office of the Corporation in the State of Delaware.
<PAGE> 2
Section 4. Notice of Meetings. Notice of each meeting of stockholders
shall be given in writing and shall state the place, date and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called. Notice of a special meeting shall indicate that it is
being issued by or at the direction of the person or persons calling or
requesting the meeting.
If, at any meeting, action is proposed to be taken which would, if
taken, entitle objecting stockholders to receive payment for their shares, the
notice shall include a statement of that purpose and to that effect.
A copy of the notice of each meeting shall be given, personally or by
first class mail, not less than 10 nor more than 60 days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice is given when deposited in the United States mail, with postage thereon
prepaid, directed to the stockholder at his address as it appears on the record
of stockholders. In the event of a change of address, he shall file with the
Secretary of the Corporation a written request that his address be changed in
the records of the Corporation, in which event notices to him shall be directed
to him at such other address.
When a meeting is adjourned to another time or place, it shall not be
necessary to give any notice of the adjourned meeting if the time and place to
which the meeting is adjourned are announced at the meeting at which the
adjournment is taken, and at the adjourned meeting any business may be
transacted that might have been transacted on the original date of the meeting.
However, if after the adjournment the Board of Directors fixes a new record date
for the adjourned meeting, or if the adjourned meeting is more than 30 days
after the
2
<PAGE> 3
adjournment, a notice of the adjourned meeting shall be given to each
stockholder of record on the new record date entitled to notice under the
preceding paragraphs of this Section 4.
Section 5. Waiver of Notice. Notice of a meeting need not be given to
any stockholder who submits a signed waiver of notice, in person or by proxy,
whether before or after the meeting. The attendance of any stockholder at a
meeting, in person or by proxy, without protesting prior to the conclusion of
the meeting the lack of notice of such meeting, shall constitute a waiver of
notice by him.
Section 6. Inspectors of Election. The Board of Directors, in advance
of any stockholders' meeting, may appoint one or more inspectors to act at the
meeting or any adjournment thereof. If inspectors are not so appointed, the
person presiding at a stockholders' meeting may, and on the request of any
stockholder entitled to vote thereat shall, appoint two inspectors. In case any
person appointed fails to appear or act, the vacancy may be filled by
appointment made by the Board in advance of the meeting or at the meeting by the
person presiding thereat. Each inspector, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according to the best of
his ability.
The inspectors shall determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, and the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the person
presiding at the meeting or
3
<PAGE> 4
any stockholder entitled to vote thereat, the inspectors shall make a report in
writing of any challenge, question or matter determined by them and execute a
certificate of any fact found by them. Any report or certificate made by them
shall be prima facie evidence of the facts stated and of the vote as certified
by them.
Section 7. List of Stockholders at Meetings. A list of stockholders as
of the record date, certified by the Secretary or Assistant Secretary or by a
transfer agent, shall be prepared at least 10 days prior to each meeting. Such
list shall be open to the examination of any stockholder for purposes germane to
the meeting and may be inspected by any stockholder who is present. If the right
to vote at any meeting is challenged, the inspectors of election, or person
presiding thereat, shall require such list of stockholders to be produced as
evidence of the right of the persons challenged to vote at such meeting, and all
persons who appear from such list to be stockholders entitled to vote thereat
may vote at such meeting.
Section 8. Qualification of Voters. Unless otherwise provided in the
Certificate of Incorporation, every stockholder of record shall be entitled at
every meeting of stockholders to one vote for every share standing in his name
on the record of stockholders.
Treasury shares as of the record date and shares held as of the record
date by another domestic or foreign corporation of any type or kind, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held as of the record date by the Corporation, shall not be
shares entitled to vote or to be counted in determining the total number of
outstanding shares.
4
<PAGE> 5
Shares held by an administrator, executor, guardian, conservator,
committee, trustee or other fiduciary, may be voted by him, either in person or
by proxy, without transfer of such shares into his name.
Shares standing in the name of another domestic or foreign corporation
of any type or kind may be voted by such officer, agent or proxy as the by-laws
of such corporation may provide, or, in the absence of such provision, as the
board of directors of such corporation may determine.
A stockholder shall not sell his vote or issue a proxy to vote to any
person for any sum of money or anything of value except as permitted by law.
Section 9. Quorum of Stockholders. The holders of a majority of the
shares entitled to vote thereat shall constitute a quorum at a meeting of
stockholders for the transaction of any business, provided that when a specified
item of business is required to be voted on by a class or series, voting as a
class, the holders of a majority of the shares of such class or series shall
constitute a quorum for the transaction of such specified item of business.
When a quorum is once present to organize a meeting, it is not broken
by the subsequent withdrawal of any stockholders.
The stockholders who are present, in person or by proxy, and who are
entitled to vote may, by a majority of votes cast, adjourn the meeting despite
the absence of a quorum.
Section 10. Proxies. Every stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent without a meeting may authorize
another person or persons to act for him by proxy.
5
<PAGE> 6
Every proxy must be signed by the stockholder or his attorney-in-fact.
No proxy shall be valid after the expiration of three years from the date
thereof unless otherwise provided in the proxy. Every proxy shall be revocable
at the pleasure of the stockholder executing it, except as otherwise provided by
law.
Except as otherwise required by applicable law, the authority of the
holder of a proxy to act shall not be revoked by the incompetence or death of
the stockholder who executed the proxy unless before the authority is exercised,
written notice of an adjudication of such incompetence or of such death is
received by the Secretary or any Assistant Secretary.
Section 11. Vote or Consent of Stockholders. Directors shall, except as
otherwise required by law, be elected by a plurality of the votes cast at a
meeting of stockholders by the holders of shares entitled to vote in the
election.
Whenever any corporate action, other than the election of directors, is
to be taken by vote of stockholders, it shall, except as otherwise required by
law, be authorized by a majority of the votes cast at a meeting of stockholders
by the holders of shares entitled to vote thereon.
Whenever stockholders are required or permitted to take any action by
vote, such action may be taken without a meeting, without prior notice and
without a vote, on written consent, setting forth the action so taken, signed by
the holders of outstanding stock having not less than the minimum numbers 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. Written
consent thus given by such holders so entitled to vote shall have the same
effect as a vote of stockholders at a meeting duly called and held. Prompt
notice of the taking of such action without a meeting
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<PAGE> 7
by less than the unanimous consent of all stockholders shall be given to those
stockholders who did not consent in writing.
Section 12. Fixing Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the Board of Directors may fix, in advance, a date
as the record date for any such determination of stockholders. Such date shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action.
When a determination of stockholders of record entitled to notice of or
to vote at any meeting of stockholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, unless the
Board of Directors fixes a new record date for the adjourned meeting.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Power of Board and Qualification of Directors. The business
of the Corporation shall be managed by the Board of Directors. Each director
shall be at least 18 years of age.
Section 2. Number of Directors. The number of directors constituting
the entire Board of Directors shall be the number, not less than one nor more
than 15, fixed from time to time by a majority of the total number of directors
which the Corporation would have, prior to
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<PAGE> 8
any increase or decrease, if there were no vacancies, provided, however, that no
decrease shall shorten the term of an incumbent director. Until otherwise fixed
by the directors, the number of directors constituting the entire Board shall be
ten.
Section 3. Election and Term of Directors. At each annual meeting of
stockholders, directors shall be elected to hold office until the next annual
meeting of stockholders and until their successors have been elected and qualify
or until their respective deaths, resignations or removals in the manner
hereinafter provided.
Section 4. Quorum of Directors and Action by the Board. A majority of
the entire Board of Directors shall constitute a quorum for the transaction of
business, and, except where otherwise provided by these By-laws, the vote of a
majority of the directors present at a meeting at the time of such vote, if a
quorum is then present, shall be the act of the Board.
Any action required or permitted to be taken by the Board of Directors
or any committee thereof may be taken without a meeting if all members of the
Board or the committee consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written consent thereto by the
members of the Board or committee shall be filed with the minutes of the
proceedings of the Board or committee.
Section 5. Meetings of the Board. An annual meeting of the Board of
Directors shall be held in each year directly after the annual meeting of
stockholders. Regular meetings of the Board shall be held at such times as may
be fixed by the Board. Special meetings of the Board may be held at any time
upon the call of the President or any two directors.
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<PAGE> 9
Meetings of the Board of Directors shall be held at such places as may
fixed by the Board for annual and regular meetings and in the notice of meeting
for special meetings. If no place is so fixed, meetings of the Board shall be
held at the office of the Corporation.
No notice need be given of annual or regular meetings of the Board of
Directors. Notice of each special meeting of the Board shall be given to each
director either by mail not later than noon, Eastern time, on the third day
prior to the meeting or by telegram, written message or orally to the director
not later than noon, Eastern time, on the day prior to the meeting. Notices are
deemed to have been given: by mail, when deposited in the United States mail; by
telegram at the time of filing; and by messenger at the time of delivery.
Notices by mail, telegram or messenger shall be sent to each director at the
address designated by him for that purpose, or, if none has been so designated,
at his last known residence or business address.
Notice of a meeting of the Board of Directors need not to be given to
any director who submits a signed waiver of notice whether before or after the
meeting, or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to him.
A notice, or waiver of notice, need not specify the purpose of any
meeting of the Board of Directors.
A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. Notice of any
adjournment of a meeting to another time or place shall be given, in the manner
described above, to the directors who were not present at the time of the
adjournment and, unless such time and place are announced at the meeting, to the
other directors.
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<PAGE> 10
Section 6. Resignations. Any director of the Corporation may resign at
any time by giving written notice to the Board of Directors or to the President
or to the Secretary of the Corporation. Such resignation shall take effect at
the time specified therein; and unless otherwise specified therein the
acceptance of such resignation shall not be necessary to make it effective.
Section 7. Removal of Directors. Any or all of the directors may be
removed with or without cause by vote of the stockholders.
Section 8. Newly Created Directorships and Vacancies. Newly created
directorships resulting from an increase in the number of directors and
vacancies occurring in the Board of Directors for any reason except the removal
of directors by stockholders may be filled by vote of a majority of the
directors then in office, although less than a quorum exists. Vacancies
occurring as a result of the removal of directors by stockholders shall be
filled by the stockholders. A director elected to fill a vacancy shall be
elected to hold office for the unexpired term of his predecessor.
Section 9. Executive and other Committees of Directors. The Board of
Directors, by resolution adopted by a majority of the entire Board, may
designate from among its members an executive committee and other committees
each consisting of one or more directors and each of which, to the extent
provided in the resolution, shall have all the authority of the Board, except
that no such committee shall have authority as to the following matters:
(1) The submission to stockholders of any action that needs
stockholders' approval;
(2) The amendment of the Certificate of Incorporation;
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<PAGE> 11
(3) The filling of vacancies in the Board or in any committee;
(4) The fixing of compensation of the directors for serving on the
Board or on any committee;
(5) The amendment or repeal of the By-laws, or the adoption of new
By-laws;
(6) The amendment or repeal of any resolution of the Board which,
by its terms, shall not be so amendable or repealable; or
(7) The removal or indemnification of directors; or unless the
resolution, these By-laws or the Certificate of Incorporation otherwise provide:
(a) The declaration of a dividend;
(b) The issuance of stock; or
(c) The adoption of a certificate of ownership and merger pursuant
to Section 253 of the General Corporation Law.
The Board of Directors may designate one or more directors as alternate
members of any such committee, who may replace any absent member or members at
any meeting of such committee.
Unless a greater proportion is required by the resolution designating a
committee, a majority of the entire authorized number of members of such
committee shall constitute a quorum for the transaction of business, and the
vote of a majority of the members present at a meeting at the time of such vote,
if a quorum is then present, shall be the act of such committee.
Each such committee shall serve at the pleasure of the Board of
Directors.
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<PAGE> 12
Section 10. Compensation of Directors. The Board of Directors shall
have authority to fix the compensation of directors for services in any
capacity.
ARTICLE III
OFFICERS
Section 1. Officers. The Board of Directors, as soon as may be
practicable after the annual election of directors, shall elect a Chairman of
the Board, President, a Secretary and a Treasurer, and from time to time may
elect or appoint one or more Vice Presidents or such other officers as it may
determine. Any two or more offices may be held by the same person.
Section 2. Other Officers. The Board of Directors may appoint such
other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 3. Compensation. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors.
Section 4. Term of Office and Removal. Each officer shall hold office
for the term for which he is elected or appointed, and until his successor has
been elected or appointed and qualified. Unless otherwise provided in the
resolution of the Board of Directors electing or appointing an officer, his term
of office shall extend to and expire at the meeting of the Board following the
next annual meeting of stockholders. Any officer may be removed by the Board,
with or without cause, at any time. Removal of an officer without cause shall be
without prejudice to his contract rights, if any, and the election or
appointment of an officer shall not of itself create contract rights.
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<PAGE> 13
Section 5. Power and Duties.
(a) Chairman of the Board: The Chairman of the Board shall be the
chief executive officer of the Corporation, shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall also
preside at all meetings of the stockholders and the Board of Directors.
He shall execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation. The Chairman of the Board shall counsel
freely with the President and shall exercise such other powers, shall perform
such other duties and have such other responsibilities as may be given from time
to time by the Board of Directors or the By-laws of the Corporation.
(b) President: The President shall be the chief operating officer
of the Corporation. He shall have responsibility for general operation of the
business of the Corporation and shall see that all orders and resolutions of the
Board of Directors are carried in effect. In the absence of the Chairman of the
Board or in the event of his inability or refusal to act, the President shall
perform the duties and exercise the powers of the Chairman of the Board. The
President shall perform such other duties and have such other responsibilities
as from time to time may be determined by the Board of Directors.
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<PAGE> 14
(c) Vice Presidents: The Vice Presidents, in the order designated
by the Board of Directors, or in the absence of any designation, then in the
order of their election, during the absence or disability of or refusal to act
by the President, shall perform the duties and exercise the powers of the
President, and shall perform such other duties as the Board of Directors shall
prescribe.
(d) Secretary and Assistant Secretaries: The Secretary shall
attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the Corporation
and of the Board of Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. He shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision he
shall be. He shall have custody of the corporate seal of the Corporation and he,
or an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his signature
or by the signature of such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature.
The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the
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<PAGE> 15
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
(e) Treasurer and Assistant Treasurers: The Treasurer shall have
the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors.
He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the President and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, he shall give the
Corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or of
there be no such determination, then in the order of their election), shall, in
the absence of the Treasurer or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the
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<PAGE> 16
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
Section 6. Books to be Kept. The Corporation shall keep (a) correct and
complete books and records of account, (b) minutes of the proceedings of the
stockholders, Board of Directors and any committees of directors, and (c) a
current list of the directors and officers and their residence addresses; and
the Corporation shall also keep at its office or at the office of its transfer
agent or registrar, if any, a record containing the names and addresses of all
stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
The Board of Directors may determine whether and to what extent and at
what times and places and under what conditions and regulations any accounts,
books, records or other documents of the Corporation shall be open to
inspection, and no creditor, security holder or other person shall have any
right to inspect any accounts, books, records or other documents of the
Corporation except as conferred by statute or as so authorized by the Board.
Section 7. Checks, Notes, etc. All checks and drafts on, and
withdrawals from the Corporation's accounts with banks or other financial
institutions, and all bills of exchange, notes and other instruments for the
payment of money, drawn, made, endorsed, or accepted by the Corporation, shall
be signed on its behalf by the person or persons thereunto authorized by, or
pursuant to resolution of, the Board of Directors.
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<PAGE> 17
ARTICLE IV
FORMS OF CERTIFICATES AND LOSS AND
TRANSFER OF SHARES
Section 1. Forms of Share Certificates. The shares of the Corporation
shall be represented by certificates, in such forms as the Board of Directors
may prescribe, signed by the Chairman of the Board, President or a Vice
President and the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the Corporation or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the Corporation or its employee. In case any officer
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer at
the date of issue.
Each certificate representing shares issued by the Corporation shall
set forth upon the face or back of the certificate, or shall state that the
Corporation will furnish to any stockholder upon request and without charge, a
full statement of the designation, relative rights, preferences and limitations
of the shares of each class of shares, if more than one, authorized to be issued
and the designation, relative rights, preferences and limitations of each series
of any class of preferred shares authorized to be issued so far as the same have
been fixed, and the authority of the Board of Directors to designate and fix the
relative rights, preferences and limitations of other series.
Each certificate representing shares shall state upon the face thereof:
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<PAGE> 18
(1) That the Corporation is formed under the laws of the State of
Delaware;
(2) The name of the person or persons to whom issued; and
(3) The number and class of shares, and the designation of the series,
if any, which such certificate represents.
Section 2. Transfers of Shares. Shares of the Corporation shall be
transferable on the record of stockholders upon presentment to the Corporation
or a transfer agent of a certificate or certificates representing the shares
requested to be transferred, with proper endorsement on the certificate or on a
separate accompanying document, together with such evidence of the payment of
transfer taxes and compliance with other provisions of law as the Corporation or
its transfer agent may require.
Section 3. Lost, Stolen or Destroyed Share Certificates. No certificate
for shares of the Corporation shall be issued in place of any certificate
alleged to have been lost, destroyed or wrongfully taken, except, if and to the
extent required by the Board of Directors, upon:
(1) Production of evidence of loss, destruction or wrongful taking;
(2) Delivery of a bond indemnifying the Corporation and its agents
against any claim that may be made against it or them on account of the alleged
loss, destruction or wrongful taking of the replaced certificate or the issuance
of the new certificate;
(3) Payment of the expenses of the Corporation and its agents incurred
in connection with the issuance of the new certificate; and
(4) Compliance with such other reasonable requirements as may be
imposed.
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ARTICLE V
OTHER MATTERS
Section 1. Corporate Seal. The Board of Directors may adopt a corporate
seal, alter such seal at pleasure, and authorize it to be used by causing it or
a facsimile to be affixed or impressed or reproduced in any other manner.
Section 2. Fiscal Year. The fiscal year of the Corporation shall be the
12 months ending June 30 or such other period as may be fixed by the Board of
Directors.
Section 3. Amendments. By-laws of the Corporation may be adopted,
amended or repealed by vote of the holders of the shares at the time entitled to
vote in the election of any directors. By-laws may also be adopted, amended or
repealed by the Board of Directors, but any By-law adopted by the Board may be
amended or repealed by the stockholders entitled to vote thereon as hereinabove
provided.
If any By-law regulating an impending election of directors is adopted,
amended or repealed by the Board of Directors, there shall be set forth in the
notice of the next meeting of stockholders for the election of directors the
By-law so adopted, amended or repealed, together with a concise statement of the
changes made.
19
<PAGE> 1
EXHIBIT 4.1
TEMPORARY CERTIFICATE--EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN
READY FOR DELIVERY
COMMON STOCK [MIDWAY GAMES INC. LOGO] COMMON STOCK
NUMBER SHARES
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE CUSIP 598148 10 4
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF THE PAR VALUE OF
$.01 PER SHARE OF
===============================MIDWAY GAMES INC.================================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney, upon surrender of this Certificate, properly
endorsed.
This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
VICE PRESIDENT AND SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- Custodian
--------------- ---------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
-------------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said shares on the books of the within named Company with full
power of substitution in the premises.
Dated
---------------------------
----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER. THE
SIGNATURE OF THE PERSON EXECUTING THIS
POWER MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION SUCH AS A
COMMERCIAL BANK, TRUST COMPANY,
SECURITIES BROKER/DEALER, CREDIT UNION,
OR A SAVINGS ASSOCIATION PARTICIPATING
IN A MEDALLION PROGRAM APPROVED BY THE
SECURITIES TRANSFER ASSOCIATION, INC.
<PAGE> 1
EXHIBIT 10.1
MANUFACTURING AND SERVICES AGREEMENT
AGREEMENT dated as of the 1st day of July 1996 by and between
WMS INDUSTRIES INC. ("WMS"), a Delaware corporation with its principal place of
business at 3401 North California Avenue, Chicago, Illinois 60618 and MIDWAY
GAMES INC. ("Midway"), a Delaware corporation with its principal place of
business at 3401 North California Avenue, Chicago, Illinois 60618.
W I T N E S S E T H :
WHEREAS, Midway is an indirect wholly-owned subsidiary of WMS;
and
WHEREAS, Midway proposes to make a public offering (the "Public
Offering") of shares of its common stock as a result of which the outstanding
shares of common stock of Midway will be owned approximately 15% by public
stockholders and approximately 85% by WMS; and
WHEREAS, WMS, directly or through subsidiaries, has heretofore
provided centralized services to its businesses; and
WHEREAS, WMS and Midway desire to set forth the terms under
which WMS will continue to provide certain manufacturing and other services to
Midway and certain costs and benefits will be allocated between WMS and Midway.
NOW, THEREFORE, the parties hereto agree as follows:
-1-
<PAGE> 2
1. CERTAIN DEFINITIONS.
1.1 The following terms as used in this Agreement shall
have the meanings set forth below:
1.1.1 "Affiliate" means, with respect to any
Person, any Person directly or indirectly controlling, controlled by or under
direct or indirect common control of such other Person.
1.1.2 "Losses" means any and all suits, debts,
causes of action, losses, liabilities, claims or demands (whether at law or in
equity), and any damages, settlement, judgment, penalty or other disposition of
the same, and all costs and expense of the same (including, without limitation,
attorneys' fees but in no situation whatsoever shall WMS be liable to Midway or
Midway be liable to WMS for incidental, indirect, special or consequential
damages).
1.1.3 "Person" means, an individual, corporation,
partnership, limited liability company, proprietorship, firm, association,
trust, estate, joint venture, unincorporated organization or other business
entity or a government or any agency or political subdivision thereof.
1.1.4 "Subsidiary" means, with respect to a
specified Person, an Affiliate controlled by such specified Person.
1.1.5 All references herein to "Atari games" refers
only to Atari Games Corporation coin-operated video games.
1.1.6 All references herein to "Midway games"
refers only to Midway coin-operated video games and does not include Atari games
or any home video games.
-2-
<PAGE> 3
1.1.7 All references herein to "amusement games"
includes Atari games, Midway games, pinball games, novelty games, video lottery
terminals and gaming machines.
1.1.8 All references herein to "core amusement
games" includes only Midway games and pinball and novelty games, and
specifically excludes Atari games, video lottery terminals and gaming machines.
1.1.9 All references herein to "Midway" means
Midway and its Subsidiaries.
1.1.10 All references herein to "WMS" means WMS and
its Affiliates, other than Midway and its Subsidiaries.
1.1.11 All references herein to allocations to be
made based upon "head count" shall be determined based upon the percentage of
the number of employees of Midway benefitting from the service to be allocated
and the total number of employees of WMS and Midway benefitting from the service
to be allocated.
1.2 Unless the context otherwise requires
1.2.1 Words used in the singular include the plural
and words used in the plural include the singular;
1.2.2 "or" is not exclusive; and
1.2.3 "including" means including without
limitation.
2. EFFECTIVE DATE AND TERM. This Agreement is effective as of
July 1, 1996 (the "Effective Date"), and will continue in effect unless
terminated by either party for any reason upon 180 days' prior notice or unless
earlier terminated pursuant to Section 14 hereof.
-3-
<PAGE> 4
Midway shall also have the right to terminate the obligations of WMS and Midway
under Section 4 hereof for any reason upon 180 days' prior notice and in such
event the remaining sections of this Agreement shall remain in full force and
effect.
3. GENERAL PRINCIPLES; NEGOTIATING COMMITTEE. It is the desire
of WMS and Midway that WMS provide services to Midway at prices and upon terms
which are fair and reasonable to both WMS and Midway, and which are consistent
with WMS' standard policies, procedures and practices. Such services have in the
past included and are anticipated to continue to include, but not be limited to,
with respect to Midway games and/or Atari games (i) manufacturing; (ii)
engineering; (iii) sales and marketing; (iv) warranty and field service; (v)
legal and administrative; (vi) assistance in banking relationships; and (vii)
maintenance of employee benefit plans. With respect to matters not specifically
covered by the provisions of this Agreement, or if changes in business
circumstances should cause the method of handling matters which are specifically
covered hereby to be unfair to either WMS or Midway, it is intended that the
matter shall be referred for resolution to a negotiating committee consisting of
two senior executives or directors designated by WMS and two senior executives
or directors designated by Midway (the "Negotiating Committee"). The initial
members of the Negotiating Committee are designated on Schedule 1 hereto. Each
party shall have the right at any time and from time to time to replace any of
its designees by giving notice in writing to the other party setting forth the
name of each designee to be replaced and the name of the replacement. The
Negotiating Committee shall act promptly to resolve all matters presented to it.
The concurrence of three members of the Negotiating Committee shall be required
for the Negotiating Committee to act.
-4-
<PAGE> 5
4. MANUFACTURING COIN-OPERATED VIDEO GAMES. Cabinets for
coin-operated video games will be manufactured for Midway by Lenc-Smith Inc., an
indirect wholly-owned subsidiary of WMS, at Lenc-Smith's facilities located in
Cicero, Illinois. Coin-operated video games will be assembled for Midway by
Williams Electronics Games Inc. ("WEG"), a wholly-owned subsidiary of WMS, at
WEG's facilities located Waukegan, Illinois. For the manufacture of cabinets,
Midway will be charged WMS' standard material, labor, fringes and Lenc-Smith
overhead, adjusted to full cost absorption. For the assembly of coin-operated
games, Midway will be charged at the direct production labor cost. All fringe
benefits for labor costs charged to Midway will be estimated and be subject to
an annual reconciliation. Materials other than cabinets required for
coin-operated video games will be purchased by Midway and delivered at Midway's
cost to WMS' Waukegan plant. The Waukegan plant operating costs will be
segregated by departments and will be allocated as follows:
DEPARTMENT ALLOCATION METHOD
- ---------- -----------------
Production Direct labor dollars
Quality Units of games produced
Building Square footage used
Industrial Engineering Units of games produced
Manufacturing Administration Direct labor dollars
Material Control Units of games produced
Any purchasing done by WMS for Midway will be done by WMS' centralized
purchasing department and the overhead and personnel costs of such department
will be allocated to Midway based upon the number of models of coin-operated
video games produced in relation to the number of models of amusement games
produced by all operations. Quality control departments
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at each plant are managed from a central office. One-third of the central office
overhead and personnel costs will be allocated to Midway. Midway shall give WMS
production orders on WMS' standard order forms with sufficient lead time to
permit orderly production scheduling by WMS. So long as the provisions of
Section 4 of this Agreement are in effect, Midway shall be required to use WMS
as Midway's sole manufacturing source for cabinets and assembly of coin-operated
video games; provided, however, that Midway may use other sources if WMS is
unable to perform its manufacturing and assembly operations consistent with
industry standards of quality or in the event WMS is prevented from
manufacturing and assembly due to force majeure, as defined in Section 15
hereof.
5. ENGINEERING AND ENGINEERING SUPPORT.
5.1 Midway will continue to conduct its own design and
engineering of coin-operated video games at the facility previously leased by
WMS at 2727 W. Roscoe Street, Chicago, Illinois (the "Roscoe Facility"), which
lease has been assigned to Midway. Midway will bear all costs under such lease
and all identifiable costs of operating the Roscoe Facility. The common costs of
operating the three-building complex at which the Roscoe Facility is located
will be allocated on the basis of square footage of floor space used.
5.2 Certain engineering support activities, such as
blue prints and engineering standards, will be provided for Midway by WMS and
allocated based upon estimated usage. Certain engineers may be employed directly
by Midway and others will be employed by WMS and devote a portion of their time
to Midway. The costs of development activities for the benefit of Midway
conducted by WMS employees will be charged to Midway.
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6. SALES AND MARKETING. Substantially all video game advertising
and promotion will be charged directly by Midway. To the extent that there are
common costs for convention or show expenses, such costs will be allocated to
Midway based upon square footage of the floor space used by Midway at the
individual show. European sales office expenses will be allocated to Midway
based on the percentage of Midway game sales in Europe to total European core
amusement game sales. All other common sales and marketing costs, including
services provided by WMS' Creative Services department, will be allocated to
Midway based upon a percentage of Midway game sales to total core amusement game
sales.
7. WARRANTY AND FIELD SERVICE. WMS will provide warranty and
general field service for coin-operated video games at the request of Midway.
Warranty transaction costs will be allocated to Midway based upon the number of
coin-operated video game warranty transactions at the average annual cost of all
amusement game warranty transactions of the WMS parts department. Material
components of coin-operated video game warranty transactions will be supplied by
Midway at its cost or charged by WMS based on standard materials costs. Field
service departmental costs will be allocated to Midway from the WMS amusement
games central field service department based on the number of telephone calls
received in respect of coin-operated video games in relation to total telephone
calls received in respect of amusement games.
8. LEGAL, ADMINISTRATIVE, ETC.
8.1 WMS will provide legal and administrative services at the
request of Midway. The cost of using WMS' in house lawyers will be charged to
Midway based upon time sheets at standard billing rates. The expense of using
outside attorneys for such matters as bad debt and collection expenses will be
charged to Midway on an identified basis. Midway
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will retain its own attorneys to perform its public company compliance work.
Payroll processing, telephone and miscellaneous fees will be allocated to Midway
based on head count. All other administrative expenses (other than corporate
expenses) will be allocated to Midway based upon the percentage of Midway games
sales to the total of core amusement game sales. Information services and human
resources will be allocated to Midway based upon salaried head count.
8.2 Corporate office expenses will be determined by types of
costs. Costs relating to WMS' public company costs, financing and hotels will be
borne entirely by WMS. Individual officers' compensation and expenses and office
operating costs, including payroll, fringes and general external professional
expenses, will be allocated to amusement game and other activities based upon
WMS' management estimates of the time devoted to each. The total corporate
expenses allocated to the entire amusement game activities will be allocated to
Midway based upon Midway game sales and total amusement game sales.
9. BANKING. Midway shall use its best efforts to establish its
own banking relations independent of WMS as soon as practicable after the
effective date of the Public Offering.
10. EMPLOYEE BENEFIT PLANS. To the extent employees of Midway
continue to be covered under WMS health, retirement or other benefit plans, WMS'
costs in respect thereof shall be allocated as follows: to the extent such costs
can be identified with a specific employee, such costs shall be allocated on an
identified basis, or, to the extent such costs cannot be identified with a
specific employee, such costs shall be allocated, along with fringe benefits, in
accordance with the relative number of employees participating in such plans.
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11. BILLING AND PAYMENT PROCEDURES. Within 15 days after the end
of each month, WMS shall provide Midway with a statement of estimated charges
allocated to Midway during the preceding month under this Agreement, together
with a reasonably detailed explanation of such charges. Midway shall pay such
charges within five days after receipt of such statement. Within 20 days after
the end of each fiscal quarter, WMS shall provide Midway with a reconciliation
statement reflecting actual charges allocated to Midway and during such quarter
under this Agreement and payments made by Midway in respect thereof, together
with a reasonably detailed explanation of such charges. Midway or WMS, as the
case may be, shall pay the amount reflected on such reconciliation statement,
within five days after receipt thereof by Midway. If Midway disputes the
accuracy of any reconciliation statement or explanation submitted by WMS, Midway
shall nevertheless pay the invoiced charges on a timely basis, but Midway may
submit such dispute to the Negotiating Committee. If at least three members of
the Negotiating Committee determine that the charges were incorrect and that
Midway has overpaid WMS, their decision shall be final and WMS shall promptly
repay Midway the amount determined to be repayable by the Negotiating Committee.
If at least three members of the Negotiating Committee determine that the
charges were correct and that Midway has not overpaid WMS, their decision shall
be final. If the Negotiating Committee is divided 2-2, the dispute shall be
submitted to a "Big Six" accounting firm mutually acceptable to Midway and WMS
for resolution, whose decision shall be final. If Midway fails to submit such
dispute to the Negotiating Committee within 60 days after receipt of the
reconciliation statement from WMS, Midway shall be deemed to accept such
charges.
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12. THIRD PARTY AGREEMENTS. WMS and/or Midway are party to
numerous agreements with third parties, including, without limitation, the
agreements set forth on Schedule 2 hereto, with respect to game development, the
obtention or grant of licenses and other matters which provide for, among other
matters, the receipt of payments, the obligation to make payments to third
parties, recoupment of prior advances, rights of first refusal, reporting and
monitoring of intellectual property rights. Royalties and expenses for external
and internal development and fees and expenses for external licenses applicable
to Midway's products will be charged to Midway at their cost to WMS. WMS and
Midway will allocate all other rights and obligations under such third party
agreements so that Midway will receive the benefit and bear the burden of such
agreements as they relate to Midway games, Atari games and home video games and
WMS will receive the benefit and bear the burden of such agreements as they
relate to all other amusement games. With respect to advance royalty or
guaranteed royalty payments received by Midway or which Midway is entitled to
receive by reason of agreements entered into on or prior the Effective Date
which are recoupable out of monies which would otherwise be payable to WMS as
license fees on or after the Effective Date, Midway shall, to the extent such
license fees are not paid directly to WMS by reason of such recoupment, remit to
WMS an amount equal to the license fees that would have been payable to WMS. WMS
acknowledges that the common stock purchase warrants issued by GT Interactive in
the name of Midway are the exclusive property of Midway.
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13. DUTY OF CARE; PRODUCT LIABILITY INSURANCE; DISCLAIMER OF
WARRANTIES; INDEMNIFICATION.
13.1 WMS shall provide its services hereunder in accordance
with its standard policies, procedures and practices as the same may exist from
time to time. WMS shall maintain product liability insurance which includes
Midway in amounts mutually agreeable to WMS and Midway. The cost of the premiums
for such insurance shall be allocated based on Midway game sales and total game
sales.
13.2 WMS disclaims all warranties, express or implied,
including, but not limited to, the implied warranties of merchantability and
fitness for a particular purposes, with respect to the services provided
hereunder. WMS shall use reasonable efforts to perform the services provided
hereunder in a professional and workmanlike manner and in accordance with the
standard of care set forth in Section 13.1 of this Agreement, provided,
however, the results of the services are furnished "as is."
13.3 Except for its obligation to comply with Section 13.1
of this Agreement, WMS shall not be liable for any Losses unless such Losses
arise from or are caused by WMS' fraud or willful misconduct, and WMS agrees to
indemnify, defend and hold harmless Midway (its directors, officers, employees
and attorneys) from any such fraud or willful misconduct.
13.4 Midway agrees to indemnify, defend and hold harmless
WMS (its directors, officers, employees and attorneys) from all Losses asserted
by or on behalf of third parties or which result from governmental action in
respect of Losses relating to the provision of services hereunder other than any
such Losses caused by WMS' fraud or willful misconduct.
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13.5 In addition to the provisions of Section 13.4 hereof,
Midway also agrees to indemnify, defend and hold harmless WMS (its directors,
officers, employees and attorneys) from all Losses which arise from actions
or the failure to act by Midway, asserted by or on behalf of third parties to
agreements to which Midway and WMS are parties including, without limitation,
those agreements and documents listed on Schedule 2 hereto, other than any
such Losses caused by WMS' fraud or willful misconduct.
13.6 With regard to either parties' indemnification, the
party required to indemnify pursuant to this Section 13 (the "Indemnitor"),
upon demand by the other party (the "Indemnitee"), the Indemnitor, at its sole
costs and expense, shall resist or defend such claim, action or proceeding
(in the Indemnitee's name, if necessary), using such attorneys as the
Indemnitee shall approve, which approval shall not be unreasonably withheld.
If, in the Indemnitee's reasonable opinion there exists a conflict of interest
which would make it inadvisable to be represented by counsel for the
Indemnitor, the Indemnitor and the Indemnitee shall jointly select acceptable
attorneys, and the Indemnitor shall pay the reasonable fees and disbursements
of such attorneys.
14. DEFAULT. If either party materially defaults hereunder, the
non-defaulting party may terminate this Agreement effective immediately (subject
to the cure periods set forth herein below) upon written notice to the
defaulting party. Subject to the provisions of Section 13, the non-defaulting
party shall be entitled to all remedies provided by law or equity (including
reasonable attorneys' fees and costs of suit incurred). The following events
shall be deemed to be material defaults hereunder:
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(a) Failure by either party to make any payment required to
be made to the other hereunder, which failure is not remedied within ten days
after receipt of written notice thereof; or
(b) Except as otherwise provided herein, failure by either
party substantially to perform in accordance with the terms and conditions of
this Agreement, which failure is not remedied within 30 days after receipt of
written notice from the other party specifying the nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either
party; (ii) filing of an involuntary bankruptcy petition against either party
which is not timely controverted and results in the entry of an order for
relief; (iii) assignment for the benefit of creditors made by either party; or
(iv) appointment of a receiver for either party.
15. FORCE MAJEURE. Except as specifically set forth in this
Agreement, WMS and Midway shall incur no liability to each other due to a
failure to perform under the terms and conditions of this Agreement resulting
from fire, flood, war, strike, lock-out, work stoppage or slow-down, labor
disturbance, power failure, major equipment breakdown, construction delays,
accident, riot, acts of God, acts of United States' enemies, laws, orders or at
the insistence or result of any governmental authority or any other delay beyond
each other's reasonable control.
16. NON-COMPETITION AND NON-SOLICITATION.
16.1 NON-COMPETITION.
16.1.1 For so long as this Agreement is in effect and
for a period of five years following the termination of this Agreement, WMS
shall not, directly or indirectly, individually or in concert with others, own,
manage, operate, join, control, participate
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in, invest in, engage in, or otherwise be connected in any manner with, any
Person other than Midway, which is engaged in the business of designing,
developing, manufacturing, licensing, publishing, marketing or distributing
coin-operated video games (which shall not be deemed to include any gaming
machines or video lottery terminals) or interactive entertainment software for
use with interactive entertainment hardware or any related business currently
conducted by Midway, or for itself, or on behalf of any other Person, call on
any supplier, licensee or licensor of Midway or be in contact with any customer,
supplier, licensee or licensor of Midway for the purpose of soliciting,
diverting, taking away or otherwise interfering with Midway's relationship with
any supplier, licensee or licensor of Midway; provided, however, that nothing in
this Section shall be construed to prohibit WMS from owning not more than five
(5%) percent of any class of publicly-held voting securities of any issuer which
is subject to the reporting requirements of the Securities and Exchange Act of
1934, as amended, or from owning any amount of the capital stock of Midway.
16.1.2 For so long as this Agreement is in effect and
for a period of five years following the termination of this Agreement, Midway
and its Affiliates shall not, directly or indirectly, individually or in concert
with others, own, manage, operate, join, control, participate in, invest in,
engage in, or otherwise be connected in any manner with, any Person other than
WMS, which is engaged in the business of designing, developing, manufacturing,
licensing, publishing, marketing or distributing coin-operated pinball games,
novelty games, video lottery terminals or gaming machines or any related
business currently conducted by WMS, or for itself, or on behalf of any other
Person, call on any supplier, licensee or licensor of WMS or be in contact with
any customer, supplier, licensee or licensor
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of WMS for the purpose of soliciting, diverting, taking away or otherwise
interfering with WMS' relationship with any supplier, licensee or licensor of
WMS; provided, however, that nothing in this Section shall be construed to
prohibit Midway from owning not more than five (5%) percent of any class of
publicly-held voting securities of any issuer which is subject to the reporting
requirements of the Securities and exchange Act of 1934, as amended, or from
owning any amount of the capital stock of WMS.
16.2 NON-SOLICITATION.
16.2.1 For so long as this Agreement is in effect and
for a period of two years following the termination of this Agreement, WMS shall
not, directly or indirectly, hire or solicit the employment of any employee of
Midway or encourage any such employee to leave his or her employment with Midway
or induce any employee of Midway to seek, accept or obtain employment by any
Person other than Midway.
16.2.2 For so long as this Agreement is in effect and
for a period of two years following the termination of this Agreement, Midway
and its Affiliates shall not, directly or indirectly, hire or solicit the
employment of any employee of WMS or encourage any such employee to leave his or
her employment with WMS or induce any employee of WMS to seek, accept or obtain
employment by any Person other than WMS.
16.3 RIGHTS AND REMEDIES UPON BREACH. If either party hereto
breaches or threatens to commit a breach of, any of the provisions of Sections
16.1 or 16.2 hereof, the other party shall have the right and remedy to have
such covenants specifically enforced by any court of competent jurisdiction,
it being agreed that any breach or threatened breach of such covenants would
cause irreparable injury and that money damages would not provide an
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adequate remedy. This right of specific performance is in addition to, and not
in lieu of, any other rights and remedies available to the respective parties
hereto under law or in equity.
16.4 SEVERABILITY OF COVENANT. Each of the parties hereto
acknowledges and agrees that the foregoing covenants in this Section 16 are
reasonable and valid in geographical and temporal scope and in all other
respects and that it has received full and adequate consideration therefor. If
any court determines that any of such covenants, or any part thereof, is invalid
or unenforceable, the remainder of such covenants shall not thereby be affected
and shall be given full effect, without regard to the invalid portions. If any
court determines that any of the foregoing covenants, or any part thereof, is
unenforceable because of the duration or geographic scope of such provision,
such court shall have the power to reduce the duration or scope of such
provision as the case may be, and, in its reduced form, such provision shall
then be enforceable.
17. CONFIDENTIALITY. Either WMS or Midway may from time to time
by written notice to the other designate information regarding its business as
confidential ("Confidential Information"). Each party shall use its best efforts
to maintain the confidentiality of the other party's Confidential Information.
All Confidential Information which either party has obtained from the other
shall be returned or destroyed (if the owner of such information so notifies the
holder) upon the expiration or earlier termination of this Agreement. Each party
shall instruct its employees who have access to the Confidential Information of
the other party to keep the same confidential by using the same care and
discretion that it uses with respect to its own confidential property and trade
secrets. The provisions of this Section 17 shall survive expiration or earlier
termination of this Agreement.
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18. ASSIGNMENT. Neither party shall, without the prior written
consent of the other, assign any rights or delegate any obligations under this
Agreement, such consent not to be unreasonably withheld, conditioned or delayed.
19. HEADINGS. The headings used in this Agreement are inserted
only for the purpose of convenience and reference, and in no way define or limit
the scope or intent of any provision or part hereof.
20. RIGHTS OF PARTIES. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder. No person shall
be deemed to be a third party beneficiary of this Agreement. Nothing herein
shall be construed to be an admission or waiver of any rights, claims and
defenses the parties may have against third parties, which rights, claims and
defense the parties specifically reserve.
21. NOTICES. All notices and other communications hereunder
shall be in writing and shall be delivered by hand, by facsimile or mailed by
registered or certified mail (return receipt requested) to the parties at the
addresses set forth on the first page of this Agreement (or at such other
addresses for a party as shall be specified by like notice) and shall be deemed
given on the date on which such notice is received.
22. FURTHER ACTION. WMS and Midway each shall cooperate in good
faith and take such actions and execute such documents and instruments as may be
reasonably requested by the other party to implement the terms and provisions of
this Agreement.
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23. GOVERNING LAW. All controversies and disputes arising out of
or under this Agreement shall be determined pursuant to the laws of the State of
Illinois, United States of America, regardless of the laws that might be applied
under applicable principles of conflicts of laws.
24. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties hereto (and supersedes all prior written or
oral communications) relating to the subject matter covered in this Agreement.
No amendment, modification, extension or failure to enforce any condition of
this Agreement by either party shall be deemed a waiver of any of its rights
herein. This Agreement shall not be amended except by a writing executed by both
of the parties hereto. The parties are entering into separate tax sharing,
patent license and registration rights agreements. In the event of any conflict
between this Agreement and the tax sharing agreement, the provisions of the tax
sharing agreement shall prevail. In the event of any conflict between this
Agreement and the patent license agreement, the provisions of the patent license
agreement shall prevail. In the event of any conflict between this Agreement and
the registration rights agreement, the provisions of the registration rights
agreement shall prevail.
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IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
WMS INDUSTRIES INC.
By: /s/ Neil D. Nicastro
-----------------------------
Name: Neil D. Nicastro
Title: President
MIDWAY GAMES INC.
By: /s/ Harold H. Bach, Jr.
-----------------------------
Name: Harold H. Bach, Jr.
Title: Executive Vice President--Finance
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SCHEDULE 1
Initial Members of the Negotiating Committee
WMS designees
Midway designees
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SCHEDULE 2
1. Asset Purchase Agreement dated April 4, 1994 among Tradewest,
Inc., Tradewest International, Inc., Williams Entertainment
Inc., Leland P. Cook, Byron C. Cook, John R. Rowe and WMS
Industries Inc.
2. Asset Purchase Agreement dated April 4, 1994 among The Leland
Corporation, Williams Entertainment Inc., Leland P. Cook,
Bryan C. Cook, John R. Rowe and WMS Industries Inc.
3. Panasonic Master Option License Agreement dated June 30, 1995
among WMS Industries Inc., Williams Electronics Games, Inc.,
Midway Manufacturing Company and Williams Entertainment Inc.
and Panasonic Software Company, Division of Matsushita
Electric Corporation of America and Interactive Media Division
of Matsushita Electric Industrial Co., Ltd.
4. GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., Midway
Manufacturing Company and Williams Entertainment Inc., and GT
Interactive Software Corp. dated December 28, 1994.
5. Amendment to GTIS Master Option and License Agreement by and
among WMS Industries Inc., Williams Electronics Games, Inc.,
Midway Manufacturing Company and Williams Entertainment Inc.,
and GT Interactive Software Corp. dated March 31, 1995.
6. Second Amendment to GTIS Master Option and License Agreement
by and among WMS Industries Inc., Williams Electronics Games,
Inc., Midway Manufacturing Company and Williams Entertainment
Inc., and GT Interactive Software Corp. dated March 27, 1996.
7. GTIS Master Option and License Agreement (Home Video Games) by
and among WMS Industries Inc., Williams Electronics Games,
Inc., Midway Manufacturing Company and Williams Entertainment
Inc., and GT Interactive Software Corp. dated March 31, 1995.
8. Amendment to GTIS Master Option and License Agreement (Home
Video Games) by and among WMS Industries Inc., Williams
Electronics Games, Inc., Midway Manufacturing Company and
Williams Entertainment Inc., and GT Interactive Software Corp.
dated March 27, 1996.
9. Master Option and License Agreement for Atari Home Video Games
dated March 27, 1996, between WMS Industries Inc. and GT
Interactive Software Corp.
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10. Master Option and License Agreement for Atari PC Games dated
March 27, 1996, between WMS Industries Inc. and GT Interactive
Software Corp.
11. Letter Agreement dated March 27, 1996, issued by WMS
Industries Inc. to GT Interactive Software Corp. with respect
to Softbank Corporation and Road Show Entertainment Pty, Ltd.
12. Letter Agreement dated March 27, 1996 issued by WMS Industries
Inc. to GT Interactive Corp. with respect to third party
agreements.
13. Letter Agreement dated March 27, 1996, issued by WMS
Industries Inc. to GT Interactive Software Corp. with respect
to Inventory.
14. Letter Agreement dated March 27, 1996, issued by WMS
Industries Inc. to GT Interactive Software Corp. with respect
to the Japan Territory.
15. Undertaking of WMS Industries Inc. in favor of Warner
Communications Inc. dated February 23, 1996.
16. Guaranty of Employment Agreement dated April 29, 1994 between
Williams Entertainment Inc. and Byron Cook.
17. Guaranty dated July 30, 1996 of WMS Industries Inc. in favor
of CB Merrell Road, Ltd. with respect to the Lease dated July
30, 1996 between Williams Entertainment Inc. and CB Merrell
Road, Ltd.
18. Guaranty dated August 15, 1996 by WMS Industries Inc. in favor
of Samsung Semiconductor, Inc. with respect to credit extended
to Williams Entertainment Inc.
19. Guaranty dated August 20, 1996 by WMS Industries Inc. in favor
of L G Semicon America Inc. with respect to credit extended to
Williams Entertainment Inc.
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EXHIBIT 10.2
TAX SHARING AGREEMENT
THIS AGREEMENT is entered into as of the 1st day of July, 1996, by and
among WMS Industries Inc., a Delaware corporation ("WMS"), Midway Games Inc., a
Delaware corporation ("Midway"), and each direct and indirect wholly owned
Midway subsidiary listed on Exhibit A and incorporated herein by reference
("Midway Subsidiaries").
WITNESSETH:
WHEREAS, WMS, Midway and the Midway Subsidiaries (hereinafter sometimes
referred to as "Members"; or in the singular "Member") are part of an affiliated
group ("WMS Group") as defined by Section 1504(a) of the Internal Revenue Code
of 1986, as amended (hereafter referred to by Sections);
WHEREAS, the WMS Group (as it then existed) has elected to file
consolidated federal income tax returns for the taxable year commencing May 30,
1981 and thereafter in accordance with Section 1501; and
WHEREAS, WMS is the Common Parent (as such term is defined in Section
1504(a)) for the affiliated group which includes WMS, Midway and Midway
Subsidiaries; and
WHEREAS, the Members desire to agree upon a method for (i) determining
the amount which Midway and the Midway Subsidiaries must pay to WMS in respect
of federal income taxes; (ii) compensating any Member for use of its "net
operating loss", "tax credits" and other tax benefits in arriving at the WMS
Group tax liability as determined under the federal consolidated return
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.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, for the WMS Group's first taxable year beginning July 1, 1996
and taxable years thereafter, the parties hereto agree as follows:
1. TAX PAYMENT CALCULATION
(a) The consolidated federal income tax liability of the WMS
Group, as determined under Section 1.1502-2 of the Regulations shall be
allocated to the Members in accordance with Section 1.1552-1(a)(1);
<PAGE> 2
(b) An additional amount shall be allocated to each Member
equal to 100 percent of the excess, if any, of (i) the "separate return tax
liability" of such Member for the taxable year over (ii) the tax liability of
such Member computed in accordance with Paragraph 1(a). For purposes of the
preceding sentence, the "separate return tax liability" of each Member for the
taxable year shall be determined as if such Member were filing a separate tax
return under the Code, and the term will not have the meaning set forth in
Section 1.1502-12 of the Regulations. In determining "separate return tax
liability" of a Member for purposes of their Agreement:
(i) any dividends received by one Member from another
Member will be assumed to qualify for the 100 percent dividends
received deduction of Section 243 of the Code, or shall be
eliminated from such calculation in accordance with Section
1.1502-14(a)(1) of the Regulations;
(ii) gain or loss on intercompany transactions shall
be treated by each Member in the manner required by Section
1.1502-13 of the Regulations;
(iii) limitations on the calculation of a deduction or
the utilization of tax credits or the calculation of a tax
liability shall be made on a consolidated basis; accordingly,
the limitations provided in Sections 38(c), 55(a), 170(b)(2),
and 172(b)(2) of the Code and similar limitations shall be
applied on a consolidated basis; and
(iv) elections as to tax credits and tax computations
which may have been different from the consolidated treatment
if separate returns were filed shall be made on an annual basis
as determined by WMS.
(c) Each Member shall pay WMS its allocated federal income tax
liability pursuant to paragraph 1(a). Each Member benefitting from net operating
losses and tax credits shall pay to WMS an additional amount determined pursuant
to paragraph 1(b). WMS shall pay to each Member which had net operating or
capital losses, tax credits or other tax benefits to which such total is
attributable, its allocable share of the total of additional amounts due from
other Members determined ratably in respect of such benefits or by such other
consistent method which reasonably reflects such losses, credits or other tax
benefits (such consistency and reasonableness to be determined by the party
charged with the administration of this Agreement in accordance with Paragraph
7(c) of this Agreement). However, for this purpose, the amounts paid to Members
will generally be deemed consistent and reasonable if paid on a basis equal to
the rate of tax in effect for the year to which such losses are carried, based
on the amount of such losses utilized, and 100 percent of tax credits utilized
(unless, due to special circumstances, this would
<PAGE> 3
be inequitable) and which is substantiated by specific records maintained by the
group for such purposes.
For purposes of this Agreement, the "net operating loss" of a
Member is the deduction which such member would have had available if it
actually filed a separate return for the year but would not include any portion
of a Member's net operating loss sustained in a prior or subsequent year which
had been absorbed by the WMS Group, any other affiliated group, or by the Member
in computing actual liabilities for prior or subsequent years. Notwithstanding
the preceding sentence, no benefit under Paragraph 3(c) of this Agreement shall
be granted a Member unless the net operating loss is availed of in reducing the
consolidated federal income tax liability. The rules stated in the previous
sentences regarding carryover net operating losses will also apply in the
computation of other carryover items such as capital losses general business tax
credits, foreign tax credits, charitable contribution deductions and other tax
benefits.
In calculating any benefit from a carryback or carryover of net
operating losses, adjustments shall be made to such prior or subsequent year's
separate return tax liability as required under Section 172(b)(2) and 172(d) of
the Code. For purposes of this calculation, the election under Section 172(b)(3)
shall be made on a separate company basis.
(d) Payments for these allocable shares are to be made no later
than ten (10) days after the date of filing of the consolidated federal income
tax return for such taxable year. The Chief Executive Officer of WMS shall have
the right to assess Members their share of estimated tax payments to be made on
the projected consolidated income tax liability for each year. Payment to WMS
shall be made ten (10) days after such assessment.
2. REFUNDS AND SUBSEQUENT ADJUSTMENTS
(a) If part or all of an unused consolidated net operating loss
or tax credit is allocated to a Member of the WMS Group pursuant to Section
1.1502-79 of the Regulations, and it is carried back or forward to a year in
which such Member actually filed or files a separate income tax return or a
consolidated federal income tax return with another affiliated group, any refund
or reduction in tax liability arising from the carryback or carryover shall be
retained by such Member. Notwithstanding the above, WMS shall determine whether
an election shall be made not to carryback any consolidated net operating loss
arising in a consolidated return year (including any portion allocated to a
Member under Section 1.1502-79) in accordance with Section 172(b)(3) of the
Code.
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<PAGE> 4
(b) If the consolidated federal income tax liability is
adjusted for any taxable period, whether by means of an amended return, claim
for refund, or after an audit by the Internal Revenue Service, the liability of
each Member shall be recomputed to give effect to such adjustments. In the case
of a refund, WMS shall pay to each Member such Member's share of the refund,
determined in the same manner, within twenty (20) days after the refund is
received and in the case of an increase in tax liability, each Member shall pay
to WMS its allocable share of such increased tax liability within twenty (20)
days after receiving notice of such liability from WMS. If any interest is to be
paid or received as a result of a consolidated federal income tax deficiency or
refund, such interest shall be allocated to the Members in the same manner as
each Member's change in consolidated federal income tax liability or right to a
refund is determined. Any penalty shall be allocated upon such basis as the
president of WMS deems just and proper in view of all applicable circumstances.
(c) If the consolidated federal income tax liability of the WMS
Group is adjusted for any taxable period prior to the Effective Date stated in
Section 4, the preceding subparagraph shall be applied as if this Agreement was
in effect for such prior period except that the portion of any adjustments which
are characterized as "permanent differences" as defined by Generally Accepted
Accounting Principals shall be deemed to be attributable to WMS.
3. STATE AND LOCAL TAXES
Each Member shall timely file its own returns and pay its own state and
local income and franchise taxes; provided, however, that if any two or more
Members are required or elect, or WMS elects or causes any two or more Members
to elect, to file combined or consolidated (or similar) income tax returns for
any taxable year under any state or local income tax law, the financial
consequences of filing such returns among such Members shall be determined in a
manner as similar as practicable to those provided herein for federal income tax
purposes.
4. EFFECTIVE DATE
This Agreement shall be effective for the tax period beginning July 1,
1996, and all subsequent taxable years, unless the Members agree in writing to
terminate the Agreement. Notwithstanding such termination, this Agreement shall
continue in effect with respect to any payment or refunds due for all taxable
periods prior to termination.
5. MISCELLANEOUS PROVISIONS
(a) For purposes of this Agreement, the subsidiaries of WMS
(other than Midway) that are includible corporations in the WMS Group will be
considered Members. No payment, however, will be required to be made to or by
the WMS Subsidiaries.
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<PAGE> 5
(b) For purposes of this Agreement, all payments due or from
any of Midway or the Midway Subsidiaries shall be netted and aggregated and paid
to or by Midway. Nothing in this Agreement shall be interpreted to require
Midway to make any payments to the Midway Subsidiaries.
(c) The Agreement shall not be assignable by any Member without
the prior written consent of the others.
(d) All material including but not limited to, returns,
supporting schedules, work papers, correspondence, and other documents relating
to the consolidated federal income tax returns filed for a taxable year during
which this Agreement was in effect shall be made available to any Member to the
Agreement during regular business hours for a minimum period equal to applicable
federal record retention requirements.
(e) The provisions of this Agreement shall be administered by
the Chief Executive Officer of WMS. A dispute between the parties with respect
to the operation or interpretation of this Agreement shall be decided by three
arbitrators who must all be certified public accountants or attorneys
specializing in tax law. WMS and Midway shall each choose an arbitrator who will
choose a third arbitrator. The court of arbitrators shall be held in the State
of Illinois in the city of Chicago. The losing party shall bear the cost of
arbitration including all fees for attorneys and accountants.
(f) Any Member corporation which leaves the consolidated group
shall be bound by this Agreement.
(g) The Members hereto recognize that from time to time other
companies may become Members of the WMS Group and hereby agree that such new
Members may become parties to this Agreement by executing the master copy of
this Agreement which shall be maintained at WMS's headquarters. It will not be
necessary for all the other Members to re-execute this Agreement; the new Member
may sign the existing Agreement, and it will be effective as if the old Members
had re-executed.
(h) Any alteration, modification, addition, deletion, or other
change in the consolidated income tax return provisions of the 1986 Code or the
regulations thereunder shall automatically be applied to this Agreement mutatis
mutandis.
(i) Failure of one or more parties hereto to qualify as a
member of the "affiliated group" within the meaning of Section 1504(a) of the
Code shall not terminate this Agreement with respect to the other parties as
long as two or more parties hereto continue so to qualify.
(j) This Agreement shall bind successors and assigns of the
parties hereto; but no assignment shall relieve any party's obligations
hereunder without the written consent of the other parties.
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<PAGE> 6
(k) All notices and other communications hereunder shall be
deemed to have been duly given if delivered by hand or mailed by certified or
registered mail, postage prepaid, to the Chief Financial Officer of any Member,
c/o WMS Industries Inc., 3401 N. California Avenue, Chicago, IL 60618 or such
other person as any member shall designate by a duly delivered notice to all
other Members.
(l) This Agreement shall be governed by the laws of the State
of Illinois.
IN WITNESS WHEREOF, the parties have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated, effective as of the date first written above.
DATED:
WMS INDUSTRIES INC.
By: /s/ Neil D. Nicastro
--------------------
Title: President
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
--------------------
Title: President
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<PAGE> 7
MIDWAY HOME ENTERTAINMENT INC.
By: /s/ Neil D. Nicastro
--------------------
Title: Chairman
MIDWAY INTERACTIVE INC.
By: /s/ Neil D. Nicastro
--------------------
Title: President
ATARI GAMES CORPORATION
By: /s/ Neil D. Nicastro
--------------------
Title: Chairman
TENGEN INC.
By: /s/ Neil D. Nicastro
--------------------
Title: Chairman
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<PAGE> 8
EXHIBIT A
Midway Home Entertainment Inc.
Midway Interactive Inc.
Atari Games Corporation
Tengen Inc.
<PAGE> 1
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENTS
This Registration Rights Agreement ("Agreement") is made and entered
into as of July 1, 1996 by and between Midway Games Inc., a Delaware corporation
(the "Company"), and WMS Industries Inc., a Delaware corporation ("WMS").
WHEREAS, WMS, directly and indirectly, owns 100% of the issued and
outstanding shares of common stock of the Company, par value $.01 per share (the
"Common Stock");
WHEREAS, pursuant to an initial public offering (the "Public
Offering"), approximately 13.2% (14.9% if the underwriters' over-allotment
option is exercised in full) of the Common Stock will be sold to the public;
WHEREAS, after the Public Offering, WMS and the Company will be
separate publicly held companies and WMS will continue to own approximately
86.8% (85.1% if the underwriters' over-allotment option is exercised in full) of
the Common Stock; and
WHEREAS, WMS and the Company desire to enter into this Agreement to set
forth the terms pursuant to which the Company will file registration statements
under the Securities Act of 1933, as amended (the "Securities Act"), in order to
permit WMS to offer and sell shares of Common Stock that WMS or its affiliates
may beneficially own.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. SECURITIES SUBJECT TO THIS AGREEMENT
For purposes of this Agreement, "Registrable Securities" shall
mean the shares of Common Stock held by WMS, or any of WMS' affiliates until
such time as (i) a registration statement covering such Registrable Securities
has been declared effective and such Registrable Securities have been disposed
of pursuant to such effective registration statement or (ii) such Registrable
Securities are transferred pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act, whichever is earlier.
2. DEMAND REGISTRATION
2.1 REQUEST FOR REGISTRATION. At any time after 180 days from
the date of the Public Offering, WMS may make a written request for registration
under the Securities Act of not less than five percent (5%) of the total number
of shares of Common Stock then outstanding (a "Demand Registration"); provided
that the Company need effect only two (2) Demand Registrations pursuant to this
Section 2.1. Such request for a Demand Registration will
<PAGE> 2
specify the aggregate number of shares of Registrable Securities proposed to be
sold and will also specify the intended method of disposition thereof.
2.2 EFFECTIVE REGISTRATION AND EXPENSES. A registration will
not count as a Demand Registration until it has become effective. In any
registration initiated as a Demand Registration, the Company will pay or cause
to be paid all Registration Expenses (as defined in Section 6 below) in
connection therewith, whether or not the registration statement becomes
effective.
2.3 UNDERWRITING. If WMS so elects, the offering of such
Registrable Securities pursuant to such Demand Registration shall be in the form
of an underwritten offering through the underwriter(s) WMS designates; provided,
however, that such underwriter must be reasonably satisfactory to the Company.
If the underwriter does not limit the number of Registrable Securities to be
underwritten in a Demand Registration, the Company may include securities for
its own account or the account of others in such registration if the
underwriters so agree and if the number of Registrable Securities which would
otherwise have been included in such registration and underwriting will not
thereby be limited.
2.4 DELAY OF DEMAND REGISTRATION. Notwithstanding any other
provision of this Agreement, if the underwriters for the Company determine that
an offering by the Company then being conducted or about to be conducted would
be adversely affected by a Demand Registration, the Company may delay such a
Demand Registration for a period of up to 60 days.
3. PIGGY-BACK REGISTRATION
If the Company proposes to file a registration statement
(other than a Demand Registration) under the Securities Act with respect to an
offering by the Company for its own account or for the account of others (other
than a registration statement on Forms S-4 or S-8 or filed in connection with an
exchange offer or an offering of securities solely to the Company's existing
stockholders) of any class of security of the Company, then the Company shall in
each case give written notice of such proposed filing to WMS at least 10 days
before the anticipated filing date, and such notice shall offer WMS the
opportunity to register such Registrable Securities as each such holder may
request (a "Piggy-back Registration"). On request of WMS received by the Company
within 10 days after the receipt by WMS of the Company's notice of intention to
file the proposed registration statement, the Company shall include in such
registration and qualification for sale under the blue sky or securities laws of
the various states, and in any underwriting in connection therewith, the number
of shares of Registrable Securities held and requested to be registered by WMS,
which may be all or a part of the Registrable Securities.
The Company shall use its best efforts to cause the managing
underwriter or underwriters of a proposed underwritten offering to permit WMS to
include such Registrable Securities in such offering on the same terms and
conditions as any similar securities of the Company included therein.
Notwithstanding the foregoing, if the managing underwriter or
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<PAGE> 3
underwriters of such offering delivers an opinion to WMS that the number of
shares which they or the Company intend to include in such offering is so large
as to materially and adversely affect the success of such offering (including
the price at which such securities can be sold), then the amount of securities
to be offered for the account of WMS shall be reduced to the extent necessary to
reduce the number of shares to be included in such offering to the number
recommended by such managing underwriter or underwriters.
4. HOLDBACK AGREEMENTS
4.1 RESTRICTIONS ON PUBLIC SALE BY WMS. To the extent not
inconsistent with applicable law, WMS agrees not to effect any public sale or
distribution of Common Stock during the 14 days prior to, and during the 90-day
period beginning on, the effective date of a registration statement that
includes Registrable Securities (except as part of such registration), but only
if and to the extent requested in writing (with reasonable prior notice) by the
managing underwriter or underwriters in the case of an underwritten public
offering by the Company of securities similar to the Registrable Securities or
by the Company in the case of such an offering that is not underwritten.
4.2 RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company
agrees not to effect any public sale or distribution of Common Stock during the
14 days prior to, and during the 90-day period beginning on, the effective date
of any registration statement which includes Registrable Securities (except as
part of such registration).
5. REGISTRATION PROCEDURES
Whenever any Registrable Securities are to be registered
pursuant to Section 2 or Section 3 of this Agreement, the Company will use its
best efforts to effect the registration and the sale of such Registrable
Securities in accordance with the intended method of disposition thereof
promptly, and in connection with any Demand Registration or with any Piggy-back
Registration, the Company will promptly;
5.1 prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement which includes the
Registrable Securities and use its best efforts to cause such registration
statement to become effective; provided that before filing a registration
statement or prospectus or any amendments or supplements thereto, including
documents incorporated by reference after the initial filing of the registration
statement, the Company will furnish to WMS and to the underwriters, if any,
draft copies of all such documents proposed to be filed at least five (5)
business days prior thereto, which documents will be subject to the reasonable
review of WMS and such underwriters, and the Company will not, unless required
by law, file any registration statement or amendment thereto or any prospectus
or any supplement thereto (including such documents incorporated by reference)
to which WMS shall reasonably object. The Company will notify WMS of any stop
order issued or threatened by the Commission in connection therewith and take
all reasonable actions required to prevent the entry of such stop order or to
remove it if entered;
3
<PAGE> 4
5.2 prepare and file with the Commission such amendments and
post-effective amendments to the registration statement as may be necessary to
keep the registration statement effective for a period of not less than 180 days
(or such shorter period which will terminate when all Registrable Securities
covered by such registration statement have been sold or withdrawn, but not
prior to the expiration of the applicable period referred to in Section 4(3) of
the Securities Act and Rule 174 thereunder; if applicable); cause the prospectus
to be supplemented by any required prospectus supplement, and as so supplemented
to be filed pursuant to Rule 424 under the Securities Act; and comply with the
provisions of the Securities Act applicable to it with respect to the
disposition of all securities covered by such registration statement during the
applicable period in accordance with the intended methods of disposition thereof
set forth in such registration statement or supplement to the prospectus;
5.3 furnish to WMS and the underwriter or underwriters, if
any, without charge, such number of conformed copies of the registration
statement, or any amendment thereto, and any post-effective amendment thereto
and such number of copies of the prospectus (including each preliminary
prospectus) and any amendments or supplements thereto, and any documents
incorporated by reference therein, as WMS or such underwriter may request in
order to facilitate the disposition of the Registrable Securities being sold by
such holder (it being understood that the Company consents to the use of the
prospectus and any amendment or supplement thereto by WMS and the underwriter or
underwriters, if any, in connection with the offering and sale of the
Registrable Securities covered by the prospectus or any amendment or supplement
thereto);
5.4 use its best efforts to list the Registrable Securities
covered by such registration statement with [the Nasdaq National Market] and any
other securities exchange on which the Common Stock of the Company is then
listed;
5.5 notify WMS at any time when a prospectus relating to the
Registrable Securities is required to be delivered under the Securities Act,
when the Company becomes aware of the happening of any event as a result of
which the prospectus included in such registration statement (as then in effect)
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein in light of the circumstances
under which they were made, not misleading and, as promptly as practicable
thereafter, prepare and file with the Commission and furnish a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading;
5.6 make generally available to its security holders an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act no later than 60 days after the end of the 12-month period beginning with
the first day of the Company's first fiscal quarter commencing after the
effective date of the registration statement, which earnings statement shall
cover said 12-month period, and which requirement will be deemed to be satisfied
if the
4
<PAGE> 5
Company timely files complete and accurate information on forms 10-Q, 10-K
and 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and otherwise complies with Rule 158 under the Securities Act as soon as
possible;
5.7 make reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of the registration statement at the earliest
possible moment;
5.8 if requested by the managing underwriter or underwriters
or WMS, promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or underwriters requests,
or WMS reasonably requests, to be included therein, including, without
limitation, with respect to the principal amount of Registrable Securities being
sold by WMS to such underwriter or underwriters, the purchase price being paid
therefor by such underwriter or underwriters and with respect to any other terms
of the underwritten offering of the Registrable Securities to be sold in such
offering, and promptly make all required filings of such prospectus supplement
or post-effective amendment;
5.9 as promptly as practicable after filing with the
Commission of any document which is incorporated by reference into a
registration statement, deliver a copy of such document to WMS;
5.10 on or prior to the date on which the registration
statement is declared effective, use its best efforts to register or qualify,
and cooperate with WMS, the underwriter or underwriters, if any, and their
counsel, in connection with the registration or qualification of the Registrable
Securities covered by the registration statement for offer and sale under the
securities or blue sky laws of each state and other jurisdiction of the United
States as WMS or any such underwriter requests in writing, to use its best
efforts to keep each such registration or qualification effective, including
through new filings, or amendments or renewals, during the period such
registration statement is required to be kept effective and to do any and all
other acts or things necessary or advisable to enable the disposition in all
such jurisdictions of the Registrable Securities covered by the applicable
registration statement; provided that the Company will not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action which would subject it to general service of
process in any such jurisdiction where it is not then so subject;
5.11 cooperate with WMS and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing securities sold
under the registration statement, and enable such securities to be in such
denominations and registered in such names as the managing underwriter or
underwriters, if any, or WMS may request;
5.12 use its best efforts to cause the Registrable Securities
covered by the registration statement to be registered with or approved by such
other governmental agencies or authorities within the United States including
the blue sky or securities administrators of such
5
<PAGE> 6
jurisdictions as may be requested by WMS, as may be necessary to enable WMS or
the underwriter or underwriters, if any, to consummate the disposition of such
securities;
5.13 if applicable, enter into such customary agreements
(including an underwriting agreement in customary form) and take such other
actions as WMS or the underwriters, if any, request in order to expedite or
facilitate the disposition of such registrable Securities;
5.14 make available for inspection by WMS, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by WMS or any such underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of the Company (collectively, the "Records"),
as shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors and employees to
supply all information requested by any such Inspector in connection with such
registration statement; provided that the Company shall not be required to
provide any information under this Section 5.14 if to do so would cause the
Company to forfeit an attorney-client privilege that was applicable to such
information; and provided, further, that Records which the Company determines,
in good faith, to be confidential and which it notifies the Inspectors are
confidential shall not be disclosed to the Inspectors unless (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
the registration statement or (ii) the release of such Records is ordered
pursuant to a subpoena or other order from a court of competent jurisdiction;
provided that prior to furnishing such information, the Company shall be
entitled to require WMS to enter into a confidentiality agreement in customary
form and subject to customary exceptions and provided, further, that any
decision not to disclose information pursuant to clause (i) shall be made after
consultation with counsel for the Company and counsel for WMS; and WMS agrees
that it will, upon learning that disclosure of such Records is sought in a court
of competent jurisdiction give notice to the Company and allow the Company at
its expense, to undertake appropriate action and to prevent disclosure of the
Records deemed confidential; and
5.15 use reasonable efforts to obtain a cold comfort letter
from the Company's independent certified public accountants in customary form
and covering such matters of the type customarily covered by cold comfort
letters as WMS or the underwriters, if any, shall reasonably request.
Upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 5.5 hereof, WMS will forthwith
discontinue disposition of the Registrable Securities until receipt of the
copies of the supplemented or amended prospectus contemplated by Section 5.5
hereof or until it is advised in writing (the "Advice") by the Company that the
use of the prospectus may be resumed, and has received copies of any additional
or supplemental filings which are incorporated by reference in the prospectus
and, if so directed by the Company, WMS will, or will request the managing
underwriter or underwriters, if any, to deliver to the Company (at the Company's
expense) all copies, other than permanent file copies
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<PAGE> 7
then in such holder's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice. In the event the
Company shall give any such notice, the time periods mentioned in Section 5.2
hereof shall be extended by the number of days during the period from and
including the date of the giving of such notice to and including the date when
WMS shall have received the copies of the supplemented or amended prospectus
contemplated by Section 5.5 hereof or the Advice.
6. REGISTRATION EXPENSES
All expenses incident to the Company's performance of or
compliance with this Agreement, including, without limitation, all Commission
and securities exchange or NASD registration and filing fees, fees and expenses
of compliance with securities or blue sky laws (including reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), rating agency fees, printing expenses, messenger and
delivery expenses, internal expenses (including without limitation, all salaries
and expenses of the Company's officers and employees performing legal or
accounting duties), the fees incurred in connection with the listing of the
securities to be registered, if any, on each securities exchange on which
similar securities issued by the Company are then listed and reasonable fees and
disbursement of counsel for the Company and its independent certified public
accountants (including the expenses of any special audit or "cold comfort"
letters required by or incident to such performance), securities act liability
insurance (if the Company elects to obtain such insurance), the reasonable fees
and expenses of any special experts retained by the Company in connection with
each registration hereunder (but not including any underwriting fees, discounts
or commissions attributable to the sale of Registrable Securities which shall be
paid by WMS) and any reasonable out-of-pocket expenses of WMS excluding any
travel costs and counsel fees except as set forth above (all such expenses being
herein called "Registration Expenses") will be borne by the Company.
7. INDEMNIFICATION; CONTRIBUTION
7.1 INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless WMS, its officers, directors and each person who
controls such holder (within the meaning of the Securities Act), and any agent
or investment advisor thereof against all losses, claims, damages, liabilities
and expenses (including reasonable costs of investigation) arising out of or
based upon any untrue or alleged untrue statement of material fact contained in
any registration statement, any amendment or supplement thereto, any prospectus
or preliminary prospectus or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as the same arise out of or are based
upon any such untrue statement or omission based upon information with respect
to WMS furnished in writing to the Company by or on behalf of WMS expressly for
use therein; provided that, in the event that the prospectus shall have been
amended or supplemented and copies thereof, as so amended or supplemented shall
have been furnished to WMS prior to the confirmation of any sale of Registrable
Securities, such indemnity with respect to the prospectus shall not inure to the
benefit of WMS if the person asserting such
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<PAGE> 8
loss, claim, damage or liability did not, at or prior to the confirmation of the
sale of the Registrable Securities to such person, receive a copy of the
prospectus as so amended or supplemented and the untrue statement or omission of
a material fact contained in the prospectus was corrected in the prospectus as
so amended or supplemented. In connection with an underwritten offering, the
Company will indemnify the underwriters thereof, their officers and directors
and each person who controls such underwriters (within the meaning of the
Securities Act) to the same extent as provided above with respect to the
indemnification of WMS except with respect to information provided by the
underwriter specifically for inclusion therein.
7.2 INDEMNIFICATION BY WMS. In connection with any
registration statement in which WMS participates, WMS will furnish to the
Company in writing such information with respect to WMS as the Company
reasonably requests for use in connection with any such registration statement
or prospectus and agrees to indemnify, to the extent permitted by law, the
Company, its directors and officers and each person who controls the Company
(within the meaning of the Securities Act) against any losses, claims, damages,
liabilities and expenses resulting from any untrue statement of a material fact
or any omission of a material fact required to be stated in the registration
statement or prospectus or any amendment thereof or supplement thereto or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement is contained in or such omission
relates to any information with respect to WMS so furnished in writing by such
holder specifically for inclusion in any prospectus or registration statement.
In no event shall the liability of any selling holder of Registrable Securities
hereunder be greater in amount than the dollar amount of the proceeds received
by such holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
7.3 CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any person
entitled to indemnification hereunder agrees to give prompt written notice to
the indemnifying party after the receipt by such person of any written notice of
the commencement of any action, suit, proceeding or investigation or threat
thereof made in writing for which such person will claim indemnification or
contribution pursuant to this Agreement and, unless in the reasonable judgment
of counsel of such indemnified party a conflict of interest may exist between
such indemnified party and the indemnifying party with respect to such claim,
permit the indemnifying party to assume defense of such claim. Whether or
not such defense is assumed by the indemnifying party, the indemnifying party
will not be subject to any liability for any settlement made without its consent
(but such consent will not be unreasonably withheld). No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect to such
claim or litigation. If the indemnifying party is not entitled to, or elects not
to, assume the defense of a claim, it will not be obliged to pay the fees and
expenses of more than one counsel with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels.
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<PAGE> 9
7.4 CONTRIBUTION. If the indemnification provided for in this
Section 7 from the indemnifying party is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified parties in connection with the actions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified parties shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact, has been made by, or relates to
information supplied by the indemnifying party or indemnifying parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 7.3, any reasonable legal or other fees or expenses reasonably incurred
by such party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 7.4 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 7.4, no underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission, and WMS
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Registrable Securities of WMS were offered to the
public exceeds the amount of any damages which WMS has otherwise been required
to pay by reason of such untrue statement or omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
If indemnification is available under this Section 7, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Sections 7.1 and 7.2 without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable consideration
provided for in this Section 7.4.
8. TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Securities
granted pursuant to this Agreement may be transferred or assigned by WMS to a
transferee or assignee of the Registrable Securities; provided, however, that
the transferee or assignee of such rights assumes the obligations of such
transferor or assignor, as the case may be, under this Agreement.
9
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9. MISCELLANEOUS
9.1 REMEDIES. In addition to being entitled to exercise all
rights granted by law, including recovery of damages, WMS will be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Agreement and hereby agrees
to waive the defense in any action for specific performance that a remedy at law
would be adequate.
9.2 NOTICES. All notices and other communications provided for
or permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by telex or telecopies, registered or
certified mail (return receipt requested), postage prepaid or courier to the
parties at the following addresses (or at such other address for any party as
shall be specified by like notice, provided that notices of a change of address
shall be effective only upon receipt thereof). Notices sent by mail shall be
effective two days after mailing; notices sent by telex shall be effective when
answered back, notices sent by telecopier shall be effective when receipt is
acknowledged, and notices sent by courier guaranteeing next day delivery shall
be effective on the next business day after timely delivery to the courier:
(i) if to WMS, at the following address:
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Attention: President
Telephone: (312) 961-1111
Telecopy No. (312) 961-1099
(ii) if to the Company, at the following address:
Midway Games Inc.
3401 North California Avenue
Chicago, IL 60618
Attention: President
Telephone: (312) 961-2222
Telecopy No. (312) 961-1099
9.3 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties.
9.4 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
10
<PAGE> 11
9.5 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
9.6 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed wholly within that State.
9.7 SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application in any respect for any reason,
the validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby.
9.8 ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final expression of their agreement and is intended to be the
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
MIDWAY GAMES INC.
By: /s/ Harold H. Bach, Jr.
-----------------------
Name: Harold H. Bach, Jr.
Title: Executive Vice President--Finance
WMS INDUSTRIES INC.
By: /s/ Neil D. Nicastro
-----------------------
Name: Neil D. Nicastro
Title: President
11
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
AGREEMENT made this 29th day of April, 1994, by and between
WILLIAMS ENTERTAINMENT INC., a Delaware corporation (the "Company"), and BYRON
C. COOK ("Executive").
W I T N E S S E T H:
WHEREAS, Executive was a shareholder and President of Tradewest,
Inc. and certain of its affiliates ("Tradewest"); and
WHEREAS, the Company is a wholly owned subsidiary of WMS Games
Inc., a Delaware corporation, which is a wholly owned subsidiary of WMS
Industries Inc., a Delaware corporation ("WMS"), and is acquiring substantially
all of the assets and business of Tradewest concurrently herewith pursuant to
the terms of two asset purchase agreements dated April 4, 1994 (collectively the
"Purchase Agreement"); and
WHEREAS, as a result of such acquisition, the Company will be
engaged in the business of designing, developing, programming, publishing and
distributing interactive entertainment software for use with interactive
entertainment hardware platforms; and
WHEREAS, the Company desires to employ Executive and Executive
is willing to undertake such employment on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual
covenants hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT; DUTIES. Effective as of the "Commencement Date,"
as hereinafter defined, the Company shall employ Executive as President and
Chief Operating Officer of the Company and to perform such duties incidental
thereto and such other duties as the Chairman of the Company shall reasonably
assign consistent with such office. In such capacity, Executive will exercise
chief operating authority over the Company's operations and activities, subject
to the requirement that Executive shall report to and be subject to the
direction and control of the Chairman of the Company and its Board of Directors.
Notwithstanding Executive's position as President, Executive shall not and shall
have no authority to enter into any license, sale, purchase or manufacturing
agreement on behalf of the Company relating to intellectual property, either as
licensee, licensor, purchaser, seller or otherwise, unless such agreement and
the terms thereof shall have been approved in writing by the President of WMS or
its successor. Executive's duties hereunder shall include his obligations under
the Purchase Agreement applicable to the operations of the Company's business.
During Executive's employment hereunder he shall be headquartered at the
Company's offices in Navarro County,
<PAGE> 2
Texas. In no event shall Executive be required to move his place of residence
out of Navarro County, Texas.
2. ACCEPTANCE AND LOYALTY. Executive hereby accepts such
employment and agrees that throughout the period of his employment hereunder, he
will devote his full time, attention, knowledge and skills, faithfully,
diligently and to the best of his ability, in furtherance of the business of the
Company and will perform the duties assigned to him pursuant to Section hereof.
Executive shall perform all duties and responsibilities in a professional manner
consistent with the skill, competence and efficiency expected of a President and
Chief Operating Officer and subject to the direction and control of the Chairman
of the Company and its Board of Directors. Executive will do such traveling as
may be reasonably required of him in the performance of his obligations
hereunder. Executive shall at all times be subject to, observe and carry out
such rules, regulations, policies, directions and restrictions as the Company
shall from time to time establish and as to which Executive is notified. During
his employment hereunder, Executive shall not, without the written approval of
the Board of Directors first had and obtained in each instance, directly or
indirectly, accept employment or compensation from or perform services of any
nature for, any business enterprise other than the Company or any of its
subsidiaries or affiliates except that Executive may continue his existing
relationship with Master Sales and that Executive may continue to serve as a
director of Corsicana National Bank provided, however, that such relationship
and services do not interfere with or detract from Executive's obligations under
this agreement to the Company. During Executive's employment hereunder,
Executive shall not be entitled to additional compensation for serving in any
office, including as a director, of the Company or any of its subsidiaries or
affiliates to which he may be elected.
3. TERM. Executive's employment and the term of this agreement
shall commence on May 2, 1994 (the "Commencement Date") and continue for a
period of four years thereafter (the "Termination Date") subject to the
provisions for termination as provided in Section below.
4. COMPENSATION. As full compensation for his services hereunder
and in consideration of the provisions of Section hereof, the Company shall pay
Executive a salary at the rate of Two Hundred Fifty Thousand ($250,000) Dollars
per annum during the term of this agreement. Executive's salary shall be payable
in equal installments in accordance with the Company's normal payroll policy,
subject to normal payroll taxes and withholding requirements.
5. EMPLOYEE BENEFITS. Executive shall be entitled to participate
to the extent he is eligible in all pension, retirement, profit-sharing,
hospitalization, insurance (including disability insurance) or other similar
employee benefits generally available to executives of the Company provided that
the benefits made available to Executive shall be made available on the same
basis of participation as those made available to Kenneth J. Fedesna in his
capacity as Vice President and General Manager of the amusement game operations
of WMS or to his successor in such position. Except to the extent that the
Company shall be so obligated directly or through WMS to make such benefits
available to Executive on the same basis as such benefits are made
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<PAGE> 3
available to Kenneth J. Fedesna or his successor from time to time, the Company
shall be under no obligation to establish or maintain any particular benefits or
any particular employee benefit plans. The foregoing obligation shall not apply
to stock options or other stock related compensation plans.
6. STOCK OPTION. On the Commencement Date, Executive shall be
granted a non-qualified stock option (the "Option") to purchase 200,000 shares
of the common stock, $.50 par value per share (the "Common Stock"), of WMS
subject to the terms of the WMS 1993 Stock Option Plan or the WMS 1991 Stock
Option Plan or otherwise containing terms and conditions substantially the same
as such plans. The exercise price of the Option will be the fair market value of
the Common Stock on the date of grant. The Option will be for a term of 10 years
and will be exercisable in four equal annual installments commencing one year
after the date of grant provided that such Option shall become exercisable in
full the business day immediately preceding the Termination Date. The Option
shall become immediately exercisable in full upon a "Change of Control" as that
term is defined in the Purchase Agreement. For purposes of the Option and
applicable plan under which it is granted, Executive will be deemed to have
terminated his employment with the written consent of the Company and the
Option, to the extent exercisable on the effective date of such termination,
shall remain exercisable as provided in the applicable plan, if Executive's
employment terminates for any of the following reasons: (i) the passage of the
Termination Date; (ii) upon a termination of Executive's employment by the
Company in violation of this agreement or (iii) Executive shall terminate his
employment by the Company for any of the following reasons: (a) Executive shall
be placed in a position of lesser stature than provided in Section hereof; (b)
Executive shall be assigned duties, performance requirements or working
conditions significantly different from or at significant variance with those
provided in Section hereof; (c) Executive shall be treated by the Chairman or
Board of Directors in a manner which is in derogation of his status as President
and Chief Operating Officer as provided in Section hereof or (d) the Company
shall change the location of its operations so that Executive is no longer
headquartered in Navarro County, Texas and is required to move his residence out
of Navarro County, Texas in order to effectively perform his duties under
Section hereof. The foregoing events described in clauses (i), (ii) and (iii)
are referred to herein as "Executive's Cause."
7. KEY-MAN LIFE INSURANCE. The Company or WMS may purchase and
maintain life insurance covering the life of Executive ("Key-man Insurance") in
an amount determined by the Company. The Company or WMS, as the case may be,
shall be the sole owner and beneficiary of the Key-man Insurance and may apply
to the payment of premiums thereunder any dividends declared and paid thereon.
Executive shall submit himself to such physical examinations as the Board of
Directors may deem necessary or desirable in connection with the purchase and
maintenance of the Key-man Insurance. Executive represents and warrants that to
his knowledge, there is no reason that any insurer would refuse to issue such
policy. Executive has not heretofore been refused on medical grounds any life
insurance for which he has applied.
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<PAGE> 4
8. REIMBURSABLE EXPENSES. The Company shall reimburse Executive
for all out-of-pocket expenses reasonably incurred by him in connection with the
performance of his duties hereunder and the business of the Company upon the
submission to the Company of appropriate receipts and/or other documentation
consistent with Company policy. Executive shall be entitled to first-class air
travel for Company business and shall otherwise be entitled to reimbursement of
expenses on the same basis as Kenneth J. Fedesna in his capacity as Vice
President and General Manager of the amusement game operations of WMS or his
successor.
9. VACATION. Executive shall be entitled to four weeks paid
vacation each year during the term hereof; such vacation is to be taken at times
mutually agreeable to Executive and the Chairman of the Company. Vacation time
shall not be accumulated from year to year unless Executive is requested by the
Chairman of the Company to forego a vacation during any year.
10. TERMINATION.
10.1 The Company may terminate Executive's employment
hereunder and remove him as an officer of the Company immediately by written
notice to Executive for any of the following reasons: (a) commission of any act
of fraud or gross negligence by Executive in the course of his employment
hereunder which, in the case of gross negligence, has a materially adverse
effect on the business or financial condition of the Company; (b) willful and
material misrepresentation at any time during the term hereof by Executive to
the Chairman or Board of Directors of the Company; (c) willful failure, willful
refusal or willful neglect by Executive to comply with any of his material
obligations hereunder which conduct continues uncured after Executive has
received written warning thereof from the Chairman of the Company or Board of
Directors that Executive's services will be terminated; (d) willful disregard of
the authority of the Board of Directors, dishonesty, habitual drunkenness or
excessive absenteeism not related to illness which conduct continues uncured
after due warning in writing from the Chairman or Board of Directors that
Executive's services will be terminated; (e) engagement by Executive in any act,
whether with respect to his employment or otherwise, which constitutes a felony
violation of the criminal laws of the United States or any state thereof or any
similar foreign law to which he may be subject; (f) death or disability (defined
as unable to perform Executive's duties hereunder due to physical or mental
disability for a period of six consecutive months) of Executive or (g) acts,
conduct or reputation of Executive which hinder, limit or prohibit the ability
of the Company or any of its affiliates from applying or qualifying for,
obtaining, maintaining or renewing any license, permit or contract related to
their businesses or proposed businesses. Executive acknowledges that the
Company's affiliates now have and may in the future desire to obtain various
licenses and other permits or approvals governing alcoholic beverages, gaming,
gambling and the like and the inability of the Company or such affiliates to
apply or qualify for, obtain, maintain or renew any such licenses, permits or
contracts will have a material adverse affect on the Company and/or its
affiliates. Accordingly, Executive acknowledges that the foregoing grounds for
termination are reasonable and necessary for the Company and its affiliates.
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<PAGE> 5
10.2 Notwithstanding the termination of Executive's
employment hereunder, the Company's obligation to pay Executive's salary under
Section hereof shall continue until the Termination Date, unless it is
ultimately determined in arbitration under this agreement or by a court of
competent jurisdiction, and such determination is final and nonappealable, that
Executive's conduct constituted fraud or a felony. In such event Executive's
employment shall be deemed for all purposes to have been terminated for cause
and the Company shall have no obligation to continue to pay Executive's salary
under Section following the date of such termination and Executive shall refund
to the Company the payments made by the Company to Executive under Section after
the effective date of his termination.
10.3 Concurrently with the execution of this agreement,
Executive has completed and submitted to the Company and WMS a pre-employment
questionnaire in the form customarily used by WMS for prospective employees. A
copy of such completed questionnaire is annexed hereto as Exhibit A (the
"Questionnaire"). In the event that Executive's employment is terminated solely
by reason of clause (g) of Section , and such termination arises from facts
which were known to Executive on the date hereof and were obviously or clearly
responsive to the Questionnaire but were nevertheless misstated so as to be
incorrect or misleading or were undisclosed on the Questionnaire, then for all
purposes such termination shall be deemed for cause and Purchaser shall have no
continuing obligation to pay Executive's salary under Section hereof following
the date of such termination.
10.4 Notwithstanding the Company's continuing
obligation to make payments under Section until the Termination Date following
Executive's termination of employment under certain circumstances, if such
termination is by reason of clauses (b), (c) or (d) of Section then for all
purposes Executive's employment shall be deemed to have been terminated for
cause.
10.5 If a Change of Control as defined in the Purchase
Agreement occurs and Sellers and the Stockholders, as those terms are defined in
the Purchase Agreement, elect to shorten the "Earnings Period" as provided in
Section 3.8 of the Purchase Agreement, then Executive shall be entitled to
terminate his employment by the Company but the Company shall nevertheless be
required to continue to pay Executive his salary under Section until the
Termination Date.
11. RESTRICTIVE COVENANTS
In consideration of the compensation and benefits
payable under this agreement including the continuation under certain
circumstances of salary payments until the Termination Date notwithstanding
termination of employment, Executive shall not, during the term of this
agreement and for a period of one year thereafter
11.1 in the United States, Canada or Mexico act in
concert with employees, representatives, agents, independent contractors or
other persons engaged in business with the Company or WMS or any of its wholly
owned subsidiaries for the purpose of
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<PAGE> 6
organizing any business activity competitive with that of the Company or WMS or
any of its wholly owned subsidiaries; or
11.2 without the prior written approval of the Board of
Directors of the Company, directly or indirectly, through any other person,
firm, partnership, corporation or other entity, solicit, raid, entice, hire,
induce or seek to influence any person that presently is or at any time during
the term hereof shall be an employee of the Company to become employed by any
other person, firm, partnership, corporation or other entity, and Executive
shall not knowingly assist or induce any such person, firm, partnership,
corporation or other entity in taking such action; or
11.3 in the United States, Canada or Mexico, (i)
directly or indirectly own, manage, operate, join, control, participate in,
invest in, be employed by, render service to or otherwise be connected with in
any manner, whether as an officer, director, employee, partner, investor,
consultant, shareholder or otherwise, any business entity engaged in the
business of designing, developing, publishing, programming or distributing
interactive entertainment software for use with interactive entertainment
hardware platforms or in any other business engaged in by the Company, or (ii)
for himself or on behalf of any other person, firm, partnership, corporation or
other entity, call on any customer, supplier, licensee or licensor of the
Company, including any licensor or licensee of any intellectual property related
to the Company's business, for the purpose of soliciting, diverting, taking away
such customer, supplier, licensor or licensee from the Company or otherwise
interfering with the Company's relationship with such customer, supplier,
licensee or licensor.
Nothing contained in this agreement shall be deemed to prohibit Executive from
investing his funds in and receiving dividends or other investment income from
securities of a company if the securities of such company are listed for trading
on a national stock exchange or traded in the over-the-counter market and
Executive's holdings therein represent less than five (5%) percent of the total
number of shares or principal amount of other securities of such company
outstanding. The parties acknowledge that Master Sales is engaged in the
business of selling and distributing coin operated video and other amusement
games. So long as the business of Master Sales is limited to such activities,
nothing herein shall be deemed to prohibit Executive from continuing his
ownership thereof.
12. CONFIDENTIALITY AGREEMENT.
12.1 As used herein, the term "Confidential
Information" shall mean any and all information of the Company and of its
affiliates (for purposes of this Section , the Company's affiliates shall be
deemed included within the meaning of the "Company"), including, but not limited
to, all data, compilations, programs, devices, strategies, or methods concerning
or related to (i) the Company's finances, financial condition, results of
operations, employee relations, amounts of compensation paid to officers and
employees and any other data or information relating to the internal affairs of
the Company and its operations; (ii) the terms and conditions (including prices)
of sales and offers of sales of the Company's products and
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<PAGE> 7
services; (iii) the terms, conditions and current status of the Company's
agreements and relationship with any customer, supplier, licensee or licensor;
(iv) the customer and supplier lists and the identities and business preferences
of the Company's actual and prospective customers, suppliers, licensees and
licensors or any employee or agent thereof with whom the Company communicates;
(v) the trade secrets, manufacturing and operating techniques, price data,
costs, methods, systems, plans, procedures, formulas, processes, hardware,
software, machines, inventions, designs, drawings, artwork, blueprints,
specifications, tools, skills, ideas, and strategic plans possessed, developed,
accumulated or acquired by the Company; (vi) any communications between the
Company, its officers, directors, stockholders, or employees, and any attorney
retained by the Company for any purpose, or any person retained or employed by
such attorney for the purpose of assisting such attorney in his or her
representation of the Company; (vii) any other information and knowledge with
respect to all interactive entertainment software, entertainment platforms
hardware, or coin-operated amusement games and gaming devices developed or in
any stage of development by the Company; (viii) the abilities and specialized
training or experience of others who as employees or consultants of the Company
during the term hereof have engaged in the design or development of any such
products; and (ix) any other matter or thing, whether or not recorded on any
medium, (a) by which the Company derives actual or potential economic value from
such matter or thing being not generally known to other persons or entities who
might obtain economic value from its disclosure or use, or (b) which gives the
Company an opportunity to obtain an advantage over its competitors who do not
know or use the same.
12.2 Confidential Information shall not include
information (i) previously known to Executive through lawful means and which was
not the subject of a prior confidentiality agreement; (ii) generally known
through lawful means to others engaged in the same trade or business; (iii) part
of public knowledge or literature or (iv) received by Executive from a third
party who was not bound by a confidentiality agreement and who obtained such
information through lawful means.
12.3 Executive acknowledges and agrees that the Company
is engaged in the highly competitive interactive entertainment software,
entertainment platforms hardware, coin-operated amusement games and gaming
devices businesses and has expended, or will expend, significant sums of money
and has invested, or will invest, a substantial amount of time to develop and
maintain the secrecy of the Confidential Information. The Company has thus
obtained, or will obtain, a valuable economic asset which has enabled, or will
enable, it to develop an extensive reputation and to establish long-term
business relationships with its suppliers, customers and others. If such
Confidential Information were disclosed to another person or entity or used for
the benefit of anyone other than the Company, the Company would suffer
irreparable harm, loss and damage. Accordingly, Executive acknowledges and
agrees that, unless the Confidential Information becomes publicly known through
legitimate origins not involving an act or omission by Executive:
(i) the Confidential Information is, and at
all times hereafter shall remain, the sole
property of the Company;
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(ii) Executive shall use his best efforts to
guard and protect the Confidential Information
from disclosure to any competitor, customer,
supplier, licensee or licensor of the Company
or any other person, firm, corporation or
other entity and will not disclose such
information except to the extent necessary and
appropriate for the legitimate purposes of the
Company or such disclosure is with the express
written consent of the Chairman of the Board;
and
(iii) unless the Company gives Executive prior
express written permission, during his
employment and thereafter, Executive shall not
at any time use for his own benefit, or
divulge to any competitor or customer or any
other person, firm, corporation, or other
entity, any of the Confidential Information
which Executive may obtain, learn about,
develop or be entrusted with as a result of
Executive's employment by the Company.
12.4 Executive also acknowledges and agrees that all
documentary and tangible Confidential Information including, without limitation,
such Confidential Information as Executive has committed to memory, is supplied
or made available by the Company to the Executive solely to assist him in
performing his services under this agreement. Executive further agrees that
after his employment with the Company terminates for any reason:
(i) Executive shall not remove from the
property of the Company and shall immediately
return to the Company, all documentary or
tangible Confidential Information in his
possession, custody, or control and not make
or keep any copies, notes, abstracts,
summaries, tapes or other record of any type
of Confidential Information; and
(ii) Executive shall immediately return to the
Company any and all other property of the
Company in his possession, custody or control,
including, without limitation, any and all
keys, security cards, passes, credit cards and
marketing literature.
13. INVENTION DISCLOSURE. Executive agrees to disclose to the
Company promptly and fully all ideas, inventions, concepts, discoveries,
developments, programs or improvements ("Inventions") that may be made or
conceived by him and all Intellectual Material (as defined below) that may be
created or developed by him (whether such inventions and Intellectual Material
are developed solely by him or jointly with others) during his employment by the
Company which either (i) in any way are connected with or related to the actual
or known to Executive to be contemplated business, work, research, or
undertakings of the Company or (ii) result from or are suggested by any task,
project, or work that he may do for, in connection with, or on behalf of the
Company. Executive agrees that such Inventions and Intellectual Material shall
become the sole and exclusive property of the Company and Executive hereby
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<PAGE> 9
assigns to the Company, all of his rights to any such Inventions and
Intellectual Material. As used herein, "Intellectual Material" shall include,
but shall not be limited to, ideas, titles, themes, production ideas, methods of
presentation, artistic renderings, sketches, plots, music, lyrics, dialogue,
phrases, slogans, catch words, characters, names and similar literary, dramatic
and musical material, trade names, trademarks and service marks and all
copyrightable expressions in audio visual works, computer software, electronic
circuitry and all mask works for integrated circuits. With respect to Inventions
and Intellectual Material, Executive shall during the period of this employment
hereunder and from time to time thereafter: (a) execute all documents required
by the Company for vesting in the Company or any of its affiliates the entire
right, title and interest in and to the same, (b) execute all documents
requested by the Company for filing and prosecuting such applications for
patents, trademarks and/or copyrights as the Company, in its sole discretion,
may desire to prosecute, and (c) give the Company all assistance it reasonably
requires, including the giving of testimony in any suit, action or proceeding,
in order to obtain, maintain and protect the Company's right therein and
thereto. If any such assistance is required following the term of this
agreement, the Company shall reimburse Executive for his lost wages or salary
and the reasonable expenses incurred by him in rendering such assistance.
Anything contained in this section does not apply to an Invention for which no
equipment, supplies, facilities, or trade secret information of the Company or
its affiliates was used and which was developed entirely on the Executive's own
time, unless the Invention relates (i) to the business of the Company or its
affiliates or (ii) to the Company's actual or demonstrably anticipated research
or development, or the Invention results from any work performed by Executive
for the Company.
14. REMEDIES. The parties hereto acknowledge that Executive's
services are of a special, unique, extraordinary and intellectual character
which gives him peculiar value and that the business of the Company and its
affiliates is highly competitive and that violation of any of the covenants
provided in Sections , and of this agreement would cause immediate, immeasurable
and irreparable harm, loss and damage to the Company not adequately compensable
by a monetary award. Executive acknowledges that the time, geographical area and
scope of activity restrained by the provisions of Sections , and are reasonable
and do not impose a greater restraint than is necessary to protect the goodwill
of the Company's business. In the event of any such breach or threatened breach
by Executive of any one or more of such covenants, the Company shall be entitled
to such equitable and injunctive relief as may be available to restrain
Executive and any business, firm, partnership, individual, corporation or entity
participating in such breach or threatened breach from the violation of the
provisions hereof. Executive further agrees that any temporary restraining order
or emergency, preliminary or final injunctions may be issued by any court of
competent jurisdiction. To the fullest extent permitted by law, Executive hereby
waives any right to require the posting of a bond as a condition to the issuance
or maintenance of such order or injunction and agrees that any such order or
injunction may be entered and maintained without the posting of a bond. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies available at law or in equity for such breach or threatened breach,
including the recovery of damages and the immediate termination of the
employment of Executive hereunder.
-9-
<PAGE> 10
15. ENTIRE AGREEMENT. This agreement constitutes the entire
agreement of the parties hereto with respect to Executive's employment with the
Company and no amendment or modification hereof shall be valid or binding unless
made in writing and signed by the party against whom enforcement thereof is
sought.
16. NOTICES. Any notice required, permitted or desired to be
given pursuant to any of the provisions of this agreement shall be deemed to
have been sufficiently given or served for all purposes if delivered in person
or sent by telephone facsimile or sent by certified mail, return receipt
requested, or sent by responsible overnight delivery service, postage and fees
prepaid, to the parties hereto at their respective addresses set forth below.
Either of the parties hereto may at any time and from time to time change the
address to which notice shall be sent hereunder by notice to the other party
given under this Section . The date of the giving of any notice sent by mail
shall be three business days following the date of the posting of the mail, if
delivered in person, the date delivered in person, if sent by overnight delivery
service, the next business day following delivery to an overnight delivery
service or if sent by telephone facsimile, the date sent by telephone facsimile.
If to the Company:
c/o WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Telephone Facsimile: 312-961-1099
Attn: Mr. Neil D. Nicastro
If to Executive:
2117 West Park Avenue
Corsicana, Texas 75110
Telephone Facsimile:______________
17. NO ASSIGNMENT. Neither this agreement nor the right to
receive any payments hereunder may be assigned by Executive. This agreement may
not be assigned by the Company. This agreement shall be binding upon Executive,
his heirs, executors and administrators and upon the Company, its successors and
assigns.
18. NO WAIVER. No course of dealing nor any delay on the part of
the Company in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
19. GOVERNING LAW. This agreement shall be governed, interpreted
and construed in accordance with the substantive laws of the State of Illinois
applicable to agreements entered into and to be performed entirely therein.
-10-
<PAGE> 11
20. ARBITRATION. The parties will arbitrate any dispute, claim
or controversy relating to or arising out of this agreement and Executive's
employment hereunder. Any party may initiate arbitration by giving written
notice to the other party of an intention to arbitrate and by filing with the
regional office of the American Arbitration Association located in San Diego,
California, three copies of such notice and three copies of this agreement
together with the appropriate filing fee. Such notice shall contain a statement
setting forth the nature of the dispute and the remedy sought. The arbitration
shall be conducted before a single arbitrator selected by the parties from the
Panel of Arbitrators with expertise in the interactive entertainment software
industry submitted to the parties by the American Arbitration Association. The
arbitration shall be conducted in San Diego, California in accordance with the
rules of the American Arbitration Association in effect at the time the notice
to arbitrate is served. The arbitrator's decision will be final and binding on
the parties. The arbitrator may grant any legal and/or equitable relief to which
a party may be entitled under the law or legal theory under which the party
seeks relief. The award shall not serve as precedent or authority in any
subsequent proceeding provided that if the losing party should fail to comply
with the award, the prevailing party may apply to any court having jurisdiction
for an order confirming the award in accordance with applicable law. Unless
otherwise required by law or court orders, the substance of any arbitration
proceedings pursuant hereto, including the content and result of the award,
shall be kept confidential by all parties and by the arbitrator. The fact that
such a proceeding exists or that an award has been rendered, need not be kept
confidential. Each party shall bear its own costs of the proceeding, including
costs of witnesses. The compensation of the arbitrator and any other costs of
the proceeding shall be shared equally by Executive and the Company.
21. SEVERABILITY. If any clause, paragraph, section or part of
this agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any arbitrator or court of competent jurisdiction, such provision
shall be ineffective but shall not in any way invalidate or affect any other
clause, paragraph, section or part of this agreement. The parties intend that
all clauses, paragraphs, sections or parts of this agreement shall be
enforceable to the fullest extent permitted by law.
22. COUNTERPARTS. This agreement may be executed in one or more
counterparts, each of which counterparts, when taken together, shall constitute
but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the day and year first above written.
WILLIAMS ENTERTAINMENT INC.
By: /s/ Neil D. Nicastro
----------------------------
Neil D. Nicastro, Chairman
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<PAGE> 12
/s/ Byron C. Cook
----------------------------
BYRON C. COOK
-12-
<PAGE> 1
EXHIBIT 10.8
FORM OF INDEMNITY AGREEMENT
_____ __, 199_
TO:
Dear:
In consideration of your service as an officer or director of Midway
Games Inc. (the "Company"), the Company will, to the extent provided herein,
indemnify you and hold you harmless from and against any and all "Losses" (as
defined below) which you may incur by reason of your election or service as an
officer, director, employee, agent, fiduciary or representative of the Company
or any "Related Entity" (as defined below) to the fullest extent permitted by
law.
1. (a) "Losses" mean all liabilities, "Costs and Expense" (as defined
below), amounts of judgments, fines, penalties or excise taxes (or other amounts
assessed, surcharged or levied under the Employee Retirement Income Security Act
of 1974, as amended) and amounts paid in settlement of or incurred in defense of
any settlement in connection with any threatened, pending or completed claim,
action, suit or proceeding, whether civil, criminal, administrative or
investigative, and whether brought by or in the right of the Company or
otherwise, and appeals in which you may become involved, as a party or
otherwise, by reason of acts or omissions or in your capacity as and while
serving as an officer, director, employee, agent, fiduciary or representative of
the Company or any Related Entity.
(b) A "Related Entity" means any corporation, limited liability
company, partnership, joint venture, trust or other entity or enterprise in
which the Company is in any way interested, or in or as to which you are serving
at the Company's request or on its behalf, as an officer, director, employee,
agent, fiduciary or representative including, but not limited to, any employee
benefit plan or any corporation of which the Company or any Related Entity is,
directly or indirectly, a stockholder or creditor.
(c) "Costs and Expenses" means all reasonable costs and expenses
incurred by you in investigating, defending or appealing any threatened, pending
or completed claim, action, suit or proceeding including, without limitation,
counsel fees and disbursements.
<PAGE> 2
2. Costs and Expenses will be paid promptly by the Company as they are
incurred or, at your request, advanced on your behalf against delivery of
invoices therefor (prior to an ultimate determination as to whether you are
entitled to be indemnified by the Company on account thereof); provided,
however, that if it shall ultimately be determined by final decision of a court
of competent jurisdiction that you are not entitled to be indemnified on account
of any Costs or Expenses for which you have theretofore received payment or
reimbursement, you shall promptly repay such amount to the Company.
3. The Company shall indemnify you and hold you harmless from and
against any and all Losses which you may incur if you are a party to or
threatened to be made a party to or otherwise involved in any proceeding or
action (other than a proceeding or action by or in the right of the Company to
procure a judgment in its favor), unless it is determined that you did not act
in good faith and in a manner reasonably believed by you to be in, or not
opposed to, the best interest of the Company and, in the case of a criminal
proceeding or action, in addition, that you had reasonable cause to believe that
your conduct was unlawful.
4. The Company shall indemnify you and hold you harmless from and
against any and all Losses which you may incur if you are a party to or
threatened to be made a party to any proceeding or action by or in the right of
the Company to procure a judgment in its favor, unless it is determined that you
did not act in good faith, and in a manner reasonably believed by you to be in,
or not opposed to, the best interest of the Company, except that no
indemnification for Losses shall be made under this Paragraph in respect of any
claim, issue or matter as to which you shall have been adjudged to be liable to
the Company, unless and only to the extent that any court in which such action
or proceeding was brought shall determine upon application that, despite the
adjudication of liability, but in view of all the circumstances of the matter,
you are fairly and reasonably entitled to indemnity for such expenses as such
court shall deem proper.
5. Anything hereinabove to the contrary notwithstanding, "Losses" shall
not include, and you shall not be entitled to indemnification under this
agreement for (i) amounts payable by you to the Company or any Related Entity in
satisfaction of any judgment or settlement in the Company's or such Related
Entity's favor (except amounts for which you shall be entitled to
indemnification pursuant to Paragraph), (ii) any amount payable on account of
profits realized by you in the purchase or sale of securities of the Company or
any Related Entity within the meaning of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or similar provisions of state law; (iii)
Losses in connection with which you are not entitled to indemnification as a
matter of law or public policy; or (iv) Losses to the extent you are indemnified
by the Company otherwise than pursuant to this agreement, including any Losses
for which payment is made to you under an insurance policy.
6. Termination of any action, suit or proceeding by judgment, order,
settlement or conviction, upon a plea of nolo contendere or its equivalent will
not, of itself create any presumption that you did not act in good faith and in
a manner which you reasonably believed to be in or not opposed to the best
interest of the Company or a Related Entity and, with respect
2
<PAGE> 3
to any criminal action or proceeding, had no reasonable cause to believe that
your conduct was unlawful.
7. The determination on behalf of the Company that you are not entitled
to be indemnified for Losses hereunder by reason of the provisions of Paragraph
or or clause (iii) of Paragraph may be made either by the Company's Board of
Directors (by majority vote of disinterested directors or directors who are not
parties to or the subject of the same or any similar claim, action, suit or
proceeding) or by independent legal counsel (who may be the outside counsel
regularly employed by the Company), as the Company's Board of Directors shall
determine. Notwithstanding such determination, the right to indemnification or
advances of Costs and Expenses as provided in this agreement shall be
enforceable by you in any court of competent jurisdiction. The burden of proving
that indemnification is not appropriate shall be on the Company. Neither the
failure of the Company (including its Board of Directors or independent legal
counsel) to have made a determination prior to the commencement of such action
that indemnification is proper in the circumstances because you have met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors or independent legal counsel) that you have
not met such applicable standard of conduct shall be a defense to the action or
create a presumption that you have not met the applicable standard of conduct.
Costs and expenses, including counsel fees, reasonably incurred by you in
connection with successfully establishing your right to indemnification, in
whole or in part, in any such action shall also be indemnified by the Company.
8. You agree to give prompt notice to the Company of any claim with
respect to which you seek indemnification and, unless a conflict of interest
shall exist between you and the Company with respect to such claim, you will
permit the Company to assume the defense of such claim with counsel of its
choice. Whether or not such defense is assumed by the Company, the Company will
not be subject to any liability for any settlement made without its consent. The
Company will not consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to you of a release from all liability with respect to
such claim or litigation. If the Company is not entitled to, or does not elect
to, assume the defense of a claim, the Company will not be obligated to pay the
fees and expenses of more than one counsel for you and any other directors or
officers of the Company who are indemnified pursuant to similar indemnity
agreements with respect to such claim, unless a conflict of interest shall exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the Company will be obligated to pay the
fees and expenses of an additional counsel for each indemnified party or group
of indemnified parties with whom a conflict of interest exists.
9. The Company's obligation to indemnify you under this agreement is in
addition to any other rights to which you may otherwise be entitled by operation
of law, vote of the Company's stockholders or directors or otherwise and will be
available to you whether or not the claim asserted against you is based upon
matters which occurred before the date of this agreement.
3
<PAGE> 4
10. The obligation of the Company to indemnify you with respect to
Losses which you may incur by reason of your service as an officer, director,
employee, agent, fiduciary or representative of the Company or a Related Entity,
as provided under this agreement, shall survive the termination of your service
in such capacities and shall inure to the benefit of your heirs, executors and
administrators.
11. The Company agrees that, so long as you shall serve as an officer,
director, employee, agent, fiduciary or representative of the company or any
Related Entity and thereafter so long as you shall be subject to any possible
claim or threatened, pending or completed action or proceeding by reason of your
service as an officer, director, employee, agent, fiduciary or representative of
the Company or any Related Entity, the Company shall purchase and maintain in
effect for your benefit valid, binding and enforceable policies of directors and
officers liability insurance ("D & O Insurance"), covering Losses; provided,
however, that the Company shall not be required to maintain D & O Insurance in
effect if such insurance is not reasonably available or if, in the reasonable
business judgment of the directors of the Company, either (i) the premium cost
for such insurance is substantially disproportionate to the amount of coverage
or (ii) the coverage provided by such insurance is so limited by exclusions that
there is insufficient benefit from such insurance.
12. If you are entitled under this agreement or otherwise to
indemnification by the Company for some or a portion of the Losses actually and
reasonably incurred by you but not, however, for the total amount thereof, the
Company shall nevertheless indemnify you for the portion of the Losses to which
you are entitled.
13. It is the intention of the parties to this agreement to provide for
indemnification in all cases under all circumstances where to do so would not
violate applicable law (and notwithstanding any limitations permitted, but not
required by statute) and the terms and provisions of this agreement shall be
interpreted and construed consistent with that intention. Nonetheless, if any
provision of this agreement or any indemnification made under this agreement
shall for any reason be determined by any court of competent jurisdiction to be
invalid, unlawful or unenforceable under current or future laws, such provision
shall be fully severable and, the remaining provisions of this agreement shall
not otherwise be affected thereby, but will remain in full force and effect and,
to the fullest extent possible, shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable.
14. This agreement shall be governed by and interpreted and construed
in accordance with the laws of the State of Delaware applicable to contracts
executed and to be performed entirely within that State.
15. No amendment, modification, termination or cancellation of this
agreement shall be effective unless in writing signed by both the Company and
you.
4
<PAGE> 5
16. Your signature below will evidence your agreement and acceptance
with respect to the foregoing.
Very truly yours,
MIDWAY GAMES INC.
By: ________________________________
Name:
Title:
AGREED TO AND ACCEPTED:
______________________
5
<PAGE> 1
Exhibit 10.9
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A CONFIDENTIAL TREATMENT REQUEST MADE
PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
GTIS MASTER OPTION AND LICENSE AGREEMENT
This Master Option and License Agreement ("Option Agreement")
is made and entered into the 28th day of December, 1994, by and among WMS
INDUSTRIES INC. ("WMS"), WILLIAMS ELECTRONICS GAMES, INC. ("WEG"); MIDWAY
MANUFACTURING COMPANY ("Midway") and WILLIAMS ENTERTAINMENT INC. ('WEI"), each
being Delaware corporations with offices at 3401 North California Avenue,
Chicago, Illinois 60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware
corporation with offices at 16 East 40th Street, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, WEG, Midway and WEI are wholly-owned subsidiaries of
WMS engaged in the business of designing, manufacturing and selling
coin-operated amusement games and software products for dedicated home game
systems and multipurpose home computers; and
WHEREAS, GTIS is engaged in the business of distributing
software entertainment products for multipurpose home computers; and
WHEREAS, GTIS desires to acquire certain rights from WMS, WEG,
Midway, WEI and other affiliates of WMS with respect to "Games," as such term is
defined herein, and WEG, Midway, WEI and WMS desire to grant such rights to
GTIS;
<PAGE> 2
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. "Accepted Game" shall mean any Game with respect to
which GTIS has received a license or has exercised an option to acquire a
license provided for in Section 2 hereof.
1.2. "Designated Multipurpose Computer Platforms" shall mean
IBM PC or Apple Macintosh or other compatible multipurpose home computers which
utilize floppy disks or CD-ROMs or other stand alone devices which may hereafter
replace or supplement floppy disks or CD-ROMs in all operating systems now known
or hereafter developed or designed for use on the aforesaid multipurpose home
computers. Designated Multipurpose Computer Platforms shall not include
dedicated home game systems, such as those marketed by Nintendo, Sega, Atari,
Sony, etc.
1.3. "First Release" or "First Released" shall have the
meaning ascribed in Section 2.4 hereof.
1.4. "Game" shall mean any coin-operated video game
(including kits), any home video game and any on- line game, released or
intended to be released, by any member of the WMS Group for sale in commercial
quantities in the normal course of business. Home video games shall include
games designed for play on dedicated home game systems, such as those marketed
by Nintendo, Sega, Atari, Sony, etc. as well as on multipurpose home computers,
such as those marketed by IBM and Apple.
1.5. "Home Computer Software Distribution and License
Agreement" shall mean an agreement for the license of an Accepted Game for use
solely on Designated
2
<PAGE> 3
Multipurpose Computer Platforms in the form of Exhibit A annexed hereto,
as the same may be amended from time to time by written agreement of the parties
thereto.
1.6. "Initial Option Period" shall have the meaning ascribed
in Section 2.1 hereof.
1.7. "Interim Period Games" shall have the meaning ascribed
in Section 2.1 hereof.
1.8. "New Game Option Notice Date" shall have the meaning
ascribed in Section 2.4 hereof.
1.9. "Option and Advance Fee" shall have the meaning
ascribed in Section 3 hereof.
1.10. "Previously Developed Games" shall have the meaning
ascribed in Section 2.3 hereof.
1.11. "Technically Acceptable Master Disk" shall mean a
completed and functioning CD-ROM Master Disk or floppy disk for the Accepted
Game in a format substantially ready to be reproduced and manufactured for
retail distribution and the instruction manual therefor. The Accepted Game
contained in the master disk will have been alpha and beta tested and all known
material bugs and defects will have been corrected.
1.12. "WMS Group" shall mean WMS, WEG, Midway and WEI, or
any subsidiary, affiliate or other entity, a majority of whose capital stock is
owned directly or indirectly by WMS, WEG, Midway or WEI or with respect to which
during the term of this Agreement, WMS, directly or indirectly, has the legal
power, without the consent of any third party, to direct the acquisition of
rights to or exploitation of Games on Designated Multipurpose
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<PAGE> 4
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Computer Platforms.
2. GRANT AND TERMINATION OF OPTION; EXERCISE OF OPTION.
2.1. The WMS Group hereby grants to GTIS a first option to
acquire a license, in the form of the Home Computer Software Distribution and
License Agreement, to manufacture, distribute and sell versions of the Game for
use solely on Designated Multipurpose Computer Platforms, with respect to (i)
Previously Developed Games, (ii) new Games First Released by the WMS Group
during the three (3) year period (subject to extension as provided below)
commencing March 22, 1995 and expiring March 31, 1998 (the "Initial Option
Period") and (iii) Games which are offered to Acclaim Entertainment, Inc.
("Acclaim") between the date hereof and March 21, 1995, but are not accepted by
Acclaim ("Interim Period Games"). If either of the "Extension Events" described
below shall have occurred during the Initial Option Period, the option period
shall be deemed extended to March 31, 1999. Extension Events shall mean either
(i) the WMS Group shall have received not less than * Dollars in the aggregate
from royalties paid under Home Computer Software Distribution and License
Agreements and the Option and Advance Fee or from voluntary payments by GTIS,
provided that the amount of voluntary payments which may be utilized to
calculate the attainment of the Extension Event shall not exceed * Dollars; or
(ii) the market value of the shares of stock which may be acquired by WMS upon
exercise of the Warrants provided for in Section 4 hereof shall have increased
by at least * Dollars as compared to the market value of such shares on the date
the Warrants were issued and an amount of such shares have been purchased or are
currently purchasable under the Warrants and have been sold or are publicly
saleable by WMS as have permitted or
4
<PAGE> 5
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
will permit WMS to realize such * Dollars increase. For purposes hereof shares
shall be considered publicly saleable (i) if they are saleable under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
or any similar rule hereafter in effect; (ii) if, in the opinion of counsel to
GTIS, such shares may be publicly sold under Section 4(1) or otherwise publicly
sold without registration under the Securities Act; (iii) if such shares have
been registered for sale and are saleable under an effective registration
statement duly filed under the Securities Act; (iv) if WMS has a demand
registration right then available under the registration rights agreement
annexed hereto as Exhibit B; or (v) if GTIS has duly exercised the GTIS Call as
that term is defined in such registration rights agreement. In calculating the
amount the WMS Group has received for purposes of clause (i) above, payments
made with royalty reports within 45 days after the end of the Initial Option
Period shall be included.
2.2. The WMS Group shall not grant a license to any third
parties to manufacture, distribute and sell versions of a Game for use on
Designated Multipurpose Computer Platforms if such Game would be subject to
GTIS' first option right specified in Section 2.1 hereof until such time as GTIS
shall have declined to acquire a license, or the option periods specified in
Sections 2.4 and 2.5 hereof, whichever is applicable, shall have expired, or the
applicable Home Computer Software License Agreement shall otherwise permit. GTIS
understands, acknowledges and agrees that (i) with respect to Games manufactured
by the WMS Group under license from third parties, the rights granted by the WMS
Group to GTIS cannot exceed the rights obtained by and will be subject to the
limitations imposed on the WMS Group from such third party and the form of Home
Computer Software Distribution and License
5
<PAGE> 6
Agreement will be deemed modified to the extent so required; (ii) although the
WMS Group is developing Games in the normal course of business, the WMS Group is
under no obligation to develop Games or to present any minimum number of Games
to GTIS under this Agreement; (iii) until March 21, 1995, Acclaim Entertainment,
Inc. ("Acclaim") has a first option to license Games for use on home computers
and GTIS' rights under this Agreement shall be subject to Acclaim's rights; and
(iv) Williams/Nintendo, Inc. (a joint venture company in formation owned by a
wholly owned subsidiary of WMS and Nintendo of America Inc.) has been granted a
first right of negotiation with respect to the exclusive right to produce and
distribute certain coin-operated games for all formats, including home
computers, if those games are implemented for play upon certain coin-operated
hardware systems proprietary to Nintendo and its licensors.
2.3. Attached hereto as Schedule 1 is a list of the titles
of certain Games heretofore developed by the WMS Group with respect to which the
WMS Group has the right to grant licenses to GTIS to manufacture, distribute and
sell versions of the Game for use on Designated Multipurpose Computer Platforms
("Previously Developed Games"). Within sixty (60) days after the date hereof,
GTIS and WMS Group shall enter into Home Computer Software Distribution and
License Agreements with respect to each of the Previously Developed Games. The
WMS Group at its own cost and expense will use reasonable efforts to complete
development of Technically Acceptable Master Disks for such Previously Developed
Games for play on IBM PC and compatible home computers, and for Troy Aikman NFL
Football for Macintosh computers as well, by the dates and in the formats set
forth on Schedule 1. If GTIS desires Technically Acceptable Master Disks to be
developed for play on Apple Macintosh home computers, it will notify WMS within
60 days of the date hereof and WMS and GTIS will agree
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<PAGE> 7
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
jointly as to the development budget and the identity of the proposed developer.
GTIS shall pay to WMS * of the actual costs of such development of Technically
Acceptable Master Disks for Apple Macintosh home computers simultaneously with
receipt of such disks and a reasonably detailed written summary of the
development costs, none of which payment shall be recoupable by GTIS or
repayable to GTIS in any manner or for any reason. The provisions of Section 2.7
hereof with respect to budget overruns shall apply to the development budget
referred to in this Section 2.3, to the extent applicable.
2.4. With respect to Games First Released by the WMS Group
for the coin-operated, home video or on-line markets after March 22, 1995,
beginning with Mortal Kombat III, or Interim Period Games, the WMS Group shall
notify GTIS in writing as to the existence of a Game within thirty (30) days
after the WMS Group has begun to ship the Game for use commercially in the
ordinary course of business (and not merely for the WMS Group's test purposes),
or within thirty (30) days after the date Acclaim's option rights expire
unexercised, whichever is later. The date of such notice is hereinafter referred
to as the "New Game Option Notice Date." A Game shall be deemed First Released
by the WMS Group on the date of the first commercial shipment in the normal
course of business and with respect to on-line Games when such Games are first
commercially sold to subscribers to the on-line service. If the WMS Group does
not actually make a commercial shipment of a Game notwithstanding its original
intention to do so, then the WMS Group shall notify GTIS of its decision not to
make such shipments and the New Game Option Notice Date for such Game shall be
deemed to be the date of such notice. Each notice given in accordance with this
Section 2.4
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<PAGE> 8
(i) shall identify the Game, (ii) shall describe in reasonable detail its
characteristics and method of play, and (iii) shall set forth a proposed budget
and time frame for developing Technically Acceptable Master Disks for such game
for play on Designated Multipurpose Computer Platforms, and the identity of the
proposed developer. GTIS shall have a reasonable opportunity to consult with the
WMS Group prior to the WMS Group determining the proposed budget, time frame and
developer, but the final decision shall be made by WMS. GTIS acknowledges that
Mortal Kombat III is currently in process of development and hereby consents to
the designation of Sculptured Software, Inc. as the developer. Each such notice
relating to a Game manufactured by the WMS Group pursuant to a license from or
other agreement with any third party shall set forth a summary of any material
limitations upon the scope of the license in respect thereof which may be
granted to GTIS hereunder, the amount or method of determining third party
royalties payable thereunder and the material terms of such license or other
agreement applicable to platforms other than Designated Multipurpose Computer
Platforms. With respect to each Game as to which GTIS receives written notice as
hereinabove provided, GTIS shall have a period of ninety (90) days from the New
Game Option Notice Date to notify WMS in writing that it elects to exercise its
option to license the Game. Upon receipt of such notice from GTIS, the WMS Group
will proceed to develop or retain a third party to develop a Technically
Acceptable Master Disk for such Game for play on one or more Designated
Multipurpose Computer Platforms as identified in the budget and will use
reasonable efforts to complete or cause the completion of such development
within twelve (12) months of receipt of such notice from GTIS. In addition to
any other payments made hereunder or under any Home Computer Software
Distribution and License Agreement, subject to the provision of Paragraph
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<PAGE> 9
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
2.7 below, GTIS shall pay to WMS * of the actual costs of such code development
simultaneously with receipt of a Technically Acceptable Master Disk and a
reasonably detailed written summary of the development costs, none of which
payment shall be recoupable by GTIS or repayable to GTIS in any manner or for
any reason. It is understood that the development budget shall include a
compensation expense of up to * if the WMS Group employs a dedicated in-house
producer for the purpose of such development.
2.5. If, by itself, or through use of a third party
developer, the WMS Group determines to develop or acquire a Game for play on
multipurpose home computers that it has not theretofore developed or acquired
for the coin-operated or dedicated home game player market, it shall notify GTIS
in writing as to its intention, which notice shall describe in reasonable detail
the proposed characteristics of the Game and shall set forth an estimated budget
and time frame for developing Technically Acceptable Master Disks for such game
for play on one or more Designated Multipurpose Computer Platforms and the
identity of the proposed developer. Each such notice relating to a Game the
rights to which are derived from a license or other agreement with a third party
shall set forth a summary of any material limitations upon the scope of the
license in respect thereof which may be granted to GTIS hereunder, the amount or
method of determining third party royalties payable thereunder and the material
terms of such license or other agreement applicable to platforms other than
Designated Multipurpose Computer Platforms. GTIS shall have an opportunity to
consult with the WMS Group prior to the WMS Group determining the proposed
budget, time frame and developer, but the final decision shall be made by WMS.
GTIS shall have a period of fifteen (15) days from the date of such notice
9
<PAGE> 10
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to notify WMS in writing that it elects to exercise its option to license the
Game. Upon receipt of such notice from GTIS, the WMS Group will proceed to
develop or retain a third party to develop a Technically Acceptable Master Disk
for such Game for play on one or more Designated Multipurpose Computer Platforms
as identified in the budget and will use reasonable efforts to complete or cause
the completion of such development within the estimated time frame set forth in
the notice. In addition to any other payments made hereunder or under any Home
Computer Software Distribution and License Agreement, subject to the provisions
of Paragraph 2.7 below, GTIS shall pay to WMS * of the actual costs of such code
development simultaneously with receipt of a Technically Acceptable Master Disk
and a reasonably detailed written summary of the development costs, none of
which payment shall be recoupable by GTIS or repayable to GTIS in any manner or
for any reason. It is understood that the development budget shall include a
compensation expense of up to * if the WMS Group employs a dedicated in-house
producer for the purpose of such development.
2.6. All Previously Developed Games and any Game as to which
GTIS has exercised its option within the notice periods specified in Sections
2.4 and 2.5 above shall become an Accepted Game for all purposes of this
Agreement. With respect to each Accepted Game, GTIS and the member of the WMS
Group which is manufacturing such Game shall enter into a Home Computer Software
Distribution and License Agreement which shall be dated the earlier of: the date
GTIS Shall have given notice of its acceptance thereof, or the date which is
sixty (60) days following the date of the option notice. If either of such
parties shall wrongfully refuse to enter into a Home Computer Software
Distribution and License Agreement
10
<PAGE> 11
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
with respect to any Accepted Game, then, in addition to any other rights of the
non-defaulting party hereunder, at the option of the non-defaulting party, such
Home Computer Software Distribution and License Agreement shall be deemed to
have been entered into as of the date on which GTIS shall have exercised its
option to acquire the license of such Accepted Game as provided herein. GTIS
understands and agrees that it will have no rights whatsoever in respect of any
Game which does not become an Accepted Game in accordance with the terms of this
Agreement and for which a Home Computer Software Distribution and License
Agreement is not duly executed (or deemed executed as provided above), and the
WMS Group may exploit its rights in any Game which does not become an Accepted
Game in any manner it sees fit, free and clear of this Agreement.
2.7. The parties hereto acknowledge that notwithstanding
efforts to produce reliable development budgets under Sections 2.4 and 2.5
hereof, in certain instances the actual costs of development may exceed the
budgeted costs. In those instances, WMS shall notify GTIS of the projected
budget overrun (the "Overrun Notice") promptly after WMS becomes aware of such
overrun.
2.7.1. The following provisions shall apply to budget
overruns in respect of Games which became Accepted Games under Section 2.4
hereof ("Section 2.4 Games"). If the actual cost of development of a Section 2.4
Game being developed by a third party developer is not more than * of the budget
approved by GTIS, GTIS will pay WMS * of such actual costs as provided in
Section 2.4 hereof. If the actual costs of development of a Section 2.4 Game
exceed * of the budget with respect to a Game being developed by a third
11
<PAGE> 12
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
party developer or * of the budget with respect to a Game being developed
in-house by the WMS Group, whichever is applicable, GTIS shall have the right,
by notice to WMS given within ten (10) days of receipt by GTIS of the Overrun
Notice, to elect to bear * of the cost of such overrun or to decline to do so. A
failure by GTIS to give such notice within such ten (10) days shall be deemed an
election to decline to bear such costs. If GTIS so declines, WMS shall be
entitled to elect to (i) abandon the development, in which event WMS shall bear
the entire cost of the development, or (ii) proceed with the development with
GTIS, in which case GTIS shall pay * of (A) the actual costs of the development
up to * of the budget with respect to a Game being developed by a third party
developer or (B) * of the budget with respect to a Game being developed in-house
by the WMS Group, whichever is applicable, as provided in Section 2.4 and WMS
shall bear the balance of the costs of such development.
2.7.2. The following provisions shall apply to budget
overruns in respect of Games which become Accepted Games under Section 2.5
hereof ("Section 2.5 Games"). If the actual cost of development of a Section 2.5
Game being developed by a third party developer is not more than * of the budget
approved by GTIS, GTIS will pay WMS * of such actual costs as provided in
Section 2.5 hereof. If the actual costs of development of a Section 2.5 Game
exceed * of the budget with respect to a Game being developed by a third party
developer or * of the budget with respect to a Game being developed in-house by
the WMS Group, whichever is applicable, GTIS shall have the right, by notice to
WMS given within ten (10) days of receipt by GTIS of the Overrun Notice, to
elect to bear * of the cost of such overrun or to decline to do so. A failure by
GTIS to give such notice within such ten (10)
12
<PAGE> 13
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
days shall be deemed an election to decline to bear such costs. If GTIS so
declines, WMS shall have the right to abandon the development, in which event
WMS shall bear the entire cost of the development, or to elect the options
provided below in this Section 2.7.2. WMS may elect (i) to proceed with the
development with GTIS in which case GTIS shall pay * of (A) the actual costs of
the development up to * of the budget with respect to Games being developed by a
third party developer or (B) * of the budget with respect to Games being
developed in-house, whichever is applicable, and WMS shall bear the balance of
the costs of such development; or (ii) in the case of a Section 2.5 Game being
developed by a third party developer who is not contemporaneously developing the
Game for WMS for other platforms, such as coin-operated or dedicated home games
systems, WMS may elect to proceed with the development without GTIS involvement,
in which case WMS shall bear the entire costs of development, and the Game shall
no longer be deemed an Accepted Game and GTIS shall have no further rights in
such Game.
2.7.3. Anything herein to the contrary notwithstanding,
on notice to GTIS and with consent of GTIS, which consent may not be
unreasonably withheld, WMS may elect to terminate development at any time prior
to delivery to GTIS of a Technically Acceptable Master Disk, at no cost to GTIS,
if WMS determines that further development work is not technically or
economically desirable. If WMS should thereafter determine to recommence
development work, it will promptly notify GTIS which will have the option on
fifteen (15) days' notice to WMS to participate in such renewed development on
the same terms and conditions as if the original development had continued
uninterrupted. If GTIS withholds its consent to
13
<PAGE> 14
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
such termination of development pursuant to this Section 2.7.3, GTIS shall (i)
promptly pay to WMS * of the costs of development to the date of WMS notice of
intent to terminate (excluding the budgeted compensation expense of the WMS
Group's dedicated in-house producer, if any); (ii) take over responsibility for
development of a Technically Acceptable Master Disk with the developer; and
(iii) bear the costs of development in excess of * of the budget. Upon receipt
by WMS of a notice from GTIS that GTIS has received a Technically Acceptable
Master Disk with respect to the Game, WMS shall pay to GTIS the amount, if any,
by which * of the actual costs of development up to * of the budget exceeds the
development costs theretofore paid by the WMS Group.
2.8. If GTIS has not exercised its option under Sections 2.4
or 2.5 above with respect to a Game and if, before a member of the WMS Group
enters into a binding agreement with a third party for Designated Multipurpose
Computer Platform rights in such Game, there shall be a material change in
design, a material decrease in the development budget or a change in the
identity of the developer from those presented to GTIS before its declination to
exercise its option, the WMS Group will present such changed information to GTIS
who shall have thirty (30) days after receipt of such information to determine
to elect to exercise its option.
2.9. GTIS acknowledges that the WMS Group manufactures and
sells Games for many different entertainment platforms, including coin-operated
games and home games of all types, and that any Games in respect of which GTIS
obtains rights hereunder for exploitation on Designated Multipurpose Computer
Platforms, including rights under Section 2.5 hereof, may be developed by the
WMS Group for other entertainment platforms and GTIS will
14
<PAGE> 15
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
have no rights therein.
2.10. WMS agrees to use commercial efforts in its reasonable
judgment, to acquire rights to exploit Games in Designated Multipurpose Computer
Platforms when it acquires rights in Games from third parties or develops rights
in Games internally or through joint ventures. It is understood that with
respect to on-line Games, third parties may require such games to be exclusively
offered on-line, and GTIS shall have no rights hereunder with respect to such
exclusive on-line games.
3. OPTION FEE AND GUARANTIED ADVANCE ROYALTY. In consideration
for the option granted herein and as a guarantied advance royalty, GTIS agrees
to pay to WMS a fee in the amount of * Dollars ("Option and Advance Fee") and to
issue the Warrants as set forth in Paragraph 4 below. The Option and Advance Fee
shall be payable in installments as follows: * Dollars shall be paid by wire
transfer to WMS in immediately available funds on the date hereof; * Dollars
shall be paid on or before December 28, 1995 and * Dollars shall be paid on or
before December 28, 1996. It is understood that under no circumstances shall the
WMS Group be required to repay any portion of such amounts nor shall GTIS be
entitled to any set off or to claim the right not to pay any portion of such
amounts for any reason; provided that GTIS shall be entitled to recoup such
payments out of royalties, to the extent provided in the Home Computer Software
Distribution and License Agreements, entered into pursuant to this Agreement. If
the payment due on December 28, 1995 is not paid in full when due, the payment
otherwise due December 28, 1996 shall become immediately due and payable. The
obligation to make such deferred payments are being fully secured by a clean
standby letter of
15
<PAGE> 16
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
credit in the amount of * Dollars, issued by Republic National Bank delivered to
WMS (which may be accomplished by delivery to WMS counsel, Shack & Siegel, P.C.)
not later than December 29, 1994. If such letter of credit is not so delivered
in form and substance satisfactory to WMS, this Agreement shall be of no further
force and effect and WMS shall return to GTIS any amounts theretofore paid by
GTIS to WMS. GTIS shall be responsible for all costs and expenses, including
legal fees, which may be incurred by WMS in connection with its collection of
the deferred payments. WMS shall permit GTIS from time to time to exchange the
original or any substitute letters of credit for other substitute letters of
credit, provided that the newest substitute letters of credit are (i) issued by
the aforesaid bank or another bank acceptable to WMS, (ii) the amounts of the
newest substitute letters of credit are not less than the amounts then owed with
respect to the above described deferred payments; and (iii) the newest
substitute letters of credit otherwise contain the same terms and conditions as
are contained in the letter of credit for which it is being substituted.
4. WARRANTS. GTIS agrees that simultaneously with the closing
of any public offering of common stock, or of preferred stock convertible into
common stock, WMS will be issued stock purchase warrants and receive a
registration rights agreement, in substantially the forms annexed hereto as
Exhibit B, with the number of shares purchasable upon exercise of the Warrants
being equal to * Dollars divided by the initial public offering price of the
common stock sold, or the conversion price of preferred stock, whichever is
applicable. The Warrants shall be exercisable for the class of common stock
issued and sold by GTIS pursuant to an effective registration statement under
the Securities Act in an initial public offering (or the
16
<PAGE> 17
class of common stock receivable upon conversion of any convertible preferred
stock so issued and sold in an initial public offering). GTIS shall have no
obligation to undertake or complete an initial public offering, and if it does
not, GTIS will have no liability whatsoever to the WMS Group and the WMS Group
shall have no right to any compensation in lieu of the Warrants referred to
herein. The Warrants and the shares issuable thereunder are being and will be
acquired by the WMS Group for investment and not with a view to the distribution
thereof by the WMS Group, and such warrants and shares will be "restricted
securities" within the meaning of the Securities Act. The WMS Group will not
sell or dispose of such warrants or shares except in compliance with the federal
securities laws.
5. REPRESENTATIONS AND WARRANTIES OF THE WMS GROUP. The members
of the WMS Group represent and warrant that this Agreement has been duly
authorized, executed and delivered by each member of the WMS Group; each such
member has the full power and authority to enter into this Agreement and to
perform its obligations hereunder and this Agreement constitutes the valid and
binding obligation of each member of the WMS Group, enforceable in accordance
with its terms, and the making of this Agreement by the member of the WMS Group
does not violate or conflict with any agreement, right or obligation existing
between any member of the WMS Group and any other person, firm or corporation,
including, without limitation, Acclaim.
6. REPRESENTATIONS AND WARRANTIES OF GTIS. GTIS represents and
warrants that this Agreement has been duly authorized, executed and delivered by
GTIS; GTIS has the full power and authority to enter into this Agreement and to
perform its obligations hereunder and this Agreement constitutes the valid and
binding obligation of GTIS enforceable
17
<PAGE> 18
in accordance with its terms; and the making of this Agreement by GTIS does not
violate or conflict with any agreement, right or obligation existing between
GTIS and any other person, firm or corporation.
7. CONFIDENTIAL INFORMATION. GTIS shall keep in confidence and
not disclose to any third party, without the written permission of WMS, the
terms of this Agreement and the proprietary information of the WMS Group made
known to it under this Agreement, except GTIS may make such disclosures to
General Atlantic Partners who have excuted a confidentiality agreement with
GTIS. Likewise, the WMS Group shall keep in confidence and not disclose to any
third party, without the written permission of GTIS, the terms of this Agreement
and the proprietary information of GTIS made known to it under this Agreement.
This requirement of confidentiality shall not apply to information that is (a)
permitted to be disclosed under a Home Computer Software Distribution and
License Agreement; (b) in the public domain through no wrongful act of the
receiving party; (c) rightfully received by the receiving party from a third
party who is not bound by a restriction of nondisclosure; (d) already in the
receiving party's possession without restriction as to disclosure; or (e) is
required to be disclosed by applicable rules and regulations of government
agencies or judicial bodies. WMS or GTIS shall not issue any press release or
other public or trade announcement with respect to the transactions contemplated
by this Agreement unless the issuing party shall have first consulted with the
other with respect thereto and obtained the other's prior written approval
therefor, which approval will not be unreasonably withheld or delayed. The
obligations of confidentiality under this Section 7 shall survive termination of
this Agreement.
8. NOTICES. Any notice, consent, approval, request, waiver or
statement
18
<PAGE> 19
to be given, made or provided for under this Agreement shall be in writing and
deemed to have been duly given (i) by its delivery personally or by express
mail; or (ii) five days after its being mailed, air express, registered or
certified, return receipt requested, in a U.S. Post office addressed as follows:
To GTIS:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz,
Telephone Number: (212) 951-3107
Facsimile Number: (212) 679-6850
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 951-3052
Facsimile Number: (212) 679-6850
To WMS Group:
WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 782-1964
19
<PAGE> 20
or such other address as either party may designate by notice given as
aforesaid.
9. DEFAULT. In the event that GTIS shall default in any of its
obligations to make payment in full hereunder or under any Home Computer
Software Distribution and License Agreement and the WMS Group has provided
notice of such default in accordance with the provisions of Paragraph 8 hereof,
if GTIS has not cured such default in making payments hereunder within fifteen
(15) days of such notice, or within the grace periods provided in the Home
Computer Software Distribution and License Agreement in respect of payments
thereunder, then, in addition to all other rights and remedies of the WMS Group
at law or in equity, at the option of the WMS Group, all rights granted to GTIS
under Paragraph 2 of this Agreement shall be deemed terminated and shall revert
to the WMS Group, provided it is understood that notwithstanding such
termination, the Home Computer Software Distribution and License Agreements
entered or deemed entered into prior to such termination which are not in
default shall remain in full force and effect. No such termination shall in any
way affect or diminish WMS' rights under Paragraphs 3 and 4 hereof. Anything
herein to the contrary notwithstanding, the rights granted to GTIS under
Paragraph 2 of this Agreement shall not be affected by an alleged default by
licensee under a Home Computer Software Distribution and License Agreement
resulting from a bona fide dispute between licensor and licensee provided that
licensee pays all undisputed amounts to licensor and all disputed amounts are
paid into a bona fide third party escrow account.
10. MISCELLANEOUS.
10.1. This Agreement is personal to GTIS and the WMS Group
and may not be assigned, in whole or in part, and none of GTIS' or the WMS
Group's rights or
20
<PAGE> 21
obligations hereunder may be delegated to any person or party without the prior
written consent of the other, except that any party may assign its rights and
obligations to any direct or indirect subsidiary or affiliate of the assigning
party or to any person, firm or corporation owning or acquiring all or
substantially all of the stock or assets of the assigning party, so long as the
assigning party remains liable for its obligations hereunder.
10.2. The entire understanding between the parties hereto
relating to the subject matter hereof is contained herein. This Agreement cannot
be changed, modified, amended or terminated except by an instrument in writing
executed by the parties hereto.
10.3. No waiver, modification or cancellation of any term
or condition of this Agreement shall be effective unless executed in writing by
the party charged therewith. No written waiver shall excuse the performance of
any act other than those specifically referred to therein and no waiver shall be
deemed or construed to be a waiver of such terms or conditions for the future or
any subsequent breach thereof.
10.4. This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between the WMS Group
and GTIS, and neither the WMS Group nor GTIS shall have any right to obligate or
bind the other in any manner whatsoever, and nothing herein contained shall give
or is intended to give any rights of any kind to any third persons.
10.5. This Agreement shall be governed by the laws of the
State of Illinois applicable to contracts made and to be wholly performed in the
State of Illinois.
10.6. If any provision of this Agreement is or becomes or
is deemed invalid, illegal or unenforceable under the applicable laws or
regulations of any jurisdiction,
21
<PAGE> 22
either such provision will be deemed amended to conform to such laws or
regulations without materially altering the intention of the parties or it shall
be stricken and the remainder of this Agreement shall remain in full force and
effect.
10.7. This Agreement may be executed in counterparts each
of which shall be deemed an original and when taken together shall be deemed one
and the same document.
22
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
WMS INDUSTRIES INC
By:/s/ Neil D. Nicastro
----------------------------
WILLIAMS ELECTRONICS GAMES, INC.
By:/s/ Neil D. Nicastro
----------------------------
MIDWAY MANUFACTURING COMPANY
By:/s/ Neil D. Niastro
----------------------------
WILLIAMS ENTERTAINMENT INC.
By:/s/ Byron Cook
----------------------------
GT INTERACTIVE SOFTWARE CORP.
By:/s/ Ron Chaimowitz
----------------------------
23
<PAGE> 24
SCHEDULE 1
Previously Developed Games
<TABLE>
<CAPTION>
Available Formats
-----------------
Scheduled Date of (IBM PC only except as indicated
Title of Game Code Availability below)(1)
------------- -----------------
<S> <C> <C>
Troy Aikman NFL 12/94 PC CD-ROM/PC Floppy
Football(2)(3)
Fun 'N' Games(4) 12/94 PC CD-ROM
Fun Paint 12/94 PC Floppy
Fun Music 12/94 PC Floppy
Island Casino 5/95 PC CD-ROM
Coin-Op Classic Combination 6/95 PC CD-ROM
(Defender, Robotron, Joust)*
Adams Family Pinball(3) 6/95 PC CD-ROM/PC Floppy
Fish Tales Pinball 8/95 PC CD-ROM/PC Floppy
White Water Pinball 10/95 PC CD-ROM/PC Floppy
Pinball Compilation (Adams 1/96 PC CD-ROM
Family, Fish Tales, White
Water, Fun House)
</TABLE>
- ----------
(1) All games can also be developed for Macintosh as well in accordance
with Section 2.3 of the Agreement, except that no Macintosh in any
format and no IBM PC floppy versions are available for combination of
Defender, Robotron and Joust.
(2) Available also in Macintosh CD-ROM and floppy versions.
(3) Subject to obtaining third party consents which are expected to be
obtained in the normal course.
(4) Sony may have the option to obtain worldwide distribution rights with
the exception of North, South and Central America and Japan. If Sony
obtains such rights, the revenues obtained from Sony shall be treated
in the same way as revenues from games exploited by licensor in the
Excluded Asian Countries, as such term is defined in the Home Computer
Software Distribution and License Agreement.
<PAGE> 25
EXHIBIT A
HOME COMPUTER SOFTWARE
DISTRIBUTION AND LICENSE AGREEMENT
AGREEMENT made this ___ day of __________, 199__, by and between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation with offices at 16 East 40th
Street, New York, New York 10016 (herein called "Licensee") and [MIDWAY
MANUFACTURING COMPANY], [WILLIAMS ELECTRONICS GAMES, INC.] [WILLIAMS
ENTERTAINMENT INC.] a Delaware corporation with offices at 3401 North California
Avenue, Chicago, Illinois 60618 (herein called "Licensor").
W I T N E S S E T H:
WHEREAS, Licensor owns or controls the rights in and to the Licensed
Property (which Licensed Property is hereinafter defined on Schedule "A"
attached hereto);
WHEREAS, Licensee is engaged in the business of manufacturing,
distributing and selling Computer Games (as hereinafter defined; such Computer
Games embodying the Licensed Property shall be hereinafter referred to as the
"Licensed Product"); and
WHEREAS, Licensee desires to use the Licensed Property in connection
with the manufacture, distribution and sale of the Licensed Product;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. The term "Computer Game" is herein defined as any
Computer Software designed to operate on IBM PC or Apple Macintosh or other
compatible multipurpose home computers, using floppy disks or CD-ROM or other
stand alone devices in all operating
<PAGE> 26
systems now known or hereafter developed or designated for use on the aforesaid
multipurpose home computers. Computer Games shall not include, among other
things, Computer Software designed to operate on dedicated home game systems
(e.g. Nintendo, Sega, Atari, Sony, etc. game platforms).
1.2. The term "Computer Software" or "Software" shall mean
any computer software containing substantially full and complete computer game
code, including the source code, the assembly code, the object code and such
data files and other files as are deemed necessary for the Licensed Product to
achieve its functional purpose, whereby data and visual images, with or without
sound, can be manipulated, communicated, reproduced or perceived with the aid of
a computer.
1.3. The term "GTIS Master Agreement" shall mean the GTIS
Master Option and License Agreement dated December 22, 1994, among Licensee, WMS
Industries Inc., Midway Manufacturing Company, Williams Electronics Games, Inc.
and Williams Entertainment Inc.
1.4. The term "Licensed Product" shall have the meaning
ascribed in the second Whereas clause of this Agreement and, as the context may
require, shall also include books which communicate game playing tactics and/or
strategies ("hint books") specifically prepared for Computer Games which shall
also be deemed Licensed Products hereunder and shall be subject to all of the
terms and conditions, including without limitation the royalty provisions,
hereof.
1.5. The term "Licensed Territory" shall have the meaning
ascribed in Section 3 of this Agreement.
1.6. The term "Other Home Computer Software Distribution and
License Agreements" shall have the meaning ascribed in Schedule B.
2
<PAGE> 27
1.7. The term "Previously Developed Game" shall have the
meaning ascribed in the GTIS Master Agreement.
1.8. The words "term of this Agreement" or "period of this
Agreement" or "term hereof" or "so long as this Agreement remains in force" or
words of similar connotation shall include the initial period of this Agreement
and the period of all renewals, extensions, substitutions or replacements of
this Agreement.
1.9. The term "Third Party Fees and Royalties" shall mean
all fees, royalties and other participations of any kind or nature payable by
Licensor to any third party, including developers, licensors and others having
rights in connection with the exploitation of the Licensed Products. There shall
be excluded from the term "Third Party Fees and Royalties" as used herein (1)
any recoupable advances which have already been included in any development
budget or acquisition costs with respect to the Licensed Product which are to be
shared by Licensor and Licensee, in accordance with the terms of the GTIS Master
Agreement and which have not yet been recouped; (2) any fees or royalties
payable to employees or consultants by Licensor or its affiliates with respect
to the development of Licensed Product in house, and (3) any fees, royalties or
other participations payable by Licensor to a developer (but any such payments
payable to other third parties shall not be so excluded) in connection with any
Previously Developed Game. If, with respect to Games other than Previously
Developed Games, Licensor or its affiliates acquires from a third party in one
transaction the rights to exploit a Game on multiple platforms, unless Licensee
shall otherwise agree, Licensor shall fund advances, if any, paid to such third
party, and any such advances shall be excluded from the term Third Party Fees
and Royalties; provided, however, that if such advances are recoupable by
Licensor or its affiliates from future royalties payable to such third party,
then Third Party Fees and Royalties shall include such royalties which would
otherwise be payable to such third
3
<PAGE> 28
party were it not for such right of recoupment.
2. GRANT OF LICENSE.
2.1. Licensor hereby grants and Licensee hereby accepts, for
the term of this Agreement and subject to the terms hereinafter set forth, the
exclusive license to utilize the Licensed Property solely in connection with the
manufacture, distribution and sale of the Licensed Products in the Territory.
Licensee shall have the right to sublicense any of the rights granted to
Licensee hereunder with Licensor's prior written consent, which consent shall
not be unreasonably withheld or delayed. Without limiting the generality of the
foregoing, (a) Licensor shall not unreasonably withhold or delay its consent to
proposals by Licensee to sublicense its rights hereunder to third party personal
computer hardware or computer peripheral device manufacturers for the purpose of
"bundling" the Licensed Products together with such hardware products for
distribution only within the Licensed Territory and (b) Licensee shall not have
the right to sublicense its rights hereunder (and Licensor may withhold its
consent to any proposed sublicense) to any third party for the purpose of
distributing Licensed Products to mass market retailers in the United States. It
is understood that the term Licensed Products does not include Computer Software
designed for play on dedicated home video game systems, such as those
manufactured by Nintendo, Sega, Sony or Atari, or any other medium of
exploitation, including handheld games, over the air, cable or fiber-optic
transmission or any ancillary rights related thereto, all of which remain the
sole property of Licensor except as otherwise specifically provided below. No
license is granted hereunder for the manufacture, sale or distribution of
Licensed Products to be used as premiums, in combination sales, as giveaways or
to be disposed of under similar methods of merchandising, except only that
Licensee shall have the right, subject to rights of third parties in the
Licensed Property, to distribute Licensed Products as
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THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
premiums, combination sales or giveaways solely (a) subject to Licensor's
consent, which shall not unreasonably be withheld or delayed, in connection with
the sale and distribution of other Computer Games licensed to Licensee by
Licensor or its affiliates under Other Home Computer Software Distribution and
License Agreements, and (b) with respect to free or promotional goods in the
quantities set forth on Schedule B. [If Licensee's rights in Licensed Products
are derived under Section 2.5 of the GTIS Master Agreement and relate to rights
acquired from third parties (as compared to rights to product developed in-house
by Licensor or its affiliates), add the following: Upon payment of the * of the
costs of the development as provided in Section 2.5 of the GTIS Master
Agreement, Licensee shall be entitled to share in * of the net profits derived
by Licensee from the exploitation of ancillary merchandising rights to the
Licensed Product and Licensee shall be entitled to direct the exploitation of
such ancillary merchandising rights (but not hand held games) after consultation
and subject to Licensor's consent, which shall not unreasonably be withheld or
delayed. Licensee shall not be entitled to exploit or share in the profits
derived from any exploitation of games whether or not having the same or similar
title or play characteristics or using similar Computer Software, in other game
platforms, such as coin-operated games or dedicated home game systems, or in any
ancillary rights relating thereto. If ancillary merchandising rights apply to or
are derived from the exploitation of games which are designed to operate on
multiple platforms (irrespective of the chronological order in which such games
are released for such platforms), then the Licensor and Licensee will consult
with each other to determine a fair and appropriate method of exploiting the
ancillary merchandising rights and the respective participations of Licensor and
Licensee therein. For the purposes
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<PAGE> 30
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
hereof, "net profits" shall be calculated by subtracting from the actual monies
received by Licensor or Licensee, as the case may be, from the exploitation of
the ancillary merchandising rights to the Licensed Product (i) an amount equal
to * of such receipts, representing Licensor's or Licensee's allocation of
overhead expenses, and (ii) all Third Party Fees and Royalties payable by
Licensor in connection therewith. Licensor shall account to Licensee not less
frequently than quarterly with respect to the calculation and payment of its
share of net profits as provided above.]
2.2. This license does not include any rights to subsequent
versions of the Licensed Property (so- called "sequels" or "derivatives"), such
rights being retained by Licensor, except as the same are otherwise required to
be offered to Licensee under the GTIS Master Agreement or as provided in the
following sentence. If any member of the WMS Group, as that term is defined in
the GTIS Master Agreement, shall, within a period beginning not later than six
(6) months after Licensee has ceased selling a Licensed Product acquired under
Section 2.5 of the GTIS Master Agreement in reasonable commercial quantities,
begin the development, in-house or through third-party developers, of a sequel
or derivative of such Licensed Product which utilizes more than * of the same
source code as such Licensed Product or substantially the same name as such
Licensed Product, then such sequel or derivative shall be offered to Licensee on
the same terms and conditions as a Game would have been offered to Licensee
during the Initial Option Period under the GTIS Master Agreement.
3. TERRITORY.
3.1. Licensee shall be entitled to manufacture, distribute
and sell the
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THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Licensed Products in all countries throughout the world, except (a) North and
South Korea, Japan, Hong Kong, China (PRC), Taiwan (ROC), Malaysia, Singapore,
Philippines, Indonesia, Thailand, India and Pakistan, (the "Excluded Asian
Countries") and (b) countries or locations which are excluded under the terms of
any license agreement between Licensor and any third party having rights to the
Licensed Property. The territory in which Licensee shall be entitled to
manufacture, sell and distribute the Licensed Products as specified above is
herein referred to as the "Licensed Territory."
3.2. Licensor shall have the exclusive right to license any
of its rights with respect to the Licensed Property in the Excluded Asian
Countries to third parties, subject to Licensee's prior written consent, which
consent shall not be unreasonably withheld or delayed. With respect to the
exploitation by Licensor of the Licensed Property in the Excluded Asian
Countries, Licensee shall be entitled to share in * of the net profits (as
calculated in Section 2.1 above) derived by Licensor from its sale of Licensed
Products in the Excluded Asian Countries. Licensor shall account and pay over to
Licensee, not less frequently than quarterly, Licensee's share of net profits
from the sale by Licensor of Licensed Products in the Excluded Asian Countries.
3.3. If within 12 months following the date hereof, Licensee
shall have declined or failed to (a) establish a dedicated business office and
personnel or (b) effect sales of Licensed Products in reasonable commercial
quantities in one or more countries of Europe, then Licensor shall have the
right, upon 90 days written notice to Licensee, to exclude any or all of the
countries of Europe from the Licensed Territory and to terminate Licensee's
right to
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<PAGE> 32
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
manufacture, sell and distribute Licensed Products therein. In such event,
Licensee shall be entitled to share in * of the net profits (as calculated in
Section 2.1 above) derived by Licensor from its sale of Licensed Products in
Europe.
4. TERM.
[Note: For Licenses granted under Section 2.3 of the GTIS
Master Agreement, insert the following:
The license granted hereunder shall be effective on the date
hereof [which date, for Previously Developed Games, shall be
the earlier of the actual release date or 60 days after
delivery of the master disk to Licensee] and shall terminate on
the earlier of (a) three years from the date hereof, or (b)
upon termination of Licensor's rights obtained from third
parties, unless sooner terminated in accordance with the terms
and conditions hereof; provided, however, that (a) the license
term shall be deemed extended for an additional one year if
Licensee has paid royalties hereunder amounting to * or more in
excess of * of the amount of all Third Party Fees and Royalties
payable in respect of the exploitation of Licensed Products
during the third license year, and (b) the license term shall
be deemed further extended for a final additional one year if
Licensee has paid royalties hereunder amounting to * or more in
excess of * of the amount of all Third
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<PAGE> 33
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Party Fees and Royalties payable in respect of the sale or
other exploitation of Licensed Products during the fourth
license year. For purposes hereof, royalties and Third Party
Fees and Royalties payable in respect of the sale or other
exploitation of Licensed Products during a license year shall
include amounts paid subsequent to the license year on account
of Licensed Products sold or otherwise exploited during such
license year, and shall not include amounts paid during a
license year on account of the sale or other exploitation of
Licensed Products during the prior license year. Licensee shall
be entitled, one time only, to make a voluntary payment to
Licensor in order to reach either (but not both) of the *
thresholds referred to above.]
[Note: For licenses granted under Section 2.4 of the GTIS
Master Agreement, insert the following:
The license granted hereunder shall be effective on the date
hereof and terminate on the termination of Licensor's rights
obtained from third parties, provided however, that at any time
prior to five years from the earlier of the actual release date
or 60 days after delivery of the master disk to Licensee,
Licensor may notify Licensee of its election to terminate the
license, effective on expiration of such five-year period, and
in such event Licensor
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<PAGE> 34
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
shall pay to Licensee the portion of the development costs paid
by Licensee under Section 2.4 of the GTIS Master Agreement.]
[Note: For licenses granted under Section 2.5 of the GTIS
Master Agreement, insert the following:
The license granted hereunder shall be effective on the date
hereof and terminate on the termination of Licensor's rights
obtained from third parties.
5. CONSIDERATION.
Licensee shall pay Licensor, with respect to the sale
throughout the Territory of the Licensed Products, a royalty as specified in
Schedule "B" annexed hereto on each unit of Licensed Product sold.
6. ACCOUNTINGS.
6.1. Licensee agrees to forward to Licensor, within
forty-five (45) days after the end of each calendar quarter ("Royalty Period"),
commencing with the first calendar quarter during which any unit of the Licensed
Product is sold, a report of the number of units and average wholesale price (by
sales bracket, as provided in Schedule B hereof) of the Licensed Products sold
within such Royalty Period and the royalty amount due for the sale of such units
calculated in accordance with Section 6.3 below and any recoupment claimed in
accordance with Schedule B annexed hereto, and Section 3 of the GTIS Master
Agreement. Such report shall also include a cumulative reconciliation of the
number of units of Licensed Products produced by Licensee to the number of units
on hand. Licensee agrees that accompanying each such report shall be payment, in
U. S. funds, of the amounts due to Licensor, if any, in respect of
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<PAGE> 35
such Royalty Period in excess of any permitted recoupment. Royalties calculated
in foreign currencies shall be converted to U. S. currency at the spot rate of
exchange published in the Wall Street Journal as of the last day of the Royalty
Period. Such reports shall be required to be submitted with respect to sales and
distributions of the Licensed Product whether or not any amounts are due under
the terms hereof.
6.2. Licensee agrees to keep accurate books of account and
records with respect to the Licensed Products, covering all sales, purchases and
inventories of Licensed Products and all royalty fees due under this Agreement
and to permit Licensor at its own expense to have accounting professionals
(which may include Licensor's employees who have accounting degrees) inspect
such books of account and records during reasonable business hours (but not
during the first three weeks of a calendar quarter), upon prior reasonable
written notice, for the sole purpose of verifying the reports to be provided
hereunder. Such inspections, together with inspections of Licensee's books of
account and records pertaining to other Computer Games licensed to Licensee by
Licensor or its affiliates under Other Home Computer Software Distribution and
License Agreements, shall occur no more frequently than twice during any twelve
(12) month period. Licensor's inspectors shall not be physically present in
Licensee's offices for more than 10 consecutive days in connection with any such
inspection, provided that Licensee shall have supplied all requested information
and documentation and responded to questions on a reasonably prompt basis.
Licensor shall keep any information obtained from any such inspections in
confidence and shall require that its accounting professionals do so as well.
Licensee's books relating to any particular royalty statement may be examined as
aforesaid only within two (2) years after the date rendered and Licensee shall
have no obligation to permit
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<PAGE> 36
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Licensor to so examine such books relating to any particular royalty statement
more than once for any one statement, unless in connection with a civil action
filed by Licensor against Licensee in connection with such statement. In the
event that any audit by Licensor's accounting professionals reveals that
Licensee has underpaid Licensor by an aggregate of * or more with respect to the
specific royalty statements which are the subject of such audit, Licensee agrees
that it shall also reimburse Licensor for the reasonable documented costs for
any such audit up to the amount of the shortfall.
6.3. Royalties shall be paid on * of products sold by
Licensee's point of sale ("POS") customers, less actual returns. With respect to
shipments to non-POS customers, not less than * of the shipment shall be deemed
a sale for royalty purposes on the date of shipment. An additional * of the
shipment, less actual returns, shall be deemed a sale for royalty purposes six
(6) months following the date of shipment and the balance of *, less actual
returns, shall be deemed a sale for royalty purposes twelve (12) months
following the date of shipment. As used herein, point of sale customers mean
those customers who report actual sales by selection number to Licensee via
computer and scan their sales by UPC codes at cash registers.
6.4. Licensor shall permit Licensee, at Licensee's own
expense, to have an independent certified public accountant inspect Licensor's
books and records with respect to the payment by Licensor of Third Party Fees
and Royalties in connection with the Licensed Products, during reasonable hours,
upon prior reasonable written notice and subject to such confidentiality
requirements (including the execution of appropriate confidentiality agreements)
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<PAGE> 37
as Licensor may require, for the sole purpose of verifying payment and
calculation by Licensor of such Third Party Fees and Royalties. Licensor's books
and records may be examined by Licensee's representatives not more frequently
than twice in any twelve-month period and Licensee shall otherwise have
substantially the same rights as provided to Licensor under Section 6.2 above.
6.5. In circumstances where either party is obligated under
this Agreement to account to the other party in respect of any entitlement to
the other party's share in net profits from the exploitation of the Licensed
Product, such party shall account substantially in the same manner and in the
same time frame as provided in this Paragraph 6 above. The party to which such
accounting is made shall also have substantially the same rights as provided to
Licensor in Section 6.2.
7. QUALITY OF LICENSED PRODUCT.
7.1. The Licensed Products as manufactured, advertised,
sold, distributed or otherwise disposed of by Licensee under this Agreement
shall be of a high quality and shall be sold and distributed in packaging
prescribed by Licensor bearing Licensor's trademarks and trade names. Such
packaging may indicate that the Licensed Products are distributed by Licensee.
Licensor shall have the right to determine in its reasonable discretion whether
the Licensed Product meets Licensor's high standards of merchantability.
Licensee agrees to furnish Licensor free of cost for Licensor's written approval
as to quality and style (which approval shall not be unreasonably withheld),
samples of the Licensed Product, together with its proposed advertising,
packaging and wrapping materials, before its manufacture, sale or distribution
(whichever first occurs) and the Licensed Product shall not be sold or
distributed
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<PAGE> 38
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
by Licensee without such written approval.
7.2. If Licensor shall disapprove of any item submitted by
Licensee for approval hereunder, Licensor shall furnish at the time notice of
disapproval is given to Licensee an explanation of the reason(s) for such
disapproval and recommendations for suggested changes and Licensee shall
resubmit such item after changes have been made for Licensor's approval.
7.3. In the event that the quality of any Licensed Product
approved by Licensor shall become less than that approved by Licensor and
Licensee shall fail to raise the quality to the approved level within thirty
(30) days after received written notice from Licensor, the license granted under
this Agreement for such Licensed Product shall automatically terminate and shall
remain terminated until Licensor shall subsequently renew its approval of the
Licensed product.
7.4. If disapproval is not received by Licensee within five
(5) business days after Licensor's receipt of the item submitted for approval,
Licensor's approval shall be deemed to have been given. Subsequent to final
approval, Licensor may request the Licensee once each quarter to send a
reasonable number of production samples (but in any event not more than *)
without payment of any Third Party Fees and Royalties or other royalty hereunder
to Licensor to ensure quality control. Should Licensor require additional
samples for any reason other than resale or any other commercial exploitation by
Licensor, Licensee shall be required to sell such samples to Licensor at its
cost (but without payment of any Third Party Fees and Royalties or other royalty
hereunder), but not more than * units of each Licensed Product.
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8. TRADEMARK AND COPYRIGHT, ETC.
8.1. "Notice" as used in this Section shall mean the
following statutory copyright notice and notice of registration or application
for registration of the licensed trademark:
_ _ _ _ (TM) or (R)
All Rights Reserved
C _ _ _ _ Licensed from [Midway Manufacturing Company(R)]
[Williams(R) Electronics Games, Inc.]
[Williams(R) Entertainment Inc.]
or such other copyright notices and notices of registration as may be required
by any third party licensors. Licensor shall advise Licensee prior to use
whether (TM) or (R) shall follow the words " _ _ _ _ ."
8.2. Licensee shall furnish to Licensor samples of all
packaging in which the Licensed Products are sold by Licensee and Licensor shall
cause the copyright in the packaging to be registered with the U.S. Copyright
Office and recorded with the U.S. Customs Dept. at Licensor's expense. Licensee
shall print, stamp or mold the Notice on all Licensed Products and on the front
of each package or container used in connection therewith, and Licensee shall
print the Notice on each label, advertisement and promotional release concerning
any Licensed Products, all in accordance with instructions from Licensor,
providing, however, that such notice shall be imprinted on the back of the
package or container used in connection therewith, displayed on the title screen
of the Licensed Product, and in the instruction booklet, if any, packaged with
the Licensed Product. Licensee agrees to execute and deliver to Licensor in such
form as Licensor may reasonably request all instruments necessary to effectuate
trademark protection or to record Licensee as a registered user of any
trademarks or to cancel
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<PAGE> 40
such registration and if Licensee fails to execute such instruments, Licensee
hereby appoints Licensor Licensee's attorney-in-fact to do so on Licensees
behalf. Licensee shall also furnish Licensor samples of all advertising or
promotional materials bearing the Notice for Licensor's approval.
8.3. Subject to the terms of this Agreement, Licensee
acknowledges and agrees that: All copyrights, trademarks and service marks and
rights to same referred to in this Section 8 in the name of and/or owned by
Licensor shall be and remain the sole and complete property of Licensor; that
all such copyrights, trademarks and service marks and rights to same in the name
of or owned by any copyright proprietor other than Licensor or Licensee shall be
and remain the sole and complete property of such copyright proprietor; that all
trademarks and service marks which, and/or the right to use which, arise out of
the license hereby granted to use the Licensed Property shall be and remain the
sole and complete property of Licensor; that Licensee shall not at any time
acquire or claim any right, title or interest of any nature whatsoever in any
such trademark or service mark by virtue of this Agreement or of Licensee's uses
thereof in connection with the Licensed Products; and that any right, title or
interest in or relating to any such trademark or service mark, which comes into
existence as a result of, or during the term of, the exercise by Licensee of any
right granted to it hereunder shall immediately vest in Licensor.
8.4. Licensee agrees to assist Licensor at Licensor's
expense to the extent necessary in the procurement of any protection or to
protect any of Licensor's right to the Licensed Property. Licensee shall notify
Licensor in writing of any infringements or imitations by others of the Licensed
Property on articles similar to those covered in this
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Agreement which may come to the Licensee's attention. Licensor shall have the
right to commence action to enforce its proprietary rights and prosecute any
such infringements, and Licensee agrees to fully cooperate, at Licensor's
expense, in any such action. However, Licensee shall not incur any such expense
reimbursable by Licensor without Licensor's express written approval and all
recoveries resulting from any such action shall belong solely to Licensor. In
the event Licensor declines to pursue any such action, Licensee may, with
Licensor's written permission, and subject to the consent of any third party
having rights in the Licensed Property, institute such an action, and Licensor,
at Licensee's expense, shall cooperate in such action instituted by Licensee and
all recoveries resulting from any such action shall belong solely to Licensee.
Licensor shall not unreasonably withhold or delay its permission to enable
Licensee to pursue an action (if Licensor shall decline to pursue such action)
against persons or entities reasonably believed by Licensee to be counterfeiting
or pirating Licensee's Licensed Products. Licensor shall not unreasonably
withhold or delay its permission to grant to any sublicensee who requires it, at
the time of entering into a sublicense, reasonable rights (without Licensor's
prior consent in each instance) to pursue persons reasonably believed to be
engaged in counterfeiting or piracy of the Licensee Product.
8.5. During the term of this Agreement and thereafter,
Licensee:
(a) will not challenge the ownership or rights of
Licensor in and to the Licensed Property or any copyright or trademark
pertaining thereto developed by or for Licensor, nor attack the validity of the
license granted hereunder or participate in any challenge thereto;
(b) will manufacture, sell and distribute the Licensed
Products
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in compliance with all applicable laws and governmental regulations in
accordance with the terms of this Agreement;
(c) will not except as set forth in this Agreement,
either directly or indirectly, use or display or authorize others to use or
display, the trademarks, copyrights or proprietary rights of Licensor in
connection with any advertising, assembly, manufacture, distribution, use, sale
or lease of any goods, other than in connection with the manufacture and sale of
the Licensed Products; and
(d) subject to Licensee's best business judgment
Licensee will exercise reasonable efforts to: (i) manufacture sufficient
quantities of the Licensed Product to meet the market demand for same; (ii)
conduct advertising activities to promote the sale of Licensed Product; and
(iii) make any and all arrangements necessary to accomplish such undertakings.
9. MATERIALS.
9.1. Notwithstanding anything contained herein to the
contrary and subject to the terms of this Agreement, all artwork, designs and
computer software embodying the Licensed Property, or any reproduction thereof,
which are designed, developed and/or created by Licensee hereunder (or any of
its sublicensees, affiliates or subsidiaries), shall be, and remain Licensor's
sole and exclusive property, inclusive of all copyrights and right to copyright
therein and thereto for the life of the copyright therein; provided that during
the term of this Agreement, Licensee shall have the exclusive right, license and
privilege (without any compensation to Licensor except as provided in Section 5)
to use all such above described materials in connection with its exploitation,
sale and distribution of the Licensed Products.
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9.2. Licensor shall make available to Licensee, at
Licensor's actual out of pocket cost, any artwork relating to the Licensed
Property which Licensor owns and which is reasonably available to Licensor for
Licensee's use in connection with the exploitation of the Licensed Property.
10. TRANSLATIONS.
In the event that Licensee shall reasonably require the
text associated with any Licensed Product to be translated into a language other
than English, Licensor shall, upon request, provide to Licensee the text files
and the text that appears in bit map files and printed copies of the script used
for audio components of the Licensed Product and Licensee shall furnish, at its
own expense, to Licensor a translation text thereof. Licensor shall then cause a
new Technically Acceptable Master Disk (as that term is defined in the GTIS
Master Agreement) containing such translation to be encoded, at Licensor's own
expense, and delivered to Licensee.
11. REPRESENTATIONS AND WARRANTIES.
11.1. Licensor hereby represents and warrants that this
Agreement has been duly authorized, executed and delivered by Licensor; Licensor
has the full power and authority to enter into this Agreement and perform its
obligations hereunder; this Agreement constitutes the valid and binding
obligation of Licensor, enforceable in accordance with its terms; the making of
this Agreement does not violate any agreement, right or obligation existing
between Licensor and any other person, firm or corporation; and the Licensed
Property, if used pursuant to the license granted herein, will not infringe upon
or violate any rights of any third party.
11.2. Licensee hereby represents and warrants that this
Agreement has
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been duly authorized, executed and delivered by Licensee; Licensee has the full
power and authority to enter into and perform its obligations hereunder; this
Agreement constitutes the valid and binding obligation of Licensee, enforceable
in accordance with its terms; the making of this Agreement does not violate any
agreement, right or obligation existing between Licensee and any other person,
firm or corporation; and its manufacture, advertisement, distribution and sale
of the Licensed Products will be in accordance with the terms of this Agreement
so as not to infringe upon or violate any rights of any third party.
12. INDEMNIFICATION.
12.1. Each party agrees to indemnify and hold the other
(including officers, directors, agents and employees of such party or its
subsidiaries, affiliates and sublicensees) harmless against any loss, damage,
expense or cost (including reasonable attorneys' fees) arising out of any claim,
demand or suit or judgment resulting from any breach of any warranty or
representation set forth in Section 11 above. Each party shall promptly inform
the other of any such claim, demand, suit or judgment.
12.2. In connection with any such claim, demand or suit
referred to above, the party so indemnifying (the "Indemnitor") agrees to
defend, contest or otherwise protect the indemnified party (the "Indemnitee")
against any such suit, action, investigation, claim or proceeding at the
Indemnitor's own cost and expense. The Indemnitee shall have the right, but not
the obligation to participate, at its own expense, in the defense thereof by
counsel of its own choice. In the event that the Indemnitor fails timely to
defend, contest or otherwise protect against any such suit, action,
investigation, claim or proceeding, the Indemnitee shall have the right to
defend, contest or otherwise protect against the same, and, upon ten (10) days'
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<PAGE> 45
written notice to the Indemnitor, make any compromise or settlement thereof and
recover the entire cost thereof from the Indemnitor, including without
limitation, reasonable attorneys' fees, disbursements and all reasonable amount
applied as a result of such suit, action, investigation, claim or proceeding or
compromise or settlement thereof. The obligations hereunder shall survive the
termination or expiration of this Agreement.
12.3. Neither Licensor nor Licensee shall be liable for any
incidental, consequential or punitive damages to the other.
13. EVENTS OF DEFAULT AND TERMINATION.
Licensee shall be deemed to be in default of this Agreement
in the event either of the following occurs:
(a) Licensee fails to make any payment or furnish any
statement in accordance herewith, provided that Licensee shall have been given a
first written notice of such default and a period of at least 15 days in which
to cure such default and, if such default shall not have been cured within such
period, Licensee shall have been given a second written notice of such default
and a further period of at least 10 days in which to cure such default; or
(b) Licensee fails after thirty (30) days' written
notice to Licensee to comply with any other of Licensee's obligations hereunder.
14. EXPIRATION OR TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement, all
rights granted to Licensee herein shall forthwith revert to Licensor with the
following consequences:
(a) All unpaid royalties shall be due and payable in
accordance with Section 6.1 hereof.
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THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
(b) Licensor shall thereafter be free to license others
to use the Licensed Property in connection with the manufacture, advertisement,
distribution and sale of items identical or similar to the Licensed Products in
the Territory.
(c) In the event of termination or expiration of this
Agreement, other than a termination by Licensor as a result of a material breach
of this Agreement by Licensee, Licensee may continue to sell for a period of one
hundred eighty (180) days after the effective date of termination all approved
copies of the units of the Licensed Product produced prior thereto.
Notwithstanding the expiration or termination of this
Agreement, Licensor will continue to account and pay over to Licensee, on a
periodic basis not less frequently than quarterly, * of the net profits (as
calculated in Section 2.1 above) derived by Licensor from the exploitation of
any ancillary merchandising rights to the Licensed Products (as provided in
Section 2.1 above) and * of the net profits derived by Licensor from the
exploitation of Licensed Products in the Excluded Asian Countries, as provided
in Section 3.2 above, or in Europe, to the extent provided in Section 3.3 above.
15. CONFIDENTIAL INFORMATION.
Each of the parties shall keep in confidence and not
disclose to any third party, without the written permission of the other party,
the terms of this Agreement and the proprietary information of the other party
made known to it under this Agreement, except that GTIS may make such
disclosures to General Atlantic Partners who have executed a confidentiality
agreement with GTIS. This requirement of confidentiality shall not apply to
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information that is (a) in the public domain through no wrongful act of the
disclosing party; (b) rightfully received by the disclosing party from a third
party who is not bound by a restriction of nondisclosure; (c) already in the
disclosing party's possession without restriction as to disclosure; or (d) is
required to be disclosed by applicable rules and regulations of government
agencies or judicial bodies. This obligation of confidentiality: (i) shall
survive termination of this Agreement and (ii) shall extend to any subcontractor
of either party and each party agrees to obtain from each such subcontractor a
written agreement to abide by the foregoing confidentiality requirements.
16. NOTICES.
Any notice, consent, approval, request, waiver or statement
to be given, made or provided for under this Agreement shall be in writing and
deemed to have been duly given (i) by its delivery personally or by express
mail; or (ii) five days after its being mailed, air express, registered or
certified, return receipt requested in a U.S. Post Office addressed as follows:
TO LICENSEE: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz,
Telephone Number: (212) 951-3107
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 951-3052
Facsimile Number: (212) 679-6850
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TO LICENSOR: WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
WITH A COPY TO: Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 782-1964
or such other address as either party may designate by notice given as
aforesaid.
17. MISCELLANEOUS.
17.1. This Agreement is personal to Licensee and Licensor
and may not be assigned, in whole or in part, and none of Licensee's or
Licensor's rights or obligations hereunder may be delegated to any person or
party without the prior written consent of the other, except that any party may
assign its rights and obligations to any direct or indirect subsidiary or
affiliate of the assigning party or to any person, firm or corporation owning or
acquiring all or substantially all of the stock or assets of the assigning
party, so long as the assigning party remains liable for its obligations
hereunder.
17.2. The entire understanding between the parties hereto
relating to the subject matter hereof is contained herein. This Agreement cannot
be changed, modified, amended or terminated except by an instrument in writing
executed by the parties hereto.
17.3. No waiver, modification or cancellation of any term
or condition of this Agreement shall be effective unless executed in writing by
the party charged therewith. No written waiver shall excuse the performance of
any act other than those specifically referred
24
<PAGE> 49
to therein and no waiver shall be deemed or construed to be a waiver of such
terms or conditions for the future or any subsequent breach thereof.
17.4. This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between Licensor and
Licensee, and neither Licensor nor Licensee shall have any right to obligate or
bind the other in any manner whatsoever, and nothing herein contained shall give
or is intended to give any rights of any kind to any third persons.
17.5. This Agreement shall be governed by the laws of the
State of Illinois applicable to contracts made and to be wholly performed in the
State of Illinois.
17.6. If any provision of this Agreement is or becomes or
is deemed invalid, illegal or unenforceable under the applicable laws or
regulations of any jurisdiction, either such provision will be deemed amended to
conform to such laws or regulations without materially altering the intention of
the parties or it shall be stricken and the remainder of this Agreement shall
remain in full force and effect.
17.7. This Agreement may be executed in counterparts each
of which shall be deemed an original and when taken together shall be deemed one
and the same document.
25
<PAGE> 50
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
[WILLIAMS ELECTRONICS GAMES, INC.]
By:
------------------------------
[MIDWAY MANUFACTURING COMPANY]
By:
------------------------------
[WILLIAMS ENTERTAINMENT INC.]
By:
------------------------------
GT INTERACTIVE SOFTWARE CORP.
By:
------------------------------
26
<PAGE> 51
SCHEDULE A
[Insert description of Licensed Property]
27
<PAGE> 52
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
SCHEDULE B
ROYALTIES
Licensee shall pay royalties in an amount equal to the
following percentages of the net wholesale sales price of a Unit sold and not
returned:
Net Wholesale Sales Price Royalty %
------------------------- ---------
* or greater *
* *
* *
* *
* *
* *
* *
At Net Wholesale Sales Prices between * and * the above percentages shall be
prorated. For example, at a Net Wholesale Sales Price of *, the royalty
percentage shall be *. Notwithstanding the above, if the Licensed Products other
than previously Developed Games cost * or more to develop or acquire ("Premium
Products"), the minimum per unit royalty for such Premium Products shall be
calculated as follows: (a) for Premium Products which are First Released (as
such term is defined in the GTIS Master Agreement) before April 1, 1996, the
minimum per unit royalty shall be * until March 31, 1996, provided, however,
that if less than six (6) months have expired since the date on which the
Premium Product was First Released, then during the period commencing on April
1, 1996 and ending upon the expiration of six months from the date on which such
Premium Product was First Released, the minimum per unit royalty shall be an
amount equal to * of the product of (1) the Net Wholesale Sales Price of such
Premium Product as of April 1, 1996 multiplied by (2) the royalty percentage
which corresponds to such Net Wholesale Sales Price on the table set forth
above; (prorated as appropriate) and (b) for Premium Products which are First
Released on or after April 1, 1996, the minimum per unit royalty during the
six-month period commencing on the date on which the Premium Product was First
Released shall be an amount equal to * of the product of (1) the Net Wholesale
Sales Price of such Premium Product as of April 1, 1996 multiplied by (2) the
royalty percentage which
28
<PAGE> 53
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
corresponds to such Net Wholesale Sales Price on the table set forth above
(prorated as appropriate). After March 31, 1996, or the expiration of the
six-month period referred to in (a) above, in the case of Premium Products which
are First Released prior to April 1, 1996, and at the expiration of the
six-month period referred to in (b) above, in the case of Premium Products First
Released after March 31, 1996, there shall be no further minimum per unit
royalty. The foregoing minimum per unit royalty provision shall not apply to
so-called "hint books" as to which there shall be no minimum royalty.
"Net Wholesale Sales Price" shall be that price invoiced by Licensee to its
customers, less any price discounts, rebates or credits granted at the time of
sale and taxes invoiced to customers (including VAT). No deduction shall be made
for bad debts or other uncollected amounts, advertising allowances, including
cooperative advertising, or any other costs incurred in manufacturing, selling
or distributing the Licensed Products. In the event that Licensee's experience
with respect to bad debts and uncollectible amounts during any calendar year in
respect of sales of Licensed Products under this Agreement and all other Home
Computer Software Distribution and License Agreements entered into between
Licensor and its affiliates and Licensee under the GTIS Master Agreement, shall
exceed * of Licensee's aggregate net sales of Licensed Products under this
Agreement and all such Other Home Computer Software Distribution and License
Agreements during such calendar year ("Excess Bad Debts"), then Licensee shall
be entitled to receive a credit against royalties payable under this Agreement
or any Other Home Computer Software Distribution and License Agreement
determined as follows: the average of the weighted Net Wholesale Sales Prices of
all Licensed Products sold under this Agreement and all Other Home Computer
Software Distribution and License Agreements during such calendar year shall be
determined, and the royalty percentage which corresponds thereto in the table
above (prorated as appropriate) shall be multiplied by the amount of Excess Bad
Debts for such calendar year to determine the amount of such credit.
Royalties for "direct response sales" shall be calculated by multiplying * of
the royalty percentages set forth above (prorated as appropriate) times
Licensor's net receipts from such sales and, for purposes of determining the
applicable royalty percentages in the table set forth above, the amount of such
net receipts shall be substituted for "Net Wholesale Sales Price." The minimum
per unit royalty shall be * of the minimum per unit royalty applicable to sales
other than "direct response sales." Direct response sales shall refer to sales
made directly to consumers other than from a fixed retail location and shall
include catalogue sales, direct mail, print and television sales. Licensee's net
receipts from direct response sales shall be based upon actual monies received,
less amounts separately paid by purchasers as sales taxes and shipping and
handling charges.
ADJUSTMENTS TO ROYALTIES
29
<PAGE> 54
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Anything above to the contrary notwithstanding:
1. If Licensor is obligated to pay any Third Party Fees and Royalties
with respect to the sale of Licensed Products, the per unit royalties to be paid
by Licensee to Licensor with respect to such Licensed Products shall be equal to
* of all such Third Party Fees and Royalties, plus the greater of (a) the
royalty otherwise payable to Licensor as provided above and (b) the other * of
such Third Party Fees and Royalties. In no event shall the per unit royalty on
the sale of Licensed Products be less than * of such Third Party Fees and
Royalties.
2. In cases where Licensed Products are sold by sublicensees under
sublicenses granted by Licensee in accordance with the provisions of Section 2.1
above, royalties shall be payable by Licensee to Licensor hereunder equal to the
sum of (a) an amount equal to all Third Party Fees and Royalties payable with
respect to the sale of such Licensed Products, plus (b) * of the net proceeds
received by Licensee from such sublicensee after deducting (i) a fee to Licensee
equal to * of such net proceeds, (ii) an amount equal to all Third Party Fees
and Royalties, and, (iii) in the case of sublicensees to whom Licensee supplies
the Licensed Product, Licensee's direct manufacturing and shipping costs. In no
event shall the royalty be less than such Third Party Fees and Royalties.
3. Until Licensee shall have fully recouped the * Option and Advance
Fee, as provided below, Licensor shall pay over to Licensee Licensor's share of
net profits from the exploitation of the Licensed Product in the Excluded Asian
Countries and in any other territories in which Licensor is entitled to exploit
the Licensed Products or ancillary merchandising rights thereto under this
Agreement, and all amounts so paid over to Licensee shall be deemed to
constitute additional Recoupable Amounts (as that term is used below) under this
Agreement.
RECOUPMENT.
Licensee shall be entitled to apply the aggregate amount by which (a) royalties
paid under this Agreement exceed (b) * of the amount of any Third Party Fees and
Royalties payable by Licensor to parties having rights with respect to the sale
of Licensed Products (the "Recoupable Amount") to recoup the * Option and
Advance Fee paid by Licensee to WMS Industries Inc. pursuant to Section 3 of the
GTIS Master Agreement, until such Recoupable Amount together with Recoupable
Amounts under any other Home Computer Software Distribution and License
Agreement entered into by Licensee pursuant to the GTIS Master Agreement ("Other
Home Software Distribution and License Agreements") equal *; provided, however,
that (a) to the extent that the aggregate of all Recoupable Amounts under this
Agreement and the Other Home Computer Software Distribution and License
Agreements between December 28, 1994 and December 28, 1995 exceeds the
installment of the Option and Advance Fee paid on December 28, 1994 such excess
shall be paid to Licensor and the licensors under the Other Home Software
Distribution and License Agreements, in accordance with their respective
interests, and applied
30
<PAGE> 55
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
in reduction of the installment of the Option and Advance Fee payable under the
GTIS Master Agreement on December 28, 1996, up to a maximum reduction of *, and
the balance of such excess, if any, shall be applied first in reduction of the
installment of the Option and Advance Fee payable on December 28, 1995, and then
in reduction of the installment of the Option and Advance Fee payable on
December 28, 1996, and (b) to the extent that the aggregate of all Recoupable
Amounts under this Agreement and all Other Home Computer Software Distribution
and License Agreements between December 28, 1994 and December 28, 1996 exceeds
the unrecouped portion of the installment of the Option and Advance Fee paid on
December 28, 1994 and December 28, 1995, the excess shall be paid to Licensor
and the licensors under the Other Home Software Distribution and License
Agreements, in accordance with their respective interests, and applied in
reduction of the installment of the Option and Advance Fee payable on December
28, 1996.
LIMITATIONS ON FREE AND PROMOTIONAL GOODS; CLOSE-OUTS.
Licensee shall be permitted to distribute free and promotional goods without the
payment of any Third Party Fees and Royalties or other royalties thereon,
subject to the provisions of Section 1 above and within the following
territorial and quantity limits:
United States and Canada: * units in the aggregate
United Kingdom,
Germany, Scandanavia,
Benelux, Italy, Spain,
Australia, and Japan): * units per country
Other Countries: * units per country
No royalties shall be payable by Licensee to Licensor in excess of any Third
Party Fees and Royalties in connection with the sale by Licensee of
"close-outs." For purposes hereof, "close-outs" shall mean any Licensed Products
that are sold for a price no greater than the sum of direct manufacturing and
shipping costs plus any Third Party Fees and Royalties.
31
<PAGE> 1
EXHIBIT 10.10
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A
CONFIDENTIAL TREATMENT REQUEST MADE PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
AMENDMENT TO
GTIS MASTER OPTION AND LICENSE AGREEMENT
This amendment agreement (the "Amendment") is made and entered into
the 31st day of March, 1995, by and among WMS INDUSTRIES INC. ("WMS"),
WILLIAMS ELECTRONICS GAMES, INC. ("WEG"); MIDWAY MANUFACTURING COMPANY
("Midway") and WILLIAMS ENTERTAINMENT INC. ("WEI"), each being Delaware
corporations with offices at 3401 North California Avenue, Chicago, Illinois
60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware corporation with
offices at 16 East 40th Street, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, on December 28, 1994 WMS, WEG, Midway, WEI and GTIS entered
into the GTIS Master Option and License Agreement (the "GTIS Master Agreement")
pursuant to which the "WMS Group" granted to GTIS certain rights with respect
to the manufacture, distribution and sale of "Games" for use on "Designated
Multipurpose Computer Platforms" (as those terms are defined in the GTIS Master
Agreement); and
WHEREAS, WMS, WEG, Midway, WEI and GTIS desire to amend the GTIS
Master Agreement to extend the term thereof, provide for an increase in
the amount of the
<PAGE> 2
"Option and Advance Fee" payable thereunder, and for other purposes, as set
forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the parties hereto
hereby agree as follows:
1. Capitalized terms used, but not defined herein, shall have
the meanings ascribed in the GTIS Master Agreement or the form of Home Computer
Software Distribution and License Agreement annexed to the GTIS Master
Agreement as Exhibit A. In addition, the GTIS Master Agreement is amended to
add a new Section 1.4A to read in its entirety as follows:
1.4A "GTIS" shall mean GTIS or any affiliate of GTIS to
whom any rights to exploit any Accepted Games granted hereunder may
be sublicensed. An affiliate of GTIS shall refer to an entity, a
majority of whose capital stock is owned directly or indirectly by
GTIS or with respect to which during the term of this Agreement, GTIS,
directly or indirectly, has the legal power without the consent of any
third party to direct the manufacture, distribution or sale of
Accepted Games.
2. The GTIS Master Agreement shall be amended to extend the term
thereof from three (3) years to five (5) years and to modify provisions
relating to the "Extension Events." Accordingly, Section 2.1 thereof is hereby
amended and restated to read in its entirety as follows:
2.1 The WMS Group hereby grants to GTIS a first option to
acquire a license, in the form of the Home Computer Software
Distribution and License Agreement, to manufacture, distribute and
sell versions of the Game for use solely on Designated Multipurpose
Computer Platforms, with respect to (a) Previously Developed Games,
(b) new Games First Released by the WMS Group during the five (5) year
period commencing March 22, 1995 and expiring March 31, 2000 (the
"Initial Option Period"), and (c) Games which
2
<PAGE> 3
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
were offered to Acclaim Entertainment, Inc. ("Acclaim") between
December 28, 1994 and March 21, 1995, but are not accepted by Acclaim
("Interim Period Games"). If either of the "Extension Events"
described below shall have occurred prior to April 1, 1998, the
Initial Option Period shall be deemed extended to March 31, 2001.
Extension Events shall mean either (i) the WMS Group shall have
received not less than * Dollars in the aggregate from royalties paid
under Home Computer Software Distribution and License Agreements and
the Option and Advance Fee or from voluntary payments by GTIS,
provided that the amount of voluntary payments which may be utilized
to calculate the attainment of the Extension Event shall not exceed *
Dollars; or (ii) the market value of the shares of stock which may be
acquired by WMS upon exercise of the Warrants provided for in Section
4 hereof shall have increased by at least * Dollars as compared to the
market value of such shares on the date the Warrants were issued and
an amount of such shares have been purchased or are currently
purchasable under the Warrants and have been sold or are publicly
saleable by WMS as have permitted or will permit WMS to realize such *
Dollars increase. For purposes hereof shares shall be considered
publicly saleable (A) if they are saleable under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"),
or any similar rule hereafter in effect; (B) if, in the opinion of
counsel to GTIS, such shares may be publicly sold under Section 4(1)
or otherwise publicly sold without registration under the Securities
Act; (C) if such shares have been registered for sale and are saleable
under an effective registration statement duly filed under the
Securities Act; (D) if WMS has a demand registration right then
available under the registration rights agreement annexed hereto as
Exhibit B; or (E) if GTIS has duly exercised the GTIS Call as that
term is defined in such registration rights agreement. In calculating
the amount the WMS Group has received for purposes of clause (i)
above, payments made with royalty reports received prior to May 16,
1998 shall be included.
On or about April 1, 1999, or, if either of the Extension
Events shall have occurred prior to April 1, 1998, then on or about
April 1, 2000, the WMS Group and GTIS shall enter into good faith
negotiations with respect to an extension (or further extension) of
the term of the GTIS Master Agreement. If the parties are unable to
reach agreement with respect to such extension, despite such good
3
<PAGE> 4
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
faith negotiations, the WMS Group shall be free (i) to negotiate with
and enter into an agreement with any third party or parties relating
to the granting of licenses for the manufacture, distribution, sale or
other exploitation of the Games or any future Games on Designated
Multipurpose Computer Platforms, on whatever terms and conditions it
may deem appropriate (a "Third Party License"), or (ii) to retain and
exploit such rights itself or through any affiliated entity, in each
case with respect to periods following the expiration of the term
hereof, provided, however, that if prior to the expiration of the term
hereof, the WMS Group shall propose to enter into a Third Party
License as contemplated in clause (i) above, it shall first give GTIS
written notice thereof and the right, for a period not to exceed
thirty (30) days, to enter into an agreement with the WMS Group on the
same terms and conditions as such Third Party License. Nothing herein
shall be deemed to require the parties to enter into any agreement
with respect to periods following the expiration of the term hereof or
in any way to inhibit the WMS Group from retaining and exploiting any
rights with respect to the Games or any future Games itself or through
any affiliated entity following the expiration of the term hereof.
References to the Initial Option Period in Section 1.6 are hereby
deleted.
3. Section 3 of the GTIS Master Agreement shall be amended to
increase the amount of the Option and Advance Fee from * Dollars to * Dollars
and to provide for payment thereof and additional security therefor.
Accordingly, Section 3 of the GTIS Master Agreement is hereby amended and
restated to read in its entirety as follows:
3. OPTION FEE AND GUARANTEED ADVANCE ROYALTY. In
consideration for the option granted herein and as a guaranteed
advance royalty, GTIS agrees to pay to WMS a fee in the amount of *
Dollars (the "Option and Advance Fee") and to issue the Warrants as
set forth in Paragraph 6 below. The Option and Advance Fee shall be
payable in installments as follows: * Dollars was paid by wire
transfer to WMS in immediately available funds on December 28, 1994; *
Dollars shall be paid by wire transfer to WMS in immediately available
funds on the date hereof; * Dollars shall be paid on or before
December 28, 1995 and * Dollars shall be paid
4
<PAGE> 5
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
on or before December 28, 1996. It is understood that under no
circumstances shall the WMS Group be required to repay any portion of
such amounts nor shall GTIS be entitled to any set off or to claim the
right not to pay any portion of such amounts for any reason; provided
that GTIS shall be entitled to recoup such payments out of royalties,
to the extent provided in the Home Computer Software Distribution and
License Agreements entered into pursuant to this Agreement. If the
payment due on December 28, 1995 is not paid in full when due, the
payment otherwise due December 28, 1996 shall become immediately due
and payable. The obligation to make such deferred payments is being
fully secured as follows: (a) a clean standby letter of credit in
the amount of * Dollars, issued by Republic National Bank was
heretofore delivered to WMS on December 29, 1994, and (b) a clean
standby letter of credit in the amount of * Dollars, issued by
Republic National Bank shall be delivered to WMS not later than March
31, 1995. GTIS shall be responsible for all costs and expenses,
including legal fees, which may be incurred by WMS in connection with
its collection of the deferred payments. WMS shall permit GTIS from
time to time to exchange the original or any substitute letters of
credit for other substitute letters of credit, provided that the
newest substitute letters of credit are (i) issued by Republic
National Bank or another bank acceptable to WMS, (ii) the amounts of
the newest substitute letters of credit are not less than the amounts
then owed with respect to the above described deferred payments, and
(iii) the newest substitute letters of credit otherwise contain the
same terms and conditions as are contained in the letter of credit for
which it is being substituted. GTIS has advised the WMS Group of its
intention to effect an initial public offering ("IPO") of its common
stock or preferred stock convertible into common stock during the
Initial Option Period. In the event that GTIS shall complete such IPO
during the Initial Option Period and, as a result thereof, the
additional or paid-in capital of GTIS shall be increased by at least *
Dollars, as shown on a balance sheet of GTIS certified by its
independent certified public accountants and furnished to the WMS
Group, then the WMS Group shall permit GTIS to cancel the letters of
credit securing the remaining deferred installments of the Option and
Advance Fee. Cancellation of such letters of credit shall in no way
relieve GTIS of its obligation to make payment of all remaining
installments of the Option and Advance Fee as set forth above.
5
<PAGE> 6
4. Section 8 of the GTIS Master Agreement and Section 16
of the Home Computer Software Distribution and License Agreement are each
amended to provide for additional copies of notices by adding the following:
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 951-2379
Facsimile Number: (212) 679-6850
With a copy to:
Williams Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
5. Section 10.1 of the GTIS Master Agreement shall be
amended and restated to read in its entirety as follows:
10.1 This Agreement is personal to GTIS as one party and the
WMS Group as the other party. Neither this Agreement nor any party's
rights under it may be assigned, in whole or in part, nor may its
obligations be delegated, in whole or in part, to any person or party
without the prior written consent of the other party, except that any
party may assign its rights and delegate obligations to any of its
direct or indirect wholly-owned subsidiaries or affiliates or to any
person, firm or corporation owning or acquiring all or substantially
all of the stock or assets of that party, as long as that party
remains fully liable for its obligations hereunder. Any sale of all
or substantially all of the assets of any member of the WMS Group
shall include a requirement for the assumption by the purchaser of all
covenants, obligations and duties undertaken by the seller pursuant to
the terms of this Agreement, including its obligations with respect to
Games and the intellectual property from which they are derived.
6
<PAGE> 7
This Agreement shall bind the parties, their successors and permitted
assignees and delegees. The members of the WMS Group, as one party,
and GTIS (including its sublicensees and affiliates as one party) are
each jointly and severally liable for their respective obligations
under the terms of this Agreement.
6. The representations and warranties of the WMS Group,
as set forth in Section 5 of the GTIS Master Agreement, and the representations
and warranties of GTIS, as set forth in Section 6 of the GTIS Master Agreement,
shall be deemed restated and confirmed by the parties, respectively, as of the
date hereof and references therein to the GTIS Master Agreement shall be deemed
to refer to the GTIS Master Agreement as amended hereby.
7. Section 3.1 of the Home Computer Software
Distribution and License Agreement shall be amended to eliminate North and
South Korea, Hong Kong, China (PRC), Taiwan (ROC), Malaysia, Singapore,
Philippines, Indonesia, Thailand, India and Pakistan from inclusion in the term
"Excluded Asian Countries." All references to "Excluded Asian Countries" shall
be deemed to refer only to Japan.
8. Sections 6.1 and 6.2 of the Home Computer Software
Distribution and License Agreement shall be amended and restated to read in
their entirety as follows:
6.1 Licensee agrees to forward to Licensor, within
forty-five (45) days after the end of each calendar quarter ("Royalty
Period"), commencing with the first calendar quarter during which any
unit of the Licensed Product is sold, a report, in reasonable detail
and reported separately, by Marketing Area, of the number of units and
average wholesale price (by sales bracket, as provided in Schedule B
hereof) of the Licensed Products sold within such Royalty Period and
the royalty amount due for the sale of such units calculated in
accordance with Section ? below and any recoupment claimed in
accordance with Schedule B annexed hereto, and Section ? of the GTIS
Master Agreement. For purposes hereof, the term "Marketing Area"
shall include North America (as such term is defined in the GTIS
Master Option and License Agreement (Home Video Games) between the
parties,
7
<PAGE> 8
dated March 31, 1995, and each of the other Marketing Areas designated
on Schedule C to Exhibit A of such GTIS Master Option and License
Agreement (Home Video Games). Such report shall also include a
cumulative reconciliation of the number of units of Licensed Products
produced by Licensee to the number of units on hand. Licensee agrees
that accompanying each such report shall be payment, in U. S. funds,
of the amounts due to Licensor, if any, in respect of such Royalty
Period in excess of any permitted recoupment. Royalties calculated in
foreign currencies shall be converted to U. S. currency at the spot
rate of exchange published in the Wall Street Journal as of the last
day of the Royalty Period. Such reports shall be required to be
submitted with respect to sales and distributions of the Licensed
Product whether or not any amounts are due under the terms hereof.
6.2. Licensee agrees to keep accurate books of account and
records with respect to the Licensed Products, covering all sales,
purchases and inventories of Licensed Products and all royalty fees
due under this Agreement at Licensee's offices (or the offices of
Licensee's affiliates) and to permit (or procure the right for)
Licensor at its own expense to have accounting professionals (which
may include Licensor's employees who have accounting degrees) inspect
such books of account and records of Licensee or its sublicensees
during reasonable business hours (but not during the first three weeks
of a calendar quarter), upon prior reasonable written notice, for the
sole purpose of verifying the reports to be provided hereunder. Such
inspections, together with inspections of Licensee's books of account
and records pertaining to other Computer Games licensed to Licensee by
Licensor or its affiliates under Other Home Computer Software
Distribution and License Agreements, shall occur no more frequently
than twice during any twelve (12) month period for each of the
Licensee's offices. Licensor's inspectors shall not be physically
present in a specific office of Licensee for more than 10 consecutive
business days in connection with any such inspection, provided that
Licensee shall have supplied all requested information and
documentation and responded to questions on a reasonably prompt basis.
Licensee shall promptly furnish to Licensor copies of any report which
Licensee may produce as the result of any audit by Licensee of the
books of account and records of any sublicensee of Licensee. Licensor
shall keep any information obtained from any such inspections in
confidence and shall require that its accounting professionals do so
as well. Licensee's books relating to any particular royalty
statement may be examined as aforesaid only
8
<PAGE> 9
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
within two (2) years after the date rendered and Licensee shall have
no obligation to permit Licensor to so examine such books relating to
any particular royalty statement more than once for any one statement,
unless in connection with a civil action filed by Licensor against
Licensee in connection with such statement. In the event that any
audit by Licensor's accounting professionals reveals that Licensee has
underpaid Licensor by an aggregate of * or more with respect to the
specific royalty statements which are the subject of such audit,
Licensee agrees that it shall also reimburse Licensor for the
reasonable documented costs for any such audit (including traveling
costs) up to the amount of the shortfall.
9. Section 6.3 of the Home Computer Software Distribution and
License Agreement shall be amended to correct the third sentence thereof to
read as follows: "Not less than * of the balance of the shipment, less actual
returns, shall be deemed a sale for royalty purposes six (6) months following
the date of shipment, and the balance of such shipment, less actual returns
not already counted, shall be deemed a sale for royalty purposes twelve (12)
months following the date of shipment."
10. Section 6 of the Home Computer Software Distribution and
License Agreement shall be amended to include the following new Section 6.6 and
6.7:
6.6 Licensee recognizes that the timely submission of all
reports required to be submitted to Licensor pursuant to Section 6.1
hereof is critical for Licensor to maintain good relations with its
third party licensors as well as for Licensor's own financial
reporting requirements. Therefore, in addition to any other rights and
remedies of Licensor, if Licensee shall be late by more than five (5)
business days with respect to any report and/or royalty payment
required to be submitted to Licensor pursuant to Section 6.1 hereof
(a "Late Report"), then Licensee shall pay to Licensor a late charge
("Late Charge") at a rate equal to the prime rate designated by
Citibank N.A. on any royalties covered by such Late Report that are
actually payable to Licensor as provided in Schedule B. Such Late
Charge
9
<PAGE> 10
shall be computed from the 46th day following the last day of the
calendar quarter for which such Late Report is due until the date
actually paid. Licensor may elect to waive payment of any such Late
Charge if Licensee shall have provided a reasonable estimate of
royalties due within fifteen (15) days following the end of the
calendar quarter covered by such Late Report.
6.7 At the time that the Licensor shall provide to
Licensee notice of availability of a Game pursuant to Section 2.4 or
2.5 of the GTIS Master Agreement, Licensor shall provide to Licensee
sufficient data to enable Licensee to calculate Third Party Fees and
Royalties payable with respect to each Licensed Product (without
regard to any advances which may have been made by Licensor). If
Licensee is unable to calculate specific Third Party Fees and
Royalties from the data provided, Licensee may request assistance from
Licensor with respect thereto, and Licensor shall use its best efforts
to respond within seven (7) days from the date of such request, but
Licensee shall provide all sales and other data in its possession
which are necessary for such calculations.
11. The second sentence of Section 7.4 of the Home Computer
Software Distribution and License Agreement shall be amended and restated to
read in its entirety as follows:
Subsequent to final approval, Licensor may request the Licensee
once each quarter to send, without charge, a reasonable number of
production samples (but in any event not less than two (2) copies of
each language version) without payment of any royalty hereunder to
Licensor to ensure quality control.
12. Section 17.1 of the Home Computer Software Distribution
License Agreement shall be amended and restated to read in its entirety as
follows:
17.1 This Agreement is personal to Licensee as one party and
Licensor as the other party. Neither this Agreement nor any party's
rights under it may be assigned, in whole or in part, nor may
Licensee's or Licensor's rights or obligations hereunder be delegated,
in whole or in part, to any person or party without the prior written
consent of the other party, except that any party may assign its
rights and delegate obligations to any of its direct or indirect
wholly-owned subsidiaries or affiliates or to any person,
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<PAGE> 11
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
firm or corporation owning or acquiring all or substantially all of
the stock or assets of that party, as long as that party remains fully
liable for its obligations hereunder. Any sale of all or
substantially all of the assets of Licensor shall include a
requirement for the assumption by the purchaser of all covenants,
obligations and duties undertaken by the seller pursuant to the terms
of this Agreement, including its obligations with respect to Games and
the intellectual property from which they are derived. This Agreement
shall bind the parties, their successors and permitted assignees and
delegees. Licensor as one party, and Licensee as the other party, are
each liable for their respective obligations under the terms of this
Agreement.
13. Schedule "B" annexed to the Home Computer Software
Distribution and License Agreement shall be amended to include the following
provision:
Where Licensor has acquired from a third party a Licensed
Property in connection with which Third Party Fees and Royalties
amounting to * or more of Licensee's estimated Net Wholesale Sales
Price are payable, Licensee may elect, at the time it elects to
accept the Licensed Product under the GTIS Master Agreement, to pay a
substitute royalty ("Substitute Royalty") therefor, which will reduce
only the highest royalty based upon the Net Wholesale Sales Price of
the Licensed Product otherwise payable pursuant to the royalty table
included in this Schedule "B." For example, if the Substitute Royalty
for a Licensed Product is *, this would apply to units sold at Net
Wholesale Sales Prices of * and above; for lower Net Wholesale Sales
Prices, the royalty percentages and corresponding Net Wholesale Sales
Prices reflected in the royalty table would not be changed, except
that the royalty percentage may not exceed the amount of the
Substitute Royalty.
The Substitute Royalty shall be computed by comparing the
gross profit of Licensor (i.e., royalty earned, less * Third Party
Fees and Royalties, less * of Shared Institutional Advertising, as
such term is hereinafter defined) to the gross profit of Licensee
(i.e., Net Wholesale Sales Price, less royalty payable to Licensor,
less * Third Party Fees and Royalties, less product manufacturing
cost, less * of Shared Institutional Advertising, less * of Net
Wholesale Sales Price (equivalent to Licensee's operating costs,
11
<PAGE> 12
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
excluding overhead)); and determining the royalty percentage that
would yield the same gross profit for both Licensor and Licensee. The
computation of the Substitute Royalty for any year shall be adjusted
following the end of such year for the prior year to reflect changes
in all of the components set forth above, except for the * figure
referenced above, during such prior year and any increase or decrease
in the Substitute Royalty resulting from such adjustment shall be
reflected on the royalty statement for the first Royalty Period of the
following year.
Where the Licensed Property (whether acquired from a third
party or developed by Licensor or any of its affiliates in house) is
not embodied in a coin-operated video or pinball game distributed by
Licensor or any of its affiliates, or will not be embodied in a
coin-operated video or pinball game distributed by Licensor or any of
its affiliates within 60 days from the release of the Licensed
Product, institutional advertising costs (i.e., radio, television and
print advertising to the general public), will be shared equally
("Shared Institutional Advertising") by Licensee and Licensor,
provided that (a) the portion of the Shared Institutional Advertising
costs to be borne by Licensor shall not exceed * of the Net Wholesale
Sales Price of the Licensed Product, and shall only be payable in that
portion of the Licensed Territory in which Licensee itself (and not
its sublicensees) actually pays for institutional advertising costs
and (b) all such Shared Institutional Advertising costs and budgets
therefor shall have been previously approved in writing by Licensor.
Licensee at its own cost and expense shall be solely responsible for
all in store and cooperative advertising costs associated with the
sale of Licensed Products in the Licensed Territory.
14. The section entitled "Adjustments to Royalties" in Schedule
"B" annexed to the Home Computer Software Distribution and License Agreement
shall be amended to change the references to "sublicensees" appearing in
Paragraph 2 thereof to "non-affiliated third party sublicensees" and to change
the reference to the "* Option and Advance Fee" appearing in Paragraph 3
thereof to the "* Option and Advance Fee."
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<PAGE> 13
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
15. The section entitled "Recoupment" in Schedule "B"
annexed to the Home Computer Software Distribution and License Agreement shall
be amended to reflect the change in the amount of the Option and Advance Fee
and the recoupment of installments paid on account thereof, and accordingly, is
amended and restated to read in its entirety as follows:
RECOUPMENT
Licensee shall be entitled to apply the aggregate amount by
which (a) royalties paid under this Agreement exceed (b) * of the
amount of any Third Party Fees and Royalties payable by Licensor to
parties having rights with respect to the sale of Licensed Products
(the "Recoupable Amount") to recoup the * Option and Advance Fee paid
by Licensee to WMS Industries Inc. pursuant to Section 3 of the GTIS
Master Agreement, until such Recoupable Amount together with
Recoupable Amounts under any other Home Computer Software Distribution
and License Agreement entered into by Licensee pursuant to the GTIS
Master Agreement ("Other Home Computer Software Distribution and
License Agreements") equal *; provided, however, that (i) to the
extent that the aggregate of all Recoupable Amounts under this
Agreement and the Other Home Computer Software Distribution and
License Agreements between December 28, 1994 and December 28, 1995
exceeds the installments of the Option and Advance Fee paid on
December 28, 1994 and March 31, 1995, such excess shall be paid to
Licensor and the licensors under the Other Home Computer Software
Distribution and License Agreements, in accordance with their
respective interests, and applied in reduction of the installment of
the Option and Advance Fee payable under the GTIS Master Agreement on
December 28, 1996, up to a maximum reduction of *, and the balance of
such excess, if any, shall be applied first in reduction of the
installment of the Option and Advance Fee payable on December 28,
1995, and then in reduction of the installment of the Option and
Advance Fee payable on December 28, 1996, and (ii) to the extent that
the aggregate of all Recoupable Amounts under this Agreement and all
Other Home Computer Software Distribution and License Agreements
between December 28, 1994 and December 28, 1996 exceeds the unrecouped
portion of the installments of the Option and Advance Fee paid on
December 28, 1994, March 31, 1995, and
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<PAGE> 14
December 28, 1995, the excess shall be paid to Licensor and the
licensors under the Other Home Computer Software Distribution and
License Agreements, in accordance with their respective interests, and
applied in reduction of the installment of the Option and Advance Fee
payable on December 28, 1996.
16. Except as otherwise set forth herein, the terms and
conditions of the GTIS Master Agreement remain unchanged and shall remain in
full force and effect in accordance with its terms.
17. This Amendment may be executed in counterparts each of which
shall be deemed an original and when taken together shall be deemed one and the
same document.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
WMS INDUSTRIES INC
By: /s/ Neil D. Nicastro
----------------------------------------
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Neil D. Nicastro
----------------------------------------
MIDWAY MANUFACTURING COMPANY
By: /s/ Neil D. Nicastro
----------------------------------------
WILLIAMS ENTERTAINMENT INC.
By: /s/ Byron Cook
----------------------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Joe Cayre
----------------------------------------
<PAGE> 1
EXHIBIT 10.11
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A
CONFIDENTIAL TREATMENT REQUEST MADE PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
SECOND AMENDMENT TO
GTIS MASTER OPTION AND LICENSE AGREEMENT
This second amendment agreement (the "Second Amendment") is made and
entered into the 27th day of March, 1996, by and among WMS INDUSTRIES INC.
("WMS"), WILLIAMS ELECTRONICS GAMES, INC. ("WEG"), MIDWAY MANUFACTURING
COMPANY ("Midway") and WILLIAMS ENTERTAINMENT INC. ("WEI"), each being Delaware
corporations with offices at 3401 North California Avenue, Chicago, Illinois
60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware corporation with
offices at 16 East 40th Street, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, on December 28, 1994 WMS, WEG, Midway, WEI and GTIS entered
into the GTIS Master Option and License Agreement (the "GTIS Master PC
Agreement") pursuant to which the WMS Group granted to GTIS certain rights with
respect to the manufacture, distribution and sale of versions of Games for use
on Designated Multipurpose Computer Platforms; and
WHEREAS, on March 31, 1995, WMS, WEG, Midway, WEI and GTIS entered
into an Amendment to the GTIS Master PC Agreement (the "First Amendment");
<PAGE> 2
and
WHEREAS, WMS, WEG, Midway, WEI and GTIS desire to further amend the
GTIS Master PC Agreement as provided for in this Second Amendment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the parties hereto
agree as follows:
1. Capitalized terms used, but not defined or revised herein,
shall have the meaning ascribed to such terms in the GTIS Master PC Agreement
or the form of Home Computer Software Distribution and License Agreement
annexed to the GTIS Master PC Agreement as Exhibit A.
2. This Second Amendment shall become effective on the date WII
closes the acquisition of AGC pursuant to the Stock Purchase Agreement
(the "Effective Date"). WMS will give GTIS prompt written notice of such
closing. If such acquisition does not close by June 30, 1996, this Second
Amendment shall be null and void and of no force and effect. The capitalized
terms used in this paragraph are defined in paragraph 3 of this Second
Amendment. GTIS' rights, if any, under the GTIS Master PC Agreement and form
of Home Computer Software Distribution and License Agreement with respect to
any games acquired pursuant to the Stock Purchase Agreement, and any subsequent
sequels, adaptations or other versions thereof, shall be subject to all third
party rights pursuant to agreements made by the Atari Group existing at the
Effective Date. All such rights, to the extent known by WMS, are set forth on
a schedule to a letter dated the date hereof and signed by WMS and GTIS.
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<PAGE> 3
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
3. Section 1 of the GTIS Master PC Agreement shall be
amended to add or replace definitions as follows:
1.1(a) "AGC" shall mean Atari Games Corporation, a California
corporation, which is currently a wholly-owned subsidiary of Warner
Communications Inc., and which is to be sold to WII pursuant to the
Stock Purchase Agreement.
1.1(b) "Atari Advance" shall mean the aggregate * Dollars
advance by GTIS to WMS pursuant to the Atari Agreements.
1.1(c) "Atari Agreements" shall mean the Master Option and
License Agreement for Atari PC Games and the Master Option and License
Agreement for Atari Home Video Games entered into by WMS and GTIS
dated March 27, 1996."
1.1(d) "Atari Game" shall mean (i) any game developed or
acquired by or on behalf of AGC or entities which were affiliates of
AGC prior to AGC being acquired by WII pursuant to the Stock Purchase
Agreement, including, without limitation, those games listed on
Schedule 1 to this Second Amendment, and any adaptations
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<PAGE> 4
of such games for other platforms, and (ii) any game currently in
development or developed subsequent to such acquisition by or on
behalf of AGC or a member of the Atari Group, or developed, in whole
or in substantial part, by any person or persons who were employees of
AGC or a member of the Atari Group as of the closing date of such
acquisition and who are employees of any member of the WMS Group at
the time of such development, and any adaptations of such games for
other platforms. For purposes of this Section, employees shall be
deemed to include independent contractors who work a substantial
portion of their time at the facilities of any member of the WMS
Group.
1.1(e) "Atari Group" shall mean AGC, or any entity, a
majority of whose capital stock is owned, directly or indirectly, by
AGC or with respect to which during the term of this Agreement, AGC,
directly or indirectly, has the legal power, without the consent of
any third party, to direct the acquisition of rights to or
exploitation of Games on Designated Multipurpose Computer Platforms.
1.1(f) "Business Day" shall mean any day other than a
Saturday, Sunday or Federal holiday.
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<PAGE> 5
1.2(a) "Early Termination Event" shall mean AGC ceasing to
be at least 50.1% owned by a member of the WMS Group, or the Atari
Group transferring a majority of its intellectual property assets and
licenses to a person or entity who is not a member of the WMS Group.
1.4 "Game" shall mean any coin-operated video game
(including kits), any home video game and any on-line game, released
or intended to be released, by any member of the WMS Group for sale in
commercial quantities in the normal course of business; provided,
however, that Game shall not include any Atari Game. Home video games
shall include games designed for play on dedicated home systems, such
as those marketed by Nintendo, Sega, Atari, Sony, etc. as well as on
multipurpose home computers, such as those marketed by IBM and Apple.
1.7(a) "Milestones" shall mean the defined tasks in the
process of the development of a Technically Acceptable Master Disk as
are deemed sufficiently important such that the achievement of such
tasks will entitle the developer to receive a payment, the amount of
such payment, the standards for approval which will entitle that
developer to
5
<PAGE> 6
receive such payment and the circumstances under which the development
arrangement may be terminated prior to completion.
1.9(a) "PC Option Expiration Date" shall have the meaning
ascribed in Section 2.1 hereof.
1.9(b) "PC Extended Expiration Date" shall have the meaning
ascribed in Section 2.1 hereof.
1.9(c) "Pirate" shall mean an individual or entity which
counterfeits a game or sells counterfeit games.
1.10(a) "Stock Purchase Agreement" shall mean the Stock
Purchase Agreement dated February 23, 1996, between Warner
Communications Inc. and WII pursuant to which Warner Communications
Inc. has agreed to sell and WII has agreed to purchase all of the
outstanding stock of AGC.
1.11(a) "WII" shall mean Williams Interactive Inc., a
wholly-owned subsidiary of WMS.
4. The GTIS Master PC Agreement shall be amended to add at the
end of Section 2.1 thereof, the following:
If the Atari Advance has not been fully recouped by the
expiration date (determined after giving effect to all Extension
Events) of GTIS' first option to acquire licenses
6
<PAGE> 7
under this Section 2.1 (the "PC Option Expiration Date"), such
expiration date shall be extended to a date which is the earlier to
occur of (i) two years from the PC Option Expiration Date, or (ii) the
date on which the Atari Advance is fully recouped. Such new
expiration date is hereafter referred to as the "PC Extended
Expiration Date." In determining whether the Atari Advance has been
fully recouped for all purposes under this Agreement, amounts owed by
GTIS but not yet reported, paid or credited to the Licensor shall be
deemed recouped by GTIS. The expiration date may be further extended
under the following circumstances. If (a) an Early Termination Event
occurs more than one year prior to the PC Extended Expiration Date,
and (b) GTIS shall not have fully recouped the Atari Advance by the PC
Extended Expiration Date (as such date may be extended from time to
time by future amendments or extensions of GTIS' first option other
than by reason of this sentence), then the expiration date shall be
further extended to a date which is the earlier to occur of (x) the
date on which the Atari Advance is fully recouped or (y) the date, to
the nearest calendar quarter end, determined by adding to the PC
Option Expiration
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<PAGE> 8
Date the number of days between the date of the Early Termination
Event and the PC Option Expiration Date.
5. Section 2.7 of the GTIS Master PC Agreement shall be amended
as follows:
5.1. Section 2.7.1 shall be amended by adding the
following to the first sentence "; provided, that this Section 2.7.1 shall not
apply to Accepted Games as to which GTIS has exercised its rights of review and
approval under Section 2.11 hereof."
5.2. Section 2.7.2 shall be amended by adding the
following to the first sentence "; provided that this Section 2.7.2 shall not
apply to Accepted Games as to which GTIS has exercised its rights of review and
approval under Section 2.11 hereof."
5.3. Former Section 2.7.3 shall be renumbered as "2.7.4"
and any references within that Section and in the GTIS Master PC Agreement to
Section 2.7.3 shall be deemed as amended to read "Section 2.7.4." A new
sentence shall be added after the first sentence of new Section 2.7.4 which
shall read as follows: "If GTIS fails to respond in writing to WMS' notice
within ten (10) Business Days after receipt thereof by GTIS, GTIS shall be
deemed to have consented to WMS' election to terminate development."
5.4. A new Section 2.7.3 shall be added which shall read as
follows:
"2.7.3. Subject to the provisions of 2.11 hereof,
GTIS
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<PAGE> 9
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
shall bear * of the actual costs of development of any Section 2.4 Game or
Section 2.5 Game as to which GTIS has exercised its rights of review and
approval under Section 2.11."
6. The GTIS Master PC Agreement shall be amended to add a new
Section 2.11 which shall read as follows:
Anything in Sections 2.4 or 2.5 to the contrary
notwithstanding, in the event that after March 31, 1996 the WMS Group
desires to hire a third party developer to develop a Technically
Acceptable Master Disk for an Accepted Game, GTIS shall have the right
to review and approve (such approval not to be unreasonably withheld)
the proposed Milestones prior to the WMS Group entering into a binding
agreement with such developer (such right of review and approval shall
not extend to any terms of the developer agreement other than the
Milestones). The WMS Group shall notify GTIS in writing of its
intention to hire such third party developer and GTIS shall notify WMS
in writing within five (5) Business Days after receipt of the WMS
Group notice that GTIS desires to exercise its right of review and
approval of Milestones. GTIS' failure to timely notify WMS shall be
deemed its election not to
9
<PAGE> 10
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
exercise such right of review and approval. If GTIS shall exercise
such right, GTIS and WMS shall negotiate in good faith to reach
agreement with respect to the proposed Milestones as promptly as
practicable. If such agreement is not reached within ten (10)
Business Days after receipt by WMS of GTIS' aforesaid notice, then WMS
may notify GTIS of Milestones which are acceptable to WMS and GTIS
shall have three (3) Business Days after receipt of such notice to
accept such Milestones. If GTIS does not accept such Milestones
within such three (3) Business Day period, WMS may proceed to enter
into an agreement with such developer as if GTIS had elected not to
exercise its right of review and approval. If a developer agreement
is signed following acceptance by GTIS of the Milestones as aforesaid,
upon approval by GTIS and WMS of the material delivered or other
requirements of each of such Milestones, GTIS shall pay to WMS * of
the Milestone payment within five (5) Business Days after GTIS
receives WMS' invoice therefor. Such payment shall be credited
against the obligations of GTIS to pay WMS * of the actual costs of
code development simultaneously with the receipt
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<PAGE> 11
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
of a Technically Acceptable Master Disk set forth in Sections 2.4 and
2.5. With respect to any Technically Acceptable Master Disk for
which GTIS is obligated to fund * of the Milestone payments, if WMS
exercises its rights in Section 2.7.4 to terminate development, the
following shall apply: (i) if GTIS consents to such termination,
neither WMS nor GTIS shall be entitled to any reimbursement of the
Milestone payments previously made by the other, or (ii) if GTIS
withholds its consent to such termination, if permitted by the
developer agreement, GTIS may take over the responsibility for
development of a Technically Acceptable Master Disk with the developer
and fund the balance of the development costs. Upon receipt by WMS of
a notice from GTIS that GTIS has received a Technically Acceptable
Master Disk with respect to the Game, WMS shall pay to GTIS, the
amount, if any, by which * of the original development budget approved
by WMS exceeds the Milestone payments previously made by WMS. If GTIS
has fully funded its obligations to make Milestone payments
theretofore due, GTIS may elect to terminate its obligations to make
Milestone payments with
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<PAGE> 12
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
respect to future Milestones on which the developer has not yet
commenced work; provided that GTIS may not so elect unless the
agreement with the developer permits WMS to terminate its obligations
to the developer by making payments only for Milestones previously
achieved or in work or GTIS agrees to pay * of any actual costs of
terminating the developer agreement. If GTIS properly elects to
terminate its obligation to make Milestone payments, (i) if WMS agrees
to such termination and also terminates the developer agreement,
neither WMS nor GTIS shall be entitled to any reimbursement of the
Milestone payments previously made by the other, or (ii) if WMS elects
to continue development of the Technically Acceptable Master Disk,
GTIS shall be entitled to reimbursement of the Milestone payments
previously made by it upon completion by WMS of the Technically
Acceptable Master Disk, but GTIS shall be deemed to have waived any
future rights to distribute or license the version of the Game
embodied in the Technically Acceptable Master Disk. GTIS shall hold
WMS harmless for any claims by developers against the WMS Group by
reason of
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<PAGE> 13
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
GTIS' failures to make timely Milestone payments as required
under this Section. WMS shall use all reasonable efforts to cause
agreements with developers entered into after March 31, 1996 which
relate to Technically Acceptable Master Disks for which GTIS is making
* of the Milestone payments to provide for GTIS to have the right to
assume the rights and obligations under that agreement should WMS
elect to terminate the agreement and GTIS elect to continue it. If
both WMS and GTIS elect to terminate a developer agreement and any
proceeds are subsequently generated from the abandoned project, the
proceeds shall be shared by WMS and GTIS in proportion to their
Milestone payments made with respect to such abandoned project. All
ownership and rights in software, artwork, literary text, designs and
other works, and all intellectual property relating thereto, which
would have vested in a member of the WMS Group but for such
termination shall vest in such member of the WMS Group, not GTIS, even
if GTIS assumes the developer agreement, and the WMS Group shall
remain entitled to all of the benefits of the representations and
warranties,
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<PAGE> 14
indemnifications, confidentiality provisions, restrictions,
covenants and other obligations of the developer which would survive
termination of such agreement. The provisions of this Section 2.11 are
in all cases subject to the provisions of Section 2.12. For developer
agreements in respect of which GTIS has agreed to make Milestone
payments, the WMS Group shall provide GTIS a copy of the final version
of the developer agreement within ten (10) Business Days after the
same is signed; provided, however, that the WMS Group shall have the
right to redact any information in that agreement relating to third
parties which does not affect GTIS' rights or obligations.
7. The GTIS Master PC Agreement shall be amended to add a new
Section 2.12 which shall read as follows:
2.12 If permitted under existing agreements with third
parties, WMS agrees to submit its choice of third party developers to
be selected under Sections 2.4 and 2.5 of this Agreement to GTIS for
GTIS' approval, such approval not to be unreasonably withheld, and,
GTIS shall notify WMS of its decision with respect to such developer
within five (5) Business Days after receipt by GTIS of WMS' notice.
If the Technically Acceptable Master Disk
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<PAGE> 15
being developed is based upon a coin-operated Game which has been
released within the 24 month period preceding WMS' request for GTIS'
approval of the developer, or is released after such request for
approval but prior to the release of the home version of such Game,
WMS shall have the final decision in selecting the developer if a
representative of WMS' coin-operated game development group advises
GTIS in writing that the selection of a particular developer is
important to such group. In all other circumstances, if GTIS
reasonably disapproves of the developer suggested by WMS, that
developer shall not be used and a new developer shall be selected by
WMS subject to GTIS' right of approval as provided above in this
Section 2.12.
8. The GTIS Master PC Agreement shall be amended to add a new
Section 2.13 which shall read as follows:
Royalties payable to WMS pursuant to Schedule B of the Home
Computer Software Distribution and License Agreement are measured by
the wholesale prices of Licensed Product. Accordingly, reasonably in
advance of WMS' decision to enter into a developer contract and
reasonably in advance of GTIS' initial release of the
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<PAGE> 16
Licensed Product, GTIS shall advise WMS, at WMS' request, of GTIS'
expected pricing strategy and the reasons therefor. Nothing herein
shall be deemed to restrict GTIS' freedom in selecting wholesale sales
prices it considers appropriate, which shall be in GTIS' sole
discretion.
9. The GTIS Master PC Agreement shall be amended to add a new
Section 2.14 which shall read as follows:
If, under Section 2.1 of any Home Computer Software
Distribution and License Agreement entered into under this Agreement,
Licensor has granted written approval (which shall not be unreasonably
withheld) to Licensee of a specific sublicensee for the Licensed
Property, such approval shall apply to the sublicensing by that
sublicensee of all Licensed Properties licensed to Licensee under Home
Computer Software Distribution and License Agreements entered into
under this Agreement, subject to the following: (i) the sublicense
agreements shall contain provisions with respect to quality of
Licensed Product, trademarks, copyrights, materials, other
intellectual property rights, rights of additional sublicensing or
assignment, termination rights, confidentiality, accounting, auditing,
reporting and payment procedures in
16
<PAGE> 17
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
form agreed to by GTIS and WMS, and the form as so agreed to may be
used by all approved sublicensees described in clause (iii) below;
provided that if such form is not so used, any other form to be used
shall be subject to prior approval as provided in this subsection (i);
(ii) no such blanket approval shall be deemed given with respect to
Licensed Properties as to which approval requirements imposed by third
parties, such as the NFL and NBA, apply, (iii) if the sublicense is
for a Marketing Area other than those designated as Key Marketing
Areas in such Home Computer Software Distribution and License
Agreement and if the expected sales volume in such Marketing Area, in
GTIS' good faith judgment, is an average of * units or less per SKU
per year, Licensee will not be required to obtain Licensor's prior
written approval of the terms of such license but Licensee will be
required to provide a copy of each sublicense to Licensor within ten
(10) Business Days after GTIS enters into such sublicense; and (iv) if
the Marketing Area is designated as a Key Marketing Area or if, in
GTIS' good faith judgment, the expected sales volume for such
Marketing Area is more
17
<PAGE> 18
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
than an average of * units per SKU per year, Licensee will be
required to obtain Licensor's prior written approval, which Licensor
will not unreasonably withhold, of the terms of a sublicense for such
Marketing Area even if the identity of the sublicensee has been
previously approved; provided, however, if a sublicense is for
multiple platforms and multiple games, the approval of the sublicense
will be deemed to be approval for all Games distributed under that
sublicense (subject to clause (ii)). Anything to the contrary
notwithstanding, (x) if a previously approved sublicensee becomes an
Exporter (as such term is defined in Exhibit A to the GTIS Master
Option and License Agreement (Home Video) dated March 31, 1995) or a
Pirate, Licensee will immediately upon becoming aware thereof notify
Licensor of the identity of such Exporter or Pirate and as soon as
practicable terminate the sublicense upon request by Licensor, and (y)
Licensor and Licensee will review every two years the identity of
sublicensees, and those sublicensees who previously received blanket
approval as provided in the first sentence of this Section and who are
no longer considered acceptable by Licensor, in the
18
<PAGE> 19
exercise of Licensor's reasonable judgment, will no longer have
such blanket approval and will be subject to Licensor's prior approval
with respect to all future sublicenses in accordance with the approval
procedures set forth above. Licensee shall use all reasonable efforts
to cause each agreement with its sublicensees to permit Licensee to
terminate such agreement immediately if such sublicensee shall be or
become an Exporter or a Pirate.
10. Section 7 of the GTIS Master PC Agreement shall be amended
to add at the end thereof, the following:
With respect to this Agreement and all Home Computer Software
Distribution and License Agreements entered into in connection
herewith, each of WMS Group and GTIS agree to use reasonable efforts
to ensure that either of them may disclose the proprietary information
of the other (including, without limitation, the software source code
and tools relating to any Game), only to those persons within their
organizations who have a need to know such information in order to
perform its obligations under this Agreement and the Home Computer
Software Distribution and License Agreements and any such disclosure
shall be limited to the information which needs to be known.
19
<PAGE> 20
Further, neither the WMS Group nor GTIS shall use any such proprietary
information for purposes other than the performance of its obligations
under this Agreement and the Home Computer Software Distribution and
License Agreements.
11. Paragraph 5 of the First Amendment shall be amended
to provide that Section 10.1 of the GTIS Master PC Agreement shall be amended
to delete the parenthetical language "(including its sublicenses and affiliates
as one party)" in the last sentence of such Section and by replacing the words
"as long as that party remains fully liable for its obligations hereunder" at
the end of the second sentence of such Section 10.1 with the words "as long as
both the assignee and the assignor remain fully liable for assignor's
obligations hereunder."
12. For purposes of the last paragraph of Paragraph 13 of
the First Amendment (i) distribution of a coin-operated video or pinball game
by any member of the Atari Group or a former affiliate of any member of the
Atari Group shall be deemed distribution by Licensor or its affiliates; and
(ii) all references to "Licensor or any of its affiliates" shall be amended to
read, "Licensor or any entity which at any time was or is an affiliate of any
member of the WMS Group or the Atari Group." The following shall be added
immediately preceding such last paragraph:
Anything in the foregoing paragraphs to the contrary
notwithstanding, where the Licensed Property has not been embodied in a
coin-operated video or pinball
20
<PAGE> 21
THIS INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIENTIAL TREATMENT.
game, whether distributed by Licensor or any entity which at any time
was an affiliate of any member of the WMS Group or the Atari Group,
Licensee may elect to pay an alternative royalty therefor. The
alternative royalty shall equal the sum of the royalty percentage
payable in accordance with the table set forth in Schedule B plus the
Licensee's share of Third Party Fees and Royalties, but in no event
shall the alternative royalty exceed * of the actual Net Wholesale
Sales Price of the Licensed Product; provided, however, that anything
in the foregoing paragraphs or this paragraph to the contrary
notwithstanding, under no circumstances shall royalties, whether
regular royalties, Substitute Royalties or alternative royalties, be
less than * of the Third Party Fees and Royalties payable with respect
to the sale of Licensed Products.
12.1. Section 1 of the Home Computer Software Distribution
and License Agreement shall be amended by adding at the end thereof, the
following:
Capitalized terms used, but not defined herein, shall have the
meaning ascribed to such terms in the GTIS Master Agreement.
21
<PAGE> 22
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
12.2. Section 3.2 of the Home Computer Software
Distribution and License Agreement shall be amended to add as the first clause
thereof, the following:
After the end of the Japan Territory Period, as defined in
the letter between WMS and GTIS dated March 27, 1996, captioned
"Japan Territory,"
13. Schedule B to the Home Computer Software Distribution and
License Agreement shall be amended as follows:
13.1. Paragraph 2 under the heading "Adjustment to
Royalties" shall be amended by adding at the end thereof, the following which
shall be deemed a clarification of the practice currently being followed by
Licensee and Licensor:
In cases where Licensed Products are bundled, net proceeds
from bundling shall be treated in the same manner as net proceeds from
sublicensees; provided, however, that if Licensee is also the
manufacturer of products for bundling, the fee to Licensee shall equal
* rather than * of net proceeds.
13.2. A new Paragraph 4 shall be added after paragraph 3
under the heading "Adjustment to Royalties" which shall read as follows:
4. For purposes of Paragraphs 1 and 2 above, the fees,
royalties or other participations referred to in clause 3 of Section
1.9 shall not be excluded in determining
22
<PAGE> 23
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
"Third Parties Fees and Royalties." For avoidance of doubt,
advances payable to developers shall continue to be excluded.
13.3. The paragraph under the heading "Recoupment"
shall be amended to replace the word "paid" on the first line of such paragraph
by the words "applied or accrued" and to insert the words "applied or accrued
by Licensee" between the words "Recoupable Amounts" and "under" on line 6 of
such paragraph.
13.4. A new paragraph shall be added at the end of
the paragraph under the heading "Recoupment" which shall read as follows:
"If the Atari Advance has not been fully recouped by GTIS on
the date on which the total of recoupable amounts under this Agreement
and other Home Computer Software Distribution and License Agreements
entered into pursuant to the GTIS Master Agreement equals the * Dollars
Option and Advance Fee and Guaranty paid by the Licensee under the GTIS
Master Agreement, then royalties otherwise payable under this Agreement
shall be recoupable against the Atari Advance in the manner set forth
in this Schedule B until the Atari Advance shall be fully recouped. In
determining whether the Atari Advance has been fully recouped, amounts
owed by GTIS but not yet reported,
23
<PAGE> 24
paid or credited to the Licensor shall be deemed recouped by GTIS. If
in respect of any royalty payment period royalties are available for
recoupment of the Atari Advance under any one or more of the
distribution and license agreements entered into under the Atari
Agreements, the GTIS Master Agreement and the GTIS Master Option and
License Agreement (Home Video Games) dated March 31, 1995, (the "GTIS
Master Home Video Agreement"), the Atari Advance shall be recouped
from royalties in the following order: (i) royalties payable under
distribution and license agreements entered into under the Atari
Agreements; (ii) royalties payable under distribution and license
agreements entered into under the GTIS Master Agreement; and (iii)
royalties payable under distribution and license agreements entered
into under the GTIS Master Home Video Agreement.
14. WMS hereby confirms to GTIS that it is WMS' present
intention that it will maintain a separate Atari Group games design
organization and that any member of the design teams working for that
organization will work solely on the creation of Atari Games. WMS further
confirms that it will use all reasonable effort to maintain such separate
organization.
15. In the event of conflicts between the provisions of the GTIS
Master
24
<PAGE> 25
Agreement and the Home Computer Software Distribution and License Agreement,
the provisions of the GTIS Master Agreement shall prevail.
25
<PAGE> 26
IN WITNESS WHEREOF, the parties have executed this Second
Amendment as of the day and year first above written.
WMS INDUSTRIES INC
By: /s/ Neil D. Nicastro
--------------------------------------
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Neil D. Nicastro
--------------------------------------
MIDWAY MANUFACTURING COMPANY
By: /s/ Neil D. Nicastro
--------------------------------------
WILLIAMS ENTERTAINMENT INC.
By: /s/ Byron Cook
--------------------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Ronald Chaimowitz
--------------------------------------
26
<PAGE> 1
EXHIBIT 10.12
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A
CONFIDENTIAL TREATMENT REQUEST MADE PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
GTIS MASTER OPTION AND LICENSE AGREEMENT
(HOME VIDEO GAMES)
This Master Option and License Agreement ("Agreement") is made
and entered into the 31st day of March, 1995, by and among WMS INDUSTRIES INC.
("WMS"), WILLIAMS ELECTRONICS GAMES, INC. ("WEG"); MIDWAY MANUFACTURING COMPANY
("Midway") and WILLIAMS ENTERTAINMENT INC. ("WEI"), each being Delaware
corporations with offices at 3401 North California Avenue, Chicago, Illinois
60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware corporation with
offices at 16 East 40th Street, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, WEG, Midway and WEI are wholly-owned subsidiaries of
WMS engaged in the business of designing, manufacturing and selling
coin-operated amusement games and software products for dedicated home video
game systems and multipurpose home computers; and
WHEREAS, GTIS is engaged in the business of distributing
entertainment software products; and
<PAGE> 2
WHEREAS, GTIS desires to acquire certain rights from WMS, WEG,
Midway, WEI and other affiliates of WMS with respect to Games, as such term is
defined herein, and WEG, Midway, WEI and WMS desire to grant such rights to
GTIS;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. "Accepted Game" shall mean any Game with
respect to which GTIS has received a license or has exercised an option to
acquire a license provided for in Section 2 hereof.
1.2. "Alternative Royalty" shall have the meaning
ascribed in Schedule "B" of the Home Video Game Distribution and License
Agreement.
1.3. "Delivery Date" shall have the meaning
ascribed in Section 2.7 hereof.
1.4. "Designated Consumer Game Platforms" shall
mean any of the Sony(R), Nintendo(R) or Sega(R) dedicated home video game
hardware platforms or other dedicated home video game hardware platforms having
a microprocessor with a 32 bit or higher capacity (excluding SNES and Sega
Genesis), on which Game software can be played utilizing cartridges, CD-ROM
disks or other devices which may hereafter replace or supplement cartridges or
CD-ROM disks in operating systems now known or hereafter developed for use on
dedicated home video game hardware platforms. Designated Consumer Game Platforms
shall not, for purposes of this Agreement, include (a) any of the Atari
Jaguar(R) system, the 3D-O(R) system, or their respective successors (including
any enhancements, improvements or updates), except only to the extent that the
WMS Group shall itself (and not through any licensee or sublicensee) actually
2
<PAGE> 3
release for commercial shipment in the normal course of business any Games on
such hardware platforms in the United States, or (b) any hand held games, or any
multipurpose home or personal computer system or any electronic distribution or
on-line interactive computer game systems or platforms.
1.5. "First Release" or "First Released" shall mean
the date of the first commercial shipment of a Game in the normal course of
business (and not merely for test purposes).
1.6. "Full Price" shall have the meaning ascribed
in Section 2.1 hereof.
1.7. "Game" shall mean any home video game designed
for play on a specific Designated Consumer Game Platform which has been released
for commercial shipment in the normal course of business by any member of the
WMS Group or by any licensee of the WMS Group on such Designated Consumer Game
Platform for sale in commercial quantities in the United States in the normal
course of business, but excluding any such home video game with respect to which
the WMS Group shall, prior to the date hereof, have granted rights (or any
option, right of first refusal or negotiation or other ability to obtain rights
which may be subsequently exercised) to any third party, including without
limitation any sublicensee of the WMS Group, to manufacture, distribute or sell
such home video game on such specific Designated Consumer Game Platform within
the Licensed Territory, including any renewals or extensions thereof resulting
from the exercise of previously granted rights. Set forth on Schedule 1 annexed
hereto is a list of all material agreements pursuant to which the WMS Group has,
prior to the date hereof, granted rights to manufacture, distribute and sell
such home video games on Designated Consumer Game Platforms within the Licensed
Territory, but excluding
3
<PAGE> 4
any agreements pursuant to which the WMS Group has granted rights to home video
games based on games which have heretofore been released for commercial shipment
in the normal course of business by the WMS Group or by any sublicensee of the
WMS Group as coin-operated video or pinball games or on any dedicated home video
game platform or agreements pursuant to which the WMS Group has granted rights
to any derivative or sequel to any such previously released coin-operated video,
pinball or home video game. A home video game shall be deemed a separate Game
with reference to the specific Designated Consumer Game Platform on which it has
been designed for play.
1.8. "GTIS" shall mean GTIS or any affiliate of
GTIS to whom any rights to exploit any Games granted hereunder may be
sublicensed. An affiliate of GTIS shall refer to an entity, a majority of whose
capital stock is owned directly or indirectly by GTIS or with respect to which
during the term of this Agreement, GTIS, directly or indirectly, has the legal
power without the consent of any third party to direct the manufacture,
distribution or sale of Games.
1.9. "Guaranteed Advance Royalty" shall have the
meaning ascribed in Section 3 hereof.
1.10. "Home Video Game Distribution and License
Agreement" shall mean an agreement for the license of an Accepted Game for use
solely on a specific Designated Consumer Game Platform in the form of Exhibit A
annexed hereto, as the same may be amended from time to time by written
agreement of the parties thereto.
1.11. "Initial Option Period" shall mean the period
commencing on the date hereof and ending on June 30, 2001.
4
<PAGE> 5
1.12. "IPO" shall have the meaning ascribed in
Section 3 hereof.
1.13. "Licensed Territory" shall have the meaning
ascribed in Section 3.1 of the Home Video Game Distribution and License
Agreement.
1.14. "Marketing Area" shall have the meaning
ascribed in Section 3.3 of the Home Video Game Distribution and License
Agreement.
1.15. "Master Disk" shall mean a CD-ROM disk or
floppy disk containing the source code utilized by the WMS Group for an Accepted
Game released or intended to be released in the United States.
1.16. "Minimum Guaranteed Royalty" shall have the
meaning ascribed in Section 3 hereof.
1.17. "Minimum Royalty Shortfall Amount" shall have
the meaning ascribed in Section 2.1 hereof.
1.18. "New Game Acceptance Notice" shall have the
meaning ascribed in Section 2.3 hereof.
1.19. "New Game Option Notice" shall have the
meaning ascribed in Section 2.3 hereof.
1.20. "New Game Option Notice Date" shall have the
meaning ascribed in Section 2.3 hereof.
1.21. "North America" shall mean (a) the United
States of America, its territories, possessions, and United States military
installations worldwide, (b) Canada and (c) Mexico.
5
<PAGE> 6
1.22. "Notice of Election" shall have the meaning
ascribed in Section 10 hereof.
1.23. "Option Period Termination Notice" shall have
the meaning ascribed in Section 2.1 hereof.
1.24. "Proposed Game" shall have the meaning
ascribed in Section 2.3 hereof.
1.25. "Renewal Option Period" shall have the meaning
ascribed in Section 2.1 hereof.
1.26. "Renewal Option Year" shall have the meaning
ascribed in Section 2.1 hereof.
1.27. "Renewal Threshold Amount" shall have the
meaning ascribed in Section 2.1 hereof.
1.28. "WMS Group" shall mean WMS, WEG, Midway and
WEI, or any subsidiary, affiliate or other entity, a majority of whose capital
stock is owned directly or indirectly by WMS, WEG, Midway or WEI or with respect
to which during the term of this Agreement, WMS, directly or indirectly, has the
legal power, without the consent of any third party, to direct the acquisition
of rights to or exploitation of Games on Designated Consumer Game Platforms.
1.29. "Weighted Average Gross Profits" shall have
the meaning ascribed in Schedule "B" of the Home Video Game Distribution and
License Agreement.
1.30. "Test Period" shall have the meaning ascribed
in Section 10 hereof.
6
<PAGE> 7
2. GRANT AND TERMINATION OF OPTION; EXERCISE OF OPTION;
RENEWAL OPTION PERIOD.
2.1. The WMS Group hereby grants to GTIS a first
option to acquire a license, in the form of the Home Video Game Distribution and
License Agreement, to manufacture, distribute, sell, sublicense and
subdistribute versions of the Games for use solely on specific Designated
Consumer Game Platforms, with respect to Games which become Accepted Games
during the Initial Option Period or Renewal Option Period, provided that such
Games are actually released by the WMS Group or its licensees in the United
States within twelve (12) months following the expiration of the Initial Option
Period or any Renewal Option Period. The Initial Option Period shall be deemed
extended annually for up to an additional five (5) years (the "Renewal Option
Period"), provided that GTIS shall not, as of the expiration of the Initial
Option Period, be in default in respect of any of its material obligations under
this Agreement, including, without limitation, its obligation in respect of the
payment of any Minimum Guaranteed Royalty then due, and provided further that
(a) gross unit sales of Accepted Games by GTIS and its sublicensees in the
Licensed Territory under all Home Video Game Distribution and License Agreements
which were entered into pursuant to this Agreement during the Initial Option
Period shall at least equal the Renewal Threshold Amount for such Initial Option
Period and (b) the gross unit sales of Accepted Games by GTIS and its
sublicensees under all Home Video Game Distribution and License Agreements
entered into pursuant to this Agreement for each year during the Renewal Option
Period (a "Renewal Option Year") shall at least equal the Renewal Threshold
Amount for such Renewal Option Year. If the gross unit sales of Accepted Games
by GTIS and its sublicensees in the Licensed Territory
7
<PAGE> 8
under all Home Video Game Distribution and License Agreements entered into
during the Initial Option Period shall not at least equal the Renewal Threshold
Amount for the Initial Option Period, then the Initial Option Period shall not
be deemed extended and, except as otherwise provided below, the Initial Option
Period shall terminate as of a date which is thirty (30) days following delivery
by the WMS Group of an Option Period Termination Notice, as provided below. If
the gross unit sales of Accepted Games by GTIS during any Renewal Option Year
shall be less than the Renewal Threshold Amount for such Renewal Option Year,
then the Renewal Option Period shall terminate as of a date which is thirty (30)
days following delivery by the WMS Group of an Option Period Termination Notice,
as provided below. Written notice (the "Option Period Termination Notice") of
termination of the Initial Option Period or the Renewal Option Period, as the
case may be, shall be given to GTIS not later than thirty (30) days following
the date on which royalty accounting statements under all Home Video Game
Distribution and License Agreements for the last quarter of such Initial Option
Period or such Renewal Option Year are due, provided, however, that if GTIS
shall not have furnished to the WMS Group all such accounting statements on or
before their due date (as provided in Section 6.1 of the Home Video Game
Distribution and License Agreement), the WMS Group may deliver an Option Period
Termination Notice on the basis of its reasonable estimate of GTIS' unit sales
during any Royalty Period for which accounting statements have not been
furnished by GTIS on or before the date upon which royalty accounting statements
are due for the last quarter of the Initial Option Period or any Renewal Option
Year. The Option Period Termination Notice shall specify the Renewal Threshold
Amount for the Initial Option Period or the prior Renewal Option Year, as the
case may be, the actual (or estimated) gross unit sales
8
<PAGE> 9
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
of Accepted Games by GTIS during such Initial Option Period or Renewal Option
Year, and, in either case, the Minimum Royalty Shortfall Amount. This Agreement
shall terminate on a date which is thirty (30) days following delivery by the
WMS Group of the Option Period Termination Notice unless GTIS shall elect to
extend the term hereof by paying to the WMS Group, within such thirty (30) day
period, an amount equal to the Minimum Royalty Shortfall Amount specified in the
Option Period Termination Notice. The "Minimum Royalty Shortfall Amount" for the
Initial Option Period or any Renewal Option Year shall be an amount equal to an
amount by which the Renewal Threshold Amount for such Initial Option Period or
Renewal Option Year exceeds the actual (or estimated) gross unit sales of
Accepted Games by GTIS and its sublicensees in the Licensed Territory under all
Home Video Game Distribution and License Agreements during such Initial Option
Period or Renewal Option Year, multiplied by * Dollars. Notwithstanding the
foregoing, however, GTIS shall not be entitled to extend the term hereof, as
provided above, by paying the Minimum Royalty Shortfall Amount to the WMS Group
with respect to the Initial Option Period if the Minimum Royalty Shortfall
Amount in respect of such Initial Option Period is more than * Dollars. In no
event shall any Minimum Shortfall Amount paid by GTIS be recoupable against the
Guaranteed Advance Royalty or any future royalties payable to the WMS Group
under any Home Video Game Distribution and License Agreement. The "Renewal
Threshold Amount" for the Initial Option Period or any Renewal Option Year shall
be an amount equal to * of the gross unit sales of Accepted Games by the WMS
Group or its licensees in North America during the Initial Option Period or such
Renewal Option Year, as the case may be, provided, however, that in computing
the Renewal Threshold Amount with
9
<PAGE> 10
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
respect to any Accepted Game which has been legally banned from sale in Germany
or in the United Kingdom by reason of the content of such Accepted Game or for
any other reason beyond the control of GTIS, only * of the gross unit sales of
Accepted Games by the WMS Group or its licenses in North America during the
Initial Option Period or Renewal Option Year, as the case may be, shall be
counted, if such Accepted Game shall be banned in one, but not both of such
countries, and only * shall be counted if such Accepted Game shall be banned in
both such countries. An Accepted Game shall not be deemed to have been legally
banned if a modified version of such Accepted Game not containing the
objectionable material has been substituted. For purposes of computing gross
units of Accepted Games sold by GTIS and its sublicensees and subdistributors in
the Licensed Territory and by the WMS Group or its licensees in North America
during the Initial Option Period or during any Renewal Option Year, as provided
in this Section 2.1, (i) only gross units of Accepted Games sold at Full Price
shall be counted, and (ii) there shall be excluded (a) any Accepted Games which
relate primarily to American football, baseball or hockey, and (b) any gross
unit sales of any Accepted Games which have been First Released by the WMS Group
or its licensees during the last ninety (90) days of the Initial Option Period.
"Full Price" shall refer to the price of Games which have been marked down or
discounted (including rebates or credits (other than cooperative advertising
allowances which are unrelated to price protection) granted within one year of
the date of the First Release of the Game) by no more than * from the original
list price of the Game. The WMS Group shall give written notice to GTIS of the
good faith estimate of the Renewal Threshold Amount on or about six (6) months
prior to the expiration of the Initial Option Period.
10
<PAGE> 11
In determining whether a unit sold during the last twelve (12) months of
the Initial Option Period or during any subsequent Renewal Option Year qualifies
as a Full Price unit, discounts and markdowns will be deemed to have been
granted on such units in accordance with historical percentages based upon the
prior two (2) years. The WMS Group shall permit GTIS, at GTIS' own expense, to
have an independent certified public accountant inspect the books and records of
the WMS Group solely with respect to the calculation of any Renewal Threshold
Amount (but only in the event that the WMS Group shall have delivered to GTIS an
Option Period Termination Notice, as provided above), during reasonable hours,
upon five (5) business days prior written notice and subject to such
confidentiality agreements (including the execution of appropriate
confidentiality agreements), as the WMS Group may require.
The WMS Group shall advise GTIS within forty-five (45) days
following the end of each twelve (12) month period during the Initial Option
Period as to gross unit sales of Accepted Games by the WMS Group or its
licensees in North America calculated in the same manner as the Renewal
Threshold Amount is calculated pursuant to this Section 2.1 above.
Royalties payable on sales of Accepted Games with respect to
which GTIS has received a license or exercised an option to acquire a license
during the Renewal Option Period shall be subject to increase, as of the
commencement of the Renewal Option Period or any subsequent Renewal Option Year,
to reflect increases in GTIS' Weighted Average Gross Profits as a percentage of
GTIS' sales of Accepted Games during the Initial Option Period or during the
prior Renewal Option Year as provided in Schedule "B" to the Home Video Game
Distribution and License Agreement.
11
<PAGE> 12
2.2. The WMS Group shall not grant a license to
any third parties to manufacture, distribute and sell versions of a Game for use
on any specific Designated Consumer Game Platform if such Game would be subject
to GTIS' first option right to manufacture, distribute and sell versions of such
Game on such Designated Consumer Game Platform, as specified in Section 2.1
hereof, until such time as GTIS shall have declined to acquire a license, or the
option period specified in Section 2.3 hereof, whichever is applicable, shall
have expired, or the applicable Home Video Game Distribution and License
Agreement shall otherwise permit. GTIS understands, acknowledges and agrees that
(a) with respect to Games manufactured by the WMS Group under license from third
parties, the rights granted by the WMS Group to GTIS (i) cannot exceed the
rights obtained by the WMS Group with respect to such Games, (ii) will be
limited to the Licensed Territory, and (iii) are subject to all limitations
imposed on the WMS Group by such third party licensors, including limitations on
the WMS Group's right to sublicense or subdistribute, and the form of Home Video
Game Distribution and License Agreement will be deemed modified to the extent so
required; and (b) although the WMS Group is developing Games in the normal
course of business, the WMS Group is under no obligation to develop Games or to
present any minimum number of Games to GTIS under this Agreement.
2.3. If the WMS Group shall determine to develop or
acquire rights in a Game for play on a Designated Consumer Game Platform which
it intends to release in the United States during the Initial Option Period or
any Renewal Option Year or within twelve (12) months thereafter (a "Proposed
Game"), the WMS Group shall notify GTIS in writing, as soon as practicable, with
respect to such determination and shall furnish to GTIS any tentative
12
<PAGE> 13
development schedule for such Proposed Game. Such tentative development schedule
shall be subject to change at any time and from time to time and the WMS Group
reserves the right to abandon, suspend, or otherwise delay the development of
such Proposed Game in its sole and absolute discretion, provided, however, that
the WMS Group shall use reasonable efforts to keep GTIS apprised of material
scheduling changes and/or the achievement of milestones in connection with the
development of such Proposed Game. The WMS Group shall, as soon as practicable,
notify GTIS in writing with respect to (a) the characteristics and method of
play of such Proposed Game, (b) any material limitations or other terms and
conditions which may affect the scope of the license which may be granted to
GTIS (including copies of relevant contractual provisions where permitted), (c)
the amount or method of determining third party fees and royalties payable in
connection therewith, and (d) the date on which the WMS Group proposes to First
Release the Proposed Game in the United States (the "New Game Option Notice").
The WMS Group shall use reasonable efforts to advise GTIS with respect to all of
the information required to be included in the New Game Option Notice, as
provided above, at least one hundred and twenty (120) days prior to the proposed
release date of the Proposed Game by the WMS Group in the United States,
provided, however, that GTIS acknowledges and agrees that such information may
not then be available to the WMS Group and the WMS Group may not have fully
determined or negotiated all material limitations or other terms and conditions
which may affect the scope of the license or Third Party Fees and Royalties
payable with respect thereto. The date of such New Game Option Notice is
hereinafter referred to as the "New Game Option Notice Date." With respect to
each Proposed Game as to which GTIS receives a New Game Option Notice, as
hereinabove provided, GTIS shall have a period of sixty
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<PAGE> 14
(60) days in which to notify WMS in writing that it either elects or declines to
exercise its option to license the Proposed Game. A notice that GTIS elects to
exercise its option to have the Proposed Game is referred to as a "New Game
Acceptance Notice." Any New Game Acceptance Notice given by GTIS shall in all
events be conditioned upon and subject to (i) the actual release of the Game by
the WMS Group in the United States within twelve (12) months following the end
of the Initial Option Period or any Renewal Option Year as provided in Section
2.4 below and (ii) the prior release of coin-operated versions of the Game, if
any, by the WMS Group no later than the end of the corresponding Initial Option
Period or Renewal Option Year. As soon as practicable following receipt of (a)
the New Game Acceptance Notice, and (b) notice from the Designated Consumer Game
Platform manufacturer of its acceptance of the Proposed Game for sale in the
United States, the WMS Group shall promptly furnish to GTIS a Master Disk with
respect to such Game as well as one NTSC and one PAL version of such Master
Disk. The WMS Group shall also furnish to GTIS, as soon as reasonably available,
(i) the beta version of the Game, (ii) text files and the text that appears in
bit map files, and printed copies of scripts used for audio components of CD-ROM
versions of the Proposed Game, for purposes of translating the Proposed Games
into languages other than English (as contemplated in the Home Video Game
Distribution and License Agreement), and (iii) copies of artwork, instruction
manuals, and other packaging, labeling and promotional materials to be used by
the WMS Group with respect to such Proposed Game substantially in commercially
reproducible form. Except as otherwise specifically provided below, GTIS shall
be solely responsible for all costs and out of pocket expenses required to
reprogram a Master Disk for use in connection with the sale of Accepted Games,
including, without limitation, editorial changes
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<PAGE> 15
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
or adaptions to local markets, changes required by all manufacturers of
Designated Consumer Game Platforms and local rating boards or similar
governmental agencies in the Licensed Territory. The WMS Group shall bear costs
up to * Dollars for editorial changes per Accepted Game required by any German
or European approval boards for modifications to Accepted Games, subject in all
events to a maximum total required expenditure by the WMS Group during the
Initial Option Period of * Dollars and * Dollar during each Renewal Option Year.
GTIS and the WMS Group shall otherwise discuss in good faith any sharing of
costs of other editorial changes, but the WMS Group shall in no event have any
obligation to bear any additional costs of such editorial changes unless it
shall specifically agree in writing with respect thereto. Although the WMS Group
shall make reasonable efforts to advise GTIS with respect to the development
schedule of a Proposed Game and the intended First Release date of such Proposed
Game by the WMS Group in the United States, nothing herein shall be deemed to
require the WMS Group to alter, amend, delay, or suspend its development
schedule with respect to such Proposed Game, or its First Release date in the
United States.
2.4. Any Proposed Game or Game as to which GTIS has
exercised its option and furnished to the WMS Group a New Game Acceptance Notice
within the notice period specified in Section 2.3 above shall become an
"Accepted Game" for purposes of this Agreement, provided that such Game shall
have actually been released by the WMS Group in the United States within twelve
(12) months following expiration of the Initial Option Period or any Renewal
Option Year, and provided further that coin-operated versions of the Game, if
any, shall have previously been released by the WMS Group during the
corresponding Initial Option
15
<PAGE> 16
Period or Renewal Option Year. With respect to each Accepted Game, GTIS and the
member of the WMS Group which has released such Game shall enter into a Home
Video Game Distribution and License Agreement which shall be dated as of the
date of the New Game Acceptance Notice. If either of such parties shall delay or
wrongfully refuse to enter into a Home Video Game Distribution and License
Agreement with respect to any Accepted Game, then, in addition to any other
rights of the non-defaulting party hereunder, at the option of the
non-defaulting party, such Home Video Game Distribution and License Agreement
shall be deemed to have been entered into as of the date on which GTIS shall
have exercised its option to acquire the license of such Accepted Game as
provided herein. GTIS understands and agrees that it will have no rights
whatsoever in respect of any Game which does not become an Accepted Game in
accordance with the terms of this Agreement and for which a Home Video Game
Distribution and License Agreement is not duly executed (or deemed executed as
provided above), and the WMS Group may exploit its rights in any Game which does
not become an Accepted Game in any manner it sees fit, free and clear of this
Agreement provided, however, that if GTIS shall fail or decline to accept a
Proposed Game as provided in Section 2.3 above, and the WMS Group shall
thereafter make material changes in the programming of the Game or in the amount
of any Third Party Fees and Royalties payable with respect thereto, then the WMS
Group shall furnish to GTIS a new New Game Option Notice with respect to such
Game as so changed and GTIS shall thereafter have the right to accept such Game
as changed in the manner provided in Section 2.3 above. The WMS Group shall also
be entitled to exploit its rights with respect to any Game and to sell and
distribute such Game, free and clear of this Agreement, in any Marketing Area
with respect to which GTIS' right to sell and distribute such
16
<PAGE> 17
Game has been suspended or revoked (or has become non-exclusive) as provided in
Section 2.7 below and Section 3.3 of any Home Video Game Distribution and
License Agreement, provided however, that if the WMS Group shall thereafter make
material changes in the programming of such Game or in the amount of any Third
Party Fees and Royalties payable with respect thereto, then the WMS Group shall
furnish to GTIS a new New Game Option Notice with respect to such Game as so
changed and GTIS shall thereafter have the right to accept such Game as changed
in the manner provided in Section 2.3 above.
2.5. GTIS acknowledges that the WMS Group
manufactures and sells Games for many different entertainment platforms,
including coin-operated games and home games of all types, and that any Games in
respect of which GTIS obtains rights hereunder for exploitation on a specific
Designated Consumer Game Platform may be developed by the WMS Group for other
entertainment platforms, including other Designated Consumer Game Platforms, or
for territories not included in the Licensed Territory and GTIS will have no
rights therein.
2.6. The WMS Group agrees to use commercial
efforts, in its reasonable judgment, to acquire rights to exploit Games on
Designated Consumer Game Platforms throughout the Licensed Territory when it
acquires rights to exploit such Games in the United States. Except to the extent
that the WMS Group has heretofore granted rights (or any option, right of first
refusal or negotiations or other ability to obtain rights which may be
subsequently exercised) to manufacture, distribute or sell home video games on
Designated Consumer Game Platforms within the Licensed Territory to any third
party (including any renewals or extensions thereof resulting from the exercise
of previously granted rights), if the WMS Group develops internally any
coin-operated or home video game, then the WMS Group shall not license the
17
<PAGE> 18
right to use its computer software source code or object code for such
coin-operated or home video game to any third party for the purpose of
developing and/or marketing a Game for play on a Designated Consumer Game
Platform in the Licensed Territory, unless the WMS Group shall have first
offered to license such Game to GTIS as provided in this Agreement. With respect
to Games in which the WMS Group acquires or intends to acquire from a third
party rights to exploit such Games on Designated Consumer Game Platforms in the
United States, but with respect to which the WMS Group is unable or unwilling to
acquire rights to exploit such Games on Designated Consumer Game Platforms in
the Licensed Territory based on the WMS Group's reasonable judgment that such
rights are not available on commercially acceptable terms, or on terms which, in
the WMS Group's judgment, would make it uneconomical for the WMS Group to
acquire and license such rights to GTIS on the terms and conditions set forth
herein and in the Home Video Game Distribution and License Agreement, the WMS
Group shall so advise GTIS and GTIS shall have the reasonable opportunity to
consult with the WMS Group (and, in GTIS' discretion, to propose other licensing
or cost sharing arrangements with respect to such Game) prior to the WMS Group's
determination whether to accept or decline to accept such rights which shall be
made in good faith.
2.7. GTIS or its sublicensees shall actively
commence marketing and selling an Accepted Game in reasonable commercial
quantities in all Marketing Areas within the Licensed Territory within six (6)
months following the date upon which the WMS Group shall have First Released
such Accepted Game in the United States (the "Delivery Date"), provided however,
that such six (6) month period shall be extended for a period of sixty (60) days
in Marketing Areas, other than those designated as "Key Marketing Areas" on
Schedule C annexed
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<PAGE> 19
to the Home Video Game Distribution and License Agreement, if GTIS shall have
proposed a sublicensee to distribute Licensed Products in such Marketing Area
and the WMS Group shall have withheld its approval of the sublicensee. If GTIS
or its sublicensees shall have failed to commence actively marketing and selling
an Accepted Game in any Marketing Area within the Licensed Territory within six
(6) months following the Delivery Date with respect thereto, then the WMS Group
shall have the right, in addition to any other rights which the WMS Group may
have hereunder or under any Home Video Game Distribution and License Agreement,
upon thirty (30) days written notice to GTIS, to suspend and revoke GTIS' or its
sublicensees' right to sell such Accepted Game in such Marketing Area or to
declare such right henceforth to be non-exclusive, as the WMS Group shall
determine. If GTIS or its sublicensees shall have failed to commence actively
marketing and selling three (3) or more Accepted Games which have been designed
for play on the same Designated Consumer Game Platform, in each case within six
(6) months following the Delivery Date with respect thereto, in any Marketing
Area within the Licensed Territory, then the WMS Group shall have the right,
upon thirty (30) days written notice to GTIS, permanently to suspend and revoke
GTIS' right to distribute and sell all future Accepted Games which have been
designed for play on the same Designated Consumer Game Platform in such
Marketing Area and to exclude such Marketing Area from the Licensed Territory
under all future Home Video Game Distribution and License Agreements for Games
which have been designed for play on such Designated Consumer Game Platforms.
Notwithstanding the foregoing, however, GTIS or its sublicensees shall not be
required to have actively commenced marketing and selling an Accepted Game in
any Marketing Area if the specific Designated Consumer Game Platform on which
such Accepted Game has been designed
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<PAGE> 20
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
for play shall not regularly be sold at retail or otherwise not be generally
available to consumers in such Marketing Area or if such Accepted Game is banned
in the entire Marketing Area.
For purposes of documenting compliance with this
Section 2.7, GTIS shall submit a report, as of the date six (6) months following
the Delivery Date, listing the Marketing Areas in which GTIS has not commenced
actively marketing and selling an Accepted Game. Such report shall be sent to
the WMS Group within forty-five (45) days after the end of said six (6) month
period, and shall indicate the status for each Marketing Area listed (indicating
the date of expected First Release and whether a sublicensee has been
appointed). Such summary report shall be made in good faith, using the best
available information as of the date the report is submitted.
3. MINIMUM GUARANTEED ROYALTY; GUARANTEED ADVANCE
ROYALTY. In consideration for the option granted herein and as a guaranteed
minimum royalty in respect of the Initial Option Period, GTIS agrees to pay to
WMS the sum of * Dollars (the "Minimum Guaranteed Royalty") and to issue the
Warrants as set forth in Paragraph 4 below. The Minimum Guaranteed Royalty shall
be payable as follows: (a) the sum of * Dollars shall be payable as a guaranteed
advance royalty (the "Guaranteed Advance Royalty") in the following
installments: * Dollars shall be paid by wire transfer to WMS in immediately
available funds on the date hereof; * Dollars shall be paid on or before March
31, 1996; and * Dollars shall be paid on or before March 31, 1997; and (b) the
amount by which the Minimum Guaranteed Royalty exceeds royalties (including the
Guaranteed Advance Royalty and all Third Party Fees and Royalties) actually paid
by GTIS to the WMS Group in respect of the Initial Option Period
20
<PAGE> 21
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
under all Home Video Game Distribution and License Agreements entered into
pursuant to this Agreement, but in no event more than * Dollars, shall be paid
on or before the date which is forty-five (45) days following the expiration of
the Initial Option Period. Under no circumstances shall any amount paid by GTIS
in respect of the Minimum Guaranteed Royalty pursuant to clause (b) of the
preceding sentence be refundable or recoupable against any future royalties
payable to the WMS Group. It is also understood that under no circumstances
shall the WMS Group be required to repay any portion of the Guaranteed Advance
Royalty, nor shall GTIS be entitled to any set off or to claim the right not to
pay any portion of the Guaranteed Advance Royalty for any reason, except as
provided in Section 10 below; provided that GTIS shall be entitled to recoup
such payments out of royalties, to the extent provided in the Home Video Game
Distribution and License Agreements entered into pursuant to this Agreement. If
the payment of the installment of the Guaranteed Advance Royalty due on March
31, 1996 is not paid in full when due, the installment otherwise due on March
31, 1997 shall become immediately due and payable. The obligation to make
payment of the deferred installments of the Guaranteed Advance Royalty are being
fully secured by a clean standby letter of credit in the amount of * Dollars,
issued by Republic National Bank delivered to WMS not later than March 31, 1995.
If such letter of credit is not so delivered in form and substance satisfactory
to WMS, this Agreement shall be of no further force and effect and WMS shall
return to GTIS any amounts theretofore paid by GTIS to WMS. GTIS shall be
responsible for all costs and expenses, including legal fees, which may be
incurred by WMS in connection with its collection of the Minimum Guaranteed
Royalty or any portion thereof. WMS shall permit GTIS from time
21
<PAGE> 22
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to time to exchange the original or any substitute letters of credit for other
substitute letters of credit, provided that the newest substitute letters of
credit are (i) issued by Republic National Bank or another bank acceptable to
WMS, (ii) the amounts of the newest substitute letters of credit are not less
than the amounts then owed with respect to the above described deferred
payments; and (iii) the newest substitute letters of credit otherwise contain
the same terms and conditions as are contained in the letter of credit for which
it is being substituted. GTIS has advised the WMS Group of its intention to
effect an initial public offering ("IPO") of its common stock or preferred stock
convertible into common stock during the Initial Option Period. In the event
that GTIS shall complete such IPO during the Initial Option Period and, as a
result thereof, the additional or paid-in capital of GTIS shall be increased by
at least * Dollars, as shown on a balance sheet of GTIS certified by its
independent certified public accountants and furnished to the WMS Group, then
the WMS Group shall permit GTIS to cancel the letter of credit securing the
remaining deferred installments of the Guaranteed Advance Royalty. Cancellation
of such letter of credit shall in no way relieve GTIS of its obligation to make
payment of all remaining installments of the Guaranteed Advance Royalty as set
forth above.
4. WARRANTS. GTIS agrees that simultaneously with the
closing of any public offering of common stock, or of preferred stock
convertible into common stock, WMS will be issued stock purchase Warrants and
receive a registration rights agreement (or an amendment to a prior registration
rights agreement between the parties, which includes the shares purchasable upon
exercise of the Warrants being issued hereunder), in substantially the
22
<PAGE> 23
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
form annexed hereto as Exhibit B, with the number of shares purchasable upon
exercise of the Warrants being equal to * Dollars divided by the initial public
offering price of the common stock sold, or the conversion price of preferred
stock, whichever is applicable. The Warrants shall be exercisable for the class
of common stock issued and sold by GTIS pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act") in
an initial public offering (or the class of common stock receivable upon
conversion of any convertible preferred stock so issued and sold in an initial
public offering). GTIS shall have no obligation to undertake or complete an
initial public offering, and if it does not, GTIS will have no liability
whatsoever to the WMS Group and the WMS Group shall have no right to any
compensation in lieu of the Warrants referred to herein. The Warrants and the
shares issuable thereunder are being and will be acquired by the WMS Group for
investment and not with a view to the distribution thereof by the WMS Group, and
such warrants and shares will be "restricted securities" within the meaning of
the Securities Act. The WMS Group will not sell or dispose of such warrants or
shares except in compliance with the federal securities laws.
5. REPRESENTATIONS AND WARRANTIES OF THE WMS GROUP. The
members of the WMS Group represent and warrant that this Agreement has been duly
authorized, executed and delivered by each member of the WMS Group; each such
member has the full power and authority to enter into this Agreement and to
perform its obligations hereunder and this Agreement constitutes the valid and
binding obligation of each member of the WMS Group, enforceable in accordance
with its terms, and the making of this Agreement by the member of
23
<PAGE> 24
the WMS Group does not violate or conflict with any agreement, right or
obligation existing between any member of the WMS Group and any other person,
firm or corporation.
6. REPRESENTATIONS AND WARRANTIES OF GTIS. GTIS
represents and warrants that this Agreement has been duly authorized, executed
and delivered by GTIS; GTIS has the full power and authority to enter into this
Agreement and to perform its obligations hereunder and this Agreement
constitutes the valid and binding obligation of GTIS enforceable in accordance
with its terms; and the making of this Agreement by GTIS does not violate or
conflict with any agreement, right or obligation existing between GTIS and any
other person, firm or corporation.
7. CONFIDENTIAL INFORMATION. GTIS shall keep in confidence and
not disclose or make available to any third party, without the written
permission of WMS, the terms of this Agreement and the proprietary information
of the WMS Group made known to it under this Agreement, including without
limitation any information with respect to Proposed Games prior to the date on
which they are First Released and any Master Disk or version thereof. Likewise,
the WMS Group shall keep in confidence and not disclose to any third party,
without the written permission of GTIS, the terms of this Agreement and the
proprietary information of GTIS made known to it under this Agreement. This
requirement of confidentiality shall not apply to information that is (a)
permitted to be disclosed under a Home Video Game Distribution and License
Agreement; (b) in the public domain through no wrongful act of the receiving
party; (c) rightfully received by the receiving party from a third party who is
not bound by a restriction of nondisclosure; (d) already in the receiving
party's possession without restriction as to disclosure; or (e) is required to
be disclosed by applicable rules and regulations of government
24
<PAGE> 25
agencies or judicial bodies. WMS or GTIS shall not issue any press release or
other public or trade announcement with respect to the transactions contemplated
by this Agreement unless the issuing party shall have first consulted with the
other with respect thereto and obtained the other's prior written approval
therefor, which approval will not be unreasonably withheld or delayed. The
obligations of confidentiality under this Section 7 shall survive termination of
this Agreement and either party shall be entitled to seek injunctive or
equitable relief to prevent the breach or threatened breach by the other of the
provisions of this Section and to secure its enforcement.
8. NOTICES. Any notice, consent, approval, request,
waiver or statement to be given, made or provided for under this Agreement shall
be in writing and deemed to have been duly given (a) by its delivery personally
or by express mail; or (b) five (5) days after its being mailed, air express,
registered or certified, return receipt requested, in a U.S. Post office
addressed as follows:
To GTIS:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz, President
Telephone Number: (212) 951-3107
Facsimile Number: (212) 679-6850
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 951-3052
Facsimile Number: (212) 679-6850
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<PAGE> 26
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 951-2379
Facsimile Number: (212) 679-6850
To WMS Group:
WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
With a copy to:
Williams Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
or such other address as either party may designate by notice given as
aforesaid.
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<PAGE> 27
9. DEFAULT. In the event that GTIS shall default in any
of its material obligations hereunder or under any Home Video Game Distribution
and License Agreement and the WMS Group has provided notice of such default in
accordance with the provisions of Section 8 hereof, if GTIS has not cured such
default within fifteen (15) days of such notice, or within the grace periods
provided in the Home Video Game Distribution and License Agreement in respect of
payments thereunder, then, in addition to all other rights and remedies of the
WMS Group at law or in equity, at the option of the WMS Group, all rights
granted to GTIS under Section 2 of this Agreement shall be deemed terminated and
shall revert to the WMS Group, provided it is understood that notwithstanding
such termination, the Home Video Game Distribution and License Agreements with
respect to Accepted Games which were deemed entered into prior to such
termination, and which are not in default, shall remain in full force and
effect. No such termination shall in any way affect or diminish WMS' rights
hereunder, including without limitation, its rights under Sections 3, 4, 7 and
10 hereof, and the right of the WMS Group to receive the Minimum Guaranteed
Royalty. Anything herein to the contrary notwithstanding, the rights granted to
GTIS under Section 2 of this Agreement shall not be affected by an alleged
default by licensee under a Home Video Game Distribution and License Agreement
resulting from a bona fide dispute between licensor and licensee provided that
licensee pays all undisputed amounts to licensor and all disputed amounts are
paid into a bona fide third party escrow account.
10. OTHER TERMINATION. Anything in this Agreement to the
contrary notwithstanding, if gross unit sales of Accepted Games by GTIS and its
sublicensees in the Licensed Territory under all Home Video Game Distribution
and License Agreements deemed
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<PAGE> 28
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to have been entered into pursuant to this Agreement during the portion of the
Initial Option Period that is prior to July 1, 1999 (the "Test Period") shall
not at least equal * of the gross unit sales of Accepted Games by the WMS Group
and its licensees in North America during such Test Period, then the WMS Group
shall have the right, in its sole and absolute discretion, to elect to terminate
all rights granted to GTIS under Section 2 of this Agreement, including any
further rights to acquire licenses to manufacture, distribute and sell versions
of the Games, provided that, notwithstanding such termination, all Home Video
Game Distribution and License Agreements with respect to Accepted Games which
were deemed entered into prior to such termination, and which are not in
default, shall remain in full force and effect. For purposes of calculating the
* of gross unit sales of Accepted Games by the WMS Group or its licensees in
North America during the Test Period with respect to any Accepted Game which has
been banned from sale by reason of the content of such Accepted Game or for any
other reason beyond the control of GTIS in (A) both Germany and the United
Kingdom, only * of the gross unit sales of Accepted Games by the WMS Group or
its licensees in North America during the Test Period shall be counted, or (B)
in either Germany or the United Kingdom, only * of the gross unit sales of
Accepted Games by the WMS Group or its licensees in North America during the
Test Period shall be counted. An Accepted Game shall not be deemed to have been
legally banned if a modified version of such Accepted Game not containing the
objectionable material has been substituted. In addition, for purposes of
computing gross units of Accepted Games sold by GTIS or its sublicensees and
subdistributors in the Licensed Territory or by the WMS Group or its licensees
in North America during the Test Period as provided in this Section 10, (i) only
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<PAGE> 29
gross units of Accepted Games sold at Full Price shall be counted, and (ii)
there shall be excluded (a) any Accepted Games which relate primarily to
American football, baseball or hockey, and (b) any gross unit sales of any
Accepted Games which have been First Released by the WMS Group or its licensees
during the last ninety (90) days of the Test Period. If the WMS Group shall
elect to exercise its right to terminate, as provided above, it shall give
written notice thereof (a "Notice of Election") to GTIS within ninety (90) days
following the date on which the WMS Group shall have received all required
reports under all Home Video Game Distribution and License Agreements with
respect to Accepted Games sold by GTIS during the Test Period. Within thirty
(30) days following the date on which the WMS Group shall issue a Notice of
Election, the WMS Group shall (a) pay to GTIS an amount equal to any then
unrecouped portion of the Guaranteed Advance Royalty which has theretofore been
paid to the WMS Group, together with interest thereon at the prime rate
designated by Citibank, N.A. calculated from the date paid, and (b) surrender to
GTIS any outstanding letters of credit securing any remaining installments of
the Guaranteed Advance Royalty. No termination by the WMS Group of GTIS' rights
to continue to acquire licenses with respect to Games pursuant to the provisions
hereof shall in any way affect or diminish any rights of the WMS Group
hereunder, including its rights under Sections 4, 7 and 11 of this Agreement or
its right to continue to receive Royalties under any Home Video Game
Distribution and License Agreement which remains in effect, except that GTIS
shall not be entitled to any further recoupment of the Guaranteed Advance
Royalty and the WMS Group shall not be entitled to be paid any Minimum
Guaranteed Royalty pursuant to Section 3 hereof. The WMS Group shall permit
GTIS, at GTIS' own expense, to have an independent certified public accountant
inspect the books and records of the WMS Group solely
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with respect to the calculation of any gross unit sales of Accepted Games by the
WMS Group in North America during the Test Period (but only in the event that
the WMS Group shall have delivered to GTIS a Notice of Election, as provided
above), during reasonable hours, upon five (5) business prior written notice and
subject to such confidentiality agreements (including the execution of
appropriate confidentiality agreements), as the WMS Group may require.
11. NON-SOLICITATION.
During the Initial Option Period and any Renewal
Option Period and for a further period of two (2) years thereafter, neither GTIS
nor the WMS Group shall, for itself or on behalf of any other person,
partnership, corporation or entity, directly or indirectly, or by action in
concert with others (a) solicit, induce, or encourage any person to terminate
his or her employment or other contractual relationship with the other party or
any of its affiliates, or (b) solicit, induce, or encourage any designer,
developer, salesperson or other person known to have a contractual relationship
with the other party to discontinue, terminate, cancel or refrain from entering
into any design, development, sales or other contractual relationship with the
other party or any of its affiliates. Each party agrees that the parties hereto
shall be entitled to injunctive or other equitable relief to prevent the breach
or threatened breach by it of the provisions of this section and to secure its
enforcement.
12. MISCELLANEOUS.
12.1. This Agreement is personal to GTIS as one
party and the WMS Group as the other party. Neither this Agreement nor any
party's rights under it may be assigned, in whole or in part, nor may its
obligations be delegated, in whole or in part, to any person or party without
the prior written consent of the other party, except that any party may
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<PAGE> 31
assign its rights and delegate obligations to any of its direct or indirect
wholly-owned subsidiaries or affiliates or to any person, firm or corporation
owning or acquiring all or substantially all of the stock or assets of that
party, as long as that party remains fully liable for its obligations hereunder.
Any sale of all or substantially all of the assets of any member of the WMS
Group shall include a requirement for the assumption by the purchaser of all
covenants, obligations and duties undertaken by the seller pursuant to the terms
of this Agreement, including its obligations with respect to Games and the
intellectual property from which they are derived. This Agreement shall bind the
parties, their successors and permitted assignees and delegees. The members of
the WMS Group, as one party, and GTIS (including its subsidiaries and affiliates
as one party) are each jointly and severally liable for their respective
obligations under the terms of this Agreement.
12.2. The entire understanding between the parties
hereto relating to the subject matter hereof is contained herein. This Agreement
cannot be changed, modified, amended or terminated except by an instrument in
writing executed by the parties hereto.
12.3. No waiver, modification or cancellation of any
term or condition of this Agreement shall be effective unless executed in
writing by the party charged therewith. No written waiver shall excuse the
performance of any act other than those specifically referred to therein and no
waiver shall be deemed or construed to be a waiver of such terms or conditions
for the future or any subsequent breach thereof.
12.4. This Agreement does not constitute and shall
not be construed as constituting a partnership or joint venture between the WMS
Group and GTIS, and neither the WMS Group nor GTIS shall have any right to
obligate or bind the other in any manner
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whatsoever, and nothing herein contained shall give or is intended to give any
rights of any kind to any third persons.
12.5. This Agreement shall be governed by the laws
of the State of Illinois applicable to contracts made and to be wholly performed
in the State of Illinois.
12.6. If any provision of this Agreement is or
becomes or is deemed invalid, illegal or unenforceable under the applicable laws
or regulations of any jurisdiction, either such provision will be deemed amended
to conform to such laws or regulations without materially altering the intention
of the parties, or it shall be stricken and the remainder of this Agreement
shall remain in full force and effect.
12.7. This Agreement may be executed in counterparts
each of which shall be deemed an original and when taken together shall be
deemed one and the same document.
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<PAGE> 33
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year first above written.
WMS INDUSTRIES INC
By: /s/ Neil D. Nicastro
------------------------------
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Neil D. Nicastro
------------------------------
MIDWAY MANUFACTURING COMPANY
By: /s/ Neil D. Nicastro
------------------------------
WILLIAMS ENTERTAINMENT INC.
By: /s/ Byron Cook
------------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Joe Cayre
------------------------------
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<PAGE> 34
SCHEDULE 1
1. License Agreement dated June 28, 1994 between Sony Electronic
Publishing Company and Midway Manufacturing Company.
2. Letter of agreement dated January 6, 1994 between Tradewest Inc. and
Sony Electronic Publishing Limited.
3. First Right of Negotiation Agreement dated March 28, 1994 between WMS
Industries Inc. and Williams/Nintendo Inc.
4. License Agreement dated August 1, 1993 between Acclaim Entertainment
Inc. and Midway Manufacturing Company with respect to WWF wrestling
games.
5. Letter Agreement dated September 19, 1994 between Atari Corporation and
WMS Industries Inc. with respect to Defender, Defender II, Robotron &
Joust.
<PAGE> 35
EXHIBIT A
HOME VIDEO GAME
DISTRIBUTION AND LICENSE AGREEMENT
AGREEMENT made this ___ day of __________, 199__, by and between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation with offices at 16 East 40th
Street, New York, New York 10016 (herein called "Licensee") and [MIDWAY
MANUFACTURING COMPANY], [WILLIAMS ELECTRONICS GAMES, INC.] [WILLIAMS
ENTERTAINMENT INC.] a Delaware corporation with offices at 3401 North California
Avenue, Chicago, Illinois 60618 (herein called "Licensor").
W I T N E S S E T H:
WHEREAS, Licensor owns or controls the right to manufacture, sell and
distribute Home Video Games (as hereinafter defined) containing the Licensed
Property (as hereinafter defined) in the Licensed Territory (as hereinafter
defined); and
WHEREAS, Licensor and Licensee are parties to the GTIS Master Agreement
(as hereinafter defined) pursuant to which Licensee has exercised its right and
option to acquire a license to manufacture, distribute and sell Home Video Games
embodying the Licensed Property in the Licensed Territory;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. "Alternative Royalty" shall have the meaning
ascribed in Schedule "B" annexed hereto.
<PAGE> 36
1.2. "Cartridge-Based Product" shall have the
meaning ascribed in Schedule "B" annexed hereto.
1.3. (1) "Cartridge Margin" shall have the meaning
ascribed in Schedule "B" annexed hereto.
1.4. "Computer Software" or "Software" shall mean
computer software in the form of a cartridge, CD-ROM disk or other device
containing substantially full and complete computer game code, including the
source code, the assembly code, the object code and such data files and other
files as are necessary for the Licensed Product to achieve its functional
purpose, whereby data and visual images, with or without sound, can be
manipulated, communicated, reproduced or perceived with the aid of a Designated
Consumer Game Platform.
1.5. "Delivery Date" shall have the meaning
ascribed in Section 2.7 of the GTIS Master Agreement.
1.6. "Designated Consumer Game Platform" shall have
the meaning ascribed in Section 1.4 of the GTIS Master Agreement.
1.7. "Exporter" shall have the meaning ascribed in
Section 3.2 hereof.
1.8. "First Foreign Sale" shall have the meaning
ascribed in Schedule "B" annexed hereto.
1.9. "First Release" or "First Released" shall have
the meaning ascribed in Section 1.5 of the GTIS Master Agreement.
1.10. "Front-line" shall have the meaning ascribed
in Schedule "B" annexed hereto.
1.11. "Full Price" shall have the meaning ascribed
in Section 1.6 of the GTIS Master Agreement.
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1.12. "Game" shall have the meaning ascribed in
Section 1.7 of the GTIS Master Agreement.
1.13. "GTIS Master Agreement" shall mean the GTIS
Master Option and License Agreement (Home Video Games) dated March 31, 1995,
among Licensee, WMS Industries Inc., Midway Manufacturing Company, Williams
Electronics Games, Inc. and Williams Entertainment Inc.
1.14. "Guaranteed Advance Royalty" shall have the
meaning ascribed in Section 3 of the GTIS Master Agreement.
1.15. "Home Video Game" shall mean Computer Software
designed to operate solely on a specific Designated Consumer Game Platform.
1.16. "Initial Option Period" shall have the meaning
ascribed in Section 1.11 of the GTIS Master Agreement.
1.17. "Late Charge" shall have the meaning ascribed
in Section 6.5 hereof.
1.18. "Late Report" shall have the meaning ascribed
in Section 6.5 hereof.
1.19. "Licensed Products" shall mean Home Video
Games embodying the Licensed Property.
1.20. "Licensed Property" shall mean the
intellectual property, game concepts, descriptions, characteristics and method
of play described in the New Game Option Notice and/or on Schedule A and
embodied in the "Licensed Products."
1.21. "Licensed Territory" shall have the meaning
ascribed in Section 3.1 of this Agreement.
1.22. "Marketing Area" shall have the meaning
ascribed in Section 3.3 hereof.
1.23. "Master Disk" shall have the meaning ascribed
in Section 1.15 of the GTIS Master Agreement.
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1.24. "Net Wholesale Sales Price" shall have the
meaning ascribed in Schedule "B" annexed hereto.
1.25. "New Game Option Notice" shall have the
meaning ascribed in Section 2.3 of the GTIS Master Agreement.
1.26. "Other Home Video Game Distribution and
License Agreements" shall have the meaning ascribed in Schedule "B" annexed
hereto.
1.27. "Recoupable Amount" shall have the meaning
ascribed in Schedule "B" annexed hereto.
1.28. "Renewal Option Period" shall have the meaning
ascribed in Section 2.1 of the GTIS Master Agreement.
1.29. "Renewal Option Year" shall have the meaning
ascribed in Section 2.1 of the GTIS Master Agreement.
1.30. "Royalty" shall have the meaning ascribed in
Schedule "B" annexed hereto.
1.31. "Royalty Period" shall have the meaning
ascribed in Section 6.1 hereof.
1.32. "Term of this Agreement" or "period of this
Agreement" or "term hereof" or "so long as this Agreement remains in force" or
words of similar connotation shall include the initial period of this Agreement
and the period of all renewals, extensions, substitutions or replacements of
this Agreement.
1.33. "Third Party Fees and Royalties" shall mean
all fees, royalties and other participations of any kind or nature payable by
Licensor to any third party, including developers, licensors and others having
rights in connection with the exploitation of the Licensed Products. There shall
be excluded from the term "Third Party Fees and Royalties" as used herein (a)
any fees or royalties payable to employees or consultants by Licensor or its
affiliates with respect to the development of the Licensed Product in house; and
(b) advances paid to any third party having rights
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<PAGE> 39
in connection with the exploitation of the Licensed Products (other than persons
referred to in clause (a)), provided, however, that if such advances are
recoupable by Licensor or its affiliates from future royalties payable to such
third party, then Third Party Fees and Royalties shall include such royalties
which would otherwise be payable to such third party were it not for such right
of recoupment.
1.34. "Weighted Average Gross Profits" shall have
the meaning ascribed in Schedule "B" annexed hereto.
2. GRANT OF LICENSE.
2.1. Licensor hereby grants and Licensee hereby
accepts, for the term of this Agreement and subject to the terms hereinafter set
forth, the exclusive license to manufacture, distribute, subdistribute and sell
the Licensed Products in the Licensed Territory. Licensee shall have the right
to sublicense any of the rights granted to Licensee hereunder to affiliates of
GTIS, as such term is defined in Section 1.8 of the GTIS Master Agreement, and,
with Licensor's prior written consent, which consent shall not be unreasonably
withheld or delayed, to unaffiliated third parties. Without limiting the
generality of the foregoing, Licensor shall not unreasonably withhold or delay
its consent to proposals by Licensee to sublicense its rights hereunder to third
party dedicated home video game hardware platform manufacturers for the purpose
of "bundling" the Licensed Products together with such hardware products for
distribution only within the Licensed Territory. Licensee shall not have the
right to sublicense its rights hereunder (and Licensor may withhold its consent
to any proposed sublicense) to any third party for the purpose of distributing,
or to any third party who Licensee knows or could reasonably expect intends to
sell or distribute, the Licensed Products outside of the Licensed Territory.
Licensor may also withhold its consent to any proposed sublicense arrangement,
if as a result thereof, it can be reasonably anticipated that Royalties which
may become payable to Licensor on account of sales of Licensed Products in the
Marketing Areas designated as "Key Marketing Areas" on Schedule C will be less
than if such Licensed Products were sold directly by Licensee. It is understood
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<PAGE> 40
that the term "Licensed Products" does not include Computer Software designed
for play on (a) the Atari Jaguar(R) system, the 3D-O(R) system, and their
respective successors (including any enhancements, improvements or updates),
except only to the extent that Licensor or any of its affiliates shall itself
(and not through any licensee or sublicensee) actually release the Licensed
Products for commercial sale in the ordinary course of business on such hardware
platforms in the United States; (b) any multipurpose home or personal computer
systems; or (c) any other medium of exploitation, including handheld games,
Computer Software playable on dedicated home video game hardware having a
microprocessor of less than 32 bit capacity (excluding SNES and Sega Genesis),
over the air, cable or fiber optic transmission, other than Designated Consumer
Game Platforms; all of which remain the sole property of Licensor. No license is
granted hereunder for the manufacture, sale or distribution of Licensed Products
to be used as premiums, in combination sales, as giveaways or to be disposed of
under similar methods of merchandising, except only that Licensee shall have the
right, subject to rights of third parties in the Licensed Property, to
distribute Licensed Products as premiums, combination sales or giveaways solely
(i) subject to Licensor's consent, which shall not unreasonably be withheld or
delayed, in connection with the sale and distribution of other Home Video Games
licensed to Licensee by Licensor or its affiliates under Other Home Video Game
Distribution and License Agreements, and (ii) with respect to free or
promotional goods in the quantities set forth on Schedule "B" annexed hereto.
2.2. This license does not include any rights to
subsequent versions of the Licensed Property (so- called "sequels" or
"derivatives"), such rights being retained by Licensor, except as the same are
otherwise required to be offered to Licensee under the GTIS Master Agreement.
3. LICENSED TERRITORY.
3.1. Licensee shall be entitled to manufacture,
distribute and sell the Licensed Products in all countries throughout the world,
except (a) the United States of America, its territories, possessions and United
States military installations worldwide; Canada; Mexico; and Japan; and (b)
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<PAGE> 41
countries or locations which are excluded under the terms of any license
agreement between Licensor and any third party having rights to the Licensed
Property. The territory in which Licensee shall be entitled to manufacture, sell
and distribute the Licensed Products as specified above is herein referred to as
the "Licensed Territory."
3.2. Licensor shall have the exclusive right to
license to third parties or otherwise exploit for its own account any of its
rights with respect to the Licensed Property outside of the Licensed Territory
(and in any portion of the Licensed Territory in which Licensee's right to
distribute Licensed Products have been revoked, suspended, or declared
non-exclusive in accordance with Section 3.3 below), and Licensee shall not
manufacture, distribute or sell any Licensed Products or otherwise exploit the
Licensed Property directly or indirectly in any area other than the Licensed
Territory. Without limiting the generality of the foregoing, Licensee shall not
at any time sublicense, distribute or sell any Licensed Products to any
distributor or customer who Licensee knows or could reasonably expect, based on
objective evidence, intends to resell or export the Licensed Products outside of
the Licensed Territory. Licensor shall similarly not at any time license,
distribute or sell any Licensed Products to any licensee, distributor or
customer who Licensor knows or could reasonably expect, based on objective
evidence, intends to resell or export the Licensed Products within the Licensed
Territory. A licensee, sublicensee, distributor or customer who wrongfully
resells or exports Licensed Products from the Licensed Territory to North
America or Japan, or from North America or Japan to the Licensed Territory, is
referred to as an "Exporter." Licensor and Licensee shall have the right, in
addition to any other rights which they may have hereunder, to require the other
to terminate any license, distribution agreement or arrangement with any such
Exporter who is wrongfully distributing Licensed Products in violation of the
rights of the other party. Licensor shall also have the right to delay for a
period up to three (3) months the introduction of any new Licensed Products into
any country in which such Exporter may be located or is operating.
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3.3. Licensee shall actively commence marketing and
selling the Licensed Products within the Licensed Territory in reasonable
commercial quantities within six (6) months following the Delivery Date,
provided however, that such six (6) month period shall be extended for a period
of sixty (60) days in Marketing Areas, other than those designated as "Key
Marketing Areas" on Schedule C annexed hereto if (a) Licensee shall have
proposed a sublicensee to distribute Licensed Products in such Marketing Area
and the Licensor shall have withheld its approval of the sublicensee or (b) if
Licensee shall have exercised its right, pursuant to Section 3.2 above, to delay
the introduction of new Licensed Products into any country within the Marketing
Area by reason of the location or operation of an Exporter in such Marketing
Area. If Licensee shall fail to have commenced actively marketing and selling
the Licensed Products in any country or in any related group of countries as
described on Schedule "C" annexed hereto, (a "Marketing Area") within the
Licensed Territory within six (6) months following the Delivery Date with
respect thereto, then the Licensor shall have the right, in addition to any
other rights which Licensor may have hereunder, upon thirty (30) days prior
written notice to Licensee, to suspend or revoke Licensee's right to sell the
Licensed Products in such Marketing Area or to declare such right henceforth to
be nonexclusive, as Licensor shall determine. Notwithstanding the foregoing,
however, Licensee shall not be required to have actively commenced marketing and
selling a Licensed Product in any Marketing Area if the specific Designated
Consumer Game Platform on which such Licensed Product has been designed for play
shall not regularly be sold at retail or otherwise not be generally available to
consumers in such Marketing Area or if the Licensed Product is banned in the
entire Marketing Area.
3.4. For purposes of documenting compliance with
Section 3.3 above, Licensee shall submit a report, as of the date six (6) months
following the Delivery Date, listing the Marketing Areas in which Licensee has
not commenced actively marketing and selling an Accepted Game. Such report shall
be sent to Licensor within forty-five (45) days after the end of said six (6)
month period,
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<PAGE> 43
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
and shall indicate the status for each Marketing Area listed (indicating the
date that marketing and selling is expected to begin and whether a sublicensee
has been appointed or will be replaced). Such summary report shall be made in
good faith, using the best available information as of the date the report is
submitted.
4. TERM.
The license granted hereunder shall be effective on
the date hereof and shall terminate on the earlier of (a) five (5) years from
the date hereof, or (b) upon termination of Licensor's rights obtained from
third parties, unless sooner terminated in accordance with the terms and
conditions hereof; provided, however, that subject to the earlier termination of
Licensor's rights obtained from third parties, the license term shall be deemed
extended for up to two (2) additional one (1) year renewal terms, if during the
immediately preceding year, sales of Licensed Products in the Licensed Territory
shall have amounted to at least * units. If Licensee's sales of Licensed
Products in the Licensed Territory during the first of such additional one-year
renewal term shall be less than * units, Licensee may pay to Licensor an amount
equal to * Dollars per unit multiplied by the number of units less than * sold
by Licensee during such year to make up the shortfall and the license term shall
then be extended for the remaining renewal year.
5. CONSIDERATION.
Licensee shall pay Licensor, with respect to sales
throughout the Licensed Territory of the Licensed Products, a Royalty as
specified in Schedule "B" annexed hereto on each unit of Licensed Product sold.
6. ACCOUNTINGS.
6.1. Licensee agrees to forward to Licensor at
Licensor's address set forth in Section 17 (with a copy to Williams
Entertainment Inc., 1800 South Business 45, Corsicana, Texas
9
<PAGE> 44
75110), within forty-five (45) days after the end of each calendar quarter (a
"Royalty Period"), commencing with the first calendar quarter during which any
unit of the Licensed Product is sold, a report of the number of units of the
Licensed Products sold within such Royalty Period and a calculation, in
reasonable detail and reported separately by Marketing Area, of the Royalty,
including any Alternative Royalty, due on account of the sale of such units in
accordance with Section 6.3 below and Schedule "B" annexed hereto, and any
recoupment of the Guaranteed Advance Royalty claimed in accordance with Schedule
"B" annexed hereto and Section 3 of the GTIS Master Agreement. Such report shall
also include a cumulative reconciliation of the number of units of Licensed
Products produced by Licensee to the number of units on hand. Licensee agrees
that accompanying each such report shall be payment, in United States funds, of
the Royalties due to Licensor, if any, in respect of such Royalty Period in
excess of any permitted recoupment. Royalties calculated in foreign currencies
shall be converted to United States currency at the spot rate of exchange
published in the Wall Street Journal as of the last day of the Royalty Period.
Such reports shall be required to be submitted with respect to sales and
distributions of the Licensed Product whether or not any amounts are due under
the terms hereof.
6.2. Licensee agrees to keep accurate books of account
and records with respect to the Licensed Products, covering all sales, purchases
and inventories of Licensed Products and all Royalties due under this Agreement,
at Licensee's offices (or the offices of Licensee's affiliates) and to permit
(or procure the right for) Licensor at its own expense to have accounting
professionals (which may include Licensor's employees who have accounting
degrees) inspect such books of account and records of Licensee or its
sublicensees during reasonable business hours (but not during the first three
(3) weeks of a calendar quarter), upon prior reasonable written notice, for the
sole purpose of verifying the reports to be provided hereunder. Such
inspections, together with inspections of Licensee's books of account and
records pertaining to other Home Video Games licensed to Licensee by Licensor or
its
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<PAGE> 45
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
affiliates under Other Home Video Game Distribution and License Agreements,
shall occur no more frequently than twice during any twelve (12) month period
for each of the Licensee's offices. Licensor's inspectors shall not be
physically present in a specific office of Licensee for more than ten (10)
consecutive business days in connection with any such inspection, provided that
Licensee shall have supplied all requested information and documentation and
responded to questions on a reasonably prompt basis. Licensee shall promptly
furnish to Licensor copies of any report which Licensee may produce as the
result of any audit by Licensee of the books of account and records of any
sublicensee of Licensee. Licensor shall keep any information obtained from any
such inspections in confidence and shall require that its accounting
professionals do so as well. Licensee's books relating to any particular Royalty
statement may be examined as aforesaid only within two (2) years after the date
rendered and Licensee shall have no obligation to permit Licensor to so examine
such books relating to any particular Royalty statement more than once for any
one statement, unless in connection with a civil action filed by Licensor
against Licensee in connection with such statement. In the event that any audit
by Licensor's accounting professionals reveals that Licensee has underpaid
Licensor by an aggregate of * or more with respect to the specific Royalty
statements which are the subject of such audit, Licensee agrees that it shall
also reimburse Licensor for the reasonable documented costs for any such audit
(including traveling costs) up to the amount of the shortfall.
6.3. Royalties shall be paid on * of products sold
by Licensee's point of sale ("POS") customers, less actual returns. With respect
to shipments to non-POS customers, not less than * of the shipment shall be
deemed a sale for Royalty purposes on the date of shipment. Not less than * the
balance of the shipment, less actual returns, shall be deemed a sale for Royalty
purposes six (6) months following the date of shipment, and the balance of such
shipment, less actual returns not already
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<PAGE> 46
counted, shall be deemed a sale for Royalty purposes twelve (12) months
following the date of shipment. As used herein, POS customers mean those
customers who report actual sales by selection number to Licensee via computer
and scan their sales by UPC codes at cash registers.
6.4. Licensor shall permit Licensee, at Licensee's own
expense, to have an independent certified public accountant inspect Licensor's
books and records with respect to the payment by Licensor of Third Party Fees
and Royalties in connection with the Licensed Products, during reasonable hours,
upon prior reasonable written notice and subject to such confidentiality
requirements (including the execution of appropriate confidentiality agreements)
as Licensor may require, for the sole purpose of verifying payment and
calculation by Licensor of such Third Party Fees and Royalties. Licensor's books
and records may be examined by Licensee's representatives not more frequently
than twice in any twelve-month period and Licensee and Licensor shall otherwise
have substantially the same rights as provided to the other under Section 6.2
above.
6.5. Licensee recognizes that the timely submission of
all reports required to be submitted to Licensor pursuant to Section 6.1 hereof
is critical for Licensor to maintain good relations with its third party
licensors as well as for Licensor's own financial reporting requirements.
Therefore, in addition to any other rights and remedies of Licensor, if Licensee
shall be late by more than five (5) business days with respect to any report
and/or Royalty payment required to be submitted to Licensor pursuant to Section
6.1 hereof (a "Late Report"), then Licensee shall pay to Licensor a late charge
("Late Charge") at a rate equal to the prime rate designated by Citibank N.A. on
any Royalties covered by such Late Report that are actually payable to Licensor
as provided in Schedule B. Such Late Charge shall be computed from the 46th day
following the last day of the calendar quarter for which such Late Report is due
until the date actually paid. Licensor may elect to waive payment of any such
Late Charge if Licensee shall have provided a reasonable estimate of Royalties
due within fifteen (15) days following the end of the calendar quarter covered
by such Late Report.
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6.6. At the time that the Licensor shall provide to
Licensee notice of availability of a Game pursuant to Section 2.4 or 2.5 of the
GTIS Master Agreement, Licensor shall provide to Licensee sufficient data to
enable Licensee to calculate Third Party Fees and Royalties payable with respect
to each Licensed Product (without regard to any advances which may have been
made by Licensor). If Licensee is unable to calculate specific Third Party Fees
and Royalties from the data provided, Licensee may request assistance from
Licensor with respect thereto, and Licensor shall use its best efforts to
respond within seven (7) days from the date of such request, but Licensee shall
provide all sales and other data in its possession which are necessary for such
calculations.
7. QUALITY OF LICENSED PRODUCT.
7.1. The Licensed Products as manufactured,
advertised, sold, distributed or otherwise disposed of by Licensee under this
Agreement shall be of a high quality and shall be sold and distributed in
packaging prescribed by Licensor bearing Licensor's trademarks and trade names.
Such packaging may indicate that the Licensed Products are distributed by
Licensee. Licensor shall have the right to determine in its reasonable
discretion whether the Licensed Product meets Licensor's high standards of
merchantability. Licensee agrees to furnish Licensor free of cost for Licensor's
written approval as to quality and style (which approval shall not be
unreasonably withheld), samples of the Licensed Product, together with its
proposed advertising, packaging and wrapping materials, before its manufacture,
sale or distribution (whichever first occurs) and the Licensed Product shall not
be sold or distributed by Licensee without such written approval.
7.2. If Licensor shall disapprove of any item
submitted by Licensee for approval hereunder, Licensor shall furnish at the time
notice of disapproval is given to Licensee an explanation of the reason(s) for
such disapproval and recommendations for suggested changes and Licensee shall
resubmit such item after changes have been made for Licensor's approval.
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<PAGE> 48
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
7.3. In the event that the quality of any Licensed
Product approved by Licensor shall become less than that approved by Licensor
and Licensee shall fail to raise the quality to the approved level within thirty
(30) days after received written notice from Licensor, the license granted under
this Agreement for such Licensed Product shall automatically terminate and shall
remain terminated until Licensor shall subsequently renew its approval of the
Licensed Product.
7.4. If disapproval is not given by Licensee within
five (5) business days after Licensor's receipt of the item submitted for
approval, Licensor's approval shall be deemed to have been given. Subsequent to
final approval, Licensor may request the Licensee once each quarter to send,
without charge, a reasonable number of production samples (but in any event not
less than * copies of each language version) without payment of any Royalty
hereunder to Licensor to ensure quality control. Should Licensor require
additional samples for any reason other than resale or any other commercial
exploitation by Licensor, Licensee shall be required to sell such samples to
Licensor at its cost (but without payment of any Royalties hereunder), but not
more than * units of each Licensed Product.
8. ADVERTISING.
Licensee, at its own cost and expense, shall be solely
responsible for all advertising costs, including all in store and institutional
advertising costs, associated with the sale of Licensed Products in the Licensed
Territory.
9. TRADEMARK AND COPYRIGHT, ETC.
9.1. "Notice" as used in this Section shall mean the
following statutory copyright notice and notice of registration or application
for registration of the licensed trademark:
_ _ _ _ (TM) or (R)
All Rights Reserved
C _ _ _ _ Licensed from [Midway Manufacturing Company(R)]
[Williams(R) Electronics Games, Inc.]
[Williams(R) Entertainment Inc.]
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or such other copyright notices and notices of registration as may be required
by any third party licensors. Licensor shall advise Licensee prior to use
whether (TM) or (R) shall follow the words " _ _ _ _ ."
9.2. Licensee shall furnish to Licensor samples of all
packaging in which the Licensed Products are sold by Licensee and Licensor shall
cause the copyright in the packaging to be registered with the United States
Copyright Office and recorded with the United States Customs Department at
Licensor's expense. Licensee shall print, stamp or mold the Notice on all
Licensed Products and on the front of each package or container used in
connection therewith, and Licensee shall print the Notice on each label,
advertisement and promotional release concerning any Licensed Products, all in
accordance with instructions from Licensor, providing, however, that such notice
shall be imprinted on the back of the package or container used in connection
therewith, displayed on the title screen of the Licensed Product, and in the
instruction booklet, if any, packaged with the Licensed Product. Licensee agrees
to execute and deliver to Licensor in such form as Licensor may reasonably
request all instruments necessary to effectuate trademark protection or to
record Licensee as a registered user of any trademarks or to cancel such
registration and if Licensee fails to execute such instruments, Licensee hereby
appoints Licensor Licensee's attorney-in-fact to do so on Licensee's behalf.
Licensee shall also furnish Licensor samples of all advertising or promotional
materials bearing the Notice for Licensor's approval.
9.3. Subject to the terms of this Agreement, Licensee
acknowledges and agrees that: All copyrights, trademarks and service marks and
rights to same referred to in this Section 9 in the name of and/or owned by
Licensor shall be and remain the sole and complete property of Licensor; that
all such copyrights, trademarks and service marks and rights to same in the name
of or owned by any copyright proprietor other than Licensor or Licensee shall be
and remain the sole and complete property of such copyright proprietor; that all
trademarks and service marks which, and/or the right to
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use which, arise out of the license hereby granted to use the Licensed Property
shall be and remain the sole and complete property of Licensor; that Licensee
shall not at any time acquire or claim any right, title or interest of any
nature whatsoever in any such trademark or service mark by virtue of this
Agreement or of Licensee's uses thereof in connection with the Licensed
Products; and that any right, title or interest in or relating to any such
trademark or service mark, which comes into existence as a result of, or during
the term of, the exercise by Licensee of any right granted to it hereunder shall
immediately vest in Licensor.
9.4. Licensee agrees to assist Licensor at Licensor's
expense to the extent necessary in the procurement of any protection or to
protect any of Licensor's right to the Licensed Property. Licensee shall notify
Licensor in writing of any infringements or imitations by others of the Licensed
Property on articles similar to those covered in this Agreement which may come
to the Licensee's attention. Licensor shall have the right to commence action to
enforce its proprietary rights and prosecute any such infringements, and
Licensee agrees to fully cooperate, at Licensor's expense, in any such action.
However, Licensee shall not incur any such expense reimbursable by Licensor
without Licensor's express written approval and all recoveries resulting from
any such action shall belong solely to Licensor. In the event Licensor declines
to pursue any such action, Licensee may, with Licensor's written permission, and
subject to the consent of any third party having rights in the Licensed
Property, institute such an action, and Licensor, at Licensee's expense, shall
cooperate in such action instituted by Licensee and all recoveries resulting
from any such action shall belong solely to Licensee. Licensor shall not
unreasonably withhold or delay its permission to enable Licensee to pursue an
action (if Licensor shall decline to pursue such action) against persons or
entities reasonably believed by Licensee to be counterfeiting or pirating
Licensee's Licensed Products. Licensor shall not unreasonably withhold or delay
its permission to grant to any sublicensee who requires it, at the time of
entering into
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a sublicense, reasonable rights (without Licensor's prior consent in each
instance) to pursue persons reasonably believed to be engaged in counterfeiting
or piracy of the Licensee Product.
9.5. During the term of this Agreement and thereafter,
Licensee:
(a) will not challenge the ownership or rights
of Licensor in and to the Licensed Property or any copyright or trademark
pertaining thereto developed by or for Licensor, nor attack the validity of the
license granted hereunder or participate in any challenge thereto;
(b) will manufacture, sell and distribute the
Licensed Products in compliance with all applicable laws and governmental
regulations in accordance with the terms of this Agreement;
(c) will not except as set forth in this
Agreement, either directly or indirectly, use or display or authorize others to
use or display, the trademarks, copyrights or proprietary rights of Licensor in
connection with any advertising, assembly, manufacture, distribution, use, sale
or lease of any goods, other than in connection with the manufacture and sale of
the Licensed Products; and
(d) subject to Licensee's best business judgment
Licensee will exercise reasonable efforts to: (i) manufacture sufficient
quantities of the Licensed Product to meet the market demand for same; (ii)
conduct advertising activities to promote the sale of Licensed Product; and
(iii) make any and all arrangements necessary to accomplish such undertakings.
10. MATERIALS.
10.1. Notwithstanding anything contained herein to
the contrary and subject to the terms of this Agreement, all artwork, designs
and computer software embodying the Licensed Property, or any reproduction
thereof, or any packaging or advertising materials, which are designed,
developed and/or created by Licensee hereunder (or any of its sublicensees,
affiliates or subsidiaries), shall be, and remain Licensor's sole and exclusive
property, inclusive of all copyrights and right to
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<PAGE> 52
copyright therein and thereto for the life of the copyright therein; provided
that during the term of this Agreement, Licensee shall have the exclusive right,
license and privilege (without any compensation to Licensor except as provided
in Section 5) to use all such above described materials in connection with its
exploitation, sale and distribution of the Licensed Products.
10.2. Licensor shall make available to Licensee, at
Licensor's actual out of pocket cost, any artwork relating to the Licensed
Property which Licensor owns and which is reasonably available to Licensor for
Licensee's use in connection with the exploitation of the Licensed Property.
11. TRANSLATIONS.
In the event that Licensee shall reasonably require
the text associated with any Licensed Product to be translated into a language
other than English, Licensor shall, upon request, provide to Licensee the text
files and the text that appears in bit map files and printed copies of the
script used for audio components of CD-ROM and cartridge versions only of the
Licensed Product and Licensee shall produce, at its own expense, a translation
text thereof and audio track therefor. Licensor shall then cause a new Master
Disk containing such translation and audio track to be encoded and delivered to
Licensee, at Licensor's own expense with respect to the CD-ROM version only and
at Licensee's expense with respect to the cartridge version, provided, however,
that Licensee shall bear the cost of encoding new Master Disks containing
translations into languages other than French, German, Chinese, Portuguese,
Spanish and Italian. Licensee shall also bear the cost of inserting audio tracks
on Home Video Game cartridges.
12. REPRESENTATIONS AND WARRANTIES.
12.1. Licensor hereby represents and warrants that
this Agreement has been duly authorized, executed and delivered by Licensor;
Licensor has the full power and authority to enter into this Agreement and
perform its obligations hereunder; this Agreement constitutes the valid and
binding obligation of Licensor, enforceable in accordance with its terms; the
making of this Agreement does
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<PAGE> 53
not violate any agreement, right or obligation existing between Licensor and any
other person, firm or corporation; and the Licensed Property, if used pursuant
to the license granted herein, will not infringe upon or violate any rights of
any third party.
12.2. Licensee hereby represents and warrants that
this Agreement has been duly authorized, executed and delivered by Licensee;
Licensee has the full power and authority to enter into and perform its
obligations hereunder; this Agreement constitutes the valid and binding
obligation of Licensee, enforceable in accordance with its terms; the making of
this Agreement does not violate any agreement, right or obligation existing
between Licensee and any other person, firm or corporation; its manufacture,
advertisement, distribution and sale of the Licensed Products will be in
accordance with the terms of this Agreement and will not infringe upon or
violate any rights of any third party. Licensee shall have obtained all
necessary licenses for the sale of the Licensed Products within the Licensed
Territory from Nintendo(R), Sega(R), Sony(R) or any other manufacturer of
Designated Consumer Game Platforms.
13. INDEMNIFICATION.
13.1. Each party agrees to indemnify and hold the
other (including officers, directors, agents and employees of such party or its
subsidiaries, affiliates and sublicensees) harmless against any loss, damage,
expense or cost (including reasonable attorneys' fees) arising out of any claim,
demand or suit or judgment resulting from any breach of any warranty or
representation set forth in Section 12 above. Each party shall promptly inform
the other of any such claim, demand, suit or judgment.
13.2. In connection with any such claim, demand or
suit referred to above, the party so indemnifying (the "Indemnitor") agrees to
defend, contest or otherwise protect the indemnified party (the "Indemnitee")
against any such suit, action, investigation, claim or proceeding at the
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<PAGE> 54
Indemnitor's own cost and expense. The Indemnitee shall have the right, but not
the obligation to participate, at its own expense, in the defense thereof by
counsel of its own choice. In the event that the Indemnitor fails timely to
defend, contest or otherwise protect against any such suit, action,
investigation, claim or proceeding, the Indemnitee shall have the right to
defend, contest or otherwise protect against the same, and, upon ten (10) days'
written notice to the Indemnitor, make any compromise or settlement thereof and
recover the entire cost thereof from the Indemnitor, including without
limitation, reasonable attorneys' fees, disbursements and all reasonable amount
applied as a result of such suit, action, investigation, claim or proceeding or
compromise or settlement thereof. The obligations hereunder shall survive the
termination or expiration of this Agreement.
13.3. Neither Licensor nor Licensee shall be liable
for any incidental, consequential or punitive damages to the other.
14. EVENTS OF DEFAULT AND TERMINATION.
Licensee shall be deemed to be in default of this
Agreement in the event either of the following occurs:
(a) Licensee fails to make any payment or
furnish any statement in accordance herewith, provided that Licensee shall have
been given a first written notice of such default and a period of at least
fifteen (15) days in which to cure such default and, if such default shall not
have been cured within such period, Licensee shall have been given a second
written notice of such default and a further period of at least ten (10) days in
which to cure such default; or
(b) Licensee fails after thirty (30) days'
written notice to Licensee to comply with any other of Licensee's obligations
hereunder.
20
<PAGE> 55
15. EXPIRATION OR TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement, all rights
granted to Licensee herein shall forthwith revert to Licensor with the following
consequences:
(a) All unpaid Royalties shall be due and payable in
accordance with Section 6.1 hereof.
(b) Licensor shall thereafter be free to license others
to use the Licensed Property in connection with the manufacture, advertisement,
distribution and sale of items identical or similar to the Licensed Products in
the Licensed Territory.
(c) In the event of termination or expiration of this
Agreement, other than a termination by Licensor as a result of a material breach
of this Agreement by Licensee, Licensee may continue to sell for a period of one
hundred eighty (180) days after the effective date of termination all approved
copies of the units of the Licensed Product produced prior thereto.
16. CONFIDENTIAL INFORMATION .
Each of the parties shall keep in confidence and not disclose
or make available to any third party, without the written permission of the
other party, the terms of this Agreement and the proprietary information of the
other party made known to it under this Agreement, including without limitation
any information with respect to Proposed Games prior to the date on which they
are First Released and any Master Disk or version thereof. This requirement of
confidentiality shall not apply to information that is (a) in the public domain
through no wrongful act of the disclosing party; (b) rightfully received by the
disclosing party from a third party who is not bound by a restriction of
nondisclosure; (c) already in the disclosing party's possession without
restriction as to disclosure; or (d) is required to be disclosed by applicable
rules and regulations of government agencies or judicial bodies. This obligation
of confidentiality: (i) shall survive termination of this Agreement and (ii)
shall extend to any subcontractor of either party and each party agrees to
obtain from each such subcontractor
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<PAGE> 56
a written agreement to abide by the foregoing confidentiality requirements. Each
of the parties shall be entitled to seek injunctive or equitable relief to
prevent the breach or threatened breach by the other of the provisions of this
Section and to secure its enforcement.
17. NOTICES.
Any notice, consent, approval, request, waiver or statement to
be given, made or provided for under this Agreement shall be in writing
and deemed to have been duly given (i) by its delivery personally or by
express mail; or (ii) five (5) days after its being mailed, air express,
registered or certified, return receipt requested in a United States Post
Office addressed as follows:
TO LICENSEE: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz,
Telephone Number: (212) 951-3107
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 951-3052
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 951-2379
Facsimile Number: (212) 679-6850
TO LICENSOR: WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
22
<PAGE> 57
WITH A COPY TO: Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
WITH A COPY TO: Williams Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
or such other address as either party may designate by notice given as
aforesaid.
18. MISCELLANEOUS .
18.1. This Agreement is personal to Licensee as one party and
Licensor as the other party. Neither this Agreement nor any party's rights under
it may be assigned, in whole or in part, nor may Licensee's or Licensor's rights
or obligations hereunder be delegated, in whole or in part, to any person or
party without the prior written consent of the other party, except that any
party may assign its rights and delegate obligations to any of its direct or
indirect wholly-owned subsidiaries or affiliates or to any person, firm or
corporation owning or acquiring all or substantially all of the stock or assets
of that party, as long as that party remains fully liable for its obligations
hereunder. Any sale of all or substantially all of the assets of Licensor shall
include a requirement for the assumption by the purchaser of all covenants,
obligations and duties undertaken by the seller pursuant to the terms of this
Agreement, including its obligations with respect to Games and the intellectual
property from which
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<PAGE> 58
they are derived. This Agreement shall bind the parties, their successors and
permitted assignees and delegees. Licensor as one party, and Licensee as the
other party, are each liable for their respective obligations under the terms of
this Agreement.
18.2. The entire understanding between the parties hereto
relating to the subject matter hereof is contained herein. This Agreement cannot
be changed, modified, amended or terminated except by an instrument in writing
executed by the parties hereto.
18.3. No waiver, modification or cancellation of any term or
condition of this Agreement shall be effective unless executed in writing by the
party charged therewith. No written waiver shall excuse the performance of any
act other than those specifically referred to therein and no waiver shall be
deemed or construed to be a waiver of such terms or conditions for the future or
any subsequent breach thereof.
18.4. This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between Licensor and
Licensee, and neither Licensor nor Licensee shall have any right to obligate or
bind the other in any manner whatsoever, and nothing herein contained shall give
or is intended to give any rights of any kind to any third persons.
18.5. This Agreement shall be governed by the laws of the
State of Illinois applicable to contracts made and to be wholly performed in the
State of Illinois.
18.6. If any provision of this Agreement is or becomes or is
deemed invalid, illegal or unenforceable under the applicable laws or
regulations of any jurisdiction, either such provision will be deemed amended to
conform to such laws or regulations without materially altering the intention of
the parties or it shall be stricken and the remainder of this Agreement shall
remain in full force and effect.
18.7. This Agreement may be executed in counterparts each of
which shall be deemed an original and when taken together shall be deemed one
and the same document.
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<PAGE> 59
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
[WILLIAMS ELECTRONICS GAMES, INC.]
By:__________________________________
[MIDWAY MANUFACTURING COMPANY]
By:__________________________________
[WILLIAMS ENTERTAINMENT INC.]
By:__________________________________
GT INTERACTIVE SOFTWARE CORP.
By:__________________________________
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<PAGE> 60
SCHEDULE A
[Description of Licensed Property as Set Forth in New Game Option Notice]
<PAGE> 61
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
SCHEDULE B
ROYALTIES
Licensee shall pay to Licensor royalties ("Royalties") computed as
follows: (a) with respect to Licensed Products which are subject to any
Third Party Fees and Royalties, an amount equal to the greater of (i) * of the
actual Net Wholesale Sales Price for each unit sold and not returned, or (ii) *
of Licensee's average Net Wholesale Sales Price for Front-line Home Video Games
designed for play on the same Designated Consumer Game Platform sold at Full
Price and not returned during the relevant Royalty Period; and (b) with respect
to Licensed Products which are not subject to any Third Party Fees and
Royalties, an amount equal to the greater of (i) * of the actual Net Wholesale
Sales Price for each unit sold and not returned, or (ii) * of Licensee's average
Net Wholesale Sales Price for Front-line Home Video Games designed for play on
the same Designated Consumer Game Platform sold at Full Price and not returned
during the relevant Royalty Period. The Royalty computed in accordance with
clauses (a)(ii) and (b)(ii) of the preceding sentence shall apply (A) for a
period of one year from the date of First Release of the Licensed Product by
Licensee or its affiliates in each Marketing Area with respect to Home Video
Games released during the first two (2) years of the Initial Option Period, and
(B) for a period of six (6) months from the date of First Release of the
Licensed Product by Licensee or its affiliates in each Marketing Area with
respect to Home Video Games released after the first two (2) years of the
Initial Option Period. For purposes of this paragraph, a Licensed Product shall
be deemed "Front-line" if it is substantially equivalent to a Home Video Game
which has been released at a premium price by Licensor or its licensees in the
United States. Royalties for Licensed Products which are not deemed Front-line
products shall be calculated as provided in clauses (a)(i) or (b)(i) of the
first sentence of this paragraph. Solely for purposes of computing Royalties in
accordance with the first sentence of this paragraph, Licensed Products shall
not be deemed to be subject to any Third Party Fees and Royalties if they are
subject only to (x) de minimis Third Party Fees and Royalties excluding
developer royalties amounting to less than * in the aggregate of the Net
Wholesale Sales Price, or (y) royalties and other participations payable to
developers for services rendered in connection with the Licensed Product. In no
event shall the Royalty with respect to the sale of a Licensed Product at any
time be less than the Third Party Fees and Royalties (including royalties and
other participations payable to developers) payable with respect to such
Licensed Product.
Notwithstanding the foregoing, if at least twelve (12) months after the
date of the initial release by Licensee (the "First Foreign Sale") of a Licensed
Product subject to Third Party Fees and Royalties in each Marketing Area, the
Net Wholesale Sales Price of such Licensed Product has been reduced from the
original list price to the equivalent of (U.S.) * or less, then Licensee may
elect to pay to Licensor in lieu of the Royalty payable in accordance with the
first sentence of this Schedule B, an alternative royalty (the "Alternative
Royalty") equal to the greater of (i)
<PAGE> 62
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
* of the Net Wholesale Sales Price of such Licensed Product, plus an amount
equal to * of all Third Party Fees and Royalties payable with respect to the
sale of such Licensed Product or (ii) * of the Net Wholesale Sales Price of such
Licensed Product.
If at any time after March 31, 1995 or, with respect to new Designated
Consumer Game Platforms which are introduced subsequent to the date hereof, the
date on which such new Designated Consumer Game Platform is introduced, there
shall occur (a) a reduction in the standard platform royalties payable by
Licensee to Nintendo(R), Sega(R), Sony(R), or any other Designated Consumer Game
Platform manufacturer with respect to the Licensed Products, or (b) a reduction
in landed unit manufacturing costs payable by Licensee to any Game manufacturer,
including, without limitation, any such reductions in platform royalties or unit
manufacturing costs which may result from reaching applicable volume discount
levels established by the Designated Consumer Game Platform manufacturer or
other Game manufacturer, then, in either or both such cases, Licensee shall pay
to Licensor, in addition to any Royalty otherwise payable hereunder, an amount
equal to * of the amount by which such platform royalty and landed manufacturing
costs have been reduced for each unit of Licensed Product sold by Licensee. Such
additional amounts shall be payable by Licensee to Licensor at the time and in
the manner specified in Section 6 above. Notwithstanding the foregoing, however,
Licensee shall not be required to pay to Licensor any such additional amounts
based on reductions in platform royalties and landed unit manufacturing costs
payable in respect of Licensed Products for the Sega Saturn and Sony PSX
platforms unless and until such platform royalties and landed unit manufacturing
costs shall fall below * Dollars per unit, and, in such cases, Licensee shall
only be required to pay * of the reduction in costs below * Dollars, as provided
above.
All payments of Royalties by Licensee to Licensor hereunder shall
either be paid from Licensee's office in the United States or from Licensee's
office in the United Kingdom. Licensee shall be solely responsible for payment
of, and shall timely file and remit, any foreign taxes (including any foreign
taxes on Royalties required to be withheld at the source) related to this
Agreement. Licensee shall promptly assist Licensor as necessary in obtaining a
United Kingdom royalty tax withholding exemption, or with any other
documentation required concerning Licensee's operations outside the United
States. If taxes on Royalties payable hereunder imposed by any foreign
jurisdiction are required to be withheld at the source, Licensee shall remit
such Royalties net of any withholding taxes together with all appropriate
documentation and reporting forms.
The "Net Wholesale Sales Price" of Licensed Products shall be the price
invoiced to customers, less any price discounts, rebates or credits granted at
the time of sale and taxes invoiced to customers (including VAT). No deduction
shall be made for bad debts or other uncollected amounts, advertising
allowances, including cooperative advertising, or any other costs incurred in
manufacturing, selling or distributing the Licensed Products.
2
<PAGE> 63
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
ADJUSTMENTS TO ROYALTIES
Anything above to the contrary notwithstanding:
1. In cases where Licensed Products are sold by non-affiliated third
party sublicensees under sublicenses granted by Licensee in accordance with the
provisions of Section 2.1 above, Royalties shall be payable by Licensee to
Licensor hereunder equal to the sum of (a) an amount equal to all Third Party
Fees and Royalties payable with respect to the sale of such Licensed Products,
plus (b) * of the proceeds received by Licensee from such sublicensee after
deducting (i) a fee to Licensee equal to * of such net proceeds, (ii) an amount
equal to all Third Party Fees and Royalties, and, (iii) in the case of
non-affiliated third party sublicensees to whom Licensee supplies the Licensed
Product, Licensee's direct manufacturing and shipping costs. In no event shall
the Royalty be less than such Third Party Fees and Royalties.
2. If Licensee's Weighted Average Gross Profits as a percentage of
sales of Accepted Games under this Agreement and all Other Home Video Game
Distribution and License Agreements other than Games with respect to which an
Alternative Royalty is payable, for the twelve (12) months ending June 30, 1997
are less than Licensee's Weighted Average Gross Profits as a percentage of sales
of Accepted Games under this Agreement and all Other Home Video Game
Distribution and License Agreements other than Games with respect to which an
Alternative Royalty is payable, for the twelve (12) months ending December 31,
2000, then the Royalties otherwise payable by Licensee under this Agreement and
all Other Home Video Game Distribution and License Agreements for the first
Renewal Option Year (ending June 30, 2002), if any, shall be increased, as a
percentage of Net Wholesale Sales Price, for each unit sold and not returned, by
an amount equal to * of the difference. If Licensee's Weighted Average Gross
Profits as a percentage of sales of Accepted Games under this Agreement and all
Other Home Video Game Distribution and License Agreements during the 12 months
ended December 31, 2001, or any subsequent 12-month period during the Renewal
Option Period, shall be greater or less than Licensee's Weighted Average Gross
Profits as a percentage of sales of Accepted Games during the preceding 12-month
period, then the Royalties otherwise payable by Licensee under this Agreement
and all Other Home Video Game Distribution and License Agreements shall be
similarly increased or decreased for the next Renewal Option Year by an amount
equal to * of the difference, but in no event shall Royalties payable by
Licensor under this Agreement and all Other Home Video Game Distribution and
License Agreements be reduced at any time to an amount less than the amounts set
forth in the first sentence of this Schedule B. For purposes hereof, Licensee's
"Weighted Average Gross Profits" with respect
3
<PAGE> 64
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to the sale of Accepted Games under this Agreement and all Other Home Video Game
License Agreements shall mean the weighted average, computed on a platform by
platform basis, of (a) aggregate sales of Accepted Games other than Games with
respect to which an Alternative Royalty is payable, less (b) landed
manufacturing costs and platform royalties paid or payable with respect to such
Accepted Games. Any amounts actually paid or payable to Licensor by Licensee as
additional Royalties hereunder by reason of a reduction in platform royalties or
landed unit manufacturing costs, as provided above (including without limitation
any such amounts paid or payable by reason of a reduction in platform royalties
or landed unit manufacturing costs of Licensed Products for the Sega Saturn or
Sony PSX platforms below * Dollars per unit), shall be added back in determining
Weighted Average Gross Profits hereunder. For example, if Licensee's Weighted
Average Gross Profits as a percentage of sales of Accepted Games during the
twelve (12) months ended by June 30, 1997 are *, and Licensee's Weighted Average
Gross Profits during the twelve months ending December 31, 2000 are * of sales
of Accepted Games, then the Royalty otherwise payable by Licensee to Licensor as
a percentage of Net Wholesale Sales Price during the first Renewal Option Year
(ending June 30, 2002) shall be increased by * of the difference, or *.
3. If the Licensed Product shall incorporate Computer Software in the
form of a cartridge, as opposed to a CD-ROM disk or other device containing the
computer game code (a "Cartridge-Based Product"), Licensee may elect to adjust
the Royalties otherwise payable with respect to sales of such Cartridge-Based
Product in a Marketing Area as follows: The "Cartridge Margin" for such
Cartridge-Based Product shall be calculated by subtracting from * the sum of (i)
the applicable percentage Royalty with respect to sales of such Cartridge-Based
Product, determined in accordance with the first sentence of this Schedule B
above, and (ii) the landed unit cost of such Cartridge-Based Product, stated as
a percentage of the Net Wholesale Sales Price therefor. If the Cartridge Margin
is less than the applicable percentage Royalty otherwise payable on sales of
such Cartridge-Based Products, the applicable percentage Royalty shall be
reduced by an amount equal to * of the difference between such percentage
Royalty and the Cartridge Margin, provided, however, that in no event shall the
Royalty payable with respect to sales of Cartridge-Based Products be less than
the Third Party Fees and Royalties payable with respect thereto.
For example, if the Royalty percentage rate determined in
accordance with the first sentence of this Schedule B is * for a Cartridge-Based
Product having a Net Wholesale Sales Price in a given Marketing Area of *
Dollars and a landed unit cost of * Dollars (i.e., * of Net Wholesale Sales
Price), the Cartridge Margin for such Cartridge-Based Product would be *. Since
the Cartridge Margin * is less than the applicable percentage Royalty *, the
applicable percentage Royalty shall be reduced by one-half of the difference, or
*, such that the adjusted Royalty percentage payable on sales of such
Cartridge-Based Product in the Marketing Area will be *.
4
<PAGE> 65
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
RECOUPMENT.
Licensee shall be entitled to apply the aggregate amount by which (a)
Royalties earned and otherwise payable under this Agreement exceed (b) * of the
amount of any Third Party Fees and Royalties payable by Licensor to parties
having rights with respect to the sale of Licensed Products (the "Recoupable
Amount"), to recoup the * Dollar Guaranteed Advance Royalty paid by Licensee to
WMS Industries Inc. pursuant to Section 3 of the GTIS Master Agreement, until
such Recoupable Amount together with the Recoupable Amounts actually paid by
Licensee under any other Home Video Game Distribution and License Agreement
entered into by Licensee pursuant to the GTIS Master Agreement ("Other Home
Video Game Distribution and License Agreements") equal * Dollars; provided,
however, that (i) to the extent that the aggregate of all Recoupable Amounts
applied or accrued under this Agreement and the Other Home Video Game
Distribution and License Agreements between March 31, 1995 and March 31, 1996
exceeds the installment of the Guaranteed Advance Royalty paid on March 31,
1995, such excess shall be paid to Licensor and the licensors under the Other
Home Video Game Distribution and License Agreements, in accordance with their
respective interests, and applied in reduction of the installment of the
Guaranteed Advance Royalty payable under the GTIS Master Agreement on March 31,
1997, up to a maximum reduction of * Dollars, and the balance of such excess, if
any, shall be applied first in reduction of the installment of the Guaranteed
Advance Royalty payable on March 31, 1996, and then in reduction of the
installment of the Guaranteed Advance Royalty payable on March 31, 1997, and
(ii) to the extent that the aggregate of all Recoupable Amounts applied or
accrued under this Agreement and all Other Home Video Game Distribution and
License Agreements between March 31, 1995 and March 31, 1997 exceed the
unrecouped portion of the installments of the Guaranteed Advance Royalty paid on
March 31, 1995 and March 31, 1996, the excess shall be paid to Licensor and the
licensors under the Other Home Video Game Distribution and License Agreements,
in accordance with their respective interests, and applied in reduction of the
installment of the Guaranteed Advance Royalty payable on March 31, 1997.
LIMITATIONS ON FREE AND PROMOTIONAL GOODS; CLOSE-OUTS.
Licensee shall be permitted to distribute free and promotional goods
without the payment of any Royalties or other royalties thereon, subject to the
provisions of Section 1 above and within the following territorial and quantity
limits:
United Kingdom,
Germany, Scandinavia,
Benelux, Italy, Spain, and
Australia: * units per country
Other Countries: * units per country
5
<PAGE> 66
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
No Royalties shall be payable by Licensee to Licensor in excess of any
Third Party Fees and Royalties in connection with the sale by Licensee of
"close-outs." For purposes hereof, "close-outs" shall mean any Licensed Products
that are sold for a price no greater than the sum of direct manufacturing and
shipping costs plus platform royalties and any Third Party Fees and Royalties.
6
<PAGE> 67
SCHEDULE C
MARKETING AREAS
The following countries or related groups of countries shall each be
deemed a single Marketing Area:
United Kingdom and Ireland*
France*
Germany, Switzerland and Austria*
Benelux*
Spain and Portugal*
Italy*
Scandinavia
Former Eastern Bloc and the Baltic States (Latvia, Lithuania, Estonia)
Russia and Rest of the CIS
Rest of Europe (including Turkey)
Africa
Middle East
India and Pakistan
China (PRC excluding Hong Kong and Macao)*
Rest of Asia
Australia and New Zealand
Brazil
Rest of South and Central America and the Caribbean
- ---------------------
* Denotes Key Marketing Area
<PAGE> 68
EXHIBIT 10.16
STOCK PURCHASE AGREEMENT
BETWEEN
WARNER COMMUNICATIONS INC., SELLER
AND
WILLIAMS INTERACTIVE INC., BUYER
February 23, 1996
<PAGE> 1
EXHIBIT 10.13
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A
CONFIDENTIAL TREATMENT REQUEST MADE PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
AMENDMENT TO
GTIS MASTER OPTION AND LICENSE AGREEMENT
(HOME VIDEO GAMES)
This amendment agreement (the "First Amendment") is made and entered
into the 27th day of March, 1996, by and among WMS INDUSTRIES INC. ("WMS"),
WILLIAMS ELECTRONICS GAMES, INC. ("WEG"), MIDWAY MANUFACTURING COMPANY
("Midway") and WILLIAMS ENTERTAINMENT INC. ("WEI"), each being Delaware
corporations with offices at 3401 North California Avenue, Chicago, Illinois
60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware corporation with
offices at 16 East 40th Street, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, on March 31, 1995 WMS, WEG, Midway, WEI and GTIS entered into
the GTIS Master Option and License Agreement (Home Video Games) (the "GTIS
Master Home Video Agreement") pursuant to which the WMS Group granted to GTIS
certain rights with respect to the manufacture, distribution and sale of
versions of Games for use on Designated Consumer Game Platforms; and
WHEREAS, WMS, WEG, Midway, WEI and GTIS desire to amend the GTIS
Master Home Video Agreement as provided for in this First Amendment.
NOW, THEREFORE, in consideration of the premises and mutual covenants
<PAGE> 2
contained herein and other good and valuable consideration, the parties hereto
agree as follows:
1. Capitalized terms used, but not defined or revised herein,
shall have the meaning ascribed to such terms in the GTIS Master Home Video
Agreement or the form of Home Video Game Distribution and License Agreement
annexed as Exhibit A to the GTIS Master Home Video Agreement.
2. This First Amendment shall become effective on the date WII
closes the acquisition of AGC pursuant to the Stock Purchase Agreement. WMS
will give GTIS prompt written notice of such closing. If such acquisition does
not close by June 30, 1996, this First Amendment shall be null and void and of
no force and effect. The capitalized terms used in this paragraph are defined
in paragraph 3 of this First Amendment. GTIS' rights, if any, under the GTIS
Master Home Video Agreement and form of Home Video Game Distribution and
License Agreement with respect to any games acquired pursuant to the Stock
Purchase Agreement, and any subsequent sequels, adaptations or other versions
thereof, shall be subject to all third party rights pursuant to agreements made
by the Atari Group existing at the Effective Date. All such rights, to the
extent known by WMS, are set forth on a schedule to a letter dated the date
hereof and signed by WMS and GTIS.
3. Section 1 of the GTIS Master Home Video Game Agreement shall
be amended to add or replace definitions as follows:
1.1(a) "AGC" shall mean Atari Games Corporation, a California
corporation, which is currently a wholly-owned subsidiary of Warner
Communications Inc., and which is to be sold to WII pursuant to the
Stock Purchase Agreement.
2
<PAGE> 3
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
1.1(b) "Atari Advance" shall mean the aggregate * Dollars
advance by GTIS to WMS pursuant to the Atari Agreements.
1.1(c) "Atari Agreements" shall mean the Master Option and
License Agreement for Atari PC Games and the Master Option and License
Agreement for Atari Home Video Games entered into by WMS and GTIS
dated March 27, 1996."
1.1(d) "Atari Game" shall mean (i) any game developed or
acquired by or on behalf of AGC or entities which were affiliates of
AGC prior to AGC being acquired by WII pursuant to the listed on
Schedule 1 to this First Amendment, and any adaptations of such games
for other platforms, and (ii) any game currently in development or
developed subsequent to such acquisition by or on behalf of AGC or a
member of the Atari Group, or developed, in whole or in substantial
part, by any person or persons who were employees of AGC or a member
of the Atari Group as of the closing date of such acquisition and who
are employees of any member of the WMS Group at the time of such
development, and any adaptations of such games for other platforms.
For purposes of this Section, employees shall be deemed to include
independent contractors who work a substantial portion of their time
at the
3
<PAGE> 4
facilities of any member of the WMS Group.
1.1(e) "Atari Group" shall mean AGC, or any entity, a
majority of whose capital stock is owned, directly or indirectly, by
AGC or with respect to which during the term of this Agreement, AGC,
directly or indirectly, has the legal power, without the consent of
any third party, to direct the acquisition of rights to or
exploitation of Games on Designated Consumer Game Platforms.
1.1(f) "Business Day" shall mean any day other than a
Saturday, Sunday or Federal holiday.
1.4(a) "Early Termination Event" shall mean AGC ceasing to
be at least 50.1% owned by a member of the WMS Group, or the Atari
Group transferring a majority of its intellectual property assets and
licenses to a person or entity who is not a member of the WMS Group.
1.7 "Game" shall mean any home video game designed for
play on a specific Designated Consumer Game Platform which has been
released for commercial shipment in the normal course of business by
any member of the WMS Group or by any licensee of the WMS Group on
such Designated Consumer Game Platform for sale in commercial
quantities in the United States in the normal course of business, but
excluding (i) any such home video game with respect to which the WMS
Group shall, prior to the date
4
<PAGE> 5
hereof, have granted rights (or any option, right of first refusal or
negotiation or other ability to obtain rights which may be
subsequently exercised) to any third party, including without
limitation any sublicensee of the WMS Group, to manufacture,
distribute or sell such home video game on such specific Designated
Consumer Game Platform within the Licensed Territory, including any
renewals or extensions thereof resulting from the exercise of
previously granted rights; and (ii) any Atari Game. Set forth on
Schedule 1 annexed hereto is a list of all material agreements
pursuant to which the WMS Group, other than the Atari Group, has,
prior to March 31, 1995, granted rights to manufacture, distribute and
sell such home video games on Designated Consumer Game Platforms
within the Licensed Territory, but excluding any agreements pursuant
to which the WMS Group has granted rights to home video games based on
games which have been released for commercial shipment prior to March
31, 1995 in the normal course of business by the WMS Group or by any
sublicensee of the WMS Group as coin-operated video or pinball games
or on any dedicated home video game platform or agreements pursuant to
which the WMS Group has granted rights to any derivative or sequel to
any such released coin-operated video, pinball or home video game. A
home video
5
<PAGE> 6
game shall be deemed a separate Game with reference to the specific
Designated Consumer Game Platform on which it has been designed for
play.
1.11 "Initial Option Period" shall mean the period
commencing on the date hereof and ending on June 30, 2001; provided,
however, if the Atari Advance has not been fully recouped by June 30,
2001, the Initial Option Period shall be extended to a date which is
the earlier to occur of (i) June 30, 2003, or (ii) the date on which
the Atari Advance is fully recouped. In determining whether the Atari
Advance has been fully recouped for all purposes under this Agreement,
amounts owed by GTIS but not yet reported, paid or credited to the
Licensor shall be deemed recouped by GTIS. The Initial Option Period
may be further extended under the following circumstances. If (a) an
Early Termination Event occurs prior to June 30, 2000, and (b) GTIS
shall not have fully recouped the Atari Advance by the end of the
Initial Option Period as extended pursuant to the first sentence of
this Section 1.11 (as such date may be further extended from time to
time by future amendments or extensions other than the extensions next
referred to in this sentence), then the Initial Option Period shall be
further extended to a date which is the earlier to occur of (x) the
date on which the Atari Advance is
6
<PAGE> 7
fully recouped or (y) the date, to the nearest calendar quarter end,
determined by adding to the date the Initial Option Period as extended
would have expired, the number of days between the occurrence of the
Early Termination Event and June 30, 2001.
1.23(a) "Pirate" shall mean an individual or entity which
counterfeits a game or sells counterfeit games.
1.27(a) "Stock Purchase Agreement" shall mean the Stock
Purchase Agreement dated February 23, 1996 between Warner
Communications Inc. and WII pursuant to which Warner Communications
Inc. has agreed to sell and WII has agreed to purchase all of the
outstanding stock of AGC.
1.27(b) "WII" shall mean Williams Interactive Inc., a
wholly -owned subsidiary of WMS.
4. The GTIS Master Home Video Agreement shall be amended to add
a new Section 2.8 which shall read as follows:
Royalties payable to WMS pursuant to Schedule B of the Home
Video Game Distribution and License Agreement are measured by the
wholesale price of Licensed Product. Accordingly, reasonably in
advance of WMS' decision to enter into a developer contract and
reasonably in advance of GTIS' initial release of the Licensed
Product, GTIS shall advise WMS, at WMS' request, of GTIS' expected
pricing strategy and the
7
<PAGE> 8
reasons therefor. Nothing herein shall be deemed to restrict GTIS'
freedom in selecting wholesale sales prices it considers appropriate,
which shall be in GTIS' sole discretion.
5. The GTIS Master Home Video Agreement shall be amended
to add a new Section 2.9 which shall read as follows:
If, under Section 2.1 of any Home Video Game Distribution
and License Agreement entered into under this Agreement, Licensor
has granted written approval (which shall not be unreasonably
withheld) to Licensee of a specific sublicensee for the Licensed
Property, such approval shall apply to the sublicensing by that
sublicensee of all Licensed Properties licensed to Licensee under Home
Video Game Distribution and License Agreements entered into under this
Agreement, subject to the following: (i) the sublicense agreements
shall contain provisions with respect to quality of Licensed Product,
trademarks, copyrights, materials, other intellectual property rights,
rights of additional sublicensing or assignment, termination rights,
confidentiality, accounting, auditing, reporting and payment
procedures in form agreed to by GTIS and WMS, and the form as so
agreed to may be used by all approved sublicensees described in clause
(iii) below; provided that if such form is not so used, any other form
to be used shall be subject to prior approval as
8
<PAGE> 9
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
provided in this subsection (i); (ii) no such blanket approval shall
be deemed given with respect to Licensed Properties as to which
approval requirements imposed by third parties, such as the NFL and
NBA, apply; (iii) if the sublicense is for a Marketing Area other than
those designated as Key Marketing Areas in such Home Video Game
Distribution and License Agreement and if the expected sales volume in
such Marketing Area, in GTIS' good faith judgment, is an average of *
units or less per SKU per year, Licensee will not be required to
obtain Licensor's prior written approval of the terms of such license
but Licensee will be required to provide a copy of each sublicense to
Licensor within ten (10) Business Days after GTIS enters into such
sublicense; and (iv) if the Marketing Area is designated as a Key
Marketing Area or if, in GTIS' good faith judgment, the expected sales
volume for such Marketing Area is more than an average of * units per
SKU per year, Licensee will be required to obtain Licensor's prior
written approval, which Licensor will not unreasonably withhold, of
the terms of a sublicense for such Marketing Area even if the identity
of the sublicensee has been previously approved; provided, however, if
a sublicense is for multiple platforms and multiple games, the
approval of the sublicense will be deemed to be
9
<PAGE> 10
approval for all Games distributed under that sublicense (subject to
clause (ii)). Anything to the contrary notwithstanding, (x) if a
previously approved sublicensee becomes an Exporter or a Pirate,
Licensee will immediately upon becoming aware thereof notify Licensor
of the identity of such Exporter or Pirate and as soon as practicable
terminate the sublicense upon request by Licensor, and (y) Licensor
and Licensee will review every two years the identity of sublicensees,
and those sublicensees who previously received blanket approval as
provided in the first sentence of this Section and who are no longer
considered acceptable by Licensor, in the exercise of Licensor's
reasonable judgment, will no longer have such blanket approval and
will be subject to Licensor's prior approval with respect to all
future sublicenses, in accordance with the approval procedures
set forth above. Licensee shall use all reasonable efforts to cause
each agreement with its sublicensees to permit Licensee to terminate
such agreement immediately if such sublicensee shall be or become an
Exporter or a Pirate.
6. Section 7 of the GTIS Master Home Video Agreement and
Section 16 of the form of Home Video Game Distribution Agreement annexed as
Exhibit A thereto shall be amended to add at the end thereof, the following:
With respect to this Agreement and the Home Video Game
Distribution and License Agreements entered into in connection
10
<PAGE> 11
herewith, each of WMS Group and GTIS agree to use reasonable efforts
to ensure that either of them may disclose the proprietary information
of the other (including, without limitation, the software source code
and tools relating to any Game), only to those persons within their
organizations who have a need to know such information in order to
perform its obligations under this Agreement and the Home Video Game
Distribution and License Agreements and any such disclosure shall be
limited to the information which needs to be known. Further, neither
the WMS Group nor GTIS shall use any such proprietary information for
purposes other than the performance of its obligations under this
Agreement and the Home Video Game Distribution and License Agreements.
7. Paragraph 12.1 of the GTIS Master Home Video Agreement shall
be amended to delete the parenthetical language "(including its sublicenses and
affiliates as one party)" in the last sentence of such Section and by replacing
the words "as long as that party remains fully liable for its obligations
hereunder" at the end of the second sentence of such Section 12.1 with the
words "as long as both the assignee and the assignor remain fully liable for
assignor's obligations hereunder."
8. Section 1 of the form of Home Video Game Distribution and
License Agreement, annexed as Exhibit A to the GTIS Master Home Video
Agreement, shall be amended by adding at the end thereof the following:
11
<PAGE> 12
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Capitalized terms used, but not defined herein, shall have the
meaning ascribed to such terms in the GTIS Master Agreement.
9. Schedule B to the Home Video Game Distribution and License
Agreement shall be amended as follows:
9.1. The paragraph under the heading "Recoupment"
shall be amended to replace the words "earned and otherwise payable" on the
first and second lines of such paragraph by the words "applied or accrued" and
to replace the words "actually paid" in line seven of such paragraph by the
words "applied or accrued."
9.2. A new paragraph shall be added at the end of
the last paragraph under the heading "Recoupment" on Schedule B to the Home
Video Game Distribution and License Agreement which shall read as follows:
"If the Atari Advance has not been fully recouped by GTIS on
the date on which the total of recoupable amounts under this
Agreement and Other Home Video Game Distribution and License
Agreements equals the * Dollars Minimum Guaranteed Royalty and
Guaranteed Advance Royalty paid by the Licensee under the GTIS Master
Agreement, then royalties otherwise payable under this Agreement shall
be recoupable against the Atari Advance in the manner set forth in
this Schedule B until the Atari Advance shall be fully recouped. In
determining whether the Atari Advance
12
<PAGE> 13
has been fully recouped, amounts owed by GTIS but not yet reported,
paid or credited to the Licensor shall be deemed recouped by
GTIS. If in respect of any royalty payment period royalties are
available for recoupment of the Atari Advance under any one or more of
the distribution and license agreements entered into under the Atari
Agreements, the GTIS Master Agreement and the GTIS Master Option and
License Agreement dated December 28, 1994, as amended (the "GTIS Master
PC Agreement"), the Atari Advance shall be recouped from royalties in
the following order of priority: (i) royalties payable under
distribution and license agreements entered into under the Atari
Agreements; (ii) royalties payable under distribution and license
agreements entered into under the GTIS Master PC Agreement; and (iii)
royalties payable under distribution and license agreements entered
into under the GTIS Master Agreement.
10. WMS hereby confirms to GTIS that it is WMS' present
intention that it will maintain a separate Atari Group games design
organization and that any member of the design teams working for that
organization will work solely on the creation of Atari Games. WMS further
confirms that it will use all reasonable efforts to maintain such separate
organization.
11. In the event of conflicts between the provisions of the GTIS
Master Home Video Agreement and the Home Video Game Distribution and License
Agreement, the
13
<PAGE> 14
provisions of the GTIS Master Home Video Agreement shall prevail.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
WMS INDUSTRIES INC
By: /s/ Neil D. Nicastro
-------------------------------------
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Neil D. Nicastro
-------------------------------------
MIDWAY MANUFACTURING COMPANY
By: /s/ Neil D. Nicastro
-------------------------------------
WILLIAMS ENTERTAINMENT INC.
By: /s/ Byron Cook
-------------------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Ronald Chaimowitz
-------------------------------------
14
<PAGE> 1
EXHIBIT 10.14
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A
CONFIDENTIAL TREATMENT REQUEST MADE PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
MASTER OPTION AND LICENSE AGREEMENT
FOR ATARI HOME VIDEO GAMES
This Master Option and License Agreement ("Agreement") is made and entered
into the 27th day of March, 1996, by and between WMS INDUSTRIES INC. ("WMS"), a
Delaware corporation with offices at 3401 North California Avenue, Chicago,
Illinois 60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware
corporation with offices at 16 East 40th Street, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, Williams Interactive Inc. ("WII"), a wholly-owned subsidiary of
WMS, has entered into an agreement with Warner Communications Inc. for the
acquisition of the stock of Atari Games Corporation, a California corporation
("AGC"); and
WHEREAS, AGC is engaged in the business of designing, manufacturing and
selling coin-operated amusement games and software products for dedicated home
video game systems and multipurpose home computers; and
WHEREAS, GTIS is engaged in the business of publishing, manufacturing and
distributing entertainment software products; and
<PAGE> 2
WHEREAS, GTIS desires to acquire certain rights from WMS and AGC and other
subsidiaries of AGC with respect to Games, as such term is defined herein, and
WMS desires to grant and to cause AGC to grant such rights to GTIS;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1 "Accepted Game" shall mean any Game with respect to which GTIS has
received a license or has exercised an option to acquire a license provided for
in Section 2 hereof.
1.2 "AGC" shall have the meaning ascribed in the first recital of this
Agreement.
1.3 "Alternative Royalty" shall have the meaning ascribed in Schedule "B" of
the Atari Home Video Game Distribution and License Agreement.
1.4 "Atari Game" shall mean (i) any game developed or acquired by or on behalf
of AGC or entities which were affiliates of AGC prior to AGC being acquired by
WII pursuant to the Stock Purchase Agreement, including, without limitation,
those games listed on Schedule 1 hereto, and any adaptations of such games for
other platforms, and (ii) any game currently in development or developed
subsequent to such acquisition by or on behalf of AGC or a member of the Atari
Group, or developed, in whole or in substantial part, by any person or persons
who were employees of AGC or a member of the Atari Group as of the closing date
of such acquisition and who are employees of any member of the WMS Group at the
time of such development, and any adaptations of such games for other
platforms. For purposes of this
2
<PAGE> 3
Section, employees shall be deemed to include independent contractors who work
a substantial portion of their time at the facilities of any member of the WMS
Group.
1.5 "Atari Group" shall mean AGC, or any entity, a majority of whose capital
stock is owned directly or indirectly by AGC or with respect to which during
the term of this Agreement, AGC, directly or indirectly, has the legal power,
without the consent of any third party, to direct the acquisition of rights to
or exploitation of Games on Designated Consumer Game Platforms.
1.6 "Atari Home Video Game Distribution and License Agreement" shall mean an
agreement for the license of an Accepted Game for use solely on a specific
Designated Consumer Game Platform in the form of Exhibit A annexed hereto, as
the same may be amended from time to time by written agreement of the parties
thereto.
1.7 "Delivery Date" shall have the meaning ascribed in Section 2.7 hereof.
1.8 "Designated Consumer Game Platforms" shall mean any of the Sony(R),
Nintendo(R) or Sega(R) dedicated home video game hardware platforms or other
dedicated home video game hardware platforms having a microprocessor with a 32
bit or higher capacity (excluding SNES and Sega Genesis), on which Game software
can be played utilizing cartridges, CD-ROM disks or other devices which may
hereafter replace or supplement cartridges or CD-ROM disks in operating systems
now known or hereafter developed for use on dedicated home video game hardware
platforms. Designated Consumer Game Platforms shall not, for purposes of this
Agreement, include (a) any of the Atari Jaguar(R) system, the 3D-O(R) system, or
their respective successors (including any enhancements, improvements or
updates), except only to
3
<PAGE> 4
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
the extent that the Atari Group shall itself (and not through any licensee or
sublicensee) actually release for commercial shipment in the normal course of
business any Games on such hardware platforms in the United States, or any
hand held games, or any multipurpose home or personal computer system or any
electronic distribution or on-line interactive computer game systems or
platforms.
1.9 "Early Termination Event" shall mean AGC ceasing to be at least 50.1%
owned by a member of the WMS Group, or the Atari Group transferring a majority
of its intellectual property assets and licenses to a person or entity who is
not a member of the WMS Group.
1.10 "Effective Date" shall mean the date WII closes the acquisition of AGC
pursuant to the Stock Purchase Agreement.
1.11 "First Release" or "First Released" shall mean the date of the first
commercial shipment of a Game in the normal course of business (and not merely
for test purposes).
1.12 "Full Price" shall mean the price of Games which have not been marked down
or discounted by more than * from the original list price of the Game.
Markdowns or discounts shall include rebates or credits (other than the
cooperative advertising allowances which are unrelated to price protection)
granted within one year of the date of the First Release of the Game).
1.13 "Game" shall mean any home video game designed for play on a specific
Designated Consumer Game Platform which is an Atari Game and which has been
4
<PAGE> 5
released for commercial shipment in the normal course of business by (i) any
member of the WMS Group, or (ii) by any licensee of the WMS Group on such
Designated Consumer Game Platform in each case for sale in commercial
quantities in the United States in the normal course of business, but excluding
any such home video game with respect to which the Atari Group shall, prior to
the date hereof, have granted rights (or any option, right of first refusal or
negotiation or other ability to obtain rights which may be subsequently
exercised) to any third party, including without limitation any sublicensee of
the Atari Group, to manufacture, distribute or sell such home video game on
such specific Designated Consumer Game Platform within the Licensed Territory,
including any renewals or extensions thereof resulting from the exercise of
previously granted rights. For purposes of this section, employees shall be
deemed to include independent contractors who work a substantial portion of
their time at the facilities of any member of the WMS Group. Set forth on a
schedule to a letter dated the date hereof and signed by WMS and GTIS is a list
of all material agreements known to WMS pursuant to which the Atari Group has,
prior to the date hereof, granted rights to manufacture, distribute and sell
such home video games on Designated Consumer Game Platforms within the Licensed
Territory, but excluding any agreements pursuant to which the Atari Group has
granted rights to home video games based on games which have heretofore been
released for commercial shipment in the normal course of business by the Atari
Group or by any sublicensee of the Atari Group as coin-operated video or
pinball games or on any dedicated home video game platform or agreements
pursuant to which the Atari Group has granted rights to any derivative or
sequel to any such previously released coin-operated video, pinball or home
video game. A home video game shall
5
<PAGE> 6
be deemed a separate Game with reference to the specific Designated Consumer
Game Platform on which it has been designed for play.
1.14 "Game Version", or version of a Game, or any similar phrase, whether or
not capitalized, shall mean the version of a Game designed to play on a
specific Designated Consumer Platform.
1.15 "GTIS" shall mean GTIS or any affiliate of GTIS to whom any rights to
exploit any Games granted hereunder may be sublicensed. An affiliate of GTIS
shall refer to an entity, a majority of whose capital stock is owned directly
or indirectly by GTIS or with respect to which during the term of this
Agreement, GTIS, directly or indirectly, has the legal power without the
consent of any third party to direct the manufacture, distribution or sale of
Games.
1.16 "GTIS Master Home Video Agreement" shall mean the GTIS Master Option and
License Agreement (Home Video Games) dated March 31, 1995, as amended, among
WMS, Williams Electronics Games, Inc., Midway Manufacturing Company, Williams
Entertainment Inc. and GTIS.
1.17 "GTIS Master PC Agreement" shall mean the GTIS Master Option and License
Agreement dated December 28, 1994, as amended, among WMS, Williams Electronics
Games, Inc., Midway Manufacturing Company, Williams Entertainment Inc. and
GTIS.
1.18 "Licensed Territory" shall have the meaning ascribed in Section 3.1 of
the Atari Home Video Game Distribution and License Agreement.
6
<PAGE> 7
1.19 "Marketing Area" shall have the meaning ascribed in Section 3.3 of the
Atari Home Video Game Distribution and License Agreement.
1.20 "Master Atari PC Agreement" shall mean the Master Option and License
Agreement for Atari PC Games being executed simultaneously herewith.
1.21 "Master Disk" shall mean a CD-ROM disk or floppy disk, or any other stand
alone device which may hereafter replace or supplant CD-ROM or floppy disks,
containing the source code utilized by the Atari Group for an Accepted Game
released or intended to be released in the United States.
1.22 "Minimum Guaranteed Advance Royalty" shall have the meaning ascribed in
Section 3 hereof.
1.23 "New Game Acceptance Notice" shall have the meaning ascribed in Section 2.3
hereof.
1.24 "New Game Option Notice" shall have the meaning ascribed in Section 2.3
hereof.
1.25 "New Game Option Notice Date" shall have the meaning ascribed in Section
2.3 hereof.
1.26 "North America" shall mean (a) the United States of America, its
territories, possessions, and United States military installations worldwide,
(b) Canada and (c) Mexico.
1.27 "Notice of Election" shall have the meaning ascribed in Section 9 hereof.
7
<PAGE> 8
1.28 "Option Period" shall mean the period commencing on the Effective Date and
ending on the earlier to occur of (i) the expiration date, including any
extensions thereof, of GTIS' first option to acquire licenses pursuant to
Section 2.1 of the GTIS Master Home Video Agreement, or (ii) the first date
after the Effective Date on which an Early Termination Event occurs.
1.29 "Pirate" shall mean an individual or entity which counterfeits a game or
sells counterfeit games.
1.30 "Proposed Game" shall have the meaning ascribed in Section 2.3 hereof.
1.31 "Renewal Option Period" shall have the meaning ascribed in Section 2.1
hereof.
1.32 "Renewal Option Year" shall have the meaning ascribed in Section 2.1
hereof.
1.33 "Stock Purchase Agreement" shall mean the Stock Purchase Agreement dated
February 23, 1996 between Warner Communications Inc. and WII pursuant to which
Warner Communications Inc. has agreed to sell and WII has agreed to purchase
all of the outstanding stock of AGC.
1.34 "Weighted Average Gross Profits" shall have the meaning ascribed in
Schedule "B" of the Atari Home Video Game Distribution and License Agreement.
1.35 "WII" shall have the meaning ascribed in the first recital of this
Agreement.
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1.36 "WMS Group" shall mean WMS, or any subsidiary, affiliate or other entity,
a majority of whose capital stock is owned directly or indirectly by WMS or
with respect to which during the term of this Agreement, WMS, directly or
indirectly, has the legal power, without the consent of any third party, to
direct the acquisition of rights to or exploitation of Games on Designated
Consumer Game Platforms.
2. GRANT AND TERMINATION OF OPTION; EXERCISE OF OPTION.
2.1 Effective from and after the Effective Date, the Atari Group hereby grants
to GTIS a first option to acquire a license, in the form of the Atari Home
Video Game Distribution and License Agreement, to manufacture, distribute,
sell, sublicense and subdistribute versions of the Games for use solely on
specific Designated Consumer Game Platforms, with respect to Games which become
Accepted Games during the Option Period, provided that such Games are actually
released by the Atari Group or its licensees in the United States within twelve
(12) months following the expiration of the Option Period.
Royalties payable on sales of Accepted Games with respect to which GTIS
has received a license or exercised an option to acquire a license during the
Renewal Option Period shall be subject to increase, as of the commencement of
the Renewal Option Period or any subsequent Renewal Option Year, to reflect
increases in GTIS' Weighted Average Gross Profits as a percentage of GTIS'
sales of Accepted Games during the Option Period or during the prior Renewal
Option Year as provided in Schedule "B" to the Atari Home Video Game
Distribution and License Agreement. Renewal Option Period and Renewal Option
Year shall have the meanings ascribed to such terms in Section 2.1 of the GTIS
Master Home Video Agreement.
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2.2 The Atari Group shall not grant a license to any third parties to
manufacture, distribute and sell versions of a Game for use on any Designated
Consumer Game Platform if such Game would be subject to GTIS' first option right
to manufacture, distribute and sell versions of such Game on such Designated
Consumer Game Platform, as specified in Section 2.1 hereof, until such time as
GTIS shall have declined to acquire a license, or the option period specified in
Sections 2.3 and 2.4 hereof, whichever is applicable, shall have expired, or the
applicable Atari Home Video Game Distribution and License Agreement shall
otherwise permit. GTIS understands, acknowledges and agrees that (a) on the
Effective Date, the Atari Group's library of Games, projects in development and
subsequent versions of Games may be subject to rights held by third parties,
including affiliates of Warner Communications Inc. who are not members of the
Atari Group; any license acquired by GTIS hereunder shall be subject to such
third party rights, and the form of Atari Home Video Distribution and License
Agreement will be deemed modified to the extent so required; (b) with respect to
Games manufactured by the Atari Group under license from third parties, the
rights granted by the Atari Group to GTIS (i) cannot exceed the rights obtained
by the Atari Group with respect to such Games, (ii) will be limited to the
Licensed Territory, and (iii) are subject to all limitations imposed on the
Atari Group by such third party licensors, including limitations on the Atari
Group's right to sublicense or subdistribute, and the form of Atari Home Video
Game Distribution and License Agreement will be deemed modified to the extent so
required, (c) under certain circumstances the ownership of the Atari Group may
revert to Warner Communications Inc. pursuant to the Stock Purchase Agreement
and documents executed in connection therewith; and (d) although the Atari Group
is developing Games in the normal course of business, the
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<PAGE> 11
Atari Group is under no obligation to develop Games or to present any minimum
number of Games to GTIS under this Agreement. GTIS shall be provided the
opportunity to review all third party agreements existing on the Effective Date
relating to Games with respect to which GTIS may acquire rights hereunder,
subject to any applicable confidentiality provisions in such agreements.
2.3 If the Atari Group has determined or shall determine to develop or acquire
rights in a Game for play on a Designated Consumer Game Platform which the
Atari Group intends to release in the United States during the Option Period or
within twelve (12) months thereafter, including Games which were in the Atari
Group library on the Effective Date but which are re-released with new
copyright notices or other changes after the Effective Date, (a "Proposed
Game"), the Atari Group shall notify GTIS in writing, as soon as practicable,
with respect to such determination and shall furnish to GTIS any tentative
development schedule for such Proposed Game. Such tentative development
schedule shall be subject to change at any time and from time to time and the
Atari Group reserves the right to abandon, suspend, or otherwise delay the
development of such Proposed Game in its sole and absolute discretion,
provided, however, that the Atari Group shall use reasonable efforts to keep
GTIS apprised of material scheduling changes and/or the achievement of
milestones in connection with the development of such Proposed Game. The Atari
Group shall, as soon as practicable, notify GTIS in writing with respect to (a)
the characteristics and method of play of such Proposed Game, (b) any material
limitations or other terms and conditions which may affect the scope of the
license which may be granted to GTIS (including copies of relevant contractual
provisions where permitted), (c) the amount or method of determining third
party fees and royalties payable
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in connection therewith, and (d) the date on which the Atari Group proposes to
First Release the Proposed Game in the United States (the "New Game Option
Notice"). The Atari Group shall use reasonable efforts to advise GTIS with
respect to all of the information required to be included in the New Game
Option Notice, as provided above, at least one hundred and twenty (120) days
prior to the proposed release date of the Proposed Game by the Atari Group in
the United States, provided, however, that GTIS acknowledges and agrees that
such information may not then be available to the Atari Group and the Atari
Group may not have fully determined or negotiated all material limitations or
other terms and conditions which may affect the scope of the license or Third
Party Fees and Royalties payable with respect thereto. The date of such New
Game Option Notice is hereinafter referred to as the "New Game Option Notice
Date." With respect to each Proposed Game as to which GTIS receives a New Game
Option Notice, as hereinabove provided, GTIS shall have a period of sixty (60)
days in which to notify AGC in writing that it either elects or declines to
exercise its option to license the Proposed Game. A notice that GTIS elects to
exercise its option to have the Proposed Game is referred to as a "New Game
Acceptance Notice." Any New Game Acceptance Notice given by GTIS shall in all
events be conditioned upon and subject to (i) the actual release of the Game by
the Atari Group in the United States within twelve (12) months following the
end of the Initial Option Period or any Renewal Option Year as those terms are
defined in the GTIS Master Home Video Agreement and (ii) the prior release of
coin-operated versions of the Game, if any, by the Atari Group no later than
the end of the corresponding Initial Option Period or Renewal Option Year. As
soon as practicable following receipt of (a) the New Game Acceptance Notice,
and (b) notice from the Designated Consumer Game Platform manufacturer of its
acceptance of the Proposed
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THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Game for sale in the United States, the Atari Group shall promptly furnish to
GTIS a Master Disk with respect to such Game as well as one NTSC and one PAL
version of such Master Disk. The Atari Group shall also furnish to GTIS, as
soon as reasonably available, (i) the beta version of the Game, (ii) text files
and the text that appears in bit map files, and printed copies of scripts used
for audio components of CD-ROM versions of the Proposed Game, for purposes of
translating the Proposed Games into languages other than English (as
contemplated in the Atari Home Video Game Distribution and License Agreement),
and (iii) copies of artwork, instruction manuals, and other packaging, labeling
and promotional materials to be used by the Atari Group with respect to such
Proposed Game substantially in commercially reproducible form. Except as
otherwise specifically provided below, GTIS shall be solely responsible for all
costs and out of pocket expenses required to reprogram a Master Disk for use in
connection with the sale of Accepted Games, including, without limitation,
editorial changes or adaptions to local markets, changes required by all
manufacturers of Designated Consumer Game Platforms and local rating boards or
similar governmental agencies in the Licensed Territory. The Atari Group shall
bear costs up to * Dollars for editorial changes per Accepted Game required by
any German or European approval boards for modifications to Accepted Games,
subject in all events to a maximum total required expenditure by the Atari Group
during the Initial Option Period of * Dollars and * Dollars during each Renewal
Option Year. GTIS and the Atari Group shall otherwise discuss in good faith any
sharing of costs of other editorial changes, but the Atari Group shall in no
event have any obligation to bear any additional costs of such editorial changes
unless it shall specifically agree in writing with respect thereto. Although
the Atari Group shall
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<PAGE> 14
make reasonable efforts to advise GTIS with respect to the development schedule
of a Proposed Game and the intended First Release date of such Proposed Game by
the Atari Group in the United States, nothing herein shall be deemed to require
the Atari Group to alter, amend, delay, or suspend its development schedule
with respect to such Proposed Game, or its First Release date in the United
States.
2.4 Any Proposed Game or Game as to which GTIS has exercised its option and
furnished to the Atari Group a New Game Acceptance Notice within the notice
period specified in Section 2.3 above shall become an "Accepted Game" for
purposes of this Agreement, provided that such Game shall have actually been
released by the Atari Group in the United States within twelve (12) months
following expiration of the Option Period, and provided further that
coin-operated versions of the Game, if any, shall have previously been released
by the Atari Group during the Option Period. With respect to each Accepted
Game, GTIS and the member of the Atari Group which has released such Game shall
enter into an Atari Home Video Game Distribution and License Agreement which
shall be dated as of the date of the New Game Acceptance Notice. If either of
such parties shall delay or wrongfully refuse to enter into an Atari Home Video
Game Distribution and License Agreement with respect to any Accepted Game, then,
in addition to any other rights of the non-defaulting party hereunder, at the
option of the non-defaulting party, such Atari Home Video Game Distribution and
License Agreement shall be deemed to have been entered into as of the date on
which GTIS shall have exercised its option to acquire the license of such
Accepted Game as provided herein. GTIS understands and agrees that it will have
no rights whatsoever in respect of any Game which does not become an Accepted
Game in accordance with the terms of this Agreement and for which
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<PAGE> 15
an Atari Home Video Game Distribution and License Agreement is not duly executed
(or deemed executed as provided above), and the Atari Group may exploit its
rights in any Game which does not become an Accepted Game in any manner it sees
fit, free and clear of this Agreement provided, however, that if GTIS shall fail
or decline to accept a Proposed Game as provided in Section 2.3 above, and the
Atari Group shall thereafter make material changes in the programming of the
Game or in the amount of any Third Party Fees and Royalties payable with respect
thereto, then the Atari Group shall furnish to GTIS a new New Game Option Notice
with respect to such Game as so changed and GTIS shall thereafter have the right
to accept such Game as changed in the manner provided in Section 2.3 above. The
Atari Group shall also be entitled to exploit its rights with respect to any
Game and to sell and distribute such Game, free and clear of this Agreement, in
any Marketing Area with respect to which GTIS' right to sell and distribute such
Game has been suspended or revoked (or has become non-exclusive) as provided in
Section 2.7 below and Section 3.3 of any Atari Home Video Game Distribution and
License Agreement, provided however, that if the Atari Group shall thereafter
make material changes in the programming of such Game or in the amount of any
Third Party Fees and Royalties payable with respect thereto, then the Atari
Group shall furnish to GTIS a new New Game Option Notice with respect to such
Game as so changed and GTIS shall thereafter have the right to accept such Game
as changed in the manner provided in Section 2.3 above.
2.5 GTIS acknowledges that the Atari Group manufactures and sells Games for
many different entertainment platforms, including coin-operated games and home
games of all types, and that any Games in respect of which GTIS obtains rights
hereunder for exploitation on a specific Designated Consumer Game Platform may
be developed by the Atari
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<PAGE> 16
Group for other entertainment platforms, including other Designated Consumer
Game Platforms, or for territories not included in the Licensed Territory and
GTIS will have no rights therein.
2.6 The Atari Group agrees to use commercial efforts, in its reasonable
judgment, to acquire rights to exploit Games on Designated Consumer Game
Platforms throughout the Licensed Territory when it acquires rights to exploit
such Games in the United States. Except to the extent that the Atari Group has
heretofore granted rights (or any option, right of first refusal or
negotiations or other ability to obtain rights which may be subsequently
exercised) to manufacture, distribute or sell home video games on Designated
Consumer Game Platforms within the Licensed Territory to any third party
(including any renewals or extensions thereof resulting from the exercise of
previously granted rights), if the Atari Group develops internally any
coin-operated or home video game, then the Atari Group shall not license the
right to use its computer software source code or object code for such
coin-operated or home video game to any third party for the purpose of
developing and/or marketing a Game for play on a Designated Consumer Game
Platform in the Licensed Territory, unless the Atari Group shall have first
offered to license such Game to GTIS as provided in this Agreement. With
respect to Games in which the Atari Group acquires or intends to acquire from a
third party rights to exploit such Games on Designated Consumer Game Platforms
in the United States, but with respect to which the Atari Group is unable or
unwilling to acquire rights to exploit such Games on Designated Consumer Game
Platforms in the Licensed Territory based on the Atari Group's reasonable
judgment that such rights are not available on commercially acceptable terms,
or on terms which, in the Atari Group's judgment, would make it uneconomical
for the Atari Group to acquire and license such rights to GTIS on the terms and
conditions set forth herein and in
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the Atari Home Video Game Distribution and License Agreement, the Atari Group
shall so advise GTIS and GTIS shall have the reasonable opportunity to consult
with the Atari Group (and, in GTIS' discretion, to propose other licensing or
cost sharing arrangements with respect to such Game) prior to the Atari Group's
determination whether to accept or decline to accept such rights which shall be
made in good faith.
2.7 GTIS or its sublicensees shall actively commence marketing and selling an
Accepted Game in reasonable commercial quantities in all Marketing Areas within
the Licensed Territory within six (6) months following the date upon which the
Atari Group shall have First Released such Accepted Game in the United States
(the "Delivery Date"), provided however, that such six (6) month period shall
be extended for a period of sixty (60) days in Marketing Areas, other than
those designated as "Key Marketing Areas" on Schedule C annexed to the Atari
Home Video Game Distribution and License Agreement, if GTIS shall have proposed
a sublicensee to distribute Licensed Products in such Marketing Area and the
Atari Group shall have withheld its approval of the sublicensee. If GTIS or
its sublicensees shall have failed to commence actively marketing and selling
an Accepted Game in any Marketing Area within the Licensed Territory within six
(6) months following the Delivery Date with respect thereto, then the Atari
Group shall have the right, in addition to any other rights which the Atari
Group may have hereunder or under any Atari Home Video Game Distribution and
License Agreement, upon thirty (30) days written notice to GTIS, to suspend and
revoke GTIS' or its sublicensees' right to sell such Accepted Game in such
Marketing Area or to declare such right henceforth to be non-exclusive, as the
Atari Group shall determine. If GTIS or its sublicensees shall have failed to
commence actively marketing and selling three (3) or more Accepted Games
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which have been designed for play on the same Designated Consumer Game
Platform, in each case within six (6) months following the Delivery Date with
respect thereto, in any Marketing Area within the Licensed Territory, then the
Atari Group shall have the right, upon thirty (30) days written notice to GTIS,
permanently to suspend and revoke GTIS' right to distribute and sell all future
Accepted Games which have been designed for play on the same Designated
Consumer Game Platform in such Marketing Area and to exclude such Marketing
Area from the Licensed Territory under all future Atari Home Video Game
Distribution and License Agreements for Games which have been designed for play
on such Designated Consumer Game Platforms. Notwithstanding the foregoing,
however, GTIS or its sublicensees shall not be required to have actively
commenced marketing and selling an Accepted Game in any Marketing Area if the
specific Designated Consumer Game Platform on which such Accepted Game has been
designed for play shall not regularly be sold at retail or otherwise not be
generally available to consumers in such Marketing Area or if such Accepted
Game is banned in the entire Marketing Area.
For purposes of documenting compliance with this Section 2.7, GTIS shall
submit a report, as of the date six (6) months following the Delivery Date,
listing the Marketing Areas in which GTIS has not commenced actively marketing
and selling an Accepted Game. Such report shall be sent to the Atari Group
within forty-five (45) days after the end of said six (6) month period, and
shall indicate the status for each Marketing Area listed (indicating the date
of expected First Release and whether a sublicensee has been appointed). Such
summary report shall be made in good faith, using the best available
information as of the date the report is submitted.
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2.8 Royalties payable to AGC pursuant to Schedule B of the Atari Home Video
Game Distribution and License Agreement are measured by the wholesale prices of
Licensed Product. Accordingly, reasonably in advance of AGC's decision to
enter into a developer contract and reasonably in advance of GTIS' initial
release of the Licensed Product, GTIS shall advise AGC, at AGC's request, of
GTIS' expected pricing strategy and the reasons therefor. Nothing herein shall
be deemed to restrict GTIS' freedom in selecting wholesale sales prices it
considers appropriate, which shall be in GTIS' sole discretion.
2.9 Anything in this Agreement to the contrary notwithstanding, with respect
to any Games currently under development by the Atari Group for which the Atari
Group has heretofore made development advances and as to which the Atari Group
has the right to grant licenses to GTIS to manufacture, distribute and sell
versions of the Game for use on one or more Designated Consumer Game Platforms,
if GTIS does not exercise its first option within the time periods or in the
manner set forth in Section 2.3 of this Agreement, GTIS shall not have any
subsequent rights with respect to such Game, including rights under Section
2.4, even if the Atari Group makes material changes in programming of the Game
or in the amount of any Third Parties Fees and Royalties.
2.10 If, under Section 2.1 of any Atari Home Video Game Distribution and
License Agreement entered into under this Agreement, Licensor has granted
written approval (which shall not be unreasonably withheld) to Licensee of a
sublicensee for the Licensed Property, such approval shall apply to the
sublicensing by that sublicensee of all Licensed Properties licensed to
Licensee under Atari Home Video Game Distribution and License Agreements
entered into under this Agreement, subject to the following: (i) the
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THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
sublicense agreements shall contain provisions with respect to quality of
Licensed Product, trademarks, copyrights, materials, other intellectual property
rights, rights of additional sublicensing or assignment, termination rights,
confidentiality, accounting, auditing, reporting and payment procedures in form
agreed to by GTIS and WMS, and the form as so agreed to may be used by all
approved sublicensees described in clause (iii) below; provided that if such
form is not so used, any other form to be used shall be subject to prior
approval as provided in this subsection (i); (ii) no such blanket approval
shall be deemed given with respect to Licensed Properties as to which approval
requirements imposed by third parties, such as the NFL and NBA, apply, (iii) if
the sublicense is for a Marketing Area other than those designated as Key
Marketing Areas in such Atari Home Video Game Distribution and License Agreement
and if the expected sales volume in such Marketing Area, in GTIS' good faith
judgment, is an average of * units or less per SKU per year, Licensee will not
be required to obtain Licensor's prior written approval of the terms of such
license but Licensee will be required to provide a copy of each sublicense to
Licensor within ten (10) Business Days after GTIS enters into such sublicense;
and (iv) if the Marketing Area is designated as a Key Marketing Area or if, in
GTIS' good faith judgment, the expected sales volume for such Marketing Area is
more than an average of * units per SKU per year, Licensee will be required to
obtain Licensor's prior written approval, which Licensor will not unreasonably
withhold, of the terms of a sublicense for such Marketing Area even if the
identity of the sublicensee has been previously approved; provided, however, if
a sublicense is for multiple platforms and multiple games, the approval of the
sublicense will be deemed to be approval for all Games distributed under that
sublicense (subject
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THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to clause (ii)). Anything to the contrary notwithstanding, (x) if a previously
approved sublicensee becomes an Exporter (as such term is defined in Exhibit A
to the Atari Home Video Game Distribution Agreement) or a Pirate, Licensee will
immediately upon becoming aware thereof notify Licensor of the identity of such
Exporter or Pirate and as soon as practicable terminate the sublicense upon
request by Licensor, and (y) Licensor and Licensee will review every two years
the identity of sublicensees, and those sublicensees who previously received
blanket approval as provided in the first sentence of this Section and who are
no longer considered acceptable by Licensor, in the exercise of Licensors'
reasonable judgment, will no longer have such blanket approval and will be
subject to Licensor's prior approval with respect to all future sublicenses in
accordance with the approval procedures set forth above. Licensee shall use
all reasonable efforts to cause each agreement with its sublicensees to permit
Licensee to terminate such agreement immediately if such sublicensee shall be
or become an Exporter or a Pirate.
3. MINIMUM GUARANTEED ADVANCE ROYALTY. In consideration for both the option
granted herein and in the Master Atari PC Agreement and as a guaranteed advance
royalty, GTIS is paying to WMS the aggregate sum of * Dollars ("Minimum
Guaranteed Advance Royalty") in the manner provided in the Master Atari PC
Agreement.
4. REPRESENTATIONS AND WARRANTIES OF WMS. WMS represents and warrants that
this Agreement has been duly authorized, executed and delivered by WMS; WMS has
the full power and authority to enter into this Agreement and to perform its
obligations hereunder and this Agreement constitutes the valid and binding
obligation of WMS, enforceable
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in accordance with its terms, and the making of this Agreement by WMS does not
violate or conflict with any agreement, right or obligation existing between
WMS and any other person, firm or corporation.
5. REPRESENTATIONS AND WARRANTIES OF GTIS. GTIS represents and warrants that
this Agreement has been duly authorized, executed and delivered by GTIS; GTIS
has the full power and authority to enter into this Agreement and to perform
its obligations hereunder and this Agreement constitutes the valid and binding
obligation of GTIS enforceable in accordance with its terms; and the making of
this Agreement by GTIS does not violate or conflict with any agreement, right
or obligation existing between GTIS and any other person, firm or corporation.
6. CONFIDENTIAL INFORMATION. GTIS shall keep in confidence and not disclose
or make available to any third party, without the written permission of AGC ,
the terms of this Agreement and the proprietary information of the Atari Group
made known to it under this Agreement, including without limitation any
information with respect to Proposed Games prior to the date on which they are
First Released and any Master Disk or version thereof. Likewise, WMS and the
Atari Group shall keep in confidence and not disclose to any third party,
without the written permission of GTIS, the terms of this Agreement and the
proprietary information of GTIS made known to it under this Agreement. This
requirement of confidentiality shall not apply to information that is (a)
permitted to be disclosed under an Atari Home Video Game Distribution and
License Agreement; (b) in the public domain through no wrongful act of the
receiving party; (c) rightfully received by the receiving party from a third
party who is not bound by a restriction of nondisclosure; (d) already in the
receiving party's possession without
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restriction as to disclosure; or (e) is required to be disclosed by applicable
rules and regulations of government agencies or judicial bodies. WMS or GTIS
shall not issue any press release or other public or trade announcement with
respect to the transactions contemplated by this Agreement unless the issuing
party shall have first consulted with the other with respect thereto and
obtained the other's prior written approval therefor, which approval will not
be unreasonably withheld or delayed. The obligations of confidentiality under
this Section 6 shall survive termination of this Agreement and either party
shall be entitled to seek injunctive or equitable relief to prevent the breach
or threatened breach by the other of the provisions of this Section and to
secure its enforcement. With respect to this Agreement and all Atari Home
Computer Software Distribution and License Agreements entered into in
connection therewith, each of the AGC Group and GTIS agree to use reasonable
efforts to ensure that either of them may disclose the proprietary information
of the other (including, without limitation, the software source code and tools
relating to any Game) only to those persons within their organizations who have
a need to know such information in order to perform its obligations under this
Agreement and the Home Video Game Distribution and License Agreements and any
such disclosure shall be limited to the information which needs to be known.
Further, neither the AGC Group nor GTIS shall use any such proprietary
information for purposes other than the performance of its obligations under
this Agreement and the Home Video Game Distribution and License Agreements.
7. NOTICES. Any notice, consent, approval, request, waiver or statement
to be given, made or provided for under this Agreement shall be in writing and
deemed to have been duly given (a) by its delivery personally or by express
mail; or (b) five (5) days after its
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being mailed, air express, registered or certified, return receipt requested,
in a U.S. Post office addressed as follows:
To GTIS:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz, President
Telephone Number: (212) 726-6508
Facsimile Number: (212) 679-6850
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 726-6523
Facsimile Number: (212) 679-6850
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 726-6500
Facsimile Number: (212) 679-6850
To WMS:
WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
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With a copy to:
Williams Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
or such other address as either party may designate by notice given as
aforesaid.
8. DEFAULT. In the event that GTIS shall default in any of its material
obligations hereunder or under any Atari Home Video Game Distribution and
License Agreement and the Atari Group or WMS has provided notice of such
default in accordance with the provisions of Section hereof, if GTIS has not
cured such default within fifteen (15) days of such notice, or within the grace
periods provided in the Atari Home Video Game Distribution and License
Agreement in respect of payments thereunder, then, in addition to all other
rights and remedies of the Atari Group or WMS at law or in equity, at the
option of the Atari Group or WMS, all rights granted to GTIS under Section 2 of
this Agreement shall be deemed terminated and shall revert to the Atari Group,
provided it is understood that notwithstanding such termination, the Atari Home
Video Game Distribution and License Agreements with respect to Accepted Games
which were deemed entered into prior to such termination, and which are not in
default, shall remain in full force and effect. No such termination shall in
any way affect
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or diminish WMS' rights hereunder, including the right of WMS to receive the
Minimum Guaranteed Advance Royalty. Anything herein to the contrary
notwithstanding, the rights granted to GTIS under Section 2 of this Agreement
shall not be affected by an alleged default by Licensee under an Atari Home
Video Game Distribution and License Agreement resulting from a bona fide
dispute between Licensor and Licensee provided that Licensee pays all
undisputed amounts to Licensor and all disputed amounts are paid into a bona
fide third party escrow account.
9. OTHER TERMINATION. Anything in this Agreement to the contrary
notwithstanding, if pursuant to Section 10 of the GTIS Master Home Video
Agreement, WMS elects to terminate all rights granted to GTIS under Section 2
of the GTIS Master Home Video Agreement (a "Notice of Election"), WMS must also
terminate all rights granted to GTIS under Section 2 of this Agreement;
provided that, notwithstanding such termination, all Atari Home Video Game
Distribution and License Agreements with respect to Accepted Games which were
deemed entered into prior to such termination, and which are not in default,
shall remain in full force and effect. Within thirty (30) days following the
date on which WMS shall issue a Notice of Election, WMS shall pay to GTIS an
amount equal to any then unrecouped portion of the Minimum Guaranteed Advance
Royalty which has theretofore been paid to WMS under this Agreement and the
Master Atari PC Agreement, together with interest thereon at the prime rate
designated by Citibank, N.A. calculated from the date paid. No termination by
WMS of GTIS' rights to continue to acquire licenses with respect to Games
pursuant to the provisions hereof shall in any way affect or diminish any
rights of WMS or the Atari Group hereunder, or the Atari Group's right to
continue to receive Royalties under any Atari Home Video Game
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Distribution and License Agreement which remains in effect, except that GTIS
shall not be entitled to any further recoupment of the Minimum Guaranteed
Advance Royalty.
10. NON-SOLICITATION.
During the Option Period and for a further period of two (2) years
thereafter, neither GTIS nor the Atari Group shall, for itself or on behalf of
any other person, partnership, corporation or entity, directly or indirectly,
or by action in concert with others (a) solicit, induce, or encourage any
person to terminate his or her employment or other contractual relationship
with the other party or any of its affiliates, or (b) solicit, induce, or
encourage any designer, developer, salesperson or other person known to have a
contractual relationship with the other party to discontinue, terminate, cancel
or refrain from entering into any design, development, sales or other
contractual relationship with the other party or any of its affiliates. Each
party agrees that the parties hereto shall be entitled to injunctive or other
equitable relief to prevent the breach or threatened breach by it of the
provisions of this section and to secure its enforcement.
11. STOCK PURCHASE AGREEMENT CONDITIONS. This Agreement shall become
effective on the Effective Date and shall be null and void and of no force and
effect if the Effective Date shall not have occurred by June 30, 1996. On the
Effective Date, WMS shall cause AGC to execute an instrument of assumption,
whereby AGC shall assume all of the obligations of AGC and the Atari Group
referred to in this Agreement. Notwithstanding such assumption by AGC, WMS
shall remain liable for the obligations of AGC under this Agreement so long as
an Early Termination Event shall not have occurred.
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12. MISCELLANEOUS.
12.1 This Agreement is personal to GTIS as one party and WMS as the other
party. Neither this Agreement nor any party's rights under it may be assigned,
in whole or in part, nor may its obligations be delegated, in whole or in part,
to any person or party without the prior written consent of the other party,
except that any party may assign its rights and delegate obligations to any of
its direct or indirect wholly-owned subsidiaries or affiliates or to any
person, firm or corporation owning or acquiring all or substantially all of the
stock or assets of that party, as long as both the assignee and the assignor
remain fully liable for assignor's obligations hereunder. After the Effective
Date, in connection with any Early Termination Event, WMS and AGC shall obtain
the assumption by the purchaser or transferee of all covenants, obligations and
duties undertaken by the seller pursuant to the terms of this Agreement,
including its obligations with respect to Games and the intellectual property
from which they are derived. This Agreement shall bind the parties, their
successors and permitted assignees and delegees. WMS, as one party, and GTIS,
as the other party, are each jointly and severally liable for their respective
obligations under the terms of this Agreement.
12.2 The entire understanding between the parties hereto relating to the
subject matter hereof is contained herein. This Agreement cannot be changed,
modified, amended or terminated except by an instrument in writing executed by
the parties hereto.
12.3 No waiver, modification or cancellation of any term or condition of this
Agreement shall be effective unless executed in writing by the party charged
therewith. No written waiver shall excuse the performance of any act other
than those specifically referred
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<PAGE> 29
to therein and no waiver shall be deemed or construed to be a waiver of such
terms or conditions for the future or any subsequent breach thereof.
12.4 This Agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between WMS and GTIS, and neither
WMS nor GTIS shall have any right to obligate or bind the other in any manner
whatsoever, and nothing herein contained shall give or is intended to give any
rights of any kind to any third persons.
12.5 This Agreement shall be governed by the laws of the State of Illinois
applicable to contracts made and to be wholly performed in the State of
Illinois.
12.6 If any provision of this Agreement is or becomes or is deemed invalid,
illegal or unenforceable under the applicable laws or regulations of any
jurisdiction, either such provision will be deemed amended to conform to such
laws or regulations without materially altering the intention of the parties,
or it shall be stricken and the remainder of this Agreement shall remain in
full force and effect.
12.7 This Agreement may be executed in counterparts each of which shall be
deemed an original and when taken together shall be deemed one and the same
document.
12.8 In the event of conflicts between the provisions of this Agreement and the
Atari Home Video Game Distribution and License Agreement, the provisions of
this Agreement shall prevail.
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<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
WMS INDUSTRIES INC.
By: /s/ Neil D. Nicastro
-----------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Ronald Chaimowitz
-----------------------------
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<PAGE> 31
EXHIBIT A
HOME VIDEO GAME
DISTRIBUTION AND LICENSE AGREEMENT FOR ATARI GAMES
AGREEMENT made this ___ day of __________, 199__, by and between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation with offices at 16 East
40th Street, New York, New York 10016 (herein called "Licensee") and ATARI
GAMES CORPORATION, a California corporation with offices at [ ]
(herein called "Licensor").
W I T N E S S E T H:
WHEREAS, Licensor owns or controls the right to
manufacture, sell and distribute Home Video Games (as hereinafter defined)
containing the Licensed Property (as hereinafter defined) in the Licensed
Territory (as hereinafter defined); and
WHEREAS, WMS industries Inc., the parent of Licensor, and Licensee are
parties to the Master Atari Home Video Agreement (as hereinafter defined)
pursuant to which Licensee has exercised its right and option to acquire a
license to manufacture, distribute and sell Home Video Games embodying the
Licensed Property in the Licensed Territory;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1 "Alternative Royalty" shall have the meaning ascribed in Schedule "B"
annexed hereto.
1.2 "Cartridge-Based Product" shall have the meaning ascribed in Schedule "B"
annexed hereto.
1.3 "Cartridge Margin" shall have the meaning ascribed in Schedule "B" annexed
hereto.
1.4 "Computer Software" or "Software" shall mean computer software in the form
of a cartridge, CD-ROM disk or other device containing substantially full and
<PAGE> 32
complete computer game code, including the source code, the assembly code, the
object code and such data files and other files as are necessary for the
Licensed Product to achieve its functional purpose, whereby data and visual
images, with or without sound, can be manipulated, communicated, reproduced or
perceived with the aid of a Designated Consumer Game Platform.
1.5 "Delivery Date" shall have the meaning ascribed in Section 1.7 of the
Master Atari Home Video Agreement.
1.6 "Designated Consumer Game Platform" shall have the meaning ascribed in
Section 1.8 of the Master Atari Home Video Agreement.
1.7 "Exporter" shall have the meaning ascribed in Section 3.3 hereof.
1.8 "First Foreign Sale" shall have the meaning ascribed in Schedule "B"
annexed hereto.
1.9 "First Release" or "First Released" shall have the meaning ascribed in
Section 1.11 of the Master Atari Home Video Agreement.
1.10 "Front-line" shall have the meaning ascribed in Schedule "B" annexed
hereto.
1.11 "Full Price" shall have the meaning ascribed in Section 1.12 of the Master
Atari Home Video Agreement.
1.12 "Game" shall have the meaning ascribed in Section 1.13 of the Master Atari
Home Video Agreement.
1.13 "Home Video Game" shall mean Computer Software designed to operate solely
on a specific Designated Consumer Game Platform.
1.14 "Late Charge" shall have the meaning ascribed in Section 6.5 hereof.
1.15 "Late Report" shall have the meaning ascribed in Section 6.5 hereof.
1.16 "Licensed Products" shall mean Home Video Games embodying the Licensed
Property.
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<PAGE> 33
1.17 "Licensed Property" shall mean the intellectual property, game concepts,
descriptions, characteristics and method of play described in the New Game
Option Notice and/or on Schedule A and embodied in the "Licensed Products."
1.18 "Licensed Territory" shall have the meaning ascribed in Section 3.1 hereof.
1.19 "Marketing Area" shall have the meaning ascribed in Section 3.4 hereof.
1.20 "Master Atari Home Video Agreement" shall mean the Master Option and
License Agreement for Atari Home Video Games dated March 27, 1996, between
Licensee and WMS Industries Inc.
1.21 "Master Disk" shall have the meaning ascribed in Section 1.21 of the
Master Atari Home Video Agreement.
1.22 "Minimum Guaranteed Advance Royalty" shall have the meaning ascribed in
Section 3 of the Master Atari Home Video Agreement.
1.23 "Net Wholesale Sales Price" shall have the meaning ascribed in Schedule
"B" annexed hereto.
1.24 "New Game Option Notice" shall have the meaning ascribed in Section 2.3 of
the Master Atari Home Video Agreement.
1.25 "Option Period" shall have the meaning ascribed in Section 1.28 of the
Master Atari Home Video Agreement.
1.26 "Other Atari Home Video Game Distribution and License Agreements" shall
have the meaning ascribed in Schedule "B" annexed hereto.
1.27 "Recoupable Amount" shall have the meaning ascribed in Schedule "B"
annexed hereto.
1.28 "Renewal Option Period" shall have the meaning ascribed in Section 2.1 of
the Master Atari Home Video Agreement.
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<PAGE> 34
1.29 "Renewal Option Year" shall have the meaning ascribed in Section 2.1 of
the Master Atari Home Video Agreement.
1.30 "Royalty" shall have the meaning ascribed in Schedule "B" annexed hereto.
1.31 "Royalty Period" shall have the meaning ascribed in Section 6.1 hereof.
1.32 "Term of this Agreement" or "period of this Agreement" or "term hereof" or
"so long as this Agreement remains in force" or words of similar connotation
shall include the initial period of this Agreement and the period of all
renewals, extensions, substitutions or replacements of this Agreement.
1.33 "Third Party Fees and Royalties" shall mean all fees, royalties and other
participations of any kind or nature payable by Licensor to any third party,
including developers, licensors and others having rights in connection with the
exploitation of the Licensed Products. There shall be excluded from the term
"Third Party Fees and Royalties" as used herein a) any fees or royalties payable
to employees or consultants by Licensor or its affiliates with respect to the
development of the Licensed Product in house; and b) advances paid to any third
party having rights in connection with the exploitation of the Licensed
Products (other than persons referred to in clause (a)), provided, however,
that if such advances are recoupable by Licensor or its affiliates from future
royalties payable to such third party, then Third Party Fees and Royalties
shall include such royalties which would otherwise be payable to such third
party were it not for such right of recoupment.
1.34 "Weighted Average Gross Profits" shall have the meaning ascribed in
Schedule "B" annexed hereto.
Capitalized terms used, but not defined herein, shall have the meaning
ascribed to such terms in the Master Atari Home Video Agreement.
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<PAGE> 35
2. GRANT OF LICENSE.
2.1 Licensor hereby grants and Licensee hereby accepts, for the term of this
Agreement and subject to the terms hereinafter set forth, the exclusive license
to manufacture, distribute, subdistribute and sell the Licensed Products in the
Licensed Territory. Licensee shall have the right to sublicense any of the
rights granted to Licensee hereunder to affiliates of GTIS, as such term is
defined in Section 1.15 of the Master Atari Home Video Agreement, and, with
Licensor's prior written consent, which consent shall not be unreasonably
withheld or delayed, to unaffiliated third parties. Without limiting the
generality of the foregoing, Licensor shall not unreasonably withhold or delay
its consent to proposals by Licensee to sublicense its rights hereunder to third
party dedicated home video game hardware platform manufacturers for the purpose
of "bundling" the Licensed Products together with such hardware products for
distribution only within the Licensed Territory. Licensee shall not have the
right to sublicense its rights hereunder (and Licensor may withhold its consent
to any proposed sublicense) to any third party for the purpose of distributing,
or to any third party who Licensee knows or could reasonably expect intends to
sell or distribute, the Licensed Products outside of the Licensed Territory.
Licensor may also withhold its consent to any proposed sublicense arrangement,
if as a result thereof, it can be reasonably anticipated that Royalties which
may become payable to Licensor on account of sales of Licensed Products in the
Marketing Areas designated as "Key Marketing Areas" on Schedule C will be less
than if such Licensed Products were sold directly by Licensee. It is understood
that the term "Licensed Products" does not include Computer Software designed
for play on a) the Atari Jaguar(R) system, the 3D-O(R) system, and their
respective successors (including any enhancements, improvements or updates),
except only to the extent that Licensor or any of its affiliates shall itself
(and not through any licensee or sublicensee) actually release the Licensed
Products for commercial sale in the ordinary course of business on such hardware
platforms in the United States; b) any multipurpose home or personal computer
systems; or c) any other medium of exploitation, including handheld games,
Computer Software playable on dedicated home video game hardware
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<PAGE> 36
having a microprocessor of less than 32 bit capacity (excluding SNES and Sega
Genesis), over the air, cable or fiber optic transmission, other than
Designated Consumer Game Platforms; all of which remain the sole property of
Licensor. No license is granted hereunder for the manufacture, sale or
distribution of Licensed Products to be used as premiums, in combination sales,
as giveaways or to be disposed of under similar methods of merchandising,
except only that Licensee shall have the right, subject to rights of third
parties in the Licensed Property, to distribute Licensed Products as premiums,
combination sales or giveaways solely (i) subject to Licensor's consent, which
shall not unreasonably be withheld or delayed, in connection with the sale and
distribution of other Home Video Games licensed to Licensee by Licensor or its
affiliates under Other Atari Home Video Game Distribution and License
Agreements, and (ii) with respect to free or promotional goods in the
quantities set forth on Schedule "B" annexed hereto.
2.2 This license does not include any rights to subsequent versions of the
Licensed Property (so-called "sequels" or "derivatives"), such rights being
retained by Licensor, except as the same are otherwise required to be offered
to Licensee under the Master Atari Home Video Agreement.
3. LICENSED TERRITORY.
3.1 Licensee shall be entitled to manufacture, distribute and sell the
Licensed Products in all countries throughout the world, except (a) the United
States of America, its territories, possessions and United States military
installations worldwide; Canada; Mexico; and Japan; and (b) countries or
locations which are excluded under the terms of any license agreement between
Licensor and any third party having rights to the Licensed Property. The
territory in which Licensee shall be entitled to manufacture, sell and
distribute the Licensed Products as specified above is herein referred to as
the "Licensed Territory."
[If this is a game license for T-Mek for Sony PSX; Primal Rage for Sega
Saturn; or Return Fire for Sony PSX or Sega Saturn, then Licensee shall have
rights to a share of the profits from the distribution of these games in Market
Areas excluded under (b) above,
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<PAGE> 37
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
but for which Licensor will receive income under distribution agreements
existing as of the Effective Date. For these agreements, Licensor shall pay to
Licensee an amount equal to * of the proceeds received by Licensor from such
sublicensee after deducting (a) an amount equal to all Third Party Fees and
Royalties, (b) an amount equal to the payment required to Warner Communications
Inc. as a result of this income, and (c) in the case of sublicensees to whom
Licensor supplies the Licensed Product, Licensor's direct manufacturing and
shipping costs. The remaining income shall remain with Licensor and not be
paid to Licensee as Recoupable Amounts.]
3.2 After the end of the Japan Territory Period, as defined in the letter
between WMS Industries Inc. and Licensee dated March 27, 1996 captioned, "Japan
Territory," Licensor shall have the exclusive right to license any of its
rights in Japan to third parties, subject to Licensee's prior written consent,
which consent shall not be unreasonably withheld or delayed. With respect to
the exploitation by Licensor of the Licensed Property in Japan, Licensee shall
be entitled to share in * of the net profits (as calculated in Section 2.1 of
Exhibit A attached to the Master Option and License Agreement for Atari PC
Games dated March 27, 1996) derived by Licensor from its sale of Licensed
Products in Japan. Licensor shall account and pay over to Licensee, not less
frequently than quarterly, Licensee's share of net profits from the sale by
Licensor of Licensed Products in Japan.
3.3 Licensor shall have the exclusive right to license to third parties or
otherwise exploit for its own account any of its rights with respect to the
Licensed Property outside of the Licensed Territory (and in any portion of the
Licensed Territory in which Licensee's right to distribute Licensed Products
have been revoked, suspended, or declared non-exclusive in accordance with
Section 3.4 below), and Licensee shall not manufacture, distribute or sell any
Licensed Products or otherwise exploit the Licensed Property directly or
indirectly in any area other than the Licensed Territory. Without limiting the
generality of the foregoing,
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<PAGE> 38
Licensee shall not at any time sublicense, distribute or sell any Licensed
Products to any distributor or customer who Licensee knows or could reasonably
expect, based on objective evidence, intends to resell or export the Licensed
Products outside of the Licensed Territory. Licensor shall similarly not at
any time license, distribute or sell any Licensed Products to any licensee,
distributor or customer who Licensor knows or could reasonably expect, based on
objective evidence, intends to resell or export the Licensed Products within
the Licensed Territory. A licensee, sublicensee, distributor or customer who
wrongfully resells or exports Licensed Products from the Licensed Territory to
North America or Japan, or from North America or Japan to the Licensed
Territory, is referred to as an "Exporter." Licensor and Licensee shall have
the right, in addition to any other rights which they may have hereunder, to
require the other to terminate any license, distribution agreement or
arrangement with any such Exporter who is wrongfully distributing Licensed
Products in violation of the rights of the other party. Licensor shall also
have the right to delay for a period up to three (3) months the introduction of
any new Licensed Products into any country in which such Exporter may be
located or is operating.
3.4 Licensee shall actively commence marketing and selling the Licensed
Products within the Licensed Territory in reasonable commercial quantities
within six (6) months following the Delivery Date, provided however, that such
six (6) month period shall be extended for a period of sixty (60) days in
Marketing Areas, other than those designated as "Key Marketing Areas" on
Schedule C annexed hereto if a) Licensee shall have proposed a sublicensee to
distribute Licensed Products in such Marketing Area and the Licensor shall have
withheld its approval of the sublicensee or b) if Licensee shall have exercised
its right, pursuant to Section 3.3 above, to delay the introduction of new
Licensed Products into any country within the Marketing Area by reason of the
location or operation of an Exporter in such Marketing Area. If Licensee shall
fail to have commenced actively marketing and selling the Licensed
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<PAGE> 39
Products in any country or in any related group of countries as described on
Schedule "C" annexed hereto, (a "Marketing Area") within the Licensed Territory
within six (6) months following the Delivery Date with respect thereto, then
the Licensor shall have the right, in addition to any other rights which
Licensor may have hereunder, upon thirty (30) days prior written notice to
Licensee, to suspend or revoke Licensee's right to sell the Licensed Products
in such Marketing Area or to declare such right henceforth to be nonexclusive,
as Licensor shall determine. Notwithstanding the foregoing, however, Licensee
shall not be required to have actively commenced marketing and selling a
Licensed Product in any Marketing Area if the specific Designated Consumer Game
Platform on which such Licensed Product has been designed for play shall not
regularly be sold at retail or otherwise not be generally available to
consumers in such Marketing Area or if the Licensed Product is banned in the
entire Marketing Area.
3.5 For purposes of documenting compliance with Section 3.4 above, Licensee
shall submit a report, as of the date six (6) months following the Delivery
Date, listing the Marketing Areas in which Licensee has not commenced actively
marketing and selling an Accepted Game. Such report shall be sent to Licensor
within forty-five (45) days after the end of said six (6) month period, and
shall indicate the status for each Marketing Area listed (indicating the date
that marketing and selling is expected to begin and whether a sublicensee has
been appointed or will be replaced). Such summary report shall be made in good
faith, using the best available information as of the date the report is
submitted.
4. TERM.
The license granted hereunder shall be effective on the date hereof and
shall terminate on the earlier of a) five (5) years from the date hereof, or
b) upon termination of Licensor's rights obtained from third parties, unless
sooner terminated in accordance with the terms and conditions hereof; provided,
however, that subject to the earlier termination of Licensor's rights obtained
from third parties, the license term shall be deemed extended for up to two (2)
additional one (1) year renewal terms, if during the immediately preceding
year, sales
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<PAGE> 40
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
of Licensed Products in the Licensed Territory shall have amounted to at least
* units. If Licensee's sales of Licensed Products in the Licensed Territory
during the first of such additional one-year renewal term shall be less than *
units, Licensee may pay to Licensor an amount equal to * Dollars per unit
multiplied by the number of units less than * sold by Licensee during such year
to make up the shortfall and the license term shall then be extended for the
remaining renewal year.
5. CONSIDERATION.
Licensee shall pay Licensor, with respect to sales throughout the Licensed
Territory of the Licensed Products, a Royalty as specified in Schedule "B"
annexed hereto on each unit of Licensed Product sold.
6. ACCOUNTINGS.
6.1 Licensee agrees to forward to Licensor at Licensor's address set forth in
Section 17, within forty-five (45) days after the end of each calendar quarter
(a "Royalty Period"), commencing with the first calendar quarter during which
any unit of the Licensed Product is sold, a report of the number of units of
the Licensed Products sold within such Royalty Period and a calculation, in
reasonable detail and reported separately by Marketing Area, of the Royalty,
including any Alternative Royalty, due on account of the sale of such units in
accordance with Section 6.3 below and Schedule "B" annexed hereto, and any
recoupment of the Minimum Guaranteed Advance Royalty claimed in accordance with
Schedule "B" annexed hereto and Section 3 of the Master Atari Home Video
Agreement. Such report shall also include a cumulative reconciliation of the
number of units of Licensed Products produced by Licensee to the number of
units on hand. Licensee agrees that accompanying each such report shall be
payment, in United States funds, of the Royalties due to Licensor, if any, in
respect of such Royalty Period in excess of any permitted recoupment. Royalties
calculated in foreign currencies shall be converted to United States currency
at the spot rate of exchange published in the Wall
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<PAGE> 41
Street Journal as of the last day of the Royalty Period. Such reports shall be
required to be submitted with respect to sales and distributions of the
Licensed Product whether or not any amounts are due under the terms hereof.
6.2 Licensee agrees to keep accurate books of account and records with respect
to the Licensed Products, covering all sales, purchases and inventories of
Licensed Products and all Royalties due under this Agreement, at Licensee's
offices (or the offices of Licensee's affiliates) and to permit (or procure the
right for) Licensor at its own expense to have accounting professionals (which
may include Licensor's employees who have accounting degrees) inspect such
books of account and records of Licensee or its sublicensees during reasonable
business hours (but not during the first three (3) weeks of a calendar
quarter), upon prior reasonable written notice, for the sole purpose of
verifying the reports to be provided hereunder. Such inspections, together with
inspections of Licensee's books of account and records pertaining to other Home
Video Games licensed to Licensee by Licensor or its affiliates under Other
Atari Home Video Game Distribution and License Agreements, shall occur no more
frequently than twice during any twelve (12) month period for each of the
Licensee's offices. Licensor's inspectors shall not be physically present in a
specific office of Licensee for more than ten (10) consecutive business days in
connection with any such inspection, provided that Licensee shall have supplied
all requested information and documentation and responded to questions on a
reasonably prompt basis. Licensee shall promptly furnish to Licensor copies of
any report which Licensee may produce as the result of any audit by Licensee of
the books of account and records of any sublicensee of Licensee. Licensor
shall keep any information obtained from any such inspections in confidence and
shall require that its accounting professionals do so as well. Licensee's
books relating to any particular Royalty statement may be examined as aforesaid
only within two (2) years after the date rendered and Licensee shall have no
obligation to permit Licensor to so examine such books relating to any
particular Royalty statement more than once for any one statement, unless in
connection with a civil action filed by Licensor against Licensee in connection
with such statement. In the event that any audit
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<PAGE> 42
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
by Licensor's accounting professionals reveals that Licensee has underpaid
Licensor by an aggregate of * or more with respect to the specific Royalty
statements which are the subject of such audit, Licensee agrees that it shall
also reimburse Licensor for the reasonable documented costs for any such audit
(including traveling costs) up to the amount of the shortfall.
6.3 Royalties shall be paid on * of products sold by Licensee's point of sale
("POS") customers, less actual returns. With respect to shipments to non-POS
customers, not less than * of the shipment shall be deemed a sale for Royalty
purposes on the date of shipment. Not less than * of the balance of the
shipment, less actual returns, shall be deemed a sale for Royalty purposes six
(6) months following the date of shipment, and the balance of such shipment,
less actual returns not already counted, shall be deemed a sale for Royalty
purposes twelve (12) months following the date of shipment. As used herein,
POS customers mean those customers who report actual sales by selection number
to Licensee via computer and scan their sales by UPC codes at cash registers.
6.4 Licensor shall permit Licensee, at Licensee's own expense, to have an
independent certified public accountant inspect Licensor's books and records
with respect to the payment by Licensor of Third Party Fees and Royalties in
connection with the Licensed Products, during reasonable hours, upon prior
reasonable written notice and subject to such confidentiality requirements
(including the execution of appropriate confidentiality agreements) as Licensor
may require, for the sole purpose of verifying payment and calculation by
Licensor of such Third Party Fees and Royalties. Licensor's books and records
may be examined by Licensee's representatives not more frequently than twice in
any twelve-month period and Licensee and Licensor shall otherwise have
substantially the same rights as provided to the other under Section 6.2
above.
6.5 Licensee recognizes that the timely submission of all reports required to
be submitted to Licensor pursuant to Section 6.1 hereof is critical for
Licensor to
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<PAGE> 43
maintain good relations with its third party licensors as well as for
Licensor's own financial reporting requirements. Therefore, in addition to any
other rights and remedies of Licensor, if Licensee shall be late by more than
five (5) business days with respect to any report and/or Royalty payment
required to be submitted to Licensor pursuant to Section 6.1 hereof (a "Late
Report"), then Licensee shall pay to Licensor a late charge ("Late Charge") at
a rate equal to the prime rate designated by Citibank N.A. on any Royalties
covered by such Late Report that are actually payable to Licensor as provided
in Schedule B. Such Late Charge shall be computed from the 46th day following
the last day of the calendar quarter for which such Late Report is due until
the date actually paid. Licensor may elect to waive payment of any such Late
Charge if Licensee shall have provided a reasonable estimate of Royalties due
within fifteen (15) days following the end of the calendar quarter covered by
such Late Report.
6.6 At the time that the Licensor shall provide to Licensee notice of
availability of a Game pursuant to Section 2.4 or 2.5 of the Master Atari Home
Video Agreement, Licensor shall provide to Licensee sufficient data to enable
Licensee to calculate Third Party Fees and Royalties payable with respect to
each Licensed Product (without regard to any advances which may have been made
by Licensor). If Licensee is unable to calculate specific Third Party Fees and
Royalties from the data provided, Licensee may request assistance from Licensor
with respect thereto, and Licensor shall use its best efforts to respond within
seven (7) days from the date of such request, but Licensee shall provide all
sales and other data in its possession which are necessary for such
calculations.
7. QUALITY OF LICENSED PRODUCT.
7.1 The Licensed Products as manufactured, advertised, sold, distributed or
otherwise disposed of by Licensee under this Agreement shall be of a high
quality and shall be sold and distributed in packaging prescribed by Licensor
bearing Licensor's trademarks and trade names. Such packaging may indicate that
the Licensed Products are distributed by Licensee. Licensor shall have the
right to determine in its reasonable discretion whether the Licensed Product
meets Licensor's high standards of merchantability. Licensee
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<PAGE> 44
agrees to furnish Licensor fee of cost for Licensor's written approval as to
quality and style which approval shall not be unreasonably withheld), samples
of the Licensed Product, together with its proposed advertising, packaging and
wrapping materials, before its manufacture, sale or distribution (whichever
first occurs) and the Licensed Product shall not be sold or distributed by
Licensee without such written approval.
7.2 If Licensor shall disapprove of any item submitted by Licensee for
approval hereunder, Licensor shall furnish at the time notice of disapproval is
given to Licensee an explanation of the reason(s) for such disapproval and
recommendations for suggested changes and Licensee shall resubmit such item
after changes have been made for Licensor's approval.
7.3 In the event that the quality of any Licensed Product approved by Licensor
shall become less than that approved by Licensor and Licensee shall fail to
raise the quality to the approved level within thirty (30) days after received
written notice from Licensor, the license granted under this Agreement for such
Licensed Product shall automatically terminate and shall remain terminated
until Licensor shall subsequently renew its approval of the Licensed Product.
7.4 If disapproval is not given by Licensee within five (5) business days
after Licensor's receipt of the item submitted for approval, Licensor's
approval shall be deemed to have been given. Subsequent to final approval,
Licensor may request the Licensee once each quarter to send, without charge, a
reasonable number of production samples (but in any event not less than two (2)
copies of each language version) without payment of any Royalty hereunder to
Licensor to ensure quality control. Should Licensor require additional samples
for any reason other than resale or any other commercial exploitation by
Licensor, Licensee shall be required
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<PAGE> 45
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to sell such samples to Licensor at its cost (but without payment of any
Royalties hereunder), but not more than * units of each Licensed Product.
8. ADVERTISING.
Licensee, at its own cost and expense, shall be solely responsible for all
advertising costs, including all in store and institutional advertising costs,
associated with the sale of Licensed Products in the Licensed Territory.
9. TRADEMARK AND COPYRIGHT, ETC.
9.1 "Notice" as used in this Section shall mean the following statutory
copyright notice and notice of registration or application for registration of
the licensed trademark:
_ _ _ _ (TM) or (R)
All Rights Reserved
C _ _ _ _ Licensed from [Atari(R) Games Corporation]
or such other copyright notices and notices of registration as may be required
by any third party licensors. Licensor shall advise Licensee prior to use
whether (TM) or (R) shall follow the words " _ _ _ _ ."
9.2 Licensee shall furnish to Licensor samples of all packaging in which the
Licensed Products are sold by Licensee and Licensor shall cause the copyright
in the packaging to be registered with the United States Copyright Office and
recorded with the United States Customs Department at Licensor's expense.
Licensee shall print, stamp or mold the Notice on all Licensed Products and on
the front of each package or container used in connection therewith, and
Licensee shall print the Notice on each label, advertisement and promotional
release concerning any Licensed Products, all in accordance with instructions
from Licensor, providing, however, that such notice shall be imprinted on the
back of the package or container
15
<PAGE> 46
used in connection therewith, displayed on the title screen of the Licensed
Product, and in the instruction booklet, if any, packaged with the Licensed
Product. Licensee agrees to execute and deliver to Licensor in such form as
Licensor may reasonably request all instruments necessary to effectuate
trademark protection or to record Licensee as a registered user of any
trademarks or to cancel such registration and if Licensee fails to execute such
instruments, Licensee hereby appoints Licensor Licensee's attorney-in-fact to
do so on Licensee's behalf. Licensee shall also furnish Licensor samples of
all advertising or promotional materials bearing the Notice for Licensor's
approval.
9.3 Subject to the terms of this Agreement, Licensee acknowledges and agrees
that: All copyrights, trademarks and service marks and rights to same referred
to in this Section in the name of and/or owned by Licensor shall be and remain
the sole and complete property of Licensor; that all such copyrights,
trademarks and service marks and rights to same in the name of or owned by any
copyright proprietor other than Licensor or Licensee shall be and remain the
sole and complete property of such copyright proprietor; that all trademarks
and service marks which, and/or the right to use which, arise out of the
license hereby granted to use the Licensed Property shall be and remain the
sole and complete property of Licensor; that Licensee shall not at any time
acquire or claim any right, title or interest of any nature whatsoever in any
such trademark or service mark by virtue of this Agreement or of Licensee's
uses thereof in connection with the Licensed Products; and that any right,
title or interest in or relating to any such trademark or service mark, which
comes into existence as a result of, or during the term of, the exercise by
Licensee of any right granted to it hereunder shall immediately vest in
Licensor.
9.4 Licensee agrees to assist Licensor at Licensor's expense to the extent
necessary in the procurement of any protection or to protect any of Licensor's
right to
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<PAGE> 47
the Licensed Property. Licensee shall notify Licensor in writing of any
infringements or imitations by others of the Licensed Property on articles
similar to those covered in this Agreement which may come to the Licensee's
attention. Licensor shall have the right to commence action to enforce its
proprietary rights and prosecute any such infringements, and Licensee agrees to
fully cooperate, at Licensor's expense, in any such action. However, Licensee
shall not incur any such expense reimbursable by Licensor without Licensor's
express written approval and all recoveries resulting from any such action
shall belong solely to Licensor. In the event Licensor declines to pursue any
such action, Licensee may, with Licensor's written permission, and subject to
the consent of any third party having rights in the Licensed Property,
institute such an action, and Licensor, at Licensee's expense, shall cooperate
in such action instituted by Licensee and all recoveries resulting from any
such action shall belong solely to Licensee. Licensor shall not unreasonably
withhold or delay its permission to enable Licensee to pursue an action (if
Licensor shall decline to pursue such action) against persons or entities
reasonably believed by Licensee to be counterfeiting or pirating Licensee's
Licensed Products. Licensor shall not unreasonably withhold or delay its
permission to grant to any sublicensee who requires it, at the time of entering
into a sublicense, reasonable rights (without Licensor's prior consent in each
instance) to pursue persons reasonably believed to be engaged in counterfeiting
or piracy of the Licensee Product.
9.5 During the term of this Agreement and thereafter, Licensee:
a) will not challenge the ownership or rights of Licensor in and to the
Licensed Property or any copyright or trademark pertaining thereto developed by
or for Licensor, nor attack the validity of the license granted hereunder or
participate in any challenge thereto;
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<PAGE> 48
b) will manufacture, sell and distribute the Licensed Products in compliance
with all applicable laws and governmental regulations in accordance with the
terms of this Agreement;
c) will not except as set forth in this Agreement, either directly or
indirectly, use or display or authorize others to use or display, the
trademarks, copyrights or proprietary rights of Licensor in connection with any
advertising, assembly, manufacture, distribution, use, sale or lease of any
goods, other than in connection with the manufacture and sale of the Licensed
Products; and
d) subject to Licensee's best business judgment Licensee will exercise
reasonable efforts to: manufacture sufficient quantities of the Licensed
Product to meet the market demand for same; conduct advertising activities to
promote the sale of Licensed Product; and make any and all arrangements
necessary to accomplish such undertakings.
10. MATERIALS.
10.1 Notwithstanding anything contained herein to the contrary and subject to
the terms of this Agreement, all artwork, designs and computer software
embodying the Licensed Property, or any reproduction thereof, or any packaging
or advertising materials, which are designed, developed and/or created by
Licensee hereunder (or any of its sublicensees, affiliates or subsidiaries),
shall be, and remain Licensor's sole and exclusive property, inclusive of all
copyrights and right to copyright therein and thereto for the life of the
copyright therein; provided that during the term of this Agreement, Licensee
shall have the exclusive right, license and privilege (without any compensation
to Licensor except as provided in Section 5) to use all such above described
materials in connection with its exploitation, sale and distribution of the
Licensed Products.
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<PAGE> 49
10.2 Licensor shall make available to Licensee, at Licensor's actual out of
pocket cost, any artwork relating to the Licensed Property which Licensor owns
and which is reasonably available to Licensor for Licensee's use in connection
with the exploitation of the Licensed Property.
11. TRANSLATIONS.
In the event that Licensee shall reasonably require the text associated
with any Licensed Product to be translated into a language other than English,
Licensor shall, upon request, provide to Licensee the text files and the text
that appears in bit map files and printed copies of the script used for audio
components of CD-ROM and cartridge versions only of the Licensed Product and
Licensee shall produce, at its own expense, a translation text thereof and
audio track therefor. Licensor shall then cause a new Master Disk containing
such translation and audio track to be encoded and delivered to Licensee, at
Licensor's own expense with respect to the CD-ROM version only and at
Licensee's expense with respect to the cartridge version, provided, however,
that Licensee shall bear the cost of encoding new Master Disks containing
translations into languages other than French, German, Chinese, Portuguese,
Spanish and Italian. Licensee shall also bear the cost of inserting audio
tracks on Home Video Game cartridges.
12. REPRESENTATIONS AND WARRANTIES.
12.1 Licensor hereby represents and warrants that this Agreement has been duly
authorized, executed and delivered by Licensor; Licensor has the full power and
authority to enter into this Agreement and perform its obligations hereunder;
this Agreement constitutes the valid and binding obligation of Licensor,
enforceable in accordance with its terms; the making of this Agreement does not
violate any agreement, right or obligation existing between Licensor and any
other person, firm or corporation; and the Licensed Property, if used
19
<PAGE> 50
pursuant to the license granted herein, will not infringe upon or violate any
rights of any third party.
12.2 Licensee hereby represents and warrants that this Agreement has been duly
authorized, executed and delivered by Licensee; Licensee has the full power and
authority to enter into and perform its obligations hereunder; this Agreement
constitutes the valid and binding obligation of Licensee, enforceable in
accordance with its terms; the making of this Agreement does not violate any
agreement, right or obligation existing between Licensee and any other person,
firm or corporation; its manufacture, advertisement, distribution and sale of
the Licensed Products will be in accordance with the terms of this Agreement
and will not infringe upon or violate any rights of any third party. Licensee
shall have obtained all necessary licenses for the sale of the Licensed
Products within the Licensed Territory from Nintendo(R), Sega(R), Sony(R) or
any other manufacturer of Designated Consumer Game Platforms.
13. INDEMNIFICATION.
13.1 Each party agrees to indemnify and hold the other (including officers,
directors, agents and employees of such party or its subsidiaries, affiliates
and sublicensees) harmless against any loss, damage, expense or cost (including
reasonable attorneys' fees) arising out of any claim, demand or suit or
judgment resulting from any breach of any warranty or representation set forth
in Section 12 above. Each party shall promptly inform the other of any such
claim, demand, suit or judgment.
13.2 In connection with any such claim, demand or suit referred to above, the
party so indemnifying (the "Indemnitor") agrees to defend, contest or otherwise
protect the indemnified party (the "Indemnitee") against any such suit, action,
investigation, claim or proceeding at the Indemnitor's own cost and expense.
The Indemnitee shall have the
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<PAGE> 51
right, but not the obligation to participate, at its own expense, in the
defense thereof by counsel of its own choice. In the event that the Indemnitor
fails timely to defend, contest or otherwise protect against any such suit,
action, investigation, claim or proceeding, the Indemnitee shall have the right
to defend, contest or otherwise protect against the same, and, upon ten (10)
days' written notice to the Indemnitor, make any compromise or settlement
thereof and recover the entire cost thereof from the Indemnitor, including
without limitation, reasonable attorneys' fees, disbursements and all
reasonable amount applied as a result of such suit, action, investigation,
claim or proceeding or compromise or settlement thereof. The obligations
hereunder shall survive the termination or expiration of this Agreement.
13.3 Neither Licensor nor Licensee shall be liable for any incidental,
consequential or punitive damages to the other.
14. EVENTS OF DEFAULT AND TERMINATION.
Licensee shall be deemed to be in default of this Agreement in the event
either of the following occurs:
a) Licensee fails to make any payment or furnish any statement in accordance
herewith, provided that Licensee shall have been given a first written notice
of such default and a period of at least fifteen (15) days in which to cure
such default and, if such default shall not have been cured within such period,
Licensee shall have been given a second written notice of such default and a
further period of at least ten (10) days in which to cure such default; or
b) Licensee fails after thirty (30) days' written notice to Licensee to
comply with any other of Licensee's obligations hereunder.
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<PAGE> 52
15. EXPIRATION OR TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement, all rights granted to
Licensee herein shall forthwith revert to Licensor with the following
consequences:
a) All unpaid Royalties shall be due and payable in accordance with Section
6.1 hereof.
b) Licensor shall thereafter be free to license others to use the Licensed
Property in connection with the manufacture, advertisement, distribution and
sale of items identical or similar to the Licensed Products in the Licensed
Territory.
c) In the event of termination or expiration of this Agreement, other than a
termination by Licensor as a result of a material breach of this Agreement by
Licensee, Licensee may continue to sell for a period of one hundred eighty
(180) days after the effective date of termination all approved copies of the
units of the Licensed Product produced prior thereto.
16. CONFIDENTIAL INFORMATION.
Each of the parties shall keep in confidence and not disclose or make
available to any third party, without the written permission of the other
party, the terms of this Agreement and the proprietary information of the other
party made known to it under this Agreement, including without limitation any
information with respect to proposed Games prior to the date on which they are
First Released and any Master Disk or version thereof. This requirement of
confidentiality shall not apply to information that is a) in the public domain
through no wrongful act of the disclosing party; b) rightfully received by the
disclosing party from a third party who is not bound by a restriction of
nondisclosure; c) already in the disclosing party's possession without
restriction as to disclosure; or d) is required to be disclosed by applicable
rules and regulations of government agencies or judicial bodies. This
obligation of
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<PAGE> 53
confidentiality: (a) shall survive termination of this Agreement and (b) shall
extend to any subcontractor of either party and each party agrees to obtain
from each such subcontractor a written agreement to abide by the foregoing
confidentiality requirements. Each of the parties shall be entitled to seek
injunctive or equitable relief to prevent the breach or threatened breach by
the other of the provisions of this Section and to secure its enforcement.
17. NOTICES.
Any notice, consent, approval, request, waiver or statement to be
given, made or provided for under this Agreement shall be in writing and deemed
to have been duly given (a) by its delivery personally or by express mail; or
(b) five (5) days after its being mailed, air express, registered or certified,
return receipt requested in a United States Post Office addressed as follows:
TO LICENSEE: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz,
Telephone Number: (212) 726-6508
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 726-6523
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 726-6500
Facsimile Number: (212) 679-6850
23
<PAGE> 54
TO LICENSOR: Atari Games Corporation
c/o WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
WITH A COPY TO: Williams Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
WITH A COPY TO: Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
or such other address as either party may designate by notice given as
aforesaid.
18. MISCELLANEOUS.
18.1 This Agreement is personal to Licensee as one party and Licensor as the
other party. Neither this Agreement nor any party's rights under it may be
assigned, in whole or in part, nor may Licensee's or Licensor's rights or
obligations hereunder be delegated, in whole or in part, to any person or party
without the prior written consent of the other party, except that any party may
assign its rights and delegate obligations to any of its direct or indirect
wholly-owned subsidiaries or affiliates or to any person, firm or corporation
owning or acquiring all or substantially all of the stock or assets of that
party, as long as that party remains fully liable for its obligations
hereunder. Any sale of all or substantially all of the assets or stock of
Licensor shall include a requirement for the assumption by the purchaser of all
covenants, obligations and duties undertaken by the seller pursuant to the
terms of this Agreement, including its obligations with respect to Games and
the intellectual property from which they are
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<PAGE> 55
derived. This Agreement shall bind the parties, their successors and permitted
assignees and delegees. Licensor as one party, and Licensee as the other
party, are each liable for their respective obligations under the terms of this
Agreement.
18.2 The entire understanding between the parties hereto relating to the
subject matter hereof is contained herein. This Agreement cannot be changed,
modified, amended or terminated except by an instrument in writing executed by
the parties hereto.
18.3 No waiver, modification or cancellation of any term or condition of this
Agreement shall be effective unless executed in writing by the party charged
therewith. No written waiver shall excuse the performance of any act other
than those specifically referred to therein and no waiver shall be deemed or
construed to be a waiver of such terms or conditions for the future or any
subsequent breach thereof.
18.4 This Agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between Licensor and Licensee, and
neither Licensor nor Licensee shall have any right to obligate or bind the
other in any manner whatsoever, and nothing herein contained shall give or is
intended to give any rights of any kind to any third persons.
18.5 This Agreement shall be governed by the laws of the State of Illinois
applicable to contracts made and to be wholly performed in the State of
Illinois.
18.6 If any provision of this Agreement is or becomes or is deemed invalid,
illegal or unenforceable under the applicable laws or regulations of any
jurisdiction, either such provision will be deemed amended to conform to such
laws or regulations without materially altering the intention of the parties or
it shall be stricken and the remainder of this Agreement shall remain in full
force and effect.
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18.7 This Agreement may be executed in counterparts each of which shall be
deemed an original and when taken together shall be deemed one and the same
document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
ATARI GAMES CORPORATION
By:
-------------------------
GT INTERACTIVE SOFTWARE CORP.
By:
-------------------------
26
<PAGE> 57
SCHEDULE A
[Description of Licensed Property as Set Forth in New Game Option Notice]
<PAGE> 58
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
SCHEDULE B
ROYALTIES
Licensee shall pay to Licensor royalties ("Royalties") computed as follows: (a)
with respect to Licensed Products which are subject to any Third Party Fees and
Royalties, an amount equal to the greater of (i) * of the actual Net Wholesale
Sales Price for each unit sold and not returned, or (ii) * of Licensee's average
Net Wholesale Sales Price for Front-line Home Video Games designed for play on
the same Designated Consumer Game Platform sold at Full Price and not returned
during the relevant Royalty Period; and (b) with respect to Licensed Products
which are not subject to any Third Party Fees and Royalties, an amount equal to
the greater of (i) * of the actual Net Wholesale Sales Price for each unit sold
and not returned, or (ii) * of Licensee's average Net Wholesale Sales Price for
Front-line Home Video Games designed for play on the same Designated Consumer
Game Platform sold at Full Price and not returned during the relevant Royalty
Period. The Royalty computed in accordance with clauses (a)(ii) and (b)(ii) of
the preceding sentence shall apply (A) for a period of one year from the date of
First Release of the Licensed Product by Licensee or its affiliates in each
Marketing Area with respect to Home Video Games released during the first two
(2) years of the Option Period, and (B) for a period of six (6) months from the
date of First Release of the Licensed Product by Licensee or its affiliates in
each Marketing Area with respect to Home Video Games released after the first
two (2) years of the Option Period. For purposes of this paragraph, a Licensed
Product shall be deemed "Front-line" if it is substantially equivalent to a Home
Video Game which has been released at a premium price by Licensor or its
licensees in the United States. Royalties for Licensed Products which are not
deemed Front-line products shall be calculated as provided in clauses (a)(i) or
(b)(i) of the first sentence of this paragraph. Solely for purposes of computing
Royalties in accordance with the first sentence of this paragraph, Licensed
Products shall not be deemed to be subject to any Third Party Fees and Royalties
if they are subject only to (x) de minimis Third Party Fees and Royalties
excluding developer royalties amounting to less than * in the aggregate of the
Net Wholesale Sales Price, or (y) royalties and other participations payable to
developers for services rendered in connection with the Licensed Product. In no
event shall the Royalty with respect to the sale of a Licensed Product at any
time be less than the Third Party Fees and Royalties (including royalties and
other participations payable to developers) payable with respect to such
Licensed Product.
Notwithstanding the foregoing, if at least twelve (12) months after the
date of the initial release by Licensee (the "First Foreign Sale") of a
Licensed Product subject to Third Party Fees and Royalties in each Marketing
Area, the Net Wholesale Sales Price of such Licensed Product has been reduced
from the original list price to the equivalent of (U.S.) * or less, then
Licensee may elect to pay to Licensor in lieu of the Royalty payable in
accordance with the first sentence of this Schedule B, an alternative royalty
(the "Alternative Royalty") equal to the greater of (i)
<PAGE> 59
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
* of the Net Wholesale Sales Price of such Licensed Product, plus an amount
equal to * of all Third Party Fees and Royalties payable with respect to the
sale of such Licensed Product or (ii) * of the Net Wholesale Sales Price of such
Licensed Product.
If at any time after March 31, 1996 or, with respect to new Designated
Consumer Game Platforms which are introduced subsequent to the date hereof, the
date on which such new Designated Consumer Game Platform is introduced, there
shall occur (a) a reduction in the standard platform royalties payable by
Licensee to Nintendo(R), Sega(R), Sony(R), or (b) any other Designated Consumer
Game Platform manufacturer with respect to the Licensed Products, or (b) a
reduction in landed unit manufacturing costs payable by Licensee to any Game
manufacturer, including, without limitation, any such reductions in platform
royalties or unit manufacturing costs which may result from reaching applicable
volume discount levels established by the Designated Consumer Game Platform
manufacturer or other Game manufacturer, then, in either or both such cases,
Licensee shall pay to Licensor, in addition to any Royalty otherwise payable
hereunder, an amount equal to * of the amount by which such platform royalty
and landed manufacturing costs have been reduced for each unit of Licensed
Product sold by Licensee. Such additional amounts shall be payable by
Licensee to Licensor at the time and in the manner specified in Section 6
above. Notwithstanding the foregoing, however, Licensee shall not be required
to pay to Licensor any such additional amounts based on reductions in platform
royalties and landed unit manufacturing costs payable in respect of Licensed
Products for the Sega Saturn and Sony PSX platforms unless and until such
platform royalties and landed unit manufacturing costs shall fall below *
Dollars per unit, and, in such cases, Licensee shall only be required to pay &
of the reduction in costs below * Dollars, as provided above.
All payments of Royalties by Licensee to Licensor hereunder shall either
be paid from Licensee's office in the United States or from Licensee's office
in the United Kingdom. Licensee shall be solely responsible for payment of,
and shall timely file and remit, any foreign taxes (including any foreign taxes
on Royalties required to be withheld at the source) related to this Agreement.
Licensee shall promptly assist Licensor as necessary in obtaining a United
Kingdom royalty tax withholding exemption, or with any other documentation
required concerning Licensee's operations outside the United States. If taxes
on Royalties payable hereunder imposed by any foreign jurisdiction are required
to be withheld at the source, Licensee shall remit such Royalties net of any
withholding taxes together with all appropriate documentation and reporting
forms.
The "Net Wholesale Sales Price" of Licensed Products shall be the price
invoiced to customers, less any price discounts, rebates or credits granted at
the time of sale and taxes invoiced to customers (including VAT). No deduction
shall be made for bad debts or other uncollected amounts, advertising
allowances, including cooperative advertising, or any other costs incurred in
manufacturing, selling or distributing the Licensed Products.
2
<PAGE> 60
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
ADJUSTMENTS TO ROYALTIES
Anything above to the contrary notwithstanding:
1. In cases where Licensed Products are sold by non-affiliated third party
sublicensees under sublicenses granted by Licensee in accordance with the
provisions of the Master Atari Home Video Agreement, Royalties shall be payable
by Licensee to Licensor hereunder equal to the sum of (a) an amount equal to
all Third Party Fees and Royalties payable with respect to the sale of such
Licensed Products, plus (b) * of the proceeds received by Licensee from such
sublicensee after deducting (i) a fee to Licensee equal to * of such net
proceeds, (ii) an amount equal to all Third Party Fees and Royalties, and,
(iii) in the case of non-affiliated third party sublicensees to whom Licensee
supplies the Licensed Product, Licensee's direct manufacturing and shipping
costs. In no event shall the Royalty per unit be less than * of such Third
Party Fees and Royalties.
2. If Licensee's Weighted Average Gross Profits as a percentage of sales
of Accepted Games under this Agreement and all Other Atari Home Video Game
Distribution and License Agreements other than Games with respect to which an
Alternative Royalty is payable, for the twelve (12) months ending June 30, 1997
are less than Licensee's Weighted Average Gross Profits as a percentage of
sales of Accepted Games under this Agreement and all Other Atari Home Video
Game Distribution and License Agreements other than Games with respect to which
an Alternative Royalty is payable, for the twelve (12) months ending December
31, 2000, then the Royalties otherwise payable by Licensee under this Agreement
and all Other Atari Home Video Game Distribution and License Agreements for the
first Renewal Option Year (ending June 30, 2002), if any, shall be increased,
as a percentage of Net Wholesale Sales Price, for each unit sold and not
returned, by an amount equal to * of the difference. If Licensee's Weighted
Average Gross Profits as a percentage of sales of Accepted Games under this
Agreement and all Other Atari Home Video Game Distribution and License
Agreements during the 12 months ended December 31, 2001, or any subsequent
12-month period during the Renewal Option Period, shall be greater or less than
Licensee's Weighted Average Gross Profits as a percentage of sales of Accepted
Games during the preceding 12-month period, then the Royalties otherwise
payable by Licensee under this Agreement and all Other Atari Home Video Game
Distribution and License Agreements shall be similarly increased or decreased
for the next Renewal Option Year by an amount equal to * of the difference, but
in no event shall Royalties payable by Licensor under this Agreement and all
Other Atari Home Video Game Distribution and License Agreements be reduced at
any time to an amount less than the amounts set forth in the first sentence of
this Schedule B. For purposes hereof, Licensee's "Weighted Average Gross
Profits" with respect to the sale of Accepted Games under this Agreement and
all Other Atari Home Video Game License Agreements shall mean the weighted
average, computed on a platform by platform basis, of (a) aggregate sales of
Accepted Games other than Games with
3
<PAGE> 61
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
respect to which an Alternative Royalty is payable, less (b) landed
manufacturing costs and platform royalties paid or payable with respect to such
Accepted Games. Any amounts actually paid or payable to Licensor by Licensee as
additional Royalties hereunder by reason of a reduction in platform royalties or
landed unit manufacturing costs, as provided above (including without limitation
any such amounts paid or payable by reason of a reduction in platform royalties
or landed unit manufacturing costs of Licensed Products for the Sega Saturn or
Sony PSX platforms below * Dollars per unit), shall be added back in determining
Weighted Average Gross Profits hereunder. For example, if Licensee's Weighted
Average Gross Profits as a percentage of sales of Accepted Games during the
twelve (12) months ended by June 30, 1997 are *, and Licensee's Weighted Average
Gross Profits during the twelve months ending December 31, 2000 are * of sales
of Accepted Games, then the Royalty otherwise payable by Licensee to Licensor as
a percentage of Net Wholesale Sales Price during the first Renewal Option Year
(ending June 30, 2002) shall be increased by * of the difference, or *.
3. If the Licensed Product shall incorporate Computer Software in the form
of a cartridge, as opposed to a CD-ROM disk or other device containing the
computer game code (a "Cartridge-Based Product"), Licensee may elect to adjust
the Royalties otherwise payable with respect to sales of such Cartridge-Based
Product in a Marketing Area as follows: The "Cartridge Margin" for such
Cartridge-Based Product shall be calculated by subtracting from * the sum of
(i) the applicable percentage Royalty with respect to sales of such
Cartridge-Based Product, determined in accordance with the first sentence of
this Schedule B above, and (ii) the landed unit cost of such Cartridge-Based
Product, stated as a percentage of the Net Wholesale Sales Price therefor. If
the Cartridge Margin is less than the applicable percentage Royalty otherwise
payable on sales of such Cartridge-Based Products, the applicable percentage
Royalty shall be reduced by an amount equal to * of the difference between such
percentage Royalty and the Cartridge Margin, provided, however, that in no
event shall the Royalty payable with respect to sales of Cartridge-Based
Products be less than the Third Party Fees and Royalties payable with respect
thereto.
For example, if the Royalty percentage rate determined in accordance with
the first sentence of this Schedule B is * for a Cartridge-Based Product having
a Net Wholesale Sales Price in a given Marketing Area of * Dollars and a
landed unit cost of * Dollars (i.e., * of Net Wholesale Sales Price), the
Cartridge Margin for such Cartridge-Based Product would be *. Since the
Cartridge Margin * is less than the applicable percentage Royalty *, the
applicable percentage Royalty shall be reduced by * of the difference, or *,
such that the adjusted Royalty percentage payable on sales of such
Cartridge-Based Product in the Marketing Area will be *.
4
<PAGE> 62
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
RECOUPMENT.
1. Licensee shall be entitled to apply the Royalties applied or accrued
under this Agreement (the "Recoupable Amount"), to recoup the * Dollar Minimum
Guaranteed Advance Royalty paid by Licensee to WMS Industries Inc. pursuant to
Section 3 of the Master Atari Home Video Agreement and the Master Atari PC
Agreement (as that term is defined in the Master Atari Home Video Agreement),
until such Recoupable Amount together with the Recoupable Amounts applied or
accrued by Licensee under any other Atari Home Video Game Distribution and
License Agreement entered into by Licensee pursuant to the Master Atari Home
Video Agreement ("Other Atari Home Video Game Distribution and License
Agreements") and under any Atari Home Computer Software License Agreement
entered into by Licensee pursuant to the Master Atari PC Agreement (and to the
extent applicable amounts which may be recouped against such Minimum Guaranteed
Advance Royalty pursuant to the GTIS Master Home Video Agreement and the GTIS
Master PC Agreement) equal * Dollars; provided, however, that (i) to the extent
that the aggregate of all Recoupable Amounts applied or accrued under this
Agreement and the Other Atari Home Video Game Distribution and License
Agreements and under any Atari Home Computer Software License Agreement entered
into pursuant to the Master Atari PC Agreement between the Effective Date and
one year after the Effective Date exceed the installment of the Minimum
Guaranteed Advance Royalty paid on the Effective Date, such excess shall be
paid to WMS Industries Inc. and applied in reduction of the installment of the
Minimum Guaranteed Advance Royalty payable one year after the Effective Date
under the Master Atari Home Video Agreement and the Master Atari PC Agreement.
2. Until Licensee shall have fully recouped the * Minimum Guaranteed
Advanced Royalty, Licensor shall pay over to Licensee, Licensor's share of net
profits from the exploitation of the Licensed Products in Japan, and all
amounts so paid over to Licensee shall be deemed to constitute additional
Recoupable Amounts (as that term is used above) under this Agreement.
LIMITATIONS ON FREE AND PROMOTIONAL GOODS; CLOSE-OUTS.
Licensee shall be permitted to distribute free and promotional goods
without the payment of any Royalties or other royalties thereon, subject to the
provisions of Section 1 above and within the following territorial and quantity
limits:
United Kingdom,
Germany, Scandinavia,
Benelux, Italy, Spain, and
Australia: * units per country
Other Countries: * units per country
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No Royalties shall be payable by Licensee to Licensor in excess of any
Third Party Fees and Royalties in connection with the sale by Licensee of
"close-outs." For purposes hereof, "close-outs" shall mean any Licensed
Products that are sold for a price no greater than the sum of direct
manufacturing and shipping costs plus platform royalties and any Third Party
Fees and Royalties.
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SCHEDULE C
MARKETING AREAS
The following countries or related groups of countries shall each be
deemed a single Marketing Area:
United Kingdom and Ireland*
France*
Germany, Switzerland and Austria*
Benelux*
Spain and Portugal*
Italy*
Scandinavia
Former Eastern Bloc and the Baltic States (Latvia, Lithuania, Estonia)
Russia and Rest of the CIS
Rest of Europe (including Turkey)
Africa
Middle East
India and Pakistan
China (PRC excluding Hong Kong and Macao)*
Rest of Asia
Australia and New Zealand
Brazil
Rest of South and Central America and the Caribbean
_____________________
* Denotes Key Marketing Area
<PAGE> 1
EXHIBIT 10.15
CERTAIN INFORMATION HAS BEEN OMITTED UNDER A
CONFIDENTIAL TREATMENT REQUEST MADE PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
MASTER OPTION AND LICENSE AGREEMENT FOR ATARI PC GAMES
This Master Option and License Agreement (the "Agreement") is made and
entered into the 27th day of March, 1996, by and among WMS INDUSTRIES INC.
("WMS"), a Delaware corporation with offices at 3401 North California Avenue,
Chicago, Illinois 60618, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a
Delaware corporation with offices at 16 East 40th Street, New York, New York
10016.
W I T N E S S E T H:
WHEREAS, Williams Interactive Inc. ("WII"), a wholly-owned subsidiary of
WMS, has entered into an agreement with Warner Communications Inc. for the
acquisition of the stock of Atari Games Corporation ("AGC"); and
WHEREAS, AGC is engaged in the business of designing, manufacturing and
selling coin-operated amusement games and software products for dedicated home
game systems and multipurpose home computers; and
WHEREAS, GTIS is engaged in the business of publishing, manufacturing and
distributing entertainment software products; and
WHEREAS, GTIS desires to acquire certain rights from WMS and AGC and
<PAGE> 2
other subsidiaries of AGC with respect to Games, as such term is defined
herein, and WMS desires to grant and to cause AGC to grant such rights to GTIS;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1 "Accepted Game" shall mean any Game with respect to which GTIS has
received a license or has exercised an option to acquire a license provided for
in Section 2 hereof.
1.2 "AGC" shall have the meaning ascribed in the first recital of this
Agreement.
1.3 "Atari Game" shall mean (i) any game developed or acquired by or on behalf
of AGC or entities which were affiliates of AGC prior to AGC being acquired by
WII pursuant to the Stock Purchase Agreement, including, without limitation,
those games listed on Schedule 1 hereto, and any adaptations of such games for
other platforms, and (ii) any game currently in development or developed
subsequent to such acquisition by or on behalf of AGC or a member of the Atari
Group, or developed, in whole or in substantial part, by any person or persons
who were employees of AGC or a member of the Atari Group as of the closing date
of such acquisition and who are employees of any member of the WMS Group at the
time of such development, and any adaptations of such games for other
platforms. For purposes of this Section, employees shall be deemed to include
independent contractors who work a substantial portion of their time at the
facilities of any member of the WMS Group.
1.4 "Atari Group" shall mean AGC, or any entity, a majority of whose capital
stock is owned directly or indirectly by AGC or with respect to which during
the term
2
<PAGE> 3
of this Agreement, AGC, directly or indirectly, has the legal power, without
the consent of any third party, to direct the acquisition of rights to or
exploitation of Games on Designated Multipurpose Computer Platforms.
1.5 "Atari Home Computer Software Distribution and License Agreement" shall
mean an agreement for the license of an Accepted Game for use solely on
Designated Multipurpose Computer Platforms in the form of Exhibit A annexed
hereto, as the same may be amended from time to time by written agreement of
the parties thereto.
1.6 "Designated Multipurpose Computer Platforms" shall mean IBM PC or Apple
Macintosh or other compatible multipurpose home computers which utilize floppy
disks or CD-ROMs or other stand alone devices which may hereafter replace or
supplement floppy disks or CD-ROMs in all operating systems now known or
hereafter developed or designed for use on the aforesaid multipurpose home
computers. Designated Multipurpose Computer Platforms shall not for purposes
of this Agreement include dedicated home game systems, such as those marketed
by Nintendo(R), Sega(R), Atari(R), Sony(R), etc.
1.7 "Early Termination Event" shall mean AGC ceasing to be at least 50.1%
owned by a member of the WMS Group, or the Atari Group transferring a majority
of its intellectual property assets and licenses to a person or entity who is
not a member of the WMS Group.
1.8 "Effective Date" shall mean the date WII closes the acquisition of AGC
pursuant to the Stock Purchase Agreement.
1.9 "First Release" or "First Released" shall have the meaning ascribed in
Section 2.4 hereof.
3
<PAGE> 4
1.10 "Game" shall mean any coin-operated video game (including kits), any home
video game and any on-line game which is an Atari Game and which is released or
intended to be released, by any member of the WMS Group for sale in commercial
quantities in the normal course of business. Home video games shall include
games designed for play on dedicated home game systems, such as those marketed
by Nintendo, Sega, Atari, Sony, etc. as well as on multipurpose home computers,
such as those marketed by IBM and Apple.
1.11 "Game Version", or version of a Game, or any similar phrase, whether or
not capitalized, shall mean the version of a Game designed to play on a
specific Designated Multipurpose Computer Platform.
1.12 "GTIS" shall mean GTIS or any affiliate of GTIS to whom any rights to
exploit any Accepted Games granted hereunder may be sublicensed. An affiliate
of GTIS shall refer to an entity, a majority of whose capital stock is owned
directly or indirectly by GTIS or with respect to which during the term of this
Agreement, GTIS, directly or indirectly, has the legal power without the
consent of any third party to direct the manufacture, distribution or sale of
Accepted Games.
1.13 "GTIS Master Home Video Agreement" shall mean the GTIS Master Option and
License Agreement (Home Video) dated March 31, 1995, as amended, among WMS,
Williams Electronics Games, Inc., Midway Manufacturing Company, Williams
Entertainment Inc. and GTIS.
1.14 "GTIS Master PC Agreement" shall mean the GTIS Master Option and License
Agreement dated December 28, 1994, as amended, among WMS, Williams Electronics
Games, Inc., Midway Manufacturing Company, Williams Entertainment Inc. and
4
<PAGE> 5
GTIS.
1.15 "Master Atari Home Video Agreement" shall mean the Master Option and
License Agreement for Atari Home Video Games being executed simultaneously
herewith.
1.16 "Master Disk" shall mean a CD-ROM disk or floppy disk or any other stand
alone devices which may hereafter replace or supplant CD-ROM or floppy disks,
containing the source code utilized by the Atari Group for an Accepted Game.
1.17 "Milestones" shall mean the defined tasks in the process of the
development of a Technically Acceptable Master Disk as are deemed sufficiently
important such that the achievement of such tasks will entitle the developer to
receive a payment, the amount of such payment, the standards for approval which
will entitle that developer to receive such payment and the circumstances under
which the development arrangement may be terminated prior to completion.
1.18 "Minimum Guaranteed Advance Royalty" shall have the meaning ascribed in
Section 3 hereof.
1.19 "New Game Option Notice Date" shall have the meaning ascribed in Section
2.4 hereof.
1.20 "Option Period" shall mean the period commencing on the Effective Date and
ending on the earlier to occur of (i) the expiration date, including any
extensions thereof, of GTIS' first option to acquire licenses pursuant to
Section 2.1 of the GTIS Master PC Agreement, or (ii) the first date after the
Effective Date on which an Early Termination Event occurs.
5
<PAGE> 6
1.21 "Pirate" shall mean an individual or entity which counterfeits a game or
sells counterfeit games.
1.22 "Projects in Process" shall have the meaning ascribed in Section 2.3
hereof.
1.23 "Stock Purchase Agreement" shall mean the Stock Purchase Agreement dated
February 23, 1996 between Warner Communications Inc. and WII pursuant to which
Warner Communications has agreed to sell and WII has agreed to purchase all of
the outstanding stock of AGC.
1.24 "Technically Acceptable Master Disk" shall mean a completed and
functioning Master Disk for the Accepted Game in a format substantially ready
to be reproduced and manufactured for retail distribution and the instruction
manual therefor. The Accepted Game contained in the Technically Acceptable
Master Disk will have been alpha and beta tested and all known material bugs
and defects will have been corrected.
1.25 "WMS Group" shall mean WMS or any subsidiary, affiliate or other entity, a
majority of whose capital stock is owned directly or indirectly by WMS or with
respect to which during the term of this Agreement, WMS, directly or
indirectly, has the legal power, without the consent of any third party, to
direct the acquisition of rights to or exploitation of Games on Designated
Multipurpose Computer Platforms.
2. GRANT AND TERMINATION OF OPTION; EXERCISE OF OPTION.
2.1 Effective from and after the Effective Date, the Atari Group hereby grants
to GTIS a first option to acquire a license, in the form of the Atari Home
Computer Software Distribution and License Agreement, to manufacture,
distribute and sell versions of the
6
<PAGE> 7
Games for use solely on Designated Multipurpose Computer Platforms, with respect
to (i) Projects in Process and (ii) other new Games First Released by the Atari
Group during the Option Period.
2.2 The Atari Group shall not grant a license to any third parties to
manufacture, distribute and sell versions of a Game for use on any Designated
Multipurpose Computer Platforms if such Game would be subject to GTIS' first
option right to manufacture, distribute and sell versions of such Game on
Designated Multipurpose Computer Platforms, as specified in Section 2.1 hereof,
until such time as GTIS shall have declined to acquire a license, or the option
periods specified in Sections 2.3, 2.4 and 2.5 hereof, whichever is applicable,
shall have expired, or the applicable Atari Home Computer Software License
Agreement shall otherwise permit. GTIS understands, acknowledges and agrees
that (i) on the Effective Date the Atari Group's library of Games, as well as
Projects in Process and subsequent versions of Games, may be subject to rights
held by third parties, including affiliates of Warner Communications Inc. who
are not members of the Atari Group; any license or rights acquired by GTIS
hereunder shall be subject to such third party rights and the form of Atari Home
Computer Software and License Agreement will be deemed modified to the extent so
required; (ii) with respect to Games manufactured by the Atari Group under
license from third parties, the rights granted by the Atari Group to GTIS cannot
exceed the rights obtained by and will be subject to the limitations imposed on
the Atari Group from such third party and the form of Atari Home Computer
Software Distribution and License Agreement will be deemed modified to the
extent so required; (iii) although the Atari Group is developing Games in the
normal course of business, the Atari Group is under no obligation to develop
Games or to present any
7
<PAGE> 8
minimum number of Games to GTIS under this Agreement; (iv) under certain
circumstances the ownership of the Atari Group may revert to Warner
Communications Inc. pursuant to the Stock Purchase Agreement and the documents
executed in connection therewith; and (iv) Williams/Nintendo, Inc. (a joint
venture company in formation owned by a wholly owned subsidiary of WMS and
Nintendo of America Inc.) has been granted a first right of negotiation with
respect to the exclusive right to produce and distribute certain coin-operated
games for all formats, including home computers, if those games are implemented
for play upon certain coin-operated hardware systems proprietary to Nintendo
and its licensors.
2.3 Schedule 2 hereto sets forth the titles of multipurpose home computer
games currently under development by the Atari Group for which the Atari Group
has heretofore made development advances and as to which the Atari Group may
have the right to grant licenses to GTIS to manufacture, distribute and sell
versions of the Game for use on one or more Designated Multipurpose Computer
Platforms ("Projects in Process"). Upon request of GTIS, GTIS shall be
provided the opportunity to review all existing third party agreements relating
to Projects in Process, as well as other games in the Atari Group library in
respect of which GTIS may have rights hereunder, subject to any applicable
confidentiality provisions in such agreements. Subject to rights of
distribution and other agreements existing on the date hereof, GTIS shall have
a period of sixty (60) days from the Effective Date to notify AGC in writing
that it elects to exercise its option to license one or more Projects in
Process under this Agreement. The Game versions included in GTIS' notice of
election shall become Accepted Games under this Agreement, except that the
Atari Group shall be under no obligations with respect to the time or method of
development of a Technically Acceptable Master Disk and GTIS
8
<PAGE> 9
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
shall not be required to fund * of the development costs upon receipt of a
Technically Acceptable Master Disk. GTIS shall be required to pay AGC * of all
developer royalties payable with respect to sales of such Games without right
of recoupment. GTIS shall have no further rights with respect to Projects in
Process not accepted within said 60 day period. The Atari Group shall have the
right to terminate the development of any Projects in Process at any time for
any reason.
2.4 With respect to Games other than Projects in Process which are First
Released by the Atari Group for the coin-operated, home video or on-line
markets after the Effective Date, including Games which were in the Atari Group
library on the Effective Date but which are re-released with new copyright
notices or other changes after the Effective Date, the Atari Group shall notify
GTIS in writing as to the existence of a Game within thirty (30) days after the
Atari Group has begun to ship the Game for use commercially in the ordinary
course of business (and not merely for the Atari Group's test purposes). The
date of such notice is hereinafter referred to as the "New Game Option Notice
Date." A Game shall be deemed First Released by the Atari Group on the date of
the first commercial shipment in the normal course of business and with respect
to on-line Games when such Games are first commercially sold to subscribers to
the on-line service. If the Atari Group does not actually make a commercial
shipment of a Game notwithstanding its original intention to do so, then the
Atari Group shall notify GTIS of its decision not to make such shipments and
the New Game Option Notice Date for such Game shall be deemed to be the date of
such notice. Each notice given in accordance with this Section 2.4, (i) shall
identify the Game, (ii) shall describe in reasonable
9
<PAGE> 10
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
detail its characteristics and method of play, and (iii) shall set forth a
proposed budget and time frame for developing Technically Acceptable Master
Disks for such game for play on Designated Multipurpose Computer Platforms, and
the identity of the proposed developer or developers. GTIS shall have a
reasonable opportunity to consult with the Atari Group prior to the Atari Group
determining the proposed budget, time frame and developers, but the final
decision shall be made by the Atari Group. Each such notice relating to a Game
manufactured by the Atari Group pursuant to a license from or subject to other
agreement with any third party shall set forth a summary of any material
limitations upon the scope of the license in respect thereof which may be
granted to GTIS hereunder, the amount or method of determining third party
royalties payable thereunder and the material terms of such license or other
agreement applicable to platforms other than Designated Multipurpose Computer
Platforms. With respect to each Game as to which GTIS receives written notice
as hereinabove provided, GTIS shall have a period of ninety (90) days from the
New Game Option Notice Date to notify AGC in writing that it elects to exercise
its option to license the Game. Upon receipt of such notice from GTIS, the
Atari Group will proceed to develop or retain a third party to develop a
Technically Acceptable Master Disk for such Game for play on one or more
Designated Multipurpose Computer Platforms as identified in the budget and will
use reasonable efforts to complete or cause the completion of such development
within twelve (12) months of receipt of such notice from GTIS. In addition to
any other payments made hereunder or under any Atari Home Computer Software
Distribution and License Agreement, subject to the provision of Paragraph 2.7
and Paragraph 2.11 below, GTIS shall pay to AGC * of the actual costs of such
code
10
<PAGE> 11
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
development simultaneously with receipt of a Technically Acceptable Master Disk
and a reasonably detailed written summary of the development costs, none of
which payment shall be recoupable by GTIS or repayable to GTIS in any manner or
for any reason. It is understood that the development budget shall include a
compensation expense of up to * for each Game version if the Atari Group
employs a dedicated in-house producer for the purpose of such development.
2.5 If, by itself, or through use of a third party developer, the Atari Group
determines to develop or acquire a Game for play on multipurpose home computers
that it has not theretofore developed or acquired for the coin-operated or
dedicated home game player market, it shall notify GTIS in writing as to its
intention, which notice shall describe in reasonable detail the proposed
characteristics of the Game and shall set forth an estimated budget and time
frame for developing Technically Acceptable Master Disks for such Game for play
on one or more Designated Multipurpose Computer Platforms and the identity of
the proposed developers. Each such notice relating to a Game the rights to
which are derived from a license or other agreement with a third party shall
set forth a summary of any material limitations upon the scope of the license
in respect thereof which may be granted to GTIS hereunder, the amount or method
of determining third party royalties payable thereunder and the material terms
of such license or other agreement applicable to platforms other than
Designated Multipurpose Computer Platforms. GTIS shall have an opportunity to
consult with the Atari Group prior to the Atari Group determining the proposed
budget, time frame and developers, but the final decision shall be made by AGC.
GTIS shall have a period of fifteen (15) days from the date of such notice
11
<PAGE> 12
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to notify AGC in writing that it elects to exercise its option to license the
Game. Upon receipt of such notice from GTIS, the Atari Group will proceed to
develop or retain a third party to develop a Technically Acceptable Master Disk
for such Game for play on one or more Designated Multipurpose Computer Platforms
as identified in the budget and will use reasonable efforts to complete or cause
the completion of such development within the estimated time frame set forth in
the notice. In addition to any other payments made hereunder or under any Atari
Home Computer Software Distribution and License Agreement, subject to the
provisions of Paragraphs 2.7 and 2.11 below, GTIS shall pay to AGC * of the
actual costs of such code development simultaneously with receipt of a
Technically Acceptable Master Disk and a reasonably detailed written summary of
the development costs, none of which payment shall be recoupable by GTIS or
repayable to GTIS in any manner or for any reason. It is understood that the
development budget shall include a compensation expense of up to * for each Game
version if the Atari Group employs a dedicated in-house producer for the purpose
of such development.
2.6 Any Game as to which GTIS has exercised its option within the notice
periods specified in Sections 2.3, 2.4 and 2.5 above shall become an Accepted
Game for all purposes of this Agreement. With respect to each Accepted Game,
GTIS and the member of the Atari Group which is manufacturing such Game shall
enter into an Atari Home Computer Software Distribution and License Agreement
which shall be dated the earlier of: the date GTIS shall have given notice of
its acceptance thereof, or the date which is sixty (60) days following the date
of the option notice. If either of such parties shall wrongfully refuse to
enter into an
12
<PAGE> 13
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Atari Home Computer Software Distribution and License Agreement with respect to
any Accepted Game, then, in addition to any other rights of the non-defaulting
party hereunder, at the option of the non-defaulting party, such Atari Home
Computer Software Distribution and License Agreement shall be deemed to have
been entered into as of the date on which GTIS shall have exercised its option
to acquire the license of such Accepted Game as provided herein. GTIS
understands and agrees that it will have no rights whatsoever in respect of any
Game which does not become an Accepted Game in accordance with the terms of
this Agreement and for which an Atari Home Computer Software Distribution and
License Agreement is not duly executed (or deemed executed as provided above),
and the Atari Group may exploit its rights in any Game which does not become an
Accepted Game in any manner it sees fit, free and clear of this Agreement.
2.7 The parties hereto acknowledge that notwithstanding efforts to produce
reliable development budgets under Sections 2.4 and 2.5 hereof, in certain
instances the actual costs of development may exceed the budgeted costs. In
those instances, AGC shall notify GTIS of the projected budget overrun (the
"Overrun Notice") promptly after AGC becomes aware of such overrun.
2.7.1 The following provisions shall apply to budget overruns in respect of
Games which became Accepted Games under Section 2.4 hereof ("Section 2.4
Games"); provided, that this Section 2.7.1 shall not apply to Accepted Games as
to which GTIS has exercised its rights of review and approval under Section 2.11
hereof. If the actual cost of development of a Section 2.4 Game being developed
by a third party developer is not more than * of the budget approved by GTIS,
GTIS will pay AGC * of such actual costs as provided in
13
<PAGE> 14
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Section 2.4 hereof. If the actual costs of development of a Section 2.4 Game
exceed * of the budget with respect to a Game being developed by a third party
developer or * of the budget with respect to a Game being developed in-house by
the Atari Group, whichever is applicable, GTIS shall have the right, by notice
to AGC given within ten (10) days of receipt by GTIS of the Overrun Notice, to
elect to bear * of the cost of such overrun or to decline to do so. A failure
by GTIS to give such notice within such ten (10) days shall be deemed an
election to decline to bear such costs. If GTIS so declines, AGC shall be
entitled to elect to (i) abandon the development, in which event AGC shall bear
the entire cost of the development, or (ii) proceed with the development with
GTIS, in which case GTIS shall pay * of (A) the actual costs of the development
up to * of the budget with respect to a Game being developed by a third party
developer or (B) * of the budget with respect to a Game being developed in-house
by the Atari Group, whichever is applicable, as provided in Section 2.4 and AGC
shall bear the balance of the costs of such development.
2.7.2 The following provisions shall apply to budget overruns in respect of
Games which become Accepted Games under Section 2.5 hereof ("Section 2.5
Games"); provided, that this Section 2.7.2 shall not apply to Accepted Games as
to which GTIS has exercised its rights of review and approval under Section 2.11
hereof. If the actual cost of development of a Section 2.5 Game being developed
by a third party developer is not more than * of the budget approved by GTIS,
GTIS will pay AGC * of such actual costs as provided in Section 2.5 hereof. If
the actual costs of development of a Section 2.5 Game exceed * of the budget
with respect to a Game being developed by a third party developer or * of the
budget
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<PAGE> 15
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
with respect to a Game being developed in-house by the Atari Group, whichever is
applicable, GTIS shall have the right, by notice to AGC given within ten (10)
days of receipt by GTIS of the Overrun Notice, to elect to bear * of the cost of
such overrun or to decline to do so. A failure by GTIS to give such notice
within such ten (10) days shall be deemed an election to decline to bear such
costs. If GTIS so declines, AGC shall have the right to abandon the
development, in which event AGC shall bear the entire cost of the development,
or to elect the options provided below in this Section 2.7.2. AGC may elect (i)
to proceed with the development with GTIS in which case GTIS shall pay * of (A)
the actual costs of the development up to * of the budget with respect to Games
being developed by a third party developer or (B) * of the budget with respect
to Games being developed in-house, whichever is applicable, and AGC shall bear
the balance of the costs of such development; or in the case of a Section 2.5
Game being developed by a third party developer who is not contemporaneously
developing the Game for AGC for other platforms, such as coin-operated or
dedicated home games systems, AGC may elect to proceed with the development
without GTIS involvement, in which case AGC shall bear the entire costs of
development, and the Game shall no longer be deemed an Accepted Game and GTIS
shall have no further rights in such Game.
2.7.3 Subject to the provisions of Section 2.11 hereof, GTIS shall bear * of the
actual costs of development of any Section 2.4 Game or Section 2.5 Game as to
which GTIS has exercised its rights of review and approval under Section 2.11.
2.7.4 Anything herein to the contrary notwithstanding, on notice
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<PAGE> 16
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
to GTIS and with consent of GTIS, which consent may not be unreasonably
withheld, AGC may elect to terminate development at any time prior to delivery
to GTIS of a Technically Acceptable Master Disk, at no cost to GTIS, if AGC
determines that further development work is not technically or economically
desirable. If GTIS fails to respond in writing to WMS' notice within ten (10)
Business Days after receipt thereof by GTIS, GTIS shall be deemed to have
consented to AGC's election to terminate development. If AGC should thereafter
determine to recommence development work, it will promptly notify GTIS which
will have the option on fifteen (15) days' notice to AGC to participate in such
renewed development on the same terms and conditions as if the original
development had continued uninterrupted. If GTIS withholds its consent to such
termination of development pursuant to this Section 2.7.4, GTIS shall (i)
promptly pay to AGC * of the costs of development to the date of AGC notice of
intent to terminate (excluding the budgeted compensation expense of the Atari
Group's dedicated in-house producer, if any); (ii) take over responsibility for
development of a Technically Acceptable Master Disk with the developer; and
(iii) bear the costs of development in excess of * of the budget. Upon receipt
by AGC of a notice from GTIS that GTIS has received a Technically Acceptable
Master Disk with respect to the Game, AGC shall pay to GTIS the amount, if any,
by which * of the actual costs of development up to * of the budget exceeds the
development costs theretofore paid by the Atari Group.
2.8 If GTIS has not exercised its option under Sections 2.4 or 2.5 above with
respect to a Game and if, before a member of the Atari Group enters into a
binding agreement with a third party for Designated Multipurpose Computer
Platform rights in such
16
<PAGE> 17
Game, there shall be a material change in design, a material decrease in the
development budget or a change in the identity of the developer from those
presented to GTIS before its declination to exercise its option, the Atari
Group will present such changed information to GTIS who shall have thirty (30)
days after receipt of such information to determine to elect to exercise its
option.
2.9 GTIS acknowledges that the Atari Group manufactures and sells Games for
many different entertainment platforms, including coin-operated games and home
games of all types, and that any Games in respect of which GTIS obtains rights
hereunder for exploitation on Designated Multipurpose Computer Platforms,
including rights under Section 2.5 hereof, may be developed by the Atari Group
for other entertainment platforms and GTIS will have no rights therein.
2.10 AGC agrees to use commercial efforts in its reasonable judgment, to
acquire rights to exploit Games in Designated Multipurpose Computer Platforms
when it acquires rights in Games from third parties or develops rights in Games
internally or through joint ventures. It is understood that with respect to
on-line Games, third parties may require such games to be exclusively offered
on-line, and GTIS shall have no rights hereunder with respect to such exclusive
on-line games.
2.11 Anything in Sections 2.4 or 2.5 to the contrary notwithstanding, in the
event that after March 31, 1996 the WMS Group desires to hire a third party
developer to develop a Technically Acceptable Master Disk for an Accepted Game,
GTIS shall have the right to review and approve (such approval not to be
unreasonably withheld) the proposed Milestones prior to the WMS Group entering
into a binding agreement with such developer (such right of review and approval
shall not extend to any terms of the developer agreement other than the
17
<PAGE> 18
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Milestones). The WMS Group shall notify GTIS in writing of its intention to
hire such third party developer and GTIS shall notify WMS in writing within five
(5) Business Days after receipt of the WMS Group notice that GTIS desires to
exercise its right of review and approval of Milestones. GTIS' failure to
timely notify WMS shall be deemed its election not to exercise such right of
review and approval. If GTIS shall exercise such right, GTIS and WMS shall
negotiate in good faith to reach agreement with respect to the proposed
Milestones as promptly as practicable. If such agreement is not reached within
ten (10) Business Days after receipt by WMS of GTIS' aforesaid notice, then WMS
may notify GTIS of Milestones which are acceptable to WMS and GTIS shall have
three (3) Business Days after receipt of such notice to accept such Milestones.
If GTIS does not accept such Milestones within such three (3) Business Day
period, WMS may proceed to enter into an agreement with such developer as if
GTIS had elected not to exercise its right of review and approval. If a
developer agreement is signed following acceptance by GTIS of the Milestones as
aforesaid, upon approval by GTIS and WMS of the material delivered and other
requirements of each of such Milestones, GTIS shall pay to WMS * of the
Milestone payments within five (5) Business Days after GTIS receives WMS'
invoice therefor. Such payment shall be credited against the obligations of
GTIS to pay WMS * of the actual costs of code development simultaneously with
the receipt of a Technically Acceptable Master Disk set forth in Sections 2.4
and 2.5. With respect to any Technically Acceptable Master Disk for which GTIS
is obligated to fund * of the Milestone payments, if WMS exercises its rights in
Section 2.7.4 to terminate development, the following shall apply: (1) if GTIS
consents to such termination, neither WMS nor GTIS shall be entitled to any
18
<PAGE> 19
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
reimbursement of the Milestone payments previously made by the other, or (2) if
GTIS withholds its consent to such termination, if permitted by the developer
agreement, GTIS may take over the responsibility for development of a
Technically Acceptable Master Disk with the developer and fund the balance of
the development costs. Upon receipt by WMS of a notice from GTIS that GTIS has
received a Technically Acceptable Master Disk with respect to the Game, WMS
shall pay to GTIS, the amount, if any, by which * of the original development
budget approved by WMS exceeds the Milestone payments previously made by WMS.
If GTIS has fully funded its obligations to make Milestone payments theretofore
due, GTIS may elect to terminate its obligations to make Milestone payments
with respect to future Milestones on which the developer has not yet commenced
work; provided that GTIS may not so elect unless the agreement with the
developer permits WMS to terminate its obligations to the developer by making
payments only for Milestones previously achieved or in work or GTIS agrees to
pay * of any costs of terminating the developer agreement. If GTIS properly
elects to terminate its obligation to make Milestone payments, (i) if WMS
agrees to such termination and also terminates the developer agreement, neither
WMS nor GTIS shall be entitled to any reimbursement of the Milestone payments
previously made by the other, or (ii) if WMS elects to continue development of
the Technically Acceptable Master Disk, GTIS shall be entitled to reimbursement
of the Milestone payments previously made by it upon completion by WMS of the
Technically Acceptable Master Disk, but GTIS shall be deemed to have waived any
future rights to distribute or license the version of the Game embodied in the
Technically Acceptable Master Disk. GTIS shall hold WMS harmless for any
claims by developers against the WMS
19
<PAGE> 20
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Group by reason of GTIS' failures to make Milestone payments under this
Section. WMS shall use its best efforts to cause agreements with developers
entered into after March 31, 1996 which relate to Technically Acceptable Master
Disks for which GTIS is making * of the Milestone payments to provide for GTIS
to have the right to assume the rights and obligations under that agreement
should WMS elect to terminate the agreement and GTIS elect to continue it. If
both WMS and GTIS elect to terminate a developer agreement and any proceeds are
subsequently generated from the abandoned project, the proceeds shall be shared
by WMS and GTIS in proportion to their Milestone payments made with respect to
such abandoned project. All ownership and rights in software, artwork,
literary text, designs and other works, and all intellectual property relating
thereto, which would have vested in a member of the WMS Group but for such
termination shall vest in such member of the WMS Group, not GTIS, even if GTIS
assumes the developer agreement, and the WMS Group shall remain entitled to all
of the benefits of the representations and warranties, indemnifications,
confidentiality provisions, restrictions, covenants and other obligations of
the developer which would survive termination of such agreement. The
provisions of this Section 2.11 are in all cases subject to the provisions of
Section 2.12. For developer agreements in respect of which GTIS has agreed to
make Milestone payments, the WMS Group shall provide GTIS a copy of the final
version of the developer agreement within ten (10) Business Days after the same
is signed; provided, however, that the WMS Group shall have the right to redact
any information in that agreement relating to third parties which does not
affect GTIS' rights or obligations.
2.12 If permitted under existing agreements with third parties, AGC
20
<PAGE> 21
agrees to submit its choice of each proposed third party developer to be
selected under Sections 2.4 and 2.5 of this Agreement to GTIS for GTIS'
approval, such approval not to be unreasonably withheld, and GTIS shall notify
AGC of its decision with respect to such developers within five (5) Business
Days after receipt by GTIS of AGC's notice. If the Technically Acceptable
Master Disk being developed is based upon a coin-operated Game which has been
released within the 24 month period preceding AGC's request for GTIS' approval
of the developer, or is released after such request for approval but prior to
the release of the home version of such Game, AGC shall have the final decision
in selecting the developer if a representative of AGC's coin-operated game
development group advises GTIS in writing that the selection of a particular
developer is important to such group. In all other circumstances, if GTIS
reasonably disapproves of the developer suggested by AGC, then that developer
shall not be used and a new developer shall be selected by AGC, subject to
GTIS' right of approval as provided above in this Section 2.12.
2.13 Royalties payable to AGC pursuant to Schedule B of the Atari Home Computer
Software Distribution and License Agreement are measured by the wholesale price
of Licensed Product. Accordingly, reasonably in advance of WMS' decision to
enter into a developer contract and reasonably in advance of GTIS' initial
release of the Licensed Product, GTIS shall advise WMS, at WMS' request, of
GTIS' expected pricing strategy and the reasons therefor. Nothing herein shall
be deemed to restrict GTIS' freedom in selecting wholesale sales prices it
considers appropriate, which shall be in GTIS' sole discretion.
2.14 If, under Section 2.1 of any Atari Home Computer Software Distribution and
License Agreement entered into under this Agreement, Licensor has granted
21
<PAGE> 22
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
written approval (which shall not be unreasonably withheld) to Licensee of a
sublicensee for the Licensed Property, such approval shall apply to the
sublicensing by that sublicensee of all Licensed Properties licensed to Licensee
under Atari Home Computer Software Distribution and License Agreements entered
into under this Agreement, subject to the following: (i) the sublicense
agreements shall contain provisions with respect to quality of Licensed Product,
trademarks, copyrights, materials, other intellectual property rights, rights of
additional sublicensing or assignment, termination rights, confidentiality,
accounting, auditing, reporting and payment procedures in form agreed to by GTIS
and WMS, and the form as so agreed to may be used by all approved sublicensees
described in clause (iii) below; provided that if such form is not so used, any
other form to be used shall be subject to prior approval as provided in this
subsection (i); (ii) no such blanket approval shall be deemed given with respect
to Licensed Properties as to which approval requirements imposed by third
parties, such as the NFL and NBA, apply, (iii) if the sublicense is for a
Marketing Area other than those designated as Key Marketing Areas in such Atari
Home Computer Software Distribution and License Agreement and if the expected
sales volume in such Marketing Area, in GTIS' good faith judgment, is an average
of * units or less per SKU per year, Licensee will not be required to obtain
Licensor's prior written approval of the terms of such license but Licensee will
be required to provide a copy of each sublicense to Licensor within ten (10)
Business Days after GTIS enters into such sublicense; and (iv) if the Marketing
Area is designated as a Key Marketing Area or if, in GTIS' good faith judgment,
the expected sales volume for such Marketing Area is more than an average of *
units per SKU per year, Licensee will be required to obtain Licensor's prior
written
22
<PAGE> 23
approval, which Licensor will not unreasonably withhold, of the terms of a
sublicense for such Marketing Area even if the identity of the sublicensee has
been previously approved; provided, however, if a sublicense is for multiple
platforms and multiple games, the approval of the sublicense will be deemed to
be approval for all Games distributed under that sublicense (subject to clause
(ii)). Anything to the contrary notwithstanding, (x) if a previously approved
sublicensee becomes an Exporter (as such term is defined in Exhibit A to the
GTIS Master Home Video Agreement) or a Pirate, Licensee will immediately upon
becoming aware thereof notify Licensor of the identity of such Exporter or
Pirate and as soon as practicable terminate the sublicense upon request by
Licensor, and (y) Licensor and Licensee will review every two years the
identity of sublicensees, and those sublicensees who previously received
blanket approval as provided in the first sentence of this Section and who are
no longer considered acceptable by Licensor, in the exercise of Licensors'
reasonable judgment, will no longer have such blanket approval and will be
subject to Licensor's prior approval with respect to all future sublicenses in
accordance with the approval procedures set forth above. Licensee shall use
all reasonable efforts to cause each agreement with its sublicensees to permit
Licensee to terminate such agreement immediately if such sublicensee shall be
or become an Exporter or a Pirate.
2.15 Within 60 days from the Effective Date, GTIS shall have the right to
propose to AGC five multipurpose home computer game projects involving up to a
maximum of 13 titles from the existing library of Atari Group games listed on
Schedule 2 hereto. AGC shall have the right to veto up to three of the titles
selected and GTIS may replace any title so vetoed by selecting another
available title from the aforesaid library. If GTIS has not proposed all five
game projects within such 60 days, it may propose the remaining projects
thereafter, but
23
<PAGE> 24
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
such later projects may involve only such titles as AGC has not exploited
itself or through third parties. GTIS will pay all costs of such projects,
including Third Party Fees and Royalties, advertising and all manufacturing and
development costs. AGC will own all copyrights, trademarks, intellectual
property and code developed in connection with such projects. GTIS will pay
AGC a royalty of * of Net Wholesale Sales Price, as such term is defined in
Schedule B to the Atari Home Computer Software Distribution and License
Agreement, of such games. Sublicensing revenues shall be treated in the same
manner as sublicensing revenues from Accepted Games except that AGC's share
shall be * of such revenues instead of *. Bundling revenues will be treated
the same as sublicensing revenues. Royalties payable to AGC will be recoupable
against the Minimum Guaranteed Advance Royalty. AGC will have rights to
approve product and packaging quality and advertising and promotional materials
as provided in the distribution and license agreements to be entered into with
respect to each such project. Such distribution and licensing agreement shall
be substantially in the form of the Atari Home Computer Distribution and
License Agreement, with such changes therein as are required to reflect the
provisions of this Section 2.15.
3. MINIMUM GUARANTEED ADVANCE ROYALTY. In consideration for both the option
granted herein and in the Master Atari Home Video Agreement and as a guaranteed
advance royalty, GTIS is paying to WMS the aggregate sum of * Dollars ("Minimum
Guaranteed Advance Royalty") in installments as follows: * Dollars shall be
paid by wire transfer to WMS in immediately available funds on the Effective
Date and * Dollars shall be paid in immediately available funds on or before
one year after the Effective Date. It is
24
<PAGE> 25
understood that under no circumstances shall the WMS Group or the Atari Group
be required to repay any portion of such amounts nor shall GTIS be entitled to
any set off or to claim the right not to pay any portion of such amounts for
any reason; provided that GTIS shall be entitled to recoup such payments out of
royalties, to the extent provided in the Atari Home Computer Software
Distribution and License Agreements entered into pursuant to this Agreement and
the Atari Home Video Distribution and License Agreements entered into pursuant
to the Master Atari Home Video Agreement, and to the extent not so recouped
from those agreements, GTIS shall be entitled to recoup such payments out of
royalties to the extent provided in the GTIS Master PC Agreement and GTIS
Master Home Video Agreement and related license agreements.
4. REPRESENTATIONS AND WARRANTIES OF WMS. WMS represents and warrants that
this Agreement has been duly authorized, executed and delivered by WMS; WMS has
the full power and authority to enter into this Agreement and to perform its
obligations hereunder and this Agreement constitutes the valid and binding
obligation of WMS, enforceable in accordance with its terms, and the making of
this Agreement by WMS does not violate or conflict with any agreement, right or
obligation existing between WMS and any other person, firm or corporation.
5. REPRESENTATIONS AND WARRANTIES OF GTIS. GTIS represents and warrants that
this Agreement has been duly authorized, executed and delivered by GTIS; GTIS
has the full power and authority to enter into this Agreement and to perform
its obligations hereunder and this Agreement constitutes the valid and binding
obligation of GTIS enforceable in accordance with its terms; and the making of
this Agreement by GTIS does not violate or conflict with any agreement, right
or obligation existing between GTIS and any other person,
25
<PAGE> 26
firm or corporation.
6. CONFIDENTIAL INFORMATION. GTIS shall keep in confidence and not disclose
to any third party, without the written permission of AGC, the terms of this
Agreement and the proprietary information of the Atari Group made known to it
under this Agreement. Likewise, WMS and the Atari Group shall keep in
confidence and not disclose to any third party, without the written permission
of GTIS, the terms of this Agreement and the proprietary information of GTIS
made known to them under this Agreement. This requirement of confidentiality
shall not apply to information that is (a) permitted to be disclosed under an
Atari Home Computer Software Distribution and License Agreement; (b) in the
public domain through no wrongful act of the receiving party; (c) rightfully
received by the receiving party from a third party who is not bound by a
restriction of nondisclosure; (d) already in the receiving party's possession
without restriction as to disclosure; or (e) is required to be disclosed by
applicable rules and regulations of government agencies or judicial bodies. WMS
or GTIS shall not issue any press release or other public or trade announcement
with respect to the transactions contemplated by this Agreement unless the
issuing party shall have first consulted with the other with respect thereto and
obtained the other's prior written approval therefor, which approval will not be
unreasonably withheld or delayed. The obligations of confidentiality under this
Section 6 shall survive termination of this Agreement. With respect to this
Agreement and all Atari Home Computer Software Distribution and License
Agreements entered into in connection therewith, each of the AGC Group and GTIS
agree to use reasonable efforts to ensure that either of them may disclose the
proprietary information of the other (including, without limitation, the
software source code and tools relating to any Game) only to those persons
within their organizations who
26
<PAGE> 27
have a need to know such information in order to perform its obligations under
this Agreement and the Atari Home Computer Software Distribution and License
Agreements and any such disclosure shall be limited to the information which
needs to be known. Further, neither the AGC Group nor GTIS shall use any such
proprietary information for purposes other than the performance of its
obligations under this Agreement and the Atari Home Computer Software
Distribution and License Agreements.
7. NOTICES. Any notice, consent, approval, request, waiver or statement to be
given, made or provided for under this Agreement shall be in writing and deemed
to have been duly given (i) by its delivery personally or by express mail; or
(ii) five (5) days after its being mailed, air express, registered or certified,
return receipt requested, in a U.S. Post office addressed as follows:
To GTIS:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz,
Telephone Number: (212) 726-6508
Facsimile Number: (212) 679-6850
With a copy to:
27
<PAGE> 28
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 726-6523
Facsimile Number: (212) 679-6850
With a copy to:
GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 726-6500
Facsimile Number: (212) 679-6850
To WMS:
WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
With a copy to:
Williams Entertainment Inc.
1800 South Business 45
Corsicana, TX 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 782-1964
or such other address as either party may designate by notice given as
aforesaid.
8. DEFAULT. In the event that GTIS shall default in any of its obligations
to
28
<PAGE> 29
make payment in full hereunder or under any Atari Home Computer Software
Distribution and License Agreement and the Atari Group or WMS has provided
notice of such default in accordance with the provisions of Section 7 hereof, if
GTIS has not cured such default in making payments hereunder within fifteen
(15) days of such notice, or within the grace periods provided in the Atari
Home Computer Software Distribution and License Agreement in respect of
payments thereunder, then, in addition to all other rights and remedies of the
Atari Group or WMS at law or in equity, at the option of the Atari Group or
WMS, all rights granted to GTIS under Section 2 of this Agreement shall be
deemed terminated and shall revert to the Atari Group, provided it is
understood that notwithstanding such termination, the Atari Home Computer
Software Distribution and License Agreements entered or deemed entered into
prior to such termination which are not in default shall remain in full force
and effect. No such termination shall in any way affect or diminish WMS' or
AGC's rights hereunder, including the right of WMS to receive the Minimum
Guaranteed Advance Royalty. Anything herein to the contrary notwithstanding,
the rights granted to GTIS under Section 2 of this Agreement shall not be
affected by an alleged default by Licensee under an Atari Home Computer
Software Distribution and License Agreement resulting from a bona fide dispute
between Licensor and Licensee provided that Licensee pays all undisputed
amounts to Licensor and all disputed amounts are paid into a bona fide third
party escrow account.
9. STOCK PURCHASE AGREEMENT CONDITIONS. This Agreement shall become
effective on the Effective Date and shall be null and void and of no further
force and effect if the Effective Date shall not have occurred by June 30,
1996. On the Effective Date, WMS shall cause AGC to execute an agreement of
assumption, whereby AGC shall assume all of the
29
<PAGE> 30
obligations of AGC and the Atari Group referred to in this Agreement.
Notwithstanding such assumption by AGC, WMS shall remain liable for the
obligations of AGC under this Agreement so long as an Early Termination Event
shall not have occurred.
10. MISCELLANEOUS.
10.1 This Agreement is personal to GTIS as one party and WMS as the other
party. Neither this Agreement nor any party's rights under it may be assigned,
in whole or in part, nor may its obligations be delegated, in whole or in part,
to any person or party without the prior written consent of the other party,
except that any party may assign its rights and delegate obligations to any of
its direct or indirect wholly-owned subsidiaries or affiliates or to any
person, firm or corporation owning or acquiring all or substantially all of the
stock or assets of that party, as long as both the assignee and the assignor
remain fully liable for assignor's obligations hereunder. After the Effective
Date, in connection with any Early Termination Event WMS and AGC shall obtain
the assumption by the purchaser or transferee of all covenants, obligations and
duties undertaken by the seller pursuant to the terms of this Agreement,
including its obligations with respect to Games and the intellectual property
from which they are derived. This Agreement shall bind the parties, their
successors and permitted assignees and delegees. WMS, as one party, and GTIS,
as the other party, are each jointly and severally liable for their respective
obligations under the terms of this Agreement.
10.2 The entire understanding between the parties hereto relating to the
subject matter hereof is contained herein. This Agreement cannot be changed,
modified, amended or terminated except by an instrument in writing executed by
the parties hereto.
10.3 No waiver, modification or cancellation of any term or condition
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<PAGE> 31
of this Agreement shall be effective unless executed in writing by the party
charged therewith. No written waiver shall excuse the performance of any act
other than those specifically referred to therein and no waiver shall be deemed
or construed to be a waiver of such terms or conditions for the future or any
subsequent breach thereof.
10.4 This Agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between WMS and GTIS, and neither
WMS nor GTIS shall have any right to obligate or bind the other in any manner
whatsoever, and nothing herein contained shall give or is intended to give any
rights of any kind to any third persons.
10.5 This Agreement shall be governed by the laws of the State of Illinois
applicable to contracts made and to be wholly performed in the State of
Illinois.
10.6 If any provision of this Agreement is or becomes or is deemed invalid,
illegal or unenforceable under the applicable laws or regulations of any
jurisdiction, either such provision will be deemed amended to conform to such
laws or regulations without materially altering the intention of the parties or
it shall be stricken and the remainder of this Agreement shall remain in full
force and effect.
10.7 This Agreement may be executed in counterparts each of which shall be
deemed an original and when taken together shall be deemed one and the same
document.
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<PAGE> 32
10.8 In the event of conflicts between the provisions of this Agreement and the
Atari Home Computer Software Distribution and License Agreement, the provisions
of this Agreement shall prevail.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
WMS INDUSTRIES INC.
By: /s/ Neil D. Nicastro
--------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Ronald Chaimowitz
--------------------------
32
<PAGE> 33
EXHIBIT A
HOME COMPUTER SOFTWARE
DISTRIBUTION AND LICENSE AGREEMENT FOR ATARI GAMES
AGREEMENT made this ___ day of __________, 199__, by and between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation with offices at 16 East
40th Street, New York, New York 10016 (herein called "Licensee") and ATARI
GAMES CORPORATION, a California corporation with offices at
(herein called "Licensor").
W I T N E S S E T H:
WHEREAS, Licensor owns or controls the rights in and to the Licensed
Property (which Licensed Property is hereinafter defined on Schedule "A"
attached hereto);
WHEREAS, Licensee is engaged in the business of manufacturing,
distributing and selling Computer Games (as hereinafter defined; such Computer
Games embodying the Licensed Property shall be hereinafter referred to as the
"Licensed Product"); and
WHEREAS, Licensee desires to use the Licensed Property in connection with
the manufacture, distribution and sale of the Licensed Product;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1 The term "Computer Game" is herein defined as any Computer Software
designed to operate on IBM PC or Apple Macintosh or other compatible
multipurpose home computers, using floppy disks or CD-ROM or other stand alone
devices in all operating
<PAGE> 34
systems now known or hereafter developed or designated for use on the aforesaid
multipurpose home computers. Computer Games shall not include, among other
things, Computer Software designed to operate on dedicated home game systems
(e.g. Nintendo, Sega, Atari, Sony, etc. game platforms).
1.2 The term "Computer Software" or "Software" shall mean any computer
software containing substantially full and complete computer game code,
including the source code, the assembly code, the object code and such data
files and other files as are deemed necessary for the Licensed Product to
achieve its functional purpose, whereby data and visual images, with or without
sound, can be manipulated, communicated, reproduced or perceived with the aid
of a computer.
1.3 The term "Master Atari PC Agreement" shall mean the Master Option and
License Agreement for Atari PC Games dated March 27, 1996, between Licensee and
WMS Industries Inc.
1.4 The term "Licensed Product" shall have the meaning ascribed in the second
Whereas clause of this Agreement and, as the context may require, shall also
include books which communicate game playing tactics and/or strategies ("hint
books") specifically prepared for Computer Games which shall also be deemed
Licensed Products hereunder and shall be subject to all of the terms and
conditions, including without limitation the royalty provisions, hereof.
1.5 The term "Licensed Territory" shall have the meaning ascribed in Section 3
of this Agreement.
1.6 The term "Other Atari Home Computer Software Distribution and
<PAGE> 35
License Agreements" shall have the meaning ascribed in Schedule B.
1.7 The term "Projects in Process" shall have the meaning ascribed in Section
1.18 of the Master Atari PC Agreement.
1.8 The words "term of this Agreement" or "period of this Agreement" or "term
hereof" or "so long as this Agreement remains in force" or words of similar
connotation shall include the initial period of this Agreement and the period
of all renewals, extensions, substitutions or replacements of this Agreement.
1.9 The term "Third Party Fees and Royalties" shall mean all fees, royalties
and other participations of any kind or nature payable by Licensor to any third
party, including developers, licensors and others having rights in connection
with the exploitation of the Licensed Products. There shall be excluded from
the term "Third Party Fees and Royalties" as used herein (1) any recoupable
advances which have already been included in any development budget or
acquisition costs with respect to the Licensed Product which are to be shared
by Licensor and Licensee, in accordance with the terms of the Master Atari PC
Agreement and which have not yet been recouped; and (2) any fees or royalties
payable to employees or consultants by Licensor or its affiliates with respect
to the development of Licensed Product in house. If, with respect to Games
other than Projects in Process, Licensor or its affiliates acquires from a
third party in one transaction the rights to exploit a Game on multiple
platforms, unless Licensee shall otherwise agree, Licensor shall fund advances,
if any, paid to such third party, and any such advances shall be excluded from
the term Third Party Fees and Royalties; provided, however, that if such
advances are recoupable by Licensor or its affiliates from future royalties
payable to such third party, then Third Party Fees and Royalties shall
3
<PAGE> 36
include such royalties which would otherwise be payable to such third party
were it not for such right of recoupment.
Capitalized terms used, but not defined herein, shall have the meaning
ascribed to such terms in the Master Atari PC Agreement.
2. GRANT OF LICENSE.
2.1 Licensor hereby grants and Licensee hereby accepts, for the term of this
Agreement and subject to the terms hereinafter set forth, the exclusive license
to utilize the Licensed Property solely in connection with the manufacture,
distribution and sale of the Licensed Products in the Licensed Territory.
Licensee shall have the right to sublicense any of the rights granted to
Licensee hereunder with Licensor's prior written consent, which consent shall
not be unreasonably withheld or delayed. Without limiting the generality of
the foregoing, (a) Licensor shall not unreasonably withhold or delay its
consent to proposals by Licensee to sublicense its rights hereunder to third
party personal computer hardware or computer peripheral device manufacturers
for the purpose of bundling the Licensed Products together with such hardware
products for distribution only within the Licensed Territory and (b) Licensee
shall not have the right to sublicense its rights hereunder (and Licensor may
withhold its consent to any proposed sublicense) to any third party for the
purpose of distributing Licensed Products to mass market retailers in the
United States. It is understood that the term Licensed Products does not
include Computer Software designed for play on dedicated home video game
systems, such as those manufactured by Nintendo, Sega, Sony or Atari, or any
other medium of exploitation, including handheld games, over the air, cable or
fiber-optic transmission or any ancillary rights related thereto, all of which
remain the sole property of Licensor except as otherwise specifically
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<PAGE> 37
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
provided below. No license is granted hereunder for the manufacture, sale or
distribution of Licensed Products to be used as premiums, in combination sales,
as giveaways or to be disposed of under similar methods of merchandising,
except only that Licensee shall have the right, subject to rights of third
parties in the Licensed Property, to distribute Licensed Products as premiums,
combination sales or giveaways solely (a) subject to Licensor's consent, which
shall not unreasonably be withheld or delayed, in connection with the sale and
distribution of other Computer Games licensed to Licensee by Licensor or its
affiliates under Other Atari Home Computer Software Distribution and License
Agreements, and (b) with respect to free or promotional goods in the quantities
set forth on Schedule B. [If Licensee's rights in Licensed Products are
derived under Section 2.5 of the Master Atari PC Agreement and relate to rights
acquired from third parties (as compared to rights to product developed
in-house by Licensor or its affiliates), add the following: Upon payment of
the * of the costs of the development as provided in Section 2.5 of the Master
Atari PC Agreement, Licensee shall be entitled to share in * of the net profits
derived by Licensee from the exploitation of ancillary merchandising rights to
the Licensed Product and Licensee shall be entitled to direct the exploitation
of such ancillary merchandising rights (but not hand held games) after
consultation and subject to Licensor's consent, which shall not unreasonably be
withheld or delayed. Licensee shall not be entitled to exploit or share in the
profits derived from any exploitation of games whether or not having the same
or similar title or play characteristics or using similar Computer Software, in
other game platforms, such as coin-operated games or dedicated home game
systems, or in any ancillary rights relating thereto. If ancillary
merchandising rights apply to or are derived from the
5
<PAGE> 38
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
exploitation of games which are designed to operate on multiple platforms
(irrespective of the chronological order in which such games are released for
such platforms), then the Licensor and Licensee will consult with each other to
determine a fair and appropriate method of exploiting the ancillary
merchandising rights and the respective participations of Licensor and Licensee
therein. For the purposes hereof, "net profits" shall be calculated by
subtracting from the actual monies received by Licensor or Licensee, as the
case may be, from the exploitation of the ancillary merchandising rights to the
Licensed Product (i) an amount equal to * of such receipts, representing
Licensor's or Licensee's allocation of overhead expenses, and (ii) all Third
Party Fees and Royalties payable by Licensor in connection therewith.
Licensor shall account to Licensee not less frequently than quarterly with
respect to the calculation and payment of its share of net profits as provided
above.]
2.2 This license does not include any rights to subsequent versions of the
Licensed Property (so-called "sequels" or "derivatives"), such rights being
retained by Licensor, except as the same are otherwise required to be offered
to Licensee under the Master Atari PC Agreement or as provided in the following
sentence. If any member of the Atari Group, as that term is defined in the
Master Atari PC Agreement, shall, within a period beginning not later than six
(6) months after Licensee has ceased selling a Licensed Product acquired under
Section 2.5 of the Master Atari PC Agreement in reasonable commercial
quantities, begin the development, in-house or through third-party developers,
of a sequel or derivative of such Licensed Product which utilizes more than *
of the same source code as such Licensed Product or substantially the same name
as such Licensed Product, then such sequel or
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<PAGE> 39
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
derivative shall be offered to Licensee on the same terms and conditions as a
Game would have been offered to Licensee during the Option Period as that term
is defined in the Master Atari PC Agreement.
3. TERRITORY.
3.1 Licensee shall be entitled to manufacture, distribute and sell the
Licensed Products in all countries throughout the world, except (a) Japan and
(b) countries or locations which are excluded under the terms of any license
agreement between Licensor and any third party having rights to the Licensed
Property. The territory in which Licensee shall be entitled to manufacture,
sell and distribute the Licensed Products as specified above is herein referred
to as the "Licensed Territory."
[If this is a game license for T-Mek for PC; or Return Fire for PC; or
Constructor for PC and Mac, then Licensee shall have rights to a share of the
profits from the distribution of these games in Market Areas excluded under (b)
above, but for which Licensor will receive income under distribution agreements
existing as of the Effective Date. For these agreements, Licensor shall pay to
Licensee an amount equal to * of the proceeds received by Licensor from such
sublicensee after deducting (i) an amount equal to all Third Party Fees and
Royalties; (ii) an amount equal to the payment required to Warner Communications
Inc. as a result of this income; and (iii) in the case of sublicensees to whom
Licensor supplies the Licensed Product, Licensor's direct manufacturing and
shipping costs. The remaining income shall remain with Licensor and not be
paid to Licensee as Recoupable Amounts.]
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<PAGE> 40
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
3.2 After the end of the Japan Territory Period, as defined in the letter
between WMS Industries Inc. and Licensee dated March 27, 1996 captioned, "Japan
Territory," Licensor shall have the exclusive right to license any of its
rights in Japan to third parties, subject to Licensee's prior written consent,
which consent shall not be unreasonably withheld or delayed. With respect to
the exploitation by Licensor of the Licensed Property in Japan, Licensee shall
be entitled to share in * of the net profits (as calculated in Section 2.1
above) derived by Licensor from its sale of Licensed Products in Japan.
Licensor shall account and pay over to Licensee, not less frequently than
quarterly, Licensee's share of net profits from the sale by Licensor of
Licensed Products in Japan.
4. TERM.
[Note: For Licenses granted under Section 2.3 of the Master Atari PC
Agreement, insert the following:
The license granted hereunder shall be effective
on the date hereof [which date, for Projects in
Process, shall be the earlier of the actual release
date or 60 days after delivery of the Technically
Acceptable Master Disk, as that term is defined in the
Master Atari PC Agreement, to Licensee] and shall
terminate on the earlier of (a) three years from the date
hereof, or (b) upon termination of Licensor's rights
obtained from third parties, unless sooner terminated
in accordance with the terms and conditions hereof;
provided, however, that (a) the license term shall be
deemed
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<PAGE> 41
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
extended for an additional one year if Licensee has paid
royalties hereunder amounting to * or more in excess of * of
the amount of all Third Party Fees and Royalties payable in
respect of the exploitation of Licensed Products during the
third license year, and (b) the license term shall be deemed
further extended for a final additional one year if Licensee
has paid royalties hereunder amounting to * or more in
excess of * of the amount of all Third Party Fees and
Royalties payable in respect of the sale or other
exploitation of Licensed Products during the fourth license
year. For purposes hereof, royalties and Third Party Fees
and Royalties payable in respect of the sale or other
exploitation of Licensed Products during a license year
shall include amounts paid subsequent to the license year on
account of Licensed Products sold or otherwise exploited
during such license year, and shall not include amounts paid
during a license year on account of the sale or other
exploitation of Licensed Products during the prior license
year. Licensee shall be entitled, one time only, to make a
voluntary payment to Licensor in order to reach either (but
not both) of the * thresholds referred to above.]
[Note: For licenses granted under Section 2.4 of the Master Atari PC
Agreement, insert the following:
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<PAGE> 42
The license granted hereunder shall be effective
on the date hereof and terminate on the termination of
Licensor's rights obtained from third parties,
provided however, that at any time prior to five years
from the earlier of the actual release date or 60 days
after delivery of the Technically Acceptable Master
Disk, as that term is defined in the Master Atari PC
Agreement, to Licensee, Licensor may notify Licensee
of its election to terminate the license, effective on
expiration of such five-year period, and in such event
Licensor shall pay to Licensee the portion of the
development costs paid by Licensee under Section 2.4
of the Master Atari PC Agreement.]
[Note: For licenses granted under Section 2.5 of the Master Atari PC
Agreement, insert the following:
The license granted hereunder shall be effective
on the date hereof and terminate on the termination of
Licensor's rights obtained from third parties.]
5. CONSIDERATION.
Licensee shall pay Licensor, with respect to the sale throughout the
Licensed Territory of the Licensed Products, a royalty as specified in Schedule
"B" annexed hereto on each unit of Licensed Product sold.
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<PAGE> 43
6. ACCOUNTINGS.
6.1 Licensee agrees to forward to Licensor, within forty-five (45) days after
the end of each calendar quarter ("Royalty Period"), commencing with the first
calendar quarter during which any unit of the Licensed Product is sold, a
report, in reasonable detail and reported separately, by Marketing Area, of the
number of units and average wholesale price (by sales bracket, as provided in
Schedule B hereof) of the Licensed Products sold within such Royalty Period and
the royalty amount due for the sale of such units calculated in accordance with
Section 6.3 below and any recoupment claimed in accordance with Schedule B
annexed hereto, and Section 3 of the Master Atari PC Agreement. For purposes
hereof, the term "Marketing Area" shall include North America (as such term is
defined in the Master Option and License Agreement for Atari Home Video Games
between WMS Industries Inc. and Licensee, dated March 27, 1996 (the "Master
Atari Home Video Agreement"), and each of the other Marketing Areas designated
on Schedule C to Exhibit A of the Master Atari Home Video Agreement. Such report
shall also include a cumulative reconciliation of the number of units of
Licensed Products produced by Licensee to the number of units on hand. Licensee
agrees that accompanying each such report shall be payment, in U. S. funds, of
the amounts due to Licensor, if any, in respect of such Royalty Period in excess
of any permitted recoupment. Royalties calculated in foreign currencies shall be
converted to U. S. currency at the spot rate of exchange published in the Wall
Street Journal as of the last day of the Royalty Period. Such reports shall be
required to be submitted with respect to sales and distributions of the Licensed
Product whether or not any amounts are due under the terms hereof.
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6.2 Licensee agrees to keep accurate books of account and records with respect
to the Licensed Products, covering all sales, purchases and inventories of
Licensed Products and all royalty fees due under this Agreement at Licensee's
offices (or the offices of Licensee's affiliates) and to permit (or procure the
right for) Licensor at its own expense to have accounting professionals (which
may include Licensor's employees who have accounting degrees) inspect such
books of account and records of Licensee or its sublicensees during reasonable
business hours (but not during the first three weeks of a calendar quarter),
upon prior reasonable written notice, for the sole purpose of verifying the
reports to be provided hereunder. Such inspections, together with inspections
of Licensee's books of account and records pertaining to other Computer Games
licensed to Licensee by Licensor or its affiliates under Other Atari Home
Computer Software Distribution and License Agreements, shall occur no more
frequently than twice during any twelve (12) month period for each of the
Licensee's offices. Licensor's inspectors shall not be physically present in a
specific office of Licensee for more than 10 consecutive business days in
connection with any such inspection, provided that Licensee shall have supplied
all requested information and documentation and responded to questions on a
reasonably prompt basis. Licensee shall promptly furnish to Licensor copies of
any report which Licensee may produce as the result of any audit by Licensee of
the books of account and records of any sublicensee of Licensee. Licensor
shall keep any information obtained from any such inspections in confidence and
shall require that its accounting professionals do so as well. Licensee's
books relating to any particular royalty statement may be examined as aforesaid
only within two (2) years after the date rendered and Licensee shall have no
obligation to permit
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<PAGE> 45
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Licensor to so examine such books relating to any particular royalty statement
more than once professionals reveals that Licensee has underpaid Licensor by an
aggregate of * or more with respect to the specific royalty statements which
are the subject of such audit, Licensee agrees that it shall also reimburse
Licensor for the reasonable documented costs for any such audit (including
traveling costs) up to the amount of the shortfall.
6.3 Royalties shall be paid on * of products sold by Licensee's point of sale
("POS") customers, less actual returns. With respect to shipments to non-POS
customers, not less than * of the shipment shall be deemed a sale for royalty
purposes on the date of shipment. Not less than * of the balance of the
shipment, less actual returns, shall be deemed a sale for royalty purposes six
(6) months following the date of shipment, and the balance of such shipment,
less actual returns not already counted, shall be deemed a sale for royalty
purposes twelve (12) months following the date of shipment. As used herein,
point of sale customers mean those customers who report actual sales by
selection number to Licensee via computer and scan their sales by UPC codes at
cash registers.
6.4 Licensor shall permit Licensee, at Licensee's own expense, to have an
independent certified public accountant inspect Licensor's books and records
with respect to the payment by Licensor of Third Party Fees and Royalties in
connection with the Licensed Products, during reasonable hours, upon prior
reasonable written notice and subject to such confidentiality requirements
(including the execution of appropriate confidentiality agreements)
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<PAGE> 46
as Licensor may require, for the sole purpose of verifying payment and
calculation by Licensor of such Third Party Fees and Royalties. Licensor's
books and records may be examined by Licensee's representatives not more
frequently than twice in any twelve-month period and Licensee shall otherwise
have substantially the same rights as provided to Licensor under Section 6.2
above.
6.5 In circumstances where either party is obligated under this Agreement to
account to the other party in respect of any entitlement to the other party's
share in net profits from the exploitation of the Licensed Product, such party
shall account substantially in the same manner and in the same time frame as
provided in this Paragraph 6 above. The party to which such accounting is made
shall also have substantially the same rights as provided to Licensor in
Section 6.2.
6.6 Licensee recognizes that the timely submission of all reports required to
be submitted to Licensor pursuant to Section 6.1 hereof is critical for
Licensor to maintain good relations with its third party licensors as well as
for Licensor's own financial reporting requirements. Therefore, in addition to
any other rights and remedies of Licensor, if Licensee shall be late by more
than five (5) business days with respect to any report and/or royalty payment
required to be submitted to Licensor pursuant to Section 6.1 hereof (a "Late
Report"), then Licensee shall pay to Licensor a late charge ("Late Charge") at
a rate equal to the prime rate designated by Citibank N.A. on any royalties
covered by such Late Report that are actually payable to Licensor as provided
in Schedule B. Such Late Charge shall be computed from the 46th day following
the last day of the calendar quarter for which such Late Report is due until
the date actually paid. Licensor may elect to waive payment of any such
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<PAGE> 47
Late Charge if Licensee shall have provided a reasonable estimate of royalties
due within fifteen (15) days following the end of the calendar quarter covered
by such Late Report.
6.7 At the time that the Licensor shall provide to Licensee notice of
availability of a Game pursuant to Section 2.4 or 2.5 of the Master Atari PC
Agreement, Licensor shall provide to Licensee sufficient data to enable
Licensee to calculate Third Party Fees and Royalties payable with respect to
each Licensed Product (without regard to any advances which may have been made
by Licensor). If Licensee is unable to calculate specific Third Party Fees and
Royalties from the data provided, Licensee may request assistance from Licensor
with respect thereto, and Licensor shall use its best efforts to respond within
seven (7) days from the date of such request, but Licensee shall provide all
sales and other data in its possession which are necessary for such
calculations.
7. QUALITY OF LICENSED PRODUCT.
7.1 The Licensed Products as manufactured, advertised, sold, distributed or
otherwise disposed of by Licensee under this Agreement shall be of a high
quality and shall be sold and distributed in packaging prescribed by Licensor
bearing Licensor's trademarks and trade names. Such packaging may indicate that
the Licensed Products are distributed by Licensee. Licensor shall have the
right to determine in its reasonable discretion whether the Licensed Product
meets Licensor's high standards of merchantability. Licensee agrees to furnish
Licensor free of cost for Licensor's written approval as to quality and style
(which approval shall not be unreasonably withheld), samples of the Licensed
Product, together with its proposed advertising, packaging and wrapping
materials, before its manufacture, sale or distribution (whichever first
occurs) and the Licensed Product shall not be sold or distributed
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<PAGE> 48
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
by Licensee without such written approval.
7.2 If Licensor shall disapprove of any item submitted by Licensee for
approval hereunder, Licensor shall furnish at the time notice of disapproval is
given to Licensee an explanation of the reason(s) for such disapproval and
recommendations for suggested changes and Licensee shall resubmit such item
after changes have been made for Licensor's approval.
7.3 In the event that the quality of any Licensed Product approved by Licensor
shall become less than that approved by Licensor and Licensee shall fail to
raise the quality to the approved level within thirty (30) days after receiving
written notice from Licensor, the license granted under this Agreement for such
Licensed Product shall automatically terminate and shall remain terminated
until Licensor shall subsequently renew its approval of the Licensed product.
7.4 If disapproval is not received by Licensee within five (5) business days
after Licensor's receipt of the item submitted for approval, Licensor's
approval shall be deemed to have been given. Subsequent to final approval,
Licensor may request the Licensee once each quarter to send, without charge, a
reasonable number of production samples (but in any event not less than two (2)
copies of each language version) without payment of any royalty hereunder to
Licensor to ensure quality control. Should Licensor require additional samples
for any reason other than resale or any other commercial exploitation by
Licensor, Licensee shall be required to sell such samples to Licensor at its
cost (but without payment of any Third Party Fees and Royalties or other
royalty hereunder), but not more than * units of each Licensed Product.
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8. TRADEMARK AND COPYRIGHT, ETC.
8.1 "Notice" as used in this Section shall mean the following statutory
copyright notice and notice of registration or application for registration of
the licensed trademark:
_ _ _ _ (TM) or (R)
All Rights Reserved
C _ _ _ _ Licensed from [Atari(R) Games Corporation]
or such other copyright notices and notices of registration as may be required
by any third party licensors. Licensor shall advise Licensee prior to use
whether (TM) or (R) shall follow the words " _ _ _ _ ."
8.2 Licensee shall furnish to Licensor samples of all packaging in which the
Licensed Products are sold by Licensee and Licensor shall cause the copyright
in the packaging to be registered with the U.S. Copyright Office and recorded
with the U.S. Customs Dept. at Licensor's expense. Licensee shall print, stamp
or mold the Notice on all Licensed Products and on the front of each package or
container used in connection therewith, and Licensee shall print the Notice on
each label, advertisement and promotional release concerning any Licensed
Products, all in accordance with instructions from Licensor, providing,
however, that such notice shall be imprinted on the back of the package or
container used in connection therewith, displayed on the title screen of the
Licensed Product, and in the instruction booklet, if any, packaged with the
Licensed Product. Licensee agrees to execute and deliver to Licensor in such
form as Licensor may reasonably request all instruments necessary to effectuate
trademark protection or to record Licensee as a registered user of any
trademarks or to cancel such registration and if Licensee fails to execute such
instruments, Licensee hereby appoints
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<PAGE> 50
Licensor Licensee's attorney-in-fact to do so on Licensee's behalf. Licensee
shall also furnish Licensor samples of all advertising or promotional materials
bearing the Notice for Licensor's approval.
8.3 Subject to the terms of this Agreement, Licensee acknowledges and agrees
that: All copyrights, trademarks and service marks and rights to same referred
to in this Section 8 in the name of and/or owned by Licensor shall be and remain
the sole and complete property of Licensor; that all such copyrights,
trademarks and service marks and rights to same in the name of or owned by any
copyright proprietor other than Licensor or Licensee shall be and remain the
sole and complete property of such copyright proprietor; that all trademarks
and service marks which, and/or the right to use which, arise out of the
license hereby granted to use the Licensed Property shall be and remain the
sole and complete property of Licensor; that Licensee shall not at any time
acquire or claim any right, title or interest of any nature whatsoever in any
such trademark or service mark by virtue of this Agreement or of Licensee's
uses thereof in connection with the Licensed Products; and that any right,
title or interest in or relating to any such trademark or service mark, which
comes into existence as a result of, or during the term of, the exercise by
Licensee of any right granted to it hereunder shall immediately vest in
Licensor.
8.4 Licensee agrees to assist Licensor at Licensor's expense to the extent
necessary in the procurement of any protection or to protect any of Licensor's
rights to the Licensed Property. Licensee shall notify Licensor in writing of
any infringements or imitations by others of the Licensed Property on articles
similar to those covered in this Agreement which may come to the Licensee's
attention. Licensor shall have the right to
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commence action to enforce its proprietary rights and prosecute any such
infringements, and Licensee agrees to fully cooperate, at Licensor's expense,
in any such action. However, Licensee shall not incur any such expense
reimbursable by Licensor without Licensor's express written approval and all
recoveries resulting from any such action shall belong solely to Licensor. In
the event Licensor declines to pursue any such action, Licensee may, with
Licensor's written permission, and subject to the consent of any third party
having rights in the Licensed Property, institute such an action, and Licensor,
at Licensee's expense, shall cooperate in such action instituted by Licensee
and all recoveries resulting from any such action shall belong solely to
Licensee. Licensor shall not unreasonably withhold or delay its permission to
enable Licensee to pursue an action (if Licensor shall decline to pursue such
action) against persons or entities reasonably believed by Licensee to be
counterfeiting or pirating Licensee's Licensed Products. Licensor shall not
unreasonably withhold or delay its permission to grant to any sublicensee who
requires it, at the time of entering into a sublicense, reasonable rights
(without Licensor's prior consent in each instance) to pursue persons
reasonably believed to be engaged in counterfeiting or piracy of the Licensee
Product.
8.5 During the term of this Agreement and thereafter, Licensee:
(a) will not challenge the ownership or rights of Licensor in and to the
Licensed Property or any copyright or trademark pertaining thereto developed by
or for Licensor, nor attack the validity of the license granted hereunder or
participate in any challenge thereto;
(b) will manufacture, sell and distribute the Licensed Products in compliance
with all applicable laws and governmental regulations in accordance with the
terms
19
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of this Agreement;
(c) will not except as set forth in this Agreement, either directly or
indirectly, use or display or authorize others to use or display, the
trademarks, copyrights or proprietary rights of Licensor in connection with any
advertising, assembly, manufacture, distribution, use, sale or lease of any
goods, other than in connection with the manufacture and sale of the Licensed
Products; and
(d) subject to Licensee's best business judgment Licensee will exercise
reasonable efforts to: (i) manufacture sufficient quantities of the Licensed
Product to meet the market demand for same; (ii) conduct advertising activities
to promote the sale of Licensed Product; and (iii) make any and all arrangements
necessary to accomplish such undertakings.
9. MATERIALS.
9.1 Notwithstanding anything contained herein to the contrary and subject to
the terms of this Agreement, all artwork, designs and computer software
embodying the Licensed Property, or any reproduction thereof, which are
designed, developed and/or created by Licensee hereunder (or any of its
sublicensees, affiliates or subsidiaries), shall be, and remain Licensor's sole
and exclusive property, inclusive of all copyrights and right to copyright
therein and thereto for the life of the copyright therein; provided that during
the term of this Agreement, Licensee shall have the exclusive right, license
and privilege (without any compensation to Licensor except as provided in
Section 5) to use all such above described materials in connection with its
exploitation, sale and distribution of the Licensed Products.
9.2 Licensor shall make available to Licensee, at Licensor's actual out
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<PAGE> 53
of pocket cost, any artwork relating to the Licensed Property which Licensor
owns and which is reasonably available to Licensor for Licensee's use in
connection with the exploitation of the Licensed Property.
10. TRANSLATIONS.
In the event that Licensee shall reasonably require the text associated
with any Licensed Product to be translated into a language other than English,
Licensor shall, upon request, provide to Licensee the text files and the text
that appears in bit map files and printed copies of the script used for audio
components of the Licensed Product and Licensee shall furnish, at its own
expense, to Licensor a translation text thereof. Licensor shall then cause a
new Technically Acceptable Master Disk (as that term is defined in the Master
Atari PC Agreement) containing such translation to be encoded, at Licensor's
own expense, and delivered to Licensee.
11. REPRESENTATIONS AND WARRANTIES.
11.1 Licensor hereby represents and warrants that this Agreement has been duly
authorized, executed and delivered by Licensor; Licensor has the full power and
authority to enter into this Agreement and perform its obligations hereunder;
this Agreement constitutes the valid and binding obligation of Licensor,
enforceable in accordance with its terms; the making of this Agreement does not
violate any agreement, right or obligation existing between Licensor and any
other person, firm or corporation; and the Licensed Property, if used pursuant
to the license granted herein, will not infringe upon or violate any rights of
any third party.
11.2 Licensee hereby represents and warrants that this Agreement has
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<PAGE> 54
been duly authorized, executed and delivered by Licensee; Licensee has the full
power and authority to enter into and perform its obligations hereunder; this
Agreement constitutes the valid and binding obligation of Licensee, enforceable
in accordance with its terms; the making of this Agreement does not violate any
agreement, right or obligation existing between Licensee and any other person,
firm or corporation; and its manufacture, advertisement, distribution and sale
of the Licensed Products will be in accordance with the terms of this Agreement
so as not to infringe upon or violate any rights of any third party.
12. INDEMNIFICATION.
12.1 Each party agrees to indemnify and hold the other (including officers,
directors, agents and employees of such party or its subsidiaries, affiliates
and sublicensees) harmless against any loss, damage, expense or cost (including
reasonable attorneys' fees) arising out of any claim, demand or suit or
judgment resulting from any breach of any warranty or representation set forth
in Section 11 above. Each party shall promptly inform the other of any such
claim, demand, suit or judgment.
12.2 In connection with any such claim, demand or suit referred to above, the
party so indemnifying (the "Indemnitor") agrees to defend, contest or otherwise
protect the indemnified party (the "Indemnitee") against any such suit, action,
investigation, claim or proceeding at the Indemnitor's own cost and expense.
The Indemnitee shall have the right, but not the obligation to participate, at
its own expense, in the defense thereof by counsel of its own choice. In the
event that the Indemnitor fails timely to defend, contest or otherwise protect
against any such suit, action, investigation, claim or proceeding, the
Indemnitee shall have the right to defend, contest or otherwise protect against
the same, and, upon ten (10) days'
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written notice to the Indemnitor, make any compromise or settlement thereof and
recover the entire cost thereof from the Indemnitor, including without
limitation, reasonable attorneys' fees, disbursements and all reasonable
amounts applied as a result of such suit, action, investigation, claim or
proceeding or compromise or settlement thereof. The obligations hereunder
shall survive the termination or expiration of this Agreement.
12.3 Neither Licensor nor Licensee shall be liable for any incidental,
consequential or punitive damages to the other.
13. EVENTS OF DEFAULT AND TERMINATION.
Licensee shall be deemed to be in default of this Agreement in the event
either of the following occurs:
(a) Licensee fails to make any payment or furnish any statement in accordance
herewith, provided that Licensee shall have been given a first written notice
of such default and a period of at least 15 days in which to cure such default
and, if such default shall not have been cured within such period, Licensee
shall have been given a second written notice of such default and a further
period of at least 10 days in which to cure such default; or
(b) Licensee fails after thirty (30) days' written notice to Licensee to
comply with any other of Licensee's obligations hereunder.
14. EXPIRATION OR TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement, all rights granted to
Licensee herein shall forthwith revert to Licensor with the following
consequences:
(a) All unpaid royalties shall be due and payable in accordance with Section
6.1 hereof.
23
<PAGE> 56
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
(b) Licensor shall thereafter be free to license others to use the Licensed
Property in connection with the manufacture, advertisement, distribution and
sale of items identical or similar to the Licensed Products in the Licensed
Territory.
(c) In the event of termination or expiration of this Agreement, other than a
termination by Licensor as a result of a material breach of this Agreement by
Licensee, Licensee may continue to sell for a period of one hundred eighty
(180) days after the effective date of termination all approved copies of the
units of the Licensed Product produced prior thereto.
Notwithstanding the expiration or termination of this Agreement, Licensor
will continue to account and pay over to Licensee, on a periodic basis not less
frequently than quarterly, * of the net profits (as calculated in Section 2.1
above) derived by Licensor from the exploitation of any ancillary merchandising
rights to the Licensed Products (as provided in Section 2.1 above) and * of the
net profits derived by Licensor from the exploitation of Licensed Products in
Japan, as provided in Section 3.2 above.
15. CONFIDENTIAL INFORMATION.
Each of the parties shall keep in confidence and not disclose to any third
party, without the written permission of the other party, the terms of this
Agreement and the proprietary information of the other party made known to it
under this Agreement. This requirement of confidentiality shall not apply to
information that is (a) in the public domain through no wrongful act of the
disclosing party; (b) rightfully received by the disclosing party from a third
party who is not bound by a restriction of nondisclosure; (c) already in the
24
<PAGE> 57
disclosing party's possession without restriction as to disclosure; or (d) is
required to be disclosed by applicable rules and regulations of government
agencies or judicial bodies. This obligation of confidentiality: (i) shall
survive termination of this Agreement and (ii) shall extend to any subcontractor
of either party and each party agrees to obtain from each such subcontractor a
written agreement to abide by the foregoing confidentiality requirements. Each
of the parties shall be entitled to seek injunctive or equitable relief to
prevent the breach or threatened breach by the other of the provisions of this
Section and to secure its enforcement.
16. NOTICES.
Any notice, consent, approval, request, waiver or statement to be given, made or
provided for under this Agreement shall be in writing and deemed to have been
duly given (i) by its delivery personally or by express mail; or (ii) five (5)
days after its being mailed, air express, registered or certified, return
receipt requested in a U.S. Post Office addressed as follows:
TO LICENSEE: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Ron Chaimowitz,
Telephone Number: (212) 726-6508
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 726-6523
Facsimile Number: (212) 679-6850
25
<PAGE> 58
WITH A COPY TO: GT Interactive Software Corp.
16 East 40th Street
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 726-6500
Facsimile Number: (212) 679-6850
TO LICENSOR: Atari Games Corporation
c/o WMS Industries Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (312) 728-2300
Facsimile Number: (312) 539-2099
WITH A COPY TO: Williams Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
WITH A COPY TO: Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 782-1964
or such other address as either party may designate by notice given as
aforesaid.
17. MISCELLANEOUS.
17.1 This Agreement is personal to Licensee as one party and Licensor as the
other party. Neither this Agreement nor any party's rights under it may be
assigned, in whole or in part, nor may Licensee's or Licensor's rights or
obligations hereunder be delegated, in whole or in part, to any person or party
without the prior written consent of the other party, except that any party may
assign its rights and delegate obligations to any of its direct or indirect
27
<PAGE> 59
wholly-owned subsidiaries or affiliates or to any person, firm or corporation
owning or acquiring all or substantially all of the stock or assets of that
party, as long as that party remains fully liable for its obligations
hereunder. Any sale of not less than 50.1% of the stock or assets of Licensor
shall include a requirement for the assumption by the purchaser of all
covenants, obligations and duties undertaken by the seller pursuant to the
terms of this Agreement, including its obligations with respect to Games and
the intellectual property from which they are derived. This Agreement shall
bind the parties, their successors and permitted assignees and delegees.
Licensor as one party, and Licensee as the other party, are each liable for
their respective obligations under the terms of this Agreement.
17.2 The entire understanding between the parties hereto relating to the
subject matter hereof is contained herein. This Agreement cannot be changed,
modified, amended or terminated except by an instrument in writing executed by
the parties hereto.
17.3 No waiver, modification or cancellation of any term or condition of this
Agreement shall be effective unless executed in writing by the party charged
therewith. No written waiver shall excuse the performance of any act other
than those specifically referred to therein and no waiver shall be deemed or
construed to be a waiver of such terms or conditions for the future or any
subsequent breach thereof.
17.4 This Agreement does not constitute and shall not be construed as
constituting a partnership or joint venture between Licensor and Licensee, and
neither Licensor nor Licensee shall have any right to obligate or bind the
other in any manner whatsoever, and nothing herein contained shall give or is
intended to give any rights of any kind to any third persons.
27
<PAGE> 60
17.5 This Agreement shall be governed by the laws of the State of Illinois
applicable to contracts made and to be wholly performed in the State of
Illinois.
17.6 If any provision of this Agreement is or becomes or is deemed invalid,
illegal or unenforceable under the applicable laws or regulations of any
jurisdiction, either such provision will be deemed amended to conform to such
laws or regulations without materially altering the intention of the parties or
it shall be stricken and the remainder of this Agreement shall remain in full
force and effect.
17.7 This Agreement may be executed in counterparts each of which shall be
deemed an original and when taken together shall be deemed one and the same
document.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
ATARI GAMES CORPORATION
By:
----------------------------
GT INTERACTIVE SOFTWARE CORP.
By:
---------------------------
28
<PAGE> 61
SCHEDULE A
[Insert description of Licensed Property]
<PAGE> 62
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
SCHEDULE B
ROYALTIES
Licensee shall pay royalties in an amount equal to the following
percentages of the net wholesale sales price of a Unit sold and not returned:
Net Wholesale Sales Price Royalty %
- ------------------------- ---------
* or greater *
* *
* *
* *
* *
* *
* *
* *
At Net Wholesale Sales Prices, as hereafter defined, between * and * the above
percentages shall be prorated based upon the next highest and next lowest
royalty percentage. For example, at a Net Wholesale Sales Price of *, the
royalty percentage shall be *. Notwithstanding the above, if the Licensed
Products cost * or more to develop or acquire ("Premium Products"), the minimum
per unit royalty for such Premium Products shall be calculated as follows: the
minimum per unit royalty during the six-month period commencing on the date on
which the Premium Product was First Released shall be an amount equal to * of
the product of (1) the Net Wholesale Sales Price of such Premium Product as of
the date of release multiplied by (2) the royalty percentage which corresponds
to such Net Wholesale Sales Price on the table set forth above (prorated as
appropriate). Thereafter, there shall be no further minimum per unit royalty.
The foregoing minimum per unit royalty provision shall not apply to so-called
"hint books" as to which there shall be no minimum royalty.
"Net Wholesale Sales Price" shall be that price invoiced by Licensee to its
customers, less any price discounts, rebates or credits granted at the time of
sale and taxes invoiced to customers (including VAT). No deduction shall be
made for bad debts or other uncollected amounts, advertising allowances,
including cooperative advertising, or any other costs incurred in
<PAGE> 63
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
manufacturing, selling or distributing the Licensed Products. In the event
that Licensee's experience with respect to bad debts and uncollectible amounts
during any calendar year in respect of sales of Licensed Products under this
Agreement and all Other Atari Home Computer Software Distribution and License
Agreements entered into between Licensor and its affiliates and Licensee under
the Master Atari PC Agreement, shall exceed * of Licensee's aggregate net sales
of Licensed Products under this Agreement and all such Other Atari Home
Computer Software Distribution and License Agreements during such calendar year
("Excess Bad Debts"), then Licensee shall be entitled to receive a credit
against royalties payable under this Agreement or any Other Atari Home Computer
Software Distribution and License Agreement determined as follows: the average
of the weighted Net Wholesale Sales Prices of all Licensed Products sold under
this Agreement and all Other Atari Home Computer Software Distribution and
License Agreements during such calendar year shall be determined, and the
royalty percentage which corresponds thereto in the table above (prorated as
appropriate) shall be multiplied by the amount of Excess Bad Debts for such
calendar year to determine the amount of such credit.
Royalties for "direct response sales" shall be calculated by multiplying * of
the royalty percentages set forth above (prorated as appropriate) times
Licensor's net receipts from such sales and, for purposes of determining the
applicable royalty percentages in the table set forth above, the amount of such
net receipts shall be substituted for "Net Wholesale Sales Price." The minimum
per unit royalty shall be * of the minimum per unit royalty applicable to sales
other than "direct response sales." Direct response sales shall refer to sales
made directly to consumers other than from a fixed retail location and shall
include catalogue sales, direct mail, print and television sales. Licensee's
net receipts from direct response sales shall be based upon actual monies
received, less amounts separately paid by purchasers as sales taxes and
shipping and handling charges.
Where Licensor has acquired from a third party a Licensed Property in
connection with which Third Party Fees and Royalties amounting to * or more of
Licensee's estimated Net Wholesale Sales Price are payable, Licensee may elect,
at the time it elects to accept the Licensed Product under the Master Atari PC
Agreement, to pay a substitute royalty ("Substitute Royalty") therefor, which
will reduce only the highest royalty based upon the Net Wholesale Sales Price
of the Licensed Product otherwise payable pursuant to the royalty table
included in this Schedule "B." For example, if the Substitute Royalty for a
Licensed Product is *, this would apply to units sold at Net Wholesale Sales
Prices of * and above; for lower Net Wholesale Sales Prices, the royalty
percentages and corresponding Net Wholesale Sales Prices reflected in the
royalty table would not be changed, except that the royalty percentage may not
exceed the amount of the Substitute Royalty.
The Substitute Royalty shall be computed by comparing the gross profit of
Licensor (i.e., royalty earned, less * Third Party Fees and Royalties, less *
of Shared Institutional Advertising, as such term is hereinafter defined) to
the gross profit of Licensee (i.e., Net Wholesale Sales Price, less
2
<PAGE> 64
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
royalty payable to Licensor, less * Third Party Fees and Royalties, less
product manufacturing cost, less * of Shared Institutional Advertising, less *
of Net Wholesale Sales Price (equivalent to Licensee's operating costs,
excluding overhead)); and determining the royalty percentage that would yield
the same gross profit for both Licensor and Licensee. The computation of the
Substitute Royalty for any year shall be adjusted following the end of such
year for the prior year to reflect changes in all of the components set forth
above, except for the * figure referenced above, during such prior year and any
increase or decrease in the Substitute Royalty resulting from such adjustment
shall be reflected on the royalty statement for the first Royalty Period of the
following year.
Where the Licensed Property (whether acquired from a third party or developed
by Licensor or any of its affiliates in house) has not been embodied in a
coin-operated video or pinball game, whether distributed by Licensor or any
entity which at any time was an affiliate or a member of the Atari Group, or
will not be embodied in a coin-operated video or pinball game distributed
within 60 days from the release of the Licensed Product, institutional
advertising costs (i.e., radio, television and print advertising to the general
public), will be shared equally ("Shared Institutional Advertising") by
Licensee and Licensor, provided that (a) the portion of the Shared
Institutional Advertising costs to be borne by Licensor shall not exceed * of
the Net Wholesale Sales Price of the Licensed Product, and shall only be
payable in that portion of the Licensed Territory in which Licensee itself (and
not its sublicensees) actually pays for institutional advertising costs and (b)
all such Shared Institutional Advertising costs and budgets therefor shall have
been previously approved in writing by Licensor. Licensee at its own cost and
expense shall be solely responsible for all in store and cooperative
advertising costs associated with the sale of Licensed Products in the Licensed
Territory.
Anything in the foregoing paragraphs to the contrary notwithstanding, where the
Licensed Property has not been embodied in a coin-operated video or pinball
game, whether distributed by Licensor or any entity which at any time was or is
an affiliate of any member of the WMS Group or the Atari Group, Licensee may
elect to pay an alternative royalty therefor. The alternative royalty shall
equal the sum of the royalty percentage payable in accordance with the table
set forth in Schedule B plus the Licensee's share of Third Party Fees and
Royalties, but in no event shall the alternative royalty exceed * of the actual
Net Wholesale Sales Price of the Licensed Product; provided, however, that
anything in the foregoing paragraphs or this paragraph to the contrary
notwithstanding, under no circumstances shall royalties, whether regular
royalties, Substitute Royalties or alternative royalties, be less than * of the
Third Party Fees and Royalties payable with respect to the sale of Licensed
Products.
See Section 2.15 of the Master Atari PC Agreement with respect to the amounts
of royalties payable for Licensed Products described therein.
ADJUSTMENTS TO ROYALTIES
3
<PAGE> 65
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Anything above to the contrary notwithstanding:
1. If Licensor is obligated to pay any Third Party Fees and Royalties with
respect to the sale of Licensed Products, the per unit royalties to be paid by
Licensee to Licensor with respect to such Licensed Products shall be equal to *
of all such Third Party Fees and Royalties, plus the greater of (a) the royalty
otherwise payable to Licensor as provided above and (b) the other * of such
Third Party Fees and Royalties. In no event shall the per unit royalty on the
sale of Licensed Products be less than * of such Third Party Fees and
Royalties.
2. In cases where Licensed Products are sold by sublicensees under
sublicenses granted by Licensee in accordance with the provisions of the Master
Atari PC Agreement, royalties shall be payable by Licensee to Licensor
hereunder equal to the sum of (a) an amount equal to all Third Party Fees and
Royalties payable with respect to the sale of such Licensed Products, plus (b)
* of the net proceeds received by Licensee from such non-affiliated third party
sublicensee after deducting (i) a fee to Licensee equal to * of such net
proceeds, (ii) an amount equal to all Third Party Fees and Royalties, and,
(iii) in the case of non-affiliated third party sublicensees to whom Licensee
supplies the Licensed Product, Licensee's direct manufacturing and shipping
costs. Revenues from bundling shall be shared in the same manner as revenues
from sublicenses; provided, however, that if Licensee is also the manufacturer
of products for bundling, the fee to Licensee shall equal * rather than * of
net proceeds. In no event shall the per unit royalty be less than * of such
Third Party Fees and Royalties.
3. Until Licensee shall have fully recouped the * Minimum Guaranteed
Advance Royalty, as provided below, Licensor shall pay over to Licensee
Licensor's share of net profits from the exploitation of the Licensed Product
in Japan and in any other territories in which Licensor is entitled to exploit
the Licensed Products or ancillary merchandising rights thereto under this
Agreement except for territories not available to Licensee by reason of third
party agreements existing on the Effective Date, and all amounts so paid over
to Licensee shall be deemed to constitute additional Recoupable Amounts (as
that term is used below) under this Agreement.
RECOUPMENT.
Licensee shall be entitled to apply the aggregate amount by which (a) Royalties
applied or accrued under this Agreement exceed (b) * of the amount of any Third
Party Fees and Royalties payable by Licensor to parties having rights with
respect to the sale of Licensed Products (the "Recoupable Amount") to recoup
the * Dollars Minimum Guaranteed Advance Royalty paid by Licensee to WMS
Industries Inc. pursuant to Section 3 of the Master Atari PC Agreement and the
Master Atari Home Video Agreement (as that term is defined in the Master Atari
PC Agreement), until such Recoupable Amount together with Recoupable Amounts
applied or accrued by Licensee under any Other Atari Home Computer Software
Distribution and License
4
<PAGE> 66
THE INFORMATION BELOW MARKED BY * HAS BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
Agreement entered into by Licensee pursuant to the Master Atari PC Agreement
("Other Home Software Distribution and License Agreements") and under any Atari
Home Video Distribution and License Agreement entered into by Licensee pursuant
to the Master Atari Home Video Agreement (and to the extent applicable amounts
which may be recouped against such Minimum Guaranteed Advance Royalty pursuant
to the GTIS Master Home Video Agreement and the GTIS Master PC Agreement) equal
* Dollars; provided, however, that (a) to the extent that the aggregate of all
Recoupable Amounts applied or accrued under this Agreement and the Other Atari
Home Computer Software Distribution and License Agreements and under any Atari
Home Video Distribution and License Agreement entered into pursuant to the
Master Atari Home Video Agreement between the Effective Date and one year after
the Effective Date exceed the installment of the Minimum Guaranteed Advance
Royalty paid on the Effective Date, such excess shall be paid to WMS Industries
Inc. and applied in reduction of the installment of the Minimum Guaranteed
Advance Royalty payable on one year after the Effective Date under the Master
Atari PC Agreement and Master Atari Home Video Agreement.
LIMITATIONS ON FREE AND PROMOTIONAL GOODS; CLOSE-OUTS.
Licensee shall be permitted to distribute free and promotional goods without
the payment of any Third Party Fees and Royalties or other royalties thereon,
subject to the provisions of Section 1 above and within the following
territorial and quantity limits:
United States and Canada: * units in the aggregate
United Kingdom,
Germany, Scandinavia,
Benelux, Italy, Spain,
Australia, and Japan: * units per country
Other Countries: * units per country
No royalties shall be payable by Licensee to Licensor in excess of any Third
Party Fees and Royalties in connection with the sale by Licensee of
"close-outs." For purposes hereof, "close-outs" shall mean any Licensed
Products that are sold for a price no greater than the sum of direct
manufacturing and shipping costs plus any Third Party Fees and Royalties.
5
<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. SALE AND PURCHASE OF . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.1 Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . 13
2.3 Interim Balance Sheet . . . . . . . . . . . . . . . . . . . . 13
2.4 Determination of Final Net Asset Value . . . . . . . . . . . . 14
2.4.1 Final Balance Sheet . . . . . . . . . . . . . . . . . . 14
2.4.2 Certification . . . . . . . . . . . . . . . . . . . . . 14
2.4.3 Disputes . . . . . . . . . . . . . . . . . . . . . . . 15
2.4.4 Interim Note Replacements . . . . . . . . . . . . . . . 16
3. CLOSING AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . 16
3.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.2 Transactions on the Closing Date . . . . . . . . . . . . . . . 16
3.3 Termination . . . . . . . . . . . . . . . . . . . . . . . . . 17
4. REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . 18
4.1 Organization of Seller and the Subsidiaries . . . . . . . . . 19
4.2 Power and Authority . . . . . . . . . . . . . . . . . . . . . 20
4.3 Capitalization of the Company; Ownership . . . . . . . . . . . 22
4.4 Capitalization of the Subsidiaries; Ownership . . . . . . . . 22
4.5 Government Approval . . . . . . . . . . . . . . . . . . . . . 23
4.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . 23
4.6.1 Audited Financial Statements . . . . . . . . . . . . . 23
4.6.2 Unaudited Financial Information . . . . . . . . . . . . 24
4.6.3 Interim Balance Sheet . . . . . . . . . . . . . . . . . 25
4.7 Absence of Certain Changes or Events . . . . . . . . . . . . . 25
4.8 Title In or Rights To Intellectual Property . . . . . . . . . 27
4.9 Title to Properties; Absence of Liens and Encumbrances . . . . 29
4.10 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.11 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . 31
4.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.13 Customers and Suppliers . . . . . . . . . . . . . . . . . . . 33
4.14 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . 34
4.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.17 Compliance with Law . . . . . . . . . . . . . . . . . . . . . 36
4.18 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.19 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . 39
4.20 Collective Bargaining Agreements and Labor . . . . . . . . . . 39
4.21 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.22 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
4.23 Environmental Matters . . . . . . . . . . . . . . . . . . . . 44
4.24 Information Concerning the Company and the Subsidiaries. . . . 46
4.25 TWIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.26 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . 46
4.27 Officers and Directors . . . . . . . . . . . . . . . . . . . . 46
4.28 Accuracy of Information . . . . . . . . . . . . . . . . . . . 46
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Page
<S> <C>
4.29 Disclaimer of Other Representations and Warranties; Knowledge; Disclosure . . 47
5. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . 49
5.1 Organization and Authority of Buyer . . . . . . . . . . . . . . . . . . . . . 49
5.2 Government Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.3 Financial Ability to Perform . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.4 Brokers and Intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . 50
5.5 Investment Intent Regarding the Shares and the Subsidiaries' Shares . . . . . 51
6. CERTAIN COVENANTS AND AGREEMENTS OF SELLER AND BUYER . . . . . . . . . . . . . . . . . . 51
6.1 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.2 Conduct of Business; Inter-company Accounts . . . . . . . . . . . . . . . . . 52
6.3 Environmental Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.4 Regulatory Filings/Hart-Scott-Rodino . . . . . . . . . . . . . . . . . . . . . 56
6.5 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
6.6 Affiliate Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.7 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
6.8 Announcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
6.9 Use of Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
6.10 Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6.10.1 Non-Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6.10.2 Non-Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.10.3 Affiliate Veto Power . . . . . . . . . . . . . . . . . . . . . . . . . 65
6.10.4 Rights and Remedies Upon Breach . . . . . . . . . . . . . . . . . . . 66
6.10.5 Severability of Covenant . . . . . . . . . . . . . . . . . . . . . . . 66
6.11 Commercially Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . 67
6.12 Notice of Certain Information . . . . . . . . . . . . . . . . . . . . . . . . 67
6.13 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
6.14 Audited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 69
6.15 Compliance With Gaming Laws . . . . . . . . . . . . . . . . . . . . . . . . . 69
6.16 Code Section 338 Election . . . . . . . . . . . . . . . . . . . . . . . . . . 71
6.17 Buyer Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
6.18 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
6.19 Public Announcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.20 Disposition of TWIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
6.21 Assignments by TWIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
7. CONDITIONS PRECEDENT OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
7.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 75
7.2 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
7.3 Buyer Certificate; Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 75
7.4 No Injunction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
7.5 Government Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
7.6 Miscellaneous Closing Deliveries . . . . . . . . . . . . . . . . . . . . . . . 77
8. CONDITIONS PRECEDENT OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
8.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . 77
8.2 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
8.3 Seller Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
8.4 Interim Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
8.5 Environmental Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
8.6 No Injunction . . . . . . . . . . . . . . . . . . . . . . . . 79
8.7 Government Approval . . . . . . . . . . . . . . . . . . . . . 79
8.8 Financial Statements . . . . . . . . . . . . . . . . . . . . . 80
8.9 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
8.10 Instruments of Transfer . . . . . . . . . . . . . . . . . . . 81
8.11 Books of Account . . . . . . . . . . . . . . . . . . . . . . . 81
8.12 Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . 81
8.13 Incumbency Certificates . . . . . . . . . . . . . . . . . . . 82
8.14 Certificates of Incorporation . . . . . . . . . . . . . . . . 82
8.15 By-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
8.16 Good Standing Certificates . . . . . . . . . . . . . . . . . . 82
8.17 Resignations of Officers and Directors . . . . . . . . . . . . 83
8.18 Disposition of TWIL . . . . . . . . . . . . . . . . . . . . . 83
8.19 WEA Distribution Agreement . . . . . . . . . . . . . . . . . . 83
8.20 WIE License Agreement . . . . . . . . . . . . . . . . . . . . 83
8.21 Miscellaneous Closing Deliveries . . . . . . . . . . . . . . . 83
8.22 Further Documents . . . . . . . . . . . . . . . . . . . . . . 84
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; CERTAIN ACKNOWLEDGMENTS . . 84
9.1 Survival of Representations and Warranties of Seller . . . . . 84
9.2 Information . . . . . . . . . . . . . . . . . . . . . . . . . 85
10. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
10.1 Indemnification of Buyer and its Affiliates by Seller . . . . 86
10.2 Liabilities included in Indemnification . . . . . . . . . . . 89
10.3 Limitations on Indemnification by Seller . . . . . . . . . . . 91
10.4 Indemnification of Seller by Buyer . . . . . . . . . . . . . . . . 92
10.5 Notice and Defense of Claims . . . . . . . . . . . . . . . . . . . 93
11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
11.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 96
11.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
11.3 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . 97
11.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
11.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 98
11.6 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
11.7 Headings; References . . . . . . . . . . . . . . . . . . . . . . . 98
11.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
11.9 Parties in Interest; Assignment . . . . . . . . . . . . . . . . . 99
11.10 Severability; Enforcement . . . . . . . . . . . . . . . . . . . . 99
11.11 Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
11.12 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
</TABLE>
<PAGE> 4
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of February 23, 1996, (the "Agreement"),
between Warner Communications Inc., a Delaware corporation ("Seller"), and
Williams Interactive Inc., a Delaware corporation ("Buyer").
RECITALS
Seller is the sole record and beneficial owner of all issued and
outstanding shares of capital stock (the "Shares") of Atari Games Corporation, a
California corporation (the "Company"); and
The Company and the Subsidiaries are engaged, among other things, in the
business of developing, manufacturing, marketing, licensing, publishing and
selling coin-operated video arcade games and interactive electronic
entertainment products for use with, among other things, home video games for
dedicated game cartridge systems and personal computer CD-ROM platforms (the
"Business"); and
Upon the terms and subject to the conditions hereinafter set forth, Seller
desires to sell and Buyer desires to purchase the Shares from Seller.
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, and in reliance upon the representations and warranties made herein, the
parties hereto hereby agree as follows:
<PAGE> 5
ARTICLE I
1. DEFINITIONS
1.1 The following terms as used in this Agreement shall have the meanings
set forth below:
"Affiliate" means, with respect to any Person, any Person
directly or indirectly controlling, controlled by or under direct or indirect
common control with such other Person.
"Agreement" shall have the meaning set forth in the preamble.
"Audited Financial Statements" shall have the meaning set
forth in Section 4.6.1 hereof.
"Business" shall have the meaning set forth in the second
recital.
"Buyer" shall have the meaning set forth in the preamble.
"Cash Payment" shall have the meaning set forth in Section 2.2
hereof.
"CERCLA" means the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended.
"CERCLIS" shall have the meaning set forth in Section 4.23.5
hereof.
"Certified Final Balance Sheet" shall have the meaning set
forth in Section 2.4.3 hereof.
"Closing" shall have the meaning set forth in Section 3.1
hereof.
"Closing Date" shall have the meaning set forth in Section 3.1
hereof.
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<PAGE> 6
"Code" means the Internal Revenue Code of 1986, as amended.
"Coin-op Business" shall have the meaning set forth in Section
6.10.1 hereof.
"Company" shall have the meaning set forth in the first
recital.
"Confidentiality Agreement" means that certain agreement
between Time Warner Inc. and Williams Electronics Games Inc. dated October 23,
1995 pursuant to which, among other things, the parties thereto agreed to
maintain certain information in confidence and not to disclose such information,
as provided therein.
"Conflicting Agreements" shall have the meaning set forth in
Section 6.18 hereof.
"December 31, 1995 Financial Statements" means the unaudited
consolidated balance sheet of the Company and the Subsidiaries at December 31,
1995 and related statements of income and cash flows for the period January 1,
1995 through December 31, 1995, copies of which were heretofore delivered to
Buyer.
"Disclosure Schedule" means the disclosure schedule dated as
of the date hereof delivered by Seller to Buyer concurrently herewith setting
forth certain matters referred to in this Agreement and which has been executed
by the parties hereto.
"Environmental Law" means any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, or policy or rule of common law
in effect on the date hereof or on the Closing Date and any judicial or
administrative interpretation
3
<PAGE> 7
thereof in effect on the date hereof or on the Closing Date relating to
pollution or protection of the environment.
"Environmental Permit" shall have the meaning set forth in
Section 10.2.5 hereof.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Examination Date" shall have the meaning set forth in Section
2.3 hereof.
"Expense" shall have the meaning set forth in Section 10.1
hereof.
"Final Balance Sheet" means the audited consolidated balance
sheet to be prepared as set forth in Section 2.4.1 hereof reflecting the
consolidated financial position of the Company and the Subsidiaries as of the
Closing Date.
"Final Deferred Amount" means the Final Net Asset Value minus
the Cash Payment.
"Final Four Year Note" means the promissory note made by the
Company in favor of Seller, dated the Closing Date, in the original principal
amount equal to the product of the Final Deferred Amount times the fraction
18/28, in the form of Exhibit A to the Disclosure Schedule, the obligations
thereunder being secured in accordance with the Four Year Security Agreement.
"Final Net Asset Value" means the Net Asset Value as it exists
as of the Closing Date as reflected on and computed from the Certified Final
Balance Sheet.
4
<PAGE> 8
"Final Two Year Note" means the promissory note made by Buyer
in favor of Seller dated the Closing Date, in the original principal amount
equal to the product of the Final Deferred Amount times the fraction 10/28, in
the form of Exhibit B to the Disclosure Schedule, the obligations thereunder
being secured in accordance with the Two Year Security Agreement.
"Four Year Security Agreement" means the security agreement
dated the Closing Date duly executed by an authorized officer of the Company,
substantially in the form of Exhibit C to the Disclosure Schedule.
"Gaming Laws" shall have the meaning set forth in Section 6.15
hereof.
"GTI" shall have the meaning set forth in the Section 6.18
hereof.
"Hazardous Material" means any "hazardous substance", as
defined by CERCLA, any "hazardous waste", as defined by the Resource
Conservation and Recovery Act, as amended, any petroleum product, or any
pollutant or contaminant or hazardous, dangerous or toxic chemical, material or
substance within the meaning of any other applicable federal, state or local
law, regulation, ordinance or requirement (including consent decrees and
administrative orders) relating to or imposing liability or standards of conduct
concerning any hazardous, toxic or dangerous waste, substance or material, all
as amended.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
5
<PAGE> 9
"Income Tax" means any Taxes measured, in whole or in part, by
net or gross income or profits.
"Indemnity Agreement" means the indemnity agreement dated the
Closing Date made by the Company in favor of the Seller, substantially in the
form of Exhibit D to the Disclosure Schedule.
"Inter-company Accounts" means any intercompany debits,
credits or accounts between the Company or any Subsidiary on the one hand and
Seller and/or any Affiliate(s) of Seller (other than the Company and the
Subsidiaries) on the other hand, exclusive, however, of any intercompany debits,
credits or accounts of the Company or any Subsidiary of Seller or any other
Affiliate of Seller arising out of or in connection with (i) the WEA
Distribution Agreement or the WIE License Agreement and set forth on the
December 31, 1995 Financial Statements or arising thereafter in the ordinary
course of business; or (ii) any other agreement separately identified as an
agreement with an Affiliate on Schedule 4.18 of the Disclosure Schedule relating
to the manufacture, distribution or sale of any product of the Business by or
through Seller or an Affiliate (other than the Company or a Subsidiary) of
Seller.
"Interim Balance Sheet" means the unaudited consolidated
balance sheet of the Company and the Subsidiaries to be prepared in accordance
with Section 2.3 hereof which reflects an estimate of the financial position of
the Company and the Subsidiaries as of the Closing Date and after capitalization
of the Intercompany Accounts as provided in Section 6.2.3 hereof, prepared in
good
6
<PAGE> 10
faith, in conformity with U.S. GAAP utilizing the most recent financial
information available, consistent with the methodology, assumptions and criteria
for calculation and valuation of assets and liabilities used or employed in the
creation of the December 31, 1995 Financial Statements and otherwise in
accordance with this Agreement.
"Interim Deferred Amount" means the Interim Net Asset Value
minus the Cash Payment.
"Interim Four Year Note" means the promissory note made by the
Company in favor of Seller, dated the Closing Date, in the original principal
amount equal to the product of the Interim Deferred Amount times the fraction
18/28, in the form of Exhibit A to the Disclosure Schedule, the obligations
thereunder being secured in accordance with the Four Year Security Agreement.
"Interim Net Asset Value" means an estimate of Net Asset Value
as reflected on and computed from the Interim Balance Sheet.
"Interim Two Year Note" means the promissory note made by
Buyer in favor of Seller dated the Closing Date, in the original principal
amount equal to the product of the Interim Deferred Amount times the fraction
10/28, in the form of Exhibit B to the Disclosure Schedule, the obligations
thereunder being secured by the Two Year Security Agreement.
"International Nintendo Licenses" means (i) the International
SNES License Agreement dated June 23, 1994 between Nintendo Co., Ltd. and Atari
Overseas Ltd. a/k/a Time Warner Interactive Limited and (ii) the International
Game Boy License
7
<PAGE> 11
Agreement dated June 23, 1994 between Nintendo Co., Ltd. and Atari Overseas
Services, Ltd. a/k/a Time Warner Interactive Limited.
"Inventory" means all items of inventory notwithstanding how
classified in the Company's or the Subsidiaries' financial records, including
all completed consumer and/or coin-op market products on hand, all completed
devices for the consumer and/or coin-op markets, and including, without
limitation, all raw materials, works-in-process, alpha-and/or beta-test versions
of actual or potential products, finished goods, supplies, spare parts, samples
in stores, regardless of where located or stored.
"Liabilities" means any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, matured or
unmatured or determined or determinable, including, without limitation, those
arising under any law, action or governmental order and those arising under any
contract, agreement, arrangement, commitment or undertaking.
"Loss" shall have the meaning set forth in Section 10.1
hereof.
"MADSP" shall have the meaning set forth in Section 6.16
hereof.
"Material Adverse Effect" means a material adverse effect on
the value of the business of the Company and the Subsidiaries or the extent or
amount of the exposure to liability presented by the Liabilities of the Company
and the Subsidiaries, taken as a whole.
"Multiemployer Plan" shall have the meaning set forth in
Section 4.22.1 hereof.
8
<PAGE> 12
"Net Asset Value" means the consolidated assets minus the
consolidated liabilities of the Company as determined in accordance with U.S.
GAAP. In determining Net Asset Value, any amounts paid by the Company or the
Subsidiaries prior to the Closing Date pursuant to a termination or
restructuring event in accordance with Section 6.2.2 hereof shall be added back
to the assets and any liability accrued in respect of such termination or
restructuring event shall be disregarded.
"Offering Memorandum" shall have the meaning set forth in
Section 4.29.1 hereof.
"Panasonic" shall have the meaning set forth in Section 6.18
hereof.
"Person" means an individual, corporation, partnership, trust
or unincorporated organization or a government or any agency or political
subdivision thereof.
"Plans" shall have the meaning set forth in Section 4.22.1
hereof.
"Pre-Closing Period" means any tax period ending on or prior
to the Closing Date.
"Purchase Price" shall have the meaning set forth in Section
2.2 hereof.
"Returns" shall have the meaning set forth in Section 4.15
hereof.
"Security Agreements" means the Four Year Security Agreement
and the Two Year Security Agreement.
9
<PAGE> 13
"Seller" shall have the meaning set forth in the preamble.
"Seller's Cap" shall have the meaning set forth in Section
10.3.2 hereof.
"Seller's Basket" shall have the meaning set forth in Section
10.3.2 hereof.
"Shares" shall have the meaning set forth in the first
recital.
"Subsidiaries" means, collectively, all of the following
companies:
(a) TWIC;
(b) Atari Games Ireland Ltd., an Ireland corporation; and
(c) K.K. Time Warner Interactive, a Japan corporation (each a
"Subsidiary").
"Subsidiaries' Shares" means, with respect to each of the
Subsidiaries, all of the issued and outstanding capital stock of each such
Subsidiary.
"Tax" or "Taxes" means all taxes and similar governmental
charges, imposts, levies, fees and assessments, however denominated (including
income taxes, franchise taxes, net worth taxes, capital taxes, estimated taxes,
withholding taxes, use taxes, gross or net receipts taxes, sales taxes, transfer
taxes or fees, excise taxes, real and personal property taxes, ad valorem taxes,
payroll related taxes, employment taxes, unemployment insurance, social security
taxes, minimum taxes and import duties and other obligations of the
10
<PAGE> 14
same or similar nature) together with any related liabilities, penalties, fines,
addition to tax or interest imposed by the United States or any federal, state,
county, provincial, local or foreign government or subdivision or agency of any
thereof.
"TWIC" means Time Warner Interactive (California) Inc., a
California corporation, all of the shares of which are owned as of the date
hereof by the Company.
"Tax Accrual" means the Tax accrual or any portion thereof in
the amount of approximately US$2,200,000 relating to periods prior to 1995 which
was reflected in the December 31, 1995 Financial Statements.
"TWIL" means Time Warner Interactive Ltd., a United Kingdom
corporation all of the issued and outstanding capital stock of which is owned on
the date hereof by the Company, and which shall be disposed of by the Company
prior to Closing Date in accordance with Section 6.20 hereof.
"Two Year Security Agreement" means the security agreement
dated the Closing Date, duly executed by an authorized officer of Buyer, and
substantially in the form of Exhibit E to the Disclosure Schedule.
"U.S. GAAP" means generally accepted accounting principles and
practices in effect in the United States as of the date of the report or
statement in issue, applied consistently throughout the periods involved.
"WARN Act" means the Worker Adjustment and Retraining
Notification Act of 1988, as amended.
11
<PAGE> 15
"WEA Distribution Agreement" means that certain agreement
dated August 25, 1995 between TWIC and Warner Elektra Atlantic Corporation
("WEA"), an Affiliate of Seller, pursuant to which, among other things, WEA has
the right to distribute and sell in the United States and Canada the Company's
products entitled "Primal Rage" and "Wayne Gretzky and the NHLPA All-Stars" for
any PC CD-ROM platform listed on Schedule 4.18 of the Disclosure Schedule.
"WIE License Agreement" means that certain agreement dated
January 1, 1996 between TWIC and Warner Interactive Entertainment Ltd. ("WIE"),
an Affiliate of Seller, pursuant to which, among other things, WIE has the right
to distribute and sell in the territories of Europe certain of the Company's
products, including, without limitation, those entitled "Constructor," and
"Return Fire," as supplemented by the side letter dated January 1, 1996 relating
thereto, both of which are listed on Schedule 4.18 of the Disclosure Schedule.
"Working Capital" shall have the meaning set forth in Section
6.13 hereof.
"Working Capital Assets" shall have the meaning set forth in
Section 6.13 hereof.
"1933 Act" shall have the meaning set forth in Section 5.5
hereof.
ARTICLE II
2. SALE AND PURCHASE OF SHARES
2.1 Purchase of Shares. Upon the terms and subject to the conditions
contained herein and the performance by the parties
12
<PAGE> 16
hereto of their respective obligations hereunder, on the Closing Date, Seller
shall sell, assign, transfer, convey and deliver to Buyer and Buyer shall
purchase and accept the Shares.
2.2 Purchase Price. The purchase price for the Shares shall be the total
of the Final Net Asset Value plus any additional capital contribution required
to be made by Seller pursuant to Section 6.13 hereof if not otherwise included
in the Final Net Asset Value (the "Purchase Price") as the same may be adjusted
as set forth herein. At the Closing, the Purchase Price shall be paid as
follows: (i) US$2,000,000 (the "Cash Payment") shall be paid by Buyer by wire
transfer as provided in Section 3.2.2.1; (ii) Buyer shall cause the Company to
execute and deliver to Seller the Interim Four Year Note; and (iii) Buyer shall
execute and deliver to Seller the Interim Two Year Note.
2.3 Interim Balance Sheet. Seller shall engage the firm of Ernst & Young
LLP to perform agreed upon procedures with respect to balance sheet information
as of a date (the "Examination Date") at least ten but no more than 20 days
prior to the Closing Date. At least ten days prior to the Closing Date, Seller
shall prepare and deliver to Buyer the Interim Balance Sheet together with a
certificate of Seller's Chief Financial Officer certifying that the Interim
Balance Sheet has been prepared in accordance with this Agreement. At the
Closing, Seller shall deliver a report of findings prepared in accordance with
Statement of Auditing Standards No. 75, Engagements to Apply Agreed-Upon
Procedures to Specified Elements, Accounts, or Items of a Financial Statement by
13
<PAGE> 17
Ernst & Young LLP based on specific procedures on specified accounts of the
Interim Balance Sheet as of the Examination Date. Schedule 2.3 of the Disclosure
Schedule identifies the accounts of the Interim Balance Sheet and the procedures
to be performed on such accounts by Ernst & Young LLP as of the Examination Date
in the preparation of such report.
2.4 Determination of Final Net Asset Value. The Purchase Price shall be
determined as follows:
2.4.1 Final Balance Sheet. Within 90 days after the Closing Date,
Buyer shall cause the Company to prepare the Final Balance Sheet. Buyer shall
prepare or cause to be prepared the Final Balance Sheet using and employing
methodology, assumptions and criteria for calculation and valuation of assets
and liabilities in accordance with U.S. GAAP applied in a manner consistent with
the Company's consolidated balance sheet at December 31, 1995 which is included
in the Audited Financial Statements delivered in accordance with Section 6.14
hereof. Buyer acknowledges that the Final Balance Sheet and the Certified Final
Balance Sheet shall not include the Tax Accrual. Seller will promptly reimburse
Buyer for one-half of any reasonable costs and expenses incurred by Buyer with
respect to services rendered by a Person other than Buyer and its Affiliates in
connection with the preparation of the Final Balance Sheet.
2.4.2 Certification. Buyer shall deliver the Final Balance Sheet to
Seller no later than 90 days following the Closing Date. Seller shall engage the
firm of Ernst & Young LLP, or if
14
<PAGE> 18
unavailable another firm of certified public accountants reasonably acceptable
to Seller and Buyer, to certify without qualification, other than a
qualification with respect to the Company's ability as an independent Company to
continue as a going concern, that the Final Balance Sheet (i) comports with U.S.
GAAP and (ii) was prepared using and employing the methodology, assumptions and
criteria required under Section 2.4.1 hereof. Seller shall deliver to Buyer
promptly upon receipt a draft of the proposed certification of the Final Balance
Sheet, together with any adjustments or qualifications thereto required for
Seller's accountants to so certify the Final Balance Sheet.
2.4.3 Disputes. The draft of the proposed certification of the Final
Balance Sheet shall be deemed final, binding and conclusive upon the parties
hereto (the "Certified Final Balance Sheet") unless Buyer delivers a written
notice to Seller hereunder within ten business days of its receipt of the draft
Certified Final Balance Sheet that Buyer disputes any terms or items thereof.
Buyer's sole bases for such disputes shall be that the adjustments or
qualifications to the Final Balance Sheet contained in the draft Certified Final
Balance Sheet do not comport with (i) U.S. GAAP or (ii) vary from the
methodology, assumptions and criteria used or employed in connection with the
creation of the Interim Balance Sheet. In the event of such a dispute,
representatives of Seller and Buyer will attempt for a period of 20 business
days after Seller's receipt of Buyer's notice of dispute to resolve in good
faith the disputed item(s) on a basis consistent with the Interim
15
<PAGE> 19
Balance Sheet and, failing such resolution, the unresolved disputed term(s) or
item(s) shall be referred for final binding resolution to a partner in the New
York City office of a nationally recognized firm of certified public accountants
mutually acceptable to Buyer and Seller whose determination shall be final,
binding and conclusive on the parties hereto. At the time that the Certified
Final Balance Sheet shall be deemed final and binding, Seller shall use its best
efforts to cause the firm of Ernst & Young LLP to issue its certification.
2.4.4 Interim Note Replacements. The Interim Two Year Note and the
Interim Four Year Note shall be replaced by the Final Two Year Note and the
Final Four Year Note within five days after issuance of the Certified Final
Balance Sheet.
ARTICLE III
3. CLOSING AND TERMINATION
3.1 Closing. The closing of the transactions provided for herein (the
"Closing") will take place at the offices of Time Warner Inc. at 75 Rockefeller
Plaza, New York, New York, at 10:00 a.m. (local time) on March 15, 1996 or at
such other date, time and place as Seller and Buyer shall agree, provided
however, that such other date shall be within two days after the satisfaction or
waiver of the conditions precedent set forth in Articles 7 and 8 hereof (the
date of the Closing being the "Closing Date").
3.2 Transactions on the Closing Date.
3.2.1 At the Closing, Seller shall deliver to Buyer the following:
16
<PAGE> 20
3.2.1.1 a stock certificate or stock certificates, evidencing the
Shares, in each case endorsed in blank for transfer or with separate stock
powers sufficient to transfer all of Seller's right title and interest in and to
the Shares to Buyer and to vest good and marketable title to the Shares in
accordance with the terms of this Agreement;
3.2.1.2 each of the certificates and other documents contemplated by
Article VIII hereof.
3.2.2 At the Closing, Buyer shall deliver or cause to be delivered to
Seller the following:
3.2.2.1 by wire transfer in immediately available funds to the
account designated by Seller, the Cash Payment as provided in Section 2.2
hereof;
3.2.2.2 the Interim Four Year Note;
3.2.2.3 the Interim Two Year Note;
3.2.2.4 the Four Year Security Agreement;
3.2.2.5 the Two Year Security Agreement;
3.2.2.6 the Indemnity Agreement;
3.2.2.7 the report of Ernst & Young LLP as provided for in Section
2.3 hereof; and 3.2.2.8 each of the certificates and other documents
contemplated by Article VII hereof.
3.3 Termination. Notwithstanding anything to the contrary contained in
this Agreement other than this Section 3.3, this Agreement may be terminated at
any time as follows:
3.3.1 by mutual consent of Seller and Buyer;
17
<PAGE> 21
3.3.2 by either Seller or Buyer, if the transactions contemplated
hereby are not consummated on or before April 30, 1996 (or such later date the
parties hereto may agree upon in writing) by reason of the failure or inability
of the other party to fulfill or comply with the conditions it is obligated
hereunder to fulfill or comply with by or on the Closing Date, unless such
failure is the result of a breach of any obligation of the party seeking
termination hereunder.
3.3.3 If this Agreement is terminated by mutual consent or other
than by reason of a party's default, then neither party shall have a claim
against the other for damages as a result of the termination. A party rightfully
terminating this Agreement as a result of the other party's breach shall retain
any claim it may have for damages arising from such breach, including without
limitation any claims it may have for reimbursement of all costs and expenses
incurred in connection with or incident to its negotiations concerning the
possible acquisition of the Shares, its negotiation and preparation of this
Agreement, and/or its performance under and compliance with all agreements and
conditions contained herein on its part to be performed or complied with,
including the fees, expenses and disbursements of its counsel, accountants and
financial advisors.
ARTICLE IV
4. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby, represents and warrants to Buyer the following:
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4.1 Organization of Seller and the Subsidiaries.
4.1.1 Each of Seller and the Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation as set forth above and has all requisite power
and authority, corporate or otherwise, to own, lease, use and operate its
properties and assets at and in the places where such properties and assets are
now owned, operated or leased and to transact its business where it is now
conducted. Complete and correct copies of the Certificate of Incorporation of
the Company and all amendments thereto and of the By-laws and all amendments
thereto have been heretofore delivered to Buyer. The Company is duly qualified
to do business and is in good standing in each jurisdiction (all of which are
set forth on Schedule 4.1 of the Disclosure Schedule) where it owns, leases or
holds real property or conducts or operates its business or where the nature of
its activities requires such qualification except where the failure to so
qualify would not have a Material Adverse Effect. The Company has not taken any
action and has not failed to take any action, which action or failure would
preclude or prevent the Company after the Closing from conducting the Business
substantially in the manner heretofore conducted. Except for the Subsidiaries'
Shares the Company does not own any capital stock or any other equity interest
in any other Person.
4.1.2 Each of the Subsidiaries is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, as set forth on Schedule
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4.1 of the Disclosure Schedule, and each has all requisite power and authority,
corporate or otherwise, to own, lease, use and operate its properties and assets
at and in the places where such properties and assets are now owned, operated or
leased and to transact its business where it is now conducted. Complete and
correct copies of the Certificate of Incorporation or equivalent of each
Subsidiary and all amendments thereto, and of the By-laws or equivalent
governing documents of each Subsidiary, and all amendments thereto, have been
heretofore delivered to Buyer. Each Subsidiary is duly qualified to do business
and is in good standing in each jurisdiction (all of which are set forth on
Schedule 4.1 of the Disclosure Schedule) where it owns, leases or holds real
property or conducts or operates its business where the nature of its activities
requires such qualification except where the failure to so qualify would not
have a material adverse effect on the business, assets or results of operations
of such Subsidiary. None of the Subsidiaries has taken any action or has failed
to take any action, which action or failure would preclude or prevent Buyer from
conducting the Business substantially in the manner heretofore conducted. None
of the Subsidiaries owns any capital stock or any other equity interest in any
other person.
4.2 Power and Authority.
4.2.1 Seller possesses the power and authority, corporate and
otherwise, to enter into this Agreement and the documents and instruments
contemplated hereby, to assume and
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perform its respective obligations hereunder and thereunder, and to comply with
the terms, conditions and provisions hereof.
4.2.2 The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action on the part of Seller. This
Agreement and the Disclosure Schedule have been duly executed and delivered by
Seller and constitute valid and binding obligations of Seller, enforceable in
accordance with their terms.
4.2.3 Except as set forth on Schedule 4.2 of the Disclosure
Schedule, none of Seller, the Company or the Subsidiaries is subject to or bound
by any provision of
(i) its Articles or Certificate of Incorporation or By-laws or
other governing documents;
(ii) any law, statute, rule, regulation or judicial or
administrative decision;
(iii) any mortgage, deed of trust, lease, note, shareholders'
agreement, bond, indenture, license, permit, trust; or
(iv) any judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator;
that would prevent or be violated by, or under which there would be a default as
a result of, nor is the consent of any Person under any contract or agreement
which has not been obtained required for, the execution, delivery and
performance by Seller of this Agreement
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and the transactions contemplated hereby, other than notification pursuant to
the HSR Act.
4.3 Capitalization of the Company; Ownership.
4.3.1 Schedule 4.3 of the Disclosure Schedule sets forth all of the
authorized and outstanding capital stock of the Company. Seller owns 100% of the
Shares free and clear of any and all security interests, liens, pledges, claims,
charges, escrows, encumbrances, options, rights of first refusal, mortgages,
indentures, security agreements or other contracts (whether or not relating in
any way to credit or the borrowing of money) and Seller has the unrestricted
right to vote the Shares.
4.3.2 The Shares are duly authorized, validly issued, fully paid and
non-assessable. There are no outstanding options, warrants or other rights of
any kind to acquire any additional shares of capital stock of the Company or
securities convertible into or exchangeable for, or which otherwise confer on
the holder thereof any right to acquire, any such additional shares, nor is the
Company committed to issue any such option, warrant, right or security.
4.4 Capitalization of the Subsidiaries; Ownership.
4.4.1 Schedule 4.4 of the Disclosure Schedule sets forth all of the
authorized and outstanding capital stock of each of the Subsidiaries and the
name of each registered holder of the Subsidiaries' Shares. The Company owns
100% of the Subsidiaries' Shares free and clear of any and all security
interests, liens, pledges, claims, charges, escrows, encumbrances, options,
rights of
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first refusal, mortgages, indentures, security agreements or other contracts
(whether or not relating in any way to credit or the borrowing of money) and the
Company has the unrestricted right to vote the Subsidiaries' Shares, except as
noted on Schedule 4.4 of the Disclosure Schedule.
4.4.2 The Subsidiaries' Shares are duly authorized, validly issued,
fully paid and non-assessable. There are no outstanding options, warrants or
other rights of any kind to acquire any additional shares of capital stock of
the Subsidiaries or securities convertible into or exchangeable for, or which
otherwise confer on the holder thereof any right to acquire, any such additional
shares, nor is the Company or any Subsidiary committed to issue any such option,
warrant, right or security.
4.5 Government Approval. Except as contemplated by Section 6.4 hereof, no
action, approval, consent, authorization or other action including, but not
limited to, any action, approval, consent or authorization by or filing with any
governmental or quasi-governmental agency, commission, board, bureau or
instrumentality is necessary or required as to Seller, the Company or any
Subsidiary for the due execution, delivery or performance by Seller of this
Agreement or any document or instrument contemplated hereby.
4.6 Financial Statements.
4.6.1 Audited Financial Statements. Seller has heretofore furnished
Buyer with copies of audited consolidated financial statements of the Company
and the Subsidiaries for the
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fiscal year ended March 31, 1994 and, in accordance with Section 6.14 hereof,
shall furnish Buyer with copies of audited consolidated financial statements of
the Company and the Subsidiaries for the nine months and fiscal year ended
December 31, 1994 and December 31, 1995 (collectively, the "Audited Financial
Statements"), including balance sheets and statements of results of operations
and cash flows for the periods then ended. Each of the Audited Financial
Statements is or shall be prepared in accordance with the books and records of
the Company and the Subsidiaries as of the dates and for the periods indicated,
has been or will be prepared in conformity with U.S. GAAP, and fairly present or
when furnished to Buyer will fairly present, the consolidated financial position
of the Company and the Subsidiaries at such dates and the results of their
operations for the periods then ended. All of the operations of the Company and
the Subsidiaries, to the extent they existed at the relevant dates, are included
in the Audited Financial Statements.
4.6.2 Unaudited Financial Information. Seller has heretofore
furnished Buyer with copies of the December 31, 1995 Financial Statements.
Except as set forth on Schedule 4.6 to the Disclosure Schedule, the December 31,
1995 Financial Statements have been prepared from the books and records of the
Company and the Subsidiaries, have been prepared in accordance with U.S. GAAP,
and fairly present the financial condition of the Company and the Subsidiaries
as of such date.
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4.6.3 Interim Balance Sheet. The Interim Balance Sheet shall be
prepared in accordance with U.S. GAAP applied on a basis consistent with the
December 31, 1995 Financial Statements.
4.7 Absence of Certain Changes or Events. Between December 31, 1995, and
the date of this Agreement, except as noted on Schedule 4.7 of the Disclosure
Schedule, there have been no adverse changes in the condition (financial or
otherwise) of the assets, liabilities, earnings, properties, Business of the
Company and the Subsidiaries as a whole. Except as set forth on Schedule 4.7
hereto, since December 31, 1995 the Business has been conducted only in the
ordinary course and neither the Company nor any Subsidiary has:
4.7.1 sustained any damage, destruction or other casualty loss,
whether or not covered by insurance, in excess of US$25,000; or
4.7.2 made any increase in (i) the rate of compensation payable to
or to become payable by the Company or the Subsidiaries to any of its officers
directors, employees, salesmen, distributors or agents, or (ii) any bonus,
pension or other employee benefit plan, payment or arrangement made by the
Company or any of the Subsidiaries for or with any such persons except, in each
case, for increases in the ordinary course of business (which shall include
without limitation normal periodic performance reviews and related compensation
and benefit increases); or
4.7.3 incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due,
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except current liabilities incurred in the ordinary course of business
consistent with prior practice; or
4.7.4 mortgaged, pledged, granted any lien or other encumbrance or
charge on any property, business or assets, tangible or intangible; or
4.7.5 sold, transferred, leased to others or made any other
disposition of any assets, except for inventory sold in the ordinary course of
business; cancelled or compromised any substantial debt or claim, or waived or
released any right of substantial value; or
4.7.6 received any notice of termination of any material contract,
lease or other agreement;
4.7.7 transferred or granted any rights under, or made any
settlement regarding the breach or infringement of, any intellectual property,
or modified any existing rights with respect thereto;
4.7.8 failed to replenish its inventories and supplies in a normal
and customary manner consistent with its prior practice or made any purchase
commitment in excess of the normal, ordinary and usual requirements of the
Business or at any price in excess of the then current market price or upon
terms and conditions more onerous than those usual and customary in the
industry, or made any change in its selling, pricing, advertising or personnel
practices inconsistent with prior practice;
4.7.9 made any capital expenditures or capital additions or
improvements in excess of an aggregate of US$25,000;
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4.7.10 instituted, settled or agreed to settle any litigation,
action or proceeding before any court or governmental body other than in the
ordinary course of business consistent with past practices but not in any case
involving amounts in excess of US$50,000;
4.7.11 entered into any transaction, contract or commitment other
than in the ordinary course of business or paid or agreed to pay any legal,
accounting, brokerage, finder's fee, Taxes or other expenses in connection with,
or incurred any severance pay obligations by reason of, this Agreement or the
transactions contemplated hereby; or
4.7.12 effected any change in the accounting practices, procedures
or methods of the Company or any of the Subsidiaries.
4.8 Title In or Rights To Intellectual Property.
4.8.1 Except as otherwise noted on Schedule 4.8 of the Disclosure
Schedule, the Company and/or one or more of the Subsidiaries owns all right,
title and interest in and to the copyrights reflected as owned by the Company
and/or the Subsidiaries on that Schedule.
4.8.2 Except as otherwise noted on Schedule 4.8 of the Disclosure
Schedule, the Company and/or one or more of the Subsidiaries is the licensee of
the copyrights reflected as licensed to the Company and/or the Subsidiaries on
that Schedule effective as of the date reflected on that Schedule.
4.8.3 Except as otherwise noted on Schedule 4.8 of the Disclosure
Schedule, the Company and/or one or more of the
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Subsidiaries owns all right, title and interest in and to the patents reflected
as owned by the Company and/or the Subsidiaries on that Schedule.
4.8.4 Except as otherwise noted on Schedule 4.8 of the Disclosure
Schedule, the Company and/or one or more of the Subsidiaries is the licensee of
the patents reflected as licensed to the Company and/or the Subsidiaries on that
Schedule effective as of the date reflected on that Schedule.
4.8.5 Except as otherwise noted on Schedule 4.8 of the Disclosure
Schedule, the Company and/or one or more of the Subsidiaries owns all right,
title and interest in and to the trademarks, service marks, trade names, logos
and designations reflected as owned by the Company and/or the Subsidiaries on
that Schedule.
4.8.6 Except as otherwise noted on Schedule 4.8 of the Disclosure
Schedule, the Company and/or one or more of the Subsidiaries is the licensee of
the trademarks, trade names, logos and designations reflected as licensed to the
Company and/or the Subsidiaries on that Schedule effective as of the date
reflected on that Schedule.
4.8.7 Except as noted on Schedule 4.8 of the Disclosure Schedule,
there is no action, suit, investigation or proceeding pending, or to the
knowledge of Seller threatened, relating to any claim or threat of infringement
of any patent, trademark, service mark, copyright or other technology of the
Company or any of the Subsidiaries. The operation of the Business as now
operated does
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not infringe upon any patents, trade secrets, copyrights, trademarks, service
marks, tradenames, packaging or promotional material owned by any other Person
and neither Seller, the Company or any Subsidiary has received any notice of
such.
4.8.8 All of the patents, trademarks, copyrights or other technology
necessary to conduct and operate the Business as heretofore conducted by the
Company and the Subsidiaries shall be owned or held by the Company and/or the
Subsidiaries at the time of the Closing, except for any patents, trademarks and
copyrights owned by TWIL and used in connection with the game "Pit Ball."
4.9 Title to Properties; Absence of Liens and Encumbrances. Each of the
Company and/or the Subsidiaries has good and valid title to all of its tangible
and intangible assets, real or personal (including leasehold interests) free and
clear of any liens, encumbrances, and defects, except for (i) such as are
reflected in the Audited Financial Statements or the December 31, 1995 Financial
Statements; (ii) liens for Taxes relating to real property not at the present
time due or delinquent or, if due or delinquent, the validity of which is being
contested in good faith in appropriate proceedings (all of such due and
delinquent Taxes being identified on Schedule 4.9 of the Disclosure Schedule);
(iii) the right reserved to or vested in any municipality or governmental or
other public authority by any statutory provision; (iv) easements,
rights-of-way, restrictions, covenants, conditions or rights against any of the
real property which do not interfere in any material respect with the operation
of the Business;
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(v) zoning and building by-laws and ordinances, municipal by-laws and
regulations and other restrictions as to the use of real property; or (vi) those
matters set forth on Schedule 4.9 of the Disclosure Schedule. Schedule 4.9 of
the Disclosure Schedule sets forth all real property owned or leased by the
Company or the Subsidiaries including a description of the use thereof and the
owner or lessee thereof. Except as set forth on Schedule 4.9 of the Disclosure
Schedule, all of the Company's and the Subsidiaries' assets are located in the
owned or leased facilities set forth on Schedule 4.9 of the Disclosure Schedule.
To the extent required, the Company or the Subsidiaries has legal and valid
occupancy permits and other required licenses or government approvals for each
of the properties and premises owned, leased, used or occupied by the Company,
the Subsidiaries or the Business. No improvement, fixture or equipment in or on
any such premises and properties to the extent owned or occupied by the Company,
the Subsidiaries or the Business, or the occupation or leasehold with respect
thereto, is in violation in any material respect of any law, including, without
limitation, any zoning, building, safety, health or Environmental Law and each
of such premises and properties is zoned for the purposes for which each of such
premises or properties is now used by the Company, the Subsidiaries or the
Business. None of such premises or properties has been condemned or otherwise
taken by any public authority, no condemnation or taking is pending or to the
knowledge of Seller threatened or contemplated, and none thereof is, to the
knowledge of Seller, subject to any claim,
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contract or law which might affect its use or value for the purposes now made of
it and each thereof is in good condition and repair, ordinary wear and tear
excepted.
4.10 Inventory. Except as set forth on Schedule 4.10 of the Disclosure
Schedule, all Inventory reflected on the December 31, 1995 Financial Statements
was and all Inventory reflected on the December 31, 1995 Audited Financial
Statements and the Certified Final Balance Sheet will be determined in
accordance with U.S. GAAP, stated at the lower of cost (based on the first-in,
first-out method) or market value. The Inventory conforms to customary trade
standards for marketable goods. Proper recognition has been given in the
December 31, 1995 Financial Statements and proper recognition will be given in
the Certified Final Balance Sheet to damaged, obsolete, slow-moving, irregular
or defective stock and to appropriate markdowns. Since the December 31, 1995
Financial Statements, there have been no changes in the Inventory except in the
ordinary course of business.
4.11 Accounts Receivable. Except as set forth on Schedule 4.11 of the
Disclosure Schedule, each account receivable reflected on the December 31, 1995
Financial Statements constitutes and each account receivable on the December 31,
1995 Audited Financial Statements or the Certified Final Balance Sheet will
constitute a bona fide receivable resulting from a bona fide sale or other
transaction with a customer or licensee in the ordinary course of business, the
amount of which was actually due on the date of such balance sheet, and Seller
has no reason to believe that the total
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amount of the receivables reflected on the Final Balance Sheet, net of reserves,
will not be collected in the ordinary course of business. The books and records
of the Company and the Subsidiaries state correctly the balance due with respect
to each account receivable. Each payment reflected on such books and records as
having been made on each such account receivable was made by the respective
account debtor and not directly or indirectly by any director, officer, employee
or agent of the Company or the Subsidiaries unless such person is shown on said
books and records as such account debtor. Each document and instrument
evidencing, securing or relating to each account receivable, including, without
limitation, each insurance policy, certificate, bill or statement, is correct
and complete in all material respects, is genuine and valid. Each account
receivable, each document and instrument and each transaction underlying or
relating thereto conforms in all material respects, including, without
limitation, in respect of interest rates charges, notices given and disclosures
made, to the requirements and provisions of each applicable law, rule,
regulation or order relating to credit, consumer credit, credit practices,
credit advertising, credit reporting, retail installment sales, credit cards,
collections, usury, interest rates and truth-in-lending, including, without
limitation, the Federal Truth in Lending Act, as amended and Regulation Z issued
by the Board of Governors of the Federal Reserve System thereunder. The reserves
and allowances reflected on the balance sheets included in the December 31, 1995
Audited
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Financial Statements and the Certified Final Balance Sheet have been or will be
established in conformity with the December 31, 1995 Financial Statements.
4.12 Insurance. Schedule 4.12 of the Disclosure Schedule sets forth a
description of the insurance coverage, including, without limitation, liability,
burglary, theft, fidelity, life, fire, product liability, worker's compensation,
health and other forms of insurance of any kind held by the Company and the
Subsidiaries and a complete and correct list of any pending claims under such
insurance. Each such policy is valid, outstanding and, to Seller's knowledge, is
and will be in full force and effect up to the Closing Date. There is no act or
failure to act which has or might cause any such policy to be cancelled or
terminated; the Company and the Subsidiaries have given each notice and
presented each claim under each such policy and taken any other required or
appropriate action with respect thereto in due and timely fashion; and each such
policy is adequate for the Business. No notice of cancellation or non-renewal
with respect to, or disallowance of any material claim under, any insurance
policies or binders of insurance has been received by the Company or any of its
Affiliates.
4.13 Customers and Suppliers. Schedule 4.13 of the Disclosure Schedule is
a complete and correct list of the names and addresses of the ten largest
customers and suppliers of the Company and the Subsidiaries during fiscal year
ended December 31, 1995, and the total sales to or purchases from such customers
or suppliers made
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by the Company or the Subsidiaries during such fiscal year. No supplier or
customer of the Company and the Subsidiaries representing in excess of five
percent of the Company and the Subsidiaries purchases or sales during the last
fiscal year has advised the Company or the Subsidiaries formally or informally,
that it intends to terminate, discontinue or substantially reduce its business
with the Company or the Subsidiaries by reason of the transactions contemplated
by this Agreement or otherwise.
4.14 Absence of Undisclosed Liabilities. Neither the Company nor any of
the Subsidiaries has any Liabilities or obligations of the type required to be
reflected on a balance sheet in accordance with U.S. GAAP, absolute, accrued,
contingent or otherwise and whether due or to become due, except (a) as set
forth on Schedule 4.14 of the Disclosure Schedule; (b) as and to the extent
disclosed or reserved against in the December 31, 1995 Financial Statements; and
(c) for Liabilities incurred after the date of the December 31, 1995 Financial
Statements in the ordinary course of business and consistent with this
Agreement.
4.15 Taxes. The Company, the Subsidiaries, their respective predecessors
or any member of an affiliated group (within the meaning of Section 1504 of the
Code) or other combined group of which any of the Company, the Subsidiaries or
their respective predecessors is or has been a member on or before the Closing
Date have filed, or will file on or before the Closing Date, with the
appropriate governmental agencies (whether foreign, federal, state, municipal or
local or other governmental unit) all tax returns and
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tax reports (the "Returns") required to be filed by the Company or the
Subsidiaries on or before the Closing Date with respect to any period ending on
or before the Closing Date. Except as set forth on Schedule 4.15 of the
Disclosure Schedule, (i) the Returns are true, complete, and correct in all
respects, (ii) all taxes due or claimed to be due pursuant thereto have been
paid, and (iii) no deficiency for any tax has been proposed, asserted, claimed
or assessed against the Company or the Subsidiaries and no delinquencies in the
payment of any tax exist for which the Company or the Subsidiaries could be
liable that have not been reserved for in the Certified Final Balance Sheet. All
withholding, payroll, FICA or other social security Taxes (or comparable Taxes
under the law of any foreign country) required to be withheld or paid prior to
the Closing Date by the Company or the Subsidiaries with respect to their
employees will have been withheld or paid prior to the Closing Date. Each of the
Company and the Subsidiaries have paid to the proper authorities all customs
fees and duties and similar or related charges required to be paid by it with
respect to the importation or exportation of goods into or from the United
States or any other country. Except as reflected on the Certified Final Balance
Sheet, there are no Taxes owed by the Subsidiaries. As of the Closing Date,
there will be no Tax sharing agreements or other arrangement with respect to
Taxes between the Company or the Subsidiaries on the one hand and Seller or any
of its other Affiliates on the other. Except as set forth on Schedule 4.15
hereto, within the last five years no material issues were raised
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(whether orally or in writing) by any taxing authority during any audit or
examination relating to Taxes of the Company or the Subsidiaries that might
apply to taxable periods following the Closing.
4.16 Litigation. Except as set forth on Schedule 4.16 of the Disclosure
Schedule, there are no and for three years prior to the Closing Date there have
not been any actions, claims, subpoenas demands, suits, arbitrations or
proceedings of any nature, civil, criminal regulatory or otherwise pending or to
the knowledge of the Seller, threatened, at law, in equity or otherwise in,
before or by any court, governmental agency or authority or arbitration or
mediation panel relating to the Company, the Subsidiaries or the Business or
against or relating to the transactions contemplated by this Agreement. Except
as disclosed on Schedule 4.16 of the Disclosure Schedule or in the December 31,
1995 Financial Statements, there are no unsatisfied judgments, or outstanding
orders, injunctions, decrees, stipulations, or awards (whether rendered by a
court or administrative agency or by arbitration) against the Company, the
Subsidiaries or the Business.
4.17 Compliance with Law. The Business is being conducted in compliance in
all material respects with all laws, ordinances and regulations of any
governmental entity applicable to the Company, the Subsidiaries or the Business.
All governmental approvals, permits and licenses required by the Company or the
Subsidiaries in connection with the conduct of the Business have been obtained
and
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are in full force and effect and are being complied with in all material
respects.
4.18 Contracts. Except only those contracts or agreements set forth on
Schedule 4.18 of the Disclosure Schedule (complete and correct copies of which
have been heretofore made available to Buyer) and purchase and sales orders
accepted in the ordinary course of business and involving less than US$25,000
over their term, neither the Company nor the Subsidiaries is a party to or has
and the Business is not bound by any contract or agreement of any kind or nature
whatsoever, written or oral, formal or informal, including, without limitation,
any (i) sales, advertising, license, franchise, distribution, dealer, agency,
manufacturer's representative, or similar agreement, or any other contract
relating to the payment of a commission; (ii) pension, profit-sharing, bonus,
stock purchase, stock option, retirement, severance, hospitalization, accident,
insurance or other similar plan, arrangement or agreement involving benefits to
current or former employees; (iii) contract or agreement for the employment of
any employee, game designer or consultant; (iv) collective bargaining agreement
or other contract with any labor union; (v) contract or agreement for services,
materials, supplies, merchandise, inventory or equipment involving in excess of
US$25,000; (vi) contract or agreement for the sale or purchase of any of its
services, products or assets involving in excess of US$25,000; (vii) mortgage,
indenture, promissory note, loan agreement, guaranty or other contract or
agreement for the
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borrowing of money or for a line or letter of credit; (viii) contract or
agreement with any Affiliate or any current or former director, officer or
employer of Seller, the Company or the Subsidiaries which will be in effect on
the Closing Date; (ix) contract or agreement with any government or agency
thereof; (x) contract pursuant to which its right to compete with any entity or
person in the conduct of its business anywhere in the world is restrained or
restricted for any reason or in any way; (xi) contract or agreement guaranteeing
the performance, liabilities or obligations of any entity or person; (xii)
contract or agreement for capital improvements or expenditures or with any
contractor or subcontractor for in excess of US$25,000; (xiii) contract or
agreement for charitable contributions; (xiv) lease or other contract or
agreement pursuant to which it is a lessee of or holds or operates any real
property, machinery, equipment, motor vehicles, office furniture, fixtures or
similar personal property owned by any third party; or (xv) contract or
agreement otherwise involving in excess of US$25,000 in cash over its term
(including any periods covered by any options to renew by any party), whether or
not in the ordinary course of business. Except as set forth on Schedule 4.18 of
the Disclosure Schedule, each of the contracts and agreements referred to
therein is valid and existing, in full force and effect and to the knowledge of
Seller no party thereto is in default and no claim of default by any party has
been made or is now pending, and no event exists which, with or without the
lapse of time or the giving of notice,
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or both, would constitute a breach or default, cause acceleration of any
obligation, would permit the termination or excuse the performance by any party
thereto, or would otherwise adversely affect the Business or assets of the
Company or the Subsidiaries. Except as noted on Schedule 4.18 of the Disclosure
Schedule no consent or authorization is required under any of the contracts and
agreements listed thereon in order to continue such contract or agreement in
full force and effect following the sale of the Shares to Buyer hereunder.
4.19 Brokers and Finders. Except for the firm of Wasserstein Perella &
Co., Inc., neither Seller nor any of its Affiliates has employed any broker,
finder, advisor, consultant or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's,
consultant's, investment banking or similar fee or commission from Seller or its
Affiliates in connection therewith or in connection with the consummation
thereof.
4.20 Collective Bargaining Agreements and Labor.
4.20.1 Except as set forth on Schedule 4.20 of the Disclosure
Schedule, there are no pending strikes, work stoppages, slowdowns, lockouts,
arbitrations or other labor disputes against the Company or the Subsidiaries.
4.20.2 Except as set forth on Schedule 4.20 of the Disclosure
Schedule, the Company and the Subsidiaries are not a party to or bound by any
collective bargaining agreement, and there are no employment contracts or
incentive plans entered into by the
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Company or the Subsidiaries with any officers or employees of the Company or the
Subsidiaries or any severance policies maintained by the Company or the
Subsidiaries. Except as set forth on that Schedule, no trade union, council of
trade unions, employee bargaining agency or affiliated bargaining agent (a)
holds bargaining rights with respect to any employees of the Company or the
Subsidiaries by way of certification, interim certification, voluntary
recognition, designation or successor rights, or (b) has applied to be certified
as the bargaining agent of any of the Company's or the Subsidiaries' employees.
4.20.3 Except as set forth on Schedule 4.20 of the Disclosure
Schedule, to the knowledge of Seller, there are no pending complaints, charges
or claims against the Company or the Subsidiaries filed with any public or
Governmental Authority, arbitrator or court based upon the employment or
termination of employment by the Company or the Subsidiaries of any individual.
4.20.4 Except as set forth on Schedule 4.20 of the Disclosure
Schedule, the Company and the Subsidiaries are in compliance in all material
respects with all United States and foreign laws, regulations and orders
relating to the employment of labor, including all such laws, regulations and
orders relating to wages, hours, WARN Act, collective bargaining,
discrimination, civil rights, safety and health, workers' compensation and the
collection and payment of withholding and/or social security taxes and any
similar tax.
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4.21 Employees. Schedule 4.21 of the Disclosure Schedule sets forth
a complete and correct list of the names and current annual salary, bonus,
commission and perquisite arrangements, written or unwritten, for each director,
officer and employee of the Company and the Subsidiaries. Except as set forth on
Schedule 4.21 of the Disclosure Schedule, no current or former director, officer
or employee of the Company and the Subsidiaries or any relative, associate or
agent of such director, officer or employee has any interest in any of the
Company's or any of the Subsidiaries' assets, or is a party, directly or
indirectly, to any contract for employment or otherwise or any lease or has
entered into any transaction with the Company or the Subsidiaries including,
without limitation, any contract for the furnishing of services, by, or rental
of real or personal property from or to, or requiring payments to, any such
director, officer, employee, relative, associate or agent. Except as set forth
on Schedule 4.21 of the Disclosure Schedule, no employee listed thereon has
advised the Company or the Subsidiaries that he or she intends to terminate his
or her employment relationship with the Company or the Subsidiaries.
4.22 ERISA.
4.22.1 Schedule 4.22 of the Disclosure Schedule sets forth all
written "employee benefit plans", as defined in Section 3(3) of ERISA (whether
or not subject to ERISA), maintained by the Company or the Subsidiaries or to
which Seller or any of the Subsidiaries contributed or are obligated to
contribute thereunder
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for current or former employees of the Company or the Subsidiaries (the
"Plans"). Schedule 4.22 of the Disclosure Schedule separately identifies each
Plan which is a multiemployer plan, as defined in Section 3(37) of ERISA
("Multiemployer Plan").
4.22.2 True, correct and complete copies of the following documents,
with respect to each of the Plans (other than the Multiemployer Plans), have
been made available or delivered to Buyer by the Company or the Subsidiaries:
(a) any plans and related trust documents, and amendments thereto; (b) the most
recent Forms 5500; (c) the last IRS determination letter, if applicable; and (d)
summary plan descriptions.
4.22.3 The Plans intended to qualify under Section 401 of the Code
and the trusts maintained pursuant thereto are exempt from federal income
taxation under Section 501 of the Code, and nothing has occurred with respect to
the operation of the Plans which could cause the loss of such qualification or
exemption or the imposition of any liability, penalty or tax under ERISA or the
Code.
4.22.4 The Plans have been maintained, in all material respects, in
accordance with their terms and with all provisions of the Code and ERISA
(including rules and regulations thereunder) and other applicable foreign,
federal and state laws and regulations.
4.22.5 No event has occurred, and no circumstance exists, in
connection with which the Company, any Subsidiary or any Plan, directly or
indirectly, could be subject to any liability under ERISA, the Code or any other
law, regulation or governmental
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order applicable to any Plan or under any agreement, instrument, statute, rule
of law or regulation pursuant to or under which the Company or any Subsidiary
has agreed to indemnify or is required to indemnify any person against liability
incurred under, or for a violation or failure to satisfy the requirements of,
any such statute, regulation or order.
4.22.6 With respect to each Plan, all payments due from the Company
or any Subsidiary have been made and all amounts properly accrued as liabilities
of the Company or any Subsidiary which have not been paid have been properly
recorded on the books of Seller, the Company or the Subsidiaries and there are
no actions, suits or claims pending (other than routine claims for benefits) or
to the knowledge of Seller, threatened with respect to such Plan or against the
assets of such Plan.
4.22.7 Except as set forth on Schedule 4.22 of the Disclosure
Schedule, no Plan which is subject to Section 302 of ERISA has any "accumulated
funding deficiency" (as defined in Section 302 of ERISA), whether or not waived.
4.22.8 Except as set forth on Schedule 4.22 of the Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not create, accelerate the time of payment or vesting of, or increase the
amount of, compensation due to any person under any Plans.
4.22.9 With respect to each Plan for which financial statements are
required by ERISA or other applicable law, there has been no change in the
financial status of such Plan since the date
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as of which the most recent such statements were prepared other than
contributions and investments made in the ordinary course under such plans.
4.23 Environmental Matters.
4.23.1 The Company and the Subsidiaries have obtained or applied for
all permits, licenses and other such authorizations required to be obtained by
them for the operation of their businesses under the Environmental Laws.
4.23.2 The Company and the Subsidiaries (i) are in compliance with
all terms and conditions of the permits, licenses and authorizations required by
Environmental Laws, and (ii) are in compliance with all other limitations,
restrictions, conditions, standards, prohibitions, requirements and obligations,
contained in the Environmental Laws.
4.23.3 There have been no past and there are no civil, criminal or
administrative actions, suits, hearings, proceedings, written notices of
violation, claims or demands pending or, to the knowledge of Seller, threatened
against the Company or any of the Subsidiaries under the Environmental Laws.
4.23.4 There have been no releases of Hazardous Materials at, on or
under any property now or previously owned or leased by the Company or the
Subsidiaries while owned or leased by the Company or the Subsidiaries.
4.23.5 No property now or previously owned or leased by the Company
or the Subsidiaries is listed or proposed for listing (with respect to owned
property only) on the National Priorities
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List pursuant to CERCLA, on the Comprehensive Environmental Response
Compensation Liability Information System List ("CERCLIS") or on any similar
state or foreign list of sites requiring investigation or clean-up.
4.23.6 Except as set forth on Schedule 4.23 of the Disclosure
Schedule, there are no underground storage tanks, active or abandoned, including
petroleum storage tanks, on or under any property now or previously owned or
leased by the Company or the Subsidiaries.
4.23.7 None of the Company or the Subsidiaries has directly
transported or directly arranged for the transportation of any Hazardous
Material to any location which is listed or proposed for listing on the National
Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list
or which is the subject of federal, state or local enforcement actions or other
investigations which may lead to claims against the Company or the Subsidiaries
for any remedial work, damage to natural resources or personal injury, including
claims under CERCLA.
4.23.8 There are no polychlorinated biphenyls that require remedial
action or friable asbestos present at any property now or previously owned or
leased by the Company or the Subsidiaries.
4.23.9 To the knowledge of Seller, no conditions exist at, on or
under any property now or previously owned or leased by the Company or the
Subsidiaries which, with the passage of time, or
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the giving of notice or both, would give rise to liability under any
Environmental Law.
4.24 Information Concerning the Company and the Subsidiaries. Set forth on
Schedule 4.24 of the Disclosure Schedule is a full and complete schedule of the
corporate structure of the Company and the Subsidiaries together with any and
all names by which such Persons were formerly known and any and all names under
which such Persons have conducted business. The Business is the only business
now or heretofore conducted by the Company and the Subsidiaries and neither the
Company nor any Subsidiary is a successor of any other business.
4.25 TWIL. No assets of TWIL are necessary to conduct and operate the
Business as heretofore conducted by the Company and the Subsidiaries except the
assets owned by TWIL and used in connection with the game "Pit Ball."
4.26 Bank Accounts. Schedule 4.26 of the Disclosure Schedule sets forth a
complete list of all bank accounts of the Company and each Subsidiary including
location, account number, type of account and authorized signatories thereto.
4.27 Officers and Directors. Schedule 4.27 of the Disclosure Schedule sets
forth a complete list of all officers and directors of the Company and each
Subsidiary.
4.28 Accuracy of Information. To the knowledge of Seller, the
representations and warranties made by Seller contained in this Agreement or in
any documents, instruments, certificates or schedules furnished pursuant to this
Agreement do not contain any
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untrue statement of a material fact or omit to state a material fact necessary
to make the statements contained herein or therein not misleading in light of
the circumstances under which they were made.
4.29 Disclaimer of Other Representations and Warranties; Knowledge;
Disclosure.
4.29.1 Seller does not make, and has not made, any representations
or warranties relating to the Company or the Subsidiaries or the Business or
otherwise in connection with the transactions contemplated hereby other than
those expressly set out herein or in any document, certificate, instrument or
schedule executed or delivered pursuant hereto. Without limiting the generality
of the foregoing, Seller does not make, and shall not be deemed to have made,
any representations or warranties in the confidential offering memorandum
entitled "Project Future" relating to the Business, notwithstanding that it was
prepared by Seller with the assistance of the firm of Wasserstein Perella & Co.,
Inc. and supplied to Buyer prior to the date hereof (the "Offering Memorandum")
or in any presentation of the Business in connection with the transactions
contemplated hereby, and no statement contained in the Offering
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Memorandum or made in any such presentation shall be deemed a representation or
warranty of Seller hereunder or otherwise. It is understood that any cost
estimates, projections or other predictions, any data, any financial information
or any memoranda or offering materials or presentations, including but not
limited to the Offering Memorandum, are not and shall not be deemed to be or
include representations or warranties of Seller. No other Person has been
authorized by Seller, the Company or any of the Subsidiaries to make any
representation or warranty relating to Seller, the Company, the Subsidiaries,
the Business or otherwise in connection with the transactions contemplated
hereby and, if made, such representation or warranty must not be relied upon as
having been authorized by Seller, the Company or any of the Subsidiaries.
4.29.2 Whenever a representation or warranty made by Seller herein
refers to the knowledge of Seller, such knowledge shall be deemed to consist
only of the actual knowledge of the present or former directors and officers of
Seller or the Company and senior management level employees of Seller and the
Company, in each case during their tenure in such position.
4.29.3 Notwithstanding any provision of this Agreement or any
Schedule of the Disclosure Schedule to the contrary, any information disclosed
in one Schedule of the Disclosure Schedule shall be deemed to be disclosed in
all Schedules of the Disclosure Schedule. Certain information set forth in the
Schedules of the Disclosure Schedule is included solely for informational
purposes and may not be required to be disclosed pursuant to this Agreement. The
disclosure of any information shall not be deemed to constitute an
acknowledgement that such information is required to be disclosed in connection
with the representations and warranties made by Seller in this Agreement or is
material, nor shall such information be deemed to establish a standard of
materiality.
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ARTICLE V
5. REPRESENTATIONS AND WARRANTIES OF BUYER
5.1 Organization and Authority of Buyer. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation as set forth above.
5.1.1 Buyer possesses the power and authority, corporate or
otherwise, to enter into this Agreement and the documents and instruments
contemplated hereby, to assume and perform its obligations hereunder, and
thereunder, and to comply with the terms, conditions and provisions hereof.
5.1.2 The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all requisite corporate action on the part of Buyer. This
Agreement and the Disclosure Schedule have been duly executed and delivered by
Buyer and constitute the valid and binding obligation of Buyer, enforceable in
according to their terms.
5.1.3 Except as set forth in Schedule 5.1 hereto, Buyer is not
subject to or bound by any provision of
(i) any articles or certificate of incorporation or by-laws;
(ii) any law, statute, rule, regulation or judicial or
administrative decision;
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(iii) any mortgage, deed of trust, lease, note, shareholders'
agreement, bond, indenture, license, permit, trust; or
(iv) any judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator;
that would prevent or be violated by, or under which there would be a default as
a result of, nor is the consent of any Person under any contract or agreement
which has not been obtained required for, the execution, delivery and
performance by Buyer of this Agreement and the transactions contemplated hereby,
other than notification pursuant to the HSR Act.
5.2 Government Approval. Except as contemplated by Section 6.4 hereof, no
action, approval, consent or authorization, including, but not limited to any
action, approval, consent or authorization by or filing with any governmental or
quasi-governmental agency, commission, board, bureau or instrumentality is
necessary or required as to Buyer in order to constitute this Agreement as a
valid and binding obligation of Buyer.
5.3 Financial Ability to Perform. Sufficient funds and credit arrangements
are available to Buyer as of the date hereof, and will be available at the
Closing, to pay the Cash Payment.
5.4 Brokers and Intermediaries. Buyer has not employed any broker, finder,
advisor, consultant or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's,
advisor's, consultant's,
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investment banking or similar fee or commission from Buyer in connection
therewith or upon the consummation thereof.
5.5 Investment Intent Regarding the Shares and the Subsidiaries' Shares.
Buyer understands that the Shares have not been registered under the Securities
Act of 1933, as amended (the "1933 Act"). Buyer further understands that the
Shares are characterized as "restricted securities" under the United States
securities laws in that they are being acquired from Seller in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the 1933 Act only in
certain circumstances. Buyer is acquiring the Shares for its own account for
investment, without a view to, or for resale in connection with, the
distribution thereof in violation of federal or state securities laws and with
no present intention of distributing or reselling any part thereof. Buyer shall
not so distribute or resell any of the Shares or the Subsidiaries' Shares in
violation of any such law or any similar foreign law.
ARTICLE VI
6. CERTAIN COVENANTS AND AGREEMENTS OF SELLER AND BUYER
6.1 Access and Information. Seller shall and shall cause the Company and
the Subsidiaries to permit Buyer and its representatives and agents after the
date of this Agreement and up to the Closing Date to have reasonable access
during normal business hours, upon reasonable advance notice, to the books,
records and employees of the Company and the Subsidiaries, for the
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purpose of verifying the representations and warranties of Seller hereunder,
provided that such access shall be conducted by Buyer and its representatives in
such a manner as not to interfere unreasonably with the Business or operation of
the Company or the Subsidiaries. In addition, Seller shall cause the Company and
the Subsidiaries to allow Buyer and its representatives and agents (including an
environmental consultant) after the date of this Agreement access, during normal
business hours and upon reasonable advance notice, to the properties of the
Company and the Subsidiaries and make available to Buyer during normal business
hours those employees of the Company or the Subsidiaries as shall be reasonably
available who have been involved in environmental compliance in order to allow
Buyer to investigate the facilities with respect to environmental matters. All
information provided to Buyer pursuant hereto shall be subject to the
Confidentiality Agreement.
6.2 Conduct of Business; Inter-company Accounts.
6.2.1 Prior to the Closing, and except as otherwise contemplated by
this Agreement or consented to, approved of or instructed by Buyer, each of the
Company and the Subsidiaries shall:
6.2.1.1 carry on the Business in, and only in, the ordinary
course, in substantially the same manner as heretofore conducted, and use all
reasonable efforts (i) to preserve intact its present business organization;
(ii) maintain its properties in good operating condition and repair; (iii) keep
available the
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services of its present officers and employees; and (iv) preserve its
relationship with customers, suppliers and others having business dealings with
it, to the end that its goodwill and going business shall be unimpaired
following the Closing;
6.2.1.2 not issue or sell any shares of their capital stock,
or to issue any options, warrants or other rights of any kind to acquire any
such shares or securities convertible into or exchangeable for, or which
otherwise confer on the holder thereof any right to acquire, any such shares, or
enter into any agreement obligating it to do any of the foregoing;
6.2.1.3 pay accounts payable and other obligations as and when
they become due and payable in the ordinary course of business consistent with
prior practice;
6.2.1.4 perform in all respects all of their obligations under
all contracts and other agreements and instruments and comply in all respects
with all laws applicable to them;
6.2.1.5 not enter into or assume any agreement, contract or
instrument having a term of more than one year or involving more than US$25,000,
or enter into or permit any amendment, supplement, waiver or other modification
in respect thereof;
6.2.1.6 not grant (or commit to grant) any increase in the
compensation (including incentive or bonus compensation), other than periodic
salary increases in the ordinary course of business, of any employee or
institute, adopt or amend (or commit
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to institute, adopt or amend) any compensation or benefit plan, policy, program
or arrangement or collective bargaining agreement;
6.2.1.7 not take any action or omit to take any action, which
action or omission would result in a breach of any of the representations and
warranties set forth in Article IV;
6.2.1.8 not enter into any agreement or conduct business
dealings with any Affiliate of Seller (other than the Subsidiaries) except
pursuant to the WEA Distribution Agreement and the WIE License Agreement or in
accordance with the conduct of the Business in the ordinary course of business
and consistent with prior practices, none of which singly or in the aggregate is
material; and
6.2.1.9 not enter into any agreement, arrangement or incur any
obligation for the borrowing of money other than borrowings from Affiliates
constituting Inter-company Accounts.
6.2.2 From the date hereof through the Closing Date, Buyer and/or
Seller may make recommendations for termination of certain employees and/or
facilities of the Business or otherwise restructure the Company and the
Subsidiaries. Seller shall not permit the Company or any Subsidiary to make such
terminations or restructuring without the prior written consent of Buyer. In the
event of any proposed termination or restructuring event, Seller shall cause the
Company to prepare a report of the costs of such termination or restructuring,
including, without limitation, severance payments. Any termination costs and
expenses in excess of amounts calculated on the basis of the severance policies
and
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contracts disclosed in the Disclosure Schedule shall be specifically identified
for Buyer. Upon Buyer's approval of such termination or restructuring and
associated costs, Seller may cause the Company to effect such termination or
restructuring and incur the costs consistent with Buyer's approval. In such
event the minimum Working Capital required at Closing as set forth in Section
6.13 hereof shall be reduced to the extent that the Company or the Subsidiaries
make payments in respect of such termination or restructuring costs prior to the
Closing Date.
6.2.3 Seller and Buyer acknowledge that all Inter-company Accounts
between Seller and any Affiliate of Seller (other than the Company or the
Subsidiaries) on the one hand and the Company and the Subsidiaries on the other
may be settled prior to the Closing, and provided however, that no assets of the
Company or the Subsidiaries other than available cash may be used for purposes
of such settlement (with the Final Net Asset Value adjusted accordingly) and
provided further, that no funds are borrowed to be used for purposes of such
settlement. Any Inter-company Accounts of the Company or any Subsidiary to
Seller or any Affiliate of Seller (other than the Company or the Subsidiaries)
not discharged prior to the Closing shall be capitalized and deemed discharged
at the Closing.
6.2.4 Notwithstanding Section 6.2.3 hereof, Seller and Buyer
acknowledge that all loans due from the Company or any Subsidiary to any
Subsidiary, other than an obligation described in
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Code Section 956(c)(2)(C), shall be discharged by way of a dividend prior to the
Closing.
6.3 Environmental Report. Buyer shall have the right, at its own expense,
to conduct an environmental review to the extent it deems appropriate of any and
all of the premises currently owned or occupied by the Company, the Subsidiaries
or the Business. Buyer shall engage its independent environmental consultants as
soon as practical after the date hereof and use its reasonable best efforts to
complete such environmental reviews as promptly as practical but such report
must be completed and received on or before March 31, 1996.
6.4 Regulatory Filings/Hart-Scott-Rodino. Seller and Buyer shall furnish
to the other party hereto such necessary information and reasonable assistance
as such other party may reasonably request in connection with its preparation of
necessary filings or submissions to any governmental agency. Seller, and/or its
Affiliates and Buyer and/or its Affiliates, as appropriate, will file as soon as
reasonably practicable, but in any event within two weeks of the execution of
this Agreement, with the United States Federal Trade Commission and the
Antitrust Division of the United States Department of Justice notification and
report forms with respect to the sale and purchase of the Shares as contemplated
hereunder pursuant to the HSR Act and local law, as the case may be. The parties
shall also file such notification and report forms with all applicable
governmental and regulatory authorities and agencies in such foreign
jurisdiction, as may be necessary under
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local laws with respect to the sale and purchase of the Shares. Such
notification and report forms will comply as to form with all requirements
applicable thereto and all of the data and information reported in such forms
shall be true, correct and complete in all material respects. The parties shall
comply as promptly as practicable with all requests if any for additional
information and documentary materials unless, in the reasonable opinion of
counsel, such information or documentation, as the case may be, is not required
to be produced. Such additional information and documentation will comply as to
form with all requirements applicable thereto and will be true, correct and
complete in all material respects and shall be delivered sufficiently in advance
of the Closing Date to allow any period of time specified by law, and any
extensions thereof, to expire prior to the Closing Date. Each of Buyer and
Seller shall pay one-half of Buyer's filing fee under the HSR Act. Buyer and
Seller shall use commercially reasonable efforts to effect compliance with the
conditions specified in Sections 7.5 and 6.18 hereof.
6.5 Tax Matters. Except as provided in Section 6.5.1 hereof Seller shall
be liable for, shall pay and shall indemnify and hold Buyer, the Company and the
Subsidiaries harmless against all Taxes of the Company and the Subsidiaries for
any taxable period ending on or before the Closing Date including any Taxes from
the making of the Section 338(h)(10) Election.
6.5.1 Buyer shall cause the Company and the Subsidiaries to be
liable for, and to pay and indemnify and hold
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Seller harmless against (i) any and all Taxes of the Company or the Subsidiaries
for any taxable year or portion thereof commencing on or after the Closing Date;
(ii) any and all Taxes not incurred in the ordinary course of business
attributable to the acts or omissions of the Company or the Subsidiaries
occurring on the Closing Date but after the Closing; and (iii) any and all Taxes
accrued by the Company or the Subsidiaries as reflected on the Certified Final
Balance Sheet; provided that nothing in this Section 6.5.1 shall include any Tax
attributable to the making of the Section 338(h)(10) Election or a comparable
election under state, local or foreign law.
6.5.2 Any Taxes for a taxable period beginning before the Closing
Date and ending after the Closing Date with respect to the Company or the
Subsidiaries shall be apportioned between Seller and the Company based on the
actual operations of the Company and the Subsidiaries during the portion of such
period ending on the Closing Date, and the portion of such period beginning on
the date following the Closing Date, and each portion of such period shall be
deemed to be a taxable period.
6.5.3 Except as set forth in Section 6.5.1, Seller shall indemnify
and hold Buyer and the Company harmless with respect to any Tax imposed on
Buyer, the Company or the Subsidiaries under Subpart F of the Code with respect
to the Company or the Subsidiaries attributable to the portion of the taxable
period of the Company or the Subsidiaries which includes the Closing Date. The
income taxable under Subpart F of the Code
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of the Company or the Subsidiaries will be allocated to the periods up to and
including the Closing Date and to the period after the Closing Date by closing
the books of the Company or the Subsidiaries as of the end of the Closing Date.
6.5.4 Seller shall be entitled to all refunds (including without
limitation interest with respect thereto) of Income Taxes received by or on
behalf of the Company or the Subsidiaries relating to any Pre-Closing Period,
except to the extent such refunds are included in the Final Net Asset Value, and
Buyer shall pay, or shall cause the Company or the Subsidiaries to pay, to
Seller any such refund promptly after receipt thereof. At the request of Seller,
Buyer shall file, or shall cause the Company or the Subsidiaries to file, any
claims for such refunds. Notwithstanding the foregoing, Seller shall not be
entitled to any refund resulting from the filing of an amended Return after the
Closing to carry back any losses resulting from operations or transactions of
the Business after the Closing.
6.5.5 Notwithstanding anything to the contrary in this Agreement,
Seller shall have the right to represent the interests of the Company or the
Subsidiaries in any Tax audit or administrative or court proceeding relating to
Returns with respect to which Seller may be liable (in whole or in part) under
this Agreement (including without limitation any such proceedings relating to
the Business, income, properties or operations of the Company or the
Subsidiaries for Pre-Closing Periods). Buyer will cause the Company to cooperate
fully with Seller and its counsel in
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the defense against or compromise of any claim in any such proceeding at
Seller's sole cost and expense.
6.5.6 Buyer will cause the Company to promptly notify Seller in
writing upon receipt by the Company or any Affiliate of the Company of a written
notice of (i) any pending or threatened federal, state, local or foreign Tax
audits or assessments of the Company or the Subsidiaries, so long as any
Pre-Closing Period remains open; and (ii) any pending or threatened federal,
state, local or foreign Tax audits or assessments of Buyer or any affiliate of
Buyer which may affect the Tax liabilities of Seller, in each case for
Pre-Closing Periods only. Seller shall promptly notify Buyer in writing upon
receipt by Seller or any Affiliate of Seller of a written notice of any pending
or threatened federal, state, local or foreign Tax audits or assessments
relating to the income, properties or operations of the Company or the
Subsidiaries, in each case for Post-Closing Periods.
6.5.7 After the Closing Date, Buyer and Seller shall provide each
other, and Buyer shall cause the Company or the Subsidiaries to provide Seller,
with such cooperation and information relating to the Company or the
Subsidiaries as either party reasonably may request in filing any Return (or
amended Return) or refund claim, determining any Tax liability or a right to a
refund, conducting or defending any audit or other proceeding in respect of
Taxes or effectuating the terms of this Agreement. The parties shall retain, and
Buyer shall cause the Company or the Subsidiaries to retain, all Returns,
schedules, work papers and
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other material documents relating thereto, until the expiration of any relevant
statute of limitations (and, to the extent notified by any party, any extensions
thereof) and, unless such Returns and other documents are offered and delivered
to Seller or Buyer, as applicable, until the final determination of any Tax in
respect of such years. Any information obtained under this Section 6.5 shall be
kept confidential, except as may be otherwise necessary in connection with
filing any Return (or amended Return) or refund claim, determining any Tax
liability or a right to a refund, conducting or defending any audit or other
proceeding in respect of Taxes or otherwise effectuating the terms of this
Agreement. Notwithstanding the foregoing, neither Seller nor Buyer, nor any of
their Affiliates, shall be required unreasonably to prepare any document, or
determine any information not then in its possession, in response to a request
under this Section 6.5.
6.5.8 Notwithstanding any other provision of this Agreement to the
contrary, all transfer, gains, documentary, sales, use, registration, stamp,
value added or other similar Taxes payable by reason of the sale, transfer or
delivery of the Shares hereunder shall be borne equally by Buyer and Seller, and
Seller shall file all necessary Returns and other documentation with respect to
all such Taxes.
6.6 Affiliate Obligations.
6.6.1 After the Closing, Buyer shall not permit (i) the Company or any of
the Subsidiaries to renew, extend or increase the liability under or assign any
of the contracts or agreements set
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forth on Schedule 6.6 of the Disclosure Schedule with respect to which Seller or
any of its Affiliates have issued guarantees; (ii) sell, assign, transfer or
convey the Shares to a Person not an Affiliate of Buyer; or (iii) permit the
Company to sell, assign, transfer or convey all or substantially all of the
Company's assets; unless Seller or such Affiliate, as the case may be, is
released from all such guarantees. This provision shall not prevent Buyer from
subletting all or any portion of the premises subject to a real property lease.
6.7 Books and Records. Buyer will, and will cause the Company and the
Subsidiaries, to retain all books, records and other documents pertaining to the
Business in existence on the Closing Date and delivered to Buyer and to make the
same available after the Closing Date for inspection and copying by Seller or
any Affiliate of Seller at Seller's expense during the normal business hours of
the Company or the Subsidiaries, as applicable, upon reasonable request and upon
reasonable notice for the purpose of preparing Seller's financial statements or
as may be necessary to perform Seller's indemnification obligations hereunder.
No such books, records or documents shall be destroyed by Buyer, the Company or
the Subsidiaries without first advising Seller in writing and giving Seller a
reasonable opportunity to obtain possession thereof. Without limiting the
generality of the foregoing, Buyer will, and will cause the Company and the
Subsidiaries to, make available to Seller, the Affiliates of Seller and their
respective representatives, all information deemed
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necessary or desirable by Seller or such Affiliates in preparing their
respective financial statements and conducting any audits in connection
therewith.
6.8 Announcement. Hereafter, neither Seller or its Affiliates on the one
hand nor Buyer or its Affiliates on the other will issue any press release or
otherwise make any public statement with respect to this Agreement and the
transactions contemplated hereby without the prior consent of the other (which
consent shall not be unreasonably withheld), except as may be required by
applicable securities laws or stock exchange regulations.
6.9 Use of Names. Buyer agrees that it will, as promptly as practicable
but in any event within 60 days following the Closing Date, eliminate the names
"Time", "Time Warner", "Time Warner Interactive", and the initials "TWI" or
"TWi" (and any variants thereof) from the name of the Company and the
Subsidiaries and within 45 days following the Closing Date, cause the Company to
remove or obliterate all trade names, trademarks and logos related to such names
from all signs, purchase orders, invoices, sales orders, packaging stock,
inserts, labels, letterheads, shipping documents and other materials used by the
Company or the Subsidiaries. Notwithstanding anything herein to the contrary,
Buyer agrees that after the Closing Date it will neither use, nor permit the
Company and the Subsidiaries to use, (i) any purchase orders, invoices, sales
orders, letterheads or shipping documents existing on the date hereof, which
bear the name "Time", "Time Warner", "Time Warner Interactive", the initials
"TWI" or "TWi" or
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any logo related to such names (or any variants thereof) or any name or logo
confusingly similar thereto, without first obliterating or covering such name,
mark or logo, or (ii) any such materials not in existence on the Closing Date
which bear such name, mark or logo (or any variants thereof); provided, however,
that the Company and the Subsidiaries shall have the right to sell or dispose of
the entire existing inventory (including work in process) of product and
replacement parts already packaged and products and parts ordered from suppliers
as of the Closing Date, including, without limitation products and replacement
parts relating to coin-operated video arcade games, home video games and
personal computers, despite the use or inclusion of one or more of the marks
otherwise prohibited under this provision. At Seller's request, Buyer will cause
the Company to cooperate, and will cause each of the Subsidiaries to cooperate,
in taking all steps reasonably necessary in any jurisdiction to preserve for
Seller and, where appropriate, assign to Seller, all right, title and interest
in and to said names, the registration and usage thereof and the goodwill
associated therewith. Buyer will not, and will cause the Company and the
Subsidiaries not to, misappropriate, misrepresent or otherwise infringe, abuse
or diminish the value of said names.
6.10 Restrictive Covenants.
6.10.1 Non-Competition. For a period of five years following the
Closing Date, Seller and its Affiliates shall not, directly or indirectly, own,
manage, operate or control, whether as
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an owner, partner, investor, stockholder or otherwise any Person which is
engaged in the business of developing, manufacturing, marketing, licensing,
publishing or selling coin-operated video arcade games (the "Coin-op Business");
or for itself, or on behalf of any other Person, call on any supplier of Buyer
or be in contact in any way with any customer or supplier of Buyer for the
purpose of soliciting, diverting or taking away any supplier or customer of
Buyer. The licensing by Seller and its Affiliates of their intellectual
properties to a Person engaged in the Coin-op Business shall not be deemed a
breach of this covenant. The acquisition by Seller and/or its Affiliates of, or
investment in, any Person, entity or business 15% or less of whose annual
revenues are derived from or 15% or less of whose assets are employed in a
Coin-Op Business shall not constitute a breach of this covenant.
6.10.2 Non-Solicitation. If this Agreement is terminated, Buyer and
its Affiliates on the one hand and Seller and its Affiliates on the other hand
will not, for a period of three years thereafter, directly or indirectly,
solicit, encourage, entice or induce to terminate his or her employment with
such party, any Person who is an employee of the other party at the date hereof
or at any time hereafter that precedes such termination.
6.10.3 Affiliate Veto Power. If Seller or any Affiliate of Seller
has veto power over certain activities of a Person, such Person shall not be
deemed an Affiliate of Seller for the purposes of Sections 6.10.1 and 6.10.2
hereof unless such veto power, if
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exercised, would restrict or prevent such Person from engaging in activities
restricted under such Sections .
6.10.4 Rights and Remedies Upon Breach. If Buyer or its Affiliates
on the one hand or Seller or its Affiliates on the other hand breach, or
threaten to commit a breach of, any of the provisions relating to such parties
of Sections 6.10.1 or 6.10.2 hereof, the other party shall have the right and
remedy to have such covenants specifically enforced by any court of competent
jurisdiction, it being agreed that any breach or threatened breach of such
covenants would cause irreparable injury and that money damages would not
provide an adequate remedy. This right of specific performance is in addition
to, and not in lieu of, any other rights and remedies available to the parties
under law or in equity.
6.10.5 Severability of Covenant. The parties hereto acknowledge and
agree that the foregoing covenants in this Paragraph 6.10 are reasonable and
valid in geographical and temporal scope and in all other respects and that they
have received full and adequate consideration therefor. If any court determines
that any of such covenants, or any part thereof, is invalid or unenforceable,
the remainder of such covenants shall not thereby be affected and shall be given
full effect, without regard to the invalid portions. If any court determines
that any of the foregoing covenants, or any part thereof, is unenforceable
because of the duration or geographic scope of such
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provision, such court shall have the power to reduce the duration or scope of
such provision as the case may be, and, in its reduced form, such provision
shall then be enforceable.
6.11 Commercially Reasonable Efforts. Each of the parties hereto shall use
commercially reasonable efforts to fulfill or obtain the fulfillment of the
conditions of the Closing, including, without limitation, the execution and
delivery of all agreements contemplated hereunder to be so executed and
delivered.
6.12 Notice of Certain Information. Buyer or Seller, as appropriate, shall
promptly notify the other upon discovery of any information (and the basis
thereof) which would indicate that a condition to a parties obligation to
consummate the transactions contemplated by this Agreement will not be
satisfied.
6.13 Working Capital. Seller hereby guarantees that the amount of Working
Capital Assets (as hereafter defined) of the Company and the Subsidiaries
reflected on the Interim Balance Sheet and the Final Balance Sheet shall exceed
the amount of total liabilities reflected thereon by at least US$19,000,000. The
amount of such excess is hereafter referred to as "Working Capital." For
purposes of such calculation, such US$19,000,000 shall be reduced by the amount
of termination or restructuring costs actually paid by the Company or any
Subsidiary prior to the Closing Date as provided in Section 6.2.2 hereof and the
amount of total liabilities shall be determined without regard to any
termination or restructuring costs accrued as a result of terminations or
restructurings effected in accordance with Section 6.2.2 hereof but which remain
unpaid as of the Closing Date.
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"Working Capital Assets" shall mean the sum of (i) cash, (ii) accounts
receivable, (iii) Inventory and (iv) prepaid expenses to the extent such prepaid
expenses relate to expenses to be incurred by the Company or any Subsidiary on
or before December 31, 1996 or for which the Company or any Subsidiary is
entitled to receive a cash refund within sixty days following the Closing. In
the event of any deficiency in the amount of Working Capital reflected on either
the Interim Balance Sheet or the Final Balance Sheet, Seller shall promptly make
an additional cash capital contribution to the Company so as to reach the
minimum Working Capital level of US$19,000,000. Notwithstanding the above, in
the event the Interim Balance Sheet reflects a deficiency of Working Capital in
excess of US$8,000,000, provided Seller is not in default hereunder, Seller may
elect to terminate this Agreement by written notice of such election delivered
to Buyer together with the Interim Balance Sheet; such election shall be
effective as of the Closing Date unless Buyer, prior to the Closing Date, shall
have waived in writing Seller's guaranty of minimum Working Capital so as to
reduce such level to an amount which would require Seller to contribute only
US$8,000,000 to the Company to meet the minimum Working Capital necessary for
Closing. If Buyer shall not have waived such obligation prior to the Closing
Date, then this Agreement shall terminate effective as of the Closing Date
without further obligation hereunder except that Seller shall reimburse Buyer
and its Affiliates for all reasonable out-of-pocket expenses, including
attorneys' and accountants' fees and expenses incurred by
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Buyer or its Affiliates in connection with the negotiation and execution of this
Agreement and the preparation for Closing hereunder up to a maximum of
US$1,000,000. Such expense reimbursement shall be paid to Buyer (or such other
Person designated by Buyer) within ten business days of Buyer's written demand
therefor, delivered to Seller together with reasonable documentation of such
out-of pocket expenses. Buyer shall supply additional information regarding such
expenses as Seller shall, on a timely basis, reasonably request.
6.14 Audited Financial Statements. Seller acknowledges that it is an
essential part of this transaction that Buyer receive the Audited Financial
Statements for each of the nine months ended December 31, 1994 and the fiscal
year ended December 31, 1995 in form and content acceptable for filing by Buyer
on Form 8-K with the Securities and Exchange Commission in connection with the
transactions contemplated by this Agreement. Seller shall at its expense cause
such Audited Financial Statements to be prepared and certified by Ernst & Young
LLP without qualification and delivered to Buyer on or before the Closing Date.
6.15 Compliance With Gaming Laws. Buyer and/or its Affiliates are subject
to various gaming laws, regulations, rules and procedures of certain foreign and
domestic jurisdiction in which Buyer or its Affiliates conduct business (the
"Gaming Laws"). As soon as practical after the date hereof, Buyer or its
Affiliates shall advise the appropriate gaming authorities of or otherwise take
such action with respect to the transactions contemplated by
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this Agreement as it deems appropriate in connection with such Gaming Laws and
the maintenance of licenses thereunder by Buyer and its Affiliates. Seller shall
cause the Company and the Subsidiaries to promptly supply such information
regarding the Company and the Subsidiaries and the operation of the Business
reasonably requested by Buyer to respond to inquiries which may be made by any
gaming board, commission or authority including, without limitation, with
respect to litigation, indictments, criminal proceedings and the like of the
Company, the Subsidiaries or any of their officers, directors or employees.
Buyer and its Affiliates shall use their best reasonable efforts to promptly
respond to requests for information or resolve any objection made by any such
board, commission or authority with respect to the transactions contemplated by
this Agreement or the Business and Buyer shall promptly notify Seller of any
objection it may receive. Upon written request from Buyer, Buyer and Seller may
mutually agree to adjourn the Closing Date for one or more reasonable periods,
to enable Buyer or its Affiliates to (i) respond to or address requests by any
such commission, board or authority for information, objections or requests for
additional time to examine the transaction and (ii) comply with any Gaming Law.
If prior to March 31, 1996, Buyer or its Affiliates reasonably determines, with
advice of counsel, that as a result of the transactions contemplated by this
Agreement being consummated, it will not be in compliance with any applicable
Gaming Laws or the maintenance of any existing gaming licenses or the obtaining
of gaming licenses or
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permits by Buyer or any of its Affiliates will be jeopardized, then Buyer shall
have the right to terminate this Agreement without penalty by written notice of
its election to do so. Notwithstanding any provision of the foregoing to the
contrary, in the event that Buyer has not notified Seller of any request for
information or any objection raised by any gaming board, commission or authority
by March 15, 1996, and this Agreement is subsequently terminated pursuant to
this provision, Buyer shall reimburse Seller for its reasonable expenses,
including attorneys' and accountants' fees and expenses, incurred after March
15, 1996 in preparing for the Closing.
6.16 Code Section 338 Election. If timely requested in writing by Seller,
Buyer shall, at the time and in the manner requested by Seller, join with Seller
in making a Code Section 338(h)(10) (as amended) election with respect to the
purchase and sale of the Shares and, in connection therewith, (i) shall cause a
Department of Treasury Form 8023-A (or the successor form thereto) that has been
completed in accordance all applicable Treasury Regulations to be executed on
the Closing Date and deliver same to Seller, and (ii) take such other action as
Seller shall reasonably request including, without limitation, providing Seller
with any requested information, and making available and causing appropriate
persons to take any action on behalf of Seller, required for the making of a
Code Section 338(h)(10) election in accordance with all applicable Treasury
Regulations and Department Treasury Form 8023-A. For purposes of the Code
Section 338(h)(10) election, the
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parties shall determine and allocate the Modified Aggregate Deemed Sale Price
(as defined by the applicable Treasury regulations) ("MADSP") among the assets
of the Company and prepare any required forms in accordance with the procedures
set forth on Schedule 6.16 of the Disclosure Schedule. The Buyer and the Seller
agree to act in accordance with such allocations in any relevant income tax
return or similar filings. Seller shall pay any income Tax attributable to the
making of the Section 338(h)(10) election (and shall indemnify Buyer and the
Company against any adverse consequences arising out of any failure to pay such
income Tax) in accordance with the tax indemnification provisions set forth in
this Agreement. Seller will also pay any state, local or foreign Tax (and
indemnify Buyer and the Company against any adverse consequences arising out of
any failure to pay such Tax) attributable to an election under state, local or
foreign law similar to the election under Section 338(g) of the Code (or which
results from the making of an election under Section 338(g) of the Code) with
respect to the purchase and sale of the Shares hereunder where the state, local
or foreign tax jurisdiction (i) does not provide or recognize a Section
338(h)(10) election or (ii) does not apply its provisions corresponding to
Section 338(h)(10) of the Code to the purchase and sale of the Shares.
6.17 Buyer Cooperation. Buyer shall use all reasonable efforts, at
Seller's expense (except for the cost of services rendered by employees of
Buyer or its Affiliates) to cooperate with Seller in obtaining consents of any
Persons required under the
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documents and agreements set forth on Schedule 8.9 of the Disclosure Schedule.
6.18 Consents. An Affiliate of Buyer is a party to agreements with
a)Panasonic Software Company and Interactive Media Division of Matsushita
Electric Industrial Co., Ltd. ("Panasonic"); and b) G.T. Interactive Software
Corp. ("GTI") which agreements conflict with the WEA Distribution Agreement,
the WIE License Agreement and certain other agreements to which the Company is
a party (the "Conflicting Agreements"). Accordingly, it is necessary for
Buyer's Affiliate to obtain the consents of Panasonic and GTI to the Company's
performance of its obligations under the Conflicting Agreements prior to the
Closing Date. Buyer shall use its best efforts to secure such consents prior to
March 7, 1996. Buyer shall immediately notify Seller if such consents have not
been obtained by Buyer prior to March 7, 1996 and shall advise Seller of
specific issues which require consent. Seller shall have ten business days to
cause the Company to modify, cancel, terminate or otherwise remedy the
conflicts the Conflicting Agreements have with the Panasonic and GTI agreements
and Seller and Buyer shall mutually consult and cooperate with each other to
resolve the conflicting issues. If such conflicts are not resolved within such
ten business days or if the consents of Panasonic and GTI are not obtained by
such time, Buyer shall then have the right to terminate this Agreement without
penalty by written notice of its election to do so.
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6.19 Public Announcement. Buyer, Seller and their Affiliates shall
not make any public disclosure or announcement regarding this Agreement or the
transactions contemplated hereby prior to such time as the consents referred to
in Section 6.18 hereof have been obtained by Buyer's Affiliate.
6.20 Disposition of TWIL. Prior to the Closing Date, Seller shall
cause the Company to dispose of all of the capital stock of TWIL by dividend
made to Seller or an Affiliate of Seller or otherwise. To the extent that the
WEA Distribution Agreement, the WEI License Agreement or any other contract or
agreement set forth on Schedule 4.18 of the Disclosure Schedule relate to the
game "Pit Ball" or provide or require the obligations thereunder to, in whole
or in part, be performed by TWIL, Seller shall or Seller shall cause TWIL to
assume and perform TWIL's obligations thereunder. Seller shall indemnify and
hold harmless Buyer and its Affiliates, in accordance with this Agreement, from
any Liabilities of TWIL and its business and from any Liabilities under any
contract or agreement to which the Company or any Subsidiary is a party insofar
as such contract or agreement relates to the game "Pit Ball." Buyer
acknowledges that the Company and the Subsidiaries shall have no rights in and
to the game "Pit Ball" after the Closing.
6.21 Assignments by TWIL. Prior to the Closing Date, if requested
by Buyer, Seller will cause TWIL to assign the International Nintendo Licenses
to the Company or to one of the Subsidiaries, as Buyer shall designate. In the
event of such
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assignment, Seller and the Company shall cooperate with Buyer in obtaining the
consent of Nintendo Co., Ltd. to such assignment.
ARTICLE VII
7. CONDITIONS PRECEDENT OF SELLER
The obligation of Seller to consummate the transactions described in
Article II hereof is subject to the fulfillment of each of the following
conditions prior to or at the Closing:
7.1 Representations and Warranties. The representations and
warranties of Buyer made hereunder shall be true in all material respects at
and as of the Closing Date, with the same force and effect as though made at
and as of the Closing Date, except for changes permitted or contemplated by
this Agreement and except to the extent that any representation or warranty is
made as of a specified date, in which case such representation or warranty
shall be true in all material respects as of such date.
7.2 Agreements. Buyer shall have performed and complied in all
material respects with all its undertakings and agreements required by this
Agreement to be performed or complied with by Buyer prior to or at the Closing.
7.3 Buyer Certificate; Payment.
7.3.1 Seller shall have been furnished with a certificate of
an authorized officer of Buyer, dated the Closing Date, certifying to the
effect that the conditions contained in Sections 7.1 and 7.2 hereof have been
fulfilled and confirming the acknowledgement set forth in Section 9.2 hereof.
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7.3.2 Seller shall have received confirmation of the receipt
of the Cash Payment to be made at Closing in respect of the Purchase Price in
the manner prescribed in Section 3.2.2.1 hereof, or such other means as Seller
may deem acceptable at the Closing.
7.3.3 The Company shall have duly executed and delivered to
Seller the Interim Four Year Note, the Interim Two Year Note and the Security
Agreements together with the documents and instruments contemplated thereby.
7.4 No Injunction. No injunction, restraining order or decree of
any nature of any court or governmental or regulatory authority shall exist
against Buyer, Seller, or any of their respective Affiliates, or any of the
principals, officers or directors of any of them, that restrains, prevents or
materially changes the transactions contemplated hereby.
7.5 Government Approval. All material consents, approvals and
authorizations of governmental and regulatory authorities, and all material
filings with and notifications of governmental authorities and regulatory
agencies or other entities which regulate the Seller, the Company, the
Subsidiaries or Buyer, necessary on the part of Seller or Buyer or their
respective Affiliates to the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, shall have been obtained
or effected (and all applicable waiting periods, if any, including any
extensions thereof, under any applicable law, statute, regulation or rule,
including but not limited to the HSR
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Act, if applicable, shall have expired or terminated, as applicable).
7.6 Miscellaneous Closing Deliveries. Seller shall have received
each of the following:
7.6.1 all documents, instruments and other closing deliveries;
7.6.2 such evidence as Seller may reasonably request, in order
to establish c) the corporate power and authority of Buyer to consummate the
transactions contemplated by this Agreement and d) compliance with the
conditions of Closing set forth herein;
7.6.3 an opinion of counsel to Buyer reasonably acceptable to
Seller substantially in the form of Exhibit F to the Disclosure Schedule.
ARTICLE VIII
8. CONDITIONS PRECEDENT OF BUYER
The obligation of Buyer to consummate the transactions described in
Article II hereof is subject to the fulfillment of each of the following
conditions prior to or at the Closing:
8.1 Representations and Warranties. The representations and
warranties of Seller made hereunder shall be true in all material respects at
and as of the Closing Date, with the same force and effect as though made at
and as of the Closing Date, except for changes permitted or contemplated by
this Agreement and except to the extent that any representation or warranty is
made as of a specified date, in which case such representation or warranty
shall be true in all material respects as of such date.
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8.2 Agreements. Seller shall have performed and complied in all
material respects with all of its respective undertakings and agreements
required by this Agreement to be performed or complied with by it prior to or
at the Closing.
8.3 Seller Certificate. Buyer shall have been furnished with a
certificate of an authorized officer of Seller, dated the Closing Date,
certifying to the effect that the conditions contained in Sections 8.1 and 8.2
hereof have been fulfilled.
8.4 Interim Balance Sheet. Buyer shall have received the Interim
Balance Sheet, in form and in level of detail reasonably satisfactory to it
together with the Certificate and letter described in Section 2.3 hereof.
8.5 Environmental Reviews. Buyer shall have received results
satisfactory to Buyer of the environmental reviews it conducts on the premises
owned or occupied by the Company, the Subsidiaries or the Business, provided
that any such results of such reviews were obtained as required under Section
6.3 hereof. The results of any such environmental review shall be deemed
acceptable to Buyer if e) such review does not reveal a condition that
constitutes a violation of any Environmental Law or which absent remedial
action, with or without the passage of time, would become a violation of any
Environmental Law or (ii) any environmental condition which absent remedial
action, with or without the passage of time, would reasonably be expected to
result in a material liability or a violation of any Environmental Law is
revealed in a written report submitted by Buyer's independent environmental
audit firm and has
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been provided to Seller and the written estimate by Buyer's independent
environmental audit firm with respect to the reasonable good faith cost to
remedy such environmental condition (a) (i) does not exceed US$25,000, or (ii)
exceeds US$25,000 but is less than $2,000,000 and Seller, at Seller's option,
deducts from the Purchase Price and reduces the Cash Payment by the amount of
such estimate in excess of US$25,000 and (b) the remedial or clean up action
determined by Buyer's independent environmental audit firm as necessary to
correct an environmental condition identified in such report is not reasonably
expected to result in or require any disruption in the operation of the
Business (whether by interruption or change of operations or otherwise) that
would have a material adverse impact on the Business.
8.6 No Injunction. No injunction, restraining order or decree of
any court or governmental or regulatory authority shall exist against Buyer,
Seller or any of their respective Affiliates, or any of the principals,
officers or directors of any of them, that restrains, prevents or materially
changes the transactions contemplated hereby.
8.7 Government Approval. All consents, approvals and
authorizations of governmental and regulatory authorities, and all filings with
and notifications of governmental authorities and regulatory agencies or other
entities which regulate the business of Seller or Buyer or their respective
Affiliates, necessary on the part of Seller or Buyer, or their respective
Affiliates, to the execution and delivery of this Agreement and the
consummation of
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the transactions contemplated hereby, shall have been obtained or effected (and
all applicable waiting periods, if any, including any extensions thereof, under
any applicable law, statute, regulation or rule, including but not limited to
the HSR Act, if applicable, shall have expired or terminated, as applicable).
8.8 Financial Statements. Buyer shall have been furnished with
copies of the Audited Financial Statements for each of the 9 months ended
December 31, 1994 and the fiscal year ended December 31, 1995 in form and
content acceptable for filing by Buyer on Form 8-K with the Securities and
Exchange Commission in connection with the transactions contemplated by this
Agreement.
8.9 Consents. Consents of any Persons required under the documents
and agreements referred to in Section 4.18 hereof as a result of the sale and
transfer of the Shares to Buyer hereunder and to the sale and transfer of the
Shares to Buyer hereunder, all as set forth on Schedule 8.9 of the Disclosure
Schedule, shall have been obtained and delivered to Buyer and certificates of
the Persons designated by an asterisk on Schedule 8.9 of the Disclosure
Schedule shall have been obtained and delivered to Buyer confirming that each
document or agreement referred to in such certificate is in full force and
effect and no party thereto is in default and no claim of default by any party
has been made or is pending and there does not exist any event which with
notice or the passing of time, or both, would constitute a default or would
excuse performance by any party thereof. Such consents and certificates shall
also have been obtained and delivered to Buyer in respect of contracts
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entered into in the ordinary course of business between the date hereof and the
Closing Date.
8.10 Instruments of Transfer. Buyer shall have received a stock
certificate or stock certificates, evidencing the Shares, in each case endorsed
in blank for transfer or with separate stock powers sufficient to transfer all
of Seller's right, title and interest in and to the Shares to Buyer and to vest
in Buyer good and marketable title to the Shares in accordance with the terms
of this Agreement.
8.11 Books of Account. Buyer shall have received the Company's
books of account, records, leases, indentures, contracts, agreements, evidences
of indebtedness, securities, correspondence and other documents relating to the
Business including the minute books of the Company and the Subsidiaries. Unless
otherwise requested by Buyer, delivery of the foregoing shall not be effected
by physical delivery at the Closing but by surrendering possession of the
premises containing the foregoing to Buyer.
8.12 Resolutions.
8.12.1 Buyer shall have received a certificate of the
Secretary of Seller certifying the resolutions duly adopted by the board of
directors of Seller authorizing and approving the transfer of the Shares and
performance by Seller of its obligations hereunder and the other documents and
instruments to be executed and delivered in connection herewith and stating
that such resolutions have not been amended or revoked and are in full force
and effect on the Closing Date.
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8.13 Incumbency Certificates. Buyer shall have received a
certificate of the Secretary of Seller dated the Closing Date as to the
incumbency and signatures of each of their respective officers authorized to
act with respect to this Agreement and the documents and instruments to be
executed in connection herewith.
8.14 Certificates of Incorporation. Buyer shall have received the
Certificate of Incorporation (or other appropriate charter document) for each
of the Company and the Subsidiaries as issued and certified within five
business days prior to the Closing Date by the Secretary of State (or other
appropriate governmental authority) of their respective jurisdiction of
incorporation.
8.15 By-laws. Buyer shall have received a Certificate of the
Secretary for each of the Company and the Subsidiaries certifying that the
By-laws attached thereto are true and complete and in full force and effect on
the Closing Date.
8.16 Good Standing Certificates. Buyer shall have received long
form certificates of good standing (or the equivalent thereof) (i) for Seller,
issued by the Secretary of State of Delaware and (ii) to the extent available,
for the Company and the Subsidiaries issued by the Secretary of State (or other
appropriate governmental authority) of each of their respective jurisdictions
of incorporation and by each jurisdiction where they are qualified to do
business, dated and certified within five business days prior to the Closing
and, to the extent available, bring-down good standing telegrams dated the
Closing Date.
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8.17 Resignations of Officers and Directors. Buyer shall have
received the resignations of the officers and directors of the Company and the
Subsidiaries effective on or prior to the Closing Date.
8.18 Disposition of TWIL. Seller shall have caused the Company to
have disposed of TWIL in accordance with Section 6.20 hereof.
8.19 WEA Distribution Agreement. The term of the WEA Distribution
Agreement shall have been terminated, all outstanding issues regarding the
"Products" as defined therein shall have been reasonably resolved pursuant to
the terms of the WEA Distribution Agreement or, if there is no pertinent
provision therein, in the customary fashion, and appropriate entries shall be
made in the Company's books and records with respect to the receivable due TWIC
and any price protection arrangements or reductions in the value of such
Products.
8.20 WIE License Agreement. The WIE License Agreement shall have
been amended so as to provide that TWIC shall have no obligation to continue to
manufacture products in Ireland, and to make, if necessary, appropriate
recognition with respect to price if such products were previously manufactured
in Ireland and are thereafter manufactured in places other than Ireland or by
third parties.
8.21 Miscellaneous Closing Deliveries. Buyer shall have received
each of the following:
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8.21.1 all documents, instruments and other closing
deliveries, including without limitation, those specified in Section 3.2
hereof;
8.21.2 such additional evidence as Buyer may reasonably
request, in order to establish f) the corporate power and authority of Seller
to consummate the transactions contemplated by this Agreement and g) compliance
with the conditions of closing set forth herein; and
8.21.3 opinions of counsel to Seller reasonably acceptable to
Buyer substantially in the form of Exhibits G and H to the Disclosure Schedule.
8.22 Further Documents. Buyer shall have received such further
certificates and documents as shall have been reasonably requested by Buyer.
ARTICLE IX
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; CERTAIN ACKNOWLEDGMENTS
9.1 Survival of Representations and Warranties of Seller.
Notwithstanding any right of Buyer and its representatives fully to investigate
the affairs of the Company and the Subsidiaries and the Business and
notwithstanding any knowledge of facts determined or determinable by Buyer and
its representatives pursuant to such investigation or right of investigation,
Buyer has the right to rely fully upon the representations, warranties,
covenants and agreements of Seller contained in this Agreement. All such
representations warranties, covenants and agreements shall survive
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the execution and delivery hereof except that the representations and
warranties set forth in h) Sections 4.1, 4.5, 4.6, 4.7, 4.10, 4.11, 4.12, 4.13,
4.18, 4.19, 4.21 and 4.29 hereof shall survive for one and one-half years after
the Closing Date; i) Sections 4.2, 4.9 (excluding the first two sentences
thereof), 4.14, 4.16, 4.17, 4.20, 4.26, 4.27 and 4.28 hereof shall survive for
three years after the Closing Date; j) Sections 4.15 and 4.22 shall survive for
a period equal to the applicable statute of limitations with respect to the
assertion of a claim for each such matter; and k) Sections 4.8.2, 4.8.4 and
4.8.6 shall survive, with respect to each of the license agreements referred to
therein, for a period equal to one year after the expiration of each such
license; and thereafter, neither Buyer nor any affiliate of Buyer shall be
entitled to first assert a claim against Seller by reason of any such
representation or warranty being untrue or incorrect when made.
9.2 Information. Buyer hereby acknowledges each of the following:
9.2.1 Buyer has received all materials relating to the
Business of the Company and the Subsidiaries which it has requested and has
been afforded the opportunity to obtain any additional information necessary to
verify the accuracy of any such information or of any representation or
warranty made by Seller hereunder or to otherwise evaluate the merits of the
transactions contemplated hereby;
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9.2.2 Seller and its representatives have answered to Buyer's
satisfaction all inquiries that Buyer or its representatives have made
concerning the Business or otherwise relating to the transactions contemplated
hereby; and
9.2.3 Buyer has not relied, in whole or in part, on any
information contained in the Offering Memorandum and Seller is making no
representations or warranties with respect to the Offering Memorandum.
ARTICLE X
10. INDEMNIFICATION
10.1 Indemnification of Buyer and its Affiliates by Seller. Seller
shall defend and promptly indemnify and hold harmless Buyer and its Affiliates,
successors and assigns from and against any and all l) liabilities, losses,
costs or damages ("Loss"); and m) reasonable attorneys' and accountants' fees
and expenses, court costs and all other reasonable out-of-pocket expenses
("Expense") incurred by Buyer and its Affiliates in connection with or arising
from:
10.1.1 any breach by Seller of any of its covenants or
agreements in this Agreement or in any agreement or instrument contemplated
hereby;
10.1.2 any failure of Seller to perform any of its obligations
in this Agreement or any agreement or instrument contemplated hereby;
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10.1.3 any representation or warranty of Seller in this
Agreement or any agreement or instrument contemplated hereby being untrue or
incorrect in any respect;
10.1.4 any liability of Seller for any Tax for transactions or
periods on or prior to the Closing Date; and
10.1.5 the actual cost of any remedial or clean up action
identified in the report received by Buyer in excess of the sum of US$25,000
and the amount deducted from the Purchase Price in accordance with Section 8.5
hereof;
10.1.6 all Liabilities of the Company and the Subsidiaries
relating to TWIL, including, without limitation, Liabilities arising out of the
conduct of TWIL's business or the game "Pit Ball" prior to and after the
Closing Date; and
10.1.7 any Liability of the Company and the Subsidiaries
except:
10.1.7.1 all liabilities and obligations of the
Company and the Subsidiaries which are reflected or reserved against on the
December 31, 1995 Financial Statements and continue to exist on the Closing
Date, but only to the extent so reflected or reserved against;
10.1.7.2 all liabilities and obligations incurred or
reserved for by the Company or the Subsidiaries in the ordinary course of the
Business and consistent with the terms and provisions of this Agreement
subsequent to December 31, 1995 and prior to the Closing Date which continue to
exist on the Closing Date;
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10.1.7.3 Taxes accrued by the Company and the
Subsidiaries as reflected on the Certified Final Balance Sheet and allocated to
Buyer pursuant to Section 6.5 hereof;
10.1.7.4 all liabilities and obligations under the
contracts listed on Schedule 4.18 of the Disclosure Schedule and those to which
the Company or the Subsidiaries become a party in the ordinary course of
business and consistent with the terms and provisions of this Agreement
subsequent to the date of this Agreement and prior to the Closing Date, which
are not performed or discharged prior to the Closing Date;
10.1.7.5 all liabilities and obligations of the
Company or the Subsidiaries to their employees after the Closing Date for
wages, salaries, bonus, vacation, severance or other remuneration for services
rendered to the Company or the Subsidiaries prior to the Closing Date to the
extent disclosed on Schedule 10.1 of the Disclosure Schedule or reflected on
the Final Balance Sheet;
10.1.7.6 all liabilities and obligations of the
Company or the Subsidiaries for death or personal injury, other injury to
persons, property damage, loss or deprivation of rights resulting or arising
from occurrences after the Closing Date (whether based on statute, negligence,
breach of warranty, strict liability or any other theory) caused by or
resulting from, directly or indirectly, any defect or claimed defect in or with
respect to any product manufactured, sold or distributed by the Company or the
Subsidiaries but as to any product manufactured,
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sold or distributed by the Company or any Subsidiary prior to the Closing Date,
Buyer and the Company shall be indemnified for any liability for any punitive
damages; and
10.1.7.7 all Liabilities of the Company and the
Subsidiaries arising from the conduct of the Business after the Closing except
as otherwise stated herein.
10.2 Liabilities included in Indemnification. The Liabilities for
which Seller is required to indemnify Buyer and its Affiliates as provided in
Section 10.1.7 shall include, without limitation, the following Liabilities of
the Company and the Subsidiaries:
10.2.1 any Inter-company Accounts existing as of the Closing
Date;
10.1.2 all Taxes now or hereafter owed by the Company or any
of its Affiliates including the Subsidiaries, and any Taxes arising from,
relating to or attributable to the Business relating to any period or portion
of any period, ending on or prior to the Closing Date (other than Taxes accrued
and reflected on the Final Balance Sheet and allocated to the Company pursuant
to Section 6.5 hereof) and Taxes incurred by the Company or its Affiliates
arising in connection with the transactions contemplated by this Agreement
except for such Taxes identified in Section 6.5.8 hereof;
10.1.3 all Liabilities of the Company or the Subsidiaries to
employees of the Company or the Subsidiaries with respect to (x) wages,
salaries, bonus, vacation, severance or other remuneration; (y) pension, profit
sharing, health, medical and life insurance benefits or other employee benefits
payable to any
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employees; (z) employee claims or employer-related claims, including, without
limitation post termination medical insurance, that are not disclosed in the
Disclosure Schedule or reserved for on the Final Balance Sheet, in each case
concerning or relating to time periods prior to the Closing Date;
10.2.4 all Liabilities of Seller or its Affiliates arising or
incurred in connection with the negotiation, preparation and execution of this
Agreement and the transactions contemplated hereby, including, without
limitation, fees and expenses of Seller's counsel, accountants, investment
bankers and other advisors;
10.2.5 all Liabilities of the Company or the Subsidiaries
relating to or arising out of (x) any failure prior to the Closing Date to
comply with any applicable Environmental Law or any failure prior to the
Closing Date to procure any permit, approval, identification number, license or
other authorization required under any Environmental Law ("Environmental
Permit"); (y) any and all administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of non-compliance or
violation, investigations, proceeding, consent orders or consent agreements
relating in any way to any Environmental Law or any Environmental Permit and
relating to any period prior to the Closing Date; or (z) the alleged or actual
release of any toxic or hazardous waste, constituent or other substance into
the environment during any period prior to the Closing Date, whether or not
attributable to actions or failures to act by the Company,
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the Subsidiaries or any of their Affiliates or any predecessor of the foregoing
with respect to the operation of or properties utilized in connection with the
Business at any time prior to the Closing Date except those identified in the
written report provided to Seller of Buyer's independent environmental audit
firm and subject to the provisions of Section 8.5 hereof;
10.2.6 all Liabilities of the Company or the Subsidiaries for
death or personal injury, other injury to persons, property damage, loss or
deprivation of rights resulting from occurrences on or before the Closing Date
(whether based on statute, negligence, breach of warranty, strict liability or
any other theory) caused by or resulting from, directly or indirectly, any
defect or claimed defect in or with respect to any product manufactured, sold
or distributed in the Business except to the extent reserved for on the Final
Balance Sheet and only to the extent reserved, including the cost of defense.
10.3 Limitations on Indemnification by Seller. Seller's obligations
to indemnify Buyer or its Affiliates, successors or assigns under Section 10.1
hereof shall be limited and conditioned by the following:
10.3.1 to the extent Buyer's operation or conduct of the
Company or the Subsidiaries after the Closing or a failure to act, knowingly
contributes to or aggravates a Loss or Expense covered by Section 10.1 hereof,
Seller's obligation to indemnify thereunder shall be reduced by such
contribution or aggravation;
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10.3.2 Seller shall be required to indemnify and hold harmless
under Section 10.1.3 hereof, excluding representations and warranties contained
in Sections 4.3, 4.4, 4.8.1, 4.8.3, 4.8.5, the first two sentences of 4.9,
4.15, 4.22, 4.23 and 4.24 hereof, with respect to a Loss and/or Expense
incurred by Buyer or its affiliates, successors and assigns only to the extent
that the aggregate amount of such Losses and Expenses exceed US$625,000 (the
"Seller's Basket"), and then only for the excess over Seller's Basket, not
exceeding, in aggregate, an amount equal to 50% of the Purchase Price
("Seller's Cap"). Sellers' obligation to indemnify and hold harmless with
respect to the representations and warranties contained in Sections 4.3, 4.4,
4.8.1, 4.8.3, 4.8.5, the first two sentences of 4.9, 4.15, 4.22, 4.23 and 4.24
hereof is for the full extent of any associated Losses or Expenses and is not
subject to Seller's Basket or Seller's Cap.
10.4 Indemnification of Seller by Buyer. Buyer shall defend and
promptly indemnify and hold harmless Seller and its Affiliates, successors and
assigns from and against any and all Losses and Expenses incurred by Seller and
its Affiliates in connection with or arising from:
10.4.1 any breach by Buyer of any of its covenants or
agreements in this Agreement or in any agreement or instrument contemplated
hereby;
10.4.2 any failure of Buyer to perform any of its obligations
in this Agreement or any agreement or instrument contemplated hereby; and
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10.4.3 any representation or warranty of Buyer in this
Agreement or any agreement or instrument contemplated hereby being untrue or
incorrect in any respect.
10.5 Notice and Defense of Claims.
10.5.1 If a party to this Agreement believes that any of the
persons indemnified under this Article X has suffered or incurred any Loss or
incurred any Expense, such party shall so notify the other promptly in writing
describing such Loss or Expense, the amount thereof, if known, and the method
of computation of such Loss or Expense, all with reasonable particularity and
containing a reference to the provisions of this Agreement or other agreement,
instrument or certificate delivered pursuant hereto in respect of which such
Loss or Expense shall have occurred. If any action at law or suit in equity is
instituted by or against a third party with respect to which any of the
indemnified persons intends to claim any liability or expense as a Loss or
Expense under this Article X, any such indemnified person shall promptly notify
the indemnifying party of such action or suit.
10.5.2 The indemnifying party's obligation to indemnify the
indemnified party with respect to any asserted claim as to which the
indemnifying party's ability to defend has been prejudiced by the indemnified
party's failure to provide prompt notice of the claim shall not be affected by
such delay except to the extent that such delay increased the amount of the
Loss or Expense. The indemnifying party shall bear the burden of proof
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with respect to any claim that a delay in notification by the indemnified party
resulted in increased Losses or Expenses and the extent of such increase.
10.5.3 The indemnifying party may, upon written notice to the
indemnified party within 30 calendar days of receipt of notice of the assertion
or pendency of a claim hereunder, assume the defense of any such claim, or any
discrete portion of a claim, if the indemnifying party acknowledges to the
indemnified party the indemnified party's right to indemnity pursuant hereto in
respect of the entirety of such claim, or the relevant portion thereof.
10.5.4 If the indemnifying party assumes the defense of any
such claim, the indemnifying party shall select nationally recognized counsel
or counsel reasonably acceptable to the indemnified party (including in-house
tax counsel of Seller or its Affiliates with respect to claims involving Tax
matters for which Buyer or its Affiliates is the indemnified party) to conduct
the defense of such claim, and shall take reasonable steps in the defense or
settlement thereof. If the indemnifying party shall have assumed the defense of
any claim in accordance with this Section 10.5, the indemnifying party shall be
authorized to consent to a settlement of, or the entry of any judgment arising
from, any such claim, without the prior written consent of the indemnified
party; provided however that the indemnifying party shall pay or cause to be
paid all amounts arising out of such settlement or judgment concurrently with
the effectiveness thereof; provided further that the indemnifying party shall
not be authorized to
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encumber any of the assets of the indemnified party or to agree to any
restriction that would apply to the indemnified party, or to its conduct of
business; provided further that if such settlement does not contain a complete
release of the indemnified party with respect to such claim, the indemnifying
party shall continue to be obligated to indemnify the indemnified party with
respect to such claim.
10.5.5 The indemnified party shall be entitled to participate
in (but not control) the defense of any such action, with its own counsel and
at its own expense. The indemnified party shall, and shall cause each of its
affiliates, officers, employees, consultants and agents, as applicable, to
cooperate fully with the indemnifying party in the defense of any claim
pursuant to this Section 10.5.
10.5.6 If the indemnifying party does not assume the defense
of any claim resulting therefrom in accordance with the terms of this Section
10.5, the indemnified party may defend against such claim in such manner as it
may reasonably deem appropriate, including settling such claim after giving
notice of same to the indemnifying party, on such terms as the indemnified
party may reasonably deem appropriate. The indemnifying party shall be bound by
the terms of any settlement so made by the indemnified party.
10.6 Characterization as Price Adjustment. The parties agree that
any payment made under this Section 10 shall be treated by the parties as an
adjustment to the Purchase Price. In the event that
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Buyer or its Affiliates are entitled to be indemnified by Seller for Losses and
Expenses arising under Section 10.1.3 hereof other than the representations and
warranties set forth in Sections 4.3, 4.4, 4.8.1, 4.8.3, 4.8.5, the first two
sentences of 4.9, 4.15, 4.22, 4.23 and 4.24 hereof, the amount of such Loss or
Expense first shall be offset against any amounts due under the Two Year Note
or the Four Year Note to the extent allocated to each such note as determined
by Buyer.
ARTICLE XI
11. MISCELLANEOUS
11.1 Further Assurances.
11.1.1 From time to time after the Closing, Seller will execute
and deliver, or cause to be executed and delivered, to Buyer such documents as
Buyer shall reasonably request in order to vest more effectively in Buyer good
title to the Shares, or to vest in the Company, good title to its assets, and
from time to time after the Closing, Buyer will execute and deliver, or cause
to be executed and delivered, such documents to Seller as Seller shall
reasonably request in order to consummate more effectively the transactions
contemplated by this Agreement.
11.2 Expenses. Each of the parties hereto shall pay the fees and
expenses of its respective counsel, accountants and other experts and shall pay
all other expenses incurred by it in connection with the negotiation,
preparation and execution of this Agreement and the consummation of the
transactions contemplated hereby.
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11.3 Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York without
reference to choice of law principles, including all matters of construction,
validity and performance.
11.4 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if signed by the
respective Person giving such notice or other communication (in the case of any
corporation the signature shall be by an authorized officer thereof) upon
receipt of: hand delivery; certified or registered mail, return receipt
requested; or telecopy transmission with confirmation of receipt:
If to Seller, to:
Warner Communications Inc.
75 Rockefeller Plaza
New York, NY 10019
Telecopier: (212) 323-3987
Attention: Chief Financial Officer
with copies to:
Gold, Farrell & Marks
41 Madison Avenue
New York, NY 10010-2201
Telecopier: (212) 481-1722
Attention: Charles R. Dickey, Esq.
If to Buyer to:
Williams Interactive Inc.
3401 North California Avenue
Chicago, IL 60618
Telecopier: (312) 961-1099
Attention: President
with a copy to:
Shack & Siegel, P.C.
530 Fifth Avenue
New York, NY 10036
Telecopier: (212) 730-1964
Attention: Jeffrey N. Siegel, Esq.
Such names and addresses may be changed from time to time by such notice.
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11.5 Entire Agreement. This Agreement (including the Disclosure
Schedule, each of which are a part hereof) the other documents and instruments
contemplated hereby and the Confidentiality Agreement contains the entire
understanding of the parties hereto with respect to the subject matter
contained herein, supersedes and cancels all prior agreements, negotiations,
correspondence, undertakings and communications of the parties, oral or
written, respecting such subject matter, including but not limited to the
Offering Memorandum. There are no restrictions, promises, representations,
warranties, agreements or undertakings of any party hereto direct or implied
with respect to the transactions under this Agreement other than those set
forth herein or made hereunder.
11.6 Amendments. This Agreement may be amended only by a written
instrument executed by the parties or their respective successors or assigns.
11.7 Headings; References. The article, section and paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. All
references herein to "Articles", "Sections", or "Schedules" shall be deemed to
be references to Articles or Sections hereof or Schedules of the Disclosure
Schedule unless otherwise indicated.
11.8 Counterparts. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original.
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11.9 Parties in Interest; Assignment. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors. Except as provided in or contemplated by Sections 6.6 and 6.10
hereof and Article X hereof (each of which shall confer upon the Persons
referred to therein for whose benefit it is intended the right to enforce such
Section or Article, as applicable), nothing in this Agreement, express or
implied, is intended to confer upon any Person not a party to this Agreement
any rights or remedies under or by reason of this Agreement. No party to this
Agreement may assign or delegate all or any portion of its rights, obligations
or liabilities under this Agreement without the prior written consent of the
other party to this Agreement.
11.10 Severability; Enforcement. The invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions
hereof. If it is ever held that any restriction hereunder is too broad to
permit enforcement of such restriction to its fullest extent, each party agrees
that a court of competent jurisdiction may enforce such restriction to the
maximum extent permitted by law, and each party hereby consents and agrees that
such scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
11.11 Jurisdiction. The parties hereto hereby irrevocably and
unconditionally submit to the exclusive jurisdiction of the state and federal
courts located in the Borough of Manhattan, The City of New York, for any
actions, suits, or proceedings arising out of or
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relating to this Agreement and the transactions contemplated hereby (and agree
not to commence any action, suit or proceeding relating thereto except in such
courts), and further agree that service of any process, summons, notice or
document by U.S. registered mail to the respective party's address set forth
above shall be effective service of process of any action, suit or proceeding
brought in any such court. The parties hereto hereby irrevocably and
unconditionally waive any objection to the laying of venue of any action, suit
or proceeding arising out of this Agreement or the transactions contemplated
hereby, in such state or federal courts as aforesaid and hereby further
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum.
11.12 Waiver. Any of the conditions to Closing set forth in this
Agreement may be waived at any time prior to or at the Closing hereunder by the
party entitled to the benefit thereof. The failure of any party hereto to
enforce at any time any of the provisions of this Agreement shall in no way be
construed to be a waiver of any such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of such party
thereafter to enforce each and every such provision. No waiver of any breach of
or non-compliance with any term of this Agreement shall be held to be a waiver
of any other or subsequent breach or non-compliance of the same or any other
term of this Agreement.
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IN WITNESS WHEREOF the parties hereto have duly executed this
Agreement as of the date first written above.
WARNER COMMUNICATIONS INC.
By: /s/ Spencer B. Hays
-----------------------
Name: Spencer B. Hays
Title: Vice President
WILLIAMS INTERACTIVE INC.
By: /s/ Neil D. Nicastro
------------------------
Name: Neil D. Nicastro
Title: President
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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. 2 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. 2 to the Registration Statement on Form S-1 (333-11919) filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
October 17, 1996
