<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 25, 1996
REGISTRATION NO. 333-11919
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MIDWAY GAMES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
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
(773) 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
(773) 961-2222
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED OCTOBER 25, 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.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO PUBLIC DISCOUNT(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share...................... $ $ $
Total(3)....................... $ $ $
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</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
<TABLE>
<S> <C>
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 1,480,000 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.
<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>
FISCAL YEAR ENDED
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
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>
- ---------------
(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.
6
<PAGE> 8
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,
7
<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."
9
<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
10
<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 Company's bank line of credit 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. Although WMS has provided
seasonal working capital advances to the Company (the maximum amount of which
during fiscal 1995 and 1996 was $25.7 million), the Company provided net cash to
WMS of $17.1 million in fiscal 1995 and $19.5 million in fiscal 1996.
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
11
<PAGE> 13
entertainment software industry may have a significant impact on the market
price of the Common Stock. In the past, the Company has experienced fluctuations
in its operating results, and it is likely that in some future quarter the
Company's revenue or operating results will be below the expectations of, and
certain new products will not be introduced when anticipated by, market analysts
and investors. In such event, the price of the Common Stock would likely be
materially adversely affected. Market prices for the Common Stock following the
Offering will be influenced by a number of factors, including quarterly
variations in the financial results of the Company and its competitors, changes
in earnings estimates by analysts, conditions in the interactive entertainment
software industry, the financial markets and the overall economy.
DILUTION
Purchasers of the Shares will experience immediate 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's bank line of credit contains
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,
12
<PAGE> 14
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
any rights to acquire Common Stock (other than shares issuable upon exercise of
outstanding options) for a period of 180 days after the date of this Prospectus,
without the prior written consent of Oppenheimer & Co., Inc., subject to certain
limited exceptions. Such shares may thereafter be sold in the public market
pursuant to Rule 144 under the Securities Act or pursuant to an effective
registration statement. The Company has entered into a registration rights
agreement with WMS pursuant to which the Company has agreed to file registration
statements under certain circumstances and take other steps requested by WMS in
order to enable WMS to sell its shares of Common Stock. See "Arrangements With
WMS -- Registration Rights Agreement." Sales of a substantial number of shares
of Common Stock in the public market could adversely affect the market price of
the Common Stock. An additional 2,000,000 shares of Common Stock are reserved
for issuance under the Company's Stock Option Plan, of which options for
approximately 1,480,000 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."
13
<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 773-961-2222.
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
14
<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 Four Year Note
bears interest at the rate of 7% per annum and the Two Year Note bears interest
at a rate equal to the lesser of 6% per annum or the minimum applicable
long-term federal rate in effect from time to time. 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 to either (i) after the fourth anniversary of the closing, 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) after the second anniversary of the closing, 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.
15
<PAGE> 17
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's bank line of
credit contains limitations on the ability of the Company to pay dividends.
16
<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.
The increase in accounts receivable and inventory at June 30, 1996 from the
amounts thereof at June 30, 1995 resulted primarily from the acquisition of
Atari Games. The Company does not expect that these increases will have any
material effect on its long-term liquidity.
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 entered into a revolving credit agreement with 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 revolving credit agreement is for a one-year term and
contains 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.
25
<PAGE> 27
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 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."
26
<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.
27
<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.
28
<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.
29
<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.
30
<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
31
<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.
32
<PAGE> 34
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 1996 Amusement and Music Operators
Association ("AMOA") trade show, Cruis'n USA was named Most Innovative Dedicated
Video Game for the second year in a row, Area 51 was named Most Innovative
Conversion Kit and Cruis'n World received an award for Best New Equipment among
all forms of coin-operated amusement games. Additionally, Mortal Kombat 3 was
named Most Played Conversion Kit at the September 1995 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.
33
<PAGE> 35
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.
34
<PAGE> 36
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.
35
<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 (24.5% 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
36
<PAGE> 38
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.
37
<PAGE> 39
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
38
<PAGE> 40
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.
39
<PAGE> 41
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.
40
<PAGE> 42
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.
41
<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each
director and executive officer of the Company. Mr. Neil D. Nicastro is the son
of Mr. Louis J. Nicastro; otherwise, there is no family relationship between any
of the directors or executive officers of the Company. Each director serves 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........... 40 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.
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
42
<PAGE> 44
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.
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 and was elected as a Director of the Company in October 1996.
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 and was elected as a Director of the Company in
October 1996.
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 and was elected as a Director of the Company in October 1996.
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).
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 and
was elected as a Director of the Company in October 1996.
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 and was elected as a Director of the
Company in October 1996.
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 and was elected as a Director of the Company in October 1996.
WMS intends to designate one additional independent director after the
completion of the Offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established, effective upon
consummation of the Offering, two standing committees: an Audit Committee and a
Compensation and Stock Option Committee.
The Audit Committee is charged with meeting periodically with the
independent auditors and Company personnel with respect to the adequacy of
internal accounting controls, receiving and reviewing the recommendations of the
independent auditors, recommending the appointment of auditors and reviewing the
scope of the audit and the compensation of the independent auditors, reviewing
consolidated financial
43
<PAGE> 45
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 after the 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
William C. Bartholomay............................................... 25,000
William E. McKenna................................................... 25,000
Norman J. Menell..................................................... 25,000
Louis J. Nicastro.................................................... 25,000
Harvey Reich......................................................... 25,000
Ira S. Sheinfeld..................................................... 25,000
Richard D. White..................................................... 25,000
</TABLE>
The total number of options granted or to be granted prior to the Offering
pursuant to the Stock Option Plan is 1,480,000.
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 Director 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
(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%(4)
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(3) *
William E. McKenna................... -- -- 25,000(3) *
Norman J. Menell..................... -- -- 25,000(3) *
Harvey Reich......................... -- -- 25,000(3) *
Ira S. Sheinfeld..................... -- -- 25,000(3) *
Richard D. White..................... -- -- 25,000(3) *
Directors and Executive Officers as a
Group (12 persons)................. -- -- 505,000 1.4%(5)
</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) Represents options to acquire 25,000 shares of Common Stock granted
immediately prior to the Offering.
(4) 85.1% if the Underwriters' over-allotment option is exercised in full.
(5) 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 as of June 30, 1996 with
respect to the beneficial ownership of the capital stock of WMS owned by persons
known to be the beneficial owner of more than five percent of such stock, and
each Director and Executive Officer of the Company or WMS.
<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. The amount the Company is required
to pay to WMS in respect of federal income taxes is determined as if the Company
was filing a separate tax return. 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.
53
<PAGE> 55
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
54
<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
55
<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
56
<PAGE> 58
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
57
<PAGE> 59
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.
The Company also maintains directors' and officers' liability insurance
providing for $10.0 million in coverage.
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.
58
<PAGE> 60
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 1,480,000
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.
59
<PAGE> 61
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 Senior 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
60
<PAGE> 62
WMS in the past and received customary compensation in connection therewith. Mr.
Richard D. White, a Managing Director of Oppenheimer & Co., Inc., is a Director
of the Company. 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 revenues and expenses of the Bally pinball business 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 Company believes that this is the most meaningful presentation in
that it presents on an historical basis the results of operations and financial
condition of all of the components of the Video Games Business that the Company
owns after giving effect to the structure implemented on the Transfer Date.
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
F-7
<PAGE> 70
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-8
<PAGE> 71
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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. Midway did not have any 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.
F-9
<PAGE> 72
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
See Note 6 for income tax allocations.
NOTE 4: ACQUISITIONS
On March 29, 1996, a wholly-owned subsidiary of the Company acquired all
the capital stock of Atari Games Corporation ("Atari Games") from Warner
Communications Inc.("Warner"), a subsidiary of Time Warner Inc. The acquisition
is being accounted for by the purchase method of accounting. The results of
operations of Atari Games subsequent to the acquisition date have been included
in the Combined Statement 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 severance and relocation costs
for employees of Atari Games, 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
F-10
<PAGE> 73
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Four Year Note is secured by the Products. Atari Game's unpaid obligations under
the Four Year Note may be satisfied by transferring the Products to Warner.
Under the terms of the purchase agreement, Warner is required to make an
additional cash payment of $3,247,000 to Atari Games in order to increase net
current assets to the required amount based upon the Atari Games final March 29,
1996 balance sheet. A receivable for this amount is included in receivables in
the June 30, 1996 Combined Balance Sheet. The final purchase price has not as
yet been accepted by Warner. The 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. 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 are not
appropriate, then the amount of goodwill recognized in the purchase may
increase.
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.
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
for both 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.
F-11
<PAGE> 74
MIDWAY GAMES INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements........................................... $ 458 $ 305
Furniture, fixtures and engineering equipment.................... 9,033 6,079
----- -----
9,491 6,384
Less accumulated depreciation.................................... (3,564) (1,590)
----- -----
Net property and equipment....................................... $ 5,927 $ 4,794
===== =====
</TABLE>
NOTE 6: INCOME TAXES
The results of the Company have been included in the consolidated income
tax returns of WMS for all years presented; however income taxes have been
recorded based on a calculation of the income taxes that would have been
incurred if the Company operated as an independent combined entity. WMS and the
Company entered into a tax sharing agreement effective July 1, 1996 that
requires a tax calculation, accrual and payment by the Company as if the Company
was filing a separate tax return.
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 1,480,000 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....................................... 250,000.00
Legal fees and expenses............................................... 300,000.00
Accountants' fees and expenses........................................ 325,000.00
Miscellaneous......................................................... 35,103.90
-------------
Total....................................................... $1,200,000.00
=============
</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.
The Registrant also maintains directors' and officers' liability insurance
providing for $10.0 million in coverage.
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
--------- -----------
<C> <S>
1 Form of Underwriting Agreement.
2.1 Rights Agreement dated as of October 24, 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.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<C> <S>
#10.16 Stock Purchase Agreement dated as of February 23, 1996 between Warner
Communications, Inc. and Williams Interactive Inc.
10.17 Credit Agreement dated as of October 15, 1996 between the Registrant and Bank
of America Illinois.
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>
- ---------------
+ 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. 3 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 25, 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. 3 to the Registration Statement (333-11919) has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ NEIL D. NICASTRO Chairman of the Board, October 25, 1996
- ------------------------------------------ President, Chief Executive
Neil D. Nicastro Officer and Chief Operating
Officer (Principal Executive
Officer) and Director
/s/ HAROLD H. BACH, JR.* Executive Vice October 25, 1996
- ------------------------------------------ President -- Finance,
Harold H. Bach, Jr. Treasurer and Chief Financial
Officer (Principal Financial
and Principal Accounting
Officer) and Director
/s/ BYRON C. COOK* Executive Vice President -- October 25, 1996
- ------------------------------------------ Home Video and Director
Byron C. Cook
/s/ KENNETH J. FEDESNA* Executive Vice President -- October 25, 1996
- ------------------------------------------ Coin-Op Video and Director
Kenneth J. Fedesna
/s/ LOUIS J. NICASTRO* Director October 25, 1996
- -----------------------------------------
Louis J. Nicastro
/s/ WILLIAM C. BARTHOLOMAY Director October 25, 1996
- ------------------------------------------
William C. Bartholomay
/s/ WILLIAM E. MCKENNA Director October 25, 1996
- ------------------------------------------
William E. McKenna
</TABLE>
II-4
<PAGE> 102
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ NORMAN J. MENELL Director October 25, 1996
- ------------------------------------------
Norman J. Menell
/s/ HARVEY REICH Director October 25, 1996
- ------------------------------------------
Harvey Reich
/s/ IRA S. SHEINFELD Director October 25, 1996
- ------------------------------------------
Ira S. Sheinfeld
/s/ RICHARD D. WHITE Director October 25, 1996
- ------------------------------------------
Richard D. White
*By: /s/ NEIL D. NICASTRO October 25, 1996
- ------------------------------------------
Neil D. Nicastro
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 103
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS.............................S-2
S-1
<PAGE> 104
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> 105
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--------- ---------------------------------------------------------------------- ----------
<C> <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. ................................................................
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--------- ---------------------------------------------------------------------- ----------
<C> <S> <C>
#10.16 Stock Purchase Agreement dated as of February 23, 1996 between Warner
Communications, Inc. and Williams Interactive Inc. ...................
10.17 Credit Agreement dated as of October 15, 1996 between the Registrant
and Bank of America Illinois..........................................
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>
- ---------------
+ Confidential treatment requested.
# Previously filed.
<PAGE> 1
5,100,000 Shares
Midway Games Inc.
Common Stock
UNDERWRITING AGREEMENT
----------------------
October __, 1996
Oppenheimer & Co., Inc.
Hambrecht & Quist LLC
UBS Securities LLC
Wasserstein Perella Securities, Inc.
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named in
Schedule I attached hereto.
Gentlemen:
Midway Games Inc., a Delaware corporation (the "Company"), proposes to sell
to you and the other underwriters named in Schedule I to this Agreement (the
"Underwriters"), for whom you are acting as Representatives, an aggregate of
5,100,000 shares (the "Firm Shares") of the Company's common stock, $0.01 par
value (the "Common Stock"). In addition, the Company proposes to grant to the
Underwriters an option to purchase up to
<PAGE> 2
an additional 765,000 shares (the "Option Shares") of Common Stock from it for
the purpose of covering over-allotments in connection with the sale of the Firm
Shares. The Firm Shares and the Option Shares are together called the "Shares."
A portion of the proceeds to be received by the Company hereunder will be
used to pay promissory notes previously distributed as a dividend to WMS
Industries Inc. ("WMS), the Company's sole stockholder. WMS has executed this
Agreement and agrees to be bound by the provisions of Sections 7 and 8 hereof as
an inducement to the Underwriters to enter into this Agreement.
1. Sale and Purchase of the Shares.
-------------------------------
On the basis of the representations, warranties and agreements contained
in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at $[ ] per share (the "Initial Price"), the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I to this
Agreement.
(b) The Company grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the Option Shares
at the Initial Price. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage (adjusted by the Representatives
to eliminate fractions) of the total number of Option Shares to be
purchased by the Underwriters as such Underwriter is purchasing of the Firm
Shares. Such option may be exercised only to cover over-allotments in the
sales of the Firm Shares by the Underwriters and may be exercised in whole
or in part at any time on or before 12:00 noon, New York City time, on the
business day before the Firm Shares Closing Date (as defined below), and
only once thereafter within 30 days after the date of this Agreement, in
each case upon written or telegraphic notice, or verbal or telephonic
notice confirmed by written or telegraphic notice, by the Representatives
to the Company no later than 12:00 noon,
-2-
<PAGE> 3
New York City time, on the business day before the Firm Shares Closing Date
or at least two business days before the Option Shares Closing Date (as
defined below), as the case may be, setting forth the number of Option
Shares to be purchased and the time and date (if other than the Firm Shares
Closing Date) of such purchase.
2. DELIVERY AND PAYMENT. Delivery by the Company of the Firm Shares to the
Representatives for the respective accounts of the Underwriters, and payment of
the purchase price by certified or official bank check or checks payable in New
York Clearing House (next day) funds to the Company, shall take place at the
offices of Oppenheimer & Co., Inc., at Oppenheimer Tower, World Financial
Center, New York, New York 10281, at 10:00 a.m., New York City time, on the
third business day following the date of this Agreement, provided, however, that
if the Shares sold hereunder are priced after 4:30 p.m., New York time, on any
business day, payment and delivery in respect of the Firm Shares shall take
place on the fourth business day following the date of this Agreement; if it is
determined that settlement within the foregoing time frame is not feasible, then
payment and delivery in respect of the Firm Shares shall occur at such time on
such other date, not later than 10 business days after the date of this
Agreement, as shall be agreed upon by the Company and the Representatives (such
time and date of delivery and payment are called the "Firm Shares Closing
Date").
In the event the option with respect to the Option Shares is exercised,
delivery by the Company of the Option Shares to the Representatives for the
respective accounts of the Underwriters and payment of the purchase price by
certified or official bank check or checks payable in New York Clearing House
(next day) funds to the Company shall take place at the offices of Oppenheimer &
Co., Inc. specified above at the time and on the date (which may be the same
date as, but in no event shall be earlier than, the Firm Shares Closing Date)
specified in the notice referred to in Section 1(b) (such time and date of
delivery and payment are called the "Option Shares Closing Date"). The Firm
Shares Closing Date and the Option Shares Closing Date are called, individually,
a "Closing Date" and, together, the "Closing Dates."
-3-
<PAGE> 4
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representatives shall request at least two
full business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the option as described in Section
l(b) and shall be made available to the Representatives for checking and
packaging, at such place as is designated by the Representatives, at least one
full business day before the Firm Shares Closing Date (or the Option Shares
Closing Date in the case of the Option Shares).
3. REGISTRATION STATEMENT AND PROSPECTUS; PUBLIC OFFERING. The Company has
prepared in conformity with the requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and the published rules and regulations
thereunder (the "Rules") adopted by the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-11919), including a
preliminary prospectus relating to the Shares, and has filed with the Commission
the Registration Statement and such amendments thereto as may have been required
to the date of this Agreement. Copies of such Registration Statement (including
all amendments thereto) and of the related preliminary prospectus have
heretofore been delivered by the Company to you. The Company may also file a
related registration statement with the Commission pursuant to Rule 462(b) under
the Securities Act for the purpose of registering additional Shares, which
registration shall be effective upon filing with the Commission. The term
"Registration Statement" means (i) the Registration Statement as amended at the
time and on the date it becomes effective (the "Effective Date"), including all
exhibits and information, if any, deemed to be part of the Registration
Statement pursuant to Rule 424(a) and Rule 430A of the Rules and (ii) any
related registration statement filed with the Commission pursuant to Rule 462(b)
of the Rules. The term "preliminary prospectus" means any preliminary prospectus
(as described in Rule 430 of the Rules) included at any time as a part of the
Registration Statement. The term "Prospectus" means the prospectus in the form
first used to confirm sales of the Shares (whether such prospectus was included
in the Registration Statement at the time of effectiveness or was subsequently
filed with the Commission pursuant to Rule 424(b) of the Rules) or the
preliminary prospectus forming part of the Registration Statement at the time it
was declared effective
-4-
<PAGE> 5
together with the term sheet permitted under Rule 434(b) and filed with the
Commission pursuant to Rule 424(b), as applicable.
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Prospectus, as soon
after the Effective Date and the date of this Agreement as the Representatives
deem advisable. The Company hereby confirms that the Underwriters and dealers
have been authorized to distribute or cause to be distributed each preliminary
prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Underwriter as follows:
(a) On the Effective Date the Registration Statement complied, and on
the date of the Prospectus, on the date any post-effective amendment to the
Registration Statement or any related registration statement filed with the
Commission pursuant to Rule 462(b) of the Rules shall become effective, on
the date any supplement or amendment to the Prospectus is filed with the
Commission and on each Closing Date, the Registration Statement and the
Prospectus (and any amendment thereof or supplement thereto) will comply in
all material respects with the applicable provisions of the Securities Act
and the Rules and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder; the Registration Statement did not, as of the Effective Date,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and on the other dates referred to
above neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will contain any untrue statement
of a material fact or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. When any related preliminary prospectus was first filed with
the
-5-
<PAGE> 6
Commission (whether filed as part of the Registration Statement or any
amendment thereto or pursuant to Rule 424(a) of the Rules) and when any
amendment thereof or supplement thereto was first filed with the
Commission, such preliminary prospectus as amended or supplemented complied
in all material respects with the applicable provisions of the Securities
Act and the Rules and did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
Company makes no representation or warranty as to the paragraph with
respect to stabilization on the inside front cover page of the Prospectus
and the statements contained under the caption "Underwriting" in the
Prospectus. The Company acknowledges that such statements constitute the
only information furnished in writing by the Representatives on behalf of
the several Underwriters specifically for inclusion in the Registration
Statement, any preliminary prospectus or the Prospectus.
(b) All contracts and other documents required to be filed as exhibits
to the Registration Statement have been filed with the Commission as
exhibits to the Registration Statement.
(c) The financial statements of the Company and of Atari Games
Corporation ("Atari") (including all notes and schedules thereto) included
in the Registration Statement and Prospectus fairly present the financial
position, the results of operations and cash flows and the stockholders'
equity (deficit) and the other information purported to be shown therein of
the Company or Atari, as the case may be, at the respective dates and for
the respective periods to which they apply; and such financial statements
have been prepared in conformity with generally accepted accounting
principles, consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of the results for such
periods have been made. The schedules included in the Registration
Statement present fairly in all material respects the information required
to be stated therein; and the historical financial information and
statistical data set
-6-
<PAGE> 7
forth in the Prospectus under the captions "Summary Financial Data,"
"Capitalization," and "Selected Financial Data" are fairly stated in all
material respects in relation to the financial statements from which they
have been derived. The pro forma financial data included in the
Registration Statement and the Prospectus present fairly the information
shown therein, comply in all material respects with the requirements of the
Act and the Rules and Regulations with respect to pro forma financial
statements, have been properly compiled on the pro forma basis described
therein and the assumptions used in the preparation thereof are reasonable
and the adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(d) Ernst & Young LLP, whose reports are filed with the Commission as
a part of the Registration Statement, is and, during the periods covered by
its reports, were independent public accountants as required by the
Securities Act and the Rules.
(e) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Each
subsidiary of the Company has been duly incorporated or formed and is an
existing corporation in good standing under the laws of the jurisdiction of
its incorporation or organization. All of the capital stock of each
subsidiary set forth on Schedule II hereto is owned by the Company, free
and clear of any liens or encumbrances. The Company has no subsidiary or
subsidiaries other than as set forth on Schedule II hereto and does not
control, directly or indirectly, any other corporation, partnership, joint
venture, association or other business organization. Each of the Company
and its subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
assets or properties (owned, leased or licensed) or the nature of its
business makes such qualification necessary, except for such jurisdictions
where the failure to so qualify individually or in the aggregate would not
have a material adverse effect on the assets or properties, business,
results of operations or financial condition of
-7-
<PAGE> 8
the Company and its subsidiaries, taken as a whole. Except as disclosed in
the Registration Statement and the Prospectus, the Company and its
subsidiaries do not own, lease or license any asset or property or conduct
any business outside the United States of America. Each of the Company and
its subsidiaries has all requisite corporate power and authority, and all
necessary authorizations, approvals, consents, orders, licenses,
certificates and permits of and from all governmental or regulatory bodies
or any other person or entity, to own, lease and license its assets and
properties and conduct its businesses as now being conducted and as
described in the Registration Statement and the Prospectus; no such
authorization, approval, consent, order, license, certificate or permit
contains a materially burdensome restriction other than as disclosed in the
Registration Statement and the Prospectus; and the Company has all such
corporate power and authority, and such authorizations, approvals,
consents, orders, licenses, certificates and permits to enter into, deliver
and perform this Agreement and to issue and sell the Shares (except as may
be required under the Securities Act and state and foreign Blue Sky laws).
(f) Except as disclosed in the Registration Statement and the
Prospectus, the Company owns or possesses adequate and enforceable rights
to use all (to the extent any of them exist) patents, patent applications,
trademarks, trademark applications, service marks, copyrights, copyright
applications, licenses and other similar rights (collectively, the
"Intangibles") necessary for the conduct of its business as now being
conducted and as described in the Registration Statement and the
Prospectus. The Company has not received any notice of, and is not aware
of, any infringements of, or conflicts with asserted rights of others with
respect to, any Intangibles which, individually or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
material adverse effect upon the assets or properties, business, results of
operations or financial condition of the Company and its subsidiaries,
taken as a whole. The Company has not made any material claim of violation
or infringement by
-8-
<PAGE> 9
others of rights to, or in connection with, the Intangibles, and the
Company knows of no basis for making any such claim.
(g) Each of the Company and its subsidiaries has good and marketable
title in fee simple to each of the items of personal property which are
reflected in the financial statements referred to in Section 4(c) or are
referred to in the Registration Statement and the Prospectus as being owned
by it and valid and enforceable leasehold interests in each of the items of
real and personal property which are referred to in the Registration
Statement and the Prospectus as being leased by it, in each case free and
clear of all liens, encumbrances, claims, security interests and defects,
other than those described in the Registration Statement and the
Prospectus.
(h) Except as disclosed in the Registration Statement and the
Prospectus, there is no litigation or governmental or other proceeding or
investigation before any court or before or by any public body or board
pending or, to the Company's best knowledge, threatened (and the Company
does not know of any basis therefor) against, or involving the assets,
properties or businesses of, the Company or any of its subsidiaries which,
if determined adversely to the Company or any of its subsidiaries, would
materially adversely affect the value or the operation of any such assets
or properties or the business, results of operations or financial condition
of the Company and its subsidiaries, taken as a whole.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as described
therein; there has not been any material adverse change or any material
adverse development or event involving a prospective change in the assets
or properties, earnings, business affairs or business prospects, results of
operations or condition (financial or otherwise) of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business; each of the Company and its subsidiaries
has not entered into
-9-
<PAGE> 10
any transaction, other than in the ordinary course of business, that is
material to the Company and its subsidiaries, taken as a whole; each of the
Company and its subsidiaries has not sustained any material loss or
interference with its assets, businesses or properties from fire,
explosion, earthquake, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree; and since the date of the latest
balance sheet included in the Registration Statement and the Prospectus,
except as reflected therein, each of the Company and its subsidiaries has
not undertaken any liability or obligation, direct or contingent, except
for liabilities or obligations undertaken in the ordinary course of
business.
(j) Each agreement listed in the Exhibits to the Registration
Statement is in full force and effect and is valid and enforceable by the
Company or one of its subsidiaries in accordance with its terms, assuming
the due authorization and execution thereof by each of the other parties
thereto. Neither the Company, nor to the best of the Company's knowledge,
any other party is in default in the observance or performance of any term
or obligation to be performed by it under any such agreement, and no event
has occurred which with notice or lapse of time or both would constitute
such a default which default or event would have a material adverse effect
on the assets or properties, business, results of operations or financial
condition of the Company and its subsidiaries, taken as a whole. No default
exists, and no event has occurred which with notice or lapse of time or
both would constitute a default, in the due performance and observance of
any term, covenant or condition, by the Company of any other indenture,
mortgage, deed of trust, note or any other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which any of them
or their properties or businesses is bound or affected which default or
event would have a material adverse effect on the assets or properties,
business, results of operations or financial condition of the Company and
its subsidiaries, taken as a whole.
-10-
<PAGE> 11
(k) Each of the Company and its subsidiaries is not in violation of
any term or provision of its charter or by-laws or of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation,
where the consequences of such violation would have a material adverse
effect on the assets or properties, business, results of operations or
financial condition of the Company.
(l) Neither the execution, delivery and performance of this Agreement
by the Company nor the consummation of any of the transactions contemplated
hereby (including, without limitation, the issuance and sale by the Company
of the Shares) will (i) give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or result in the breach
of any term or provision of, or constitute a default (or any event which
with notice or lapse of time or both would constitute a default) under, or
require any consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any properties or assets
of the Company or any of its subsidiaries pursuant to the terms of, any
indenture, mortgage, deed of trust, note or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which any
of them or their properties or businesses is bound, or any franchise,
license, permit, judgment, decree, order, statute, rule or regulation
applicable to the Company or any of its subsidiaries or (ii) violate any
provision of the charter or by-laws of the Company or any of its
subsidiaries.
(m) The Company has an authorized and outstanding capitalization as
set forth under the caption "Capitalization" in the Prospectus. All of the
outstanding shares of Common Stock have been duly and validly authorized
and have been duly and validly issued and are fully paid and nonassessable
and none of them was issued in violation of any preemptive or other similar
statutory right. The Shares, when issued and sold pursuant to this
Agreement, will be duly and validly issued, fully paid and nonassessable
and none of them will be issued in violation of any preemptive or other
similar statutory right. Except as disclosed in the Registration
-11-
<PAGE> 12
Statement and the Prospectus, there is no outstanding option, warrant or
other right calling for the issuance of, and no commitment, plan or
agreement to issue, any share of stock of the Company or any security
convertible into, or exercisable or exchangeable for, stock of the Company.
The Common Stock and the preferred stock, $0.01 par value (the "Preferred
Stock") and the Shares conform to all statements in relation thereto
contained in the Registration Statement and the Prospectus.
(n) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as described
or referred to therein (including any borrowings from WMS described or
referred to therein), the Company has not (i) issued any securities or
incurred any liability or obligation, direct or contingent, for borrowed
money, (ii) entered into any transaction not in the ordinary course of
business or (iii) declared or paid any dividend or made any distribution on
any shares of its stock or redeemed, purchased or otherwise acquired or
agreed to redeem, purchase or otherwise acquire any shares of its stock.
(o) No holder of any security of the Company has any right to have any
security owned by such holder included in the Registration Statement or to
demand registration of any security owned by such holder during the period
ending 180 days from the date of this Agreement. The Company has obtained
from certain officers and directors of the Company, and from WMS, the
Company's sole stockholder prior to the sale of the Firm Shares, who
together hold all the outstanding shares of Common Stock and all
outstanding options to purchase shares of Common Stock, their enforceable
written agreement that for a period of at least 180 days from the date of
this Agreement they will not, without the prior written consent of
Oppenheimer & Co., Inc., offer, sell, contract to sell, distribute, pledge,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, or encumber, or exercise any registration rights with respect
to, any shares of Common Stock (or any securities convertible into or
exercisable or exchangeable for any shares of Common Stock).
-12-
<PAGE> 13
(p) All necessary corporate action has been duly and validly taken by
the Company to authorize the execution, delivery and performance of this
Agreement and the issuance and sale of the Shares. This Agreement has been
duly and validly executed and delivered by the Company and constitutes and
will constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except (A) as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally and by general equitable principles and (B)
with respect to this Agreement, to the extent that rights to indemnity or
contribution under this Agreement may be limited by federal and state
securities laws or the public policy underlying such laws.
(q) Each of the Company and its subsidiaries is conducting its
business in compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations, except where the failure to be so in compliance would not have
a material adverse effect on the assets or properties, business, results of
operations or financial condition of the Company and its subsidiaries,
taken as a whole.
(r) No transaction has occurred between or among the Company or any of
its affiliates and any of its officers or directors or any affiliate or
affiliates of any such officer or director that is required to be described
in and is not described in the Registration Statement and the Prospectus.
(s) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of any of the Shares.
-13-
<PAGE> 14
(t) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed through the date hereof, or has
received extensions thereof, and has paid all taxes shown on such returns
and all assessments received by it.
(u) The Shares have been approved for listing on the New York Stock
Exchange (the "NYSE"), subject to official notice of issuance.
(v) The Company has complied with all of the requirements and filed
the required forms as specified in Florida Statutes Section 517.075.
5. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 6(A)(a) hereof.
(b) The Registration Statement shall have become effective. No order
preventing or suspending the use of any preliminary prospectus or the
Prospectus shall have been or shall be in effect, and no order suspending
the effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose shall be pending before or threatened by the
Commission, and any requests for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the satisfaction of the
Representatives.
(c) The representations and warranties of the Company contained in
this Agreement and in the certificates delivered pursuant to Section 5(d)
shall be true and correct when made and on and as of each Closing Date as
if made on such date and the Company shall have performed all covenants and
agreements and satisfied all the conditions contained in this Agreement
required to be
-14-
<PAGE> 15
performed or satisfied by it at or before such Closing Date.
(d) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing Date,
of the chief executive or chief operating officer and the chief financial
officer or chief accounting officer of the Company, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Prospectus and this Agreement and that the representations
and warranties of the Company in this Agreement are true and correct on and
as of such Closing Date with the same effect as if made on such Closing
Date and the Company has performed all covenants and agreements and
satisfied all conditions contained in this Agreement required to be
performed or satisfied by it at or prior to such Closing Date.
(e) The Representatives shall have received at the time this Agreement
is executed and on each Closing Date a letter or letters signed by Ernst &
Young LLP, addressed to the Representatives and dated, respectively, the
date of this Agreement and each such Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are independent
public accountants within the meaning of the Securities Act and the Rules,
that the response to Item 10 of the Registration Statement is correct
insofar as it relates to them and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules and pro forma financial statements
included in the Registration Statement and the Prospectus and reported
on by them comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the
Rules;
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings "Summary
Financial Data" and "Selected Financial Data;" their limited
-15-
<PAGE> 16
review in accordance with standards established by the American Institute
of Certified Public Accountants of the unaudited financial statements of
Atari for the three months ended March 29, 1996 and March 31, 1995;
carrying out certain procedures (but not an examination in accordance with
generally accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the stockholders and
directors and audit committee of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company as to transactions and events subsequent
to the date of the latest audited financial statements, nothing came to
their attention which caused them to believe that:
(A) the amounts in "Summary Financial Data" and "Selected
Financial Data" included in the Registration Statement and the
Prospectus do not agree with the corresponding amounts in the audited
and unaudited financial statements from which such amounts were
derived; or
(B) the unaudited financial statements of Atari for the three
months ended March 29, 1996 and March 31, 1995 included in the
Registration Statement (i) do not comply in form in all material
respects with the applicable accounting requirements of the Securities
Act and the Rules and (ii) are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements of Atari; or
(C) (i) with respect to the Company there were, at a specified
date not more than five business days prior to the date of the letter,
any increases in the total current liabilities, long-term debt or
capital stock of the Company or decreases in working capital
(deficit), total current assets, total assets or total
-16-
<PAGE> 17
stockholders' equity (deficit), of the Company, as compared with the
amounts shown on the Company's audited June 30, 1996 balance sheet
included in the Registration Statement and the Prospectus, or (ii) for
the period from June 30, 1996 to such specified date not more than
five business days prior to the date of the letter, there were any
decreases in revenues, operating income or net income;
(iii) they have performed certain other procedures as a result of
which they determined that certain information of an accounting, financial
or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company) set forth in the Registration Statement and the Prospectus and
specified by the Representatives agrees with the accounting records of the
Company; and
(iv) on the basis of a reading of the unaudited pro forma financial
statements included in the Registration Statement and the Prospectus (the
"pro forma financial statements"); carrying out certain specified
procedures; inquiries of certain officials of the Company who have
responsibility for financial and accounting matters; and proving the
arithmetic accuracy of the application of the pro forma adjustments to the
historical amounts in the pro forma financial statements, nothing came to
their attention which caused them to believe that the pro forma financial
statements do not comply in form in all material respects with the
applicable accounting requirements of Rule 11-02 of Regulation S-X or that
the pro forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
References to the Registration Statement and the Prospectus in this paragraph
(e) are to such documents as amended and supplemented at the date of the letter.
-17-
<PAGE> 18
(f) The Representatives shall have received on each Closing Date from Shack
& Siegel, P.C., counsel for the Company, an opinion, addressed to the
Representatives and dated such Closing Date, and stating in effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Each
U.S. subsidiary of the Company has been duly incorporated or formed and is
an existing corporation in good standing under the laws of the jurisdiction
of its incorporation or organization, except for such jurisdictions where
the failure to so qualify, individually or in the aggregate, would not have
a material adverse effect on the assets or properties, business, results of
operations or financial condition of the Company and its subsidiaries,
taken as a whole.
(ii) Each of the Company and its U.S. subsidiaries has all requisite
corporate power and authority to own, lease and license its assets and
properties and conduct its business as described in the Registration
Statement and the Prospectus; and the Company has all requisite corporate
power and authority and all necessary governmental, and all other necessary
authorizations, approvals, consents, orders, licenses, certificates and
permits, to enter into, deliver and perform this Agreement and to issue and
sell the Shares, other than those required under the Securities Act and
state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capitalization as set
forth under the caption "Capitalization" in the Prospectus; the
certificates evidencing the Shares are in due and proper legal form and
have been duly authorized for issuance by the Company; all of the
outstanding shares of Common Stock of the Company have been duly and
validly authorized and have been duly and validly issued and, assuming full
payment therefor, are fully paid and nonassessable and none of them was
issued in
-18-
<PAGE> 19
violation of any preemptive or other similar statutory right. The Shares,
when issued and sold pursuant to this Agreement, will be duly and validly
issued, fully paid and nonassessable and none of them will have been issued
in violation of any preemptive or other similar statutory right. Except as
disclosed in the Registration Statement and the Prospectus, to such
counsel's knowledge, there is no outstanding option, warrant or other right
calling for the issuance of, and no commitment, plan or agreement to issue,
any share of stock of the Company or any security convertible into, or
exercisable or exchangeable for, stock of the Company. The Common Stock,
the Preferred Stock and the Shares conform in all material respects to all
statements in relation thereto contained in the Registration Statement and
the Prospectus.
(iv) All necessary corporate action has been duly and validly taken by
the Company to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly and validly executed and delivered
by the Company and constitutes and will constitute the legal, valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms except (A) as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and
by general equitable principles and (B) with respect to this Agreement, to
the extent that rights to indemnity or contribution under this Agreement
may be limited by federal or state securities laws or the public policy
underlying such laws.
(v) Neither the execution, delivery and performance of this Agreement
by the Company nor the consummation of any of the transactions contemplated
hereby (including, without limitation, the issuance and sale by the Company
of the Shares) will (i) give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or
-19-
<PAGE> 20
result in the breach of any term or provision of, or constitute a default
(or any event which with notice or lapse of time, or both, would constitute
a default) under, or require any consent or waiver under, or result in the
execution or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company or any of its subsidiaries pursuant to
the terms of, any indenture, mortgage, deed of trust, note or other
agreement or instrument of which such counsel is aware and to which the
Company or any of its subsidiaries is a party or by which any of them or
their properties or businesses is bound, or any franchise, license, permit,
judgment, decree, order, statute, rule or regulation of which such counsel
is aware and applicable to the Company or any of its subsidiaries or (ii)
violate any provision of the charter or by-laws of the Company or any of
its subsidiaries.
(vi) To such counsel's knowledge, no default exists, and no event has
occurred which with notice or lapse of time or both would constitute a
default, in the due performance and observance of any term, covenant or
condition, of any indenture, mortgage, deed of trust, note or any other
agreement or instrument to which the Company or any of its subsidiaries is
a party or by which any of them or their assets or properties or businesses
is bound or affected which default would have a material adverse effect on
the assets or properties, business, results of operations or financial
condition of the Company and its subsidiaries, taken as a whole.
(vii) To such counsel's knowledge, each of the Company and its
subsidiaries is not in violation of any term or provision of its charter or
by-laws or of any franchise, license, permit, judgment, decree, order,
statute, rule or regulation, where the consequences of such violation would
have a material adverse effect on the assets or properties, businesses,
results of operations or financial condition of the Company and its
subsidiaries, taken as a whole.
-20-
<PAGE> 21
(viii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the performance of this
Agreement by the Company or the consummation of the transactions
contemplated hereby, except such as have been obtained under the Securities
Act and such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the several
Underwriters.
(ix) Except as described in the Registration Statement and the
Prospectus, to such counsel's knowledge, there is no litigation or
governmental or other proceeding or investigation before any court or
before or by any public body or board pending or threatened (and such
counsel does not know of any basis therefor) against, or involving the
assets, properties or businesses of, the Company or any of its subsidiaries
which, if determined adversely to the Company or any of its subsidiaries,
would materially adversely affect the value or the operation of any such
assets or properties or the business, results of operations or financial
condition of the Company and its subsidiaries, taken as a whole.
(x) The agreement of the Company, certain of its officers and
directors, and WMS, the Company's sole stockholder prior to the sale of the
Firm Shares stating that for a period of 180 days from the date of the
Prospectus they will not, without Oppenheimer & Co., Inc.'s prior written
consent issue, offer, sell, contract to sell, distribute, pledge, grant any
option for the sale of, or otherwise dispose of, directly or indirectly, or
encumber, or exercise any registration rights with respect to, or register
with the Commission, as applicable, any shares of Common Stock owned by
them (or any securities convertible into, exercisable for, or exchangeable
for any shares of Common Stock) has been duly and validly delivered by such
persons and constitutes a legal, valid and binding obligations of each such
person (assuming due and valid execution
-21-
<PAGE> 22
thereof by each such person) enforceable against each such person in
accordance with its terms, except as the enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles.
(xi) The statements in the Prospectus under the captions "Risk
Factors-Anti-Takeover Provisions;" "-Shares Eligible for Future Sale";
"Business-Platform Licenses"; "-Intellectual Property Licenses"; "-Patent,
Trademark, Copyright and Product Protection"; "-Legal Proceedings";
"Management-Compensation Committee Interlocks and Insider Participation;"
"-Executive Compensation;" "-Employment Agreements"; "-Stock Option Plan;"
"Certain Transactions"; "Arrangements With WMS"; "Description of Capital
Stock"; and "Shares Eligible for Future Sale", insofar as such statements
constitute a summary of documents referred to therein or matters of law,
are fair summaries of the material provisions thereof and accurately
present the information called for with respect to such documents and
matters. All contracts and other documents, of which such counsel is aware,
required to be filed as exhibits to, or described in, the Registration
Statement have been so filed with the Commission or are fairly described in
the Registration Statement, as the case may be.
(xii) The Registration Statement, all preliminary prospectuses and the
Prospectus and each amendment or supplement thereto (except for the
financial statements and notes and schedules and other financial and
statistical data included therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the requirements
of the Securities Act and the Rules.
(xiii) The Registration Statement has become effective under the
Securities Act, and, to such
-22-
<PAGE> 23
counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are threatened, pending or contemplated.
To the extent deemed advisable by such counsel, they may rely as to matters
of fact on certificates of responsible officers of the Company and public
officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws of
the State of New York, the General Corporation Law of the State of Delaware and
the federal laws of the United States; provided that such counsel shall state
that in their opinion the Underwriters and they are justified in relying on such
other opinions. Copies of such certificates and other opinions shall be
furnished to the Representatives and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of the Representatives and representatives of the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as specified
in the foregoing opinion), on the basis of the foregoing no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective (except with respect to
the financial statements and notes and schedules thereto and other financial and
statistical data, as to which such counsel need make no statement) contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or that the Prospectus as amended or supplemented (except with respect to the
financial statements and notes and schedules thereto and other financial and
statistical data, as to which such counsel need make no statement) on the date
thereof contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements
-23-
<PAGE> 24
therein, in the light of the circumstances under which they were made, not
misleading.
(g) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives and their counsel
and the Underwriters shall have received from Morgan, Lewis & Bockius LLP a
favorable opinion, addressed to the Representatives and dated such Closing
Date, with respect to the Shares, the Registration Statement and the
Prospectus, and such other related matters, as the Representatives may
reasonably request, and the Company shall have furnished to Morgan, Lewis &
Bockius LLP such documents as they may reasonably request for the purpose
of enabling them to pass upon such matters.
(h) The Representatives shall have received on each Closing Date a
certificate, including exhibits thereto, addressed to the Representatives
and dated such Closing Date, of the Secretary or an Assistant Secretary of
the Company, signed in such officer's capacity as such officer, as to the
(i) certificate of incorporation and bylaws of the Company, (ii)
resolutions authorizing the execution and delivery of the Registration
Statement, this Agreement and the performance of the transactions
contemplated by this Agreement, the Registration Statement, the Prospectus
and the offering of the Shares, and (iii) incumbency of the person or
persons authorized to execute and deliver the Registration Statement, this
Agreement and any other documents contemplated by the offering of the
Shares.
(i) The Representatives shall have received on each Closing Date
certificates of the Secretaries of State of each State where the Company or
any of its U.S. subsidiaries is incorporated and doing business as to the
good standing of the Company or such subsidiary, listing all charter
documents on file, if applicable, qualification of the Company or such
subsidiary to do business as a foreign corporation, if applicable, payment
of taxes and filing of annual reports. In addition, the Representatives
shall have received copies of all charter
-24-
<PAGE> 25
documents of the Company and each of its subsidiaries certified by the
Secretary of State of the State of such corporation's incorporation.
(j) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives, and dated such Closing Date,
of an executive officer of the Company to the effect that the signer of
such certificate has reviewed and understands the provisions of Section
517.075 of the Florida Statutes, and represents that the Company has
complied, and at all times will comply, with all provisions of Section
517.075 and further, that as of such Closing Date, neither the Company nor
any of its affiliates does business with the government of Cuba or with any
person or affiliate located in Cuba.
6. Covenants of the Company.
------------------------
(A) The Company covenants and agrees as follows:
(a) The Company shall prepare the Prospectus in a form approved by the
Representatives and file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than the Commission's close of business on the
second business day following the execution and delivery of this Agreement,
or, if such second business day would be more than fifteen business days
after the Effective Date of the Registration Statement or any
post-effective amendment thereto, such earlier date as would permit such
Prospectus to be filed without filing a post-effective amendment as set
forth in Rule 430A(a)(3) under the Securities Act, and shall promptly
advise the Representatives (i) when the Registration Statement shall have
become effective, (ii) when any amendment thereof or any related
registration statement filed with the Commission pursuant to Rule 462(b) of
the Rules shall have become effective, (iii) of any request by the
Commission for any amendment of the Registration Statement or the
Prospectus or for any additional information, (iv) of the prevention or
suspension of the use of any preliminary prospectus or the Prospectus or of
the issuance by the Commission of any stop order suspending the
effectiveness
-25-
<PAGE> 26
of the Registration Statement or the institution or threatening of any
proceeding for that purpose and (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. If contemplated by this Agreement, the Company
shall prepare and file with the Commission in conformity with the
Securities Act and the Rules a related registration statement pursuant to
Rule 462(b) under the Securities Act for the purpose of registering
additional shares. The Company shall not file any amendment of the
Registration Statement or amendment or supplement to the Prospectus unless
the Company has furnished the Representatives a copy for its review prior
to filing and shall not file any such proposed amendment or supplement to
which the Representatives reasonably object. The Company shall use its best
efforts to prevent the issuance of any such stop order and, if issued, to
obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any event
occurs as a result of which the Prospectus as then amended or supplemented
would include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall be
necessary to amend or supplement the Prospectus to comply with the
Securities Act or the Rules, the Company promptly shall prepare and file
with the Commission, subject to the third sentence of paragraph (a) of this
Section 6(A), an amendment or supplement which shall correct such statement
or omission or an amendment which shall effect such compliance.
(c) The Company shall make generally available to its security holders
and to the Representatives as soon as practicable, but not later than 45
days after the end of the 12-month period beginning at the end of the
fiscal quarter of the Company during which the Effective Date occurs (or 90
days if such 12-month period coincides with
-26-
<PAGE> 27
the Company's fiscal year), an earnings statement (which need not be
audited) of the Company, covering such 12-month period, which shall satisfy
the provisions of Section 11(a) of the Securities Act or Rule 158 of the
Rules.
(d) The Company shall furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and to
each other Underwriter a copy of the Registration Statement (without
exhibits thereto) and all amendments thereof and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Securities
Act or the Rules, as many copies of any preliminary prospectus and the
Prospectus and any amendments thereof and supplements thereto as the
Representatives may reasonably request.
(e) The Company shall cooperate with the Representatives and their
counsel in endeavoring to qualify the Shares for offer and sale under the
laws of such jurisdictions as the Representatives may designate and shall
maintain such qualifications in effect so long as required for the
distribution of the Shares; provided, however, that the Company shall not
be required in connection therewith, as a condition thereof, to qualify as
a foreign corporation or to execute a general consent to service of process
in any jurisdiction or subject itself to taxation as doing business in any
jurisdiction.
(f) For a period of five years after the date of this Agreement, the
Company shall supply to the Representatives, and to each other Underwriter
who may so request in writing, copies of such financial statements and
other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock and
to furnish to the Representatives a copy of each annual or other report it
shall be required to file with the Commission.
(g) Without the prior written consent of Oppenheimer & Co., Inc., for
a period of 180 days after the date of this Agreement, the Company shall
not issue, offer, sell,
-27-
<PAGE> 28
contract to sell, distribute, grant any option for the sale of, or register
with the Commission, or otherwise encumber or dispose of, directly or
indirectly, any equity securities of the Company (or any securities
convertible into or exercisable or exchangeable for equity securities of
the Company), except for (i) the issuance of the Shares pursuant to the
Registration Statement and (ii) the issuance of options, and the issuance
of shares pursuant to the exercise of outstanding options, under the
Company's existing stock option plans.
(h) On or before completion of this offering, the Company shall make
all filings required under applicable securities laws and by the NYSE
(including any required registration under the Exchange Act).
(B) The Company agrees to pay, or reimburse if paid by the Representatives,
whether or not the transactions contemplated hereby are consummated or this
Agreement is terminated, all costs and expenses of the Company incident to the
public offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to (i) the preparation,
printing, filing and distribution of the Registration Statement including all
exhibits thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and the
printing, filing and distribution of this Agreement; (ii) the preparation and
delivery of certificates for the Shares to the Underwriters; (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the various jurisdictions referred to in Section
6(A)(e), including the fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification and the preparation,
printing, distribution and shipment of preliminary and supplementary Blue Sky
memoranda; (iv) the furnishing (including costs of shipping and mailing) to the
Representatives and to the Underwriters of copies of each preliminary
prospectus, the Prospectus and all amendments or supplements to the Prospectus,
and of the several documents required by this Section to be so furnished, as may
be reasonably requested for use in connection with the offering and sale of the
Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the
filing fees of the National Association of
-28-
<PAGE> 29
Securities Dealers, Inc. in connection with its review of the terms of the
public offering; (vi) the furnishing (including costs of shipping and mailing)
to the Representatives and to the Underwriters of copies of all reports and
information required by Section 6(A)(f); and (vii) inclusion of the Shares for
listing on the NYSE.
7. Indemnification.
---------------
(a) Each of the Company and WMS agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act against any and all losses, claims, damages and liabilities,
joint or several (including any reasonable investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claim asserted), to which they, or
any of them, may become subject under the Securities Act, the Exchange Act
or other federal or state law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities arise out of or are
based upon any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, the Registration Statement or
the Prospectus or any amendment thereof or supplement thereto, or arise out
of or are based upon 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; provided, however, that such indemnity
shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) on account of any losses, claims, damages or
liabilities arising from the sale of the Shares to any person by such
Underwriter if such untrue statement or omission or alleged untrue
statement or omission was made in such preliminary prospectus, the
Registration Statement or the Prospectus, or such amendment or supplement,
in reliance upon and in conformity with information furnished in writing to
the Company by the Representatives on behalf of any Underwriter
specifically for use therein; provided, further, that the Underwriters may
seek to enforce their rights to indemnity against WMS pursuant to this
Section
-29-
<PAGE> 30
7(a) only if the Underwriters believe in good faith that there is a
material risk that they may not obtain such payment from the Company
despite using their best efforts to do so. This indemnity agreement will be
in addition to any liability which the Company or WMS may otherwise have:
provided, however, that notwithstanding anything in this Agreement to the
contrary, WMS shall not be liable under this Section 7(a), or under any
other provision of this Agreement, for any amount in excess of the sum of
$50,000,000 plus the amount of any interest paid on the Dividend Notes (as
such term is defined in the Prospectus). The Company and WMS may agree, as
among themselves and without limiting the rights of the Underwriters under
this Agreement, as to their respective amounts of such liability for which
they each shall be responsible.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, each director of the Company, and each officer of
the Company who signs the Registration Statement, to the same extent as the
foregoing indemnity from the Company and WMS to each Underwriter, but only
insofar as such losses, claims, damages or liabilities arise out of or are
based upon any untrue statement or omission or alleged untrue statement or
omission which was made in any preliminary prospectus, the Registration
Statement or the Prospectus, or any amendment thereof or supplement
thereto, contained in the last paragraph of the cover page, in the
paragraph relating to stabilization on the inside front cover page of the
Prospectus and the statements with respect to the public offering of the
Shares under the caption "Underwriting" in the Prospectus; provided,
however, that the obligation of each Underwriter to indemnify the Company
(including any controlling person, director or officer thereof) shall be
limited to the net proceeds received by the Company from such Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after
-30-
<PAGE> 31
receipt of notice of commencement of any action, suit or proceeding against
such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section, notify each such
indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 7(a) or 7(b) shall be available to any party who shall fail to give
notice as provided in this Section 7(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was prejudiced by the failure to give such notice but the omission so
to notify such indemnifying party of any such action, suit or proceeding
shall not relieve it from any liability that it may have to any indemnified
party for contribution or otherwise than under this Section. In case any
such action, suit or proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in, and,
to the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof and the approval by the indemnified party of such
counsel, the indemnifying party shall not be liable to such indemnified
party for any legal or other expenses, except as provided below and except
for the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The indemnified
party shall have the right to employ its counsel in any such action, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of counsel by such indemnified
party has been authorized in writing by the indemnifying parties, (ii) the
indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the indemnified
party in the conduct of the defense of such action (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (iii) the indemnifying
-31-
<PAGE> 32
counsel's knowledge, no stop order suspending the parties shall not have
employed counsel to assume the defense of such action within a reasonable
time after notice of the commencement thereof, in each of which cases the
fees and expenses of counsel shall be at the expense of the indemnifying
parties. An indemnifying party shall not be liable for any settlement of
any action, suit, proceeding or claim effected without its written consent.
8. CONTRIBUTION. In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 7(a) or 7(b)
is due in accordance with its terms but for any reason is held to be unavailable
from the Company or WMS or the Underwriters, as the case may be, the Company,
WMS and the Underwriters shall contribute to the aggregate losses, claims,
damages and liabilities (including any investigation, legal and other expenses
reasonably incurred in connection with, and any amount paid in settlement of,
any action, suit or proceeding or any claims asserted, but after deducting any
contribution received by the Company or WMS from persons other than the
Underwriters, such as persons who control the Company or WMS within the meaning
of the Securities Act, officers of the Company who signed the Registration
Statement and directors of the Company, who may also be liable for contribution)
to which the Company, WMS and one or more of the Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company and WMS on the one hand and the Underwriters on the other from the
offering of the Shares or, if such allocation is not permitted by applicable law
or indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company and WMS on the one hand and the Underwriters
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and WMS on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts but before deducting expenses) received by the Company,
as set forth in the table on the cover page of the Prospectus, bear to (y) the
-32-
<PAGE> 33
underwriting discounts received by the Underwriters, as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company and WMS,
and the Underwriters, shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement or omission or alleged omission
of a material fact related to information supplied by the Company or WMS, or
the Underwriters, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, WMS and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this Section 8, (i) in no case shall any Underwriter (except as may be
provided in the Agreement Among Underwriters) be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) the Company and WMS shall be
liable and responsible for any amount in excess of such underwriting discount;
provided, however, that notwithstanding anything in this Agreement to the
contrary, WMS shall not be liable under this Section 8, or under any other
provision of this Agreement, for any amount in excess of the sum of $50,000,000
plus the amount of any interest paid on the Dividend Notes (as such term is
defined in the Prospectus); provided, further, that 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. For purposes of this Section 8,
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Securities Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of the Section 15 of the Securities Act
or Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to clauses
(i) and (ii) in the immediately preceding sentence of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding
-33-
<PAGE> 34
against such party in respect of which a claim for contribution may be made
against another party or parties under this Section, notify such party or
parties from whom contribution may be sought, but the failure so to notify such
party or parties from whom contribution may be sought shall not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have hereunder or otherwise than under this Section. No party
shall be liable for contribution with respect to any action, suit, proceeding
or claim settled without its written consent. The Underwriter's obligations to
contribute pursuant to this Section 8 are several in proportion to their
respective underwriting commitments and not joint.
9. TERMINATION. This Agreement may be terminated with respect to the Shares
to be purchased on a Closing Date by the Representatives by notifying the
Company at any time
(a) in the absolute discretion of the Representatives at or before any
Closing Date: (i) if on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or in
the reasonable opinion of the Representatives will in the future materially
disrupt, the securities markets; (ii) if there has occurred any new
outbreak or material escalation of hostilities or other calamity or crisis
the effect of which on the financial markets of the United States is such
as to make it, in the reasonable judgment of the Representatives,
inadvisable to proceed with the offering; (iii) if there shall be such a
material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States is such as to make it, in the reasonable
judgment of the Representatives, inadvisable or impracticable to market the
Shares; (iv) if trading in the Shares has been suspended by the Commission
or trading generally on the New York Stock Exchange, Inc. or on the
American Stock Exchange, Inc. has been suspended or limited, or minimum or
maximum ranges for prices for securities shall have been fixed, or maximum
ranges for prices for securities have been required, by said exchanges or
by order of the Commission, the National Association of Securities Dealers,
Inc., or any other governmental or regulatory authority; or (v) if a
banking
-34-
<PAGE> 35
moratorium has been declared by any state or federal authority, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as required
by this Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of their counsel) incurred by them in connection with the proposed
purchase and sale of the Shares or in contemplation of performing their
obligations hereunder and (z) no Underwriter who shall have failed or refused to
purchase the Shares agreed to be purchased by it under this Agreement, without
some reason sufficient hereunder to justify cancellation or termination of its
obligations under this Agreement, shall be relieved of liability to the Company
or to the other Underwriters for damages occasioned by its failure or refusal.
10. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters shall
fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares that
all the Underwriters are
-35-
<PAGE> 36
obligated to purchase on such Closing Date, then each of the nondefaulting
Underwriters shall be obligated to purchase such Shares on the terms herein
set forth in proportion to their respective obligations hereunder;
provided, that in no event shall the maximum number of Shares that any
Underwriter has agreed to purchase pursuant to Section 1 be increased
pursuant to this Section 10 by more than one-ninth of such number of Shares
without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that all
the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to an additional business day within which it
may, but is not obligated to, find one or more substitute underwriters
reasonably satisfactory to the Representatives to purchase such Shares upon
the terms set forth in this Agreement.
In any such case, either the Representatives or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representatives and the Company. If the number of Shares
to be purchased on such Closing Date by such defaulting Underwriter or
Underwriters shall exceed 10% of the Shares that all the Underwriters are
obligated to purchase on such Closing Date, and none of the nondefaulting
Underwriters or the Company shall make arrangements pursuant to this Section
within the period stated for the purchase of the Shares that the defaulting
Underwriters agreed to purchase, this Agreement shall terminate with respect to
the Shares to be purchased on such Closing Date without liability on the part of
any nondefaulting Underwriter to the Company and without liability on the part
of the Company, except in both cases as provided in Sections 6(B), 7, 8 and 9.
The provisions of this Section shall not in any way affect the liability of any
defaulting Underwriter to the Company or the nondefaulting Underwriters arising
out of such default. A substitute underwriter hereunder shall become an
Underwriter for all purposes of this Agreement.
-36-
<PAGE> 37
11. MISCELLANEOUS. The respective agreements, representations, warranties,
indemnities and other statements of the Company or its officers, of WMS and of
the Underwriters set forth in or made pursuant to this Agreement shall remain in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter or the Company or any of the officers, directors or controlling
persons referred to in Sections 7 and 8 hereof, and shall survive delivery of
and payment for the Shares. The provisions of Sections 6(B), 7, 8 and 9 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters and
the Company and WMS and their respective successors and assigns, and, to the
extent expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or telegraph if subsequently confirmed in writing, (a)
if to the Representatives, c/o Oppenheimer & Co., Inc., Oppenheimer Tower, World
Financial Center, New York, New York 10281 Attention: Richard White, (b) if to
the Company, to its agent for service as such agent's address appears on the
cover page of the Registration Statement, and (c) if to WMS, to Neil D.
Nicastro, WMS Industries Inc., 3401 North California Avenue, Chicago, Illinois
60618.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
-37-
<PAGE> 38
Please confirm that the foregoing correctly sets forth the agreement among
us.
Very truly yours,
MIDWAY GAMES INC.
By
--------------------------------
Title:
WMS INDUSTRIES INC.
By
--------------------------------
Title:
Confirmed:
OPPENHEIMER & CO., INC.
HAMBRECHT & QUIST LLC
UBS SECURITIES LLC
WASSERSTEIN PERELLA SECURITIES, INC.
Acting severally on behalf of itself
and as representative of the several
Underwriters named in Schedule I annexed
hereto.
By Oppenheimer & Co., Inc.
By
-------------------------
Title: Managing Director
-38-
<PAGE> 39
<TABLE>
SCHEDULE I
<CAPTION>
Number of
Firm Shares to
Name Be Purchased
---- --------------
<S> <C>
Oppenheimer & Co., Inc.
Hambrecht & Quist LLC
UBS Securities LLC
Wasserstein Perella Securities, Inc.
----------
TOTAL 5,100,000
</TABLE>
-i-
<PAGE> 40
SCHEDULE II
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
Midway Home Entertainment Inc. Delaware
Midway Interactive Inc. Delaware
Atari Games Corporation California
Tengen, Inc. California
K.K. Atari Interactive Japan
-ii-
<PAGE> 1
Exhibit 2.1
-----------
RIGHTS AGREEMENT
----------------
RIGHTS AGREEMENT, dated as of October 24, 1996 (the "Agreement"), between
Midway Games Inc., a Delaware corporation (the "Company"), and The Bank of New
York (the "Rights Agent").
W I T N E S S E T H :
-------------------
WHEREAS, the Board of Directors of the Company authorized and declared a
dividend of one right for each share of common stock, par value $.01 per share,
of the Company (the "Common Stock") outstanding at the close of business on the
effective date of the Initial Public Offering of the Company's Common Stock (the
"Offering") (the "Record Date"), and has further authorized the issuance of one
right (as such number may hereinafter be adjusted pursuant to the provisions of
Section 11 (p) hereof) for each share of Common Stock of the Company issued
between the Record Date (whether originally issued or delivered from the
Company's treasury) and the earlier of the Expiration Date or Rights
Distribution Date, each Right initially representing the right to purchase
one one-hundredth (.01) of a share of Series A Preferred Stock of the Company
having the rights, powers and preferences set forth in the form of Certificate
of Designation, attached hereto as Exhibit A, upon the terms and subject to
the conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms
have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 10% or more of shares of Common Stock then outstanding, but shall not include
an Exempt Person.
<PAGE> 2
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(c) A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding, whether or not in writing (other than
customary agreements with and between underwriters and selling group members
with respect to a bona fide public offering of securities), or upon the exercise
of conversion rights, exchange rights, rights (other than these Rights),
warrants or options, or otherwise; provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own," securities tendered
pursuant to a tender or exchange offer made by or on behalf of such Person or
any of such Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security which: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable provisions of the General Rules and
Regulations under the Exchange Act, and (B) is not also then reportable by such
Person on Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such Person
(or any Affiliate or Associate thereof) has any agreement, arrangement or
understanding, whether or not in writing, for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy as described
2
<PAGE> 3
in the proviso to subparagraph (ii) of this paragraph (c)) or disposing of any
voting securities of the Company; provided, however, that nothing in this
paragraph (c) shall cause a Person engaged in business as an underwriter of
securities to be the "Beneficial Owner" of, or to "beneficially own," any
securities acquired through such Person's participation in good faith in a firm
commitment underwriting until the expiration of 40 days after the date of such
acquisition.
(iv) Notwithstanding anything to the contrary contained herein,
no director or officer or other employee of the Company shall be deemed the
"Beneficial Owner" of, or to "beneficially own," any security beneficially owned
by any other director, officer or other employee by virtue of the common status
of such Persons as directors, officers or employees of the Company, as the case
may be.
(d) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M., New
York City time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., New York City time, on the next succeeding
Business Day.
(f) "Common Stock" shall mean the common stock, par value $.01 per
share, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company shall mean the capital stock of such other
Person or the equity securities or other equity interest having power to control
or direct the management of such Person.
(g) "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company immediately prior to the Rights Distribution Date, and
(ii) any Person who is subsequently elected to the Board if such Person is
recommended or approved by a majority of the persons described in clause (i);
provided, however, that the term shall not include an Acquiring Person, or any
Affiliate or Associate of an Acquiring Person, or any representative of any of
the foregoing.
(h) "Exempt Person" shall mean (i) the Company, any Subsidiary of the
Company, WMS Industries Inc. and any of its Affiliates and Associates ("WMS"),
any employee
3
<PAGE> 4
benefit plan of the Company or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan; or (ii) any Person who is the Beneficial Owner of
10% or more of the outstanding shares of Common Stock on the date of this
Agreement until such time hereafter as such Person shall become the Beneficial
Owner (other than by means of a stock dividend or stock split or in connection
with an employee or other direct stock option program of the Company) of an
additional number of shares of Common Stock greater than one percent (1%) of the
number of such shares outstanding (excluding WMS); or (iii) any Person who
inadvertently acquired Beneficial Ownership of 10% or more of the outstanding
shares of Common Stock or otherwise acquired Beneficial Ownership of shares of
Common Stock without any plan or intention to seek control of the Company and
without knowledge that such acquisition would make such Person an Acquiring
Person, if, in either case, such Person promptly divests (without exercising or
retaining any power, including voting, with respect to such shares) a sufficient
number of shares of Common Stock (or securities convertible into Common Stock)
so that such Person ceases to be the Beneficial Owner of a number of shares of
Common Stock that would otherwise cause such Person to be an Acquiring Person,
after notice by the Company (or, after the first Stock Acquisition Date, after
notice by a majority of the Continuing Directors) that such Person will be
deemed by the Company to be an Acquiring Person unless it makes such
divestitures; or (iv) any Person whose Beneficial Ownership of 10% or more of
the outstanding shares of Common Stock is approved in advance (but only to the
extent of Beneficial Ownership which is so approved) by the Board of Directors
of the Company or, after the first Stock Acquisition Date, by a majority of the
Continuing Directors;
(i) "Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
(j) "Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(k) "Person" shall mean any individual, firm, corporation, partnership
or other entity.
(l) "Preferred Stock" shall mean shares of Series A Preferred Stock,
par value $.01 per share, of the Company having the rights and preferences set
forth in the form of
4
<PAGE> 5
Certificate of Designation attached to this Agreement as Exhibit A and, to the
extent that there are not a sufficient number of shares of Series A Preferred
Stock authorized to permit the full exercise of the Rights, any other series of
Preferred Stock, par value $.01 per share, of the Company designated for such
purpose containing terms substantially similar to the terms of the Series A
Preferred Stock.
(m) "Rights Distribution Date" shall have the meaning set forth in
Section 3(a) hereof.
(n) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii) hereof.
(o) "Section 13 Event" shall have the meaning set forth in Section
13(a) hereof.
(p) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
(q) "Subsidiary " shall mean, with reference to any Person, any
corporation, association, partnership, limited liability company or other
business entity of which more than 50% of the total voting power of shares of
capital stock or other interests (including partnership interests) entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such Person, or otherwise controlled by such Person.
(r) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights
Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
5
<PAGE> 6
3. ISSUE OF RIGHTS CERTIFICATES.
(a) Until the earlier of (i) the Close of Business on the tenth day
after the Stock Acquisition Date or (ii) the Close of Business on the tenth
Business Day (or such later day as may be determined by action of the Board of
Directors (but only if at the time of such determination there are then in
office not less than two Continuing Directors and such action is approved by a
majority of the Continuing Directors) prior to such time as any Person becomes
an Acquiring Person) after the date of commencement by any Person (other than an
Exempt Person) of, or of the first public announcement of the intention of any
Person (other than an Exempt Person) to commence, a tender or exchange offer, if
upon consummation thereof, such Person would be the Beneficial Owner of 10% or
more of the Common Stock then outstanding (the earlier of (i) and (ii) being
herein referred to as the "Rights Distribution Date"), the Rights will be
evidenced (subject to the provisions of paragraph (b) of this Section ) by the
certificates for the Common Stock registered in the names of the holders thereof
(which certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates, and will be transferable only in
connection with the transfer of the underlying shares of Common Stock. As soon
as practicable after the Rights Distribution Date, the Rights Agent will send by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock as of the close of business on the Rights Distribution Date, at the
address of such holder shown on the records of the Company, one or more Rights
certificates, in substantially the form of Exhibit B hereto (the "Rights
Certificates"), evidencing one Right for each share of Common Stock so held,
subject to adjustment in the number of Rights per share of Common Stock as has
been made pursuant to Section 11(p) hereof, at the time of distribution of the
Rights Certificates, the Company shall make the necessary and appropriate
rounding adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Rights
Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.
(b) A summary of this Agreement is contained in Exhibit C annexed
hereto (the "Summary of Rights") as well as in the Prospectus prepared by the
Company in connection with the Offering. With respect to certificates for the
Common Stock outstanding as of the
6
<PAGE> 7
Record Date, until the Rights Distribution Date, the Rights will be evidenced by
such certificates for Common Stock and the registered holders of the Common
Stock shall also be the registered holders of the associated Rights. Until the
earlier of the Rights Distribution Date or the Expiration Date, the transfer of
any certificates representing shares of Common Stock in respect of which Rights
have been issued shall also constitute the transfer of the Rights associated
with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common Stock
which are issued after the Record Date but prior to the earlier of the Rights
Distribution Date or the Expiration Date. Certificates representing such shares
of Common Stock shall also be deemed to be certificates for Rights, and shall
bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between Midway
Games Inc., (the "Company") and The Bank of New York (the "Rights
Agent") dated as of October 24, 1996 (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a copy
of which is on file at the principal offices of the Rights Agent.
Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. The Rights Agent will mail to
the holder of this certificate a copy of the Rights Agreement, as in
effect on the date of mailing, without charge promptly after receipt
of a written request therefor. Under certain circumstances set forth
in the Rights Agreement, Rights issued to, or held by, any Person who
is or was an Acquiring person or any Affiliate or Associate thereof
(as such terms are defined in the Rights Agreement), whether currently
held by or on behalf of such Person or by any subsequent holder, may
become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Rights Distribution Date or (ii) the Expiration Date, the
Rights associated with the Common Stock represented by such certificates shall
be evidenced by such certificates alone, and the surrender for transfer of any
of such certificates shall also constitute the transfer of the Rights associated
with the Common Stock represented by such certificates.
7
<PAGE> 8
4. FORM OF RIGHTS CERTIFICATE.
--------------------------
(a) The Rights Certificates (and the forms of election to purchase and
of assignment to be printed on the reverse thereof) shall each be substantially
in the form set forth in Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever distributed, shall be
dated as of the Record Date and on their face shall entitle the holders thereof
to purchase such number of shares (in one one-hundredth (.01) of a share
increments) of Preferred Stock as shall be set forth therein at the price set
forth therein (the "Purchase Price"), but the amount and type of securities
purchasable upon the exercise of each Right and the Purchase Price thereof shall
be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person or (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, and any Rights Certificate
issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange,
replacement or adjustment of any other Rights Certificate referred to in this
sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or is an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of such Agreement.
The provisions of Section 7(e) of this Rights Agreement shall be operative
whether or not the foregoing legend is contained on any such Rights Certificate.
8
<PAGE> 9
5. COUNTERSIGNATURE AND REGISTRATION.
---------------------------------
(a) The Rights Certificates shall be executed on behalf of the Company
by its Chairman of the Board, its President or any Vice President, either
manually or by facsimile thereof which shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile signature.
The Rights Certificates shall be manually or by facsimile signature
countersigned by the Rights Agent and shall not be valid for any purpose unless
so countersigned. In case any officer of the Company who shall have signed any
of the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the Person who signed such Rights Certificates had not ceased to be such officer
of the Company.
(b) Following the Rights Distribution Date, the Rights Agent will keep
or cause to be kept, at its office designated as the appropriate place for
surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the date of each of the Rights Certificates.
6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES;
--------------------------------------------------------------------
MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
- --------------------------------------------------------
(a) Subject to the provisions of Section 4(b), Section 7(e) and
Section 14 hereof, at any time after the Close of Business on the Rights
Distribution Date, and at or prior to the Close of Business on the Expiration
Date, any Rights Certificate or Rights Certificates may be transferred, split
up, combined or exchanged for another Rights Certificate or Rights Certificates,
entitling the registered holder to purchase a like number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock (or, following a
Triggering Event, Common Stock, other securities, cash or other assets, as the
case may be) as the Rights Certificates or Certificates surrendered then
entitled such holder (or former holder in the case
9
<PAGE> 10
of a transfer) to purchase. Any registered holder desiring to transfer, split
up, combine or exchange any Rights Certificate or Rights Certificates shall make
such request in writing delivered to the Rights Agent, and shall surrender the
Rights Certificate or Rights Certificates to be transferred, split up, combined
or exchanged at the office of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and upon surrender to the Rights
Agent and cancellation of the Rights Certificate if mutilated, the Company will
execute and deliver a new Rights Certificate of like tenor to the Rights Agent
for countersignature and delivery to the registered owner in lieu of the Rights
Certificate so lost, stolen, destroyed or mutilated.
7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS.
-------------------------------------------------------------
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein, including without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii), Section 23(a) and
Section 24(b) hereof) in whole or in part at any time after the Rights
Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase
10
<PAGE> 11
and the certificate on the reverse side thereof duly executed, to the Rights
Agent at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price with respect to
the total number of shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock (or other shares, securities, cash or other assets, as the case
may be) as to which such surrendered Rights are then exercisable, at or prior to
the earlier of (i) the close of business on December 31, 2006 (the "Final
Expiration Date"), and (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the earlier of (i) or (ii) being herein referred
to as the "Expiration Date").
(b) The Purchase Price of each one one-hundredth (.01) of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be one
hundred dollars ($100.00), and shall be subject to adjustment from time to time
as provided in Sections 11 and 13(a) hereof and shall be payable in accordance
with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price and an amount equal to any applicable transfer tax, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the shares of Preferred Stock (or make available, if
the Rights Agent is the transfer agent for such shares) certificates for the
total number of shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock to be purchased and the Company hereby irrevocably authorizes
its transfer agent to comply with all such requests, or (B) if the Company shall
have elected to deposit the total number of shares of Preferred Stock issuable
upon exercise of the Rights hereunder with a depository agent, requisition from
the depository agent of depository receipts representing such number of shares
(in one one-hundredth (.01) of a share increments) of Preferred Stock as are to
be purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depository agent) and the Company hereby directs the depository agent to comply
with such request, (ii) when appropriate, requisition from the Company the
amount of cash, if any, to be paid in lieu of fractional shares in accordance
with Section 14 hereof, (iii) after receipt of such certificates or depository
receipts, cause the same
11
<PAGE> 12
to be delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, and (iv) when appropriate, after receipt thereof, deliver such cash, if
any, to or upon the order of the registered holder of such Rights Certificate.
The payment of the Purchase Price (as such amount may be reduced pursuant to
Section 11(a)(iii) hereof) may be made in cash or by certified bank check or
bank draft payable to the order of the Company. In the event that the Company is
obligated to issue other securities (including Common Stock) of the Company, pay
cash and/or distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other securities, cash
and/or other property are available for distribution by the Rights Agent, if and
when appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a)(ii) Event, any rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, or (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to insure that the provisions of this Section
7(e) and Section 4(b) hereof are complied with, but shall have no liability to
any holder of Rights Certificates or other Person as a result of its failure to
make any determinations hereunder with respect to an Acquiring Person or its
Affiliates, Associates or transferees.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7
12
<PAGE> 13
unless such registered holder shall have (i) completed and signed the
certificate contained in the form of election to purchase set forth on the
reverse side of the Rights Certificate surrendered for such exercise, and (ii)
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request.
8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificates purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Rights Certificates, and in such case shall deliver a certificate of
destruction thereof to the Company.
9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.
---------------------------------------------
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued shares of Preferred Stock
(and, following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock and/or other securities or out of its authorized
and issued shares held in its treasury), the number of shares of Preferred Stock
(and, following the occurrence of a Triggering Event, Common Stock and/or other
securities) that will be sufficient to permit the exercise in full of all
outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
and deliverable upon the exercise of the Rights may be listed on any national
securities exchange or automated quotation system, the Company shall use its
best efforts to cause, from and after such time as the Rights
13
<PAGE> 14
become exercisable, all shares reserved for such issuance to be listed on such
exchange or quotation system upon official notice of issuance upon such
exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, a registration statement under the Securities Act of 1933, as amended
(the "Act"), with respect to the securities purchasable upon exercise of the
Rights on an appropriate form, (ii) cause such registration statement to become
effective as soon as practicable after such filing, and (iii) cause such
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the date
of the expiration of the Rights. The Company will also take such action as may
be appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
The Company may temporarily suspend, for a period of time not to exceed 90 days
after the date set forth in clause (i) of the first sentence of this Section
9(c), the exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. In addition,
if the Company shall determine that a registration statement is required
following the Rights Distribution Date, the Company may temporarily suspend the
exercisability of the Rights until such time as a registration statement has
been declared effective. Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification in such jurisdiction shall not have been obtained or the
exercise thereof shall not be permitted under applicable law.
(d) The Company covenants and agrees that it will take such action as
may be necessary to ensure that all shares (in one one-hundredth (.01) of a
share increments) of Preferred Stock (and, following the occurrence of a
Triggering Event, Common Stock and/or other securities) delivered upon exercise
of Rights shall, at the time of delivery of the certificates
14
<PAGE> 15
for such shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of the Rights Certificates and
of any certificates for a number of shares (in one one-hundredth (.01) of a
share increments) of Preferred Stock (or Common Stock and/or other securities,
as the case may be) upon the exercise of Rights. The Company shall not, however,
be required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Rights Certificates to a person other than, or the
issuance or delivery of a number of shares (in one one-hundredth (.01) of a
share increments) of Preferred Stock (or Common Stock and/or other securities,
as the case may be) in respect of a name other than that of, the registered
holder of the Rights Certificates evidencing Rights surrendered for exercise or
to issue or deliver any certificates for a number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificates at
the time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
10. PREFERRED STOCK RECORD DATE. Each person in whose name any
certificate for a number of shares (in one one-hundredth (.01) of a share
increments) of Preferred Stock (or Common Stock and/or other securities, as the
case may be) is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of such fractional shares of
Preferred Stock (or Common Stock and/or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and all applicable transfer taxes) was made; provided,
however, that if the date of such surrender and payment is a date upon which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are closed, such Person shall be deemed to
15
<PAGE> 16
have become the record holder of such shares (fractional or otherwise) on, and
such certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate shall not be entitled to
any rights of a stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR NUMBER
OF RIGHTS. The Purchase Price, the number and kind of shares covered by each
Right and the number of rights outstanding are subject to adjustment from time
to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in shares
of Preferred Stock, (B) subdivide the outstanding Preferred Stock into a greater
number of shares, (C) combine the outstanding Preferred Stock into a smaller
number of share, or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), except as otherwise provided in this Section 11(a)
and Section 7(e) hereof, the Purchase Price in effect at the time of the record
date for such dividend or of the effective date of such subdivision, combination
or reclassification, and the number and kind of shares of Preferred Stock or
capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive, upon payment of the Purchase Price then in
effect, the aggregate number and kind of shares of Preferred Stock or capital
stock as the case may be, which, if such Right had been exercised immediately
prior to such date and at a time when the Preferred Stock transfer books of the
Company were open, he would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification. If an event
16
<PAGE> 17
occurs which would require an adjustment under both this Section 11(a)(i) and
Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Section 24 of this Agreement, in the event any
Person, alone or together with its Affiliates and Associates, shall become an
Acquiring Person, unless the event causing such Person to become an Acquiring
Person is a transaction set forth in Section 13(a) hereof, then, promptly
following the date of the occurrence of such event, proper provision shall be
made so that each holder of a Right (except as provided below and in Section
7(e) hereof) shall thereafter have the right to receive, upon exercise thereof
at the then current Purchase Price in accordance with the terms of this
Agreement, in lieu of the number of shares (in one one-hundredth (.01) of a
share increments) of Preferred Stock, such number of shares of Common Stock of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the then number of shares (in one-one hundredth (.01)
of a share increments) of Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii) Event, and (y)
dividing that product (which, following such first occurrence, shall thereafter
be referred to as the "Purchase Price" for each Right and for all purposes of
this Agreement) by 50% of the current market price (determined pursuant to
Section 11(d) hereof) per share of Common Stock on the date of such first
occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that the number of shares of Common Stock
which are authorized by the Company's certificate of incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights in
accordance with the foregoing subparagraph (ii) of this Section 11(a), the
Company shall: (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (the "Current Value") over (2) the
Purchase Price (such excess shall be referred to herein as the "Spread"), and
(B) with respect to each Right, make adequate provision to substitute for the
Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2)
a reduction in the Purchase Price, (3) Common Stock or other equity securities
of the Company (including, without limitation, shares, or units of shares, of
17
<PAGE> 18
preferred stock which the Board of Directors of the Company has deemed to have
the same value as shares of Common Stock (such shares of preferred stock shall
be referred to herein as "common stock equivalents")), (4) debt securities of
the Company, (5) other assets, or (6) any combination of the foregoing, having
an aggregate value equal to the Current Value, where such aggregate value has
been determined by the Board of Directors of the Company based upon the advice
of a nationally recognized investment banking firm selected by the Board of
Directors of the Company; provided, however, if the Company shall not have made
adequate provision to deliver value pursuant to clause (B) above within 30 days
following the date on which the Company's right of redemption pursuant to
Section 23(a) expires (the "Section 11(a)(ii) Trigger Date"), then the Company
shall be obligated to deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which shares and/or cash have an
aggregate value equal to the Spread. If the Board of Directors of the Company
shall determine in good faith that it is likely that sufficient additional
shares of Common Stock could be authorized for issuance upon exercise in full of
the Rights, the 30 day period set forth above may be extended to the extent
necessary, but not more than 90 days after the Section 11(a)(ii) Trigger Date,
in order that the Company may seek stockholder approval for the authorization of
such additional shares (such period, as it may be extended, shall be referred to
herein as the "Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the first and/or second sentences of
this Section 11(a)(iii), the Company (x) shall provide, subject to Section 11(e)
hereof, that such action shall apply uniformly to all outstanding Rights, and
(y) may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant to
such first sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For purposes
of this Section 11(a)(iii), the value of the Common Stock shall be the current
market price (as determined pursuant to Section 11(d) hereof) per share of the
Common Stock on the Section 11(a)(ii)
18
<PAGE> 19
Trigger Date and the value of any "common stock equivalent" shall be deemed to
have the same value as the Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within 45 calendar days after
such record date) Preferred Stock (or shares having the same rights, privileges
and preferences as the shares of Preferred Stock ("equivalent preferred stock"))
or securities convertible into Preferred Stock or equivalent preferred stock at
a price per share of Preferred Stock or per share of equivalent preferred stock
(or having a conversion price per share, if a security is convertible into
Preferred Stock or equivalent preferred stock) less than the current market
price (as determined pursuant to Section 11(d) hereof) per share of Preferred
Stock on such record date, the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
number of shares of Preferred Stock outstanding on such record date, plus the
number of shares of Preferred Stock which the aggregate offering price of the
total number of shares of Preferred Stock and/or equivalent preferred stock so
to be offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of additional shares of
Preferred Stock and/or equivalent preferred stock to be offered for subscription
or purchase (or into which the convertible securities so to be offered are
initially convertible). In case such subscription price may be paid by delivery
of consideration part or all of which may be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Shares of Preferred Stock owned by or held for the
account of the Company or a Subsidiary shall not be deemed outstanding for the
purpose of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed, and in the event that such rights or
warrants are not so issued, the
19
<PAGE> 20
Purchase Price shall be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to
all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a cash dividend out
of the earnings or retained earnings of the Company), assets (other than a
dividend payable in Preferred Stock, but including any dividend payable in stock
other than Preferred Stock) or subscription rights or warrants (excluding those
referred to in Section 11(b) hereof), the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the current market price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock on such record date, less the fair market
value (as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the Rights
Agent) of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to a share of
Preferred Stock and the denominator of which shall be such current market price
(as determined pursuant to Section 11(d) hereof) per share of Preferred Stock.
Such adjustments shall be made successively whenever such a record date is
fixed, and in the event that such distribution is not so made, the Purchase
Price shall be adjusted to be the Purchase Price which would have been in effect
if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "current market
price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days (as such term is hereinafter defined) immediately prior
to such date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "current market price" per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices per share of
such Common Stock for the 10 consecutive Trading Days immediately following such
date; provided, however, that in the event that the current market price per
share of the Common Stock is determined during
20
<PAGE> 21
a period following the announcement by the issuer of such Common Stock of (A) a
dividend or distribution on such Common Stock payable in shares of such Common
Stock or securities convertible into shares of such Common Stock (other than the
Rights), or (B) any subdivision, combination or reclassification of such Common
Stock, and prior to the expiration of the requisite 30 Trading Day or 10 Trading
Day period, as set forth above, after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "current market price" shall
be properly adjusted to take into account ex-dividend trading. The closing price
for each day shall be the last reported sales price as reported by the New York
Stock Exchange, Inc. ("NYSE"), or if the shares of Common Stock are not listed
or traded on the NYSE, the closing price for each day shall be the last reported
sales price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
shares of Common Stock are listed or admitted to trading or, if the shares of
Common Stock are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, or, if on any such date
the shares of Common Stock are not quoted by the NYSE or any such other
organization and are not listed on a national securities exchange, the average
of the closing bid and asked prices as furnished by a professional market maker
making a market in the Common Stock selected by the Board of Directors of the
Company. If on any such date no market maker is making a market in the Common
Stock, the fair value of such shares on such date as determined in good faith by
the Board of Directors of the Company shall be used. The term "Trading Day"
shall mean a day on which the NYSE is open for the transaction of business or,
if the shares of Common Stock are not listed for quotation on the NYSE, a
Business Day. If the Common Stock is not publicly held or not so listed or
traded, "current market price" per share shall mean the fair value per share as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
21
<PAGE> 22
(ii) For the purpose of any computation hereunder, the "current
market price" per share of Preferred Stock shall be determined in the same
manner set forth for the Common Stock in clause (i) of this Section 11(d) (other
than the last sentence thereof). If the current market price per share of
Preferred Stock cannot be determined in the manner provided above or if the
Preferred Stock is not publicly held or listed or traded in a manner described
in clause (i) of this Section 11(d), then the "current market price" per share
of Preferred Stock shall be conclusively deemed to be an amount equal to 100 (as
such number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalization with respect to the Common Stock occurring after
the date of this Agreement) multiplied by the current market price per share of
the Common Stock. If neither the Common Stock nor the Preferred Stock is
publicly held or so listed or traded, "current market price" per share of the
Preferred Stock shall mean the fair value per share as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes. For all purposes of this Agreement, the "current market price" of one
one-hundredth (.01) of a share of Preferred Stock shall be equal to the "current
market price" of one share of Preferred Stock divided by 100.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest ten-thousandth (.0001) of a share of
Common Stock or other share or one-millionth (.000001) of a share of Preferred
Stock, as the case may be. Notwithstanding the first sentence of this Section
11(e), any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three (3) years from the date of the transaction which
mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any shares of capital stock other than Preferred
Stock, thereafter the number of such other shares so
22
<PAGE> 23
receivable upon exercise of any Right and the Purchase Price thereof shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Preferred Stock
contained in Section 11(a), (b), (c), (e), (g), (h), (i), (j), (k), and (m), and
the provisions of Section 7, 9, 10, 13 and 14 hereof with respect to the
Preferred Stock shall apply on like terms to any such other shares.
(g) All rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock purchasable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock (calculated to the
nearest one-millionth (.000001) of a share) obtained by (i) multiplying (x) the
number of shares (in one one-hundredth (.01) of a share increments) covered by a
Right immediately prior to such adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in lieu of any adjustment in
the number of shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock purchasable upon the exercise of a Right. Each of the Rights
outstanding after the adjustment in the number of Rights shall be exercisable
for the number of shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest
one-ten-thousandth (.0001)) obtained by dividing the Purchase Price in effect
immediately prior to adjustment of the Purchase Price by the Purchase
23
<PAGE> 24
Price in effect immediately after adjustment of the Purchase Price. The Company
shall make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. This record date may be the date on which
the Purchase Price is adjusted or any day thereafter, but, if the Rights
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Rights Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Rights Certificates on such record date Rights Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the rights to which such holders shall be
entitled after such adjustment. Rights Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Purchase Price) and shall be
registered in the names of the holders of record of Rights Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock issuable upon the exercise of the Rights, the Rights
Certificates theretofore and thereafter issued may continue to express the
Purchase Price per one one-hundredth (.01) of a share and the number of shares
(in one one-hundredth (.01) of a share increments) which were expressed in the
initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then stated par value, if any, of the number of
shares (in one one-hundredth (.01) of a share increments) of Preferred Stock
issuable upon exercise of the Rights, the Company shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue such number of fully paid and
24
<PAGE> 25
nonassessable shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of shares (in one one-hundredth (.01) of a share increments) of
Preferred Stock and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares (fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for
cash or any shares of Preferred Stock at less than the current market price,
(iii) issuance wholly for cash or shares of Preferred Stock or securities which
by their terms are convertible into or exchangeable for shares of Preferred
Stock, (iv) stock dividends or (v) issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to holders of its
Preferred Stock shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Rights Distribution Date, (i) consolidate with any other Persons
(other than a Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), (ii) merge with or into any other Persons (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more
25
<PAGE> 26
than 50% of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons (other than the Company and/or
any of its Subsidiaries in one or more transactions each of which complies with
Section 11(o) hereof), if (x) at the time of or immediately after such
consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the stockholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Rights
Distribution Date, it will not, except as permitted by Section 23 or Section 26
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Rights Distribution Date (i)
declare a dividend on the outstanding shares of Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
the number of Rights associated with each share of Common Stock then
outstanding, or issued or delivered thereafter but prior to the Rights
Distribution Date, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to such event by a
fraction the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
26
<PAGE> 27
12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 and Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail a
brief summary thereof to each holder of a Rights Certificate (or, if prior to
the Rights Distribution Date, to each holder of a certificate representing
shares of Common Stock) in accordance with Section 25 hereof. The Rights Agent
shall be fully protected in relying on any such certificate and on any
adjustment therein contained.
13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER.
--------------------------------------------------------------------
(a) In the event that, following the Stock Acquisition Date, directly
or indirectly, (x) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such consolidation or merger, (y) any Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof) shall consolidate with, or merger with or into, the Company, and
the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the outstanding shares of Common Stock shall be changed into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or one or more of
its Subsidiaries shall sell or otherwise transfer), in one transaction or a
series of related transactions, assets or earning power aggregating more than
50% of the assets or earning power of the Company and its Subsidiaries (taken as
a whole) to any Person or Persons (other than the Company or any Subsidiary of
the Company in one or more transactions each of which complies with Section
11(o) hereof) (any event described in (x), (y) or (z) being referred to
hereinafter as a "Section 13 Event"), then, and in each such case (except as may
be contemplated by Section 13(d) hereof), proper provisions shall be made so
that: (i) each holder of a Right, except as may be contemplated by Section 7(e)
hereof), shall
27
<PAGE> 28
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price in accordance with the terms of this Agreement, such
number of validly authorized and issued, fully paid, non-assessable and freely
tradeable shares of Common Stock of the Principal Party (as such term is
hereinafter defined), not subject to any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by (i)
multiplying the then current Purchase Price by the number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock for which a Right
is exercisable immediately prior to the first occurrence of a Section 13 Event
(or, if a Section 11(a)(ii) Event has occurred prior to the first occurrence of
a Section 13 Event, multiplying the number of shares (in one one-hundredth (.01)
of a share increments) for which a Right was exercisable immediately prior to
the first occurrence of a Section 11(a)(ii) Event by the Purchase Price in
effect immediately prior to such first occurrence), and (2) dividing the product
(which, following the first occurrence of a Section 13 Event, shall be referred
to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d)(i) hereof) per share of the Common Stock of such Principal Party on the
date of consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of Section 11 hereof shall
apply only to such Principal Party following the first occurrence of a Section
13 Event; (iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common
Stock) in connection with the consummation of any such transaction as may be
necessary to ensure that the provisions hereof shall thereafter be applicable,
as nearly as reasonably may be, in relation to its shares of Common Stock
thereafter deliverable upon the exercise of the Rights; and (v) the provisions
of Section 11(a)(ii) hereof shall be of no effect following the first occurrence
of any Section 13 Event. Notwithstanding anything in this Agreement to the
contrary, Section 13(a) shall not be applicable to a transaction described in
clauses (x) or (y) of Section 13(a) if (A) such transaction is consummated with
a Person or Persons who acquired shares of Common Stock pursuant to an all cash
tender offer for all of
28
<PAGE> 29
the Company's outstanding Common Stock which was approved by the Board of
Directors (or a wholly-owned subsidiary of any such Person or Persons) or, after
the first Stock Acquisition Date, a majority of the Continuing Directors, (B)
the price per share of Common Stock offered in such transaction is not less than
the price per share of Common Stock paid to all holders of Common Stock whose
shares were purchased pursuant to such tender offer and (C) the form of
consideration being offered to the remaining holders of Common Stock is the same
as the form of consideration paid pursuant to such tender offer.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y)
of the first sentence of Section 13(a), the Person that is the issuer of any
securities into which shares of Common Stock of the Company are converted in
such merger or consolidation, and if no securities are so issued, the Person
that is the other party to such merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of
the first sentence of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions; provided, however, that in any such case, (1) if
the Common Stock of such Person is not at such time and has not been
continuously over the preceding 12 month period registered under Section 12 of
the Exchange Act, and such Person is a direct or indirect Subsidiary of another
Person the Common Stock of which is and has been so registered, "Principal
Party" shall refer to such other Person; and (2) in case such person is a
Subsidiary, directly or indirectly, of more than one Person, the Common Stocks
of two or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Stock having the
greatest aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Rights Agent a supplemental
29
<PAGE> 30
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 the Principal Party will
(i) prepare and file a registration statement under the Act, with
respect to the Rights on an appropriate form, and will use its best efforts to
cause such registration statement to (A) become effective as soon as practicable
after such filing and (B) remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply in
all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that a
Section 13 Event shall occur at any time after the occurrence of a Section
11(a)(ii) Event, the Rights which have not theretofore been exercised shall
thereafter become exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x), (y) or (z) of Section 13(a) if such transaction is (i) approved (whether or
not the approval of the Board of Directors is required in connection with such
transaction) by a majority of the Board of Directors of the Company (or, from
and after the Stock Acquisition Date, a majority of Continuing Directors), or
(ii) a merger which follows a cash tender offer approved by the Board of
Directors (or, from and 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, and (x) at the time the Board of
Directors approves such transaction, the Board of Directors is aware of the
identity of any Person (and the identities of all the Person's Affiliates and
Associates) whose beneficial ownership will equal or exceed 10% of the shares of
Common Stock of the Company both before and after such transaction and (y) the
number of shares of Common Stock beneficially owned by any such Person, together
with such Person's Affiliates and Associates both before and after such
transaction.
30
<PAGE> 31
14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Rights Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered holders
of the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For purposes of this Section 14(a), the
current market value of a whole Right shall be the closing price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable. The closing price of the Rights for
any day shall be the last sales price or, if not listed or traded on the NYSE,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by a NYSE member or such other system then in use or, if on any such
date the Rights are not quoted by any organization, the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Rights are
listed or admitted to trading on any national securities exchange, the average
of the closing bid and asked prices as furnished by a professional market maker
making a market in the Rights selected by the Board of Directors of the Company.
If on any such date no such market maker is making a market in the Rights the
fair value of the Rights on such date as determined in good faith by the Board
of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-hundredth (.01) of a share of Preferred Stock) upon exercise of the
Rights or to distribute certificates which evidence fractional shares of
Preferred Stock (other than fractions which are integral multiples of one
one-hundredth (.01) of a share of Preferred Stock). In lieu of fractional shares
of Preferred Stock that are not integral multiples of one one-hundredth (.01) of
a share of Preferred Stock, the Company may pay to the registered holders of
Rights Certificates at the time such Rights are exercised as herein provided an
amount in cash equal to the same fraction of the current market
31
<PAGE> 32
value of one one-hundredth (.01) of a share of Preferred Stock. For purposes of
this Section 14(b), the current market value of one one-hundredth (.01) of the
closing price of a share of Preferred Stock (as determined pursuant to Section
11(d)(ii) hereof) for the Trading Day immediately prior to the date of such
exercise.
(c) Following the occurrence of a Triggering Event, the
Company shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one (1) share of Common Stock. For
purposes of this Section 14(c), the current market value of one (1) share of
Common Stock shall be the closing price of one (1) share of Common Stock (as
determined pursuant to Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
15. RIGHTS OF ACTION. All rights of action in respect of this Agreement
are vested in the respective registered holders of the Rights Certificates (and,
prior to the Rights Distribution Date, the registered holders of the Common
Stock); and any registered holder of any Rights Certificate (or, prior to the
Rights Distribution Date, of the Common Stock), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Rights Distribution Date, of the Common Stock), may, in his or her own behalf
and for his or her own benefit, enforce and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in respect
of, his or her right to exercise the Rights evidenced by such Rights Certificate
in the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and shall be entitled to specific
performance
32
<PAGE> 33
of the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any person subject to this Agreement.
16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by accepting
the same consents and agrees with the Company and the Rights Agent and with
every other holder of a Right that:
(a) prior to the Rights Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) from and after the Rights Distribution Date, the Rights
Certificates are transferable only on the registry books of the Rights Agent if
surrendered at the principal office or offices of the Rights Agent designated
for such purposes, duly endorsed or accompanied by a proper instrument of
transfer and with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Rights Distribution Date, the associated Common
Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise overturned
as soon as possible.
33
<PAGE> 34
17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as
such, of any Rights Certificate shall be entitled to vote, receive dividends or
be deemed for any purpose the holder of the number of shares (in one
one-hundredth (.01) of a share increments) of Preferred Stock or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any Rights
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 24 hereof), or to receive
dividends or subscription rights, or otherwise, until the Right or Rights
evidenced by such Rights Certificate shall have been exercised in accordance
with the provisions hereof.
18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper
34
<PAGE> 35
or document believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper Person or Persons.
19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
---------------------------------------------------------
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at the time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
35
<PAGE> 36
20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Rights Certificates, by their
acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "current market price") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be
36
<PAGE> 37
responsible for any adjustment required under the provisions of Section 11 or
Section 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or Preferred Stock to
be issued pursuant to this Agreement or any Rights Certificate or as to whether
any shares of Common Stock or Preferred Stock will, when so issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct; provided,
however, reasonable care was exercised in the selection and continued employment
thereof.
37
<PAGE> 38
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise of transfer without first consulting with the Company.
21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights
Agent may resign and be discharged from its duties under this Agreement upon 30
days' notice in writing mailed to the Company, and to each transfer agent of the
Common Stock and Preferred Stock, by registered or certified mail, and to the
holders of the Rights Certificates by first-class mail at the expense of the
Company. The Company may remove the Rights Agent or any successor Rights Agent
upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Stock and
Preferred Stock, by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Rights Certificate
(who shall, with such notice, submit his or her Rights Certificate for
inspection by the Company), then any registered holder of any Rights Certificate
may apply to any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company or by
such a court, shall be a corporation organized and doing business under the laws
of the United States or of the State of New York (or of any other state of the
United States so long as such
38
<PAGE> 39
corporation is authorized to do business as a banking institution in the State
of New York in good standing, having a principal office in the State of New York
which is authorized under such laws to exercise corporate trust powers and is
subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50,000,000. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for that purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock and the Preferred Stock, and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
22. ISSUANCE OF NEW RIGHTS CERTIFICATES.
-----------------------------------
(a) Notwithstanding any of the provisions of this Agreement or
of the Rights to the contrary, the Company may, at its option, issue new Rights
Certificates evidencing Rights in such form as may be approved by its Board of
Directors to reflect any adjustment or change in the Purchase Price and the
number or kind or class of shares or other securities or property purchasable
under the Rights Certificates made in accordance with the provisions of this
Agreement. In addition, in connection with the issuance or sale of shares of
Common Stock following the Rights Distribution Date and prior to the redemption
or expiration of the Rights, the Company (a) shall, with respect to shares of
Common Stock so issued or sold pursuant to the exercise of stock options or
under any employee plan or arrangement, or upon the exercise, conversion or
exchange of securities hereinafter issued by the Company, and (b) may, in any
other case, if deemed necessary or appropriate by the Board of Directors of the
Company, issue
39
<PAGE> 40
Rights Certificates representing the appropriate number of Rights in connection
with such issuance or sale: provided, however, that (i) no such Rights
Certificate shall be issued if, and to the extent that, the Company shall be
advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
23. REDEMPTION AND TERMINATION.
--------------------------
(a) The Board of Directors of the Company may, at its option,
at any time prior to the earlier of (i) the Stock Acquisition Date, or (ii) the
Final Expiration Date, redeem all but not less than all the then outstanding
Rights at a redemption price of $.01 per Right, as such amount may be
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"), and the Company may, at its
option pay the Redemption Price in securities, cash or other assets, provided,
however, if the Board of Directors of the Company authorizes redemption of the
Rights on or after the time a Person becomes an Acquiring Person, then there
must be Continuing Directors then in office and such authorization shall require
the concurrence of a majority of such Continuing Directors. In the event a
majority of the Board of Directors of the Company is changed by vote of the
stockholders of the Company, the Rights shall not be redeemable for a period of
10 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 10 Business Day period.
Notwithstanding anything contained in this Agreement to the contrary, the Rights
shall not be exercisable after the first occurrence of a Section 11 (a)(ii)
Event until such time as the Company's right of redemption hereunder has
expired (as such time period may be extended pursuant to this agreement). The
Company may, at its option, pay the Redemption Price in cash, shares of Common
Stock (based on the "Current Market Price" of the Common Stock at the time of
redemption) or any other form of consideration deemed appropriate by the
Board of Directors.
40
<PAGE> 41
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to all such holders at each holder's last address as it appears upon
the registry books of the Rights Agent or, prior to the Rights Distribution
Date, on the registry books of the Transfer Agent for the Common Stock. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
24. EXCHANGE.
--------
(a) The Board of Directors of the Company, may, at its option,
at any time after any Person becomes an Acquiring Person, exchange all or part
of the then outstanding and exercisable Rights (which shall not include Rights
that have become void pursuant to the provisions of Section 7 (e) hereof) for
Common Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio").
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the
right to exercise such Rights shall terminate and the only right thereafter
of a holder of such rights shall be to receive that number of shares of Common
Stock equal to the number of such Rights held by such holder multiplied by
the Exchange Ratio. The Company shall promptly give public notice of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to
41
<PAGE> 42
all of the holders of such Rights act their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Stock for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial exchange
shall be effected pro rata based on the number of Rights (other than Rights
which have become void pursuant to the provisions of Section 11 (a)(ii) hereof)
held by each holder of Rights.
(c) In the event that there shall not be sufficient Common
Stock issued but not outstanding or Common Stock authorized but unissued to
permit any exchange of Rights as contemplated in accordance with this Section
24, the Company shall take all such action as may be necessary to authorize
additional shares of Common Stock for issuance upon exchange of the Rights. In
the event the Company shall, after good faith effort, be unable to take all such
action as may be necessary to authorize such additional shares of Common Stock,
the Company shall substitute, for each share of Common Stock that would
otherwise be issuable upon exchange of a right, common stock equivalents.
(d) The Company shall not be required to issue fractional
shares of Common Stock or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of such fractional shares of Common Stock, there
shall be paid to the registered holders of the Right Certificates with regard to
which such fractional shares of Common Stock would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
share of Common Stock. For the purposes of this subsection (d), the current
market value of a whole share of Common Stock shall be the closing price of a
share of Common Stock (as determined pursuant to Section 11 (d)(i) hereof for
the Trading Day immediately prior to the date of exchange pursuant to this
Section 24.
(e) All actions and decisions by the Board of Directors of the
Company under this Section 24 shall require the affirmative vote of a
majority of the Continuing Directors.
42
<PAGE> 43
25. NOTICE OF CERTAIN EVENTS.
------------------------
(a) In case the Company shall propose, at any time after the Rights
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a cash dividend out of earnings or retained
earnings of the Company)m or (ii) to offer to the holders of Preferred Stock
rights or warrants to subscribe for or to purchase any additional shares of
Preferred Stock or shares of stock of any class or any other securities, rights
or options, or (iii) to effect any reclassification of its Preferred Stock
(other than a reclassification involving only the subdivision of outstanding
shares of Preferred Stock), or (iv) to effect any consolidation or merger into
or with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11 (o) hereof), or to effect any sale
or other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one transaction or a series of related
transactions, of more than 50% of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any other Person or Persons (other
than the Company and/or any of its Subsidiaries in one or more transactions
each of which complies with Section 11 (o) hereof), or (v) to effect the
liquidation, dissolution or winding up of the Company, then, in each such case,
the Company shall give to each holder of a Rights Certificate, to the extent
feasible and in accordance with Section 25 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, distribution of rights or warrants, or the date in which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the shares of Preferred Stock, if any such date is to
be fixed, and such notice shall be so given in the case of any action covered
by clause (i) or (ii) above at least 20 days prior to the record date for
determining holders of the shares of Preferred Stock for purposes of such
action, and in the case of any such other action, at least 20 days prior to the
date of the taking of such proposed action or the date of participation therein
by the holders of the shares of Preferred Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section 11 (a)(ii)
hereof shall occur, then, in any such case, (i) the Company shall as soon as
practicable thereafter give to each
43
<PAGE> 44
holder of a Rights Certificate, to the extent feasible and in accordance with
Section hereof, a notice of the occurrence of such event, which shall specify
the event and the consequences of the event to holders of Rights under Section
11 (a)(ii) hereof, and (ii) all references in the preceding paragraph to
Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if
appropriate, other securities.
26. NOTICES. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, or by overnight delivery service, addressed (until
another address is filed in writing with the Rights Agent) as follows:
Midway Games Inc.
3401 N. California Avenue
Chicago, Illinois 60618
Attention: President
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, or by overnight delivery service,
addressed (until another address is filed in writing with the Company) as
follows:
The Bank of New York
101 Barclay Street, 22W
New York, New York 10280
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Rights Distribution Date, to the holder of certificates
representing shares of Common Stock) shall be sufficiently given or made if sent
by first-class mail, postage prepaid, or by overnight delivery service,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
44
<PAGE> 45
27. SUPPLEMENTS AND AMENDMENTS. Prior to the Rights Distribution Date,
the Company and the Rights Agent shall, if the Company so directs, supplement or
amend any provision of this Agreement without the approval of any holders of
certificates representing shares of Common Stock. For any holder, and after the
Rights Distribution Date, the Company and the Rights Agent shall, if the Company
so directs, supplement or amend this Agreement without the approval of any
holders of Rights Certificates in order (i) to cure any ambiguity, (ii) to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, (iii) to shorten or lengthen any
time period hereunder or (iv) to change or supplement the provisions hereunder
in any manner which the Company may deem necessary or desirable, provided that
no such amendment or supplement shall be made which (x) changes the Redemption
Price, the Final Expiration Date, the Purchase Price or the number of shares (in
one one-hundredth (.01) of a share increments) of Preferred Stock for which a
Right is exercisable or (y) adversely affects the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Affiliate or Associate
of an Acquiring Person); provided, however, that this Agreement may not be
supplemented or amended to lengthen, pursuant to clause (iii) of this sentence,
(A) a time period relating to when the Rights may be redeemed (x) at such time
as the Rights are not then redeemable, or (y) without the approval of a majority
of the Continuing Directors, or (B) any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company or, so long as there is
an Acquiring Person hereunder, from a majority of the Continuing Directors,
which states that the proposed supplement or amendment is in compliance with the
terms of this Section
45
<PAGE> 46
27, the Rights Agent shall execute such supplement or amendment. Prior to the
Rights Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Stock.
28. SUCCESSORS. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure
to the benefit of their respective successors and assigns hereunder.
29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS, ETC. For all
purposes of this Agreement, any calculation of the number of shares of Common
Stock outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding shares of Common Stock of which
any Person is the Beneficial Owner, shall be made in accordance with the last
sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the
Exchange Act. The Board of Directors of the Company shall have the exclusive
power and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including
without limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend this Agreement); provided, however, that from and
after the first Stock Acquisition Date, all references in this Section 29 to the
Board of Directors shall be deemed to refer to a majority of the Continuing
Directors. All such actions, calculations,
46
<PAGE> 47
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject the Board to any liability to the holders of the Rights.
30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Rights
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Rights
Distribution Date, registered holders of the Common Stock).
31. SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
32. GOVERNING LAW. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and
47
<PAGE> 48
for all purposes shall be governed by and construed in accordance with the laws
of such State applicable to contracts made and to be performed entirely within
such State.
33. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
48
<PAGE> 49
34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: MIDWAY GAMES INC.
By: By:
------------------------------- -------------------------------
Name: Name:
Title: Title:
Attest: THE BANK OF NEW YORK
By: By:
------------------------------- -------------------------------
Name: Name:
Title: Title:
49
<PAGE> 50
Exhibit A
---------
CERTIFICATE OF DESIGNATION OF THE VOTING
POWERS, DESIGNATION, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTION OR OTHER SPECIAL RIGHTS AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF THE SERIES A PREFERRED STOCK
--------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
--------------
We, Neil D. Nicastro, Chairman of the Board, and Barbara M. Norman,
Secretary of MIDWAY GAMES INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), DO HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors of
the Corporation by its Amended and Restated Certificate of Incorporation (the
"Certificate"), and, pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, said Board of Directors, at a duly
called meeting held on ______ __, ____, at which a quorum was present and acted
throughout, adopted the following resolutions, which resolutions remain in full
force and effect on the date hereof creating a series of _____ shares of
Preferred Stock having a par value of $0.01 per share, designated as Series A
Preferred Stock (the "Series A Preferred Stock"), out of the total number of
five million (5,000,000) shares of preferred stock of the par value of $0.01
per share (the "Preferred Stock") authorized by the Certificate:
RESOLVED that pursuant to the authority vested in the Board of
Directors in accordance with the provisions of the Certificate, the Board of
Directors does hereby create, authorize and provide for the issuance of the
Series A Preferred Stock having the voting powers, designation, relative,
participating, optional and other special rights, preferences, and
qualifications, limitations and restrictions thereof that are set forth as
follows:
1. DESIGNATION AND AMOUNT. The shares of such shall be designated as
"Series A Preferred Stock" and the number constituting such series shall be
_____.
2. DIVIDENDS AND DISTRIBUTIONS.
---------------------------
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Preferred Stock with respect to dividends, if any, the
holders of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
<PAGE> 51
available for the purpose, quarterly dividends payable in cash on the last day
of January, April, July and October in each year (each such date being referred
to herein as a "Quarterly Dividends Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to, subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends or the outstanding shares of common stock (by
reclassification or otherwise), declared on the common stock, par value $.01
per share, of the Corporation (the "Common Stock") since the immediately
preceding Quarterly Dividend Payment Date. In the event the Corporation shall
at any time after a Rights Declaration Date (the "Right Declaration Date") (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock into a greater number of shares or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue form the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividend shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such share shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 30 days prior to the date fixed
for the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall
have the following voting rights:
<PAGE> 52
(A) Subject to the provisions for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of the stockholders of the Corporation. In
the event the Corporation shall at amy time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock
(ii) subdivide the outstanding Common Stock into a greater number of shares, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of shares
of Series A Preferred Stock were entitled immediately prior to such event shall
be adjusted by multiplying such number by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as outlawries provided herein or by law, the holders of shares
of Series A Preferred Stock and the holders of Shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(C) Except as set forth herein, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
4. CERTAIN RESTRICTIONS.
--------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock, as provided in Section 2 hereof, are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except dividends
paid ratably on the Series A Preferred Stock and all such parity stock on which
dividends are payable, or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares
<PAGE> 53
of any stock of the Corporation ranging junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration of any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity with the
Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith with result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP.
--------------------------------------
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received $100.00 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the "Series A Preferred
Liquidation Preference"). Following the payment of the full amount of the Series
A Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series A Preferred Stock unless, prior thereto, the holders
of shares of Common Stock shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in
subparagraph C below to reflect such events as stock splits, stock dividends and
recapitalization with respect to the Common Stock) (such number in clause (ii),
the "Adjustment Number"). Following the payment of the full amount of the Series
A Liquidation Preference and the Common Adjustment in respect of all outstanding
shares of Preferred Stock and Common Stock, respectively, holders of Series A
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ration of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
<PAGE> 54
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of Preferred Stock if any, which
rank on a parity with the Series A Preferred Stock, then such remaining assets
shall be distributed ratably to the holders of such parity shares in proportion
to their respective liquidation preferences. In the event, however, that there
are not sufficient assets available to permit payment in full of the Common
Adjustment, then such remaining assets shall be distributed ratably to the
holders of Common Stock.
(c) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock into a greater number
of shares, or (iii) combine the outstanding Common Stock into a smaller number
of shares, then in each such case the Adjustment Number in effect immediately
prior to such event shall be adjusted by multiplying such Adjustment Number by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of Series A
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock into a greater number of shares, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be
redeemable.
9. RANKING. The Series A Preferred Stock shall rank senior to all other
series of the Corporation's Preferred Stock as to the payment of dividends and
the distribution of assets, unless the terms of any such series shall provide
otherwise.
10. AMENDMENT. The Certificate shall not be further amended in any manner
which would materially alter or change the powers, preferences or special rights
of the Series A Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a
<PAGE> 55
majority or more of the outstanding shares of Series A Preferred Stock, voting
separately as a class.
11. FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate of
Designation and do affirm the foregoing as true under the penalties of perjury
this __ day of ___, ___.
---------------------------------------
Neil D. Nicastro, Chairman of the Board
Attest:
- -----------------------------
Barbara M. Norman, Secretary
6
<PAGE> 56
Exhibit B
---------
[Form of Rights Certificate]
Certificate No. R- ______ Rights
NOT EXERCISABLE AFTER DECEMBER 31, 2006 OR EARLIER UNDER CERTAIN
CIRCUMSTANCES OF IF REDEEMED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO
REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT, ON THE
TERMS SET FROTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES,
RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OR SUCH
RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS
CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR IS AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS
RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL
AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH
AGREEMENT.]
Rights Certificate
MIDWAY GAMES INC.
This certifies that , or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entities the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of October 24, 1996 (the "Rights Agreement"), between
Midway Games Inc., a Delaware corporation (the "Company"), and The Bank of New
York (the "Rights Agent"), to purchase from the Company at any time prior to
5:00 P.M. (New York City time) on the earlier to occur on (i) December 31,
2006; and (ii) the time at which the Rights are redeemed or exchanged as
provided in the Rights Agreement, at the office or offices of the Rights Agent,
designated for such purpose, or its successors as Rights Agent, one
one-hundredth (.01) of a fully paid, non-assessable share of Series A Preferred
Stock (the "Preferred Stock") of the Company, at a purchase price of $___ per
one-one hundredth (.01) of a share (the "Purchase Price"), upon presentation
and surrender of this Rights
<PAGE> 57
Certificate with the Form of Election to Purchase and related Certificate duly
executed. The Purchase Price shall be paid in cash. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
share set forth above, are the number and Purchase Price as of_________ ,_____,
based on the Preferred Stock as constituted as such date.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined
in the Rights Amendment), if Rights evidenced by this Rights Certificate are
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of
any such Acquiring Person (as such terms are defined in the Rights Agreement) or
(ii) a transferee of any such Acquiring Person, Associate or Affiliate, such
Rights shall become null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such Section 11(a)(ii)
Event.
As provided in the Rights Agreement, the Purchase Price and the number and
kind of shares of Preferred Stock or other securities, which may be purchased
upon the exercise of the Rights evidenced by this Rights Certificate are subject
to modification and adjustment upon the happening of certain events, including
Triggering Events (as such term is defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
reference to the Rights Agreement is hereby made for a full description of the
rights, limitations of rights, obligations, duties and immunities hereunder of
the Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Rights Agent.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office or offices of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of shares (in one-hundredth (.01) of a
<PAGE> 58
share increments) of Preferred Stock as the Rights evidenced by the Rights
Certificate or Rights Certificates surrendered shall have entitled such holder
to purchase. If this Rights Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Rights Certificate
or Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company at its option at a redemption
price of $.01 per Right in cash or in shares of Common Stock at any time prior
to the earlier of the close of business on (i) the tenth day following the Stock
Acquisition Date (as such time period may be extended pursuant to the Rights
Agreement), and (ii) the Final Expiration Date (as defined in the Rights
Agreement). Under certain circumstances set forth in the Rights Agreement, the
decision to redeem shall require the concurrence of a majority of the
Continuing Directors.
No fractional shares of Preferred Stock will be issued upon the exercise of
any Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth (.01) of a share of Preferred Stock, which may,
at the election of the Company, be evidenced by depository receipts), but in
lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of shares of Preferred Stock
or any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or, to receive notice of meetings or
other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Rights Certificate shall have been
exercised as provided in the Rights Agreement.
<PAGE> 59
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal.
ATTEST: MIDWAY GAMES INC.
- --------------------------- By:
------------------------
Name:
Title:
Countersigned:
- ---------------------------
By:
-----------------------
Name:
Title:
4
<PAGE> 60
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ____________________________________________________________
hereby sell, assigns and transfer unto ________________________________________
_______________________________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ________ Attorney, to
transfer the within Rights Certificate on the books of the within-named Company,
with full power of substitution.
Dated: _______________, ______
______________________________
Signature
Signature Guaranteed:
<PAGE> 61
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate / / is / / is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it / /
did / / did not acquire the Rights evidenced by this Rights Certificate from any
Person who is or was an Acquiring Person or an Affiliate or Associate of an
Acquiring person.
Dated:
------------, ------ ---------------------------------
Signature
Signature Guaranteed:
NOTICE
------
The signature to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
2
<PAGE> 62
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to exercise Rights
represented by the Rights Certificate.)
TO: MIDWAY GAMES INC.
The undersigned hereby irrevocably elects to exercise Rights
represented by this Rights Certificate to purchase the shares of Preferred
Stock issuable upon the exercise of the Rights (or such other securities of
Midway Games Inc. or of any other person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be
issued in the name of and delivered to:
Please insert social security or
other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security or
other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated:
-------------, ------ -----------------------------------
Signature
Signature Guaranteed:
<PAGE> 63
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Certificate / / are / / are not
being exercised by or on behalf of a Person who is or was an Acquiring Person
or an Affiliate or Associate of any such Acquiring Person (as such terms are
defined in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned
/ / did / / did not acquire the Rights evidenced by this Rights Certificate
from any Person who is or was an Acquiring Person or an Affiliate or Associate
of an Acquiring person.
Dated:
--------------, ------- --------------------------------
Signature
Signature Guaranteed:
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
4
<PAGE> 64
Exhibit C
---------
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED STOCK
The following is a brief description of the Company's Rights Agreement,
dated as of October 24, 1996 (the "Right Agreement"), between the Company and
The Bank of New York, as Rights Agent.
The Rights Agreement provides that one Right will be issued with each share
of the Common Stock issued (whether originally issued or form the Company's
treasury) on or after the effective date of the initial public offering of the
Company's Common Stock (the "Offering") and prior to the Rights Distribution
Date (as defined). The Rights are not exercisable after 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, par
value $.01 per share (the "Preferred Stock"), at an exercise price of $100,000,
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 (as defined), 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 Industries Inc., 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
<PAGE> 65
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 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 (o after the Stock Acquisition Date, a
majority of Continuing Directors) for all outstanding shares of Common Stock so
long as 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 or 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
2
<PAGE> 66
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.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form S-1 dated
September 13, 1996, as amended. A copy of the Rights Agreement is available
free of charge from the Rights Agent. This summary description of the Rights
does not purport to be complete and is qualified in its entirety by reference
to the Rights Agreement, which is incorporated herein by reference.
<PAGE> 1
EXHIBIT 5
SHACK & SIEGEL, P.C.
530 FIFTH AVENUE
NEW YORK, NY 10035
(212) 782-0700
October 25, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Midway Games Inc. -- Registration Statement
on Form S-1, as amended (File No. 333-11919)
--------------------------------------------
Dear Sir or Madam:
Reference is made to the Registration Statement on Form S-1 (File No.
333-11919) filed September 13, 1996, as amended (the "Registration Statement"),
with the Securities and Exchange Commission by Midway Games Inc., a Delaware
corporation (the "Company"), relating to the Company's proposed offer to sell
5,100,000 (5,865,000 if the underwriters' over-allotment option is exercised in
full) shares of common stock (the "Shares").
We advise you that we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Certificate of Incorporation
and By-Laws of the Company, and such other documents, instruments and
certificates of officers and representatives of the Company and public
officials, and we have made such examination of law as we have deemed
appropriate as the basis for the opinion hereinafter expressed. In making such
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
to original documents of documents submitted to us as certified or photostatic
copies.
Based upon the foregoing, it is our opinion that the Shares when
issued and sold in accordance with the terms described in the Prospectus
relating to the Shares forming a part of the Registration Statement (the
"Prospectus") will be validly issued, fully paid and non- assessable.
<PAGE> 2
Securities and Exchange Commission - 2 - October 25, 1996
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and we further consent to the reference made to us under
the caption "Legal Matters" in the Prospectus.
Very truly yours,
SHACK & SIEGEL, P.C.
By: /s/ Paul S. Goodman
----------------------------
Paul S. Goodman, Esq.
<PAGE> 1
EXHIBIT 10.4
PATENT LICENSE AGREEMENT
This Agreement, effective as of July 1, 1996, is made by and between
Williams Electronics Games, Inc. ("Williams"), a Delaware corporation having an
office at 3401 North California Avenue, Chicago, Illinois 60618, WMS Gaming
Inc. ("Gaming"), a Delaware corporation having an office at 3401 North
California Avenue, Chicago, Illinois 60618, and Midway Games Inc. ("Midway"), a
Delaware corporation having an office at 3401 North California Avenue, Chicago,
Illinois 60618.
WHEREAS Williams, Gaming and Midway are separate corporations engaged
in the design and manufacture of coin-operated pinball games, gaming devices
and coin-operated video games, respectively; and
WHEREAS Williams, Gaming and Midway are all majority owned
subsidiaries of WMS Industries Inc.; and
WHEREAS Williams, Gaming and Midway desire to use the inventions
developed by each corporation by its employees;
NOW, THEREFORE Williams, Gaming and Midway hereby understand and agree
as follows:
1. License Grants
(a) Williams grants to Midway a royalty-free,
non-exclusive license to make, use and sell any invention described or claimed
in any patent owned by or assigned to Williams, provided that such invention
was conceived and prototyped prior to the Separation Date (as defined below).
<PAGE> 2
(b) Williams grants to Gaming a royalty-free,
non-exclusive license to make, use and sell any invention described or claimed
in any patent owned by or assigned to Williams, provided that such invention
was conceived and prototyped prior to the Separation Date.
(c) Midway grants to Williams a royalty-free,
non-exclusive license to make, use and sell any invention described or claimed
in any patent owned by or assigned to Midway, provided that such invention was
conceived and prototyped prior to the Separation Date.
(d) Midway grants to Gaming a royalty-free, non-exclusive
license to make, use and sell any invention described or claimed in any patent
owned by or assigned to Midway, provided that such invention was conceived and
prototyped prior to the Separation Date.
(e) Gaming grants to Williams a royalty-free,
non-exclusive license to make, use and sell any invention described or claimed
in any patent owned by or assigned to Gaming, provided that such invention was
conceived and prototyped prior to the Separation Date.
(f) Gaming grants to Midway a royalty-free, non-exclusive
license to make, use and sell any invention described or claimed in any patent
owned by or assigned to Gaming, provided that such invention was conceived and
prototyped prior to the Separation Date.
As to each of the licenses granted in Paragraphs (a) through (f)
above, the "Separation Date" shall mean the date on which the majority
ownership of the licensor and the majority ownership of the licensee ceases to
be the same.
2. Term and Territory. The licenses granted in Paragraphs 1(a)
through (f) above shall continue for the life of the patents which are the
subject matter thereof (unless earlier terminated in accordance with Paragraph
6 hereof) and shall be effective in all of the territories
2
<PAGE> 3
in which such patents may be granted (whether granted before or after the
applicable Separation Date.)
3. Sublicenses. Each of the licensees hereunder may exercise its
rights under a license granted to it hereunder through (a) any entity directly
or indirectly controlling, controlled by, or under common control with it (such
entity being an "Affiliate"), and (b) third parties which manufacture
components or products which are to be sold, leased or otherwise disposed of by
the licensee or its Affiliates, or incorporated into products which will be
sold, leased or otherwise disposed of by the licensee or its Affiliates.
Except as otherwise expressly provided in this Paragraph 3, none of the
licensees hereunder may sublicense its rights under the licenses granted to it
hereunder.
4. Improvements. As to each license granted in Paragraphs 1(a)
through (f) above, the licensee grants to the licensor a royalty- free,
non-exclusive license to any patents obtained on any improvements made by the
licensee or its Affiliates relating to the subject matter of the license, which
shall last for the term of the patents obtained on the improvements and shall
include all territories in which such patents on the improvements may be
granted. For the avoidance of doubt, the licenses granted under this Paragraph
4 are subject to Paragraphs 3, 5 and 6 hereof.
5. Notice. Each licensee hereunder shall affix on all products
embodying patents licensed to it hereunder a notice to the public of the
patent, or, if this cannot be done, the licensee shall fix the notice on the
packaging for the product.
6. Termination. As to each invention for which a license is
granted hereunder, if the licensee fails after fifteen (15) days' written
notice from the licensor to comply with the
3
<PAGE> 4
licensee's material obligations under this Agreement as they relate to such
license, the licensor may terminate such license for such invention. If a
party (the "Bankrupt Party") shall be unable to pay its liabilities when due,
or shall make any assignment for the benefit of creditors, or shall file any
petition under any federal or state bankruptcy statute, or be adjudicated a
bankrupt or insolvent, or if any receiver is appointed for its business or
property, or if any trustee in bankruptcy shall be appointed under the laws of
the United States or any state, and in the case of an involuntary filing only,
such impediment is not removed within thirty (30) days from the inception of
same, either of the other parties may terminate the licenses it has granted
hereunder to the Bankrupt Party upon thirty (30) days' written notice.
7. General.
(a) Each party shall have the right, at its election, to
assign this Agreement to any of its Affiliates or to any entity acquiring
substantially all of its assets. Except as expressly provided in this
Agreement, each party shall have no right to assign or sublicense any of its
rights or obligations hereunder without the prior, written approval of the
other parties hereto.
(b) The entire understanding between the parties hereto
relating to the subject matter hereof is contained herein and supersedes all
other agreements relating to the subject matter hereof, including, without
limitation, the Agreement dated August 1, 1988 between Williams and Midway.
This Agreement cannot be changed, modified, amended or terminated except by an
instrument in writing executed by all of the parties hereto.
(c) 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
4
<PAGE> 5
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.
(d) This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between parties and no
party shall have any right to obligate or bind either of the other parties in
any manner whatsoever, and nothing herein contained shall give or is intended
to give any rights of any kind to any third persons.
(e) 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.
(f) 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.
(g) In the event of litigation or arbitration between the
parties arising out of or relating to this Agreement, the prevailing party will
be entitled to recover court or arbitration costs and reasonable fees of
attorneys, accountants and expert witnesses incurred by such a party in
connection with the action or arbitration.
(h) Each of the parties hereto consents to the exclusive
jurisdiction and venue of the state and federal courts of the State of
Illinois, located in Chicago, with respect to any matter relating to this
Agreement, and each party hereto consents to the personal jurisdiction of such
courts and shall subject itself to such personal jurisdiction. The parties
agree that service
5
<PAGE> 6
of process may be made upon them in any manner permitted by the rules of such
courts and the laws of the State of Illinois.
(i) None of the parties shall be liable to the other
parties for incidental, consequential, special or other indirect damages
arising out of or relating to this Agreement, even if informed of the
possibility thereof.
(j) 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; (ii) by its being sent by telefax or telex (confirmed in
writing); or (iii) five days after its being mailed, registered or certified,
return-receipt requested in a U.S. Post Office addressed to the party's address
as the party may designate by notice given as aforesaid. A copy of any notice
sent to Gaming or Williams shall also be sent to Vice President and General
Counsel, WMS Industries Inc., 3401 North California Avenue, Chicago, Illinois
60618.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this agreement through
their duly authorized representatives.
WILLIAMS ELECTRONICS GAMES, INC.
By:
--------------------------------
Name:
Title:
WMS GAMING INC.
By:
--------------------------------
Name:
Title:
MIDWAY GAMES INC.
By:
--------------------------------
Name:
Title:
7
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
AGREEMENT dated as of July 1, 1996, by and between MIDWAY GAMES INC.
("Midway"), a Delaware corporation with offices at 3401 North California
Avenue, Chicago, IL 60618 and NEIL D. NICASTRO ("Nicastro"), residing at 999
North Sheridan Road, Lake Forest, Illinois 60045.
W I T N E S S E T H
WHEREAS, Midway desires to employ Nicastro and Nicastro is willing to
undertake such employment on the terms and subject to the conditions
hereinafter set forth:
NOW, THEREFORE, in consideration of the mutual covenants, conditions
and agreements hereinafter set forth, the parties hereto agree as follows:
1. Midway hereby employs Nicastro, and Nicastro agrees to be
employed by Midway pursuant hereto, to perform the duties of the Chairman of
the Board, President, Chief Executive Officer and Chief Operating Officer of
Midway and such other supervisory or executive duties on behalf of Midway as
the Board of Directors of Midway shall determine. Except with the consent of
Nicastro, the principal office in which he shall perform his duties shall be
located in Chicago, Illinois, or its environs.
2. The term of Nicastro's employment hereunder shall commence on
the date hereof and terminate on June 30, 2001 (the "Original Term"); provided,
however, that the term of Nicastro's employment shall be deemed automatically
extended from time to time such that the term of such employment shall at no
time be less than three years (the "Extended Term"); and provided further, that
Nicastro's services hereunder may be terminated by either party, effective upon
expiration of the Original Term or the Extended Term upon written notice from
the
<PAGE> 2
terminating party to the other party dated and received at least three (3)
years prior to the respective termination date, and, provided further, that in
the event of the "total disability" of Nicastro (as hereinafter defined), any
right of Midway to terminate Nicastro's services shall be subject to the
provisions of Paragraph 7 of this Agreement.
3. (a) Midway shall pay to Nicastro in respect of each year
of his employment hereunder, a base salary at the rate of $300,000 per annum,
payable in equal bi-weekly installments, or such greater amount as the Board of
Directors of Midway shall from time to time determine.
(b) Commencing with the fiscal year of Midway beginning
July 1, 1996 and each fiscal year thereafter during the term of this Agreement,
Nicastro shall be paid a bonus in the amount equal to two percent (2%) of
"pre-tax income" multiplied by the percentage of Midway common stock
outstanding which is not owned by WMS Industries Inc. ("WMS"). The term
"pre-tax income" means the "Income before tax provision and extraordinary
items" of Midway as reported on its audited consolidated statements of
operations with respect to the applicable fiscal year, but modified to
eliminate the effect of (A) any adjustment for taxes, penalties or interest
payable with respect to any fiscal year beginning before July 1, 1996 and (B)
the bonus payable pursuant to this subparagraph, both such modifications to be
determined by the Board of Directors in accordance with generally accepted
accounting principles. The amount of the bonus, if any, to which Nicastro
becomes entitled pursuant to this subparagraph shall be paid within fifteen
(15) days after Midway releases its audited financial statements for the
applicable fiscal year. With respect to the fiscal year of Midway during which
Nicastro's employment hereunder terminates for any reason, Nicastro shall be
entitled to a pro-rata bonus
2
<PAGE> 3
based upon the number of days in such fiscal year during which Nicastro was
employed by Midway. If requested by Nicastro, Midway shall make quarterly
interest free advances against the bonus in amounts mutually agreeable to
Midway and Nicastro.
(c) In addition to other compensation hereunder, Nicastro
shall be entitled to participate in and receive the benefits of all pension and
retirement plans, bonus plans, health, life, hospital, medical and dental
insurance (including reimbursement for all medical and dental expenses incurred
by him, his spouse and his children twenty-one (21) years of age or younger, to
the extent such expenses are not otherwise reimbursed by insurance provided by
WMS or Midway, as the case may be) and all other employee benefits and
perquisites generally made available to employees of Midway to the extent that
WMS fails for any reason to provide the aforementioned benefits and perquisites
to Nicastro pursuant to the WMS Agreement (as hereinafter defined). Nicastro
shall also be entitled to a paid vacation of not less than four (4) weeks per
annum. In addition, Midway shall provide Nicastro with One Million Dollars
($1,000,000) in additional life insurance coverage, payable to such beneficiary
as Nicastro shall designate from time to time, in such form and manner as
Midway and Nicastro shall determine as appropriate in order to minimize the
income tax consequences of such coverage to Nicastro.
4. During the term of this Agreement, Midway shall reimburse
Nicastro for all expenses reasonably incurred by him in connection with the
business of Midway, including, but not limited to, such items as entertainment,
traveling, hotel, gifts and similar items as shall be deemed necessary and
commensurate with his position as Chairman of the Board, President, Chief
Executive Officer and Chief Operating Officer of Midway. Nicastro will present
receipts or vouchers for any requested reimbursements in accordance with
Midway's normal policy and
3
<PAGE> 4
will comply with any appropriate procedures established by Midway to provide
for payment or withholding of income or other taxes as may be required by law
to be paid or withheld in connection with any such reimbursements.
5. (a) Nicastro agrees that, throughout the period in which
he is required to perform services hereunder, he will devote his attention,
knowledge and skills faithfully, diligently and to the best of his ability in
furtherance of the business of Midway and businesses in which Midway has an
interest, and in the full performance of the duties assigned to him hereunder,
subject at all times, to the direction and control of the Board of Directors of
Midway, and he shall not, throughout such period, enter into the service of, or
be employed in any capacity or for any purpose whatsoever by, any person, firm
or corporation other than Midway and businesses in which Midway has an
interest, except as permitted in this Paragraph 5(a) and in Paragraph 5(b)
below with respect to Nicastro's activities on behalf of WMS, if such other
services or employment would interfere with the performance of his duties
hereunder. Nothing contained in this paragraph shall be deemed to prohibit
Nicastro from (i) investing his assets or funds, so long as the business of any
such entity in which he shall make his investments shall not be in direct
competition with that of Midway, except that Nicastro may invest in a corporate
entity in competition with Midway if such corporation's stock is listed for
trading on a national stock exchange or traded in the over-the-counter market
and Nicastro's holdings therein represent less than 5% of the outstanding stock
thereof; or (ii) acting as a director, trustee, officer, or upon a committee of
any other firm, trust or corporation where such positions do not unreasonably
interfere with the services to be rendered by Nicastro hereunder. Midway
acknowledges that Nicastro may continue to perform services for businesses in
which Midway
4
<PAGE> 5
had an interest at the time his services commenced even after Midway's interest
terminates, so long as such services do not unreasonably interfere with the
services to be rendered by Nicastro hereunder.
(b) Midway acknowledges that Nicastro currently serves as
Chairman of the Board of Directors, President, Chief Executive Officer and
Chief Operating Officer of WMS, the parent company of Midway, pursuant to a
Third Amended and Restated Employment Agreement dated as of July 1, 1996
between WMS and Nicastro, and that he will divide his time and attention
between the business of Midway and the business of WMS in such manner as he
shall consider appropriate. Any termination of this Agreement by Midway by
reason of Midway's determination that Nicastro has not devoted sufficient time
and attention to the business of Midway shall be deemed a termination in
violation of this Agreement.
6. (a) In the event Nicastro shall die during the term of
this Agreement but prior to his "Retirement Date" (as hereinafter defined),
Midway shall, in addition to the benefits, which may become payable pursuant to
subparagraph 3(c), pay death benefits as hereinafter provided to such person or
persons as Nicastro shall, at his option, from time to time designate by
written instrument delivered to Midway, each subsequent designation to be
deemed to revoke all prior designations, or if no such designation is made, to
his estate, for a period of seven (7) years, in equal monthly payments
commencing the first day of the first month following death. Such annual death
benefit shall be equal to one-half (1/2) of the aggregate annual base salary
payable to Nicastro as of the date of death, but in no event shall be less than
One Hundred Fifty Thousand Dollars ($150,000) per annum.
5
<PAGE> 6
(b) "Retirement Date" shall mean the later to occur of
(i) the date on which Nicastro shall become forty-five (45) years old or (ii)
the date of the termination of Nicastro's employment by Midway. Midway will
pay to Nicastro on the first day of the first month following his Retirement
Date, and on the first day of each month thereafter for a period of seven (7)
years in equal monthly payments, an annual retirement income benefit equal to
one-half (1/2) of the aggregate annual base salary payable to Nicastro as of
the date of termination of his employment by Midway, but in no event less than
One Hundred Fifty Thousand Dollars ($150,000) per annum. In the event that
Nicastro shall die after his Retirement Date, but before the retirement
benefits provided for herein shall be fully paid, the balance thereof shall
thereafter be payable in monthly installments to his estate.
(c) The death and retirement benefits provided by
subparagraphs 6(a) and (b) hereof shall be payable notwithstanding the
termination of Nicastro's employment by Midway for any reason or the
resignation of Nicastro at any time after the date hereof.
7. Nicastro shall receive full compensation for any period of
illness or incapacity during the term of his employment hereunder.
Notwithstanding the foregoing, if such illness or incapacity shall have
disabled Nicastro from performing his duties hereunder for a period of more
than six (6) consecutive months (hereinafter referred to as "total
disability"), Midway shall thereafter have the right to terminate Nicastro's
employment under this Agreement upon giving at least thirty (30) days' written
notice of its intention to do so. If Nicastro shall resume his duties within
thirty (30) days following the receipt of such notice, and shall perform such
duties on a regular basis for two (2) consecutive months thereafter, this
Agreement and Nicastro's employment hereunder shall continue in full force and
Midway's notice of intention to terminate
6
<PAGE> 7
shall have no further force or validity. In the event that Midway shall give
such notice of termination and Nicastro shall not timely resume his duties
hereunder, Nicastro's employment under this Agreement shall terminate on the
date set forth in the notice but all other applicable terms of this Agreement,
including, among other things, the obligation of Midway to pay death and
retirement benefits under Paragraph 6 above, shall remain in full force and
effect.
8. Subject to Nicastro's duties to WMS and except as permitted in
Paragraph 5 hereof, Nicastro covenants and agrees as follows:
(a) During the period of his employment hereunder, and
for a further period of one (1) year thereafter he shall not, directly or
indirectly own, manage, operate, join, control, participate in, invest in, or
otherwise be connected with, in any manner, whether as an officer, director,
employee, partner, investor or otherwise, or allow his name to be used in any
business or enterprise which competes in any way with Midway in any city or
trade territory in the United States (including Puerto Rico) or Canada where
Midway is directly or indirectly, through distributors or others, engaged in
the operation of its business.
(b) During the term of this Agreement and thereafter, he
shall hold in a fiduciary capacity for the benefit of Midway, all information,
knowledge and data relating to or concerned with its operations, sales,
businesses and affairs, and he shall not disclose or divulge any such
information, knowledge or data to any person, firm or corporation other than to
Midway or its designees, except as may otherwise be required in connection with
the business and affairs of Midway.
Nicastro acknowledges that the provisions of this Paragraph 8 are
reasonable and necessary for the protection of Midway, and that each provision,
and the period or periods of
7
<PAGE> 8
time, geographic areas and types and scope of restrictions on the activities
specified herein are, and are intended to be, divisible. In the event that any
provision of this Paragraph 8, including any sentence, clause or part hereof,
shall be deemed contrary to law or invalid or unenforceable in any respect by a
court of competent jurisdiction, the remaining provisions shall not be
affected, but shall, subject to the discretion of such court, remain in full
force and effect and any invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same valid and enforceable.
Midway acknowledges that Nicastro's duties to WMS may, at such time as WMS is
permitted to engage in businesses competitive with that of Midway, include
activities competitive with that of Midway and that any termination of this
Agreement by Midway by reason of the foregoing shall be deemed a termination in
violation of this Agreement.
9. (a) Except as provided in the next succeeding
subparagraph, in the event of a breach or threatened breach by either Midway or
Nicastro of any obligations under this Agreement, the parties hereto
acknowledge that Midway or Nicastro, as the case may be, will not have an
adequate remedy at law, and shall be entitled to such equitable and injunctive
relief as may be available to restrain violations of the provisions of this
Agreement. Nothing in this subparagraph shall be construed as prohibiting the
parties hereto from pursuing any other remedies available for such breach or
threatened breach, including the recovery of damages for such breach or
threatened breach.
(b) Notwithstanding anything contained in the preceding
subparagraph to the contrary:
8
<PAGE> 9
(i) (A) If Midway terminates Nicastro's
employment in violation of this Agreement and Nicastro gives
the written notice to Midway provided for in subparagraph 9(c)
hereof; or (B) if at any time during the term of this
Agreement, individuals who presently constitute the Board of
Directors of Midway, or who have been recommended for election
to the Board by two-thirds of the Board consisting of
individuals who are either presently on the Board or such
recommended successors (such present directors or recommended
directors being hereafter referred to as "Acceptable
Directors"), cease for any reason to constitute at least a
majority of such Board, and Nicastro gives the written notice
to Midway provided for in subparagraph 9(d) hereof, Midway
shall pay to Nicastro within fifteen (15) days (or, if later,
five (5) business days after Nicastro's delivery of the notice
of determination described in subparagraph 9(b)(iii) below)
after such termination pursuant to clause (A) or (B) hereof,
as the case may be, as severance pay and liquidated damages,
in lieu of any other rights or remedies which might otherwise
be available to him under this Agreement, and without
mitigation of any kind or amount, whether or not Nicastro
shall seek or accept other employment, a lump sum payment
equal in amount to the sum of:
(I) the aggregate base salary which would have
been payable to Nicastro pursuant to subparagraph 3(a) of this
Agreement during the remaining term hereof (for purposes of
this subparagraph 9(b)(I), the rate of Nicastro's base salary
shall be deemed to be Nicastro's base salary at the highest
annual rate in effect during the one-year period immediately
preceding termination);
(II) the aggregate bonus which would have been
payable to Nicastro pursuant to subparagraph 3(b) of this
Agreement during the remaining term hereof, assuming pre-tax
income of Midway during the remaining term hereof is
9
<PAGE> 10
earned at the highest level achieved in either of the last two
(2) full fiscal years prior to such termination; and
(III) the aggregate retirement benefits which would
have been payable to Nicastro pursuant to subparagraph 6(b) of
this Agreement (for purposes of this subparagraph 9(b)(III),
Nicastro's Retirement Date shall be deemed the date of such
termination if such Retirement Date has not yet actually
occurred);
but in no event shall the payment pursuant to this
subparagraph 9(b)(i) be less than three times Nicastro's base
salary at the highest annual rate in effect during the
one-year period immediately preceding termination. Each of
the payments provided for in this subparagraph 9(b)(i) shall
be paid in full, without discount to present value. In
addition to such lump sum payment to Nicastro, Nicastro shall
have the right, exercisable within thirty (30) days after such
termination pursuant to clauses (A) or (B) hereof, to sell to
Midway any or all options held by Nicastro to purchase Midway
common stock and options to purchase the securities of any
other company at least 20% of the voting securities of which
are owned by Midway (a "Related Company") at a price per
option equal to the amount by which (i) the average closing
price of the Midway common stock or the securities of such
Related Company, as the case may be, on the New York Stock
Exchange (or other applicable trading market if not listed on
the New York Stock Exchange) during the thirty-day period
immediately preceding the date on which he notifies Midway of
his election to sell such options plus the fair market value
per share of other securities or assets which Nicastro would
be entitled to receive upon exercise of such options exceeds
(ii) the option exercise price for each such share. All
options not yet fully exercisable shall be deemed fully
exercisable for
10
<PAGE> 11
purposes of the foregoing computation. Such payments shall be
made by Midway at the time provided in this subparagraph
9(b)(i) and shall not require any further authorization or
approval of the Board of Directors of Midway.
(ii) If it shall be determined that any amount
payable under subparagraph 9(b) by Midway to or for the
benefit of Nicastro (a "Base Payment") would be subject to the
excise tax (the "Excise Tax") imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), then
Nicastro shall be entitled to receive an additional payment
(the "Gross-up Payment") in an amount such that the net amount
retained by Nicastro, after the calculation and deduction of
any Excise Tax on the Base Payment and any federal, state, and
local income taxes and Excise Tax on the Gross-Up Payment,
shall be equal to the Base Payment. In determining this
amount, the amount of the Gross-Up Payment attributable to
federal income taxes shall be reduced by the maximum reduction
in federal income taxes that could be obtained by the
deduction of the portion of the Gross- Up Payment attributable
to state and local income taxes. Finally, the Gross-Up
Payment shall be reduced by income or Excise Tax withholding
payments made by Midway to any federal, state, or local taxing
authority with respect to the Gross-Up Payment that was not
deducted from compensation payable to Nicastro.
(iii) All determinations required to be made under
subparagraph 9(b)(ii), including whether and when a Gross-Up
Payment is required, the amount of such Gross-Up Payment, and
the assumptions to be utilized in arriving at such
11
<PAGE> 12
determination, except as specified above, shall be made by
Midway's independent auditors (the "Accounting Firm"), which
shall provide detailed supporting calculations both to Midway
and Nicastro within fifteen business days after the receipt of
notice from Nicastro that there should be a Gross-Up Payment.
The determination of tax liability made by the Accounting Firm
shall be subject to review by Nicastro's tax advisor, and, if
Nicastro's tax advisor does not agree with the determination
reached by the Accounting Firm, then the Accounting Firm and
Nicastro's tax advisor shall jointly designate a nationally
recognized public accounting firm, which shall make the
determination. All fees and expenses of the accountants and
tax advisors retained by either Nicastro or Midway shall be
borne by Midway. Any Gross-Up Payment shall be paid by Midway
to Nicastro within five days after the receipt of the
determination. Any determination by a jointly designated
public accounting firm shall be binding upon Midway and
Nicastro.
(c) Midway shall be deemed to have terminated Nicastro's
employment in violation of this Agreement for all purposes hereunder, if, among
other things, without his prior written consent:
(i) Nicastro is placed in any position of lesser
stature than that of Chairman of the Board, President, Chief
Executive Officer and Chief Operating Officer of Midway; is
assigned duties inconsistent with such positions or duties
which, if performed, would result in a significant change in
the nature or scope of powers, authority, functions or duties
inherent in such positions on the date
12
<PAGE> 13
hereof; is assigned performance requirements or working
conditions which are at variance with the performance
requirements and working conditions in effect on the date
hereof; or is accorded treatment on a general basis which is
in derogation of his status as President and Chief Executive
Officer;
(ii) Nicastro ceases to serve as a member of the
Board of Directors of Midway;
(iii) Midway discontinues or reduces (from the
highest level in effect during the term of this Agreement) the
amount of base salary or bonus payable to Nicastro pursuant to
subparagraphs 3(a) or 3(b) of this Agreement; or
(iv) Midway discontinues or reduces (from the
level in effect on the date hereof) the perquisites or fringe
benefits inherent in Nicastro's position on the date hereof;
and Nicastro gives written notice of his election to deem such act to
constitute termination, in which event termination pursuant to this
subparagraph 9(c) shall be deemed to have occurred upon the date of the giving
of such notice.
(d) In the event of a change in the constitution of the Board of
Directors of Midway such that it does not include a majority of Acceptable
Directors as provided in Clause (B) of subparagraph 9(b)(i) hereof, and in the
further event that at any time thereafter, Nicastro gives written notice of his
election to terminate this Agreement, termination pursuant to this subparagraph
9(d) shall be deemed to have occurred upon the date of the giving of such
notice.
10. This Agreement may not be assigned by Nicastro but shall inure
to the benefit of and shall be binding upon the successors and assigns of
Midway.
13
<PAGE> 14
11. All notices shall be addressed to each party hereto at its
address set forth on the first page of this Agreement or as such address may be
changed from time to time by notice in accordance with this Paragraph 11 and
shall be delivered in person or sent by mail with first class postage prepaid
or by express mail service for next day delivery or other responsible overnight
delivery service, and, if sent by mail shall be deemed to have been given and
received two business days after the date of deposit in the mails and, if sent
by express mail service or overnight delivery service shall be deemed to have
been given and received on the next business day after the date of the delivery
of the notice to such service.
12. Any waiver by either Midway or Nicastro of any breach of any
provisions of this Agreement by the other party shall not operate or be
construed as a waiver of any other or subsequent breach hereof.
13. This Agreement shall be governed and construed in accordance
with the substantive laws of the State of Illinois applicable to agreements to
be performed entirely therein.
14. No amendment or modification of this Agreement shall be valid
and binding unless made in writing and signed by both of the parties hereto.
15. In the event that any provision of this Agreement, including
any sentence, clause or part hereof, shall be deemed contrary to law or invalid
or unenforceable in any respect by a court of competent jurisdiction, the
remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect and any invalid and
unenforceable provision shall be deemed, without further action on the part of
the parties hereto, modified, amended and limited to the extent necessary to
render the same valid and enforceable.
14
<PAGE> 15
16. Notwithstanding anything to the contrary contained herein,
this Agreement is subject to, and shall have no force and effect until, the
completion of the initial public offering of common stock by Midway.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
MIDWAY GAMES INC.
By:________________________
Harold H. Bach, Jr.
Executive Vice
President - Finance
___________________________
NEIL D. NICASTRO
15
<PAGE> 1
EXHIBIT 10.7
MIDWAY GAMES INC.
1996 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF THE PLAN
The 1996 Stock Option Plan (the "Plan) is intended to provide a method
whereby "Employees," "Directors" and "Consultants and Advisers" of Midway Games
Inc. (the "Company") and its "Subsidiaries" (as such quoted terms are
hereinafter defined) may be encouraged to acquire a proprietary interest in the
Company and whereby such individuals may realize benefits from an increase in
the value of the shares of the Common Stock, $.01 par value (the "Common
Stock"), of the Company; to provide such Employees, Directors and Consultants
and Advisers with greater incentive and to encourage their continued provision
of services to the Company; and, generally, to promote the interests of the
Company and all of its stockholders. Under the Plan, from time to time on or
before October 31, 2006, options to purchase shares of Common Stock and related
Stock Appreciation Rights (as hereinafter defined) may be granted to such
persons as may be selected in the manner hereinafter provided on the terms and
subject to the conditions hereinafter set forth.
ARTICLE II
ADMINISTRATION OF THE PLAN
SECTION 1. Subject to the authority as described herein of the Board
of Directors (the "Board") of the Company, the Plan shall be administered by
the Compensation and Stock Option Committee of the Company's Board of Directors
(the "Committee") which is composed of at least two members of the Board who
are Non-Employee Directors (as hereinafter defined). The Committee is
authorized to interpret the Plan and may from time to time adopt such rules and
regulations for carrying out the Plan as it may deem best. All determinations
by the Committee shall be made by the affirmative vote of a majority of its
members but any determination reduced to writing and signed by a majority of
its members shall be fully enforceable and effective as if it had been made by
a majority vote at a meeting duly called and held. Subject to any applicable
provisions of the Plan, all determinations by the Committee or by the Board
pursuant to the provisions of the Plan, and all related orders or resolutions
of the Committee or the Board, shall be final, conclusive and binding on all
persons, including the Company and its stockholders, employees, directors and
optionees.
SECTION 2. All authority delegated to the Committee pursuant to the
Plan, other than decisions relating to selection of individuals for
participation and decisions concerning the timing, pricing and the amount of a
grant, may also be exercised by the Board. No action of the Board taken
pursuant to the provisions of the Plan shall be effective unless at the time
both a majority of the Board and a majority of the directors acting in the
manner are Non-Employee
<PAGE> 2
Directors. In the event of any conflict or inconsistency between
determinations, orders, resolutions or other actions of the Committee and the
Board taken in connection with the Plan, other than with respect to those
decisions set forth in the first sentence hereof which may only be made by the
Committee, the actions of the Board shall control.
SECTION 3. With respect to Section 16 of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), transactions under the Plan are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the 1934 Act. To the extent any provision of the Plan or action by the
Committee fails to so comply, it shall be deemed null and void to the extent
permitted by law and deemed advisable by the Committee.
ARTICLE III
STOCK SUBJECT TO THE PLAN
SECTION 1. The shares to be issued or delivered upon exercise of
options or rights granted under the Plan shall be made available, at the
discretion of the Board, either from the authorized but unissued shares of
Common Stock of the Company or from shares of Common Stock reacquired by the
Company, including shares purchased by the Company in the open market or
otherwise obtained.
SECTION 2. Subject to the provisions of Section 3 of this Article
III, the aggregate number of shares of Common Stock which may be purchased
pursuant to options granted at any time under the Plan shall not exceed
2,000,000. Such number shall be reduced by the aggregate number of shares
covered by options in respect of which Stock Appreciation Rights are exercised.
Shares subject to any options which are canceled, lapse or are otherwise
terminated shall be immediately available for reissuance under the Plan.
SECTION 3. In the event of the payment of any dividends payable in
Common Stock or in the event of any subdivision or combination of the Common
Stock, the number of shares which may be purchased under this Plan shall be
increased or decreased proportionately, as the case may be, and the number of
shares deliverable upon the exercise thereafter of any option theretofore
granted (whether or not then exercisable) shall be increased or decreased
proportionately, as the case may be, without change in the aggregate purchase
price. Subject to any required action by its stockholders, if the Company
shall be the surviving corporation in any merger or consolidation, any option
granted hereunder shall be adjusted so as to pertain and apply to the
securities to which the holder of the number of shares of the Common Stock
subject to the option would have been entitled. In the event that the Company
is merged or consolidated into or with another corporation, or substantially
all of its assets are sold to another corporation, provisions shall be made for
the protection and continuation of any outstanding options by the substitution,
on an equitable basis, of such stock, other securities, cash or combination
thereof as shall be appropriate.
2
<PAGE> 3
ARTICLE IV
PURCHASE PRICE OF OPTIONED SHARES
Unless the Committee shall fix a greater purchase price, the purchase
price per share of Common Stock under each option granted to Employees,
Directors, Consultants and Advisers shall not be less than one hundred percent
(100%) of the Fair Market Value (as hereinafter defined) of the Common Stock at
the time such option is granted, but in no case shall such price be less than
the par value of the Common Stock, provided, however, that in the case of an
incentive stock option (as hereinafter defined) granted to an Employee who, at
the time of the grant, owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company (a "Ten
Percent Stockholder"), such purchase price per share shall be at least one
hundred and ten percent (110%) of the Fair Market Value.
ARTICLE V
ELIGIBILITY OF RECIPIENTS
Options will be granted only to persons who are Employees, Directors,
Consultants or Advisers of the Company or a Subsidiary.
ARTICLE VI
DURATION OF THE PLAN
Unless previously terminated by the Committee or the Board, the Plan
will terminate on October 31, 2006. Such termination will not terminate any
option then outstanding.
ARTICLE VII
GRANT OF OPTIONS TO EMPLOYEES, DIRECTORS, CONSULTANTS AND ADVISERS
SECTION 1. Each option granted under the Plan to Employees shall
constitute either an option intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") ("incentive stock
option"), or an option not intended to qualify under such Section 422
("nonqualified stock option), as determined in each case by the Committee and
each option granted to Directors, Consultants and Advisers shall constitute a
nonqualified stock option. With respect to incentive stock options granted to
Employees, to the extent that the aggregate Fair Market Value (determined at
the time an option is granted) of Common Stock of the Company with respect to
which such incentive stock options are exercisable for the first time by any
individual during any calendar year (under the Plan and any other stock option
plan of the Company) exceeds $100,000, such incentive stock options shall be
treated as nonqualified stock options. The foregoing rule shall be applied by
taking incentive stock options into account in the order in which they were
granted. In the event outstanding incentive stock options become
3
<PAGE> 4
immediately exercisable under the terms hereof, such incentive stock options
will, to the extent the aggregate Fair Market Value thereof exceeds $100,000,
be treated as nonqualified stock options.
SECTION 2. The Committee shall from time to time determine the
Employees, Directors, Consultants and Advisers to be granted options, it being
understood that options may be granted at different times to the same person,
provided, however, that no one person may receive an option or options under
the Plan covering more than fifty percent (50%) of the total number of shares
subject to the Plan. In addition, the Committee shall determine subject to the
terms of the Plan: (a) the number of shares subject to each option, (b) the
time or times when the options will be granted, (c) whether such options shall
be incentive stock options, nonqualified stock options or both, (d) whether
Stock Appreciation Rights will be granted in connection with the grant of
options, (e) the purchase price of the shares subject to each option, which
price shall be not less than that specified in Article IV, (f) the time or
times when each option and any related Stock Appreciation Rights may be
exercised and (g) the terms and conditions pursuant to which each grant shall
be issued.
SECTION 3. All instruments evidencing options granted to Employees,
Directors, Consultants and Advisers under the Plan shall be in such form, which
shall be consistent with the Plan and any applicable determinations, orders,
resolutions or other actions of the Committee or the Board.
SECTION 4. The Committee, in its sole discretion, on the granting of
an option to an Employee, Director, Consultant or Adviser under the Plan may
also grant Stock Appreciation Rights relating to any number of shares but,
except as hereinafter provided, not more than fifty percent (50%) of the number
of shares covered by such option shall include Stock Appreciation Rights. Such
options shall be subject to such terms and conditions, not inconsistent with
the Plan, that the Committee shall impose, including the following:
(i) Stock Appreciation Rights may be granted only in writing
and only attached to an underlying option at the time of the grant of
the option;
(ii) Stock Appreciation Rights may be exercised only at the
time when the option to which it is attached is exercisable;
(iii) Stock Appreciation Rights shall entitle the optionee
(or any person entitled to act under the provisions of the Plan) to
surrender unexercised all or part of the then exercisable portion of
the option to which the Stock Appreciation Rights are attached to the
Company and to receive from the Company in exchange therefor a payment
in cash equal to the excess, if any, of the then value of one share
covered by such portion over the option price per share specified in
such option, multiplied by the number of shares covered by the portion
of the option so surrendered (which excess is herein called the
"Appreciated Value"). For purposes of computation of the Appreciated
Value, the value of one share shall be deemed to be the average Fair
Market Value of such share during
4
<PAGE> 5
the four-week period immediately preceding the date of notice of
exercise of the Stock Appreciation Rights;
(iv) if Stock Appreciation Rights attached to an option are
exercised, such option shall be deemed to have been canceled to the
extent of the number of shares surrendered on exercise of the Stock
Appreciation Rights and no further options may be granted covering
such shares; and
(v) if an option to which Stock Appreciation Rights are
attached is exercised, such Stock Appreciation Rights shall be
canceled to the extent necessary to cause the number of shares to
which such Stock Appreciation Rights relate not to exceed the number
of remaining shares subject to such option.
ARTICLE VIII
NON-TRANSFERABILITY OF OPTIONS
No incentive stock option or any related Stock Appreciation Rights
granted under the Plan shall be transferable by the optionee otherwise than by
will or by the laws of descent and distribution, and any such incentive stock
option or any related Stock Appreciation Rights shall be exercised during the
lifetime of the optionee solely by him or her. Nonqualified stock options
granted under the Plan shall be transferable, if at all, as set forth in the
individual agreements pursuant to which each grant shall be issued.
ARTICLE IX
EXERCISE OF OPTIONS
SECTION 1. Each option (and any related Stock Appreciation Rights)
granted under the Plan shall terminate not later than the expiration of ten
years from the date on which it was granted; provided, however, that in the
case of an incentive stock option granted to an Employee who, at the time of
the grant is a Ten Percent Stockholder, such period shall not exceed five (5)
years from the date of grant.
SECTION 2. Except in the cases provided for in Article XII hereof,
each option (and any related Stock Appreciation Rights) granted under the Plan
may be exercised only while the optionee is an Employee or Non-Employee
Director of the Company.
SECTION 3. A person electing to exercise an option or Stock
Appreciation Rights then exercisable shall give written notice to the Company
of such election and, if electing to exercise an option, of the number of
shares of Common Stock such person has elected to purchase. A person
exercising an option shall at the time of purchase tender the full purchase
price of such shares, which tender, except as provided in Section 4 of this
Article IX, shall be made in cash or cash equivalent (which may be such
person's personal check) or, to the extent permitted by
5
<PAGE> 6
applicable law, in shares of Common Stock already owned by such person (which
shares shall be valued for such purpose on the basis of their Fair Market Value
on the date of exercise), or in any combination thereof. In the event of
payment in shares of Common Stock already owned, such shares shall be
appropriately endorsed for transfer to the Company. The Company shall have no
obligation to deliver shares of Common Stock pursuant to the exercise of any
option, in whole or in part, until such payment in full of the purchase price
therefor is received by the Company. No optionee, or legal representative,
legatee or distributee of such optionee, shall be or be deemed to be a holder
of any shares of Common stock subject to such option or entitled to any rights
of a stockholder of the Company in respect of any shares of Common Stock
covered by such option until such shares have been paid for in full and issued
or delivered by the Company.
SECTION 4. In order to assist an optionee in the exercise of an
option granted under the Plan, the Committee or Board may, in its discretion,
authorize, either at the time for the grant of the option or thereafter (a) the
extension of a loan to the optionee by the Company, (b) the payment by the
optionee of the purchase price of the Common Stock in installments, (c) the
guarantee by the Company of a loan obtained by the optionee from a third party
or (d) make such other reasonable arrangements to facilitate the exercise of
options in accordance with applicable law. The Committee or Board shall
authorize the terms of any such loan, installment payment arrangement or
guarantee, including the interest rate (which, in the case of incentive stock
options, shall be not less than the higher of (i) the "prime rate" as from time
to time in effect at a commercial bank of recognized standing, and (ii) the
rate of interest from time to time imputed under Section 483 of the Code and
terms of repayment thereof, and shall cause the instrument evidencing any such
option to be amended, if required, to provide for any such extension of credit.
Loans, installment payment arrangements and guarantees may be authorized
without security, and the maximum amount of any such loan or guarantee shall be
the purchase price of the Common Stock being acquired, plus related interest
payments.
SECTION 5. Each option shall be subject to the requirement that if at
any time the Board shall in its discretion determine that the listing,
registration or qualification of the shares of Common Stock subject to such
option upon any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of or in connection with, the granting of such option
or the issuance or purchase of shares thereunder, such option may not be
exercised in whole or in part unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free from any
conditions not reasonably acceptable to the Board. Unless at the time of
exercise of an option and the issuance of Common Stock so purchased, there
shall be in effect as to such Common Stock a registration statement under the
Securities Act of 1933, as amended (the "Act"), the holder of such option shall
deliver a certification (a) acknowledging that such shares of Common Stock may
be "restricted securities" as defined in Rule 144 promulgated under the Act;
and (b) containing such optionee's agreement that such Common Stock may not be
sold or otherwise disposed of except in compliance with applicable provisions
of the Act. In the event that the Common Stock is then listed on a national
securities exchange, the Company shall use
6
<PAGE> 7
its best efforts to cause the listing of the shares of Common Stock subject to
options upon such exchange.
SECTION 6. All payments made by the Company pursuant to Section 4 of
this Article IX shall be subject to withholding in respect of such income or
other taxes as may be required by law to be paid or withheld. The Company may
establish appropriate procedures to provide for payment or withholding of such
income or other taxes as may be required by law to be paid or withheld in
connection with the exercise of options under the Plan, and to ensure that the
Company receives prompt advice concerning the occurrence of any event which may
create, or affect the timing or amount of, any obligation to pay or withhold
any such taxes or which may make available to the Company any tax deduction
resulting from the occurrence of such event.
ARTICLE X
ADJUSTMENTS
SECTION 1. New option rights may be substituted for the options
granted under the Plan, or the Company's duties as to options outstanding under
the Plan may be assumed, by a corporation other than the Company, or by a
parent or subsidiary of the Company or such corporation, in connection with any
merger, consolidation, acquisition, separation, reorganization, liquidation or
like occurrence in which the Company is involved. Notwithstanding the
foregoing or the provisions of this Article X, in the event such corporation,
or parent or subsidiary of the Company or such corporation, does not substitute
new option rights for, and substantially equivalent to, the options granted
hereunder, or assume the options granted hereunder, the options granted
hereunder shall terminate and thereupon become null and void (i) upon
dissolution or liquidation of the Company, or similar occurrence, (ii) upon any
merger, consolidation, acquisition, separation, reorganization, or similar
occurrence, where the Company will not be a surviving entity or (iii) upon a
transfer of substantially all of the assets of the Company or more than 80% of
the outstanding shares in a single transaction; provided, however, that each
optionee shall have the right immediately prior to or concurrently with such
dissolution, liquidation, merger, consolidation, acquisition, separation,
reorganization or similar occurrence, to exercise any unexpired option granted
hereunder whether or not then exercisable.
SECTION 2. The existence of outstanding options shall not affect in
any way the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issuance of Common Stock or subscription
rights thereto, or any issuance of bonds, debentures, preferred or prior
preference stock ahead of or affecting the shares or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
SECTION 3. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, shares, other
securities, or other property),
7
<PAGE> 8
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
shares or other securities of the Company, issuance of warrants or other rights
to purchase shares or other securities of the Company, or other corporate
transaction or event affects the shares such that an adjustment is determined
by the Committee to be appropriate in order to prevent dilution or enlargement
of the benefits or potential benefits intended to be made available under the
Plan, then the Committee shall, in such manner as it may deem equitable, adjust
any or all of (i) the number of shares or other securities of the Company (or
number and kind of other securities or property) with respect to which options
may be granted, (ii) the number of shares or other securities of the Company
(or number and kind of other securities or property) subject to outstanding
options and (iii) the grant or exercise price with respect to any option or, if
deemed appropriate, make provision for a cash payment to the holder of an
outstanding option; provided, in each case, that with respect to incentive
stock options no such adjustment shall be authorized to the extent that such
authority would cause the Plan to violate Section 422(b)(1) of the Code.
Without limiting the generality of the foregoing, any such adjustment shall be
deemed to have prevented any dilution and enlargement of an optionee's rights
if such optionee receives in any such adjustment rights which are substantially
similar) after taking into account the fact that the optionee has not paid the
applicable exercise price) to the rights the optionee would have received had
he or she exercised his or her outstanding options and become a stockholder of
the Company immediately prior to the event giving rise to such adjustment.
SECTION 4. Adjustments and elections under this Article X shall be
made by the Committee whose determination as to what adjustments, if any, shall
be made and the extent thereof shall be final, binding and conclusive.
ARTICLE XI
PRIVILEGES OF STOCK OWNERSHIP
No optionee shall be entitled to the privileges of stock ownership as
to any shares of Common Stock not actually issued and delivered to him or her.
ARTICLE XII
TERMINATION OF SERVICE OR EMPLOYMENT
SECTION 1. In the event that an optionee shall cease his or her
relationship with the Company or a Subsidiary by voluntarily terminating such
relationship without the written consent of the Company or a Subsidiary, or if
the Company or a Subsidiary shall terminate for cause such relationship, the
option held by such optionee shall terminate forthwith.
SECTION 2. If the holder of an option shall voluntarily terminate his
or her relationship with the Company or a Subsidiary with the written consent
of the Company, which written consent expressly sets forth a statement to the
effect that options which are exercisable on the
8
<PAGE> 9
date of such termination shall remain exercisable, or if the optionee's
relationship with the Company or a Subsidiary shall have terminated by the
Company or a Subsidiary for reasons other than cause, except as may be provided
in the terms and conditions pursuant to which each option is granted, such
optionee may exercise his or her option to the extent exercisable at the time
of such termination, at any time prior to the expiration of three months after
such termination or the date of expiration of the option as fixed at the time
of grant, whichever shall first occur. Options granted under the Plan to
Employees shall not be affected by any change in the position of employment so
long as the holder thereof continues to be an Employee.
SECTION 3. Should an optionee die during the existence of his or her
relationship with the Company, all of the optionee's options shall be
terminated except that any option (and any related Stock Appreciation Rights)
to the extent exercisable by the optionee at the time of such death, may be
exercised within one year after the date of such death but not later than the
expiration date of the option solely in accordance with all of the terms and
conditions of the Plan by the optionee's personal representatives or by the
person or persons to whom the optionee's rights under the option shall pass by
will or by the applicable laws of descent and distribution.
ARTICLE XIII
AMENDMENTS TO PLAN
The Board may at any time terminate or from time to time amend, modify
or suspend the Plan; provided, however, that no such amendment or modification
without the approval of the stockholders of the Company shall:
(i) materially increase the benefits accruing to
participants under the Plan;
(ii) materially increase the maximum number (determined as
provided in the Plan) of shares of Common Stock which may be purchased
pursuant to options granted under the Plan; or
(iii) materially modify the requirements as to eligibility
for participation in the Plan.
The amendment or termination of the Plan shall not, without the written consent
of an optionee, adversely affect any rights or obligations under any option
theretofore granted to such optionee under the Plan.
ARTICLE XIV
EFFECTIVE DATE OF PLAN
The Plan shall be effective on October 24, 1996.
9
<PAGE> 10
ARTICLE XV
DEFINITIONS
For the purposes of this Plan, the following terms shall have the
meanings indicated:
Consultants and Advisers: Such term shall include any third party
retained or engaged by the Company or any Subsidiary to provide services to the
Company or such Subsidiary, including any employee of such third party
providing such services.
Director: Such term shall include any director of the Company.
Employee: Such term shall include any officer as well as any
full-time salaried key executive, managerial, professional, administrative, or
key employee of the Company or a Subsidiary. Such term shall also include an
employee on approved leave of absence provided such employee's right to
continue employment with the Company or a Subsidiary upon expiration of such
employee's leave of absence is guaranteed either by statute or by contract with
or by a policy of the Company or a Subsidiary.
Fair Market Value: The closing sale price of a share of Common Stock
on the date in question (or, if there is no reported sale on such date, on the
last preceding date on which any reported sale occurred) on the consolidated
tape for New York Stock Exchange-listed stocks or, if on such date the Common
Stock is not quoted on such consolidated tape, on the New York Stock Exchange,
or if on such date the Common Stock is not listed on the New York Stock
Exchange, such value as shall be determined by the Committee or Board in a
manner consistent with the provisions of the Code.
Non-Employee Director: Such term shall have the meaning ascribed
thereto in Rule 16b-3 promulgated under the 1934 Act.
Person: Such term shall have the meaning ascribed to it under the
1934 Act.
Stock Appreciation Rights: Means the rights granted by the Committee
pursuant to Section 4 of Article VI hereof.
Subsidiary: Means and includes a "Subsidiary Corporation" of the
Company (as defined in Section 424 of the Code).
10
<PAGE> 1
Exhibit 10.17
-------------
CREDIT AGREEMENT
dated as of October 15, 1996
between
MIDWAY GAMES INC.
and
BANK OF AMERICA ILLINOIS
as Lender
<PAGE> 2
TABLE OF CONTENTS
-----------------
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
SECTION 1.1 Defined Terms................................................. 1
SECTION 1.2 Accounting Terms.............................................. 8
ARTICLE 2
AMOUNT AND TERMS OF THE REVOLVING LOANS
---------------------------------------
SECTION 2.1 Revolving Credit.............................................. 9
SECTION 2.2 Revolving Loan Borrowing Procedure............................ 9
SECTION 2.3 Interest...................................................... 10
SECTION 2.4 (1) Non-Use Fee............................................... 11
SECTION 2.5 Revolving Note................................................ 12
SECTION 2.6 Prepayments................................................... 12
SECTION 2.7 Method of Payment............................................. 12
SECTION 2.8 Use of Proceeds............................................... 13
SECTION 2.9 Increased Costs............................................... 13
SECTION 2.10 Change in Rate of Return...................................... 14
SECTION 2.11 Basis for Determining Interest Rate Inadequate or Unfair...... 14
SECTION 2.12 Changes in Law Rendering Certain Loans Unlawful............... 15
SECTION 2.13 Funding Losses................................................ 15
SECTION 2.14 Right of The Lender to Fund Through Other Offices............. 16
SECTION 2.15 Discretion of The Lender as to Manner of Funding.............. 16
SECTION 2.16 Conclusiveness of Statements; Survival of Provisions......... 16
SECTION 2.17 Letters of Credit............................................. 16
SECTION 2.18 Clean-Up/Clean-Down Provisions................................ 18
ARTICLE 3
CONDITIONS PRECEDENT
--------------------
SECTION 3.1 Condition Precedent to Effectiveness of Agreement............. 18
SECTION 3.2 Conditions Precedent to All Borrowings........................ 19
<PAGE> 3
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 4.1 Incorporation, Good Standing, and Due Qualification........... 20
SECTION 4.2 Corporate Power and Authority................................. 20
SECTION 4.3 Legally Enforceable Agreement................................. 21
SECTION 4.4 Financial Statements.......................................... 21
SECTION 4.5 Other Agreements.............................................. 21
SECTION 4.6 Litigation.................................................... 21
SECTION 4.7 No Defaults on Outstanding Judgments or Orders................ 21
SECTION 4.8 Governmental and Regulatory Approvals......................... 22
SECTION 4.9 Ownership and Liens........................................... 22
SECTION 4.10 Subsidiaries, etc............................................. 22
SECTION 4.11 ERISA......................................................... 22
SECTION 4.12 Hazardous Materials........................................... 22
SECTION 4.13 Taxes......................................................... 23
SECTION 4.14 Debt.......................................................... 23
SECTION 4.15 Investment Company Act........................................ 23
SECTION 4.16 Public Utility Holding Company Act............................ 23
ARTICLE 5
AFFIRMATIVE COVENANTS
---------------------
SECTION 5.1 Maintenance of Existence...................................... 24
SECTION 5.2 Maintenance of Records........................................ 24
SECTION 5.3 Maintenance of Properties..................................... 24
SECTION 5.4 Conduct of Business........................................... 24
SECTION 5.5 Maintenance of Insurance...................................... 24
SECTION 5.6 Compliance With Laws.......................................... 25
SECTION 5.7 Right of Inspection........................................... 25
SECTION 5.8 Reporting Requirements........................................ 25
SECTION 5.9 Environmental Laws............................................ 27
SECTION 5.10 Maintenance of Bank Accounts.................................. 27
ARTICLE 6
NEGATIVE COVENANTS
------------------
SECTION 6.1 Liens......................................................... 28
SECTION 6.2 Debt.......................................................... 29
SECTION 6.3 Mergers, Etc.................................................. 29
SECTION 6.4 Guaranties, Etc............................................... 29
<PAGE> 4
SECTION 6.5 Subordinated Debt............................................. 30
SECTION 6.6 Capital Expenditures.......................................... 30
SECTION 6.7 Dividends, etc................................................ 30
ARTICLE 7
FINANCIAL COVENANTS
-------------------
SECTION 7.1 Minimum Net Income............................................ 30
SECTION 7.2 Minimum Net Worth............................................. 30
SECTION 7.3 Interest Coverage Ratio....................................... 30
SECTION 7.4 Funded Debt Ratio............................................. 31
SECTION 7.5 Liquid Asset Coverage Ratio................................... 31
ARTICLE 8
EVENTS OF DEFAULT
-----------------
SECTION 8.1 Events of Default............................................. 31
SECTION 8.2 Effect of Event of Default.................................... 33
ARTICLE 9
MISCELLANEOUS
-------------
SECTION 9.1 Waivers and Amendments........................................ 34
SECTION 9.2 Notices, Etc.................................................. 34
SECTION 9.3 No Waiver; Remedies........................................... 34
SECTION 9.4 Successors and Assigns........................................ 34
SECTION 9.5 Assignments and Participations; Information................... 34
SECTION 9.6 Costs, Expenses, and Taxes.................................... 35
SECTION 9.7 Right of Setoff............................................... 35
SECTION 9.8 Governing Law................................................. 36
SECTION 9.9 Severability of Provisions.................................... 36
SECTION 9.10 Headings...................................................... 36
SECTION 9.11 General Indemnity............................................. 36
SECTION 9.12 Waiver of Jury Trial.......................................... 37
SECTION 9.13 Submission to Jurisdiction.................................... 37
SECTION 9.14 Service of Process............................................ 37
<PAGE> 5
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT dated as of October 15, 1996, between MIDWAY GAMES
INC., a Delaware corporation (the "Borrower") and BANK OF AMERICA ILLINOIS, an
Illinois banking corporation having its principal place of business at 231 South
LaSalle Street, Chicago, Illinois 60697 (the "Lender").
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
SECTION 1.1 DEFINED TERMS. As used in this Agreement the following terms
have the following meanings (terms defined in the singular to have the same
meaning when used in the plural and vice versa):
"Agreement" means this Credit Agreement, as amended, supplemented,
modified, restated, refinanced, refunded or renewed from time to time.
"Applications" - see SECTION 2.17.
"Authorized Officer" means any one of the following officers of the
Borrower: the President and Executive Vice President - Finance.
"Borrower" - see Preamble.
"Borrowing" means a borrowing hereunder consisting of Revolving Loans or
Letters of Credit made to the Borrower by the Lender pursuant to SECTION 2.
"Borrowing Date" means any Business Day specified in a Borrowing Request
pursuant to SECTION 2.2 as a date on which the Borrower requests the Lender to
make Revolving Loans hereunder.
"Borrowing Request" - see SECTION 2.2.
"Business Day" means any day other than a Saturday, Sunday, or other day on
which commercial banks in Chicago, Illinois are authorized or required to close
under the laws of the State of Illinois.
"Capital Expenditures" means all expenditures which, in accordance with
generally accepted accounting principles, would be required to be capitalized
and shown on the consolidated balance sheet of the Borrower, but excluding
expenditures made in connection with the replacement, substitution or
restoration of assets to the extent financed (1) from insurance proceeds (or
other similar recoveries) paid on account of the loss of or damage to
-1-
<PAGE> 6
the assets being replaced or restored or (2) with awards of compensation arising
from the taking by eminent domain or condemnation of the assets being replaced.
"Capital Lease" means, with respect to any Person, any lease of (or other
agreement conveying the right to use) any real or personal property by such
Person which, in conformity with generally accepted accounting principles, is
accounted for as a capital lease on the balance sheet of such Person.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commitment" means the Lender's commitment to make Revolving Credit
available to the Borrower in accordance with the terms of this Agreement in an
aggregate principal amount not to exceed $50,000,000.
"Committed Revolving Credit" - see SECTION 2.1.
"Computation Period" means any period of four consecutive Fiscal Quarters
ending on the last day of a Fiscal Quarter.
"Consolidated Net Income" means, with respect to the Borrower and its
Subsidiaries for any period, the net income (or loss) of the Borrower and its
Subsidiaries for such period.
"Consolidated Net Worth" means an amount equal to Net Worth.
"Contingent Obligation" means any agreement, undertaking or arrangement by
which any person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to or otherwise to invest in a
Person, or otherwise to assure a creditor against loss) any indebtedness,
obligation or other liability of any other Person (other than by endorsements of
instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The amount of any
Person's liability under any Contingent Obligation shall (subject to any
limitation set forth therein) be deemed to be the principal amount of the debt,
obligation or other liability guaranteed thereby.
"Continuation Notice" - see SECTION 2.2.
"Debt" means: (1) indebtedness or liability for borrowed money, or for the
deferred purchase price of property or services (including trade obligations);
(2) obligations as lessee under Capital Leases; (3) current liabilities in
respect of unfunded vested benefits under any Plan; (4) obligations under
letters of credit issued for the account of any Person; (5) all obligations
arising under bankers' acceptance facilities; (6) all guaranties, endorsements
(other than for collection or deposit in the ordinary course of business), and
any other Contingent Obligations; and (7) obligations secured by any Lien on
property owned by the Person, whether or not the obligations have been assumed.
<PAGE> 7
"Default" means any of the events specified in SECTION 8.1, whether or not
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Dollar" and the symbol "$" mean lawful money of the United States of
America.
"Earnings Credit Rate" means the rate set by the Lender (net of reserve
requirements) used for purposes of calculating the Multiplier.
"Effective Date" - see SECTION 3.1.
"Environmental Laws" means any and all federal, state, local laws,
regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges, releases
or threatened releases of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes into the environment including, without
limitation, ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof.
"ERISA Affiliate" means any trade or business within the United States
(whether or not incorporated) which together with the Borrower would be treated
as a single employer under Section 4001 of ERISA.
"Event of Default" means any of the events specified in SECTION 8.1.
"Eurocurrency Reserve Percentage" means, with respect to any Revolving
Loan for any Interest Period, a percentage (expressed as a decimal) equal to the
daily average during such Interest Period, as prescribed by the Federal Reserve
Board, for determining the aggregate maximum reserve requirements (including all
basic, supplemental, marginal and other reserves) applicable to "Eurocurrency
liabilities" pursuant to Regulation D of the Board of Governors of the Federal
Reserve System or any other then-applicable regulation of the Federal Reserve
Board which prescribes reserve requirements applicable to "Eurocurrency
liabilities," as defined in Regulation D referred to above, as applicable to the
class of banks of which the Lender is a member. Without limiting the effect of
the foregoing, the Eurocurrency Reserve Percentage shall reflect any other
reserves required to be maintained by the Lender against (1) any category of
liabilities that includes deposits by reference to which the Eurodollar Rate
(Reserve Adjusted) is to be determined, or (2) any category of extensions of
credit or other assets that includes Revolving Loans. For purposes of this
Agreement, any Revolving Loan hereunder shall be deemed to be "Eurocurrency," as
defined in Regulation D referred to above, and, as such, shall be deemed to be
subject to such
<PAGE> 8
reserve requirements without the benefit of, or credit for, proration,
exceptions or offsets which may be available to the Lender from time to time
under Regulation D referred to above.
"Eurodollar Rate," means, with respect to any Revolving Loan for any
Interest Period, the rate per annum equal to the average (rounded upward, if
necessary, to the next higher 1/16 of it) rate per annum at which Dollar
deposits in immediately available funds are offered to the Lending Office of the
Lender two Business Days prior to the beginning of such Interest Period by prime
banks in the interbank eurodollar market as at or about the relevant local time
of such Lending Office, for delivery on the first day of such Interest Period,
for the number of days comprised therein and in an amount equal or comparable to
the amount of the Revolving Loan of the Lender for such Interest Period. As used
herein, "relevant local time" shall mean 11:00 A.M., London time, when the
Lending Office of the Lender is located in Europe, or 10:00 A.M., New York time,
when such Lending Office is located in North America or otherwise outside of
Europe.
"Eurodollar Rate (Reserve Adjusted)" means, with respect to any
Revolving Loan for any Interest Period, a rate per annum (rounded upward, if
necessary, to the nearest 1/100 of 1%) determined pursuant to the following
formula:
Eurodollar Rate = Eurodollar Rate
(Reserve Adjusted) ---------------
1-Eurocurrency
Reserve Percentage
"Fiscal Quarter" means a fiscal quarter of a Fiscal Year.
"Fiscal Year" means the period beginning on July 1 and ending on June 30 of
the following year.
"Funded Debt" means all Debt of the Borrower and its Subsidiaries,
excluding (1) Contingent Obligations in respect of undrawn letters of credit,
except to the extent constituting Contingent Obligations in respect of any
indebtedness, obligation or other liability of a Person other than the Borrower
or any Subsidiary of the Borrower, and (2) Debt of the Borrower to any
Wholly-Owned Subsidiary and Debt of any Wholly-Owned Subsidiary to the Borrower
or to any other Wholly-Owned Subsidiary.
"Funded Debt Ratio" means, as of the last day of any Fiscal Quarter, the
ratio of (1) Funded Debt as of such day to (2) Consolidated Net Income before
deducting Interest Expense, taxes, depreciation and amortization (and excluding
extraordinary gains and extraordinary losses) for the Computation Period ending
on such day.
"GAAP" means generally accepted accounting principles in the United States
applied by the Borrower consistent with past practice.
<PAGE> 9
"Head Office" means the principal office of the Lender at 231 South LaSalle
Street, Chicago, IL 60697.
"Interest Coverage Ratio" means, as of the last day of any Fiscal Quarter,
the ratio of (1) Consolidated Net Income before deducting Interest Expense and
taxes for the Computation Period ending on such day (excluding extraordinary
gains and extraordinary losses) to (2) Interest Expense for such Computation
Period.
"Interest Expense" means, for any period, the consolidated interest expense
of the Borrower and its Subsidiaries for such period (including, without
limitation, all imputed interest on Capital Leases).
"Interest Period" - see SECTION 2.3(3) .
"Lender" - see Preamble.
"Lending Office" means any office designated (whether or not notice is
given to the Borrower) by the Lender in its sole discretion as a Lending Office
for purposes hereunder. Such Lending Office may be a foreign branch or an
affiliate of the Lender or the Lender's holding company.
"Letter(s) of Credit" - see SECTION 2.1.
"Letter of Credit Utilization" means, as of any date of determination, the
sum of (1) the maximum aggregate amount which is or at any time thereafter may
be available for drawing under all Letters of Credit then outstanding plus (2)
the aggregate amount of all drawings under Letters of Credit honored by the
Lender and not theretofore reimbursed by the Borrower.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement, or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
capital lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction to evidence any of the
foregoing).
"Liquid Asset Coverage Ratio" means, as of the last day of any Fiscal
Quarter, the ratio of (1) total cash, cash equivalents, marketable securities
and accounts receivable, net of any reserve related thereto as of such day to
(2) the aggregate amount of the Revolving Loans at such date.
"Loan Documents" means this Agreement, the Revolving Note, the Applications
and all other agreements, instruments and documents delivered from time to time
to the Lender
<PAGE> 10
with respect to this Agreement or with respect to any liabilities arising in
connection herewith.
"Material Adverse Change" means a material adverse change in the condition
(financial or otherwise), business, operations or prospects of the Borrower and
its Subsidiaries, taken as a whole.
"Multiemployer Plan" means a Plan described in Section 4001 (a) (3) of
ERISA which covers employees of the Borrower or any ERISA Affiliate.
"Multiplier" means the average monthly collected balance required to
generate $1.00 at the Earnings Credit Rate. The Multiplier is calculated as
follows:
Multiplier = 365 days + Earnings Credit
---------------------
no. of days in the month Rate
in question
Multiplier x Total Service Charges = Total Collected
Balances Required
"Non-Use Fee" - see SECTION 2.4(1).
"Net Worth" means Borrower's consolidated stockholders' equity.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, corporation, business trust,
limited liability company or partnership, joint stock company, trust,
unincorporated association, joint venture, governmental authority, or other
entity of whatever nature.
"Plan" means any plan (as defined in Section 3(3) of ERISA) established,
maintained, or to which contributions have been made by the Borrower or any
ERISA Affiliate.
"Prohibited Transaction" means any transaction set forth in Section 406 of
ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended from time
to time.
"Public Offering" means any BONA FIDE initial public offering of common
stock of the Borrower pursuant to an effective registration statement filed
under the Securities Act of 1933, as amended, and yielding aggregate gross
proceeds of not less than $80,000,000.
"Reportable Event" means any of the events set forth in Section 4043 of
ERISA.
"Revolving Credit" - see SECTION 2.1.
<PAGE> 11
"Revolving Loan(s)" - see SECTION 2.1.
"Revolving Note" - see SECTION 2.5.
"Subordinated Debt" means Debt of the Borrower which is subordinated in
priority of payment to the Debt of the Borrower under this Agreement, the
Revolving Note and the Applications (including refinancings of and post-petition
interest on this Agreement and the Revolving Note and the Applications) in the
Lender's sole opinion.
"Subsidiary" means, as to the Borrower, a Person (other than an individual
and Atari Games Ireland, Ltd. and K.K. Time Warner Interactive) organized under
the laws of the United States of which shares of stock, partnership units or
other equity interests having ordinary voting power to elect a majority of the
board of directors or other managers of such Person are at the time owned, or
the management of which is otherwise controlled, directly or indirectly through
one or more intermediaries, or both, by the Borrower. Except as otherwise
specified or the context otherwise requires a different interpretation, each
reference to Subsidiary contained herein shall mean a Subsidiary of the
Borrower.
"Termination Date" means the earlier of the date on which the Lender makes
demand on the Borrower for repayment of all amounts due hereunder, or October
31, 1997.
"Uncommitted Revolving Credit" - see SECTION 2.1.
"Unused Balance" means the difference between $50,000,000 and the aggregate
principal amount of all Revolving Loans outstanding at any time.
"Wholly-Owned Subsidiary" means any Subsidiary of which the Borrower owns,
directly or indirectly through one or more intermediaries, or both, all of the
issued and outstanding voting stock.
"WMS Credit Agreement" means the Credit Agreement, dated as of April 21,
1994, between WMS Industries, Inc. and Lender.
SECTION 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP consistent with that applied
in the preparation of the financial statements referred to in SECTION 4.4, and
all financial data submitted pursuant to this Agreement shall be prepared in
accordance with such principles.
ARTICLE 2
AMOUNT AND TERMS OF THE REVOLVING LOANS
---------------------------------------
SECTION 2.1 REVOLVING CREDIT. Subject to the terms and conditions hereof
and the other Loan Documents,
<PAGE> 12
(1) the Lender agrees to extend credit to the Borrower under a revolving
credit facility (the "Committed Revolving Credit") which may be availed of by
the Borrower in its discretion on a revolving basis from time to time to and
including the Termination Date. The Committed Revolving Credit, subject to all
the terms and conditions hereof, may be utilized by the Borrower in the form of
loans (the "Revolving Loans") and commercial and standby letters of credit all
as more fully hereinafter set forth; provided that notwithstanding anything
herein to the contrary, the aggregate amount of Revolving Loans and Letter of
Credit Utilization (excluding Letter of Credit Utilization in respect of
Uncommitted Revolving Credit) outstanding at any one time shall not exceed
$50,000,000.
(2) the Lender may, in its sole and absolute discretion, extend credit to
the Borrower under a revolving credit facility (the "Uncommitted Revolving
Credit", and together with the Committed Revolving Credit, collectively, called
the "Revolving Credit") which, if provided, may be availed of by the Borrower in
its discretion on a revolving basis from time to time to and including the
Termination Date. The Uncommitted Revolving Credit, subject to all the terms and
conditions hereof, may be utilized by the Borrower in the form of commercial,
standby, and trade letters of credit (such letters of credit together with the
letters of credit set forth in SECTION 2.1(1), collectively, called the "Letters
of Credit") solely to purchase home video games from Pacific Rim entities and
any subsidiaries or affiliates thereof, all as more fully hereinafter set forth;
provided that notwithstanding anything herein to the contrary, the aggregate
amount of Committed Revolving Loans and Letter of Credit Utilization (excluding
Letter of Credit Utilization in respect of Committed Revolving Credit)
outstanding at any one time shall not exceed $30,000,000.
SECTION 2.2 Revolving Loan Borrowing Procedure.
----------------------------------
(1) Any Authorized Officer of the Borrower may request a Revolving
Loan on behalf of the Borrower after the Effective Date and prior to the
Termination Date in Dollars on any Business Day by giving the Lender
telephonic, telex or facsimile notice (which notice shall be irrevocable
once given and shall be promptly confirmed in writing if given
telephonically) in the form of EXHIBIT B ("Borrowing Request") or such
other form as shall be acceptable to the Lender. Each Borrowing Request
must be received by the Lender prior to 11:00 A.M., Chicago time, at least
three (3) Business Days prior to the proposed date of such Borrowing (which
must be a Business Day) and shall specify (a) the principal amount of such
Revolving Loan, (b) the proposed date of Revolving Loan (which must be a
Business Day), and (c) the initial Interest Period for such Revolving Loan.
Each Revolving Loan shall be in a principal amount of $500,000 or a larger
integral multiple of $250,000 in excess thereof. Subject to the
satisfaction of the applicable conditions precedent set forth in ARTICLE 3
hereof, the Lender shall make the proceeds of each Revolving Loan available
to the Borrower by causing an amount of immediately available funds equal
to the principal amount of such Revolving Loan to be credited to the
account of the Borrower at the Lender unless otherwise required pursuant to
the terms of this Agreement.
<PAGE> 13
(2) Continuation of Loans. The Borrower may, by delivery to the Lender
of a notice ("Continuation Notice") in the form of EXHIBIT C attached
hereto with appropriate insertions, before 10:00 A.M., Chicago time, two
(2) Business Days prior to continuation, continue a Revolving Loan as into
a subsequent Interest Period of the same duration or of any other duration
permitted hereunder provided that in the case of a continuation of less
than all Revolving Loans, the aggregate principal amount of such Revolving
Loans continued shall be not less than $500,000 or any larger integral
multiple of $250,000 in excess thereof.
SECTION 2.3 Interest.
--------
(1) INTEREST RATES. With respect to each Revolving Loan, the Borrower
hereby promises to pay interest (computed on the basis of a year of 360
days and actual days elapsed) on the unpaid principal amount thereof for
the period commencing on the date of such Revolving Loan until such
Revolving Loan is paid in full for each Interest Period, at a rate per
annum equal to the Eurodollar Rate (Reserve Adjusted) applicable to such
Interest Period, plus (a) at all times when the aggregate principal amount
of the Revolving Loans is less than $15,000,000, .75% per annum and (b) at
all times when the aggregate principal amount of the Revolving Loans is
$15,000,000 or more, 1.50% per annum.
(2) INTEREST PAYMENT DATES. Accrued interest on each Revolving Loan
shall be payable on the last day of each Interest Period relating to such
Loan (and if such Interest Period exceeds 90 days, also payable on the
ninetieth day of such Interest Period), and at maturity. After maturity,
accrued interest on all Loans shall be payable on demand.
(3) INTEREST PERIODS. Each "Interest Period" for a Revolving Loan
shall commence on the date such Revolving Loan was made or on the
expiration of the immediately preceding Interest Period for such Revolving
Loan, and shall end on the date which is 30, 60, 90 or 180 days thereafter,
as the Borrower may specify pursuant to SECTION 2.2(1) or (2) hereof. Each
Interest Period for a Revolving Loan which would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day
(unless such next succeeding Business Day is the first Business Day of a
calendar month, in which case such Interest Period shall end on the next
preceding Business Day).
(4) SETTING AND NOTICE OF RATES. The applicable Eurodollar Rate for
each Interest Period shall be determined by the Lender, and notice thereof
shall be given by the Lender promptly to the Borrower. Each determination
of the applicable Eurodollar Rate by the Lender shall be conclusive and
binding upon the parties hereto, in the absence of demonstrable error. If
the Lender is unable to determine such a rate, the provisions of SECTION
2.11 shall apply. The Lender shall, upon written request of the Borrower,
deliver to the Borrower a statement showing the
<PAGE> 14
computations used by the Lender in determining any applicable Eurodollar
Rate hereunder.
(5) DEFAULT INTEREST. Any principal payments on the Loans not paid
when due, whether at stated maturity, by notice of repayment, by
acceleration or otherwise, shall, to the extent permitted by applicable
law, thereafter bear interest (compounded monthly and payable upon demand)
at a rate which is 2% per annum in excess of the rate of interest otherwise
payable under this Agreement in respect of such principal amount until such
unpaid amount has been paid in full (whether before or after judgment) .
SECTION 2.4 (1) NON-USE FEE. The Borrower agrees to pay the Lender an
unused commitment fee (the "Non-Use Fee") at the rate of .1875% per annum on the
average daily Unused Balance for the period commencing on the date hereof and
continuing to but not including the Termination Date. Borrower shall pay the
Non-Use Fee either (i) quarterly in arrears on the last Business Day of
December, March, June and September of each year and at maturity, or (ii) by
maintaining collected checking account balances in those bank accounts
referenced in Section 5.10 hereof with the Lender which when converted to the
appropriate Earnings Credit Rate using the Multiplier as adjusted from time to
time is equal to the Non-Use Fee.
(2) CLOSING FEE. The Borrower agrees to pay the Lender a closing fee
on the Effective Date in the amount of $10,000.
SECTION 2.5 REVOLVING NOTE. All Revolving Loans made by the Lender under
this Agreement shall be evidenced by, and repaid with interest in accordance
with, a single promissory note of the Borrower in substantially the form of
EXHIBIT A duly completed, in the principal amount of Fifty Million Dollars
($50,000,000), dated the Effective Date and payable to the Lender (the
"Revolving Note"). The Lender is hereby authorized by the Borrower to endorse on
the schedule attached to the Revolving Note the amount of each Revolving Loan
and of each payment of principal received by the Lender on account of the
Revolving Loans, which endorsement shall, in the absence of demonstrable error,
be conclusive as to the outstanding balance of the Revolving Loans made by the
Lender; PROVIDED, HOWEVER, that the failure to make such notation with respect
to any Revolving Loan or payment shall not limit or otherwise affect the
obligations of the Borrower or the Lender under this Agreement or the Revolving
Note.
SECTION 2.6 PREPAYMENTS. The Borrower may prepay at any time the Revolving
Note in whole or in part with accrued interest to the date of such prepayment on
the amount prepaid; PROVIDED, that (1) any prepayment of a Revolving Loan shall
be made subject to the Borrower's payment obligations set forth in SECTION 2.13
and (2) each partial prepayment shall be in a principal amount not less than
twenty-five thousand Dollars ($25,000), in which event such prepaid amount may
be reborrowed hereunder in a Revolving Loan to the extent outstanding amounts
hereunder shall not exceed the Commitment at such time.
<PAGE> 15
SECTION 2.7 METHOD OF PAYMENT. The Borrower shall make each payment under
this Agreement and under the Revolving Note not later than 11:00 A.M., Chicago
time, on the date when due in lawful money of the United States to the Lender.
The Borrower hereby authorizes the Lender, if and to the extent payment is not
made when due under this Agreement or under the Revolving Note, to charge from
time to time against any account of the Borrower with the Lender any amount so
due. Subject to SECTION 2.3(3), whenever any payment to be made under this
Agreement or under the Revolving Note shall be stated to be due on a Saturday,
Sunday, or a public holiday, or the equivalent for banks generally under the
laws of the State of Illinois, such payment shall be made on the next succeeding
Business Day, and such extension of time in such case shall be included in the
computation of the payment of interest.
SECTION 2.8 USE OF PROCEEDS. The proceeds of the Revolving Loans shall be
used by the Borrower for general working capital purposes; provided that no
portion of such proceeds shall be used for the consummation of any acquisition
of any Person. The Borrower will not, directly or indirectly, use any part of
such proceeds for the purpose of purchasing or carrying any margin stock within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System or to extend credit to any Person for the purpose of purchasing or
carrying any such margin stock.
SECTION 2.9 INCREASED COSTS. If after the date hereof, (1) Regulation D of
the Board of Governors of the Federal Reserve System, or (2) the adoption of any
applicable law, rule or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Lender (or any Lending Office of the Lender) with
any request or directive (whether or not having the force of law) or any such
authority, central bank or comparable agency,
(a) shall subject the Lender (or any Lending Office of the Lender) to
any tax, duty or other charge with respect to the Revolving Credit or its
obligation to make the Revolving Credit, or shall change the basis of
taxation of payments to the Lender of the principal of or interest on the
Revolving Credit or any other amounts due under this Agreement in respect
of the Revolving Credit or its obligation to make the Revolving Credit
(except for changes in the rate of tax on the overall gross or net income
of the Lender or its Lending Office); or
(b) shall impose, modify or deem applicable any reserve (including,
without limitation, any reserve imposed by the Board of Governors of the
Federal Reserve System), special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, the
Lender (or any Lending Office of the Lender); or
(c) shall impose on the Lender (or its Lending Office) any other
condition affecting the Revolving Credit;
<PAGE> 16
and the result of any of the foregoing is to increase the cost to (or in the
case of Regulation D referred to above, to impose a cost on) the Lender (or any
Lending Office of the Lender) of making or maintaining the Revolving Credit or
to reduce the amount of any sum received or receivable by the Lender (or the
Lending Office of the Lender) under this Agreement or under the Revolving Credit
with respect thereto, then upon demand by the Lender (which demand shall be made
within 45 days after the Lender has actual knowledge of such additional cost or
reduced sum receivable and shall be accompanied by a statement setting forth the
basis of such demand), the Borrower shall pay directly to the Lender such
additional amount or amounts as will reimburse the Lender for such increased
cost or such reduction.
SECTION 2.10 CHANGE IN RATE OF RETURN. If, after the date hereof, any
change in, or the introduction, adoption, effectiveness, interpretation,
reinterpretation or phase-in of, any law or regulation, directive, guideline,
decision or request (whether or not having the force of law) of any court,
central bank, regulator or other governmental authority affects or would affect
the amount of capital required or expected to be maintained by the Lender or any
Person controlling the Lender, and the Lender reasonably determines that the
rate of return on its or such controlling Person's capital as a consequence of
the Commitment, the Revolving Credit or the Revolving Loans made by the Lender
is reduced to a level below that which the Lender or such controlling Person
could have achieved but for the occurrence of any such circumstance, then, in
any such case the Borrower shall, upon demand by the Lender (which demand shall
be made within 45 days after the Lender has actual knowledge of such increase in
capital or reduction in rate of return) pay directly to the Lender additional
amounts sufficient to compensate the Lender or such controlling Person for such
reduction in rate of return. A statement of the Lender as to any such additional
amount or amounts shall be prepared in good faith (including calculations
thereof in reasonable detail) and shall, in the absence of manifest error, be
conclusive and binding on the Borrower. In determining such amount, the Lender
may use any method of averaging and attribution that it shall deem reasonably
applicable.
SECTION 2.11. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR. If
with respect to any Interest Period:
(1) the Lender is advised that deposits in Dollars (in the applicable
amounts) are not being offered in the relevant market for such Interest
Period, or the Lender otherwise determines (which determination shall be
binding and conclusive on the Borrower) that by reason of circumstances
affecting the interbank eurodollar market adequate and reasonable means do
not exist for ascertaining the applicable Eurodollar Rate; or
(2) the Eurodollar Rate (Reserve Adjusted), as determined by the
Lender, will not adequately and fairly reflect the cost to the Lender of
maintaining or funding such Revolving Loans for such Interest Period, or
that the making or funding of Revolving Loans has become impracticable as a
result of an event occurring after the date of this Agreement which in the
opinion of the Lender materially changes such
<PAGE> 17
Revolving Loans, then, so long as such circumstances shall continue: (a)
the Lender shall promptly notify the Borrower thereof, and (b) on the last
day of the then current Interest Period for Revolving Loans, such Revolving
Loans shall be repaid in full.
SECTION 2.12 CHANGES IN LAW RENDERING CERTAIN LOANS UNLAWFUL. In the event,
after the date hereof, that any change in (including the adoption of any new)
applicable laws or regulations, or any change in the interpretation of
applicable laws or regulations by any governmental or other regulatory body
charged with the administration thereof, should make it unlawful for the Lender
or the Lending Office of the Lender to make, maintain or fund Revolving Loans,
then (1) the Lender shall promptly notify the Borrower, (2) the obligation of
the Lender to make Revolving Loans shall, upon the effectiveness of such event,
be suspended for the duration of such unlawfulness, and (3) the last day of the
current Interest Period for each Revolving Loan (or, in any event, if the Lender
so requests, on such earlier date as may be required by the relevant law,
regulation or interpretation), such Revolving Loan shall be repaid in full.
SECTION 2.13 FUNDING LOSSES. The Borrower hereby agrees that upon demand by
the Lender (which demand shall be accompanied by a statement setting forth the
basis for the calculations of the amount being claimed) the Borrower will
indemnify the Lender against any net loss or expense which the Lender may
sustain or incur (including, without limitation, any net loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by the Lender to fund or maintain Revolving Loans), as reasonably
determined by the Lender, as a result of (1) any payment or prepayment of any
Revolving Loan on a date other than the last day of an Interest Period for a
Revolving Loan, or (2) any failure of the Borrower to borrow any Revolving Loans
on a date specified therefor in a Borrowing Request or Continuation Notice
pursuant to this Agreement. For this purpose, all notices to the Lender pursuant
to this Agreement shall be deemed to be irrevocable.
SECTION 2.14 RIGHT OF THE LENDER TO FUND THROUGH OTHER OFFICES. The Lender
may, if it so elects, fulfill its Commitment as to any Revolving Loan by causing
its Lending Office to make such Revolving Loan, provided that in such event for
the purposes of this Agreement, such Revolving Loan shall be deemed to have been
made by the Lender and the obligation of the Borrower to repay such Revolving
Loan shall nevertheless be to the Lender and shall be deemed held by it, to the
extent of such Revolving Loan, for the account of such branch or affiliate.
SECTION 2.15 DISCRETION OF THE LENDER AS TO MANNER OF FUNDING.
Notwithstanding any provision of this Agreement to the contrary, the Lender
shall be entitled to fund and maintain its funding of all or any part of the
Revolving Loans in any manner it sees fit, it being understood, however, that
for the purposes of this Agreement all determinations hereunder shall be made as
if the Lender had actually funded and maintained each Revolving Loan during each
Interest Period for such Revolving Loan through the purchase of deposits having
a maturity corresponding to such Interest Period and bearing an interest rate
equal to the Eurodollar Rate for such Interest Period.
<PAGE> 18
SECTION 2.16 CONCLUSIVENESS OF STATEMENTS; SURVIVAL OF PROVISIONS.
Determinations and statements of the Lender pursuant to SECTIONS 2.9, 2.10,
2.11, 2.12 or 2.13 shall be conclusive absent demonstrable error. The provisions
of SECTIONS 2.9, 2.10 and 2.11 shall survive termination of this Agreement.
SECTION 2.17 Letters of Credit.
-----------------
(1) GENERAL TERMS. Subject to all of the terms and conditions hereof,
the Revolving Credit may be availed of in the form of Letters of Credit.
(2) TERM. Except as may be otherwise agreed between Lender and
Borrower, each Letter of Credit issued hereunder shall expire not later
than the earlier of (i) one (1) year from the date issued (or be cancelable
not later than one (1) year from the date issued) or (ii) the Termination
Date.
(3) GENERAL CHARACTERISTICS. Each Letter of Credit issued hereunder
shall be payable in Dollars, shall conform to the general requirements of
the Lender for the issuance of commercial, standby and trade letters of
credit (as appropriate) as to form and substance and shall be a letter of
credit which the Lender may lawfully issue.
(4) APPLICATIONS. At the time the Borrower requests each Letter of
Credit to be issued (or prior to the first issuance of a Letter of Credit,
in the case of a continuing application), it shall execute and deliver to
the Lender an application for such Letter of Credit in the form customarily
prescribed by the Lender for a Letter of Credit of the type requested (the
"Applications"). The Borrower may elect to have one or more of its
Wholly-Owned Subsidiaries be co-applicant for a Letter of Credit, which
shall not affect the Borrower's complete liability in connection with the
issuance of said Letter of Credit in accordance with the terms and
provisions of this Agreement. In the event that the Lender is not promptly
reimbursed for the amount of any draft drawn under a Letter of Credit
issued hereunder, the obligation of the Borrower to reimburse it for the
amount of such draft so paid by the Lender shall bear interest (which the
Borrower hereby promises to pay) from and after the date such draft is paid
at the rate per annum determined by adding two percent (2%) per annum to
the interest rate set forth in SECTION 2.3(1) as from time to time in
effect. This Agreement supersedes any terms of the Applications which are
irreconcilably inconsistent with the terms hereof. Anything contained in
the Applications to the contrary notwithstanding, the Borrower shall pay
fees in connection with Letters of Credit as set forth in SECTIONS 2.17(5)
and 2.17(6) hereof.
(5) Letter of Credit Fees.
---------------------
(a) STANDBY LETTERS OF CREDIT. The Borrower shall pay the Lender a
nonrefundable fee for each special purpose standby Letter of Credit issued
hereunder equal to one percent (1%) of the face amount of each standby
Letter of Credit, such fee to be payable quarterly in arrears from the date
of issuance
<PAGE> 19
of the relevant Letter of Credit and, in the event the term of any Letter
of Credit expires or is extendible for more than one year from the issuance
thereof, on the date(s) occurring each year thereafter and such fee to be
nonrefundable in the event any Letter of Credit is terminated or canceled
prior to its expressed maturity date.
(b) COMMERCIAL AND TRADE LETTERS OF CREDIT. The Borrower shall pay the
Lender a nonrefundable negotiation fee for each documentary commercial or
trade Letter of Credit issued hereunder equal to the greater of (i)
one-eighth percent (1/8%) of the initial face amount of such Letter of
Credit, or (ii) $100, in either case such fee to be payable upon issuance
of the Letter of Credit.
(6) TRANSACTION CHARGES. The Borrower shall pay the Lender such
issuing and processing fees and charges as the Lender from time to time
customarily imposes in connection with the issuance, negotiation and
payment of letters of credit and drafts drawn thereunder, such fees to be
paid in accordance with the standard and customary practice of the Lender.
SECTION 2.18 CLEAN-UP/CLEAN-DOWN PROVISIONS. Notwithstanding any other
provision contained in this Agreement to the contrary, the Borrower agrees that
from March 31 of each Fiscal Year during the term of this Agreement, commencing
March 31, 1997, and for a period of sixty (60) consecutive days thereafter the
outstanding Revolving Loans shall be zero (0) and the amount of the outstanding
Letters of Credit issued in respect of the Uncommitted Revolving Credit shall be
less than or equal to $5,000,000. The Borrower agrees to make any prepayment of
the Revolving Loans or the Uncommitted Revolving Credit which may be necessary
to comply with the terms of this SECTION 2.18.
ARTICLE 3
CONDITIONS PRECEDENT
--------------------
SECTION 3.1 CONDITION PRECEDENT TO EFFECTIVENESS OF AGREEMENT. The terms
and provisions of this Agreement shall become effective (the "Effective Date"),
on such date upon which the Lender shall have received each of the following,
each dated the Effective Date and in form and substance reasonably satisfactory
to the Lender and its counsel:
(1) REVOLVING NOTE. The Revolving Note duly executed by the Borrower;
(2) CERTIFICATE OF THE BORROWER. A certificate or certificates of the
Secretary of the Borrower certifying: (a) a copy of the Certificate of
Incorporation of the Borrower, as theretofore amended; (b) a copy of the
bylaws of the Borrower, as theretofore amended; (c) copies of all corporate
action taken by the Borrower,
<PAGE> 20
including resolutions of its board of directors, authorizing the execution,
delivery, and performance of the Loan Documents by the Borrower and each
other document to be delivered pursuant to this Agreement and authorizing
borrowings by each of the Authorized Officers; and (d) the names and true
signatures of the officers of the Borrower authorized to sign the Loan
Documents to which it is a party and the other documents to be delivered by
the Borrower under this Agreement;
(3) CERTIFIED CHARTER AND GOOD STANDING. A certificate of the due
formation, valid existence and good standing of the Borrower in its state
of incorporation, issued by the appropriate authorities of such
jurisdiction, and certificates of Borrower's good standing and due
qualification to do business, issued by appropriate officials in any states
in which the Borrower is required to be so qualified as a foreign
corporation;
(4) OPINION OF COUNSEL FOR THE BORROWER. An opinion of Barbara Norman,
counsel for the Borrower, in substantially the form of EXHIBIT D and as to
such other matters as the Lender and its counsel may reasonably request;
(5) CONSUMMATION OF PUBLIC OFFERING. The Borrower shall have
consummated the Public Offering and received the proceeds therefrom; and
(6) REPAYMENT OF WMS INDUSTRIES INDEBTEDNESS. WMS Industries Inc.
shall have paid in full all of the Revolving Loans (as defined in the WMS
Credit Agreement) under the WMS Credit Agreement, all Letters of Credit (as
defined therein) issued thereunder shall have been returned to the Lender
and canceled or transferred to the Borrower and the Commitments (as defined
therein) shall have been terminated; and
(7) MISCELLANEOUS. Such other approvals, opinions or documents as the
Lender may reasonably request.
SECTION 3.2 CONDITIONS PRECEDENT TO ALL BORROWINGS. The obligation of the
Lender to make each Revolving Loan and issue any Letter of Credit shall be
subject to the further conditions precedent that on the date of such Borrowing:
(1) The following statements shall be true and the Lender shall have
received a certificate signed by a duly authorized officer of the Borrower
(in his or her capacity as such, and without any personal liability
therefor) dated the date of such Revolving Loan stating that:
(a) The representations and warranties contained in Article 4 of
this Agreement are correct on and as of the date of such Borrowing as
though made on and as of such date; and
<PAGE> 21
(b) No Default or Event of Default has occurred and is
continuing, or would result from the Borrowing;
(2) The Lender shall have received such other approvals, opinions, or
documents as the Lender may reasonably request.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower represents and warrants to the Lender that:
SECTION 4.1 INCORPORATION, GOOD STANDING, AND DUE QUALIFICATION. The
Borrower and each of its Subsidiaries: (1) is a corporation, limited liability
company or partnership, as the case may be, duly organized, validly existing and
in good standing under the laws of the jurisdiction of its organization or
formation; (2) has the power and authority, and has all material governmental
licenses, authorizations, consents and approvals necessary to own its assets and
to transact the business in which it is now engaged or proposed to be engaged;
and (3) is duly qualified as a foreign corporation, limited liability company or
partnership, as the case may be, and in good standing under the laws of each
other jurisdiction in which the failure to so qualify would result in a Material
Adverse Change.
SECTION 4.2 CORPORATE POWER AND AUTHORITY. The execution, delivery, and
performance by the Borrower of the Loan Documents have been duly authorized by
all necessary corporate action and do not and will not (1) contravene or
conflict with the charter or bylaws of the Borrower; (2) violate any provision
of, or cause the Borrower to be in default under, any law, rule, regulation
(including, without limitation, Regulation U of the Board of Governors of the
Federal Reserve System), order, writ, judgment, injunction, decree,
determination, or award currently in effect having applicability to the
Borrower; (3) result in a breach of, or constitute a default under, any material
indenture or loan or credit agreement or any other material agreement, lease, or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected; (4) result in, or require, the creation or imposition of
any Lien (except such Liens as may be permitted pursuant to SECTION 6.1 of this
Agreement) upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
SECTION 4.3 LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and each of
the other Loan Documents will be, legal, valid, and binding obligations of the
Borrower enforceable against the Borrower in accordance with their respective
terms, except to the extent that such enforcement may be limited by applicable
bankruptcy, insolvency, and other similar laws affecting creditors' rights
generally and by general principles of equity.
SECTION 4.4 FINANCIAL STATEMENTS. The Borrower's audited combined financial
statements as at June 30, 1996 (the "Audited Statements") have been furnished to
<PAGE> 22
the Lender. The Audited Statements have been prepared in conformity with GAAP
and fairly present the financial condition of the Borrower and its Subsidiaries
as at such dates and the results of operations for the periods then ended. Since
the date of the most recent financial statements supplied to the Lender pursuant
to either SECTION 5.8(1) or (2), whichever is the most recently delivered, there
has been no Material Adverse Change. No information, exhibit, or report
furnished by the Borrower to the Lender in connection with the negotiation of
this Agreement or any other Loan Document contains any material misstatement of
fact or omits to state a material fact necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
materially misleading.
SECTION 4.5 OTHER AGREEMENTS. Neither the Borrower nor any Subsidiary is a
party to any material indenture, loan, or credit agreement, or to any material
lease or other agreement or instrument, or subject to any charter or corporate
restriction which would be breached or accelerated by entering into the Loan
Documents or which would have a material adverse effect on the ability of the
Borrower to carry out its obligations under the Loan Documents. Neither the
Borrower nor, to the best of Borrower's knowledge, any Subsidiary is in default
in any respect in the performance, observance, or fulfillment of any of the
obligations, covenants, or conditions contained in any material agreement or
instrument.
SECTION 4.6 LITIGATION. There is no litigation or governmental proceeding
pending or (to the Borrower's knowledge) threatened against or affecting the
Borrower or any Subsidiary before any court, governmental agency, or arbitrator,
which, if adversely determined would (a) impair the validity or enforceability
of, or impair the ability of the Borrower to perform its obligations under, the
Loan Documents or (b) result in any Material Adverse Change.
SECTION 4.7 NO DEFAULTS ON OUTSTANDING JUDGMENTS OR ORDERS. Neither the
Borrower nor any Subsidiary is in default with respect to any judgment, writ,
injunction, decree, rule, or regulation of any court, arbitrator, or federal,
state, municipal, or other governmental authority, commission, board, bureau,
agency, or instrumentality, domestic or foreign, which default would result in a
Material Adverse Change.
SECTION 4.8 GOVERNMENTAL AND REGULATORY APPROVALS. No authorizations,
approvals or consents of, and no filings or registrations with, any governmental
or regulatory authority or agency are necessary for the execution, delivery or
performance by the Borrower of the Loan Documents or for the validity or
enforceability thereof.
SECTION 4.9 OWNERSHIP AND LIENS. The Borrower and each Subsidiary has title
to, or valid leasehold interests in, all of its properties and assets, real and
personal, including the properties and assets and leasehold interests reflected
in the financial statements referred to in SECTION 4.4 (other than any
properties or assets disposed of in the ordinary course of business), and none
of the properties and assets owned by the Borrower or any Subsidiary operating
within the United States and none of their leasehold interests is subject
<PAGE> 23
to any Lien, except such as may be permitted pursuant to SECTION 6.1 and SECTION
4.14 of this Agreement.
SECTION 4.10 SUBSIDIARIES, ETC. Schedule 4.10 sets forth as of the date of
the Effective Date a true and correct list of all capital stock, partnership
units or other equity interests of any Person owned or otherwise held (including
capital stock, partnership units or other equity interests held as collateral)
by the Borrower and its Wholly-Owned Subsidiaries and indicates whether such
capital stock, partnership units or other equity interests are owned or held in
some other capacity by the Borrower or such Wholly-Owned Subsidiary.
SECTION 4.11 ERISA. The Borrower and the ERISA Affiliates are in compliance
in all material respects with the applicable provisions of ERISA.
SECTION 4.12 HAZARDOUS MATERIALS. The Borrower and each of its Subsidiaries
operating within the United States have obtained all permits, licenses and other
authorizations which are required under all Environmental Laws. The Borrower and
each Subsidiary operating within the United States are in compliance with the
terms and conditions of all such permits, licenses and authorizations, and are
also in compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and timetables
contained in any applicable Environmental Law or in any regulation, code, plan,
order, decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder.
There have been no material environmental investigations, studies, audits,
tests, reviews or other analyses conducted by or which are in the possession of
the Borrower or any Subsidiary operating within the United States in relation to
any property or facility now or previously owned or leased by the Borrower or
any Subsidiary operating within the United States.
The Borrower has informed the Lender in writing of all non-compliance of
the Borrower and each Subsidiary operating within the United States with the
terms and conditions of all (1) permits, licenses or authorizations required
under all Environmental Laws and (2) other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in any applicable Environmental Law or in any applicable
regulation, code, plan, order, decree, judgment, injunction notice or demand
letter issued, entered, promulgated or approved thereunder.
SECTION 4.13 TAXES. The Borrower and each Subsidiary have filed all tax
returns (federal, state, and local) required to be filed and have paid all
taxes, assessments, and governmental charges and levies thereon which it is
aware are due, including interest and penalties, except to the extent the
validity thereof is being contested in good faith and by appropriate
proceedings.
SECTION 4.14 DEBT. As of the initial date of this Agreement, SCHEDULE 4.14
sets forth a complete and correct list of all credit agreements, indentures,
purchase
<PAGE> 24
agreements, guaranties, capital leases, and other investments, agreements, and
arrangements currently in effect providing for or relating to extensions of
credit (including agreements and arrangements for the issuance of letters of
credit or for bankers' acceptance financing) in respect of which the Borrower or
any Subsidiary is in any manner directly or contingently obligated; and the
maximum principal or face amounts of the credit in question, which are
outstanding and which can be outstanding, are correctly stated, and all Liens of
any nature given or agreed to be given as security therefor are correctly
described or indicated in such Schedule.
SECTION 4.15 INVESTMENT COMPANY ACT. Neither the Borrower nor any
Subsidiary is an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 4.16 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor
any Subsidiary is a "holding company" or an "affiliate" of a "holding company"
or a "subsidiary company" of a "holding company," within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
ARTICLE 5
AFFIRMATIVE COVENANTS
---------------------
Unless otherwise consented to in writing by the Lender, so long as any
Letters of Credit are outstanding, the Revolving Note shall remain unpaid and
the Commitment has not expired or been terminated, the Borrower will:
SECTION 5.1 MAINTENANCE OF EXISTENCE. Preserve and maintain, and cause each
Subsidiary to preserve and maintain, its corporate, limited liability company or
partnership existence, as the case may be, and good standing in the jurisdiction
of its organization or formation, and qualify and remain qualified, and cause
each Subsidiary to qualify and remain qualified, as a foreign corporation,
limited liability company or partnership, as the case may be, in each
jurisdiction in which the failure to so qualify would result in a Material
Adverse Change.
SECTION 5.2 MAINTENANCE OF RECORDS. Keep, and cause each Subsidiary to
keep, adequate records and books of account.
SECTION 5.3 MAINTENANCE OF PROPERTIES. Maintain, keep, and preserve, and
cause each Subsidiary to maintain, keep, and preserve, all of its material
properties (tangible and intangible) necessary or useful in the proper conduct
of its business in good working order and condition, ordinary wear and tear
excepted.
SECTION 5.4 CONDUCT OF BUSINESS. Not engage in any business, if, as a
result, the general nature of the business which would then be engaged in by the
Borrower
<PAGE> 25
and the Subsidiaries would be substantially changed from the general nature of
the business engaged in by the Borrower and its Subsidiaries on the date of this
Agreement.
SECTION 5.5 MAINTENANCE OF INSURANCE. Maintain, and cause each Subsidiary
to maintain, insurance with commercially reasonable and reputable insurance
companies or associations in such amounts and covering such risks as are usually
carried by companies engaged in the same or a similar business and similarly
situated, which insurance may provide for reasonable deductibility from coverage
thereof.
SECTION 5.6 COMPLIANCE WITH LAWS. Conduct its business, and cause each
Subsidiary to conduct its business, in compliance with all applicable laws,
rules, regulations, ordinances and orders of any governmental or judicial
authorities, such compliance to include, without limitation, paying before the
same become delinquent all taxes, assessments, and governmental charges imposed
upon it or upon its property except to the extent the validity thereof is being
contested in good faith and by appropriate proceedings and reserves, if
appropriate, shall have been established therefor that are adequate in the
Lender's opinion.
SECTION 5.7 RIGHT OF INSPECTION. At any reasonable time and from time to
time, permit the Lender or any agent or representative thereof to examine and
make copies of and abstracts from the records and books of account of, and visit
the properties of, the Borrower and any Subsidiary, and to discuss the affairs,
finances, and accounts of the Borrower and any Subsidiary with any of their
respective officers, directors and employees and the Borrower's or such
Subsidiary's independent accountants. At Borrower's request, Lender will execute
a confidentiality agreement as to those materials of Borrower made available to
Lender hereunder.
SECTION 5.8 REPORTING REQUIREMENTS. Furnish to the Lender:
(1) MONTHLY FINANCIAL STATEMENTS. As soon as available and in any
event within thirty (30) days after the end of each calendar month (except
for the month of July for which the time period shall be forty-five (45)
days), consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries as at the end of such month, consolidated and
consolidating statements of operations of the Borrower and the Subsidiaries
for the period commencing at the end of the previous Fiscal Year and ending
with the end of such month, and consolidated statements of cash flows of
the Borrower and the Subsidiaries for the portion of the Fiscal Year ended
with the last day of such month, all in reasonable detail and stating in
comparative form the respective consolidated figures for the corresponding
date and period in the previous Fiscal Year;
(2) ANNUAL FINANCIAL STATEMENTS. As soon as available and in any event
within ninety (90) days after the end of each Fiscal Year of the Borrower,
a consolidated balance sheet of the Borrower and the Subsidiaries as at the
end of such Fiscal Year, consolidated statements of operations of the
Borrower and the Subsidiaries for such Fiscal Year, and consolidated
statements of cash flows of the
<PAGE> 26
Borrower and the Subsidiaries for such Fiscal Year, all in reasonable
detail and stating in comparative form the respective consolidated figures
for the corresponding date and period in the prior Fiscal Year and all
prepared in accordance with GAAP and as to the consolidated statements
accompanied by an opinion thereon reasonably acceptable to the Lender by
Ernst & Young LLP or other independent accountants selected by the Borrower
and reasonably acceptable to the Lender;
(3) CERTIFICATE OF NO DEFAULT. At the end of each ninety (90) day
period following the Effective Date hereof, a certificate of the Executive
Vice President - Finance of the Borrower certifying that to the best of his
or her knowledge no Default or Event of Default has occurred and is
continuing, or if a Default or Event of Default has occurred and is
continuing, a statement as to the nature thereof and the action which is
proposed to be taken with respect thereto;
(4) NOTICE OF LITIGATION. Promptly after the commencement thereof,
notice of all actions, suits, and proceedings before any court or
governmental department, commission, board, bureau, agency, or
instrumentality, domestic or foreign, affecting the Borrower or any
Subsidiary, which, in any one case or in the aggregate, are material to the
Borrower and such Subsidiary taken as a whole, or affect the ability of the
Borrower to perform its obligations under the Loan Documents;
(5) NOTICE OF DEFAULTS AND EVENTS OF DEFAULT. As soon as possible and
in any event within three (3) Business Days after the Borrower becomes
aware of the occurrence of each Default or Event of Default, a written
notice setting forth the details of such Default or Event of Default;
(6) ERISA REPORTS. Promptly after the receipt of notices by the
Borrower or any Subsidiary from the PBGC or the U.S. Department of Labor
under ERISA; and as soon as possible and in any event within thirty'(30)
days after the Borrower or any Subsidiary knows or has reason to know that
any Reportable Event or Prohibited Transaction has occurred with respect to
any Plan or that the PBGC or the Borrower or any Subsidiary has instituted
or will institute proceedings under Title IV of ERISA to terminate any
Plan, the Borrower will deliver to the Lender a certificate of the
Executive Vice President - Finance of the Borrower (in his or her capacity
as such and with no personal liability therefor) setting forth details as
to such Reportable Event or Prohibited Transaction or Plan termination and
the action the Borrower proposes to take with respect thereto;
(7) REPORTS TO OTHER CREDITORS. Promptly after the furnishing thereof,
copies of any material statement or report furnished to any other creditor
of the Borrower pursuant to the terms of any indenture, loan, or credit or
similar agreement and not otherwise required to be furnished to the Lender
pursuant to any other clause of this SECTION 5.8;
<PAGE> 27
(8) PROXY STATEMENTS, ETC. Promptly after the sending or filing
thereof, copies of all proxy statements, financial statements, and reports
which the Borrower sends to its stockholders, and copies of all regular,
periodic, and special reports, and all registration statements which the
Borrower or any Subsidiary files with the Securities and Exchange
Commission (or any governmental authority which may be substituted
therefor) or with any national securities exchange;
(9) NOTICE OF MATERIAL ADVERSE CHANGE. As soon as possible and in any
event within three (3) Business Days after the Borrower becomes aware of
the occurrence of a Material Adverse Change, a written notice setting forth
the details of such Material Adverse Change; and
(10) GENERAL INFORMATION. Such other information respecting the
condition or operations, financial or otherwise, of the Borrower or any
Subsidiary as the Lender may from time to time reasonably request.
SECTION 5.9 ENVIRONMENTAL LAWS. Use and operate, and cause each Subsidiary
operating within the United States to use and operate, all of its facilities and
properties in compliance with all Environmental Laws, keep all necessary
permits, approvals, certificates, licenses and other authorizations relating to
environmental matters in effect and remain in compliance therewith, and handle
all hazardous substances in compliance with all applicable Environmental Laws;
and provide such information and certifications which the Lender may request
from time to time to evidence compliance with this Section.
SECTION 5.10 MAINTENANCE OF BANK ACCOUNTS. Maintain with the Lender an
account of the Borrower and all of the primary bank accounts of any Subsidiary
with a principal office located within any of the 48 contiguous states of the
United States, which accounts shall be subject to the customary fees of the
Lender.
ARTICLE 6
NEGATIVE COVENANTS
------------------
Unless otherwise consented to in writing by the Lender, so long as any
Letters of Credit are outstanding, the Revolving Note shall remain unpaid, and
the Commitment has not expired or been terminated, the Borrower will not:
SECTION 6.1 LIENS. Create, incur, assume, or suffer to exist, any Lien upon
or with respect to any of its properties, now owned or hereafter acquired,
except:
(1) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or, if due and payable, if they are being
contested in good faith by appropriate proceedings and for which
appropriate reserves are maintained;
<PAGE> 28
(2) Liens imposed by law, such as mechanics', materialmen's,
landlords', warehousemen's, and carriers' Liens, and other similar Liens,
securing obligations incurred in the ordinary course of business which are
not past due for more than thirty (30) days or which are being contested in
good faith by appropriate proceedings and for which appropriate reserves
have been established;
(3) Liens under workmen's compensation, unemployment insurance, social
security, or similar legislation;
(4) Liens, deposits, or pledges to secure the performance of bids,
tenders, contracts (other than contracts for the payment of money), leases
(permitted under the terms of this Agreement), public or statutory
obligations, surety, stay, appeal, indemnity, performance or other similar
bonds, or other similar obligations arising in the ordinary course of
business;
(5) Easements, rights-of-way, restrictions, and other similar
encumbrances which do not interfere with the occupation, use, and enjoyment
by the Borrower or any Subsidiary of the property or assets encumbered
thereby in the normal course of its business or impair the value of the
property subject thereto; and
(6) Purchase money liens on equipment or personal property securing
the payment of the purchase price thereof and not extending to any other
property, provided that the aggregate of indebtedness secured by such
purchase money liens shall not exceed Two Million Five Hundred Thousand
Dollars ($2,500,000), at any one time outstanding.
SECTION 6.2 DEBT. Create, incur, assume, or suffer to exist any Debt,
except:
(1) Debt of the Borrower under this Agreement, the Letters of Credit
or the Revolving Note;
(2) Accounts payable to trade creditors for goods or services which
are not aged more than ninety (90) days from the billing date, incurred in
the ordinary course of business and paid within the specified time, unless
contested in good faith and by appropriate proceedings;
(3) Debt which is secured by Liens of the type described in CLAUSE (6)
of SECTION 6.1;
(4) Debt existing as of the Effective Date which is identified on
SCHEDULE 4.14; and
<PAGE> 29
(5) Debt not otherwise permitted by this section aggregating not more
than Two Million Five Hundred Thousand Dollars ($2,500,000), which Debt
shall rank PARI PASSU with any Borrowings hereunder.
SECTION 6.3 MERGERS, ETC. Merge or consolidate with, or sell, assign,
lease, liquidate or otherwise dispose of (whether in one transaction or in a
series of transactions) all or substantially all of its assets (whether now
owned or hereafter acquired) to any Person, or acquire all or substantially all
of the assets or the business of any Person, or permit any Subsidiary to do so.
SECTION 6.4 GUARANTIES, ETC. Assume, guarantee, endorse, or otherwise be or
become directly or contingently responsible or liable, for the obligations of
any Person, other than a Wholly-Owned Subsidiary of the Borrower on an unsecured
basis, (including, but not limited to, an agreement to purchase any obligation,
stock, assets, goods, or services, or to supply or advance any funds, assets,
goods, or services, or to maintain or cause such Person to maintain a minimum
working capital or net worth, or otherwise to assure the creditors of any Person
against loss). Nothing in this Section 6.4 shall be deemed to prohibit
guaranties by endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business.
SECTION 6.5 SUBORDINATED DEBT. Make any payment or prepayment with respect
to Subordinated Debt.
SECTION 6.6 CAPITAL EXPENDITURES. Make payments for Capital Expenditures in
excess of $8,000,000 in any Fiscal Year.
SECTION 6.7 DIVIDENDS, ETC. (1) Declare or pay any dividends or other
distribution on any of its capital stock (other than dividends payable in
capital stock) or permit any Subsidiary to do so, (2) purchase or redeem any
capital stock of the Borrower or any Subsidiary or any warrants, options or
other rights in respect of such stock, (3) make any distribution to stockholders
of the Borrower or any Subsidiary, or (4) set aside funds for any of the
foregoing; PROVIDED that (a) any Subsidiary may declare and pay dividends to the
Borrower, and (b) so long as no Default or Event of Default has occurred and is
continuing or would result therefrom, the Borrower may pay dividends or other
distributions on its capital stock to WMS Industries Inc. from the net proceeds
received by the Borrower in connection with the Public Offering; provided that
such dividend or distribution shall not exceed (in the aggregate) the lesser of
(i) the net proceeds received by the Borrower from such initial public offering
and (ii) $50,000,000.
<PAGE> 30
ARTICLE 7
FINANCIAL COVENANTS
From and after the date hereof, so long as any Letters of Credit are
outstanding, the Revolving Note shall remain unpaid, and the Commitment has not
expired or been terminated, the Borrower will not:
SECTION 7.1 MINIMUM NET INCOME. Permit Consolidated Net Income for any
Fiscal Quarter to be less than zero; provided that notwithstanding the foregoing
Consolidated Net Income for the Fiscal Quarter ending March 31, 1997 shall not
be less than negative $2,000,000.
SECTION 7.2 MINIMUM NET WORTH. Permit Consolidated Net Worth as of the last
day of any Fiscal Quarter to be less than (a) $5,700,000, plus (b) 100% of the
net proceeds raised from the Public Offering plus (c) on and after June 30,
1997, $25,000,000.
SECTION 7.3 INTEREST COVERAGE RATIO. Permit the Interest Coverage Ratio as
of the last day of any Fiscal Quarter to be less than 4.0 to 1.
SECTION 7.4 FUNDED DEBT RATIO. Permit the Funded Debt Ratio as of the last
day of any Fiscal Quarter to exceed 2.0 to 1.
SECTION 7.5 LIQUID ASSET COVERAGE RATIO. Permit the Liquid Asset Coverage
Ratio as of the last day of any Fiscal Quarter to be less than 1 to 1.
ARTICLE 8
EVENTS OF DEFAULT
-----------------
SECTION 8.1 EVENTS OF DEFAULT. If any of the following events ("Events of
Default") shall occur:
(1) The Borrower should fail to pay the principal of or interest on,
the Revolving Note or any amount payable under the Applications, or any
other sums required to be paid pursuant to this Agreement as and when due
and payable and in the case of interest such failure shall continue for two
(2) Business Days;
(2) Any representation or warranty made or deemed made by the Borrower
in this Agreement or any other Loan Document or which is contained in any
certificate, document, opinion, or financial or other statement furnished
at any time under or in connection with any Loan Document shall prove, in
light of the circumstances under which it was made, to have been incorrect
in any material respect on or as of the date made or deemed made;
<PAGE> 31
(3) The Borrower or any Subsidiary shall fail to perform or observe
any term, covenant or agreement contained in Sections 2.3, 2.4, 2.5, 2.9,
5.6 through 5.9, 6.3 through 6.7 or ARTICLE 7 of this Agreement applicable
thereto;
(4) The Borrower or any Subsidiary shall fail to perform or observe
any term, covenant or agreement contained in Sections 6.1, 6.2, 9.6 or 9.11
of this Agreement and such failure shall continue for four (4) Business
Days after the earlier of discovery, notification or final calculation
thereof applicable thereto;
(5) The Borrower or any Subsidiary shall fail to perform or observe
any other term, covenant, or agreement contained in any Loan Document
applicable hereto (other than the Revolving Note and those Sections
referenced in the foregoing CLAUSES (3) and (4)) on its part to be
performed or observed and such failure shall continue for fifteen (15)
Business Days following notice thereof from the Lender;
(6) The Borrower or any Subsidiary shall (a) fail to pay any
indebtedness for borrowed money (other than the Revolving Note) of the
Borrower, or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and any applicable grace periods shall have expired, or (b) fail
to perform or observe any term, covenant, or condition on its part to be
performed or observed under any agreement or instrument relating to any
such indebtedness, when required to be performed or observed, if the effect
of such failure to perform or observe is to accelerate, or to permit the
acceleration, after the giving of notice, of the maturity of such
indebtedness, unless such failure to perform or observe shall be waived by
the holder of such indebtedness without any material payment or other
material accommodation on the part of the Borrower; or any such
indebtedness shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment), prior to
the stated maturity thereof;
(7) The Borrower or any Subsidiary (a) shall generally not, or shall
be unable to, or shall admit in writing its inability to pay its debts as
such debts become due; or (b) shall make an assignment for the benefit of
creditors, petition or apply to any tribunal for the appointment of a
custodian, receiver, or trustee for it or a substantial part of its assets;
or (c) shall commence any proceeding under any bankruptcy, reorganization,
arrangements, readjustment of debt, dissolution, or liquidation law or
statute of any jurisdiction, whether now or hereafter in effect; or (d)
shall have any such petition or application filed or any such proceeding
commenced against it in which an order for relief is entered or
adjudication or appointment is made and which remains undismissed for a
period of sixty (60) days or more; or (e) by any act or omission shall
indicate its consent to, approval of, or knowing acquiescence in any such
petition, application, or proceeding, or order for relief, or the
appointment of a custodian, receiver, or trustee for all or any substantial
part of its properties; or (f) shall suffer any such custodianship,
receivership, or trusteeship to continue undischarged for a period of sixty
(60) days or more;
<PAGE> 32
(8) Any of the following events occur or exist with respect to the
Borrower or any ERISA Affiliate; (a) any Prohibited Transaction involving
any Plan; (b) any Reportable Event with respect to any Plan; (c) the filing
under Section 4041 of ERISA of a notice of intent to terminate any Plan or
the termination of any Plan; (d) any event or circumstance that might
constitute grounds entitling the PBGC to institute proceedings under
Section 4042 of ERISA for the termination of, or for the appointment of a
trustee to administer, any Plan, or the institution by the PBGC of any such
proceedings; (e) complete or partial withdrawal under Section 4201 or 4204
of ERISA from a Multiemployer -Plan or the reorganization, insolvency, or
termination of any Multiemployer Plan; and in each case above, such event
or condition, together with all other events or conditions, if any, could
in the reasonable opinion of the Lender subject the Borrower to any tax,
penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or
otherwise (or any combination thereof) which in the aggregate exceed or may
exceed five hundred thousand Dollars ($500,000) and such event or condition
remains unsatisfied after fifteen (15) Business Days from its initial
occurrence or results in a Lien (subject to Liens permitted under SECTION
6.1) on Borrower's assets.
SECTION 8.2 EFFECT OF EVENT OF DEFAULT. If any Event of Default described
in SECTION 8.1(7) shall occur, automatically the Commitment of the Lender to
make Revolving Loans or issue Letters of Credit hereunder shall immediately
terminate and the outstanding principal amount of the Revolving Note, all
interest thereon and all other amounts payable under this Agreement and
the other Loan Documents shall become immediately due and payable and the
Borrower shall become immediately obligated to deliver to the Lender cash
collateral in an amount equal to the outstanding face amount of all Letters of
Credit; and, in the case of any other Event of Default, the Lender may by notice
to the Borrower, (1) declare the Commitment of the Lender to be terminated, and
(2) declare the outstanding principal amount of the Revolving Note, all interest
thereon, and all other amounts payable under this Agreement and the other Loan
Documents to be forthwith due and payable, whereupon the Revolving Note, all
such interest, and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest, or further notice of any kind,
all of which are hereby expressly waived by the Borrower, and the Borrower shall
become immediately obligated to deliver to the Lender cash collateral in an
amount equal to the outstanding face amount of all Letters of Credit.
ARTICLE 9
MISCELLANEOUS
-------------
SECTION 9.1 WAIVERS AND AMENDMENTS. The provisions of this Agreement and of
each Loan Document may from time to time be amended, modified or waived, if such
amendment, modification or waiver is in writing and consented to by the Borrower
and the Lender, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
<PAGE> 33
SECTION 9.2 NOTICES, ETC. All notices and other communications provided for
under this Agreement and under the other Loan Documents to which the Borrower is
a party shall be in writing (including telegraphic, telex or facsimile
communication) and mailed or telecommunicated or delivered to the address of the
respective party as set forth on the signature pages hereto; or, as to each
party, at such other address as shall be designated by such party in a written
notice to the other party complying as to delivery with the terms of this
SECTION 9.2. All such notices and communications shall, when mailed or
telecommunicated, be effective upon the earlier of actual receipt or three (3)
Business Days after deposited in the mails, or one (1) Business Day after
transmitted by telex and the appropriate answer back received, transmitted by
facsimile or delivered to the telegraph company, respectively, addressed as
aforesaid, except that notices to the Lender pursuant to the provisions of
Article 2 shall not be effective until received by the Lender.
SECTION 9.3 NO WAIVER; REMEDIES. No failure on the part of any party to
exercise, and no delay in exercising, any right, power, or remedy under any Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Documents preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies provided by
law.
SECTION 9.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights under any Loan Document to which the Borrower is a party without
the prior written consent of the Lender.
SECTION 9.5 ASSIGNMENTS AND PARTICIPATIONS; INFORMATION. The Lender may
(without the Borrower's consent) grant participations in or sell, assign,
transfer or otherwise dispose of, at any time and from time to time hereafter,
the Lender's rights, titles, interests, remedies, powers and/or duties this
Agreement or any other Loan Document, or of any portion of any thereof, (each
Person to whom such participation is to be made being herein referred to as a
"Participant" and each Person to whom such assignment, transfer or disposition
is to be made being herein referred to as an "Assignee"). The Lender may furnish
any information concerning the Borrower in the possession of the Lender from
time to time to assignees of the rights and/or obligations of the Lender
hereunder and to participants in any Revolving Loan or Letter of Credit
(including prospective assignees and participants). The Lender may furnish
information in response to credit inquiries consistent with general banking
practice. The Lender shall promptly notify the Borrower of the Lender's grant of
any participation in or sale, assignment, transfer or other disposition of this
Agreement or any other Loan Document, or of any portion of any thereof. The
Borrower shall use its reasonable efforts to assist each Lender in its efforts
to sell assignments and participations.
SECTION 9.6 COSTS, EXPENSES, AND TAXES. The Borrower agrees to pay on
demand all costs and expenses in connection with the preparation, execution,
delivery, filing, recording, and administration of any of the Loan Documents,
including, without limitation,
<PAGE> 34
the fees and out-of-pocket expenses of counsel for the Lender and all costs and
expenses, if any, in connection with the enforcement of any of the Loan
Documents. In addition, the Borrower shall pay any and all stamp and other taxes
and fees payable or determined to be payable in connection with the execution,
delivery, filing, and recording of any of the Loan Documents and the other
documents to be delivered under any such Loan Documents, and agrees to save the
Lender harmless from and against any and all liabilities with respect to or
resulting from any delay attributed to the Borrower in paying or omission to pay
such taxes and fees.
SECTION 9.7 RIGHT OF SETOFF. Upon the occurrence and during the continuance
of any Event of Default, the Lender is hereby authorized at any time and from
time to time, without notice to the Borrower (any such notice being expressly
waived by the Borrower), to setoff and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Lender to or for the credit or the account
of the Borrower against any and all of the obligations of the Borrower now or
hereafter existing under this Agreement, the Revolving Note, any Letter of
Credit or any other Loan Document, irrespective of whether or not the Lender
shall have made any demand under this Agreement, the Revolving Note, any Letter
of Credit or such other Loan Document and although such obligations may be
unmatured. The Lender agrees promptly to notify the Borrower after any such
setoff and application; PROVIDED, that the failure to give such notice shall not
affect the validity of such setoff and application. The rights of the Lender
under this SECTION 9.7 are in addition to other rights and remedies (including,
without limitation, other rights of setoff) which the Lender may have.
SECTION 9.8 GOVERNING LAW. This Agreement and the Revolving Note shall be
governed by, and construed in accordance with, the laws of the State of Illinois
without regard to its conflict of laws provisions.
SECTION 9.9 SEVERABILITY OF PROVISIONS. Any provision of any Loan Document
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such Prohibition or
unenforceability without invalidating the remaining provisions of such Loan
Document or affecting the validity or enforceability of such provision in any
other jurisdiction.
SECTION 9.10 HEADINGS. Article and Section headings in the Loan Documents
are included in such Loan Documents for the convenience of reference only and
shall not constitute a part of the applicable Loan Documents for any other
purpose.
SECTION 9.11 GENERAL INDEMNITY. In addition to the payment of expenses
pursuant to SECTION 9.6, Borrower agrees to indemnify, pay and hold the Lender,
and the officers, directors, employees, agents, and affiliates of the Lender
(collectively, the "Indemnities"), harmless from and against any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of counsel
for any of such Indemnities in connection with any investigative,
<PAGE> 35
administrative or judicial proceeding commenced or threatened, whether or not
any of such Indemnitee shall be designated a party thereto) that may be imposed
on, incurred by, or asserted against any Indemnitee, in any manner relating to
or arising out of this Agreement, any other Loan Document or any other
agreements executed and delivered by the Borrower in connection herewith, the
Lender's agreement to make the Revolving Credit hereunder, or the use or
intended use of the proceeds of any of the Revolving Loans (the "indemnified
liabilities"); PROVIDED, that Borrower shall have no obligation to an Indemnitee
hereunder with respect to indemnified liabilities arising from the gross
negligence or willful misconduct of such Indemnitee. To the extent that the
undertaking to indemnify, pay and hold harmless set forth in the preceding
sentence may be unenforceable because it violates any law or public policy, the
Borrower shall contribute the maximum portion that it is permitted to pay under
applicable law to the payment and satisfaction of all indemnified liabilities
incurred by the Indemnities or any of them. The provisions of the undertakings
and indemnification set out in this SECTION 9.11 shall survive satisfaction and
payment of Borrower's obligations hereunder and termination of this Agreement.
SECTION 9.12 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS
AGREEMENT, ANY OTHER LOAN DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR
THEREWITH, OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH
THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM SHALL
BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE LENDER ENTERING INTO THIS AGREEMENT.
SECTION 9.13 SUBMISSION TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL OR ILLINOIS STATE COURT
SITTING IN CHICAGO, ILLINOIS, OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS, AND THE BORROWER HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY
BE HEARD AND DETERMINED IN SUCH FEDERAL OR ILLINOIS STATE COURT.
SECTION 9.14 SERVICE OF PROCESS. THE BORROWER AND THE LENDER HEREBY
IRREVOCABLY CONSENT TO SERVICE OF PROCESS BY MEANS OF CERTIFIED MAIL AT THE
ADDRESS PROVIDED FOR IN SECTION 9.2. NOTHING IN THIS AGREEMENT WILL AFFECT THE
RIGHT OF THE LENDER, THE LENDER OR THE BORROWER TO SERVE SERVICE OF PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW.
<PAGE> 36
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
MIDWAY GAMES INC.
By /s/ Harold H. Bach, Jr.
---------------------------
Harold H. Bach, Jr.
Executive Vice President-
Finance
3401 North California Avenue
Chicago, Illinois 60618
Attn: Harold H. Bach, Jr.
Telephone: (312) 728-2300
Facsimile: (312) 961-1099
BANK OF AMERICA ILLINOIS
By /s/ L. Richard DiDonato
---------------------------
Name: L. Richard DiDonato
Title: Vice President
231 South LaSalle Street
Chicago, Illinois 60697
Attn: L. Richard DiDonato
Telephone: (312) 828-1995
Facsimile: (312) 828-1974
<PAGE> 37
EXHIBIT A
FORM OF REVOLVING NOTE
$ , 1996
------------------ -------------
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned promises to pay to the order of (the
"Lender") at its principal office in Chicago, Illinois, the principal amount of
($ ) or, if less, the aggregate unpaid principal amount of all Revolving Loans
(as defined in the Credit Agreement hereinafter referenced) outstanding, as duly
shown in the records of the Lender or, at the Lender's option, on the schedule
attached hereto (and any continuation thereof), on the Termination Date.
The undersigned also promises to pay interest on the unpaid principal
amount hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Credit Agreement.
Payments of both principal and interest are to be made in lawful money of
the United States of America in immediately available funds.
This Note is the Revolving Note described in, and is subject to the terms
and provisions of, the Credit Agreement, dated as of October 15, 1996 (as the
same may at any time be amended, modified or supplemented from time to time, the
"Credit Agreement"), between the undersigned and the Lender. Terms used herein
and not otherwise defined herein are used herein as defined in the Credit
Agreement.
Reference is hereby made to the Credit Agreement for a statement of the
prepayment rights and obligations of the undersigned and for a statement of the
terms and conditions under which the due date of this Note may be accelerated.
Upon the occurrence of any Event of Default as specified in the Credit
Agreement, the principal balance hereof and the interest accrued hereon may be
declared to be forthwith due and payable, and any indebtedness of the Lender or
other holder hereof to the undersigned may be appropriated and applied hereon.
In addition to and not in limitation of the foregoing and the provisions of
the Credit Agreement, the undersigned further agrees, subject only to any
limitation imposed by applicable law, to pay all expenses, including reasonable
attorneys, fees and legal expenses, incurred by the holder of this Note in
endeavoring to collect any amounts payable hereunder which are not paid when
due, whether by acceleration or otherwise.
<PAGE> 38
All parties hereto, whether as makers, endorsers, or otherwise, severally
waive presentment for payment, demand, protest and notice of dishonor.
THIS REVOLVING NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES.
MIDWAY GAMES, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-2-
<PAGE> 39
<TABLE>
Schedule attached to Revolving Note dated October 15, 1996 of Midway Games Inc.,
payable to the order of ______________________
<CAPTION>
Date of Loan or Interest Amount of Interest Amount of Notation
Continuation Period Loan Rate per Repayment Made By
- --------------- -------- --------- Annum --------- ---------
--------
<S> <C> <C> <C> <C> <C>
</TABLE>
- 3 -
<PAGE> 40
EXHIBIT B
FORM OF BORROWING REQUEST
BANK OF AMERICA ILLINOIS
231 South LaSalle Street
Chicago, Illinois 60697
Attention: L. Richard DiDonato
Ladies and Gentlemen:
This Borrowing Request is delivered to you pursuant to SECTIONS 2.2(1) of
the Credit Agreement, dated as of October 15, 1996 (as amended or modified, the
"Credit Agreement"), between Midway Games Inc., a Delaware corporation (the
"Borrower") and Bank of America Illinois (the "Lender"). Unless otherwise
defined herein, capitalized terms used herein have the meanings provided in the
Credit Agreement.
The Borrower hereby requests that a Revolving Loan be made in the aggregate
principal amount of $__________________ on _________________________, 19__
having an Interest Period of days.
The Borrower hereby certifies and warrants that on the date the Revolving
Loan requested hereby is made, after giving effect to the making of such
Revolving Loan:
(a) No Default or Event of Default has occurred and is continuing or
will result from the Borrowing of such Revolving Loan.
(b) The representations and warranties of the Borrower contained in
the Credit Agreement are true and correct with the same effect as though
made on the date hereof.
The Borrower agrees that if prior to the time of the Revolving Loan
requested hereby any matter certified to herein by it will not be true and
correct at such time as if then made, it will immediately so notify the Lender.
Except to the extent, if any, that prior to the time of the Revolving Loan
requested hereby the Lender shall receive written notice to the contrary from
the Borrower, each matter certified to herein shall be deemed once again to be
certified as true and correct at the date of such Revolving Loan as if then
made.
Please make the proceeds of the Revolving Loan available in accordance with
the instructions set forth on ANNEX I attached hereto.
<PAGE> 41
The Borrower has caused this Borrowing Request to be executed and
delivered, and the certification and warranties contained herein to be made, by
an Authorized Officer this __ day of ___________________________, 19__.
MIDWAY GAMES, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
- 2 -
<PAGE> 42
ANNEX I
Instructions
------------
<PAGE> 43
EXHIBIT C
FORM OF CONTINUATION NOTICE
BANK OF AMERICA ILLINOIS
231 South LaSalle Street
Chicago, Illinois 60697
Attention: L. Richard DiDonato
Ladies and Gentlemen:
This Continuation Notice is delivered to you pursuant to SECTION 2.2(2) of
the Credit Agreement, dated as of October 15, 1996 (as amended or modified, the
"Credit Agreement"), between Midway Games Inc., a Delaware corporation (the
"Borrower") and Bank of America Illinois, (the "Lender"). Unless otherwise
defined herein, capitalized terms used herein have the meanings provided in the
Credit Agreement.
The Borrower hereby requests that on ______________, 19___ , $ of the
presently outstanding principal amount of the Revolving Loans originally made on
____________ be continued having an Interest Period of ____________ days.
The Borrower hereby certifies and warrants that on the date the
continuation herein requested is made, after giving effect to the making of such
continuation:
(a) No Default or Event of Default has occurred and is continuing or
will result from the continuation herein requested.
(b) The representations and warranties of the Borrower contained in
the Credit Agreement are true and correct with the same effect as though
made on the date hereof.
Except to the extent, if any, that prior to the time of the continuation
requested hereby the Lender shall receive written notice to the contrary from
the Borrower, each matter certified to herein shall be deemed to be certified at
the date of such continuation as if then made.
<PAGE> 44
The Borrower has caused this Continuation Notice to be executed and
delivered, and the certification and warranties contained herein to be made, by
an Authorized Officer this ___ day of ___________________, 19__ .
MIDWAY GAMES, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
- 2 -
<PAGE> 45
EXHIBIT D
[ON LETTERHEAD OF BORROWER'S COUNSEL]
October 15, 1996
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
Re: Midway Games Inc.
----------------
Ladies and Gentlemen:
I have acted as counsel for Midway Games Inc., a Delaware corporation (the
"Borrower"), in connection with the preparation, execution and delivery of the
Credit Agreement and the Loan Documents (hereinafter defined). This opinion is
furnished to you pursuant to Section 3.1(4) of the Credit Agreement. Capitalized
terms used herein and not otherwise defined herein have the meanings ascribed to
them in the Credit Agreement.
In rendering this opinion, I have examined the following documents (which
are collectively referred to as the "Loan Documents"):
(i) the Credit Agreement (the "Credit Agreement"), dated as of October
15, 1996 between the Borrower and Bank of America Illinois (the "Lender");
and
(ii) the Revolving Note of the Borrower, dated as of the date hereof
and delivered pursuant to the Credit Agreement.
I have examined originals, or copies certified or otherwise identified to
my satisfaction, of such records, documents, certificates and other instruments
as in my judgment are necessary or appropriate for the purposes of the opinions
contained herein. I have assumed the genuineness of all signatures, the
authenticity of all documents submitted to me as originals and the conformity to
original documents of all documents submitted to us as certified or photostatic
copies. I have further assumed, with respect to all documents I have reviewed,
the due authorization, execution and delivery thereof by parties other than the
Borrower. I have relied as to factual matters upon certificates or statements of
such public officials and such officers and duly appointed agents of the
Borrower as I have deemed relevant or necessary.
I am a member of the Bar of the States of New York and Connecticut, and I
express no opinion with respect to laws other
<PAGE> 46
than the laws of these States, the General Corporation Law of the State of
Delaware and federal laws of the United States of America. I have assumed that
the laws of the State of Illinois are the same as the General Corporation Law of
the State of Delaware for the purposes of this opinion.
Based upon and subject to the matters stated herein and upon such
investigation as I have deemed necessary, I am of the opinion that:
1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, is duly licensed
or qualified to transact business as a foreign corporation in the State of
Illinois, and has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
2. The Borrower has the power and authority to execute, deliver and
perform the terms and provisions of each of the Loan Documents and has
taken all necessary action to authorize the execution, delivery and
performance by it of each of such Loan Documents.
3. The execution, delivery and performance by the Borrower of each of
the Loan Documents, and compliance by it with the terms and provisions
thereof, will not (i) violate any provision of any existing law, statute,
rule or regulation applicable to it, (ii) result in any breach of, or
constitute a default under, any agreement, instrument, order, writ,
judgment or decree known to me to which the Borrower is a party or by which
it may be bound, (iii) result in the creation or imposition of (or the
obligation to create or impose) any Lien (except for Liens under SECTION
6.1 of the Credit Agreement) upon any of its property or assets pursuant to
the terms of any agreement, instrument, order, writ, judgment or decree
known to us to which the Borrower is a party or by which it may be bound,
or (iv) contravene or conflict with its corporate charter or by-laws.
4. No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with or exemption by, any
governmental or public body or authority of the United States or the State
of Illinois, or any subdivision thereof, is required to authorize, or is
required in connection with, the execution and delivery by the Borrower of
any Loan Document and the performance by the Borrower of its obligations
thereunder.
5. The Borrower has duly executed and delivered each of the Loan
Documents, and each of such Loan Documents
-2-
<PAGE> 47
constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
6. To my knowledge, there are no actions or proceedings pending or
overtly threatened in writing against the Borrower before any court,
governmental agency or arbitrator which could affect the validity, binding
effect or enforceability of any of the Loan Documents.
7. The making of the Revolving Loans and the application of the
proceeds thereof as provided in the Credit Agreement do not violate
Regulation U of the Board of Governors of the Federal Reserve System.
8. Neither the Borrower nor any of its Subsidiaries is an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
9. Neither the Borrower nor any of its Subsidiaries is a "holding
company" or a "subsidiary company" of a "holding company" or an "affiliate"
of a "holding company" or of a "subsidiary company" of a "holding company"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
The foregoing opinions are limited by the following qualifications:
(a) my opinions relating to validity, binding effect and
enforceability in paragraph 5 above, are subject to limitations imposed by
any applicable bankruptcy, insolvency, reorganization, avoidable transfers,
moratorium and other laws affecting the validity or enforcement of
creditors, rights generally and, in addition, my opinion relating to
enforceability in paragraph 5 above is subject to (i) the effect of general
principles of equity (regardless of whether considered in a proceeding in
equity or at law) and (ii) limitations on enforceability under certain
circumstances of provisions indemnifying a party against liability for its
own wrongful or negligent acts, imposed by public policy relating thereto;
(b) certain remedial provisions of the Loan Documents may be
unenforceable in whole or in part, but the inclusion of such provisions
does not affect the validity of the Loan Documents; however, the
unenforceability of such provisions may result in delays in the enforcement
of your rights and remedies under the Loan Documents, and I express no
opinion as to the economic consequences, if any, of such delay; and
- 3 -
<PAGE> 48
(c) I express no opinion as to the effect of your compliance or
noncompliance with any state or federal laws or regulations applicable to
you because of your legal or regulatory status or the nature of your
business.
These opinions and this letter may not be used or relied on by or published
or communicated to any party other than you and your assignees without our
written consent.
Very truly yours,
--------------------------
Barbara M. Norman
Vice President, Secretary
and General Counsel
-4-
<PAGE> 49
Schedule 4.10
The Borrower's Subsidiaries
---------------------------
<PAGE> 50
Schedule 4.14
Indebtedness
------------
-6-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION
OF
SUBSIDIARY INCORPORATION
- --------------------------------------------------------------------------------- -----------
<S> <C>
Midway Home Entertainment Inc.................................................... Delaware
Midway Interactive Inc........................................................... Delaware
Williams/Nintendo Inc............................................................ Delaware
Atari Games Corporation.......................................................... California
Atari Interactive (California) Inc............................................... California
K.K. Atari Interactive........................................................... Japan
[OTHERS]
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the combined financial statements of Midway Games Inc.
dated September 12, 1996 and our report on the consolidated financial statements
of Atari Games Corporation dated March 22, 1996, in Amendment No. 3 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. 3 to the Registration Statement on Form S-1 (333-11919) filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
October 24, 1996
