<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for use of the
Commission only
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
MIDWAY LOGO
MIDWAY GAMES INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JANUARY 27, 1998
------------------------
To the Stockholders of
MIDWAY GAMES INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Midway
Games Inc. (the "Company," or "Midway") will be held on Tuesday, January 27,
1998 at 10:30 A.M. Eastern Standard Time at the New York Athletic Club,
President's Room, 10th Floor, 180 Central Park South, New York, New York 10019,
to consider and act upon the following matters:
1. Electing a board of twelve (12) directors;
2. Amending the Amended and Restated Certificate of Incorporation of the Company
(the "Certificate of Incorporation") and the Amended and Restated Bylaws of
the Company (the "Bylaws") to provide for the classification of the Board of
Directors into three classes with staggered terms;
3. Amending the Certificate of Incorporation and the Bylaws to provide that any
vacancy on the Board of Directors may be filled for the unexpired term only
by a vote of a majority of the remaining directors then in office;
4. Amending the Certificate of Incorporation and the Bylaws to eliminate
stockholder action by written consent;
5. Amending the Certificate of Incorporation and the Bylaws to permit only the
President, the Chairman of the Board or the Board of Directors to call
special meetings of stockholders and to limit the business permitted to be
conducted at such meetings to that brought before the meetings by or at the
direction of the Board of Directors;
6. Amending the Certificate of Incorporation and the Bylaws to implement an
advance notice procedure for the submission of director nominations and other
business to be considered at annual meetings of stockholders;
7. Amending the Bylaws to require either a majority vote of the Board of
Directors or an affirmative vote of 80% of the outstanding Common Stock
entitled to vote thereon in order to adopt, amend or repeal the Bylaws, and
amending the Certificate of Incorporation to require an affirmative vote of
80% of the outstanding Common Stock entitled to vote thereon in order to
adopt, amend or repeal the amendments to the Certificate of Incorporation
proposed herein.
8. Ratifying the appointment of Ernst & Young LLP as independent auditors for
the 1998 fiscal year; and
9. Transacting such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
The close of business on December 8, 1997 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting and any adjournments thereof. A list of the stockholders entitled to
vote at the Annual Meeting will be open to the examination of any stockholder of
the
<PAGE> 3
Company for any purpose germane to the Annual Meeting during regular business
hours at the offices of the Company for the ten-day period prior to the Annual
Meeting.
YOU ARE EARNESTLY REQUESTED, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE
MEETING, TO MARK, DATE, SIGN AND RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE
ENCLOSED ENVELOPE TO WHICH NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED
STATES.
By Order of the Board of Directors,
ORRIN J. EDIDIN
Vice President, Secretary and General
Counsel
Chicago, Illinois
December , 1997
<PAGE> 4
ANNUAL MEETING OF STOCKHOLDERS
OF
MIDWAY GAMES INC.
------------------------
PROXY STATEMENT
------------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (the "Board") of Midway Games Inc. (the "Company" or
"Midway") of proxies to be voted at the Annual Meeting of Stockholders to be
held at the New York Athletic Club, President's Room, 10th Floor, 180 Central
Park South, New York, New York 10019, on Tuesday, January 27, 1998 at 10:30 A.M.
Eastern Standard Time, and at any adjournment or adjournments thereof (the
"Annual Meeting").
All proxies in the accompanying form which are properly executed and duly
returned will be voted in accordance with the instructions specified therein. If
no instructions are given, such proxies will be voted in accordance with the
recommendations of the Board as indicated in this Proxy Statement. A proxy may
be revoked at any time prior to its exercise by written notice to the Company,
by submission of another proxy bearing a later date or by voting in person at
the meeting. Such revocation will not affect a vote on any matters taken prior
thereto. The mere presence at the meeting of the person appointing a proxy will
not revoke the appointment.
The mailing address of the Company's principal executive offices is 3401
North California Avenue, Chicago, Illinois 60618. This Proxy Statement and the
accompanying proxy card are being mailed to stockholders on or about December
, 1997.
Only holders of the Company's Common Stock, $.01 par value per share (the
"Common Stock"), of record at the close of business on December 8, 1997 (the
"Record Date") will be entitled to vote at the Annual Meeting or any adjournment
or adjournments of such meeting. There were 38,500,000 shares of Common Stock
outstanding on the Record Date. Each such share entitles the holder thereof to
one vote.
1
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the Record Date
concerning persons which, to the knowledge of Midway, beneficially own more than
5% of the outstanding shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNED COMMON STOCK
- ------------------------------------ ------------------- -------------------------
<S> <C> <C>
WMS Industries Inc. .................................. 33,400,000 86.8%
3401 North California Avenue
Chicago, IL 60618
</TABLE>
Because WMS Industries Inc. ("WMS") owns 86.8% of the outstanding Common
Stock, WMS will be able to decide all of the proposals to be considered at the
Annual Meeting. WMS has indicated that it intends to vote "For" the nominees for
election as directors and "For" each other proposal set forth in the Notice of
the Annual Meeting. Therefore, all of the proposals are expected to be approved.
If the proposed spin off by WMS described below under the heading "The Offering
and Proposed Distribution" is completed in 1998, as expected, WMS will no longer
own any Common Stock at the time of the 1999 annual meeting of stockholders.
2
<PAGE> 6
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of the Record Date, certain information
concerning beneficial ownership of shares of Common Stock by each director of
Midway, each executive officer of Midway and by all directors and executive
officers of Midway as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING
BENEFICIALLY COMMON
NAME OF BENEFICIAL OWNER OWNED(1) STOCK(2)
------------------------ ------------ -------------
<S> <C> <C>
Harold H. Bach, Jr *................................ 65,000(3) **
William C. Bartholomay*............................. 35,000(4) **
Byron C. Cook*...................................... 72,000(3) **
Orrin J. Edidin..................................... 0 **
Kenneth J. Fedesna*................................. 61,000(3) **
William E. McKenna*................................. 26,000(4) **
Norman J. Menell*................................... 27,000(4) **
Louis J. Nicastro*.................................. 35,000(4) **
Neil D. Nicastro*................................... 320,000(5) **
Harvey Reich*....................................... 27,000(4) **
Ira S. Sheinfeld*................................... 25,000(4) **
Gerald O. Sweeney, Jr.*............................. 25,000(4) **
Richard D. White*................................... 25,000(4) **
------- ---
Directors and Executive Officers as a group (13
persons).......................................... 743,000(6) 1.9%
======= ===
</TABLE>
- -------------------------
* Nominee for Director
** Less than 1%
(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. Except as otherwise indicated in the following
footnotes, each of the persons listed in the table owns the shares of Common
Stock opposite his name and has sole voting and dispositive power with
respect to such shares.
(2) For purposes of calculating the percentage of outstanding shares of Common
Stock, shares issuable to such person upon the exercise of stock options
within 60 days have been deemed to be outstanding.
(3) Includes 60,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(4) Includes 25,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(5) Includes 300,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(6) Includes 680,000 shares of Common Stock which directors and executive
officers have the right to acquire upon the exercise of stock options.
THE OFFERING AND PROPOSED DISTRIBUTION
On October 29, 1996, Midway completed an initial public offering of
5,100,000 shares of its Common Stock for $20.00 per share (the "Offering"). As
of the Record Date, Midway had 38,500,000 shares of its Common Stock outstanding
of which WMS owned 33,400,000 shares, representing approximately 86.8% of the
outstanding shares of Midway Common Stock.
On August 11, 1997, WMS announced that it would distribute on a pro rata
basis to its stockholders all of the Common Stock which it owns. Midway believes
that the price of its Common Stock has been adversely affected by Midway's
relatively small public share float and by the substantial short position that
exists in Midway stock attributable to arbitragers that have purchased WMS
shares while establishing a short position
3
<PAGE> 7
in Midway. Therefore, Midway's desire to grow its business, in part through
acquisitions, may be enhanced by the spin-off of Midway. In order to realize its
acquisition strategies, Midway would have to either raise cash to fund a cash
acquisition by borrowing or by selling additional shares of its Common Stock or
other securities or issue additional shares of its Common Stock or other
securities as the method of payment. Accordingly, the price and liquidity of
Common Stock is an important consideration. Midway also believes that the
spin-off will reduce regulatory burdens by separating ownership of Midway's
business from WMS' gaming device business.
The proposed spin-off is conditioned upon several requirements, including,
among other things, the receipt of a ruling from the Internal Revenue Service
that the transaction will be tax free to WMS and its stockholders. WMS
anticipates that the spin-off would be completed in early 1998.
PROPOSAL 1 -- ELECTION OF DIRECTORS
Upon the recommendation of the Nominating Committee, twelve (12) directors,
constituting the entire Board, are to be elected to serve until the next annual
meeting of stockholders and until their respective successors are duly elected
and qualified. All of the nominees are at present directors of the Company. Mr.
Neil D. Nicastro is the son of Mr. Louis J. Nicastro. Should any of the nominees
be unable to serve or refuse to serve as a director (an event which the Board
does not anticipate), proxies solicited hereunder will be voted in favor of
those nominees who do remain as candidates and may be voted for substituted
nominees.
<TABLE>
<CAPTION>
POSITION WITH COMPANY AND DIRECTOR
NAME OF NOMINEE(AGE) PRINCIPAL OCCUPATION SINCE
-------------------- ------------------------- --------
<S> <C> <C>
Neil D. Nicastro (41)................ Chairman of the Board of Directors, President, Chief 1988
Executive Officer and Chief Operating Officer of the
Company and President, Chief Executive Officer and
Chief Operating Officer of WMS
Harold H. Bach, Jr. (65)............. Executive Vice President -- Finance, Treasurer and 1990
Chief Financial Officer and Director of the Company
and Vice President -- Finance, Treasurer, Chief
Financial and Chief Accounting Officer of WMS
Byron C. Cook (43)................... Executive Vice President -- Home Video and Director 1996
of the Company
Kenneth J. Fedesna (48).............. Executive Vice President -- Coin-Op Video and 1996
Director of the Company and Vice President and
General Manager of Williams Electronics Games, Inc.
William C. Bartholomay (69).......... Director of the Company and President of Near North 1996
National Group
William E. McKenna (78).............. Director of the Company and General Partner, MCK 1996
Investment Company
Norman J. Menell (66)................ Director of the Company and Vice Chairman of the 1996
Board of WMS
Louis J. Nicastro (69)............... Director of the Company and Chairman of the Board 1988
and Chief Executive Officer of WHG Resorts & Casinos
Inc.
Harvey Reich (68).................... Director of the Company and Attorney, Robinson Brog 1996
Leinwand Greene Genovese & Gluck, P.C.
Ira S. Sheinfeld (59)................ Director of the Company and Attorney, Squadron, 1996
Ellenoff, Plesent & Sheinfeld LLP
Gerald O. Sweeney, Jr. (45).......... Director of the Company and Attorney, Lord, Bissell 1996
& Brook
Richard D. White (43)................ Director of the Company and Managing Director, CIBC 1996
Oppenheimer Corp.
</TABLE>
4
<PAGE> 8
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.
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 is also
the Vice President -- Finance, Chief Financial and Chief Accounting Officer of
WMS. Prior to joining WMS, Mr. Bach was a partner in the accounting firms of
Ernst & Young (1989-1990) and Arthur Young & Company (1967-1989).
BYRON C. COOK became a Director and Executive Vice President -- Home Video
of the Company on August 30, 1996. Mr. Cook is also the President and Chief
Operating Officer of Midway Home Entertainment Inc., a wholly-owned subsidiary
of the Company, positions he assumed upon the acquisition of Tradewest in April
1994. Prior to the acquisition, Mr. Cook was President of Tradewest (1988-1994)
as well as a co-founder thereof.
KENNETH J. FEDESNA became a Director and Executive Vice
President -- Coin-Op Video of the Company on August 30, 1996. Mr. Fedesna served
as Vice President and General Manager of the Company from July 29, 1988 to
August 30, 1996. He has also been a Director of WMS since 1993 as well as Vice
President and General Manager of Williams Electronics Games, Inc., a
wholly-owned subsidiary of WMS, for in excess of five years.
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., a division of Time Warner Inc., since April 1994
having also held that office during the period 1976-1992 and having served as a
Director (1976-1994). 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 has been the Chairman of the Board and Chief Executive
Officer of WHG Resorts & Casinos Inc. and its predecessors since 1983. Mr.
Nicastro became a Director of the Company on August 30, 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), President of the Company
(1988-1989 and 1990-1991) and as a Director of the Company from 1988 until June
26, 1996. 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). He has served as Chairman of
the Board of Directors of WMS since its incorporation in 1974.
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.
5
<PAGE> 9
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.
GERALD O. SWEENEY, JR. has been a member of the law firm Lord, Bissell &
Brook, Chicago, Illinois for in excess of five years. He was elected as a
Director of the Company in November 1996.
RICHARD D. WHITE has been a Managing Director of CIBC Oppenheimer Corp.,
New York, New York for in excess of five years and was elected as a Director of
the Company in October 1996. Mr. White is also director of Vestcom
International, Inc.
Proposal 2 below provides for the classification of the Board of Directors
into three classes, with one Class to be elected each year, with the initial
term of office of Class III directors to expire at the annual meeting of
stockholders to be held in 1999, with the initial term of office of Class II
directors to expire at the annual meeting of stockholders to be held in 2000,
and with the initial term of office of Class I directors to expire at the annual
meeting of stockholders to be held in 2001. If Proposal 2 is approved, the
nominees for directors will be designated members of the Class of directors set
forth in Proposal 2.
REQUIRED VOTE
The affirmative vote of a plurality of the shares of Common Stock present
in person or by proxy at the Annual Meeting is required to elect directors.
THESE INDIVIDUALS WILL BE PLACED IN NOMINATION FOR ELECTION TO THE BOARD OF
DIRECTORS. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEES FOR ELECTION AS
DIRECTORS.
------------------------
THE BOARD OF DIRECTORS
The Board of Directors is responsible for the overall affairs of the
Company. To assist it in carrying out its duties, the Board has delegated
certain authority to several committees. The majority of the Board, seven of the
twelve directors, are outside directors who are neither officers nor employees
of the Company or its subsidiaries.
During the 1997 fiscal year, the Board of Directors of the Company held
three meetings. All other action taken by the Board was by the unanimous written
consent of the members after review of proposals presented to each member. Each
director attended more than 75% of the aggregate of meetings of the Board and
committees on which he served during the fiscal year.
DIRECTOR COMPENSATION
The Company pays 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 receives a
further fee of $2,500 per annum for his services in such capacity and each other
member of the Company's Audit Committee receives an additional fee of $2,500 per
annum.
Additionally, immediately prior to the Offering, the Company granted
options to purchase 25,000 shares of Common Stock to each of its non-employee
directors. Subsequent to the Offering, the Company granted options to purchase
25,000 shares of Common Stock to Mr. Gerald O. Sweeney, Jr., a non-employee
director of the Company who was elected to the Board of Directors after the
Offering in November 1996.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee is currently composed of three members, Messrs. McKenna
(Chairman), Bartholomay, Sheinfeld and White. This 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
6
<PAGE> 10
and reviewing the scope of the audit and the compensation of the independent
auditors, reviewing consolidated financial statements and, generally, reviewing
the Company's accounting policies and resolving potential conflicts of interest.
During the 1997 fiscal year this Committee held one meeting.
The Nominating Committee is currently composed of Messrs. L.J. Nicastro
(Chairman) and Bartholomay. This Committee is charged with making
recommendations with respect to the nomination of candidates for election to the
Board and does not accept recommendations from stockholders of the Company.
During the 1997 fiscal year this Committee did not hold any meetings, taking all
action by the unanimous written consent of its members.
The WEG/MG Negotiating Committee is currently composed of Messrs. G. O.
Sweeney, Jr. (Chairman) and R. D. White. This Committee is charged with the
responsibility for reviewing and authorizing any agreement to be entered into in
the future, and any modification to any existing agreement between the Company
and WMS. During fiscal year 1997 this Committee did not hold any meetings,
taking all action by the unanimous written consent of its members.
The Compensation and Stock Option Committee is currently composed of
Messrs. Reich (Chairman) and McKenna. This Committee is charged with making
recommendations regarding the compensation of senior management personnel and
approves the selection of individuals for participation in, and determines the
timing, pricing and the amount of option grants under the provisions of, the
Company's 1996 Stock Option Plan other than formula awards made to Non-Employee
Directors of the Company. During the 1997 fiscal year this Committee did not
hold any meetings, taking all action by the unanimous written consent of the
members.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Harvey Reich serves as Chairman of the Company's Compensation and Stock
Option Committee and Mr. William E. McKenna serves 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.
7
<PAGE> 11
EXECUTIVE OFFICERS
The following individuals were elected to serve in the capacities set forth
below until the 1998 annual meeting of the Board of Directors and until their
respective successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Neil D. Nicastro.......................... 41 Chairman of the Board of Directors, President,
Chief Executive Officer and Chief Operating Officer
Harold H. Bach, Jr........................ 65 Executive Vice President -- Finance, Treasurer and
Chief Financial Officer
Byron C. Cook............................. 43 Executive Vice President -- Home Video
Kenneth J. Fedesna........................ 47 Executive Vice President -- Coin-Op Video
Orrin J. Edidin........................... 36 Vice President, Secretary and General Counsel
</TABLE>
The current principal occupation or employment of Messrs. Nicastro, Bach,
Cook and Fedesna during the last five years is set forth on pages 6 and 7
hereof.
Mr. Edidin has served as Vice President, Secretary and General Counsel of
the Company since June 30, 1997. Mr. Edidin served as Associate General Counsel
of Fruit of the Loom, Inc., an apparel company, from August 1992 until May 1997.
Mr. Edidin has also served as Vice President, Secretary and General Counsel of
WMS since May 30, 1997.
EXECUTIVE COMPENSATION
To provide stockholders with an understanding of the Company's executive
compensation program, the following are presented below: (i) the Summary
Compensation Table; (ii) the Stock Option Tables; (iii) the Report by the
Compensation and Stock Option Committee of the Board of Directors on Fiscal 1997
Executive Compensation; (iv) the Corporate Performance Graph; and (v) a
description of Employment Agreements.
SUMMARY COMPENSATION TABLE
The executive officers of the Company (other than Mr. Neil D. Nicastro and
Mr. Byron C. Cook) received no compensation from the Company during the fiscal
years ended June 30, 1997, 1996 or 1995. The Summary Compensation Table below
sets forth the cash compensation paid by WMS (or in the case of (i) Mr.
Nicastro, for the period from the date of the Offering, by WMS and the Company,
and (ii) Mr. Cook, by the Company) for service in all capacities (including on
behalf of the Company) during the fiscal years ended June 30, 1997, 1996 and
1995 to each of the Company's executive officers who served during such period
and whose salary and bonus from WMS or the Company exceeded $100,000. Pursuant
to the Manufacturing and Services Agreement described below under the heading
"Certain Relationships and Related Transactions", after the Offering the
compensation paid by WMS to the executive officers of the Company (other than
Messrs. Nicastro and Cook) is allocated to the Company based upon estimates by
management of WMS of the percentage of time devoted to the Company. Management
of the Company believes that such executive officers devoted at least 50% of
their time to the Company. The results of operations for each of the fiscal
years ended June 30, 1997, 1996 and 1995 include an allocation of the
compensation of the Company's executive officers based on estimates by
management of WMS. Mr. Orrin J. Edidin, Vice President, Secretary and General
Counsel of the Company, commenced his employment with
8
<PAGE> 12
the Company on May 19, 1997 and, therefore, is not included in the Summary
Compensation Table set forth below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Neil D. Nicastro....................... 1997 600,000 969,160 500,000 54,632(1)
Chairman of the Board, 1996 532,500 267,600 -- 35,791(1)
Chief Executive Officer, 1995 532,500 489,100 -- 35,762(1)
President and Chief
Operating Officer
Harold H. Bach, Jr..................... 1997 300,000 175,000 100,000
Executive Vice President -- 1996 262,500 67,800 -- --
Finance, Treasurer and 1995 250,000 67,800 -- --
Chief Financial Officer
Byron C. Cook.......................... 1997 300,000 250,000 100,000
Executive Vice 1996 250,000 150,000 -- --
President -- Home Video 1995 250,000 -- -- --
Kenneth J. Fedesna..................... 1997 310,000 150,000 100,000 2,500(2)
Executive Vice 1996 267,500 66,000 -- 2,500(2)
President -- Coin-Op Video 1995 250,000 66,000 -- 2,500(2)
Barbara M. Norman(3)................... 1997 168,270 50,000 25,000 --
Vice President, Secretary 1996 157,500 27,200 -- --
and General Counsel 1995 150,000 27,200 -- --
</TABLE>
- -------------------------
(1) Amount shown for Mr. Neil D. Nicastro includes for fiscal 1997, 1996 and
1995 life insurance premiums of $1,467, $691 and $662, respectively, and
$53,165, $35,100 and $35,100 for fiscal 1997, 1996 and 1995, respectively,
accrual for contractual retirement benefits.
(2) Amount shown for Mr. Fedesna includes life insurance premiums paid on his
behalf.
(3) Does not include an option to purchase 94,433 shares of WMS common stock
issued to her by WMS in fiscal 1997 in exchange for options which terminated
upon termination of her employment with WMS in June 1997. Ms. Barbara M.
Norman served as Vice President, Secretary and General Counsel to the
Company from June 15, 1992 until June 16, 1997, and she also served as Vice
President, Secretary and General Counsel of WMS during that period.
9
<PAGE> 13
STOCK OPTION TABLES
The following tables set forth certain information with respect to options
to purchase Common Stock granted under the Company's 1996 Stock Option Plan to
persons who served as executive officers of the Company during fiscal year 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
---------------------------------------------------------- ----------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(%) ($/SHARE) DATE 5%($) 10%($)
---- ---------- --------------- -------------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Neil D. Nicastro........ 500,000(2) 28.4 20.00 10/31/06 6,288,946 15,937,425
Harold H. Bach, Jr...... 100,000(2) 5.7 20.00 10/31/06 1,257,789 3,187,485
Byron C. Cook........... 100,000(2) 5.7 20.00 10/31/06 1,257,789 3,187,485
Kenneth J. Fedesna...... 100,000(2) 5.7 20.00 10/31/06 1,257,789 3,187,485
Barbara M. Norman....... 25,000(2)(3) 1.4 20.00 10/31/06 314,447 796,871
</TABLE>
- -------------------------
(1) The assumed appreciation rates are set pursuant to the rules and regulations
promulgated under the Securities Exchange Act of 1934, as amended, and are
not derived from the historical or projected prices of the Company's Common
Stock or results of operations or financial conditions and they should not
be viewed as a prediction of possible prices for the Common Stock in the
future. Total potential stock price appreciation from November 1, 1996 to
October 31, 2006 for all stockholders based on the price of $20.00 per share
of Common Stock on November 1, 1996 and a total of 38,500,000 shares of
Common Stock outstanding would be $496,829,104 and $1,259,056,575 at assumed
rates of stock appreciation of 5% and 10%, respectively.
(2) In connection with the Offering, the optionee was granted options to
purchase Common Stock, 40% of which became exercisable upon completion of
the Offering and the balance of which become exercisable in equal
installments on each of the three succeeding anniversary dates of the
completion of the Offering.
(3) Ms. Norman's employment with the Company terminated effective June 16, 1997.
However, Ms. Norman is a consultant to the Company, and the options
previously issued to her remain outstanding.
10
<PAGE> 14
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
SHARES 6/30/97(#) 6/30/97($)(1)
ACQUIRED ON VALUE EXERCISABLE(E) EXERCISABLE(E)
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- ----------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Neil D. Nicastro................... -- -- 200,000(E) 275,000(E)
300,000(U) 412,500(U)
Harold H. Bach, Jr................. -- -- 40,000(E) 55,000(E)
60,000(U) 82,500(U)
Byron C. Cook...................... -- -- 40,000(E) 55,000(E)
60,000(U) 82,500(U)
Kenneth J. Fedesna................. -- -- 40,000(E) 55,000(E)
60,000(U) 82,500(U)
Barbara M. Norman.................. -- -- 10,000(E) 13,750(E)
15,000(U) 20,625(U)
</TABLE>
- -------------------------
(1) Based on the closing price of the Common Stock on the New York Stock
Exchange on June 30, 1997, which was $21.375.
11
<PAGE> 15
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE
ON FISCAL 1997 EXECUTIVE COMPENSATION
The Compensation and Stock Option Committee is charged with making
recommendations to the Board of Directors regarding the compensation of senior
management personnel and, to the extent stock options form a portion of a
compensation package, making recommendations regarding stock option grants and
awards.
It is the policy of the Compensation and Stock Option Committee to provide
attractive compensation packages to senior management so as to motivate them to
devote their full energies to the success of the Company, to reward them for
their services and to align the interests of senior management with the
interests of stockholders. The Company's executive compensation packages are
comprised primarily of base salaries, annual contractual and discretionary cash
bonuses, stock options and retirement and other benefits. It is the philosophy
of the Compensation and Stock Option Committee that the Company be staffed with
a small number of well compensated senior management personnel.
In general, the level of base salary is intended to provide appropriate
basic pay to senior management taking into account historical contributions to
the Company and each person's unique value and the recommendation of the Chief
Executive Officer. The amount of any discretionary bonus is subjective but is
generally based on the actual performance of the Company in the preceding fiscal
year, the special contribution of the executive to such performance and the
overall level of the executive's compensation including other elements of the
compensation package. The Company also has used stock options, which increase in
value only if the Company's Common Stock increases in value, and which terminate
a short time after an executive leaves the Company, as a means of long-term
incentive compensation.
The cash bonus paid to Mr. Neil D. Nicastro for the fiscal year 1997 was
determined through a negotiated formula set forth in his employment agreements
with the Company and with WMS which provided for bonus compensation as fully
described under "Employment Agreements" below. Senior executives other than Mr.
Neil D. Nicastro were granted discretionary bonuses for the 1997 fiscal year.
The decision to pay such bonuses was subjective but involved consideration of
the efforts expended by such executives as well as consideration of the
financial performance of the Company. For information with respect to options
held by senior management at fiscal year end, see "Stock Option Tables" set
forth above.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") generally
provides that, for fiscal years commencing in 1994, compensation paid by
publicly-held corporations to the chief executive officer and the four most
highly paid senior executive officers in excess of one million dollars per year
per executive will be deductible by the Company only if paid pursuant to
qualifying performance-based compensation plans approved by stockholders of the
Company. Compensation as defined by the Budget Act includes, among other things,
base salary, incentive compensation and gains on stock option transactions.
Since the ultimate value of an option cannot be determined until it is exercised
or until the stock underlying the option is sold, executive compensation
relating to options may, in a given year, exceed one million dollars. It is the
present policy of the Compensation and Stock Option Committee to submit for
stockholder approval stock option plans in which the chief executive officer and
the most highly paid senior executive officers of the Company may participate.
The Compensation and Stock Option Committee intends to consider, on a case by
case basis, how the Budget Act will affect contractual and discretionary cash
compensation. The Compensation and Stock Option Committee does not intend to
request Mr. N.D. Nicastro to submit his employment agreement for stockholder
approval. See "Employment Agreements -- Employment Contracts." Depending on the
performance of the Company, payments to Mr. Nicastro under such agreement may
exceed one million dollars and such excess payments will not be deductible by
the Company.
The Compensation and Stock Option Committee
Harvey Reich, Chairman
William E. McKenna
The foregoing Report of the Compensation and Stock Option Committee on
executive compensation shall not be deemed to be incorporated by reference into
any filing of the Company under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates such information by reference.
12
<PAGE> 16
CORPORATE PERFORMANCE GRAPH
The following graph compares for the period beginning October 29, 1996 (the
date trading of the Common Stock on the New York Stock Exchange commenced) and
ending June 30, 1997 the percentage change in cumulative total stockholder
return on the Company's Common Stock with (1) the cumulative total return of the
Standard and Poor's 500 Stock Index ("S&P 500") and (2) the cumulative total
return of the Standard and Poor's Leisure Time Index ("S&P Leisure"). The graph
assumes an investment of $100 on October 29, 1996 in the Company's Common Stock
and $100 invested at that time in each of the Indexes and the reinvestment of
dividends where applicable.
<TABLE>
<CAPTION>
Measurement Period S&P -
(Fiscal Year Covered) MIDWAY S&P 500 Leisure
<S> <C> <C> <C>
10/30/96 100 100 100
06/30/97 102 128 122
</TABLE>
The foregoing table shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates such information by reference.
13
<PAGE> 17
EMPLOYMENT AGREEMENTS
Mr. Neil D. Nicastro is employed as the Company's Chairman of the Board,
President, Chief Executive Officer and Chief Operating Officer under the terms
of an Employment Agreement dated as of July 1, 1996. 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 is charged to the Company pursuant to the
Manufacturing and Services Agreement. The employment agreement expires October
29, 2001, 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, the Company is required to pay to Mr. Nicastro
or his designee, or if no designation is made, to his estate, for a period of
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 and WMS will each 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 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
14
<PAGE> 18
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 Section
280G of the Internal Revenue Code of 1986, as amended, 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. For fiscal 1997, Mr. Cook also received a bonus of
$250,000. 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP 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 was reduced
from 100.0% to 86.8%. 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.
In contemplation of the Offering, the Company and WMS entered into the
following agreements:
Manufacturing and Services Agreement. The Company and WMS entered into 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 are 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 are manufactured and
assembled by WMS at its facilities in Cicero and Waukegan, Illinois. Materials
used in the manufacture of coin-operated video games are purchased by Midway at
its expense. Certain other manufacturing costs are 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 are
charged to the Company at actual cost to WMS.
15
<PAGE> 19
Certain management, legal and administrative expenses and sales and marketing
expenses are 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.
Tax Sharing Agreement. The Company has been a member of the consolidated
group of corporations of which WMS was the common parent for federal income tax
purposes (the "WMS Group") since 1988. Therefore, the Company is jointly and
severally liable for any federal tax liability incurred by the WMS Group. The
Company and WMS entered into a Tax Sharing Agreement (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
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 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.
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 of 1933, as amended, 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. 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.
16
<PAGE> 20
Patent License Agreement. The Company and WMS 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.
OTHER RELATED TRANSACTIONS
Mr. Byron C. Cook, Executive Vice President -- Home Video and a Director of
the Company, owned a one-third interest in each of the three commonly owned
companies which constituted 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 three years of the earn-out period,
the Company has paid an aggregate sum of $21.6 million as additional purchase
price. The Company will pay an additional $14.4 million in additional purchase
price.
Mr. Ira S. Sheinfeld, a Director of each of the Company and WMS, 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 1997 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
CIBC Oppenheimer Corp., which was one of the representatives of the underwriters
of the Offering and which received customary compensation in connection
therewith. CIBC Oppenheimer Corp., is currently rendering financial advisory
services to WMS in connection with the proposed spin-off by WMS of all of the
Common Stock owned by WMS. Additionally, CIBC Oppenheimer Corp. has rendered
financial advisory services to WMS in the past and received customary
compensation in connection therewith.
Mr. Gerald O. Sweeney, Jr., a Director of the Company, is a member of the
law firm of Lord, Bissell & Brook which performs legal services for the Company
from time to time.
------------------------
ANTI-TAKEOVER PROPOSALS
Proposals 2 through 7 in this Proxy Statement are proposals to amend the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Amended and Restated Bylaws (the "Bylaws") which amendments,
as discussed below, may have certain anti-takeover effects. The following
section discusses the general consequences to stockholders of these proposals
and should be read in conjunction with the individual discussions with respect
to each proposal.
The Board has evaluated the potential vulnerability of the Company's
stockholders to the threat of unfair or coercive takeover tactics and, although
the Board is not currently aware of any such threat, has considered the range of
possible responses to any such threat. The Board has unanimously approved, and
recommends to the Company's stockholders for their approval, the amendments to
the Certificate of Incorporation and Bylaws described in Proposals 2 through 7
set forth below. Proposals 2 through 7 are referred to collectively as the
"Anti-Takeover Amendments." Approval of the Anti-Takeover Amendments requires
the affirmative vote of holders of a majority of the outstanding Common Stock.
WMS, which holds 86.8% of the outstanding Common Stock, has advised the Company
that it plans to vote all of the shares of Common Stock owned by it in favor of
the Anti-Takeover Amendments. Accordingly, the Anti-Takeover Amendments are
expected to be approved by the stockholders.
THE ANTI-TAKEOVER AMENDMENTS
The Anti-Takeover Amendments involve related amendments to the Certificate
of Incorporation and Bylaws designed to assist the Company's stockholders in
obtaining fair and equitable treatment in the event of a threatened takeover of
the Company. The Anti-Takeover Amendments, if approved, will: (i) divide the
17
<PAGE> 21
Board into three classes with staggered terms; (ii) provide that any vacancy on
the Board may be filled only by a vote of a majority of the remaining directors
then in office; (iii) eliminate stockholder action by written consent; (iv)
permit only the President, the Chairman of the Board or the Board of Directors
to call special meetings of stockholders and to limit the business permitted to
be conducted at such meetings to that brought before the meetings by or at the
direction of the Board; (v) provide for an advance notice procedure for the
submission by stockholders of director nominations and other business to be
considered at an annual meetings of stockholders; and (vi) require either a
majority vote of the Board or an affirmative vote of at least 80% of the
outstanding Common Stock entitled to vote thereon in order to adopt, amend or
repeal the Bylaws, and require an affirmative vote of 80% of the outstanding
Common Stock entitled to vote thereon in order to adopt, amend or repeal the
amendments to the Certificate of Incorporation proposed herein.
The Anti-Takeover Amendments are not in response to any effort, of which
the Company is aware, to accumulate Common Stock or to obtain control of the
Company. The Board has observed the relatively common use of certain coercive
takeover tactics in recent years, including the accumulation of substantial
common stock positions as a prelude to a threatened takeover or corporate
restructuring, proxy fights and partial tender offers and the related use of
"two-tiered" pricing. In addition, persons who do not intend to gain control of
companies use the threat of takeover bids to force the companies to repurchase
their shares at a premium or temporarily drive up the market price of their
stock. The Board believes that the use of these tactics can place undue pressure
on a corporation's board of directors and stockholders to act hastily and on
incomplete information and, therefore, can be highly disruptive to a corporation
as well as divert valuable corporate resources and result in unfair differences
in treatment of stockholders who act immediately in response to announcement of
takeover activity and those who choose to act later, if at all. The
Anti-Takeover Amendments are intended to encourage persons seeking to acquire
control of the Company to initiate such an acquisition through arm's-length
negotiations with the Board.
While the Anti-Takeover Amendments, individually and collectively, give
added protection to the Company's stockholders and may help the Company obtain
the best price in a potential transaction, they may also have the effect of
making more difficult and discouraging a merger, tender offer or proxy contest,
even if such transaction or event may be favorable to the interests of some or
all of the Company's stockholders. The Anti-Takeover Amendments also may delay
the assumption of control by a holder of a large block of Common Stock and the
removal of incumbent management, even if such removal might be beneficial to
some or all of the stockholders. Furthermore, the Anti-Takeover Amendments may
have the effect of deterring or frustrating certain types of future takeover
attempts that may not be approved by the incumbent Board, but that the holders
of a majority of the shares of Common Stock may deem to be in their best
interests or in which some or all of the stockholders may receive a substantial
premium over prevailing market prices for their stock. By discouraging takeover
attempts, the Anti-Takeover Amendments also could have the incidental effect of
inhibiting certain changes in management (some or all of the members of which
might be replaced in the course of a change of control) and also the temporary
fluctuations in the market price of Common Stock that often result from actual
or rumored takeover attempts.
The Board recognizes that a takeover might in some circumstances be
beneficial to some or all of the Company's stockholders but, nevertheless,
believes that the stockholders as a whole will benefit from the adoption of the
Anti-Takeover Amendments. The Board further believes that it is preferable to
act on the proposed Anti-Takeover Amendments when they can be considered
carefully rather than hastily during an unsolicited bid for control. Under
Delaware law, each of the proposed Anti-Takeover Amendments described in
Proposals 2 through 7 requires the affirmative vote of the holders of a majority
of the Company's outstanding shares of Common Stock. All of the proposals are
permitted by law.
If stockholders approve any or all of the Anti-Takeover Amendments, the
Company will file with the Secretary of State of the State of Delaware an
amendment to the Certificate of Incorporation that reflects the amendments which
have been approved containing the provisions as set forth under each proposal.
The approved amendments to the Certificate of Incorporation will become
effective upon the filing with the Secretary of State of the State of Delaware
of a certificate with respect to such amendment, and the approved amendments to
the Bylaws will become effective immediately upon such approval. Each of the
Anti-Takeover
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Amendments adopted by the Company's stockholders will become effective
regardless of whether any of the other Anti-Takeover Amendments to be acted upon
at the Annual Meeting is adopted.
Stockholders are urged to read carefully the following descriptions and
discussions of each of the proposed Anti-Takeover Amendments before voting on
the Anti-Takeover Amendments.
OTHER ANTI-TAKEOVER DEVICES
Existing Provisions of the Certificate and Bylaws
In addition to the proposed Anti-Takeover Amendments, an existing provision
of the Certificate of Incorporation may be deemed to be an anti-takeover device
which could be utilized as a method of discouraging, delaying or preventing a
change in control of the Company or diluting the public ownership of the
Company, even if such transaction or occurrence may be favorable to the
interests of some or all of the Company's stockholders. The Certificate of
Incorporation currently authorizes the Board to issue 5,000,000 shares of
preferred stock having such rights, preferences and privileges as designated
from time to time by the Board (the "Preferred Stock") without stockholder
approval. Accordingly, the Board is empowered to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of Common Stock. None of
the preferred stock has been issued to date, and the proposed amendments will
not change the number of authorized shares of preferred stock.
Under certain circumstances, the Company could use the Preferred Stock or
currently authorized but unissued shares of Common stock to create voting
impediments or to frustrate persons seeking to effect a takeover or otherwise
gain control of the Company or to dilute the public ownership of the Company and
thereby to protect the continuity of the Company's management. The Company could
also privately place any such shares with purchasers who might favor the Board
in opposing a hostile takeover bid, although the Company has no present
intention to do so and has no present knowledge of any such takeover efforts.
Other than existence of a class of preferred stock and the existence of
authorized but unissued Common Stock, the Certificate of Incorporation and
Bylaws do not currently contain any other anti-takeover provisions, and no such
other provisions are currently contemplated, other than the proposals contained
herein. While Delaware General Corporation Law Section 214 provides that a
company's certificate of incorporation may provide for cumulative voting, such
voting is not provided for under the Certificate of Incorporation. Therefore,
the holders of a majority of the shares of Common Stock can elect all of the
directors being elected at any annual meeting of stockholders.
Rights Agreement
In October 1996, the Board adopted a Rights Agreement (as amended in
November 1997, the "Rights Agreement"). The Rights Agreement provides that one
right (a "Right") will be issued with each share of Common Stock outstanding on
the effective date of the Offering or 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 will not be 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 will entitle 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 anti-dilution 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 Board, 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 15% or
more of the 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 15% or more
is approved by the Board in advance) who, after the date of adoption of the
Rights Agreement,
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<PAGE> 23
acquires beneficial ownership of 15% or more of the Common Stock will be
considered an "Acquiring Person." If the spin-off by WMS described in "The
Offering and Proposed Distribution" above is completed, any person or group of
affiliated persons who acquires 15% or more of the Common Stock as a result of
such spin-off will be excluded from the definition of 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 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 will be 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 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 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 will be able to amend the Rights
Agreement in any manner prior to the Rights Distribution Date. After the Rights
Distribution Date, the Board will be able to 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 interest of the
Rights Holders and does not relate to any principal economic term of the Rights.
Delaware General Corporation Law
Generally, Section 203 of the Delaware General Corporation Law 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 corporations outstanding voting stock) for three years
following the time such person became an interested stockholder unless: (i)
before the person becomes an
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<PAGE> 24
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 the outstanding voting stock of the corporation
(excluding shares owned by directors who are also offices 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 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 stockholder. Section 203 may discourage
persons from making a tender offer for or acquisitions of substantial amounts of
the Common Stock, which 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.
PROPOSAL 2 -- CLASSIFICATION OF THE BOARD OF DIRECTORS
AND ELECTION FOR STAGGERED TERMS
The Company's Bylaws provide that the directors shall be elected at each
annual meeting of the stockholders. Presently there are twelve directors, and
the Board is not divided into classes. The Board has adopted, subject to
stockholder approval, an amendment to the Certificate of Incorporation and a
corresponding amendment to the Bylaws to cause the Board to be divided into
three classes. At the Annual Meeting, stockholders will be asked to consider and
vote on these proposed amendments.
If Proposal 2 is approved, the Board will be divided into Class I, Class II
and Class III Directors, with one class to be elected each year. The initial
term of office for the Class III Directors would expire at the Annual Meeting of
Stockholders to be held in 1999; the initial term of office for the Class II
Directors would expire at the Annual Meeting of Stockholders to be held in 2000;
and the initial term of the Class I Directors would expire at the Annual Meeting
of Stockholders to be held in 2001. Upon the expiration of the initial staggered
terms, Directors would be elected for three year terms to succeed those
Directors whose terms expire. New directors elected to fill a vacancy on the
Board will serve until the next election of the class of directors to which such
director belongs. In addition, under Delaware law, because such directors serve
on a classified board, stockholders may only remove them for cause. "Cause"
under Delaware law is not defined by statute and its meaning has not been
definitively articulated by the courts. The amendments contemplated by this
Proposal 2 will define "cause" as being convicted of a felony or being adjudged
to be liable for negligence or misconduct in the performance of his or her duty
to the Company.
If this proposal is approved, the following persons, if elected as
directors pursuant to Proposal 1, shall be members of the class of directors set
forth opposite their names below, to serve for the terms described above and
until their successors are duly elected and qualified:
<TABLE>
<CAPTION>
CLASS OF
NAME DIRECTORS
---- ---------
<S> <C>
, , and ........................................... I
, , and ........................................... II
, , and ........................................... III
</TABLE>
Since directors will be serving for longer terms which expire at different
times, and may be removed only for cause by the stockholders, the Board of
Directors believes that a classified Board will promote continuity of management
and thereby enhance the ability of the Company to carry out long-range plans and
goals for its benefit and the benefit of its stockholders. Although the Company
has not experienced difficulties in the past in maintaining continuity of the
Board and management, the Board of Directors believes that a classified Board
will assist the Company in maintaining this continuity of management into the
future.
This proposal, if adopted, could have the effect of discouraging, or making
it more difficult to effect, a merger, a tender offer, the assumption of control
by a holder of a large block of the Common Stock or the removal of incumbent
management, because the proposed amendment would require a longer period of time
21
<PAGE> 25
to change the Board even if a majority of the stockholders desired a change.
This effect could occur even if such actions would be favorable to the interest
of the stockholders. Assuming each class of directors is equal in size, a
majority stockholder could not obtain control of the Board until the second
annual stockholder's meeting after it acquired a majority of the voting stock.
During this time, the Board of Directors would have a better opportunity to
negotiate with any such majority stockholder to obtain more favorable price and
terms in any merger or tender offer. However, the Board is not aware of any
efforts to obtain control of the Company, and the proposal of this measure is
not being made in response to any such efforts. For a general discussion of
certain anti-takeover effects of Proposal 2, see the section entitled
"Anti-Takeover Proposals" above.
PROPOSED RESOLUTIONS
"RESOLVED, that the Certificate of Incorporation be amended by adding a new
Article Eleventh, which shall be and read as follows:
ELEVENTH: The directors shall be divided into three classes, designated
Class I, Class II and Class III. Each class shall consist, as nearly as may
be possible, of one-third of the total number of directors constituting the
entire Board of Directors. The term of the initial Class I directors shall
terminate on the date of the 2001 annual meeting of stockholders; the term
of the initial Class II directors shall terminate on the date of the 2000
annual meeting of stockholders; and the term of the initial Class III
directors shall terminate on the date of the 1999 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1999,
successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. If the number of directors
is changed, any increase or decrease in directorships shall be apportioned
among the classes so as to maintain the number of directors in each class
as nearly equal as possible, and any additional directors of any class
elected to fill a vacancy resulting from an increase in such class shall
hold office only until the next election of directors of that class by the
stockholders of the Corporation, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. Directors
shall hold office until the annual meeting for the year in which their
terms expire and until their successors shall be duly elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be
governed by the terms of this Certificate of Incorporation, or the
resolution or resolutions adopted by the Board of Directors creating such
class or series, as the case may be, applicable thereto, and such directors
so elected shall not be divided into classes pursuant to this Article
ELEVENTH unless expressly provided by such terms.
For purposes of Section 141(k) of the General Corporation Law of the State
of Delaware, "Cause" is defined as being convicted of a felony by a court
of competent jurisdiction and such conviction is no longer subject to
direct appeal, or being adjudged to be liable for negligence or misconduct
in the performance of his or her duty to the Corporation by a court of
competent jurisdiction and such adjudication is no longer subject to direct
appeal.
RESOLVED, that Section 3 of Article II of the Bylaws be amended by adding a
provision substantially the same as the provision set forth in the preceding
resolution and other provisions, if any, as may be necessary to make the Bylaws
consistent with this amendment."
REQUIRED VOTE
The affirmative vote of a majority of the Common Stock outstanding and
entitled to vote at the Annual Meeting is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
PROPOSAL 2.
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<PAGE> 26
PROPOSAL 3 -- FILLING OF VACANCIES ON THE BOARD
The Bylaws currently provide that a vacancy on the Board resulting from an
increase in the number of directors and vacancies occurring in the Board for any
reason except the removal of directors by stockholders may be filled by vote of
a majority of the directors then in office, although less than a quorum exists,
and that vacancies occurring as a result of the removal of directors by
stockholders shall be filled by the stockholders. The Board has adopted, subject
to stockholder approval, an amendment to the Certificate of Incorporation and a
corresponding amendment to the Bylaws providing that a vacancy on the Board,
including a vacancy created by an increase in the authorized number of
directors, may be filled only by the remaining directors. In addition, the
amendments provide that any new director elected to fill a vacancy on the Board
will serve until the next election of the class of directors to which such
director belongs (or until the next annual meeting of the Company if Proposal 2
above is not approved). At the Annual Meeting, stockholders will be asked to
consider and vote on these proposed amendments.
Because, by increasing or decreasing the size of the Board, a filling of
vacancies by stockholders could circumvent the continuity to be provided for by
the proposal for a classified board, the Board believes that this provision
governing the filling of vacancies on the Board will promote such continuity of
management and thereby enhance the ability of the Company to carry out
long-range plans and goals for its benefit and the benefit of its stockholders.
In addition, this proposal, coupled with the foregoing proposal relating to the
removal of directors, if adopted, will preclude stockholders from removing
incumbent directors without cause and simultaneously gaining control of the
Board by filling the vacancies created by such removal with their own nominees.
Although the Company has not experienced difficulties in the past in maintaining
continuity of the Board and management, the Board of Directors believes that
this proposal will assist the Company in maintaining this continuity of
management into the future.
This proposal would protect the continuity of the Board resulting from both
a classified board and the inability to remove directors other than for cause,
and thus may have the effect of discouraging potential unfriendly bids for
shares of the Company even if a majority of the stockholders desired a change.
The effects could occur even if such actions would be favorable to the interest
of the stockholders. However, the Board is not aware of any efforts to obtain
control of the Company, and the proposal of this measure is not in response to
any such efforts. For a general discussion of certain anti-takeover effects of
Proposal 3, see the section entitled "Anti-Takeover Proposals" above.
PROPOSED RESOLUTIONS
"RESOLVED, that the Certificate of Incorporation be amended by adding an
additional paragraph to new Article Eleventh, which shall be and read as
follows:
Any vacancy on the Board of Directors, howsoever resulting, including
through an increase in the number of directors, shall only be filled by the
affirmative vote of a majority of the remaining directors then in office,
even if less than a quorum, or by the sole remaining director. Any director
elected to fill a vacancy shall hold office for the same remaining term as
that of his or her predecessor, or if such director was elected as a result
of an increase in the number of directors, then for the term indicated in
paragraph one of this Article ELEVENTH.
RESOLVED, that Section 8 of Article II of the Bylaws be amended by adding a
provision substantially the same as the provision set forth in the preceding
resolution and other provisions, if any, as may be necessary to make the Bylaws
consistent with this amendment."
REQUIRED VOTE
The affirmative vote of a majority of the Common Stock outstanding and
entitled to vote at the Annual Meeting is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
PROPOSAL 3.
------------------------
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<PAGE> 27
PROPOSAL 4 -- ELIMINATING STOCKHOLDER ACTION BY WRITTEN CONSENT
Under Delaware law, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken by stockholders of a
corporation may be taken without a meeting, without prior notice and without a
stockholder vote if a written consent setting forth the action to be taken is
signed by the holders of shares of outstanding stock having the requisite number
of votes that would be necessary to authorize such an action at a meeting of
stockholders at which all shares entitled to vote thereon were present and
voted. The Bylaws currently also provide for such stockholder action by written
consent. The Board has adopted, subject to stockholder approval, an amendment to
the Certificate of Incorporation and a corresponding amendment to the Bylaws to
provide that actions required or permitted to be taken at any annual or special
meeting of the stockholders may be taken only upon the vote of the stockholders
at a meeting duly called and may not be taken by written consent of the
stockholders. At the Annual Meeting, stockholders will be asked to consider and
vote on these proposed amendments.
The Board of Directors believes that this Proposal would give all the
stockholders of the Company increased opportunity to participate in determining
any proposed action and would prevent the holders of a simple majority of the
voting power of the Company from using the written consent procedure to take
stockholder action without a meeting. The ability of holders of a simple
majority of the voting stock of the Company to take action without the
opportunity for discussion at a meeting decreases the ability of minority
stockholders to have their views considered.
The adoption of this amendment would eliminate the ability of the Company's
stockholders to act by written consent in lieu of a meeting. The Board does not
believe that the elimination of stockholder action by written consent will
create a significant impediment to a tender offer or other effort to take
control of the Company. Nevertheless, the effect of this proposal may be to make
more difficult or less attractive, or delay, certain actions by a person or a
group acquiring a substantial percentage of the Company's stock, even though
such actions might be desired by, or beneficial to, the holders of a majority
the Company's stock. For these reasons, Proposal 4 may have an anti-takeover
effect. The Board, however, is not aware of any efforts to obtain control of the
Company, and the proposal of this measure is not in response to any such
efforts. For a general discussion of certain anti-takeover effects of Proposal
4, see the section entitled "Anti-Takeover Proposals" above.
PROPOSED RESOLUTIONS
"RESOLVED, that the Certificate of Incorporation be amended by adding a new
paragraph of a new Article Twelfth, which paragraph one of such amendment shall
be and read as follows:
TWELFTH: Except as otherwise provided in the resolutions of the Board of
Directors designating any series of Preferred Stock, any action required or
permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders and may
not be effected by a consent in writing by any such stockholders.
RESOLVED, that Section 11 of Article I of the Bylaws be amended by adding a
provision substantially the same as the provision set forth in the preceding
resolution and other provisions, if any, as may be necessary to make the Bylaws
consistent with this amendment."
REQUIRED VOTE
The affirmative vote of a majority of the Common Stock outstanding and
entitled to vote at the Annual Meeting is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
PROPOSAL 4.
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<PAGE> 28
PROPOSAL 5 -- LIMITATIONS ON STOCKHOLDERS
WITH RESPECT TO SPECIAL MEETINGS
The Bylaws currently provide that special meetings of stockholders may be
called by any two directors or the President, or by the Secretary at the
direction of the foregoing, and shall be called by the Board upon written
request of the holders of record of a majority of the outstanding shares of the
Company entitled to vote at the meeting requested to be called. The Board has
adopted, subject to stockholder approval, an amendment to the Certificate of
Incorporation and a corresponding amendment to the Bylaws to require that
special meetings of stockholders may only be called by the President, the
Chairman of the Board or by the Board of Directors, that stockholders of the
Company are not permitted to call a special meeting or to require that the Board
call a special meeting of stockholders and that the business permitted to be
conducted at such meetings be limited to that brought before the meetings by or
at the direction of the Board. At the Annual Meeting, stockholders will be asked
to consider and vote on these proposed amendments.
The amendment will provide for the orderly conduct of all Company affairs
at special meetings of stockholders. Accordingly, a stockholder could not force
stockholder consideration of a proposal over the opposition of the Board by
calling a special meeting of stockholders prior to the next annual meeting or
prior to such time that the Board believed such consideration to be appropriate.
As a result, the Board would have the opportunity to inform other stockholders
adequately of the matters to be considered.
Persons attempting a takeover bid could be delayed or deterred by not being
able to propose a transaction at a time advantageous for them. For these
reasons, this Proposal may have an anti-takeover effect. The Board, however, is
not aware of any efforts to obtain control of the Company, and the proposal of
this measure is not in response to any such efforts. For a general discussion of
certain anti-takeover effects of Proposal 5, see the section entitled
"Anti-Takeover Proposals" above.
PROPOSED RESOLUTIONS
"RESOLVED, that the Certificate of Incorporation be amended by adding an
additional paragraph to new Article Twelfth, which shall be and read as follows:
Subject to the rights of holders of any class or series of Preferred Stock,
special meetings of stockholders may be called only by the Chairman of the
Board or President of the Corporation or by the Board of Directors pursuant
to a resolution adopted by a majority vote of the total number of
authorized directors (whether or not there exists any vacancies in
previously authorized directorships) at the time any such resolutions are
presented to the Board for adoption. Stockholders of the Corporation are
not permitted to call a special meeting or to require that the Board call a
special meeting of stockholders. The business permitted at any special
meeting of stockholders shall be limited to the business brought before the
meeting by or at the direction of the Board.
RESOLVED, that Section 2 of Article I of the Bylaws be amended by adding a
provision substantially the same as the provision set forth in the preceding
resolution and other provisions, if any, as may be necessary to make the Bylaws
consistent with this amendment."
REQUIRED VOTE
The affirmative vote of a majority of the Common Stock outstanding and
entitled to vote at the Annual Meeting is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
PROPOSAL 5.
------------------------
PROPOSAL 6 -- ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS AND PROPOSALS
The Board has adopted, subject to stockholder approval, an amendment to the
Certificate of Incorporation and a corresponding amendment to the Bylaws
requiring that stockholders submit director nominations
25
<PAGE> 29
and other business to be considered at annual meetings of stockholders in
accordance with a specific advance notice procedure. No such procedure is
currently provided for in either the Certificate of Incorporation or the Bylaws.
At the Annual Meeting, stockholders will be asked to consider and vote on these
proposed amendments.
The proposed amendments will provide a detailed and circumscribed notice
procedure with regard to the nomination other than by or at the direction of the
Board of candidates for election as directors (the "Nomination Procedure") and
with regard to stockholder proposals to be brought before an annual meeting of
stockholders (the "Business Procedure"). The Nomination Procedure provides that
only persons who are nominated by or at the direction of the Company Board, or
by a stockholder who has given timely prior written notice to the Corporate
Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors. The Business Procedure
provides that stockholder proposals must be submitted in writing in a timely
manner in order to be considered at any annual meeting. To be timely, notice for
nominations or stockholder proposals must be received by the Company not less
than 60 days nor more than 90 days prior to the annual meeting; provided,
however, that in the event that less than 70 days notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders,
notice by a stockholder, to be timely, must be received no later than the close
of business on the tenth day following the date on which such notice of the date
of the annual meeting was made or such public disclosure was made, whichever
first occurs.
Under the Nomination Procedure, notice to the Company from a stockholder
who proposes to nominate a person at a meeting for election as a director must
contain certain information about that person, including age, business and
residence addresses, principal occupation, the Class and number of shares of
Common Stock beneficially owned, the consent of such person to be nominated and
such other information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee, and certain
information about the stockholder proposing to nominate that person. Under the
Business Procedure, notice relating to a stockholder proposal must contain
certain information about such proposal and about the stockholder who proposes
to bring the proposal before the meeting.
The purpose of the Nomination Procedure is, by requiring a specified amount
of advance notice of nominations by stockholders, to afford the Board a
meaningful opportunity to consider the qualifications of the proposed nominees
during the appropriate period when the Board is focused on nominations and, to
the extent deemed necessary or desirable by the Board, to inform stockholders
about such qualifications. The purpose of the Business Procedure is, by
requiring a specified amount of advance notice of stockholder proposals, to
provide a more orderly procedure for conducting annual meetings of stockholders
and, to the extent deemed necessary or desirable by the Board, to provide the
Board with a meaningful opportunity to analyze such proposals and to decide
whether it is appropriate to either (i) omit such proposal or (ii) inform
stockholders, prior to such meetings, of any proposal to be introduced at such
meetings, together with any recommendation or the Board's position or belief as
to action to be taken with respect to such proposal, so as to enable
stockholders better to determine whether they desire to attend such meeting or
grant a proxy to the Board as to the disposition of any such proposal.
Although the amendment does not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or any other
proposal submitted by stockholders, the amendment may have the effect of
precluding or making more difficult a stockholder nomination for the election of
directors or the submission by stockholders of proposals at a particular
stockholders meeting, because of the difficulty of the procedures to be
followed, and may discourage a stockholder from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company, even if the conduct of such solicitation or such attempt
might be beneficial to the Company and its stockholders. For these reasons, this
Proposal may have an anti-takeover effect, particularly when combined with
Proposal 5 above. The Board, however, is not aware of any efforts to obtain
control of the Company, and the proposal of this measure is not in response to
any such efforts. For a general discussion of certain anti-takeover effects of
Proposal 6, see the section entitled "Anti-Takeover Proposals" above.
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<PAGE> 30
PROPOSED RESOLUTIONS
"RESOLVED, that the Certificate of Incorporation be amended by adding a new
Article Thirteenth, which shall be and read as follows:
THIRTEENTH: Subject to the rights of holders of any Class or series of
Preferred Stock,
(i) nominations for the election of directors, and
(ii) business proposed to be brought before an annual meeting of
stockholders
may be made by the Board of Directors or proxy committee appointed by the
Board of Directors or by any stockholder entitled to vote in the election
of directors generally. However, any such stockholder may nominate one or
more persons for election as directors at an annual meeting or propose
business to be brought before an annual meeting, or both, only if such
stockholder has given timely notice in proper written form of his or her
intent to make such nomination or nominations or to propose such business.
To be timely, a stockholder's notice must be delivered to or mailed and
received by the Secretary of the Corporation not less than 60 days nor more
than 90 days prior to the annual meeting; provided, however, that in the
event that less than 70 days notice or prior public disclosure of the date
of the annual meeting is given or made to stockholders, notice by a
stockholder, to be timely, must be received no later than the close of
business on the tenth day following the date on which such notice of the
date of the annual meeting was made or such public disclosure was made,
whichever first occurs. To be in proper written form, a stockholder's
notice to the Secretary shall set forth:
(a) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(b) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(c) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;
(d) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed, by the Board of Directors, and such other information about
the nominee as the Board of Directors deems appropriate, including,
without limitation, the nominee's age, business and residence addresses,
principal occupation and the class and number of shares of Common Stock
beneficially owned by the nominee, or such other information about the
business to be proposed and about the stockholder making such business
proposal before the annual meeting as the Board of Directors deems
appropriate, including, without limitation, the Class and number of
shares of Common Stock beneficially owned by such stockholder; and
(e) if applicable, the consent of each nominee to serve as director
of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination
of any person or the proposal of any business not made in compliance with
the foregoing procedure.
RESOLVED, that Article I of the Bylaws be amended by adding a new Section
13 containing a provision substantially the same as the provision set forth in
the preceding resolution and other provisions, if any, as may be necessary to
make the Bylaws consistent with this amendment."
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<PAGE> 31
REQUIRED VOTE
The affirmative vote of a majority of the Common Stock outstanding and
entitled to vote at the Annual Meeting is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
PROPOSAL 6.
------------------------
PROPOSAL 7 -- SUPERMAJORITY VOTING REQUIRED TO AMEND BYLAWS
AND PROPOSED PROVISIONS OF THE CERTIFICATE OF INCORPORATION
Delaware law confers sole authority to adopt, amend or repeal bylaws in the
stockholders unless the certificate of incorporation also confers such a power
upon the board of directors. The Certificate of Incorporation expressly confers
such powers upon the Board. In addition, the Bylaws currently provide that the
Bylaws may be adopted, amended or repealed by the vote of the stockholders at
the time entitled to vote or by the Board. However, any bylaw adopted by the
Board may be amended or repealed by the stockholders entitled to vote thereon.
Delaware Law further provides that the Certificate of Incorporation may be
amended by the vote of a majority of the shares of Common Stock outstanding and
entitled to vote. The Board has adopted, subject to stockholder approval, an
amendment to the Bylaws to require the affirmative vote of eighty percent (80%)
of the outstanding shares of Common Stock entitled to vote thereon to adopt,
amend or repeal the Bylaws and an amendment to the Certificate of Incorporation
to require the affirmative vote of eighty percent (80%) of the shares of Common
Stock outstanding and entitled to vote thereon to amend the provisions added by
Proposals 2 through 6 above and this Proposal 7. At the Annual Meeting,
stockholders will be asked to consider and vote on the proposed amendment.
Proposal 7, by limiting the manner in which the Bylaws and the proposed
amendments to the Certificate of Incorporation may be amended, is intended not
only to promote continuity of operations and thereby enhance the Company's
ability to attain its long term goals, but also to allow the Board to more
effectively manage the affairs of and internal operating procedures of the
Company. These proposals are intended to have the effect of making it more
difficult for stockholders, following the Annual Meeting, to eliminate the
constituent elements contained within Proposals 2 to 6.
Proposal 7 will have the effect of making it more difficult for
stockholders and the Board to change the internal operating procedures of the
Company. These provisions may further discourage potentially unfriendly bids for
shares of the Company. For these reasons, Proposal 7 may have an anti-takeover
effect. The Board, however, is not aware of any efforts to obtain control of the
Company, and the proposal of this measure is not in response to any such
efforts. For a general discussion of certain anti-takeover effects of Proposal
7, see the section entitled "Anti-Takeover Proposals" above.
PROPOSED RESOLUTIONS
"RESOLVED, that the Bylaws be amended by changing Section 3 of Article V so
that, as amended, said Section shall be and read as follows:
Section 3. Amendments. In furtherance, and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to
make, alter, amend, change, add to or repeal the By-laws of the Corporation
and shall have the right (which, to the extent exercised, shall be
exclusive) to establish the rights, powers, duties, rules and procedures
that from time to time shall govern the Board of Directors and each of its
members, including, without limitation, the vote required for any action by
the Board of Directors, and that from time to time shall affect the
directors' powers to manage the business and affairs of the Corporation,
provided that such By-laws are not inconsistent with the General
Corporation Law of the State of Delaware or the Restated Certificate of
Incorporation, as amended, and such By-laws relate to the business of the
Corporation, the conduct of its affairs, and its rights or powers or the
rights or powers of its stockholders, directors, officers or employees. In
addition, the By-laws of the Corporation may be adopted, repealed, altered,
amended or rescinded by the affirmative vote of eighty percent (80%)
28
<PAGE> 32
of the outstanding stock of the Corporation entitled to vote thereon,
provided that such By-laws are not inconsistent with the General
Corporation Law of the State of Delaware or the Certificate of
Incorporation, and such By-laws relate to the business of the Corporation,
the conduct of its affairs, and its rights or powers, or the rights or
powers of its stockholders, directors, officers or employees. In addition
to the powers and authority hereinbefore or by statute expressly conferred
upon them, the directors are hereby empowered to exercise all such powers
and do all such acts and things as may be exercised or done by the
Corporation, subject, nevertheless, to the provisions of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation,
and any By-laws adopted by the stockholders; provided, however, that no
By-laws hereafter adopted by the stockholders shall invalidate any prior
act of the directors which would have been valid if such By-laws had not
been adopted.
If any By-law regulating an impending election of directors is made,
altered, amended, changed, added or repealed by the Board of Directors,
there shall be set forth in the notice of the next meeting of stockholders
for the election of directors the By-law so made, altered, amended, changed
or repealed, together with a concise statement of the changes made.
RESOLVED, that the Certificate of Incorporation be amended by adding a new
Article Fourteenth, which shall be and read as follows:
FOURTEENTH: Notwithstanding anything contained in the Certificate of
Incorporation or the by-laws of this Corporation to the contrary (and
notwithstanding the fact that a lesser percentage or separate Class vote
may be specified by law, this Certificate of Incorporation, the by-laws of
this Corporation or any common stock or preferred stock designation),
Articles ELEVENTH, TWELFTH and THIRTEENTH hereby shall not be altered,
amended or repealed and no provision inconsistent therewith shall be
adopted without the affirmative vote of the holders of at least eighty
percent (80%) of the voting power of all the outstanding stock of the
corporation entitled to vote generally in the election of directors, voting
together as a single class. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least eighty percent (80%) of the voting power of all the
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to alter,
amend or adopt any provision inconsistent with or repeal this Article
FOURTEENTH."
REQUIRED VOTE
The affirmative vote of a majority of the Common Stock outstanding and
entitled to vote at the Annual Meeting is required to approve this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
PROPOSAL 7.
------------------------
PROPOSAL 8 -- APPOINTMENT OF INDEPENDENT AUDITORS
It is proposed that the stockholders ratify the appointment by the Board of
Directors of Ernst & Young LLP as independent auditors for the Company for the
1998 fiscal year. The Company expects representatives of Ernst & Young LLP to be
present at the Annual Meeting at which time they will respond to appropriate
questions submitted by stockholders and may make such statements as they may
desire.
Approval by the stockholders of the appointment of independent auditors is
not required but the Board deems it desirable to submit this matter to the
stockholders. If a majority of the Common Stock present and entitled to vote at
the meeting should not approve the selection of Ernst & Young LLP, the selection
of independent auditors will be reconsidered by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS OF THE COMPANY.
------------------------
29
<PAGE> 33
GENERAL
As of the date of this Proxy Statement, the Board does not intend to
present any other matters for action. However, if any other matters are properly
brought before the meeting, it is intended that the persons voting the
accompanying proxy will vote the shares represented thereby in accordance with
their best judgment.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Stockholder proposals in respect of matters to be acted upon at the
Company's next annual meeting of stockholders should be received by the Company
on or before August 14, 1998 in order that they may be considered for inclusion
in the Company's proxy materials.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own greater than
10% of a registered Class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based solely on a review of the forms it has received and on representations
from certain reporting persons that no such forms were required for them, the
Company believes that during fiscal 1997 all Section 16(a) filing requirements
applicable to its officers, directors and 10% beneficial owners were complied
with by such persons.
OTHER MATTERS
THE COMPANY WILL PROVIDE WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997, INCLUDING FINANCIAL
STATEMENTS AND SCHEDULES THERETO, TO EACH OF THE COMPANY'S STOCKHOLDERS OF
RECORD ON DECEMBER 8, 1997, AND EACH BENEFICIAL OWNER OF STOCK ON THAT DATE UPON
RECEIPT OF A WRITTEN REQUEST THEREFOR MAILED TO THE COMPANY'S OFFICES, 3401
NORTH CALIFORNIA AVENUE, CHICAGO, ILLINOIS 60618, ATTENTION: TREASURER. IN THE
EVENT THAT EXHIBITS TO SUCH FORM 10-K ARE REQUESTED, A REASONABLE FEE WILL BE
CHARGED FOR REPRODUCTION OF SUCH EXHIBITS. REQUESTS FROM BENEFICIAL OWNERS OF
COMMON STOCK MUST SET FORTH A GOOD FAITH REPRESENTATION AS TO SUCH OWNERSHIP.
It is important that the accompanying proxy card be returned promptly.
Therefore, whether or not you plan to attend the meeting in person, you are
earnestly requested to mark, date, sign and return your proxy in the enclosed
envelope to which no postage need be affixed if mailed in the United States. The
proxy may be revoked at any time before it is exercised. If you attend the
meeting in person, you may withdraw the proxy and vote your own shares.
MANNER AND EXPENSES OF SOLICITATION
The solicitation of proxies in the accompanying form is made by the Board
and all costs thereof will be borne by the Company. In addition to the
solicitation of proxies by use of the mails, some of the officers, directors and
other employees of the Company may also solicit proxies personally or by mail,
telephone or telegraph, but they will not receive additional compensation for
such services. Brokerage firms, custodians, banks, trustees, nominees or other
fiduciaries holding shares of Common Stock in their names will be required by
the Company to forward proxy material to their principals and will be reimbursed
for their reasonable out of pocket expenses in such connection.
VOTING PROCEDURES
Inspectors of election will be appointed to tabulate the number of shares
of Common Stock represented at the meeting in person or by proxy, to determine
whether or not a quorum is present and to count all votes cast at the meeting.
The inspectors of election will treat abstentions and broker non-votes as shares
that are
30
<PAGE> 34
present and entitled to vote for purposes of determining the presence of a
quorum. Votes withheld in connection with the election of one or more of the
nominees for director will not be counted in determining the votes cast and will
have no effect on the vote. With respect to the tabulation of votes cast on a
specific proposal presented to the stockholders at the meeting, abstentions will
be considered as present and entitled to vote with respect to that specific
proposal, whereas broker non-votes will not be considered as present and
entitled to vote with respect to that specific proposal. Abstentions and broker
non-votes with respect to each proposal that requires approval by holders of a
majority of the outstanding Common Stock will have the effect of a vote against
the proposal. Brokers who hold shares in street name for customers have
authority to vote on certain items when they have not received instructions from
beneficial owners, including voting upon election of directors and the selection
of independent auditors.
By Order of the Board of Directors,
ORRIN J. EDIDIN
Vice President, Secretary and General
Counsel
Chicago, Illinois
December , 1997
31
<PAGE> 35
MIDWAY GAMES INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
THE UNDERSIGNED, revoking all previous proxies, hereby appoints NEIL D.
NICASTRO and HAROLD H. BACH, JR., or either of them, as attorneys, agents and
proxies with power of substitution, and with all powers the undersigned would
possess if personally present, to vote all shares of common stock of Midway
Games Inc. (the "Company") which the undersigned is entitled to vote at the
Annual Meeting of Stockholders of the Company to be held on Tuesday, January
27, 1998 and at all adjournments thereof. The shares represented by this Proxy
will be voted as indicated below upon the following matters, all more fully
described in the accompanying Proxy Statement.
(1) Election of a board of twelve (12) directors.
[ ] FOR all nominees listed (except as [ ] WITHHOLD AUTHORITY
marked to the contrary) to vote for nominees listed
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE
A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW:
Louis J. Nicastro, Neil D. Nicastro, Harold H. Bach, Jr., Byron C. Cook,
Kenneth J. Fedesna, Norman J. Menell, William C. Bartholomay, William E.
McKenna, Harvey Reich, Ira S. Sheinfeld, Gerald O. Sweeney, Jr., Richard D.
White.
(2) The amendments to the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") and Amended and Restated Bylaws (the
"Bylaws") to provide for the classification of the Board of Directors into
three classes with staggered terms.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(3) The amendments to the Certificate and Bylaws to provide that any vacancy
on the Board of Directors may be filled for the unexpired term only by a
vote of a majority of the remaining directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(4) The amendments to the Certificate and Bylaws to eliminate stockholder
action by written consent.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(5) The amendments to the Certificate and Bylaws to permit only the
President, the Chairman of the Board or the Board of Directors to call
special meetings of stockholders and to limit the business permitted to be
conducted at such meetings to that brought before the meetings by the
Board of Directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(6) The amendments to the Certificate and Bylaws to require an advance notice
procedure for the submission of director nominations and other stockholder
proposals.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(See reverse side)
<PAGE> 36
(7) The amendments to the Bylaws to require either a vote of the Board of
Directors or a vote of 80% of the Common Stock entitled to vote thereon in
order to adopt, amend or repeal the Bylaws, and to the Certificate to
require a vote of 80% of the Common Stock entitled to vote thereon in
order to adopt, amend or repeal the amendments to the Certificate proposed
herein.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(8) Ratification of the appointment of Ernst & Young LLP as independent
auditors for the 1998 fiscal year.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN. IF NO SUCH INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED
BY THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES FOR DIRECTORS
DESIGNATED BY THE BOARD OF DIRECTORS AND "FOR" ITEMS 2, 3, 4, 5, 6, 7 AND 8.
Dated: ______________________, 199__
____________________________________
(Signature)
____________________________________
(Signature)
NOTE: Please sign exactly as your
name or names appear hereon, and
when signing as attorney, executor,
administrator, trustee or guardian,
give your full title as such. If
signatory is a corporation, sign the
full corporate name by a duly
authorized officer. If shares are
held jointly, each stockholder named
should sign.
NOTE: PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY IN THE ENVELOPE ENCLOSED FOR
THIS PURPOSE. NO POSTAGE IS REQUIRED FOR MAILING IN THE UNITED STATES.
