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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-12367
MIDWAY GAMES INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 22-2906244
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3401 NORTH CALIFORNIA AVE., CHICAGO, ILLINOIS 60618
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (773) 961-2222
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Stock Purchase Rights pursuant to Rights Agreement New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 36,710,457 shares of Common Stock held by
non-affiliates of the registrant on September 15, 1998 was $454,292,000. Solely
for purposes of this calculation, all shares held by directors and executive
officers of the registrant have been excluded. Such exclusion should not be
deemed an admission that such individuals are affiliates of the registrant. On
such date, the number of shares of Common Stock outstanding (excluding 1,079,400
shares held as treasury shares) was 37,420,600 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
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PART
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Annual Report to Stockholders of Registrant for the fiscal
year ended June 30, 1998.................................. I, II, IV
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PART I
This Annual Report on Form 10-K contains forward looking information and
describes the beliefs of Midway Games Inc. (the "Company" or "Midway")
concerning future business conditions and the outlook for the Company based on
currently available information. Wherever possible, the Company has identified
these forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: the financial
strength of the amusement games industry, the ability of the Company to develop
new technologies on a timely basis and to design, introduce and market
successful new game titles, the level of consumer spending for such games, the
success of planned advertising, marketing and promotional campaigns and the
introduction of new dedicated platforms, as well as the items set forth under
"Item 1. Business -- Factors Affecting Future Performance." The Company assumes
no obligation to update publicly any forward looking statements, whether as a
result of new information, future events or otherwise. Discussions containing
such forward looking statements may be found in the materials set forth under
"Item 1. Business -- The Company," "-- Business" and "-- Factors Affecting
Future Performance" contained herein and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
Company's 1998 Annual Report to Stockholders (the "1998 Annual Report").
ITEM 1. BUSINESS
THE COMPANY
Midway is a leading designer, publisher and marketer of interactive
entertainment software played in both the coin-operated and home markets. Since
the late 1970s, Midway has released many of the industry's leading games,
including Mortal Kombat (which line of games has sold over 15 million copies in
the home market), NFL Blitz, Cruis'n USA, Cruis'n World, Rampage, NBA Jam,
Joust, Defender, Pacman and Space Invaders, and, through its Atari Games
Corporation subsidiary ("Atari Games"), such leading games as San Francisco Rush
Extreme Racing, The NHLPA & NHL Present Wayne Gretzky's 3D Hockey, Area 51,
Gauntlet, Centipede, Asteroids and Pong. Midway's games are generally available
for play on all major dedicated home video game platforms, including those of
Nintendo, Sony and Sega, and personal computers.
On October 29, 1996, the Company completed an initial public offering of
5,100,000 shares of common stock, par value $.01 per share (the "Common Stock"),
at a price of $20.00 per share (the "Offering"). As of September 15, 1998, the
Company had 37,420,600 shares of Common Stock outstanding.
Prior to the Offering, the Company was a wholly-owned subsidiary of WMS
Industries Inc. ("WMS"). WMS is a leading designer, manufacturer and marketer of
gaming equipment and coin-operated pinball and novelty games. WMS continues to
provide certain administrative, accounting and information services and
facilities to the Company and acts as a contract manufacturer for the Company's
coin-operated video games. The Company provides certain sales and marketing
services to WMS. See "Item 13. Certain Relationships and Related Transactions."
Prior to July 1996, the Company also conducted certain aspects of the pinball
operations of WMS' amusement games business, which operations were transferred
to another subsidiary of WMS and the results of which are not included in the
Company's results of operations. See Note 3 to the Company's financial
statements contained in the 1998 Annual Report.
On April 6, 1998, WMS distributed, on a pro rata basis to its stockholders,
the remaining 33,400,000 shares (or 86.8%) of the Company's Common Stock owned
by WMS (the "Distribution"). Pursuant to the Distribution, WMS stockholders
received 1.19773 shares of Midway Common Stock for each share of WMS common
stock owned. Fractional shares were sold and the net proceeds thereof paid in
cash. The distribution ratio reflected 27,886,021 shares of WMS common stock
outstanding on the record date for the Distribution.
The Company is a Delaware corporation formed in July 1988. Its address is
3401 North California Avenue, Chicago, Illinois 60618, and its telephone number
is (773) 961-2222.
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Midway(R) is a registered trademark of the Company. With the exception of
trademarks licensed from third parties, titles to all of the Company's games
referred to in this Annual Report on Form 10-K are either registered trademarks
of the Company or the subject of pending trademark applications. Nintendo, Super
Nintendo Entertainment System, Game Boy, and Nintendo 64 and N64 are trademarks
of Nintendo of America, Inc. Sega, Genesis, Game Gear and Saturn are trademarks
of Sega Enterprises, Ltd. Sony and PlayStation are trademarks of Sony Computer
Entertainment of America Inc. This Annual Report on Form 10-K includes
trademarks other than those identified in this paragraph. The use of any such
trademark herein is in an editorial form only, and to the benefit of the owner
thereof, with no intention of infringement of the trademark.
INDUSTRY OVERVIEW
GENERAL
Video games are sold in two primary formats: (i) coin-operated games
distributed to arcades and route operators and (ii) home games for dedicated
hardware platforms (Nintendo 64, Sony PlayStation and Sega Saturn), portable
game systems (Nintendo's Game Boy), and personal computers distributed to mass
merchandisers, national and regional retailers, discount store chains, video
rental retailers and entertainment software distributors. A successful video
game may present the opportunity to exploit ancillary rights such as film,
television and merchandising rights. The primary groups that play video games
are male teenagers and young adults.
The video game business has undergone significant consolidation in recent
years, and the Company believes that significant barriers to entry into the
video game business exist that make it difficult for new entrants to succeed.
The video game business requires specialized creative talent capable of
utilizing the sophisticated technological tools required to design the complex
video games that characterize the business today. The cost of developing video
games is high and likely to increase as technology continues to evolve. In the
home video game business, distribution channels are dominated by a select group
of companies, and access to retail shelf space is a significant competitive
factor.
COIN-OPERATED GAMES
Coin-operated video games utilize specialized technology and hardware
platforms that permit greater design flexibility than dedicated home platforms,
which are limited by the design specifications of the particular platform.
Coin-operated video games are manufactured in self-contained cabinetry
containing large video screens that display the game. Multiple players can play
the same game simultaneously, and games are generally designed to permit the
players to play against each other, in addition to being able to play against
the game itself. Most coin-operated video games cost 50c to play a game of
approximately two minutes in duration. New technologies employed in the
manufacturing of coin-operated video games utilize advanced video platforms in
which digital images are mapped to computer generated polygons that allow for
the creation of three-dimensional graphic images.
Coin-operated games are sold through distributors to two primary
customers -- arcades and route operators. The distributors typically provide
product warranties to their customers and receive a price allowance from the
manufacturer to cover warranty claims. A typical arcade is located in a shopping
mall and operates numerous types of games, including video, pinball, novelty and
redemption games. An arcade will often purchase multiple units of the most
popular games. Route operators purchase coin-operated video games and provide
the games on a revenue sharing basis to various establishments, such as
restaurants, taverns, convenience stores and movie theaters, which typically
install only a few games and only rarely lease multiple units of the same games
for a particular location.
After introduction, a coin-operated video game will generally experience a
product life cycle for a manufacturer of one to two years, although sales are
generally concentrated in the first six to eight months after introduction.
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Coin-operated games are distributed throughout North America, Europe, and
to a lesser extent to Australia and countries in Asia and South America. The
Company believes that the market for coin-operated video games, particularly in
the United States, is mature and stable and is unlikely to experience
significant growth in the near-term. Growth in international markets may occur
in emerging markets as well as developed countries where the coin-operated video
game market is more mature. The Company believes that Japan is the second
largest market for coin-operated video games after the United States. Although
the Company is pursuing marketing opportunities in Japan, United States
manufacturers of coin-operated games, including the Company, have not as yet
achieved meaningful sales in the Japanese market.
HOME GAMES
Like coin-operated video games, interactive software programs for the home
allow the consumer to participate actively in the outcome of the game. The
interactive software publishing business involves the creation or acquisition of
titles or intellectual property rights, the development of interactive software
products based on these titles or rights, and the publication, marketing,
merchandising, distribution and licensing of the resulting software products.
This process in general involves converting software created for the
coin-operated version of a game into software for use on the multiple platforms
on which home games are released, or creating original games for release into
the home market. The business is highly dependent on consumer tastes and
preferences and on the commercial success of the hardware platforms for which
the software is produced. The principal types of interactive hardware platforms
are dedicated game systems, such as those manufactured by Nintendo, Sony and
Sega, portable game systems and personal computers.
Dedicated Platforms. Historically, no hardware platform or system has
achieved long-term dominance in the interactive entertainment market. In 1986
and 1987 Nintendo and Sega, respectively, introduced 8-bit video game systems
that, compared to existing personal computers available at the time, were low in
price, easy to use and had sophisticated audio-video capabilities. In late 1989,
Sega began shipping its Genesis system, a more-powerful 16-bit video game
system. In August 1991, Nintendo introduced its 16-bit Super Nintendo
Entertainment System. Sega and Sony each began distribution of their 32-bit
hardware systems (named Saturn and PlayStation, respectively) in Japan during
the quarter ended December 1994. Sega began limited shipment of the Saturn in
North America in May 1995, and Sony commenced shipping the PlayStation in North
America in September 1995. Nintendo shipped its 64-bit Nintendo 64 system in
Japan in June 1996 and in North America in September 1996. By June 1998, the
estimated number of units of the Nintendo 64 system, Saturn system and the
PlayStation system owned by users worldwide was approximately 16 million units,
9 million units and 30 million units, respectively. The Company believes that
content providers with demonstrated capability for developing successful games
will be in a position to develop games for whichever platforms achieve
significant consumer acceptance.
Previously, most software products for dedicated platforms were sold in
cartridge form. However, compact discs have become increasingly popular because
they have substantially lower manufacturing costs than games in cartridge form.
The newer Sony PlayStation and Sega Saturn platforms are based on CD-ROM
technology. However, the 64-bit Nintendo 64 system continues to utilize software
products in cartridge form.
Portable Game Systems. Nintendo's release in 1989 of the Game Boy, a
battery-operated, hand-held interactive entertainment system incorporating an
8-bit microprocessor, revolutionized the hand-held game machine market.
Previously, the only hand-held systems available were dedicated to a single
game.
Personal Computer Software. The introduction of faster microprocessors,
graphics accelerator chips, high density disk drives, enhanced operating
systems, and increases in memory and processing power have facilitated the
development of more cost-effective, graphically oriented and user-friendly
personal computer software. As personal computers have become more powerful,
less expensive and easier to use, their use in both the home and business
environments has expanded, resulting in increased demand for a wide variety of
software products, including video games.
New Technologies. Recent advances in digital processing, data storage,
graphics, data compression and communications technologies have made possible a
new range of interactive software products and services. A number of companies
are developing technologies to permit the broadcast of interactive entertainment
services
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directly via satellite, fiber optic cables, and telephone and cable television
lines. Many companies are also developing on-line interactive games and
interactive networks for playing video games, such as the Company's interactive
multi-player video game network product, Wavenet.
BUSINESS
GENERAL
Midway is a leading designer, publisher and marketer of interactive
entertainment software played in both the coin-operated and home markets. Since
the late 1970s, Midway has released many of the industry's leading games,
including NFL Blitz, Mortal Kombat (which line of games has sold over 15 million
copies in the home market), Cruis'n USA, Cruis'n World, Rampage, NBA Jam, Joust,
Defender, Pacman and Space Invaders, and, through its Atari Games subsidiary,
such leading games as San Francisco Rush Extreme Racing, The NHLPA & NHL Present
Wayne Gretzky's 3D Hockey, Area 51, Gauntlet, Centipede, Asteroids and Pong.
Midway's games are generally available for play on all major dedicated home
video game platforms, including those of Nintendo, Sony and Sega, and personal
computers.
Midway began publishing home video games based on its own coin-operated
video games in September 1995 with the introduction of Mortal Kombat 3, the best
selling home video game in the United States in 1995 according to TRSTS reports.
Prior to that time, Midway had granted a third party the right to publish home
versions of most coin-operated video games released by Midway for a modest
royalty. In preparation for the end of this arrangement and to maximize
profitability, Midway developed and implemented a new strategy to begin to
publish home versions of its coin-operated video games and expand the number of
its coin-operated and home video game releases. As part of this strategy, in
April 1994 Midway acquired the operating assets and business of three commonly
owned companies: Tradewest, Inc., Tradewest International, Inc., and The Leland
Corporation (collectively "Tradewest"), a home video game development and
distribution business, and in March 1996 Midway acquired Atari Games, a
designer, publisher and marketer of interactive entertainment software. Midway
also significantly increased its research and development expenditures to $67.5
million in fiscal 1998, up from $55.9 million in fiscal 1997 and $32.5 million
in fiscal 1996. In fiscal 1998, Midway released eight coin-operated video games
and 35 home video games (directly or under licensing arrangements, including all
platforms), compared to seven new coin-operated video games and 29 new home
video games (directly or under licensing arrangements, including all platforms)
in fiscal 1997.
Midway's coin-operated video games are primarily sold through a worldwide
network of distributors who in turn sell or lease such games directly to arcades
and route operators. The Company currently markets and sells its home video
games in North America through a combination of direct sales by Midway's
internal sales staff and independent sales representatives. Midway's principal
customers for its home video games are mass merchandisers such as Toys-R-Us,
Wal-Mart and Target, national and regional retailers, discount store chains,
video rental retailers and entertainment software distributors.
STRATEGY
Midway's business strategy is based upon the following:
- CREATE PORTFOLIO OF EXCITING GAMES -- The key to success in the video
game business is to produce games that are the most fun and exciting to
play, which requires the creative talents of experienced game designers.
Midway employs over 350 game design personnel organized in teams
comprised of programmers, artists, mechanical and electrical engineers,
musicians and actors. The game design teams operate in a studio
environment that encourages creativity, productivity and cooperation
among design teams. Midway believes that this environment, together with
a compensation structure that rewards design teams for the success of
their games and a policy of providing design teams substantial
independence and flexibility, enables Midway to attract and retain
designers who the Company believes are among the best game designers in
the industry. The design teams are supported by state-of-the-art design
technology that allows for the creation of cutting-edge,
three-dimensional graphics and
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advanced audio effects. Midway produces games in the action, simulation,
adventure and sports categories.
- EXPLOIT COIN-OPERATED PROVING GROUND -- Midway generally develops its
video games for initial release in the coin-operated market. To be
successful, a coin-operated video game must be action packed and fun, and
provide enough excitement to encourage players to play such game
repeatedly. Midway considers coin-operated video games that sell at least
5,000 units and home games that sell at least 100,000 units per dedicated
platform to be successful games. Midway's experience has been that a
successful coin-operated game is almost always a success in the home
market. Each of the coin-operated video games released by Midway in the
past four years which has sold at least 5,000 units has then sold at
least 100,000 units for each major dedicated platform on which it was
released in the home market. The significant benefits realized by Midway
from this strategic approach are threefold: (i) the results achieved in
the initial coin-operated release are a meaningful indicator of the
success the game might realize in the home market and help to determine
the strategy which Midway will follow in choosing and releasing games in
the home market, (ii) the knowledge that a particular coin-operated video
game is popular with consumers allows Midway to maximize profitability
through simultaneous publication across multiple home platforms thereby
spreading developmental, advertising and promotional costs over a greater
number of units and (iii) a successful coin-operated game promotes sales
for subsequent home versions of the game among the players exposed to the
game in arcades and other coin-operated venues.
- MAINTAIN PLATFORM INDEPENDENCE -- Midway develops games for all major
dedicated home platforms (Nintendo, Sony and Sega) as well as for the
personal computer and hand-held platforms. Midway is a leading developer
of video games for the 32-and 64-bit game platforms which are currently
being marketed by hardware manufacturers. According to TRSTS reports for
fiscal 1998, the Company was ranked fourth among 53 companies in sales of
32- and 64-bit home video games. In August 1996, the Company ranked
seventh in sales for these platforms. In both fiscal 1998 and fiscal
1997, Midway released more games on the new Nintendo 64 platform than any
developer other than Nintendo itself. Because it produces video games for
multiple platforms, Midway is not dependent on any particular game
platform. Midway believes that, as a result of its relationships with the
major home platform manufacturers, its game development expertise and its
strategy of investing in advanced technology, it is well positioned for
the rapid technological evolution that characterizes the home video game
market.
- EXPLOIT FRANCHISE AND LIBRARY VALUE -- Midway seeks to exploit its
franchise properties such as Mortal Kombat. Midway has released five
different coin-operated games under the Mortal Kombat title and published
or licensed home versions of each of those games. Midway has also
licensed two film adaptations of Mortal Kombat and granted merchandising
licenses in the toy, clothing, comic book, strategy guide and other
product lines. In fiscal 1997, Midway released two Mortal Kombat home
games, Ultimate Mortal Kombat 3 and Mortal Kombat Trilogy, and in fiscal
1998, Midway released Mortal Kombat 4 and Mortal Kombat Mythologies:
Sub-Zero. An animated television series based on Mortal Kombat was
introduced in the fall of 1996, and a sequel to the movie version of
Mortal Kombat entitled Mortal Kombat -- Annihilation was released in the
fall of 1997. A live action television series based on Mortal Kombat is
scheduled to debut in the fall of 1998. Midway also seeks to utilize its
large library of video games to release "arcade classics" and updated
versions of such classics. For the home market in fiscal 1997, Midway
released two collections of arcade classic games and Robotron X, a new
version of a classic arcade game. In fiscal 1998, Midway released two
additional collections of arcade classic games. Midway's TouchMaster
products also incorporate a variety of games including versions of
classic games such as Centipede and Breakout.
- DEVELOP AND EXPLOIT MULTI-SITE GAME PLAYING NETWORK -- Midway is testing
its own proprietary multi-player interactive video game playing network
technology known as Wavenet, allowing players to play against others
located at remote coin-operated locations. This technology has resulted
in greater player utilization and profitability of games. As new on-line
interactive formats develop for game playing, such as over the Internet
or other networks, Midway intends to create a competitive advantage by
exploiting its developing multi-player network technology.
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- INVEST IN ADVANCED TECHNOLOGY -- Midway has developed its own proprietary
hardware and software for creating digitally texture-mapped polygon
images, which enable it to produce games with state-of-the-art visual
simulations at cost levels that are attractive to Midway's customers.
Midway has also created proprietary tools to facilitate the development
of new products, the transfer of game features from one product to
another and the transfer of existing products to additional hardware
platforms. Midway believes its proprietary hardware and software have
helped it to achieve and sustain a reputation for developing high quality
products and to position itself for involvement in evolving technologies.
NEW PRODUCT DEVELOPMENT
The Company's goal is to produce video games that are action packed and
fun, and provide enough excitement and challenge at various levels of
proficiency to encourage players to play such game repeatedly. The Company's
game design personnel are organized in teams comprised of programmers, artists,
mechanical and electrical engineers, musicians and actors. The lead designers
manage the work of the other team members and are responsible for the overall
design of the game. Ideas for new games generally originate with the Company's
lead designers. The Company also evaluates coin-operated games designed by
others with a view toward obtaining licenses authorizing it to manufacture and
sell such games. Each concept, whether from the Company's designers or from
third parties, is reviewed initially for technical feasibility and evaluated
relative to several factors, including whether the proposed product fits in with
the Company's general strategy and profitability objectives. The Company
produces games in the action, simulation, adventure and sports categories.
The game design teams operate in a studio environment that encourages
creativity, productivity and cooperation among design teams. The Company
believes that this environment, together with a compensation structure that
rewards design teams for the success of their games and a policy of providing
design teams substantial independence and flexibility, enables the Company to
attract and retain game designers that are among the best in the industry.
The designers are supported by state-of-the-art design technology that
allows for the creation of cutting-edge, three-dimensional graphics and advanced
audio effects. The Company has developed and maintains a substantial library of
proprietary software and development tools, including animation and digitally
texture-mapped polygon images that are used primarily in game products. Use of
these tools streamlines the development process, allowing members of the
development team to focus their efforts on the play and simulation aspects of
the product under development. The Company has also developed software tools to
expedite conversion of software from one hardware format to another and provide
sound and special visual effects. The Company continually creates new software
and development tools and refines and upgrades its existing tools.
Development of a new coin-operated video game generally takes 18 months or
longer, and typically involves the expenditure of substantial funds, including
development, testing and sampling costs. The Company believes that the basic
development costs of a coin-operated game can exceed $2.5 million and, depending
on the specific hardware and software requirements, may cost up to $5.0 million
per game. Because of changing technology during the past few years, both the
time and cost to develop games have increased during the same period. Conversion
of a coin-operated game to a home game usually takes six to 12 months, which
period may overlap with the development period of the coin-operated version of
the game. The Company utilizes both independent third parties and its own
personnel to convert coin-operated games to home games. The Company is generally
obligated to submit new games to the dedicated platform manufacturers for
approval prior to development and/or manufacturing. Additionally, prior to
release, each product undergoes careful quality assurance testing which involves
technical review of each component of the final product and testing on the
applicable platforms.
During the fiscal years ended June 30, 1998, 1997 and 1996, the Company
spent approximately $67.5 million, $55.9 million and $32.5 million,
respectively, on research and development. Certain features of the Company's
products are protected by patents, trademarks and copyrights. The Company is
both a licensor and licensee of these proprietary rights.
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Under the Company's arrangements with GT Interactive Software Corp. ("GT
Interactive"), the Company and GT Interactive shared equally the cost to develop
personal computer CD-ROM versions of those of the Company's coin-operated video
games released prior to March 1997 that GT Interactive elected to release into
the home market. For later games, the Company bears all costs of development,
and GT Interactive bears the cost of translating and localizing games which it
elects to release outside of North America and Japan. In the event that the
Company elects not to convert a coin-operated video game for use on personal
computers, GT Interactive may elect to do so, but must then bear all conversion
costs.
From time to time, the Company has also purchased distribution rights to
certain games under development by third parties for various home video game
platforms and personal computers. Certain of these games are sequels to games
which have previously been successfully released. The Company also from time to
time obtains the right to adapt games owned by third parties from one platform
to another, where it believes that success on the original platform suggests a
probability of success on the other platform.
The Company endeavors to comply with the rules established by a domestic
ratings board voluntarily established by the home game and coin-operated video
game industries and certain foreign countries' ratings boards and properly
displays the ratings received for its products. The Company believes that
ratings as to the violence contained in home games and coin-operated video games
will not have an adverse effect upon the Company so long as such ratings are
consistently applied throughout the industry.
PRODUCTS
Coin-Operated Games. The Company is one of the leading developers and
marketers of coin-operated video games, having released since the late 1970s
such titles as Mortal Kombat, Cruis'n USA, Cruis'n World, NBA Jam, Terminator 2,
Joust, Robotron: 2084, Ms. Pacman, Defender, Pacman and Space Invaders, and,
through its Atari Games subsidiary, such titles as San Francisco Rush Extreme
Racing, Area 51, Primal Rage, Hard Drivin', Gauntlet, Centipede, Missile
Command, Break Out, Asteroids and Pong. In fiscal 1998, the Company released
eight new coin-operated video games: Mortal Kombat 4, NFL Blitz, Off Road
Challenge, Hyper Drive, Rush: The Rock, California Speed, Surf Planet and
Radikal Bikers. During fiscal 1997, seven coin-operated video games were
introduced under the Midway name: Maximum Force, The NHLPA & NHL Present Wayne
Gretzky's 3D Hockey, San Francisco Rush Extreme Racing, Mace -- The Dark Age,
Rampage World Tour, Cruis'n World and War Gods. During fiscal 1996, the Company
introduced TouchMaster, a touchscreen countertop game containing multiple game
options which the Company continued to sell through fiscal 1998 and which the
Company expects to continue to update in fiscal 1999. The Company also released
two software upgrades for the TouchMaster System during fiscal 1998 and
introduced an upright version of the game in the third quarter of fiscal 1998.
At the March 1998 Amusement Showcase International, Play Meter Magazine
named Cruis'n World Best Video Simulator and Maximum Force Best Dedicated Video.
At the March 1997 Amusement Showcase International, Play Meter Magazine named
Cruis'n USA the Best Dedicated Video Game and Area 51 Best Video Kit. Six of
Midway's video games were awarded the American Amusement Machine Association's
("AAMA") Silver, Gold and Platinum Sales Achievement Awards during fiscal 1998,
and two of Midway's video games were Silver and Gold Sales Achievement Awards
during fiscal 1997. In fiscal 1998, Midway's Cruis'n World and San Francisco
Rush coin-operated video games were awarded the AAMA Diamond Sales Achievement
Award -- the highest category of award presented in any given year. During
fiscal 1997, Midway's Mortal Kombat 3 coin-operated video game conversion kit
was awarded the Diamond Sales Achievement Award. At the October 1997 Amusement
and Music Operators Association ("AMOA") trade show, Cruis'n World was named
Most Played Dedicated Video Game.
Coin-operated games are sold to distributors at prices ranging from $3,000
to $7,000. The Company also manufactures kits which can be used by the operator
to convert an existing coin-operated cabinet to a new release. The kits are sold
at prices ranging from $1,000 to $3,000.
The Company has developed a proprietary multi-player interactive
coin-operated video game playing network, known as Wavenet, allowing players to
play against others located at remote coin-operated locations. The Company
believes that this technology will result in greater player utilization and
profitability.
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Home Games. In fiscal 1999, the Company expects to release at least 22 home
game titles. The fiscal 1998 home game product line featured 20 titles,
including Mortal Kombat 4, Mortal Kombat Mythologies: Sub-Zero, Top Gear Rally,
The NHL & NHLPA Present Wayne Gretzky's 3D Hockey '98, San Francisco Rush
Extreme Racing, Rampage World Tour, Mace -- The Dark Age, Gex 2 and Pandemonium
2. During fiscal 1997, the Company published 15 video games for the home market,
including Ultimate Mortal Kombat 3, Mortal Kombat Trilogy, NBA Hangtime, Doom
64, Final Doom, War Gods, The NHLPA & NHL Present Wayne Gretzky's 3D Hockey,
Area 51 and two collections of arcade classics. Most titles are published in
multiple versions, each of which is designed for a specific dedicated platform.
However, certain new games featuring advanced three-dimensional graphics can
only be played on 32- and/or 64-bit platforms. Although the Company did not
release any game titles for hand-held platforms during fiscal 1998, the Company
anticipates releasing at least six new hand-held titles during fiscal 1999.
Most of the Company's home games have suggested retail prices ranging from
$39.95 to $59.95.
1998 MIDWAY HOME GAME RELEASES
The following table sets forth the games that were released by the Company
directly or under licensing arrangements during fiscal 1998 and the platforms on
which each can be played in the home market.
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
---- -------- -----------
<S> <C> <C>
Arcade's Greatest Hits -- Atari
Collection*............................ Classic Super Nintendo Entertainment System
Arcade's Greatest Hits -- Midway
Collection 2*.......................... Classic PlayStation Personal Computer
BioFreaks................................ Action Nintendo 64
PlayStation
Chopper Attack........................... Action Nintendo 64
NBA Fastbreak '98........................ Sports PlayStation
Gex: Enter the Gecko..................... Action PlayStation
Mace -- The Dark Age*.................... Action Nintendo 64
Maximum Force*........................... Action PlayStation
Saturn
Personal Computer
Micro Machines V3........................ Driving PlayStation
Mortal Kombat 4*......................... Action Nintendo 64
PlayStation
Personal Computer
Mortal Kombat Mythologies: Sub-Zero*..... Action PlayStation
Nintendo 64
Mortal Kombat Trilogy*................... Action Saturn
Personal Computer
The NHL & NHLPA Present Wayne Gretzky's
3D Hockey '98*......................... Sports Nintendo 64
PlayStation
Off Road Challenge*...................... Driving Nintendo 64
Olympic Hockey Nagano '98................ Sports Nintendo 64
Open Ice................................. Sports Personal Computer
Pandemonium 2............................ Action PlayStation
Quake.................................... Action Nintendo 64
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
---- -------- -----------
<S> <C> <C>
Rampage World Tour*...................... Action PlayStation
Saturn
Nintendo 64
Personal Computer
Robotron X............................... Action Nintendo 64
San Francisco Rush Extreme Racing*....... Driving Nintendo 64
PlayStation
Top Gear Rally........................... Driving Nintendo 64
</TABLE>
- -------------------------
* Based upon one or more previously released coin-operated video games.
1997 MIDWAY HOME GAME RELEASES
The following table sets forth the games that were released by the Company
directly or under licensing arrangements during fiscal 1997 and the platforms on
which each can be played in the home market.
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
---- -------- -----------
<S> <C> <C>
Arcades Greatest Hits*................... Classic Super Nintendo Entertainment System
Genesis
Saturn
Arcades Greatest Hits -- Atari Collection
1*..................................... Classic PlayStation
Saturn
Area 51*................................. Action PlayStation
Saturn
Personal Computer
Doom 64.................................. Action Nintendo 64
Final Doom............................... Action PlayStation
Mortal Kombat Trilogy*................... Action Nintendo 64
PlayStation
Ms. Pacman*.............................. Classic Super Nintendo Entertainment System
NBA Hangtime*............................ Sports Nintendo 64
Super Nintendo Entertainment System
PlayStation
Genesis
Personal Computer
The NHLPA & NHL Present Wayne Gretzky's
3D Hockey*............................. Sports Nintendo 64
Open Ice*................................ Sports PlayStation
Return Fire.............................. Action Personal Computer
Robotron X*.............................. Action PlayStation
Personal Computer
T-MEK*................................... Action Personal Computer
Ultimate Mortal Kombat 3*................ Action Super Nintendo Entertainment System
Genesis
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
---- -------- -----------
<S> <C> <C>
War Gods*................................ Action Nintendo 64
PlayStation
Personal Computer
</TABLE>
- -------------------------
* Based upon one or more previously released coin-operated video games.
MARKETING AND DISTRIBUTION
Coin-Operated Games. Coin-operated video games are sold under the Midway
and Atari trademarks. Coin-operated video games are marketed primarily through
approximately 106 independent distributors worldwide. Distributors sell these
products to operators who own and operate the machines and place them in
amusement arcades, restaurants, taverns, convenience stores and movie theaters.
Distributors are primarily responsible for the sale and distribution of these
products in designated territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. It is
customary for distributors of the Company's coin-operated video games also to
distribute games produced by other manufacturers.
Coin-operated games are also marketed through trade shows, promotional
videotapes and advertising in trade publications. The Company maintains separate
sales and marketing teams for its Midway and Atari product lines.
Export sales of coin-operated games, primarily to Western Europe, were
approximately $36.1 million (9.2% of revenues) for the fiscal year ended June
30, 1998 compared with $62.4 million (16.1% of revenues) for the fiscal year
ended June 30, 1997 and $25.3 million (10.3% of revenues) for the fiscal year
ended June 30, 1996. Substantially all foreign sales are made in United States
dollars and, therefore, the Company is not generally subject to the risk of
fluctuation of the value of foreign currencies in relation to the dollar. The
Company believes that while the loss of a single distributor could temporarily
affect the distribution of a particular model, it would not have a material
adverse effect on the business of the Company. In any such event, the Company
believes it could make arrangements with alternate distributors for the
distribution of the Company's coin-operated games.
Home Games. Commencing with the Company's fall 1996 product line, all newly
released home video games are marketed under the Midway trademark. Prior to that
time, the Company's home video games had been marketed under the Williams and
Tradewest trademarks and Atari Games home games had been marketed under the
Tengen and Time Warner Interactive trademarks.
The Company began to publish home video games based on its own
coin-operated video games in September 1995 with the introduction of Mortal
Kombat 3, the best selling home video game in the United States in 1995. Prior
to that time, the Company had granted a third party the right to publish home
video game versions of most coin-operated video games released by the Company.
Home games are marketed in the United States through the Company's internal
sales staff and through independent sales representatives to approximately
14,000 stores domestically, including mass merchandisers, national and regional
retailers, discount store chains, video rental retailers and entertainment
software distributors.
The Company's marketing activities include television and print
advertising, retail store promotions, direct mailings and user support programs.
The Company also utilizes a store-oriented marketing approach which includes
point-of-purchase promotions, use of display cards and other forms of
merchandise displays. The Company's sales literature, which features advance
information on new products, encourages potential users to purchase the
Company's products at their local retail outlets, creating retail demand for new
products before their release. The Company provides technical support for its
home products through its customer support department, which is staffed by
personnel trained to respond to customer inquiries.
Midway has launched a web site located at www.midway.com which displays
currently available games and future game releases searchable by either game
title or platform. Service updates and press releases are
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<PAGE> 12
available on the web site as well as interactive features, including the ability
to download music featured in certain video games and on-line registration for
the Midway Fan Club.
The Company's principal customers for its home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Target. Sales to the Company's
largest customer, Toys-R-Us, in fiscal 1998 represented 12.5% of total Company
revenues compared to 10.5% of total Company revenues in fiscal 1997. It is
customary for the sales representatives and the distributors of the Company's
home games who are assigned specific customers to also distribute games produced
by other manufacturers. The Company exploits the worldwide markets for these
games through direct distribution channels and market licensing agreements.
These distribution efforts are supported by marketing programs which emphasize
product awareness, brand recognition, dealer merchandising opportunities and
celebrity endorsements.
The Company has also entered into strategic relationships for the
distribution of home games. In December 1994, the Company appointed GT
Interactive as distributor of certain of its games as adapted for play on
personal computers worldwide. In March 1995, the Company also appointed GT
Interactive as an international distributor (excluding the U.S., Canada and
Mexico) of certain of the Company's domestically distributed home video games
for play on several of the 32- and 64-bit platforms, such as Sega Saturn,
Nintendo 64 and Sony PlayStation. The Company's personal computer and platform
game distribution agreements with GT Interactive expire in March 2000 and June
2001, respectively, subject to various conditions under which each agreement may
be extended if licensing fees remain unrecouped or terminated if certain sales
performance criteria have not been achieved. Games optioned under these
agreements are licensed for varying terms. In March 1996, the Company entered
into agreements with GT Interactive with respect to games developed by Atari
Games, which agreements contain similar expiration and renewal provisions as the
other agreements. Licensing fees under the Atari Games agreements are recoupable
in certain circumstances from royalties payable under the other agreements.
Pursuant to the agreements with GT Interactive described above, GT
Interactive paid non-refundable license fees in the aggregate amount of $35.0
million. GT Interactive will not be required to pay more than $5.0 million of
additional license fees to the Company unless certain sales levels are achieved.
All of the license fees were recognized as revenue by the Company in the year in
which the applicable agreement was entered into ($25.0 million in fiscal 1995
and $10.0 million in fiscal 1996). As a result, the Company does not expect that
it will recognize significant further revenue from the exploitation of its games
in the territories or on the platforms licensed to GT Interactive during at
least the next year. The royalties are contracted in United States dollars and,
therefore, the Company is not generally subject to the risk of fluctuation of
the value of foreign currencies in relation to the dollar. In March 1998, the
Company reacquired from GT Interactive the distribution rights for personal
computer games in North America and Japan for games subsequently released by the
Company and games not previously accepted by GT Interactive. For fiscal 1999,
the Company anticipates releasing at least eight new personal computer games. As
of July 1, 1999, the Company will have the right to terminate GT Interactive's
distribution of future platform games if GT Interactive has not met certain
sales performance criteria. If the Company exercises this right, it will be
obligated to repay the unrecouped portion of the advance paid by GTIS (excluding
the advance for the Midway personal computer games), plus interest.
In March 1994, the Company formed a joint venture with Nintendo to develop
video games on certain platforms being developed by Nintendo. The joint venture
is owned 50% by each of the Company and Nintendo. In connection with the
formation of the joint venture, the Company also entered into arrangements with
Nintendo for the development of a version of Cruis'n USA and Cruis'n World for
Nintendo 64. The joint venture has the right to distribute home versions of any
coin-operated sequels of Cruis'n USA developed by the Company and the right of
first negotiation with respect to distribution of home versions of any
coin-operated video games developed by the Company on a new coin-operated
platform developed by Nintendo. To date, no home video games have been released
through this joint venture, although the Company expects Nintendo to release the
home video game Cruis'n World under license from the joint venture in Fall 1998.
In September 1996, the Company entered into a master license agreement with
Tiger Electronics, Inc. pursuant to which the Company granted Tiger the right to
manufacture and distribute throughout the world
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<PAGE> 13
certain liquid crystal display ("LCD") games based on certain of the Company's
coin-operated video games and home games. The product categories licensed to
Tiger include certain LCD game systems, including cartridges for Tiger's
proprietary hand-held dot matrix LCD game system, and certain other electronic
products. The initial term of the agreement with Tiger expires in December 2001,
subject to certain renewal rights. The license agreements for specific products
optioned under the master license agreement expire upon the later of the
expiration of the master license agreement or 24 months after the prescribed
release date. In March 1998, Tiger assigned the master license agreement to
Hasbro, Inc. in connection with Hasbro's acquisition of Tiger's assets and
business.
MANUFACTURING
Coin-Operated Games. The Company's coin-operated games are manufactured by
WMS at WMS' factory in Illinois pursuant to the Manufacturing Agreement dated as
of April 6, 1998 between the parties (the "Manufacturing Agreement"). Prior to
the Distribution, WMS manufactured the Company's coin-operated video games
pursuant to the Manufacturing and Services Agreement dated as of July 1, 1996
(the "Manufacturing and Services Agreement"), which agreement was entered into
in connection with the Offering. Effective as of April 6, 1998 and in connection
with the Distribution, the Manufacturing Agreement superseded the Manufacturing
and Services Agreement. See "Item 13. Certain Relationships and Related
Transactions." The Company believes such arrangements and facilities are
adequate for its current and planned production needs. Game production is
generally based on advance purchase orders from distributors with respect to
coin-operated games, and no significant inventory of finished goods is
customarily maintained.
Since the amount of backlog orders varies from the beginning to the end of
a normal two-to three-month production process of a game, meaningful comparison
of backlog orders can only be made at the same period during a production cycle
and not at the end of fiscal years. The Company does not consider order backlog
to be a meaningful indicator of future sales.
Most coin-operated games are warranted for a period of 60 days, and home
games are warranted for a period of 90 days. The costs incurred by the Company
in connection with these warranties have been insignificant.
The raw materials used in manufacturing coin-operated video games include
various metals, plastics, wood and glass obtained from numerous sources of
supply. In addition, numerous component parts, including electronic
subassemblies and video monitors, are purchased from suppliers. Wood cabinets
for coin-operated video games are manufactured by WMS' subsidiary Lenc-Smith
Inc. pursuant to the Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and the Company, as well as by other outside suppliers. See
"Item 13. Certain Relationships and Related Transactions." The Company believes
that the sources of supply of component parts and raw materials are adequate and
that substitute sources of materials are available.
Software Products for Home Games. Manufacturing of home games for 32- and
64-bit platforms is performed for the Company by the developer of the game
platform (i.e., Nintendo, Sony or Sega), as required by the applicable platform
license. The Company is one of only a limited number of software publishers who
have been granted the right by Nintendo and Sega to self-manufacture cartridges
for their 16-bit platforms. For such platforms, the Company generally employs
contract manufacturing sources in Mexico. Platform manufacturers typically
retain the right to limit the number of games and approve timing of release
under manufacturing and licensing arrangements. Home game production is based
upon estimated demand for each specific title and the level of the inventory of
finished goods depends upon the variance in market demand during the life of a
specific game title. At the time a product is approved for manufacturing, the
Company must provide certain of the platform manufacturers with a purchase order
for that product and an irrevocable letter of credit for 100% of the purchase
price. Most products manufactured by the dedicated platform manufacturers for
the Company are purchased by the Company on an "as is" and "where is" basis and
are delivered to the Company FOB place of manufacture and shipped at the
Company's own expense and risk. Initial orders generally require 30 to 75 days
to manufacture depending on the platform. Reorders of cartridge based products
require approximately 50 days to manufacture, while reorders of CD-ROM based
products
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<PAGE> 14
generally require only 14 days. Shipping of orders requires an additional three
to 10 days, depending on the mode of transport and location of manufacturer.
The Company leases a warehouse facility in Dallas, Texas from which it
distributes home games. Certain products are imported into the United States,
whereupon they are inspected by customs agents and transferred to the Company's
warehouse facility where they are unpacked and shipped to the Company's
customers. Certain of these product components are assembled into finished
products for the Company by third parties prior to their transfer to the
Company's warehouse facility. Products ordered for inventory are stored at the
warehouse facility and used to fill additional orders as received.
The Company participates in the electronic data interchange program
maintained by most of its largest customers for home games. Re-orders from
inventory are generally filled by the Company within two days. As a result, home
games traditionally have no backlog of orders.
CD-ROM Based Software Products for Personal Computers. Under the Company's
arrangements with GT Interactive, the Company and GT Interactive shared equally
the cost to develop personal computer CD-ROM versions of those of the Company's
coin-operated video games released prior to March 1997 that GT Interactive
elected to release to the home market. If GT Interactive elects to release a
game for the home market, it is responsible for and bears the cost of the
manufacture of the CD-ROMs as well as all other costs related to the sale of
these CD-ROMs. For games released after March 1997, the Company bears all costs
of development, and GT Interactive bears the cost of translating and localizing
games which it elects to release outside of North America and Japan. In the
event that the Company elects not to convert a coin-operated video game for use
on personal computers, GT Interactive may elect to do so, but must then bear all
conversion costs.
PRODUCT RETURNS AND PRICE ADJUSTMENTS
In its home video game business, the Company accepts product returns for
defective products and sometimes provides replacements, markdowns or other
credits on varying terms in the event that the customer holds slow-moving
inventory of the Company's home games. At the time of product shipment, the
Company establishes reserves, including reserves under the Company's policies
for price protection and returns of defective products, which estimate the
potential for future returns of products based on historical return rates,
seasonality of sales, retailer inventories of the Company's products and other
factors. Product returns, markdowns and credits that exceed the Company's
reserves could have a material adverse effect on the Company's business,
operating results and financial condition. Although the Company maintains
reserves which it believes to be adequate with respect to product returns and
price reductions, there can be no assurance that the reserves established will
not be exceeded.
PLATFORM LICENSES
Under non-exclusive license arrangements with Nintendo, Sony and Sega, the
Company has the right to develop and market software products for (i) Nintendo's
Super Nintendo Entertainment System, Nintendo 64, Game Boy and Color Game Boy
platforms, (ii) Sony's PlayStation, and (iii) Sega's Genesis and Saturn
platforms. Generally, no specific hardware license is required for the
development and marketing of personal computer software. Certain of the platform
license agreements or renewals of existing agreements are in the process of
being finalized with the platform manufacturers. However, the Company and such
platform manufacturers have proceeded as if the formal agreements were in place
by approving new game concepts, manufacturing new home games and otherwise. The
Company believes such informal arrangements are not uncommon in the home video
game business. The Company does not believe there is any significant risk that
the definitive platform license agreements will not be finalized on terms
acceptable to the Company.
Each dedicated platform manufacturer requires that the software and a
prototype of each title, together with all related artwork and documentation, be
submitted to such dedicated platform manufacturer, as applicable, for
pre-publication approval. Such approval is generally discretionary. The Company
bears all costs and expenses in connection with its development of games under
its agreements with each of the dedicated platform manufacturers. Dedicated
platform manufacturers charge the Company a fixed amount for each
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<PAGE> 15
software cartridge or CD-ROM manufactured by such dedicated platform
manufacturer. This charge generally includes a manufacturing, printing and
packaging fee, as well as a royalty for the use of the manufacturer's name and
proprietary information and technology, and may be subject to adjustment by such
dedicated platform manufacturer in its discretion. The Company is responsible in
most cases for resolving, at its own expense, any software warranty or repair
claim. To date, the Company has not experienced any material software warranty
claims.
Certain platform license arrangements require that the Company bear the
risk that the information and technology licensed from the dedicated platform
manufacturers and incorporated into the Company's software may infringe the
rights of third parties. The Company must indemnify the dedicated platform
manufacturers against certain claims resulting from the development, marketing,
sale or use of the Company's software products, including certain claims for
copyright, patent or trademark infringement that may be brought against a
dedicated platform manufacturer. To date, no dedicated platform manufacturer has
sought indemnity for any liabilities incurred as a result of such lawsuits or
for any legal expenses incurred in defending such lawsuits. No assurance can be
given, however, that the Company's indemnification obligations under its license
arrangements with the dedicated platform manufacturers will not have a material
adverse effect on the Company's future results of operations or financial
condition.
The Company's licenses from dedicated platform manufacturers may be
terminated by the manufacturer upon a breach or default by the Company, or upon
the occurrence of certain other specified events. Generally, if a dedicated
platform license is terminated by reason of breach by the Company, the Company
will be required to destroy all of its inventory for use on such dedicated
platform. Additionally, upon expiration of a dedicated platform license, the
Company usually is provided a period of limited duration to sell off all its
inventory subject to such license, after which time any remaining inventory is
generally required to be destroyed.
There can be no assurance that the Company's licenses with any of the
dedicated platform manufacturers will be renewed upon expiration. Furthermore,
there is no limit on the number of licenses that dedicated platform
manufacturers may grant to others or on the number of titles that they may
permit their licensees to publish or that they themselves may release in the
future. Nintendo, Sony and Sega are the largest publishers of software for use
on their respective systems and are direct competitors of the Company.
In fiscal 1998, 86% of the Company's unit sales of software products were
for use on 32- and 64-bit game platforms (Nintendo 64, Sony PlayStation and Sega
Saturn platform). The balance of the Company's home video game unit sales were
primarily for the 16-bit Super Nintendo Entertainment System and Sega Genesis
platforms, as well as for portable game systems. The Company expects that an
increasing portion of its revenues in the coming years will be comprised of
games for 32- and 64-bit game platforms. If the popularity of home video games
on dedicated hardware platforms materially declines, or if the Company were to
lose its license to publish software from any of these companies, the Company's
business would be materially and adversely affected.
INTELLECTUAL PROPERTY LICENSES
While the Company primarily seeks to develop original proprietary games,
certain of the Company's games are based on properties or trademarks owned by
third parties, such as the National Basketball Association, National Football
League, National Hockey League or their respective players' associations, and
licensed to the Company. Typically, the Company is obligated to make certain
minimum guaranteed royalty payments over the term of the license and to advance
payment against such guarantees. License agreements generally extend for a term
of two to three years, are terminable in the event of material breach (including
failure to pay any amounts owing to the licensor in a timely manner) by the
Company and certain other events, and, in some cases, are renewable upon payment
of certain minimum guarantees or the attainment of specified sales levels during
the term of the license. Certain licenses are limited to specific territories or
platforms. Each license typically provides that the licensor retains the right
to exploit the licensed property for all other purposes, including the right to
license the property for use with other products and, in some cases, software
for other interactive hardware platforms.
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The Company depends on Nintendo, Sony and Sega for the protection of the
intellectual property rights to their respective hardware platforms and
technology, their ability to control the proliferation of new titles by
licensees and others and their ability to discourage unauthorized persons from
producing software for the Nintendo, Sony and Sega platforms.
PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
Each software title may embody a number of separately protected
intellectual property rights, including: (i) trademarks associated with elements
of the game (e.g., the NBA team logos in NBA Hangtime); (ii) the trademarks
under which the game is marketed (e.g., Mortal Kombat); (iii) the copyrights for
the game software (including the game's audiovisual elements); (iv) copyrights
for the software associated with the hardware platform; and (v) the patents for
inventions in the game software and hardware platforms.
Each dedicated home game includes patents, copyrights and trademarks
licensed from the platform manufacturer. Elements of certain of the Company's
titles are owned by third parties and licensed to the Company. The Company
relies on such third parties for protection of such intellectual property
rights. Their failure to adequately protect such rights could have a material
adverse effect on the Company.
The Company has over 1,000 trademark registrations worldwide for its games
and applies for trademark protection for all of its game titles, other than
those licensed from third parties.
The Company has registered the copyrights in the video game software for
most of its owned coin-operated titles. Notwithstanding such copyright
protection, preventing unauthorized duplication of software products is
difficult and costly and, in the case of personal computer software, such
unauthorized duplication is relatively common. Certain of the Company's personal
computer products require the user to refer to materials shipped with the
software in order to use the product. Despite such protection, the Company
believes that such requirements can be, and in certain instances have been,
circumvented.
The dedicated platform manufacturers have procured patents for certain of
the technology utilized in connection with their respective home game systems.
The dedicated platform manufacturers incorporate security devices in their
cartridges, CD-ROMs and platforms which seek to prevent unlicensed software
products from being played on their platforms. The Company does not own the
trademarks, copyrights or patents, if any, covering the proprietary information
and technology utilized in the dedicated platform manufacturers' cartridges or
CD-ROMs. Accordingly, the Company relies upon each dedicated platform
manufacturer for protection of such intellectual property from infringement and
bears the risk of claims of infringement brought by third parties arising from
the sale of software with respect to intellectual property supplied by third
party developers and embodied in the Company's software products. The Company's
agreements with these outside developers generally require the developers to
indemnify the Company for costs and damages incurred in connection with such
claims. No assurance can be given, however, that such software developers will
have sufficient resources to indemnify the Company fully in respect of any such
claims that may arise.
COMPETITION
The video game business is intensely competitive and is characterized by
the continuous introduction of new titles and the development of new
technologies. The ability of the Company to compete successfully in this market
is based, in large part, upon its ability to select and develop popular titles,
to identify and obtain rights to commercially marketable intellectual properties
and to adapt its products for use with new technologies. In addition, successful
competition is also based upon price, access to retail shelf space in the case
of home games, product enhancements, new product introductions, marketing
support and distribution systems. The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of the
Company.
In the coin-operated market, the Company competes principally with foreign
manufacturers such as Capcom, Konami, Namco, Sega and Taito.
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<PAGE> 17
In the home market, the Company competes principally with Nintendo, Sony
and Sega, the largest publishers of software for their respective systems. Due
to their dominant position in the industry as primary manufacturers of dedicated
platform hardware and software, Nintendo, Sony and Sega have a competitive
advantage with respect to retail pricing, acquiring intellectual property
licenses and securing shelf space. There can be no assurance that Nintendo, Sony
or Sega will not increase their own software development efforts. The Company
also competes in the United States and Canada with numerous companies licensed
by Nintendo, Sony and Sega to develop software products for use with their
respective systems. These competitors include Acclaim, Capcom, Eidos, Electronic
Arts, GT Interactive, Konami, Lucas Arts, Namco and THQ. Additionally, the
Company's games which are sold for use on personal computers compete with
entertainment software sold by companies such as Acclaim, Cendant, Electronic
Arts, GT Interactive, Learning Co. and Microsoft, among others. The entry and
participation of new industries and companies, including diversified
entertainment companies, in markets in which the Company competes may adversely
affect the Company's performance in such markets.
The Company believes that many of the Company's competitors, in addition to
large software companies such as Microsoft, are developing on-line interactive
games and interactive networks that will be competitive with the Company's
interactive products. See "Factors Affecting Future Performance -- Competition"
below.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience
significant quarterly fluctuations in net sales and operating results due to a
variety of factors, including fluctuations in the mix of products with varying
profit margins sold by the Company, the size and rate of growth of the consumer
software market, market acceptance of the Company's products and those of its
competitors and dedicated platform manufacturers, development and promotional
expenses relating to the introduction of new products or enhancements of
existing products, the timing and success of product introductions, changes in
pricing policies by the Company and its competitors, the accuracy of the
Company's and retailers' forecasts of consumer demand, the timing of orders from
major customers, order cancellations and delays in shipment. The Company's
expense levels are based, in part, on its expectations regarding future sales
and, as a result, operating results would be adversely affected by a decrease in
sales or a failure to meet the Company's sales expectations.
While the coin-operated video game business is not generally seasonal in
nature, the home video game business is highly seasonal. Sales of home video
games are typically significantly higher during the September and December
quarters due to the year-end holiday buying season. Sales in other quarters are
generally lower and vary significantly as a result of new product introductions
and other factors. There can be no assurance that the Company will achieve
consistent profitability on a quarterly or annual basis.
EMPLOYEES
At June 30, 1998, the Company had approximately 550 employees. The Company
believes that its relations with its employees are satisfactory.
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FACTORS AFFECTING FUTURE PERFORMANCE
Some of the risks and uncertainties which may cause the Company's operating
results to vary from anticipated results or which may materially and adversely
affect its operating results are as follows:
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS
The Company's success depends on generating revenue from new products and
enhancements of existing products. The process of developing software products
such as those offered by the Company is extremely complex and is expected to
become more complex and expensive in the future as new platforms and
technologies are introduced. In addition, consumer preferences for video games
are difficult to predict, and few video game products achieve sustained market
acceptance. There can be no assurance that new products introduced by the
Company will achieve any significant degree of market acceptance, or that such
acceptance will be sustained for any meaningful period. A significant delay in
the introduction of one or more new products or enhancements or the failure of
new products to achieve or sustain market acceptance would have a material
adverse effect on the Company's business, operating results and financial
condition.
TECHNOLOGICAL CHANGE
The video game market, both in the coin-operated and home segments, is
characterized by rapidly changing technology. The Company must continually
anticipate and adapt its products to emerging technologies, including new
hardware platforms. When the Company chooses to incorporate a new technology in
its products or to publish or develop a product for a new platform, it may be
required to make a substantial development investment one to two years in
advance of initial shipment of such products. There can be no assurance that the
Company will be able to identify accurately which emerging technologies will
gain widespread acceptance. If the Company invests in the development of a video
game that does not achieve significant commercial success, the Company's
revenues from that product will be adversely affected and it may not recover its
development costs. If the Company does not choose to pursue the development of
products incorporating new technology or for new platforms that achieve
significant commercial success, the Company's revenue growth may be adversely
affected. In addition, consumers may defer purchasing software for use on
existing platforms following the announcement of an introduction date for
hardware platforms incorporating new technologies. Accordingly, sales of the
Company's existing software products could be adversely affected by such
announcements. There can be no assurance that the Company will be able to
develop or acquire the expertise necessary to enable it to develop or market
products for emerging technologies.
RELIANCE ON MORTAL KOMBAT PRODUCTS
Revenues from Mortal Kombat products accounted for approximately 19.1%,
22.0% and 34.9% of the Company's total revenues during fiscal 1998, 1997 and
1996, respectively. If Mortal Kombat products fail to continue to sell or if the
Company fails to replace the Mortal Kombat products with additional products
generating significant revenues, the Company's business, operating results and
financial condition could be materially and adversely affected.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company has experienced and expects to continue to experience
significant quarterly fluctuations in net sales and operating results due to a
variety of factors, including fluctuations in the mix of products with varying
profit margins sold by the Company, the size and rate of growth of the consumer
software market, market acceptance of the Company's products and those of its
competitors and dedicated platform manufacturers, development and promotional
expenses relating to the introduction of new products or enhancements of
existing products, the timing and success of product introductions, changes in
pricing policies by the Company and its competitors, the accuracy of the
Company's and retailers' forecasts of consumer demand, the timing of orders from
major customers, order cancellations and delays in shipment. The Company's
expense levels are based, in part, on its expectations regarding future sales
and, as a result,
17
<PAGE> 19
operating results would be adversely affected by a decrease in sales or a
failure to meet the Company's sales expectations.
While the coin-operated game business is not generally seasonal in nature,
the home video game business is highly seasonal. Sales of home video games are
typically significantly higher during the September and December quarters due to
the year-end holiday buying season. Sales in other quarters are generally lower
and vary significantly as a result of new product introductions and other
factors. There can be no assurance that the Company will achieve consistent
profitability on a quarterly or annual basis.
COMPETITION
The video game business is intensely competitive and is characterized by
the continuous introduction of new titles and the development of new
technologies. The ability of the Company to compete successfully in this market
is based, in large part, upon its ability to select and develop popular titles,
to identify and obtain rights to commercially marketable intellectual properties
and to adapt its products for use with new technologies. In addition, successful
competition is also based upon price, access to retail shelf space in the case
of home games, product enhancements, new product introductions, marketing
support and distribution channels. The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of the
Company. See "Business -- Competition" above.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, are increasing their focus on the interactive entertainment market,
which will result in greater competition for the Company. In particular, many of
the Company's competitors are developing on-line interactive games and
interactive networks that will be competitive with the Company's interactive
products. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially and adversely affect its business and
financial condition.
PRODUCT RETURNS AND PRICE ADJUSTMENTS
In its home video game business, the Company accepts product returns for
defective products and sometimes provides replacements, markdowns or other
credits on varying terms in the event that the customer holds slow-moving
inventory of the Company's home games. At the time of product shipment, the
Company establishes reserves, including reserves under the Company's policies
for price protection and returns of defective products, which estimate the
potential for future returns of products based on historical return rates,
seasonality of sales, retailer inventories of the Company's products and other
factors. Product returns, markdowns and credits that exceed the Company's
reserves could have a material adverse effect on the Company's business,
operating results and financial condition. Although the Company maintains
reserves which it believes to be adequate with respect to product returns and
price reductions, there can be no assurance that the reserves established will
not be exceeded.
DEPENDENCE ON DEDICATED PLATFORM MANUFACTURERS
In fiscal 1998, 86% of the Company's unit sales of software products were
for use on 32- and 64-bit game platforms (Nintendo 64, Sony PlayStation and Sega
Saturn platform). The balance of the Company's home video game unit sales were
primarily for the 16-bit Super Nintendo Entertainment System and Sega Genesis
platforms, as well as for portable game systems. The Company expects an
increasing portion of its revenues in the coming years will be comprised of
games for 32- and 64-bit game platforms. If the popularity of home video games
on dedicated hardware platforms materially declines, or if the Company were to
lose its license to publish software from any of the major platform
manufacturers, namely Nintendo and Sony, the Company's business would be
materially and adversely affected.
The Company is generally obligated to submit new games to the dedicated
platform manufacturers for approval prior to development and/or manufacturing.
Rejection or substantial delay in approval of a product by a dedicated platform
manufacturer could have a material adverse effect on the Company's financial
18
<PAGE> 20
condition and results of operations. The Company has not experienced any
significant delays in the approval process for any of its games in the past.
However, there can be no assurance that the Company will not experience such
delays in the future. The dedicated platform manufacturers may also limit the
number of titles that the Company can release in any year, which may limit any
future growth in sales.
The Company depends on Nintendo, Sony and Sega for the protection of the
intellectual property rights to their respective hardware platforms and
technology, their ability to control the proliferation of new titles by
licensees and others and their ability to discourage unauthorized persons from
producing software for the Nintendo, Sony and Sega platforms. The Company also
relies upon the dedicated platform manufacturers for the manufacturing of
software cartridges and CD-ROMs for their platforms.
MANUFACTURING RISKS
The manufacturing of cartridges and CD-ROMs for the Company's home games is
performed for the Company by third parties. While the Company has not to date
experienced any material delays or interruptions in the manufacture of the
Company's products, there can be no assurance that such delays or interruptions
will not occur or, if any do occur, that they could be remedied without further
delay and without materially and adversely affecting the Company's business,
operating results or financial condition. Unanticipated delays in receipt of
shipments or price increases from any of the Company's contract manufacturing
sources could adversely affect the Company's business.
INTELLECTUAL PROPERTY LICENSES AND APPROVALS
While the Company primarily seeks to develop original proprietary games,
certain of the Company's games are based on properties or trademarks owned by
third parties, such as the National Basketball Association, National Football
League, National Hockey League or their respective players' associations. The
Company's future success may also be dependent upon its ability to procure
licenses for additional popular intellectual properties. There is competition
for such licenses, and there can be no assurance that the Company will be
successful in acquiring additional intellectual property rights with significant
commercial value.
The Company's intellectual property licenses generally require that new
products developed under such licenses be submitted to the licensor for approval
prior to release. Such approval is generally discretionary. Rejection or delay
in approval of a product by a licensor could have a material adverse effect on
the Company's business, operating results and financial condition. While the
Company has not experienced any significant delays in obtaining new product
approvals from its licensors in the past, there can be no assurance that the
Company will not experience delays in the future. The owners of intellectual
property licensed by the Company generally reserve the right to protect such
intellectual property against infringement.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends to a significant extent upon the
performance of senior management and on its ability to continue to attract,
motivate and retain highly qualified software developers. The loss of services
of senior management, highly-qualified software developers or other key
personnel could have a material adverse effect on the Company. Competition for
highly skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. Specifically, the Company may experience increased costs in order to
attract and retain skilled employees.
CONFLICTS OF INTEREST WITH WMS
Certain of the Company's officers and directors are also officers,
directors and stockholders of WMS, and may be subject to various conflicts of
interest including, among others, the performance by the two companies under
their existing agreements with each other as well as the negotiation of any
agreements required to be entered into in the future between these two parties.
Additionally, the Company may be subject to various conflicts of interest
arising from the relationship among it and WMS and their respective affiliates.
19
<PAGE> 21
Mr. Neil D. Nicastro, the Chairman of the Board, President, Chief Executive
Officer and Chief Operating Officer of the Company is also a Director of and a
consultant to WMS. Mr. Louis J. Nicastro, a Director of the Company is also the
Chairman of the Board, President and Chief Executive Officer of WMS. Mr. Neil D.
Nicastro is the son of Mr. Louis J. Nicastro. Mr. Harold H. Bach, Jr., Mr.
Kenneth J. Fedesna and Mr. Orrin J. Edidin, officers and employees of WMS and/or
various of its affiliates, are also officers of the Company. Mr. Bach and Mr.
Fedesna are also Directors of the Company. Each of Messrs. Bach, Fedesna and
Edidin will devote such time to the business and affairs of the Company as the
Company's Board of Directors deems appropriate. However, each such person has
other duties and responsibilities with WMS that may conflict with time which
might otherwise be devoted to his duties with the Company. The Company
anticipates that Messrs. Bach, Fedesna and Edidin will resign their positions
with WMS by the end of fiscal 1999.
ITEM 2. PROPERTIES.
The Company's principal office is located at 3401 North California Avenue,
Chicago, Illinois in premises owned by WMS. The following table contains certain
information describing the general character of the Company's other principal
properties, all of which are leased facilities.
<TABLE>
<CAPTION>
APPROXIMATE ANNUAL LEASE
LOCATION PRINCIPAL USE SQUARE FEET RENT($) EXPIRATION DATE
-------- ------------- ----------- ------- ---------------
<S> <C> <C> <C> <C>
2727 W. Roscoe Street Video Game Design and 47,500 146,000 06/30/01
Chicago, IL Development
675 Sycamore Drive Video Game Design and 84,501 593,196 07/31/05
Milpitas, CA Development and Offices
800 N. Main Street Video Games Sales and 14,700 77,760 06/01/03
Corsicana, TX Marketing
1800 S. Business 45 Video Games Sales and 6,000 48,000 02/28/99
Corsicana, TX Marketing
2400 S. Business 45 Office/Warehouse 5,000 30,000 month-to-month
Corsicana, TX
2820 Merrell Road Warehouse 28,234 84,702 07/31/99
Dallas, TX
10110 Mesa Rim Road Video Game Design and 27,512 250,644 06/01/02
San Diego, CA Development
6865 Flanders Drive Video Game Design and 4,187 50,244 06/30/02
San Diego, CA Development
6620 Mesa Ridge Road Video Game Sales and 9,104 98,329 06/30/02
San Diego, CA Marketing
</TABLE>
The Company believes that its facilities and equipment will be suitable for
the purposes for which they are employed, are adequately maintained and will be
adequate for current requirements and projected normal growth.
ITEM 3. LEGAL PROCEEDINGS.
The Company currently and from time to time is involved in litigation
incidental to the conduct of its business, none of which, in the opinion of the
Company, is likely to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
20
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Reference is made to "Market for the Company's Common Stock and Related
Security-Holder Matters" set forth in the 1998 Annual Report, which information
is incorporated by reference herein.
ITEM 6. SELECTED FINANCIAL DATA.
Reference is made to "Selected Five-Year Financial Data" set forth in the
1998 Annual Report, which information is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the 1998 Annual Report, which
information is incorporated by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Financial Statements and Notes thereto and Report
of Independent Auditors set forth in the 1998 Annual Report, which information
is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. The following table sets forth certain
information with respect to each director of the Company. Mr. Neil D. Nicastro
is the son of Mr. Louis J. Nicastro; otherwise, there is no family relationship
between any of the directors or executive officers of the Company.
Upon approval by the Company's stockholders at the 1998 Annual Meeting of
Stockholders, the Board of Directors was divided into three classes. The initial
term of office for the Class III directors expires at the Annual Meeting of
Stockholders to be held in 1999; the initial term of office for the Class II
directors expires at the Annual Meeting of Stockholders to be held in 2000; and
the initial term of the Class I directors expires at the Annual Meeting of
Stockholders to be held in 2001. Upon expiration of the initial staggered terms,
directors will be elected for three year terms to succeed those directors whose
terms expire.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENTAGE
DIRECTOR OR DEEMED TO BE OF
EXECUTIVE BENEFICIALLY OUTSTANDING
POSITION(S) WITH THE COMPANY AND OFFICER OF THE OWNED AS OF COMMON
NAME (AGE) PRINCIPAL OCCUPATION AS OF 9/15/98 COMPANY SINCE 9/15/98(1) STOCK(2)
---------- ---------------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Class I Directors: Initial term expiring at the Company's 2001 Annual Meeting
Neil D. Nicastro (41)......... Chairman of the Board of Directors, 1998 863,458(3) 2.3%
President, Chief Executive Officer
and Chief Operating Officer of the
Company
William C. Bartholomay (70)... Director of the Company and President 1996 80,370(4) *
of Near North National Group
Norman J. Menell (66)......... Director of the Company and Vice 1996 52,506(4) *
Chairman of the Board of WMS
Louis J. Nicastro (70)........ Director of the Company and Chairman 1998 50,547(4) *
of the Board, President and Chief
Executive Officer of WMS
Class II Directors: Initial term expiring at the Company's 2000 Annual Meeting
Kenneth J. Fedesna (48)....... Executive Vice President -- Coin-Op 1996 132,463(5) *
Video and Director of the Company and
Vice President and General Manager of
Williams Electronics Games, Inc.
William E. McKenna (79)....... Director of the Company and General 1996 51,958(4) *
Partner, MCK Investment Company
Harvey Reich (69)............. Director of the Company and Attorney 1996 51,277(4) *
Ira S. Sheinfeld (60)......... Director of the Company and Attorney, 1996 56,801(4) *
Squadron, Ellenoff, Plesent &
Sheinfeld LLP
Class III Directors: Initial term expiring at the Company's 1999 Annual Meeting
Harold H. Bach, Jr. (66)...... Executive Vice President -- Finance, 1990 121,674(5) *
Treasurer and Chief Financial Officer
and Director of the Company and Vice
President -- Finance, Treasurer,
Chief Financial and Chief Accounting
Officer of WMS
Byron C. Cook (44)............ Executive Vice President -- Home 1996 158,589(5) *
Video and Director of the Company
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENTAGE
DIRECTOR OR DEEMED TO BE OF
EXECUTIVE BENEFICIALLY OUTSTANDING
POSITION(S) WITH THE COMPANY AND OFFICER OF THE OWNED AS OF COMMON
NAME (AGE) PRINCIPAL OCCUPATION AS OF 9/15/98 COMPANY SINCE 9/15/98(1) STOCK(2)
---------- ---------------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Richard D. White (44)......... Director of the Company and Managing 1996 35,000(4) *
Director, CIBC Oppenheimer Corp.
Gerald O. Sweeney, Jr. (46)... Director of the Company and Attorney, 1996 35,000(4) *
Lord, Bissell & Brook
</TABLE>
- -------------------------
* Less than 1% of the number of outstanding shares of Common Stock on
September 15, 1998.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days.
(2) For purposes of calculating the percentage of outstanding Common Stock owned
by each director, shares beneficially owned and issuable upon the exercise
of stock options exercisable within 60 days have been deemed to be
outstanding.
(3) Includes 430,000 shares of Common Stock which the director has the right to
acquire upon the exercise of stock options.
(4) Includes 35,000 share of Common Stock which the director has the right to
acquire upon the exercise of stock options.
(5) Includes 90,000 shares of Common Stock which the director has the right to
acquire upon the exercise of stock options.
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 has also served as a Director of WMS since 1986 and as
consultant to WMS since April 6, 1998. Mr. Nicastro was elected President of WMS
June 18, 1991, sole Chief Executive Officer June 26, 1996, Co-Chief Executive
Officer August 29, 1994 and Chief Operating Officer September 30, 1990. Mr.
Nicastro resigned his officerships with WMS on April 6, 1998, the date WMS
completed the Distribution.
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). He also served as Vice Chairman of the Board of Directors
of Frank B. Hall & Co. Inc. (1974-1990). Mr. Bartholomay has also served as a
Director of WMS since 1981 and was elected as a Director of the Company in
October 1996.
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 President and Chief Executive Officer of WMS
since April 6, 1998. He has served as Chairman of the Board of Directors of WMS
since its incorporation in 1974. Mr. Nicastro has also served WMS as Co-Chief
Executive Officer (1994-1996), Chief Executive Officer (1974-1994), President
(1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986 and 1998). Mr.
Nicastro also served as Chairman of the Board and Chief Executive Officer of WHG
Resorts & Casinos Inc. and its predecessors from 1983 until January 1998. Mr.
Nicastro was a Director of the Company from 1988 until June 26, 1996. He
rejoined the Company as a Director on August 30, 1996. Mr. Nicastro also served
as
23
<PAGE> 25
Chairman of the Board and Co-Chief Executive Officer of the Company from
December 1, 1994 to June 26, 1996, Chairman of the Board and Chief Executive
Officer of the Company (1988-1994), and President of the Company (1988-1989 and
1990-1991).
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 served as Vice President and General Manager of
Williams Electronics Games, Inc., a wholly-owned subsidiary of WMS, for in
excess of five years and was a Director of WMS from 1993 until his resignation
on April 6, 1998.
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., 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.
HARVEY REICH was 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 until his retirement from that firm in July 1998. He has
also served as a Director of WMS since 1983 and was elected as a Director of the
Company in October 1996.
IRA S. SHEINFELD has been a member of the law firm of Squadron, Ellenoff,
Plesent & Sheinfeld LLP, New York, New York for in excess of five years. He has
also served as a Director of WMS since 1993 and was elected as a Director of the
Company in October 1996.
HAROLD H. BACH, JR. became a Director, Executive Vice President -- Finance
and Chief Financial Officer of the Company on August 30, 1996. Previously, Mr.
Bach served as Senior Vice President -- Finance and Chief Financial Officer of
the Company from September 17, 1990 to August 30, 1996, and he has served as
Treasurer continuously since December 1, 1994. Additionally, Mr. Bach has also
served as Vice President -- Finance, Chief Financial and Chief Accounting
Officer of WMS for in excess of five years. 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.
RICHARD D. WHITE has been a Managing Director of CIBC Wood Gundy Capital
Corp., New York, New York, an affiliate of CIBC Oppenheimer Corp. and its
predecessor, for in excess of five years, and was elected as a Director of the
Company in October 1996. Mr. White is also a director of Vestcom International,
Inc.
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.
(b) Identification of Executive Officers. The following table sets forth
certain information with respect to each executive officer of the Company. Each
executive officer serves as an executive officer until the next
24
<PAGE> 26
annual meeting of the Company's Board of Directors and until his respective
successor is duly elected and qualify.
<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................... 66 Executive Vice President -- Finance, Treasurer and Chief
Financial Officer
Byron C. Cook........................ 44 Executive Vice President -- Home Video
Kenneth J. Fedesna................... 48 Executive Vice President -- Coin-Op Video
Orrin J. Edidin...................... 37 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 in Item 10(a) above.
See also "Item 11. Executive Compensation -- Employment Contracts" with respect
to the term of employment of each of Mr. Nicastro and Mr. Cook.
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. from August 1992 until May 1997. Mr. Edidin has also
served as Vice President, Secretary and General Counsel of WMS since May 30,
1997.
(c) Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934 requires the Company's officers and
directors, and persons who own more than 10 percent 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. Such reporting persons
are required by regulation to furnish the Company with copies of all Section
16(a) reports that they file.
Based on its review of the copies of such reports received by it, or
written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that, during the period from
July 1, 1997 through June 30, 1998, all filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with, except that WMS was late in filing its Form 4 reporting the Distribution.
ITEM 11. EXECUTIVE COMPENSATION.
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, 1998, 1997 or 1996. The Summary Compensation Table below
sets forth the cash compensation paid by WMS (or in the case of (i) Mr.
Nicastro, (A) for the period from the date of the Offering until the date of the
Distribution, by WMS and the Company, and (B) for the period from the date of
the Distribution through June 30, 1998, by 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, 1998, 1997 and 1996 to each of the
Company's executive officers who served during such period and whose
compensation from WMS or the Company exceeded $100,000. Pursuant to the
Manufacturing and Services Agreement between WMS and the Company, after the
Offering and until the Distribution the compensation paid by WMS to the
executive officers of the Company (other than Messrs. Nicastro and Cook) was
allocated to the Company based upon estimates by management of the Company and
management of WMS of the percentage of time devoted to the Company. After the
Distribution, compensation paid by WMS to the executive officers of the Company
(other than Messrs. Nicastro and Cook) is reimbursed by the Company in amounts
equal to the Company's allocated cost pursuant to the Temporary Support Services
Agreement dated as of April 6, 1998 between WMS and the Company (the "Temporary
Support Services Agreement"). Management of the Company believes that such
executive officers devoted 40% to 70% of their time to the Company during fiscal
1998. The results of operations for each of the fiscal years ended June 30,
1998, 1997 and 1996 include an allocation of the compensation of the Company's
executive officers based on estimates by management of WMS. See
25
<PAGE> 27
"Item 13. Certain Relationships and Related Transactions" for a description of
the Manufacturing and Services Agreement and the Temporary Support Services
Agreement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS(4) OPTIONS(#)(1) COMPENSATION($)(2)
--------------------------- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Neil D. Nicastro(3).................. 1998 575,000 1,387,820 150,000 47,074(4)
Chairman of the Board, Chief 1997 600,000 969,160 500,000 54,632(4)
Executive Officer, President and 1996 532,500 267,600 -- 35,791(4)
Chief Operating Officer
Harold H. Bach, Jr................... 1998 300,000 220,000 50,000
Executive Vice
President -- Finance, 1997 300,000 175,000 100,000 --
Treasurer and Chief Financial
Officer 1996 262,500 67,800 -- --
Byron C. Cook........................ 1998 300,000 350,000 50,000 --
Executive Vice President--Home
Video........................... 1997 300,000 250,000 100,000 --
1996 250,000 150,000 -- --
Kenneth J. Fedesna................... 1998 310,000 150,000 50,000 2,500(5)
Executive Vice President--Coin-Op 1997 310,000 150,000 100,000 2,500(5)
Video 1996 267,500 66,000 -- 2,500(5)
Orrin J. Edidin...................... 1998 180,000 75,000 35,000 --
Vice President, Secretary and
General Counsel
</TABLE>
- -------------------------
(1) Excludes options to purchase shares of WMS common stock, all of which were
granted at an exercise price equal to market value on the date of grant. In
fiscal 1998, Mr. Nicastro received options to purchase 250,000 shares of WMS
common stock, and Mr. Edidin received 25,000 options to purchase WMS common
stock. In fiscal 1997, Mr. Edidin received 25,000 options to purchase WMS
common stock.
(2) Excludes adjustments to WMS options made pursuant to the adjustment plan
described under "Compensation from WMS Option Adjustment" below.
(3) Mr. Nicastro also received severance payments from WMS in fiscal 1998
consisting of $2,500,000 in addition to the stock options described in
footnote 1 above. See "Employment Agreements" below.
(4) Amount shown for Mr. Neil D. Nicastro includes for fiscal 1998, 1997 and
1996 life insurance premiums of $1,571, $1,467 and $691, respectively, and
$45,503, $53,165 and $35,100 for fiscal 1998, 1997 and 1996, respectively,
accrual for contractual retirement benefits.
(5) Amount shown for Mr. Fedesna includes life insurance premiums.
26
<PAGE> 28
The following table sets forth certain information with respect to options
to purchase Common Stock granted during fiscal year 1998 under the Company's
Stock Option Plans for the executive officers named in the Summary Compensation
Table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------- POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATE
TOTAL OPTIONS OF STOCK PRICE
GRANTED TO APPRECIATION FOR OPTION
NUMBER OF SECURITIES EMPLOYEES IN TERM (1)
UNDERLYING OPTIONS FISCAL EXERCISE PRICE --------------------------
NAME GRANTED (#) YEAR (%) ($/SHARE) EXPIRATION DATE 5%($) 10%(S)
---- -------------------- ------------- -------------- --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Neil D. Nicastro........ 150,000(2) 31.6 16.50 5/17/08 1,556,514 3,944,512
Harold H. Bach, Jr...... 50,000(2) 10.5 16.50 5/17/08 518,838 1,314,837
Byron C. Cook........... 50,000(2) 10.5 16.50 5/17/08 518,838 1,314,837
Kenneth J. Fedesna...... 50,000(2) 10.5 16.50 5/17/08 518,838 1,314,837
Orrin J. Edidin......... 35,000(3) 7.4 16.50 5/17/08 363,187 920,386
</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. Total potential stock price appreciation from May 18, 1998 to May 17,
2008 for all stockholders based on the price of $16.50 per share of Common
Stock on May 18, 1998 and a total of 38,500,000 shares of Common Stock then
outstanding would be $399,505,000 and $1,012,425,000 at assumed rates of
stock appreciation of 5% and 10%, respectively.
(2) Twenty percent of these options were immediately exercisable upon the date
of the grant. The balance of the options become exercisable up to 40%, 60%,
80% and 100% of the total number of options granted upon the first, second,
third and fourth anniversaries, respectively, of the date of the grant.
(3) This option becomes exercisable up to 10%, 30%, 60% and 100% of the total
number of options granted upon the first, second, third and fourth
anniversaries, respectively, of the date of the grant.
27
<PAGE> 29
The following table sets forth certain information with respect to the
number and assumed values of options to purchase Common Stock owned by the
executive officers named in the Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 6/30/98(#) 6/30/98($)(1)
ACQUIRED EXERCISABLE(E) EXERCISABLE(E)
NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- -------------- ----------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Neil D. Nicastro....... -- -- 330,000(E) --(E)
320,000(U) --(U)
Harold H. Bach, Jr. ... -- -- 70,000(E) --(E)
80,000(U) --(U)
Byron C. Cook.......... -- -- 70,000(E) --(E)
80,000(U) --(U)
Kenneth J. Fedesna..... -- -- 70,000(E) --(E)
80,000(U) --(U)
Orrin J. Edidin........ -- -- --(E) --(E)
35,000(U) --(U)
</TABLE>
- -------------------------
(1) Based on the closing price of the Common Stock on the New York Stock
Exchange on June 30, 1998, which was $15.625.
COMPENSATION FROM WMS OPTION ADJUSTMENT
As of the date of the Distribution, certain of the Company's directors and
officers held options to purchase shares of WMS common stock. Each of WMS's four
Stock Option Plans in effect prior to the Distribution provided that in the
event of a dividend or other distribution, such as the Distribution, outstanding
options were to be adjusted so as to prevent dilution of the benefits or
potential benefits intended to be made available by the options. WMS adopted an
adjustment plan (the "Adjustment Plan") intended to prevent such dilution by
giving option holders (i) the same number of options to acquire shares of WMS
common stock after the Distribution (at adjusted exercise prices) as such
holders held at the time of the Distribution and (ii) compensation for the lost
opportunity value represented by the shares of Common Stock being distributed in
the Distribution. The Adjustment Plan also provided that such compensation be
paid by WMS through a combination of cash and shares of WMS common stock.
The consideration paid by WMS under the Adjustment Plan in fiscal 1998 to
the persons named in the Summary Compensation Table is in addition to the
amounts set forth therein and is as follows: Neil D. Nicastro received WMS
Common Stock valued at $6,079,497 and cash in the amount of $12,428,476. Harold
H. Bach, Jr. received WMS Common Stock valued at $534,722 and cash in the amount
of $1,093,193. Byron C. Cook received WMS Common Stock valued at $1,153,488 and
cash in the amount of $3,485,699. Kenneth J. Fedesna received WMS Common Stock
valued at $940,058 and cash in the amount of $1,921,830. Orrin J. Edidin
received cash in the amount of $49,442 in respect of Mr. Edidin's vested WMS
options. Additional cash adjustment payments for the unvested portion of the
options ($441,335 if Mr. Edidin is still serving WMS or the Company through the
end of the vesting period) will be made in the fiscal years in which such
options would have vested. The WMS common stock was valued at the average of the
high and low prices for WMS common stock on the New York Stock Exchange on April
3, 1998, the last day of trading prior to the Distribution.
28
<PAGE> 30
COMPENSATION OF DIRECTORS
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. Five of the Company's eight non-employee directors also serve on the
Board of Directors of WMS and receive compensation therefor. See "Item 10.
Directors and Executive Officers of the Registrant."
Additionally, immediately prior to the Offering the Company granted market
priced 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. In May 1998, the Company granted market priced
options to purchase an additional 10,000 shares of Common Stock to each of its
non-employee directors. See "Stock Option Plan" below.
Pursuant to the Adjustment Plan described above, Mr. Sheinfeld received
18,202 shares of WMS common stock valued at $604,648 and cash in the amount of
$1,236,277. Messrs. Reich, Menell, McKenna and Bartholomay each received 10,731
shares of WMS common stock valued at $356,470 and cash in the amount of
$728,799.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Compensation and Stock Option Committee was an
employee or officer of the Company, and no officer, director or other person had
any relationship required to be disclosed here.
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, which agreement was amended
on March 5, 1998 (the "Amendment"). The Amendment became effective on April 6,
1998, the date of the Distribution. Prior to May 1, 1998, the employment
agreement provided for salaried compensation at the rate of $300,000 per annum,
plus bonus compensation in an amount equal to two percent of the pre-tax income
of the Company. On May 1, 1998, Mr. Nicastro's base salary was increased to
$600,000. For the fiscal year ending June 30, 1998, bonus compensation under the
employment agreement was in an amount equal to two percent of the pre-tax income
of the Company multiplied by the percentage of Common Stock outstanding which
was not owned by WMS at June 30, 1998. The portion of Mr. Nicastro's bonus from
WMS that was attributable to the pre-tax income of the Company through the date
of the Distribution was charged to the Company pursuant to the Manufacturing and
Services Agreement described in "Item 13. Certain Relationships and Related
Transactions" below. 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. The Amendment to the employment agreement provides
that Mr. Nicastro may continue to serve as a Director of and consultant to WMS
as he deems appropriate. Upon the termination of Mr. Nicastro's employment with
WMS, WMS paid Mr. Nicastro $2,500,000 in severance payments and granted him
10-year options to purchase 250,000 shares of WMS common stock at an exercise
price equal to market value on the date of grant.
Until April 6, 1998, Mr. Nicastro was employed by WMS pursuant to an
employment agreement which provided for, among other things, full participation
in all benefit plans available to senior executives of WMS
29
<PAGE> 31
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. Prior to the
Amendment, Mr. Nicastro's employment agreement with the Company provided that
should WMS fail for any reason to provide the aforementioned benefits to Mr.
Nicastro, the Company and WMS would each provide such benefits to him at its
expense. The Amendment provides that Mr. Nicastro will be entitled to
participate and receive the benefits of all pension and retirement plans, bonus
plans, health, life, hospital, medical and dental insurance (including
reimbursement for all medical and dental expenses incurred by him, his spouse
and his children under the age of twenty-one, to the extent such expenses are
not otherwise reimbursed by insurance provided by the Company) and all other
employee benefits and perquisites generally made available to employees of the
Company. Additionally, the Company currently provides Mr. Nicastro with
$2,000,000 of life insurance coverage in addition to the standard amount
provided to Company employees. Prior to the Amendment and termination of Mr.
Nicastro's employment with WMS, Mr. Nicastro was provided $1,000,000 of life
insurance by each of the Company and WMS.
Mr. Nicastro's employment agreement with the Company 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 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.
30
<PAGE> 32
Midway Home Entertainment Inc. ("Midway Home"), a wholly-owned subsidiary
of the Company, 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 expired May 1, 1998. Mr. Cook's base salary in fiscal
1998 was $300,000 per annum. For fiscal 1998, Mr. Cook also received a bonus of
$350,000. 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. The Company continued to employ Mr. Cook after expiration of the
employment agreement upon similar terms and conditions.
STOCK OPTION PLANS
The Company has adopted a 1998 Non-Qualified Stock Option Plan (the "1998
Stock Option Plan") and a 1996 Stock Option Plan (the "1996 Stock Option Plan"
and together with the 1998 Stock Option Plan, the "Stock Option Plans"). The
Stock Option Plans provide for the granting of stock options to directors,
officers, employees, consultants and advisors of the Company and its
subsidiaries. The Stock Option Plans are intended to encourage stock ownership
by directors, officers, employees, consultants and advisors of the Company and
its subsidiaries and thereby enhance their proprietary interest in the Company.
Subject to the provisions of the Stock Option Plans, the Compensation and Stock
Option Committee determines which of the eligible directors, officers,
employees, consultants and advisors of the Company receive stock options, the
terms, including applicable vesting periods, of such options, and the number of
shares for which such options are granted.
The total number of shares of the Company's Common Stock that may be
purchased pursuant to stock options under the 1998 Stock Option Plan and the
1996 Stock Option Plan shall not exceed in the aggregate 750,000 and 2,000,000
shares, respectively. The option price per share with respect to each such
option are determined by the Compensation and Stock Option Committee and
generally are not less than 100% of the fair market value of the Company's
Common Stock on the date such option is granted as determined by the Committee.
The 1998 Stock Option Plan and 1996 Stock Option Plan terminate in 2008 and
2006, respectively, unless terminated earlier.
At June 30, 1998, options to purchase 475,000 shares of Common Stock
exercisable at $16.50 per share were outstanding under the 1998 Stock Option
Plan, 465,000 of which are held by directors and employees of the Company and
10,000 of which are held by advisors and consultants to the Company. At June 30,
1998, options to purchase 1,810,000 shares of Common Stock exercisable at $20.00
per share were outstanding under the 1996 Stock Option Plan, 1,760,000 of which
are held by officers, directors and employees of the Company and 50,000 of which
are held by advisors and consultants to the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of September 11, 1998
(except as otherwise footnoted) with respect to persons known to be the
beneficial owner of more than five percent (5%) of the Company's Common Stock,
each Executive Officer of the Company who is not also a Director of the Company,
and Directors and Executive Officers of the Company as a group. Security
ownership of the
31
<PAGE> 33
individual Directors of the Company, including those who are also Executive
Officers of the Company, is set forth under the heading "Identification of
Directors" in Item 10(a) above.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF OUTSTANDING
COMMON STOCK COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) STOCK(2)
------------------------------------ --------------------- -------------
<S> <C> <C>
Sumner M. Redstone and National Amusements, Inc. ........... 8,354,836(3) 22.3%
200 Elm Street
Dedham, MA 02026
Orrin J. Edidin............................................. 500 *
Midway Games Inc.
3401 North California Avenue
Chicago, IL 60618
Directors and Executive Officers as a group (13 persons).... 1,690,143(4) 4.4%
</TABLE>
- -------------------------
* Less than 1% of the number of outstanding shares of Common Stock on
September 15, 1998.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days.
(2) For purposes of calculating the percentage of outstanding Common Stock owned
by each Executive Officer and Directors and Executive Officers as a group,
shares issuable upon the exercise of stock options exercisable within 60
days have been deemed to be outstanding.
(3) The number of shares reported is based upon information contained in the
Schedule 13D filed with the Securities and Exchange Commission by Sumner M.
Redstone on April 16, 1998. Pursuant to such Schedule, Mr. Redstone and
National Amusements, Inc., a Maryland corporation, reported beneficial
ownership of and sole investment power with respect to 4,182,065 and
4,172,771 shares, respectively, of the Common Stock. As a result of his
stock ownership in National Amusements, Inc., Mr. Redstone is deemed the
beneficial owner of the shares of Common Stock owned by National Amusements,
Inc.
(4) Includes an aggregate of 980,000 shares of Common Stock which the directors
and executive officers of the Company have the right to acquire upon the
exercise of stock options.
ITEM 13. 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%. As a result of the Distribution, WMS does not own any
Common Stock. 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. See "Item 10 -- Directors and Executive
Officers of the Registrant."
In connection with the Distribution, the Company and WMS entered into the
following agreements:
Manufacturing Agreement. The Company and Williams Electronics Games, Inc.
("WEG"), a wholly owned subsidiary of WMS, entered into the Manufacturing
Agreement with respect to the manufacture of coin-operated video games and kits.
The Manufacturing Agreement became effective as of April 6, 1998 and will
continue in effect for a period of three years and for successive renewal
periods of six months each unless terminated (a) by either party for any reason
upon six months' notice or (b) in the event of a material default under the
Manufacturing Agreement or under the Confidentiality provisions of the
Confidentiality and Non-Competition Agreement discussed below, immediately at
the election of the non-defaulting party. Pursuant to this Agreement, all of the
Company's coin-operated video games are manufactured by WEG at its facility in
Waukegan, Illinois.
32
<PAGE> 34
WEG is required to allocate 65% of its combined production and storeroom
square footage at the Waukegan plant to perform its obligations under the
Manufacturing Agreement. The Company conducts its own design and engineering of
coin-operated video games, including programming, graphic design, electrical
engineering, sound engineering and model shop engineering. Certain production
engineering activities, such as the design process for the assembly of each
game, creating work station profiles and quality control of incoming parts and
the assembly process are provided to the Company by WEG. Materials used in the
manufacture of coin-operated video games which are unique to such games are
purchased by the Company from third party vendors. Materials used in the
manufacture of coin-operated video games which are common with materials used in
the production of products sold by WEG (estimated to be 5.0% of total materials
costs) are purchased by WEG and charged to the Company at actual cost plus 9.0%.
All labor costs, including fringe benefits, directly associated with the
manufacturing of coin-operated video games are charged to the Company at WEG's
actual cost plus 9.0%. The Waukegan plant's operating costs are either
identified as Company costs and charged to the Company or allocated as agreed
between the parties. Such identified or allocated costs include, without
limitation, manufacturing costs, materials management costs, quality assurance
costs and administration costs. Plant operating costs of WEG paid by the Company
under the Manufacturing Agreement are increased by 9.0%. The obligations of WEG
under the Manufacturing Agreement are guaranteed by WMS.
Cabinet Supply Agreement. The Company and Lenc-Smith Inc. ("Lenc-Smith"), a
wholly owned subsidiary of WMS, entered into the Cabinet Supply Agreement with
respect to the supply of cabinets for coin-operated video games. The Cabinet
Supply Agreement became effective as of April 6, 1998 and will continue in
effect for a period of three years and for successive renewal periods of six
months each unless terminated (a) by either party for any reason upon six
months' notice or (b) in the event of a material default, immediately at the
election of the non-defaulting party.
The Cabinet Supply Agreement provides that to initiate the purchase of
video game cabinets, the Company shall issue a pricing inquiry to Lenc-Smith
specifying the number of cabinets to be ordered and the cabinet specifications.
Lenc-Smith then provides a formal quote on the pricing inquiry, and, upon
agreement on a final price, a purchase order will be issued. Lenc-Smith ships
all cabinets to WEG's Waukegan, Illinois plant for use in the manufacture of
coin-operated video games. The Company may obtain competitive quotes and
purchase cabinets from manufacturers other than Lenc-Smith.
Spare Parts Sales and Service Agreement. The Company and Atari Games
entered into the Spare Parts and Sales Service Agreement with WEG pursuant to
which WEG sells spare parts for coin-operated video games produced on behalf of
the Company and Atari Games. The agreement became effective as of April 6, 1998
and has the same term and is terminable in the same manner as the Cabinet Supply
Agreement. Pursuant to the agreement, WEG must purchase and maintain an adequate
inventory of spare parts needed by end-users of coin-operated video games of the
Company and Atari Games. To the extent any parts are proprietary to the Company,
the Company will sell or arrange for the sale of such parts to WEG. WEG will
purchase all non-proprietary parts through its usual vendor sources or through
the Company at negotiated prices. The Company and Atari Games are required to
refer their customers to WEG for spare parts purchases during the term of the
agreement. The agreement does not include warranty services, which services the
Company is required to provide to its customers.
Sales Agreement. The Company entered into the Sales Agreement with WEG
effective April 6, 1998. The term of the agreement is the same as the term of
the Cabinet Supply Agreement. During the term of the agreement, the Company will
supply WEG with certain sales services, including sales testing for all new
products developed by WEG, coordinating and negotiating print advertising and
video presentations with third-party advertising and media firms, and
negotiating distribution and sales agency agreements with third-party
distributors. In consideration for such services, WEG will pay the Company
$500,000 per annum plus a commission of 1.5% on the first $25.0 million of
annual net sales of WEG products made by the Company and 1.0% on annual net
sales of WEG products made by the Company in excess of $25.0 million. The
commission for the period April 6, 1998 through June 30, 1998 was 1.5% of the
first $6,250,000 of net sales made by the Company and 1.0% thereafter. An annual
budget for marketing and testing will be developed and agreed upon in advance
between the parties annually and modified quarterly upon mutual
33
<PAGE> 35
agreement. To the extent that additional services are provided which were not
included in the budget, certain additional charges will be applicable for
payroll, overhead and expense at the Company's cost plus 8.0%.
Information Systems Service Agreement. The Company and WEG entered into an
Information Systems Service Agreement effective as of April 6, 1998 for a term
of three years with successive renewal periods of 18 months. The agreement is
terminable by either party (a) upon 18 months' notice or (b) upon a material
default, immediately by the non-defaulting party. Pursuant to the agreement, WEG
provides the Company with access to its computer systems for business
applications, including, without limitation, order entry, financial and
manufacturing modules, marketing and sales and engineering (including electronic
engineering documentation and blueprint systems) as well as support for the
computer system. The agreement also provides that WEG will coordinate the
provision and maintenance of cabling, wiring, switching components, routers and
gateway and the purchasing, maintaining and upgrading of network services for
the Company. These services include purchasing of desktop computers and related
hardware as well as providing certain telecommunications service to the Company.
The Company may also request WEG to provide services to develop the
communications networking, operating and computer system of the Company and
other related services. The Company pays WEG an amount equal to the cost to WEG
for all services provided plus 6.6% of such cost.
Confidentiality and Non-Competition Agreement. The Company entered into the
Confidentiality and Non-Competition Agreement with WMS effective as of April 6,
1998. Pursuant to the agreement, either party may designate information
regarding its business as confidential, which each party will use its best
efforts to keep confidential. For a period of five years from the date of the
agreement, neither party shall engage, directly or indirectly, in the business
currently conducted by the other party (except that the Company may engage in
any business related to coin-operated video game manufacturing, cabinet supply,
spare parts sales and video-simulated non-mechanical pinball games).
Additionally, for the greater of (i) the period from the date of the agreement
until April 5, 2000 or (ii) a period ending one year after the date that any
particular employee of the Company or WMS no longer is providing services to the
other party pursuant to any of the agreements entered into in connection with
the Distribution, such other party shall not, directly or indirectly, hire or
solicit the employment of such employee or encourage such employee to leave his
or her employment or induce any such employee to seek, accept or obtain
employment by any person other than such employer.
Right of First Refusal Agreement. The Company and WMS entered into the
Right of First Refusal Agreement as of April 6, 1998 pursuant to which the
Company was granted the right of first refusal with respect to any offer to WMS
to purchase the Waukegan plant, or any material part thereof, which offer is not
made in connection with the sale of substantially all of WMS' assets and
business as a going concern or a sale of substantially all of the capital stock
of WMS, and which WMS intends to accept. The term of the agreement is for 10
years expiring April 5, 2008.
Third Parties Agreement. The Company entered into the Third Parties
Agreement with WMS on April 6, 1998. The agreement governs the treatment of the
numerous arrangements with third parties that WMS and the Company are party to
with respect to game development, the obtaining or grant of licenses and other
matters, which provide for, among other matters, the receipt of payments, the
obligation or guaranty of an obligation to make payments to third parties,
recoupment of prior advances, rights of first refusal and reporting and
monitoring of intellectual property rights. The parties will allocate all other
rights and obligations under third party arrangements so that the party
receiving the benefit will bear the burden of such agreements. The agreement
shall remain in effect so long as any third party arrangements remain
outstanding.
Temporary Support Services Agreement. The Company and WMS entered into a
Temporary Support Services Agreement which provides, among other things, that
WMS will supply all or a portion of the Company's administrative, legal and
accounting, human resources, maintenance and janitorial and other agreed upon
services, including the use of space by the Company in any WMS facility, as
requested from time to time by the Company. In consideration for the services
provided by WMS, the Company will pay WMS an amount equal to its direct or
allocated cost (including, without limitation, wages, salaries, fringe benefits
and materials), as indicated on monthly invoices supplied by WMS. The agreement
was effective as of April 6, 1998 and will continue for a period of 18 months
and for successive renewal periods of three months each;
34
<PAGE> 36
provided, however, that the agreement may be terminated by either party upon six
months' notice, and each party may, upon 60 days' notice, terminate any one or
more of the services provided, except the use of space by the Company in any WMS
facility.
Tax Separation 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 the Tax Separation Agreement as of April 6, 1998.
The agreement sets forth the parties respective liabilities for federal, state
and local taxes as well as their agreements as a result of the Company and its
subsidiaries ceasing to be members of the WMS Group. The Tax Separation
Agreement governs, among other things, (i) the filing of tax returns with
federal, state and local authorities, (ii) the carryover of any tax benefits of
the Company, (iii) the treatment of the deduction attributable to the exercise
of stock options to purchase WMS common stock which are held by employees or
former employees of the Company and any other similar compensation related tax
deductions, (iv) the treatment of certain net operating loss carrybacks, (v) the
treatment of audit adjustments, (vi) procedures with respect to any proposed
audit adjustment or other claim made by any taxing authority with respect to a
tax liability of the Company or any of its subsidiaries. Certain other tax
matters are addressed in the Tax Sharing Agreement which was entered into in
connection with the Offering and which remains in full force and effect. See
"Tax Sharing Agreement" below.
Tax Indemnification Agreement. The Company entered into the Tax
Indemnification Agreement with WMS effective as of April 6, 1998 providing for
indemnifications in the event the Distribution fails to qualify under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"). Each of the
parties agreed that for a period of two years after the Distribution, each would
continue active conduct of its historic trade or business as conducted by it
during the five-year period prior to the Distribution. The Company also agreed
that to fund an acquisition, within one year after the Distribution, it would
either (i) raise cash through an offering of shares of Common Stock or
debentures with detachable warrants for shares of Common Stock or (ii) use
shares of Common Stock as acquisition consideration. Additionally, each party
agreed not to: (i) merge or consolidate with another entity; (ii) liquidate or
partially liquidate; (iii) sell or transfer all or substantially all its assets
in a single transaction or a series of transactions; (iv) redeem or otherwise
repurchase any of its capital stock in a manner contrary to certain Internal
Revenue Service ("IRS") revenue procedures; (v) enter into any transaction or
make any change in its equity structure which may cause the Distribution to be
treated as a plan pursuant to which one or more persons acquire directly or
indirectly its common stock representing a "50 percent or greater interest"
within the meaning of Section 355(d)(4) of the Code; or (vi) in the case of the
Company except in connection with stock issued pursuant to an employee benefit
or compensation plan and except as described in the private letter ruling issued
in connection with the Distribution issue additional shares of its capital
stock, unless such party first obtains the consent of the other party and, if
applicable, the person or persons acquiring a "50 percent or greater interest"
in such party have agreed to become jointly or severally liable for payments
required to be made by such party pursuant to the Tax Indemnification Agreement.
The Company will indemnify WMS with respect to any action referred to above
which it takes or if it fails to issue Common Stock as set forth above which
causes the Distribution to fail to qualify under Section 355 of the Code,
against any federal, state and local taxes, interest, penalties and additions to
tax imposed upon or incurred by the WMS Group or any member thereof. WMS will
indemnify the Company and its subsidiaries against any and all federal, state
and local taxes, interest, penalties and additions to tax resulting from the
Distribution, other than any such liabilities for which the Company is required
to indemnify WMS. The agreement also governs the procedures for indemnification,
calculation of the amount of indemnified liability for income taxes and
reduction of indemnity by income tax benefits from indemnified liabilities.
In connection with 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
relationship after the Offering. As of the
35
<PAGE> 37
Distribution, the Manufacturing Agreement referred to above superseded and
replaced the Manufacturing and Services Agreement. The Manufacturing and
Services Agreement became effective as of July 1, 1996. The Manufacturing and
Services Agreement provided, among other things, for WMS to 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.
Materials used in the manufacture of coin-operated video games were
purchased by the Company at its expense. Certain other manufacturing costs were
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 were charged to the Company at actual cost to WMS.
Certain management, legal and administrative expenses and sales and marketing
expenses were 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.
Tax Sharing Agreement. The Company and WMS entered into a Tax Sharing
Agreement (the "Tax Sharing Agreement") (which remains in effect, except as
provided in the Tax Separation Agreement referred to above) 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 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.
Patent License Agreement. The Company and WMS entered into a patent license
agreement, which remains in effect, 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 PARTY TRANSACTIONS
Mr. Neil D. Nicastro, Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer of the Company, entered into the
Termination Agreement, pursuant to which Mr. Nicastro's employment with WMS was
terminated effective at the time of the Distribution. Pursuant to the
Termination Agreement, Mr. Nicastro resigned as President, Chief Executive
Officer and Chief Operating Officer of WMS. As full consideration for payments
that would otherwise have been made to Mr. Nicastro under his employment
agreement with WMS with respect to base salary, bonus, retirement and death
benefits, Mr. Nicastro was paid a lump sum of $2,500,000, and he was granted
10-year options to purchase 250,000 shares of WMS common stock at an exercise
price of $5.4375. Additionally, the $1,000,000 of life insurance coverage
provided by WMS under Mr. Nicastro's employment agreement with WMS was
transferred to the Company at the time of the Distribution.
In connection with the Distribution, WMS also entered into a consulting
agreement (the "Consulting Agreement") with Mr. Nicastro pursuant to which Mr.
Nicastro agreed to make himself reasonably available
36
<PAGE> 38
at WMS's request, to render such services concerning WMS as the Board of
Directors or the Chairman of the Board and Chief Executive Officer of WMS may
reasonably request. The term of the Consulting Agreement is for five years from
the date of the Distribution, and is automatically renewable for successive one
year terms unless either party shall give notice of termination not less than
six months prior to the end of the term then in effect. WMS pays Mr. Nicastro
$1,000 per month for his services under the Consulting Agreement.
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 companies, the
operating assets and business of which were acquired by the Company in April
1994. The minimum purchase price of $14.1 million was paid at the closing, and
the maximum additional payment of $36.0 million was paid during the four-year
earn-out period.
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 1998 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 Wood Gundy Capital Corp., an affiliate of CIBC Oppenheimer Corp., the
predecessor of which, Oppenheimer & Co., Inc., was one of the representatives of
the underwriters of the Offering and which received customary compensation in
connection therewith. CIBC Oppenheimer Corp. rendered financial advisory
services to WMS in connection with the Distribution. Additionally, CIBC
Oppenheimer Corp. and its predecessor have 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.
37
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements of the Company. See "Index to Financial
Information" on page F-1.
(2) Financial Statement Schedule of the Company. See "Index to
Financial Information" on page F-1.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.1 to the
S-1 Registration Statement.
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Registrant, incorporated
by reference to Exhibit 2 to the Registrant's Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20,
1998 (the "8-A Registration Statement").
3.3 Form of Certificate of Designations of Series A Preferred
Stock (included as Exhibit A to Exhibit 2.1 hereof),
incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1, File No. 333-11919,
filed on September 13, 1996 (the "S-1 Registration
Statement").
3.4 Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3 to the 8-A Registration Statement.
4.1 Rights Agreement dated as of October 24, 1996 between the
Registrant and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 2.1 to the S-1
Registration Statement.
4.2 Specimen Form of Rights Certificate (included as Exhibit B
to Exhibit 2.1 hereof), incorporated by reference to Exhibit
2.3 to the S-1 Registration Statement.
4.3 Summary of Rights Plan (included as Exhibit C to Exhibit 2.1
hereof), incorporated by reference to Exhibit 2.4 to the S-1
Registration Statement.
4.4 First Amendment to Rights Agreement dated as of November 6,
1997 between the Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to Exhibit 8 to the
8-A Registration Statement.
4.5 Specimen of Common Stock Certificate, incorporated by
reference to Exhibit 4.1 to the S-1 Registration Statement.
10.1 Manufacturing and Services Agreement dated as of July 1,
1996 between WMS Industries Inc. and the Registrant,
incorporated by reference to Exhibit 10.1 to the S-1
Registration Statement.
10.2 Tax Sharing Agreement dated as of July 1, 1996 among WMS
Industries Inc., the Registrant, Midway Home Entertainment
Inc., Midway Interactive Inc., Atari Games Corporation and
Tengen Inc., incorporated by reference to Exhibit 10.2 to
the S-1 Registration Statement.
10.3 Patent License Agreement dated as of July 1, 1996 between
the Registrant and Williams Electronics Games, Inc.,
incorporated by reference to Exhibit 10.4 to the S-1
Registration Statement.
10.4 Employment Agreement dated as of July 1, 1996 between Mr.
Neil D. Nicastro and the Registrant, incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement.
10.5 Employment Agreement dated April 29, 1994 between Mr. Byron
C. Cook and Midway Home Entertainment Inc., incorporated by
reference to Exhibit 10.6 to the S-1 Registration Statement.
10.6 1996 Stock Option Plan of the Registrant, incorporated by
reference to Exhibit 10.7 to the S-1 Registration Statement.
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.7 Form of Indemnity Agreement authorized to be entered into
between the Registrant and each Officer and Director of the
Registrant, incorporated by reference to Exhibit 10.8 to the
S-1 Registration Statement.
10.8 GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated December 28, 1994,
incorporated by reference to Exhibit 10.9 to the S-1
Registration Statement.*
10.9 Amendment to GTIS Master Option and License Agreement by and
among WMS Industries Inc., Williams Electronics Games, Inc.,
the Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated March 31, 1995,
incorporated by reference to Exhibit 10.10 to the S-1
Registration Statement.*
10.10 Second Amendment to GTIS Master Option and License Agreement
by and among WMS Industries Inc., Williams Electronics
Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT Interactive Software Corp. dated March 27,
1996, incorporated by reference to Exhibit 10.11 to the S-1
Registration Statement.*
10.11 GTIS Master Option and License Agreement (Home Video Games)
by and among WMS Industries Inc., Williams Electronics
Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT Interactive Software Corp. dated March 31,
1995, incorporated by reference to Exhibit 10.12 to the S-1
Registration Statement.*
10.12 Amendment to GTIS Master Option and License Agreement (Home
Video Games) by and among WMS Industries Inc., Williams
Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated
March 27, 1996, incorporated by reference to Exhibit 10.13
to the S-1 Registration Statement.*
10.13 Master Option and License Agreement for Atari Home Video
Games dated March 27, 1996, between WMS Industries Inc. and
GT Interactive Software Corp., incorporated by reference to
Exhibit 10.14 to the S-1 Registration Statement.*
10.14 Master Option and License Agreement for Atari PC Games dated
March 27, 1996, between WMS Industries Inc. and GT
Interactive Software Corp., incorporated by reference to
Exhibit 10.15 to the S-1 Registration Statement.*
10.15 Credit Agreement (the "Credit Agreement") dated as of
October 15, 1996 between the Registrant and Bank of America
Illinois, incorporated by reference to Exhibit 10.17 to the
S-1 Registration Statement.
10.16 Letter Agreement dated October 27, 1997 between the
Registrant and Bank of America National Trust and Savings
Association (as successor to Bank of America Illinois)
extending the term of the Credit Agreement.
10.17 1998 Non-Qualified Stock Option Plan of the Registrant,
incorporated by reference to Exhibit 4.4(a) to the
Registrant's Registration Statement on Form S-8, filed on
June 24, 1998 (File No. 333-57583) (the "S-8 Registration
Statement").
10.18 Letter Agreement dated March 5, 1998 between the Registrant
and Mr. Neil D. Nicastro amending Mr. Nicastro's Employment
Agreement with the Company referred to in Exhibit 10.5
above.
10.19 Third Amendment to GTIS Master Option and License Agreement
among the Registrant, Midway Home Entertainment Inc. and GT
Interactive Software Corp. dated March 12, 1998.**
10.20 First Amendment to Master Option and License Agreement for
Atari PC Games dated March 12, 1998 between the Registrant
and GT Interactive Software Corp.**
10.21 Letter Agreement dated March 12, 1998 among WMS Industries
Inc., the Registrant, Midway Home Entertainment Inc.,
Williams Electronics Games, Inc. and GT Interactive Software
Corp.
10.22 Letter Agreement dated March 12, 1998 among the Registrant,
Midway Home Entertainment Inc., Atari Games Corporation and
GT Interactive Software Corp.**
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.23 Manufacturing Agreement dated as of April 6, 1998 between
Williams Electronics Games, Inc. and the Registrant and the
Guaranty of the obligations of Williams Electronics Games,
Inc. thereunder by WMS Industries Inc.
10.24 Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and the Registrant.
10.25 Spare Parts Sales and Service Agreement dated as of April 6,
1998 among Williams Electronics Games, Inc., the
Registration and Atari Games Corporation.
10.26 Sales Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and the Registrant.
10.27 Information Systems Service Agreement dated as of April 6,
1998 between Williams Electronics Games, Inc. and the
Registrant.
10.28 Confidentiality and Non-Competition Agreement dated as of
April 6, 1998 between WMS Industries Inc. and the
Registrant.
10.29 Right of First Refusal Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant.
10.30 Third Parties Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant.
10.31 Temporary Support Services Agreement dated as of April 6,
1998 between WMS Industries Inc. and the Registrant.
10.32 Tax Separation Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant.
10.33 Tax Indemnification Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant.
13 Portions of 1998 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- -------------------------
* Portions of this exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
** Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a Request for Confidential
Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Company in the last quarter of
fiscal 1998.
40
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
24th day of September, 1998.
MIDWAY GAMES INC.
By: /s/ NEIL D. NICASTRO
------------------------------------
Neil D. Nicastro
Chairman of the Board, President,
Chief Executive Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ NEIL D. NICASTRO Chairman of the Board, President, September 24, 1998
- --------------------------------------- Chief Executive Officer and Chief
Neil D. Nicastro Operating Officer (Principal
Executive Officer) and Director
/s/ HAROLD H. BACH, JR. Executive Vice President -- Finance, September 24, 1998
- --------------------------------------- Treasurer and Chief Financial Officer
Harold H. Bach, Jr. (Principal Financial and Principal
Accounting Officer) and Director
/s/ BYRON C. COOK Executive Vice President -- September 24, 1998
- --------------------------------------- Home Video and Director
Byron C. Cook
/s/ KENNETH J. FEDESNA Executive Vice President -- September 24, 1998
- --------------------------------------- Coin-Op Video and Director
Kenneth J. Fedesna
/s/ LOUIS J. NICASTRO Director September 24, 1998
- ---------------------------------------
Louis J. Nicastro
/s/ WILLIAM C. BARTHOLOMAY Director September 24, 1998
- ---------------------------------------
William C. Bartholomay
/s/ WILLIAM E. MCKENNA Director September 24, 1998
- ---------------------------------------
William E. McKenna
/s/ NORMAN J. MENELL Director September 24, 1998
- ---------------------------------------
Norman J. Menell
/s/ HARVEY REICH Director September 24, 1998
- ---------------------------------------
Harvey Reich
/s/ IRA S. SHEINFELD Director September 24, 1998
- ---------------------------------------
Ira S. Sheinfeld
/s/ RICHARD D. WHITE Director September 24, 1998
- ---------------------------------------
Richard D. White
/s/ GERALD O. SWEENEY, JR. Director September 24, 1998
- ---------------------------------------
Gerald O. Sweeney, Jr.
</TABLE>
41
<PAGE> 43
MIDWAY GAMES INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Financial Statements and Financial Statement Schedule.......
Report of independent auditors.............................. F-2
Consolidated Balance sheets at June 30, 1998 and June 30,
1997...................................................... *
Statements of income for the years ended June 30, 1998, 1997
and 1996.................................................. *
Statements of changes in stockholders' equity for the years
ended June 30, 1998, 1997 and 1996........................ *
Statements of cash flows for the years ended June 30, 1998,
1997 and 1996............................................. *
Notes to financial statements............................... *
Financial statements schedule II -- Valuation and Qualifying
Accounts for the years ended June 30, 1998, 1997 and
1996...................................................... F-3
</TABLE>
- -------------------------
* Incorporated by reference to the portions of the Company's 1998 Annual Report
to Stockholders filed as Exhibit 13 to this Form 10-K.
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
F-1
<PAGE> 44
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Midway Games Inc.
We have audited the financial statements of Midway Games Inc. and
subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K of Midway
Games Inc. for the year ended June 30, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). The financial
statements and related schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and related schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related schedule
are free of material misstatements. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Midway Games
Inc. and subsidiaries at June 30, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended June
30, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 17, 1998
F-2
<PAGE> 45
MIDWAY GAMES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- --------------------- ------------------- ----------------------------------- ------------------ -------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-AMOUNTS BALANCE AT
DESCRIPTION BEGINNING OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS WRITTEN OFF END OF PERIOD
----------- ------------------- ------------------ -------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Allowance for
receivables:
1998................. $4,940,000 $16,872,000 $ -- $14,795,000 $7,017,000
1997................. $ 995,000 $14,586,000 $ -- $10,641,000 $4,940,000
1996................. $1,078,000 $ 3,358,000 $ -- $ 3,441,000 $ 995,000
</TABLE>
F-3
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.1 to the
S-1 Registration Statement.
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Registrant, incorporated
by reference to Exhibit 2 to the Registrant's Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20,
1998 (the "8-A Registration Statement").
3.3 Form of Certificate of Designations of Series A Preferred
Stock (included as Exhibit A to Exhibit 2.1 hereof),
incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1, File No. 333-11919,
filed on September 13, 1996 (the "S-1 Registration
Statement").
3.4 Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3 to the 8-A Registration Statement.
4.1 Rights Agreement dated as of October 24, 1996 between the
Registrant and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 2.1 to the S-1
Registration Statement.
4.2 Specimen Form of Rights Certificate (included as Exhibit B
to Exhibit 2.1 hereof), incorporated by reference to Exhibit
2.3 to the S-1 Registration Statement.
4.3 Summary of Rights Plan (included as Exhibit C to Exhibit 2.1
hereof), incorporated by reference to Exhibit 2.4 to the S-1
Registration Statement.
4.4 First Amendment to Rights Agreement dated as of November 6,
1997 between the Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to Exhibit 8 to the
8-A Registration Statement.
4.5 Specimen of Common Stock Certificate, incorporated by
reference to Exhibit 4.1 to the S-1 Registration Statement.
10.1 Manufacturing and Services Agreement dated as of July 1,
1996 between WMS Industries Inc. and the Registrant,
incorporated by reference to Exhibit 10.1 to the S-1
Registration Statement.
10.2 Tax Sharing Agreement dated as of July 1, 1996 among WMS
Industries Inc., the Registrant, Midway Home Entertainment
Inc., Midway Interactive Inc., Atari Games Corporation and
Tengen Inc., incorporated by reference to Exhibit 10.2 to
the S-1 Registration Statement.
10.3 Patent License Agreement dated as of July 1, 1996 between
the Registrant and Williams Electronics Games, Inc.,
incorporated by reference to Exhibit 10.4 to the S-1
Registration Statement.
10.4 Employment Agreement dated as of July 1, 1996 between Mr.
Neil D. Nicastro and the Registrant, incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement.
10.5 Employment Agreement dated April 29, 1994 between Mr. Byron
C. Cook and Midway Home Entertainment Inc., incorporated by
reference to Exhibit 10.6 to the S-1 Registration Statement.
10.6 1996 Stock Option Plan of the Registrant, incorporated by
reference to Exhibit 10.7 to the S-1 Registration Statement.
10.7 Form of Indemnity Agreement authorized to be entered into
between the Registrant and each Officer and Director of the
Registrant, incorporated by reference to Exhibit 10.8 to the
S-1 Registration Statement.
10.8 GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated December 28, 1994,
incorporated by reference to Exhibit 10.9 to the S-1
Registration Statement.*
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.9 Amendment to GTIS Master Option and License Agreement by and
among WMS Industries Inc., Williams Electronics Games, Inc.,
the Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated March 31, 1995,
incorporated by reference to Exhibit 10.10 to the S-1
Registration Statement.*
10.10 Second Amendment to GTIS Master Option and License Agreement
by and among WMS Industries Inc., Williams Electronics
Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT Interactive Software Corp. dated March 27,
1996, incorporated by reference to Exhibit 10.11 to the S-1
Registration Statement.*
10.11 GTIS Master Option and License Agreement (Home Video Games)
by and among WMS Industries Inc., Williams Electronics
Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT Interactive Software Corp. dated March 31,
1995, incorporated by reference to Exhibit 10.12 to the S-1
Registration Statement.*
10.12 Amendment to GTIS Master Option and License Agreement (Home
Video Games) by and among WMS Industries Inc., Williams
Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated
March 27, 1996, incorporated by reference to Exhibit 10.13
to the S-1 Registration Statement.*
10.13 Master Option and License Agreement for Atari Home Video
Games dated March 27, 1996, between WMS Industries Inc. and
GT Interactive Software Corp., incorporated by reference to
Exhibit 10.14 to the S-1 Registration Statement.*
10.14 Master Option and License Agreement for Atari PC Games dated
March 27, 1996, between WMS Industries Inc. and GT
Interactive Software Corp., incorporated by reference to
Exhibit 10.15 to the S-1 Registration Statement.*
10.15 Credit Agreement (the "Credit Agreement") dated as of
October 15, 1996 between the Registrant and Bank of America
Illinois, incorporated by reference to Exhibit 10.17 to the
S-1 Registration Statement.
10.16 Letter Agreement dated October 27, 1997 between the
Registrant and Bank of America National Trust and Savings
Association (as successor to Bank of America Illinois)
extending the term of the Credit Agreement.
10.17 1998 Non-Qualified Stock Option Plan of the Registrant,
incorporated by reference to Exhibit 4.4(a) to the
Registrant's Registration Statement on Form S-8, filed on
June 24, 1998 (File No. 333-57583) (the "S-8 Registration
Statement").
10.18 Letter Agreement dated March 5, 1998 between the Registrant
and Mr. Neil D. Nicastro amending Mr. Nicastro's Employment
Agreement with the Company referred to in Exhibit 10.5
above.
10.19 Third Amendment to GTIS Master Option and License Agreement
among the Registrant, Midway Home Entertainment Inc. and GT
Interactive Software Corp. dated March 12, 1998.**
10.20 First Amendment to Master Option and License Agreement for
Atari PC Games dated March 12, 1998 between the Registrant
and GT Interactive Software Corp.**
10.21 Letter Agreement dated March 12, 1998 among WMS Industries
Inc., the Registrant, Midway Home Entertainment Inc.,
Williams Electronics Games, Inc. and GT Interactive Software
Corp.
10.22 Letter Agreement dated March 12, 1998 among the Registrant,
Midway Home Entertainment Inc., Atari Games Corporation and
GT Interactive Software Corp.**
10.23 Manufacturing Agreement dated as of April 6, 1998 between
Williams Electronics Games, Inc. and the Registrant and the
Guaranty of the obligations of Williams Electronics Games,
Inc. thereunder by WMS Industries Inc.
10.24 Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and the Registrant.
10.25 Spare Parts Sales and Service Agreement dated as of April 6,
1998 among Williams Electronics Games, Inc., the
Registration and Atari Games Corporation.
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.26 Sales Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and the Registrant.
10.27 Information Systems Service Agreement dated as of April 6,
1998 between Williams Electronics Games, Inc. and the
Registrant.
10.28 Confidentiality and Non-Competition Agreement dated as of
April 6, 1998 between WMS Industries Inc. and the
Registrant.
10.29 Right of First Refusal Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant.
10.30 Third Parties Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant.
10.31 Temporary Support Services Agreement dated as of April 6,
1998 between WMS Industries Inc. and the Registrant.
10.32 Tax Separation Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant.
10.33 Tax Indemnification Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant.
13 Portions of 1998 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- --------
* Portions of this exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment pursuant
to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
** Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a Request for Confidential
Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended.
<PAGE> 1
EXHIBIT 10.16
October 27, 1997
Midway Games Inc.
3401 North California Avenue
Chicago, IL 60618
Re: Extension of Credit Agreement
-----------------------------
Ladies and Gentlemen:
We make reference to that certain Credit Agreement, dated as of
October 15, 1996 (as in effect on the date hereof, the "Credit Agreement"),
between Midway Games, Inc. (the "Borrower") and Bank of America National Trust
and Savings Association (successor by merger to Bank of America Illinois) (the
"Lender"). Capitalized terms used herein and not otherwise defined shall have
the meanings provided in the Credit Agreement.
We understand that the Borrower desires to extend the Termination
Date under the Credit Agreement to October 31, 1998 from October 31, 1997 and
the Lender desires to accommodate such request. The Borrower and Lender hereby
agree that the date October 31, 1997 contained in the definition of Termination
Date set forth in Section 1.1 of the Credit Agreement shall be deleted and
replaced with October 31, 1998.
In consideration of the foregoing amendment, the Borrower hereby
represents and warrants to the Lender that:
(a) This amendment is within the Borrower's authority (corporate or
otherwise), has been duly authorized by all necessary action, has received
all necessary consents and approvals (if any shall be required), and does
not and will not contravene or conflict with any provision of law or of the
charter, bylaws or other organizational documents of the Borrower or its
Subsidiaries, or of any other agreement binding upon the Borrower or its
Subsidiaries or their respective property;
(b) This amendment constitutes the legal, valid, and binding
obligation of the Borrower, enforceable against the Borrower in accordance
with its terms;
(c) No Default has occurred and is continuing or will result from the
terms set forth in this amendment; and
<PAGE> 2
(d) The representations and warranties of the Borrower set forth in
Section 4 of the Credit Agreement are true and correct as if made on the date
hereof, except any such representation or warranty which speaks to a specific
date.
Notwithstanding anything contained in the foregoing to the contrary,
the amendment hereunder will not in any way operate as an amendment or
modification of the Credit Agreement or any Loan Document or a consent or
waiver with respect to any existing or future Default not specifically
enumerated above.
If the foregoing is in accordance with your understanding and is
acceptable to you, please so indicate by
<PAGE> 3
executing this letter in the space provided below and returning it to us.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION (as
successor to Bank of America
Illinois)
By: /s/ Marcia Clausen
----------------------------
Name: Marcia Clausen
--------------------------
Title: Managing Director
-------------------------
Agreed and Accepted this 27th day of October, 1997:
MIDWAY GAMES, INC.
By: /s/ Harold H. Bach, Jr.
----------------------------
Name: HAROLD H. BACH, JR.
--------------------------
Title: Vice President - Finance
-------------------------
<PAGE> 1
EXHIBIT 10.18
MIDWAY GAMES INC.
3401 North California Avenue
Chicago, IL 60618
March 5, 1998
Mr. Neil D. Nicastro
999 North Sheridan Road
Lake Forest, Illinois 60045
Dear Mr. Nicastro:
Reference is made to your Employment Agreement dated July 1, 1996 (the
"Midway Employment Agreement") between Midway Games Inc. ("Midway") and you.
Reference is also made to (i) a letter agreement between you and WMS Industries
Inc. ("WMS"), dated the date hereof, pursuant to which your employment by WMS
will be terminated effective on the distribution date for the spin-off of the
Midway shares owned by WMS (the "Effective Date") and (ii) a consulting
agreement between you and WMS dated the date hereof.
This letter will reflect our agreement that on the Effective Date, the
Midway Employment Agreement shall be deemed amended as follows:
1. The first sentence of subparagraph 3(b) of the Midway Employment
Agreement shall be amended in its entirety to read as follows:
"Commencing with the fiscal year of Midway beginning July 1,
1997 and each fiscal year thereafter during the term of this
Agreement, Nicastro shall be paid a bonus in the amount equal
to two percent (2%) of `pre-tax income'."
2. The first sentence of subparagraph 3(c) of the Midway Employment
Agreement shall be amended in its entirety to read as follows:
"In addition to other compensation hereunder, Nicastro shall
be entitled to participate in and receive the benefits of all
pension and retirement plans, bonus plans, health, life,
hospital, medical and dental insurance (including
reimbursement for all medical and dental expenses incurred by
him, his spouse and his children twenty-one (21) years of age
or younger, to the extent such expenses are not otherwise
reimbursed by insurance provided by Midway) and all other
employee benefits and perquisites generally made available to
employees of Midway."
3. The last sentence of subparagraph 3(c) of the Midway Employment
Agreement shall be amended to substitute "Two Million Dollars ($2,000,000)" for
"One Million Dollars ($1,000,000)."
<PAGE> 2
Mr. Neil D. Nicastro 2 March 5, 1998
4. Paragraph 5 of the Midway Employment Agreement shall be amended (i)
to add in subparagraph 5(a), after the word "WMS", the words "Industries Inc.
('WMS')"; (ii) to add a clause at the end of subparagraph 5(a)(i) as follows:
"or if such corporation is WMS"; and (iii) to amend subparagraph 5(b) in its
entirety to read as follows:
"Midway acknowledges that Nicastro currently serves as a
director of WMS and as a consultant to WMS pursuant to a
letter agreement dated March 5, 1998, and he will perform such
services as a director or pursuant to such agreement as he
shall consider appropriate. Any termination of this Agreement
by Midway by reason of Nicastro's performance of any such
services shall be deemed a termination in violation of this
Agreement."
In all other respects, the Midway Employment Agreement is hereby
confirmed and is in full force and effect. If the Effective Date does not occur
by June 30, 1998, this letter agreement shall be of no force or effect.
Please indicate your agreement to the foregoing by signing this letter
in the place provided below.
Very truly yours,
MIDWAY GAMES INC.
By: /s/ Harold H. Bach, Jr.
----------------------------------
Harold H. Bach, Jr.
Executive Vice President - Finance
Accepted and Agreed to:
/s/ Neil D. Nicastro
- ---------------------------
NEIL D. NICASTRO
<PAGE> 1
CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED.
EXHIBIT 10.19
THIRD AMENDMENT TO
GTIS MASTER OPTION AND LICENSE AGREEMENT
This third amendment agreement (the "Third Amendment") is made and
entered into this 12th day of March, 1998, by and among MIDWAY GAMES INC.
("MIDWAY"), a Delaware corporation with offices at 3401 North California Avenue,
Chicago, Illinois 60618 and MIDWAY HOME ENTERTAINMENT INC. (formerly Williams
Entertainment Inc. and referred to herein as "Midway Home Entertainment"), a
Delaware corporation with offices at 1800 South Business Highway 45, Corsicana,
Texas 75110, and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware corporation
with offices at 417 Fifth Avenue, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, on December 28, 1994 WMS Industries Inc. and certain of its
wholly-owned subsidiaries comprising the WMS Group and GTIS entered into the
GTIS Master Option and License Agreement (the "GTIS Master PC Agreement")
pursuant to which WMS granted to GTIS certain rights with respect to the
manufacture, distribution and sale of versions of Games for use on Designated
Multipurpose Computer Platforms; and
WHEREAS, on March 31, 1995 and on March 27, 1996, GTIS and members of
the WMS Group entered into an Amendment and a Second Amendment to the GTIS
Master PC Agreement (respectively, the "First Amendment" and the "Second
Amendment"); and
WHEREAS, on July 1, 1996 WMS and Williams Electronics Games, Inc.
assigned their rights and delegated their obligations under the GTIS Master PC
Agreement together with substantially all other assets and liabilities
comprising the video game business of WMS to its then wholly-owned subsidiary,
Midway; and
WHEREAS, GTIS, Midway and Midway Home Entertainment desire to amend
further the GTIS Master PC Agreement as provided herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the parties hereto
agree as follows:
1. Definitions. Capitalized terms used, but not otherwise defined
or revised herein, shall have the meanings ascribed to such terms in the GTIS
Master PC Agreement or the form of Home Computer Software Distribution and
License Agreement which is annexed to the GTIS Master PC Agreement as Exhibit A.
In addition, Section 1 of the GTIS Master PC Agreement shall be
amended to add or replace definitions as follows:
1.1 "Delivery Date" shall have the meaning provided in
Section 6 below.
1.2 "Designated Multipurpose Computer Platforms" shall
1
<PAGE> 2
mean IBM PC or Apple Macintosh or other compatible multipurpose home computers
which utilize floppy disks or CD-ROMS or other stand alone devices which may
hereafter replace or supplement floppy disks or CD-ROMS in all operating systems
now known or hereafter developed or designed for use on the aforesaid
multipurpose home computers. Designated Multipurpose Computer Platforms shall
not for purposes of this Agreement include (a) dedicated home game systems, such
as those marketed by Nintendo(R), Sega(R), Atari(R), Sony(R), etc. or (b) On-
Line Games.
1.3 All references to "Early Termination Event" shall be
deleted.
1.4 All references to "Extension Event" shall be deleted.
1.5 "Foreign Rights Only Games" shall have the meaning
provided in Section 3 below.
1.6 "Game" shall mean any coin-operated video game (including
kits), any home video game and any On-Line Game, released by any member of the
Midway Group or by any licensee of the Midway Group for sale in commercial
quantities in the normal course of business; provided, however, that Game shall
not include any Atari Game. Home video games shall include games designed for
play on dedicated home systems, such as those marketed by Nintendo, Sega, Atari,
Sony, etc. as well as on multipurpose home computers, such as those marketed by
IBM and Apple.
1.7 "Marketing Area" shall have the meaning provided in
Schedule C to the form of Home Computer Software Distribution and License
Agreement annexed as Exhibit A hereto.
1.8 "New Game Option Notice" shall have the meaning provided
in Section 4 below.
1.9 "New Games" shall have the meaning provided in Section 3
below.
1.10 "New PC Titles" shall have the meaning provided in
Section 3 below.
1.11 "North America" shall mean (a) the United States of
America, its territories, possessions, and United States military installations
worldwide, (b) Canada and (c) Mexico.
1.12 "On-Line Games" shall mean games which require access to
on-line services, including, without limitation, the Internet, as a substantial
element of the game and which may not be played without such on-line access,
whether or not such games also require the use of floppy disks or CD-ROMS or
other stand alone devices or storage media in order to be played.
1.13 "PC Option Expiration Date" and "PC Extended Expiration
Date" shall have the meanings set forth in Section 2 below.
1.14 "Pre-Existing Third Party Materials" shall have the
meaning provided in Section 4 below.
1.15 "Reduction Amount" shall have the meaning
2
<PAGE> 3
provided in Section 7 below.
1.16 "Required Foreign Release Date" shall have the meaning
provided in Section 6.1 below.
1.17 "Special Marketing Areas" shall have the meaning
provided in Section 6 below.
1.18 "Unaccepted PC Projects" shall have the meaning provided
in Section 3 below.
1.19 "Unrecouped Balance" shall have the meaning provided in
Section 2.2 below.
1.20 "Worldwide Rights Games" shall have the meaning provided
in Section 3.5 below.
1.21 With respect to periods from and after July 1, 1996,
unless the context shall otherwise require, "WMS Group" shall be replaced by
reference to "Midway Group," which shall mean Midway or Midway Home
Entertainment Inc. or any subsidiary, affiliate or other entity, a majority of
whose capital stock is owned directly or indirectly by Midway or with respect to
which during the term of the GTIS Master PC Agreement, Midway, directly or
indirectly, has the legal power, without the consent of any third party, to
direct the acquisition of rights to or exploitation of Games on Designated
Multipurpose Computer Platforms. With respect to periods from and after July 1,
1996, unless the context shall otherwise require, "WMS" shall be replaced by
reference to "Midway." For purposes of clarification, any entity a majority of
whose capital stock is acquired by Midway shall not be deemed a member of the
Midway Group with respect to periods preceding the date on which Midway acquired
such capital stock, and (i) coin-operated video games (including kits), home
video games or On-Line Games which were released by such acquired entity prior
to its date of acquisition by Midway shall not be deemed to constitute Games
First Released by the Midway Group unless such coin-operated video games, home
video games or On-Line Games are subsequently released by a member of the Midway
Group (which shall include such acquired entity), and (ii) coin-operated games
(including kits), home video games or On-Line Games which are released by such
acquired entity on or after its date of acquisition by Midway shall be deemed to
be Games First Released by the Midway Group (which shall then include such
acquired entity) and shall be available for license by GTIS (subject to all
limitations and contractual agreements theretofore entered into by such acquired
entity prior to the date of its acquisition by Midway, including any limitations
on the Midway Group's right to sublicense or subdistribute such Games). (As used
in the preceding sentence, the term "home video games" shall have the meaning
provided in the second sentence of Section 1.6 above.)
2. Elimination of Extension Events and Early Termination Events.
The GTIS Master PC Agreement shall be amended to eliminate provisions relating
to (a) "Extension Events" (as such term is defined in Section 2 of the First
Amendment) and (b) the "Early Termination Event" (as defined in Section 3 of the
Second Amendment).
2.1 Anything in the GTIS Master PC Agreement (as amended by
the First Amendment and the Second Amendment) to the contrary notwithstanding,
the Initial Option Period shall expire on March 31, 2000 (and shall not be
extended by any Extension Events.) However, if the Atari Advance (as such term
is defined in Section 3 of the Second Amendment) has not been fully recouped by
the expiration date of the Initial Option Period, i.e. March 31, 2000 (which
date shall hereinafter be referred to as the "PC Option Expiration Date") such
PC Option Expiration Date shall be extended to a date which is the earlier to
occur of (i) two (2) years from the PC Option Expiration Date, i.e. March 31,
2002, or (ii) the date on which the Atari
3
<PAGE> 4
Advance is fully recouped (which extended expiration date shall be referred to
as the "PC Extended Expiration Date"). In determining whether the Atari Advance
has been fully recouped, amounts owed by GTIS but not yet reported, paid or
credited to the Atari Group as well as any unrecouped portion of the Atari
Advance which has otherwise actually been paid to GTIS by Midway of the Midway
Group shall be deemed recouped by GTIS. The second paragraph of Section 2.1 of
the GTIS Master PC Agreement, as amended and restated in Section 2 of the First
Amendment, is hereby deleted, and (except only as provided in the following
sentence) nothing herein or in the GTIS Master PC Agreement or in any other
agreement between the parties shall be deemed to require the parties to
negotiate with respect to or enter into any agreement with respect to an
extension or further extension of the term of the GTIS Master PC Agreement for
periods following the expiration of the term hereof. Notwithstanding the
foregoing, however, prior to the termination of the Initial Option Period,
Midway shall not actually enter into or publicly announce the execution of a
definitive, binding written agreement with a third party or parties (a "New
Third Party License Agreement") relating to the granting of licenses for the
manufacture, distribution, sale or other exploitation of any Games designed for
play on Designated Multipurpose Computer Platforms outside of North America and
Japan which are to be First Released following the expiration of the Initial
Option Period (and which are not available for license by GTIS under the GTIS
Master PC Agreement) unless Midway shall have first offered to GTIS a right (a
"Matching Right") to enter into a distribution and license agreement with Midway
for the manufacture, distribution, sale or other exploitation of such future
Games outside of North America and Japan following the expiration of the Initial
Option Period on the same terms and conditions as are set forth in the New Third
Party License Agreement. Midway shall give written notice to GTIS at least ten
(10) days prior to its execution of any such New Third Party License Agreement,
and shall deliver to GTIS a copy thereof. GTIS may then exercise its Matching
Right by written notice to the Midway Group given within seven (7) business days
following its receipt of such copy of the New Third Party License Agreement. In
the event that GTIS exercises its Matching Right within such seven (7) business
day period, Midway and GTIS will then execute a definitive distribution and
license agreement in the form of the New Third Party License Agreement (except
with changes of the names of the parties and similar conforming changes) within
eight (8) business days thereafter. If for any reason the parties shall fail to
execute such definitive distribution agreement, as contemplated herein, the
Matching Right shall terminate.
For the sake of clarity and the avoidance of doubt, (a) nothing herein
is intended to limit the Midway Group itself or through any affiliated entity,
in retaining and exploiting any rights with respect to any future Games which
are to be First Released following the expiration of the Initial Option Period
and no Matching Right shall in any way apply thereto, and (b) no negotiations,
proposals, agreements in principle, discussions or communications of any kind or
nature, written or oral, between the Midway Group and any third party or
parties, whether occurring before or after the expiration of the Initial Option
Period, relating to the granting of licenses for the manufacture, distribution,
sale or other exploitation of any future Games designed for play on Designated
Multipurpose Computer Platforms outside of North America and Japan following the
expiration of the Initial Option Period shall be deemed to create any Matching
Right on the part of GTIS. The parties acknowledge that Midway shall have the
absolute right to enter into a definitive distribution and license agreement in
any form whatsoever with any third party at any time following the expiration of
the Initial Option Period and GTIS shall have no Matching Right with respect
thereof. For purposes hereof, Midway shall not be deemed to have publicly
announced the execution of a definitive New Third Party License Agreement unless
Midway shall have specifically issued a press release or cooperated with the
issuance of a press release or provided other authorized information to the
public or the media with respect thereto,
4
<PAGE> 5
but no news article or other information disseminated by third parties without
Midway's participation shall be deemed to create any Matching Right as
contemplated hereunder.
2.2 If the Option and Advance Fee (as reduced by the
Reduction Amount as provided in Section 7 below) has not been fully recouped
prior to the PC Option Expiration Date or, if applicable, the PC Extended
Expiration Date, then Midway will pay to GTIS the remaining balance of such
Option and Advance Fee which is unrecouped as of such date (the "Unrecouped
Balance"), without interest thereon. In determining the Unrecouped Balance,
amounts owing by GTIS but not yet reported, paid or credited shall be deemed to
have been recouped by GTIS. Payment of the Unrecouped Balance will be made
within thirty (30) days following Midway's receipt of royalty reports (which are
complete and accurate in all material respects) pursuant to Section 6 of all
Home Computer Software Distribution and License Agreements with respect to all
quarterly periods during the Initial Option Term (i.e., all periods prior to the
PC Option Expiration Date or PC Extended Expiration Date, as the case may be).
2.3 Section 4 of the Second Amendment, including, without
limitation, all references therein to an "Early Termination Event" (and in the
definitional Section 1.2(a) of Section 3), is hereby deleted in its entirety.
Midway confirms that its right to effect a surrender to Warner Communications of
all of the outstanding stock of AGC under the Stock Purchase Agreement has
terminated and is no longer in effect.
3. Termination of Option to License Games for North America and
Japan. Anything in the GTIS Master PC Agreement to the contrary notwithstanding,
GTIS shall no longer have a first option to acquire a license to manufacture,
distribute and sell versions of the Games for play on Designated Multipurpose
Computer Platforms (a) in North America and, (b) from and after March 27, 1998,
in Japan (notwithstanding any provisions of the Japan Territory Agreement to the
contrary and without regard to satisfaction of any further terms or conditions
set forth therein), with respect to: (i) multipurpose home computer games which
were not under development by the Midway Group or the WMS Group, as the case may
be, prior to August 1, 1997, or for which the Midway Group or the WMS Group, as
the case may be, had not made development advances prior to August 1, 1997 ("New
PC Titles"), (ii) Games which were available for license by GTIS in accordance
with Sections 2.4 or 2.5 of the GTIS Master PC Agreement as of the date hereof
(i.e., Games which were subject to a written notice of availability given to
GTIS by the Midway Group or the WMS Group, as the case may be, prior to the date
hereof and which, as of the date hereof, have not been rejected by GTIS or the
period during which GTIS' option to license such Game has not expired), but
which GTIS had not accepted as of the date hereof ("Unaccepted PC Projects"), or
(iii) any new Games, whether or not GTIS shall have exercised its option to
license such Games prior to the date hereof, First Released by the Midway Group
or the WMS Group after March 1, 1997 ("New Games"). (New PC Titles, Unaccepted
PC Projects and New Games are hereinafter sometimes referred to collectively as
"Foreign Rights Only Games"). Unless the parties shall agree otherwise in
writing, there shall be excluded from Foreign Rights Only Games any New PC
Titles, Unaccepted PC Projects and New Games which have heretofore been offered
to GTIS and which GTIS has declined to accept, or for which the period during
which GTIS had the right pursuant to Sections 2.4 and 2.5 of the GTIS Master PC
Agreement to accept such Games has expired. For clarification purposes,
notwithstanding the termination of the Japan Territory Period, (i) Home Computer
Software Distribution and License Agreements entered or deemed entered into
prior to the termination of the Japan Territory Period (i.e., on or before March
27, 1998) and still in effect on March 27, 1998 shall continue for their term,
and (ii) Games which are available for license
5
<PAGE> 6
by GTIS in accordance with this Agreement as of March 27, 1998 (i.e., Games
which were subject to a New Game Option Notice given or to be given to GTIS by
the Midway Group or the WMS Group, as the case may be, prior to March 27, 1998,
and which, as of such date have not been rejected by GTIS or the period during
which GTIS' option to license such Game has not expired) shall continue to be
available for license by GTIS in Japan in accordance with the terms of this
Agreement and the related Home Computer Software Distribution and License
Agreement.
3.1 Section 2.1 of the GTIS Master PC Agreement (as amended
herein and pursuant to the First Amendment) shall be further amended to provide
that GTIS shall have a first option to acquire a license, in the form of the
Home Computer Software Distribution and License Agreement (as amended pursuant
to Section 3.3 below), to manufacture, distribute and sell outside of North
America and, from and after March 27, 1998, outside of Japan, versions of
Foreign Rights Only Games which become Accepted Games prior to the PC Option
Expiration Date or, if applicable, the PC Extended Expiration Date, for use
solely on Designated Multipurpose Computer Platforms, provided that such Foreign
Rights Only Games are First Released by the Midway Group or its licensees in
North America for play on Designated Multipurpose Computer Platforms prior to
such PC Option Expiration Date or Extended Expiration Date, as the case may be.
3.2 Section 2.2 of the GTIS Master PC Agreement shall be
amended to provide that the Midway Group shall not grant a license to any third
parties to manufacture, distribute and sell versions of a Foreign Rights Only
Game in the Licensed Territory, if such Foreign Rights Only Game would be
subject to GTIS' first option to manufacture, distribute and sell versions of
such Foreign Rights Only Game in the Licensed Territory on Designated
Multipurpose Computer Platforms, until such time as GTIS shall have declined to
acquire a license, or the option periods specified in Sections 2.4 or 2.5 of the
GTIS Master PC Agreement, whichever is applicable, shall have expired or the
applicable Home Computer Software License Agreement shall otherwise permit. GTIS
understands, acknowledges and agrees that (a) with respect to Foreign Rights
Only Games manufactured by the Midway Group under license from or which are
purchased or otherwise acquired from third parties, the rights granted by the
Midway Group to GTIS (i) cannot exceed the rights obtained by the Midway Group
with respect to such Foreign Rights Only Games, (ii) will be limited to the
Licensed Territory, and (iii) are subject to all limitations imposed on the
Midway Group and are subject to all contractual agreements theretofore entered
into by such third party licensors or other transferors, including limitations
on the Midway Group's right to sublicense or subdistribute, and the form of Home
Computer Software Distribution and License Agreement will be deemed modified to
the extent so required; (b) although the Midway Group is developing Games in the
normal course of business, the Midway Group is under no obligation to develop
Games or to present any minimum number of Games to GTIS under the GTIS Master PC
Agreement; and (c) under agreements entered into prior to December 28, 1994
Midway/Nintendo Inc. (a joint venture company owned by Midway and Nintendo Co.,
Ltd.) has been granted certain rights with respect to certain coin-operated
games. If the Midway Group develops any Game internally, then the Midway Group
shall, subject to all of the provisions of the GTIS Master PC Agreement,
including without limitation the provisions of Sections 2.1, 2.2, 2.4 and 2.5
thereof (as heretofore or herein amended), and Sections 4 and 5.5 below, offer
to license the Game to GTIS for exploitation throughout the Licensed Territory
in accordance with the terms of the GTIS Master PC Agreement as heretofore and
herein amended. The Midway Group also agrees to use its best efforts to acquire
rights to exploit Games on Multipurpose Home Computer Platforms throughout the
Licensed Territory when it acquires rights to exploit Games on Multipurpose Home
Computer Platforms in North America, provided that the Midway Group shall not be
obligated to acquire such rights if it determines, in its reasonable
6
<PAGE> 7
judgement, that such rights are not available on commercially acceptable terms
or terms which, in the reasonable judgement of the Midway Group, would make it
uneconomical for the Midway Group to acquire and license such rights to GTIS
hereunder, having due regard for economic and other terms and conditions
generally applicable to the acquisition of similar rights for comparable Games
in the software industry. If the Midway Group shall determine that rights to
exploit a Game for play on Multipurpose Home Computer Platforms throughout the
Licensed Territory are not available in accordance with the preceding sentence,
then the New Game Option Notice delivered by the Midway Group to GTIS with
respect to such Game shall so indicate.
3.3 The form of the Home Computer Software Distribution and
License Agreement with respect to all Foreign Rights Only Games and Section 4
Games shall be amended and restated as provided in Exhibit A hereto.
3.4 Anything herein or in the GTIS Master PC Agreement to the
contrary notwithstanding, GTIS shall no longer have the first option to acquire
a license to manufacture, distribute and sell versions of any Games for play on
Designated Multipurpose Home Computers which (a) are Previously Developed Games
listed on Schedule 1 to the GTIS Master PC Agreement, including any such Games
which are re-released with new copyright notices or subsequent versions of any
of such Previously Developed Games, except only to the extent that such
Previously Developed Games constitute Worldwide Rights Games and are listed on
Schedule 1 hereto or (b) are not Foreign Rights Only Games (including Section 4
Games).
3.5 A list of those Accepted Games with respect to which GTIS
shall continue to be entitled to manufacture, sell and distribute Licensed
Products in all locations worldwide, including North America (subject to third
party territorial limitations) ("Worldwide Rights Games"), pursuant to Home
Computer Software Distribution and License Agreements is annexed hereto as
Schedule 1.
3.6 Midway and Midway Home Entertainment hereby represent and
warrant that set forth on Schedule 2 annexed hereto is a complete list of all
Games First Released (and the platform upon which the Game was First Released)
by the Midway Group for the coin-operated, home video or On-Line markets after
March 22, 1995.
4. Games Which Are Not Developed by the Midway Group for Play on
Designated Multipurpose Computer Platforms. With respect to Foreign Rights Only
Games which have not heretofore been the subject of a written notice of
availability given by the Midway Group to GTIS in accordance with Sections 2.4
or 2.5 of the GTIS Master PC Agreement, the Midway Group shall indicate, in its
notice to GTIS pursuant to Section 2.4 or 2.5 of the GTIS Master PC Agreement (a
"New Game Option Notice"), in addition to the information otherwise required to
be provided therein (as amended hereby), whether the Midway Group intends to
develop such Game for play in North America on a Designated Multipurpose
Computer Platform (and if so, for which such Designated Multipurpose Computer
Platform(s) (e.g., IBM, Macintosh, etc.) the Midway Group intends to develop
such Game). If the New Game Option Notice shall indicate that the Midway Group
does not intend to develop such Game for play in North America on a Designated
Multipurpose Computer Platform (or on all Designated Multipurpose Computer
Platforms which GTIS desires to license), then, notwithstanding the proviso at
the end of Section 3.1 above, GTIS may elect to exercise its option to license
such Game for play on a Designated Multipurpose Computer Platform by notice
given in the manner and within the time specified in Section 2.4 or 2.5 of the
GTIS Master PC Agreement. A Game which the Midway Group has indicated its
intention not to develop for play in North America on a Designated Multipurpose
Computer Platform is hereinafter
7
<PAGE> 8
referred to as a "Section 4 Game". Upon receipt of such notice from GTIS, the
Midway Group will provide to GTIS or to a third party developer selected by GTIS
an IBM PC or compatible and/or Macintosh readable disc or discs containing the
source code for such Section 4 Game and, if required by GTIS and available,
samples of coin-operated game printed circuit boards, graphics, sound and music
data, user instruction materials, and such other materials and technical support
as are applicable and reasonably available to the Midway Group for the
conversion or development of such Section 4 Game for play on the Designated
Multipurpose Computer Platform. The obligation of the Midway Group to furnish
such materials is subject to the timely execution of a confidentiality agreement
between Midway and each third party developer, converter and/or translator
involved in the development of the Section 4 Game in accordance with Midway's
usual terms and conditions for confidentiality agreements with its developers
and the requirements of any third party having rights in the Game. GTIS shall be
solely responsible for developing, converting and localizing such Section 4
Games for play on the Designated Multipurpose Computer Platform and shall bear
[*] of the development costs (including [*] of any advances) and Third Party
Fees and Royalties and out-of-pocket expenses incurred in connection therewith.
Without limiting the generality of the foregoing, GTIS shall be solely
responsible for [*] costs of programming, artwork, music and sound effects and
testing, whether such development work is performed by the Midway Group or third
party developers, including language translation providers, which GTIS elects to
engage for such purpose. None of such development costs and out-of-pocket
expenses incurred by GTIS shall be recoupable or repayable to GTIS in any manner
or for any reason. Any third party developer designated by GTIS to develop,
convert and/or localize the Section 4 Game for play on the Designated
Multipurpose Computer Platform shall be subject to the consent of the Midway
Group, which consent shall not unreasonably be withheld or delayed. Prior to any
manufacture, distribution or release of the Section 4 Game version by GTIS, GTIS
shall furnish to the Midway Group a completed and functioning Technically
Acceptable Master Disc (together with source code and all related development
materials) for the Section 4 Game version for its prior written approval, which
shall not unreasonably be withheld or delayed. The Midway Group shall own all
copyrights, trademarks, intellectual property and code of such Game version,
other than "Pre-Existing Third Party Materials" and generally available
commercial software and any agreement between GTIS and any third party developer
shall explicitly so provide. The Midway Group shall not, however, own the
following (collectively, "Pre-Existing Third Party Materials"): pre-existing
utilities which are proprietary to GTIS, its developers or their respective
licensors and modifications thereto created during development of the Game
version by GTIS and not derived from the intellectual property rights in the
Game or any other materials furnished by the Midway Group. GTIS will grant or
cause its third party developer and all licensors and others having rights to
such Pre-Existing Third-Party Materials to grant to the Midway Group an
irrevocable, worldwide, non-exclusive license with respect to such Pre-Existing
Third Party Materials, in perpetuity, without payment of any royalties (except
only the same per unit royalties, if any, as may be payable by GTIS to its
unaffiliated third party developers or licensors for the use of such
Pre-Existing Third Party Materials in connection with sales by GTIS of the Game
version), with the right to sublicense, to reproduce, display, perform,
distribute, make derivative works of, make, sell and otherwise use such
Pre-Existing Third Party Materials in connection with the development,
reproduction, manufacture, marketing, sale, distribution, display, performance,
licensing and other exploitation of the Game version and sequels, conversions or
adaptations (e.g., to other game
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
8
<PAGE> 9
platforms), or other software derivative works of the Game version or Game, and
any agreement between GTIS and any third party developer shall contain any
provisions necessary for GTIS to grant such license. With respect to any
generally available commercial software which is used in developing the Section
4 Game version, GTIS shall identify such commercially available software and the
means by which it was used in connection with the Section 4 Game version at the
time that GTIS delivers the Technically Acceptable Master Disc to the Midway
Group as provided above, rather than providing the source code of such software
(or the executable form of such software other than as found in the Technically
Acceptable Master Disc).
5. Development of Foreign Rights Only Games.
5.1 Sections 2.4 and 2.5 of the GTIS Master PC Agreement are
amended to provide that, except as provided above with respect to Section 4
Games, GTIS shall not be required to pay to the Midway Group [*] portion of the
Midway Group's costs of code development for Foreign Rights Only Games. GTIS
shall be solely responsible for contracting with third party developers
(including, without limitation, the Midway Group) and language translation
providers which it elects to engage to translate and localize Foreign Rights
Only Games and, subject to the obligations of the Midway Group to encode
language translations on a new Technically Acceptable Master Disc pursuant to
Section 10 of the Home Computer Software Distribution and License Agreement,
GTIS shall bear [*] of the costs and out-of-pocket expenses incurred in
connection therewith, none of which costs shall be recoupable or repayable to
GTIS in any manner or for any reason. Any third party developer designated by
GTIS to translate and/or localize the Game for play on the Designated
Multipurpose Computer Platform shall be subject to the consent of the Midway
Group, which consent shall not unreasonably be withheld or delayed.
5.2 Anything to the contrary in Sections 2.4 or 2.5 of the
GTIS Master PC Agreement notwithstanding, all New Game Option Notices given by
the Midway Group to GTIS with respect to Foreign Rights Only Games need not set
forth a proposed budget for developing a Technically Acceptable Master Disc for
such Game for play on Designated Multipurpose Computer Platforms or the identity
of the Midway Group's proposed developer or developers. The Midway Group shall
not be required to afford GTIS an opportunity to consult with the Midway Group
prior to the Midway Group determining the proposed budget, time frame and
developers.
5.3 If the Midway Group shall notify GTIS in writing that the
Midway Group has determined to develop or acquire a Game for play on Designated
Multipurpose Computer Platforms that it has not theretofore developed or
acquired for the coin-operated or dedicated home game player market pursuant to
Section 2.5 of the GTIS Master PC Agreement, such notice shall describe in
reasonable detail the proposed characteristics of the Game and shall set forth
an estimated time frame for developing Technically Acceptable Master Discs for
such Game for play on one or more Designated Multipurpose Computer Platforms. No
estimated budgetary information need be given and GTIS shall have no
responsibility to pay to the Midway Group [*] portion of the costs of code
development with respect to the North American version of such Game. Each such
notice given by the Midway Group to GTIS pursuant to Section 2.4 or 2.5 of the
GTIS Master PC Agreement relating to a Game the rights to which are derived from
a license or other agreement with a third party shall set forth a summary of any
material limitations upon the
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
9
<PAGE> 10
scope of the license in respect thereof which may be granted to GTIS hereunder,
and the amount or method of determining third party royalties payable
thereunder, but such notice need not include any terms of such license or other
agreement to the extent that such terms are applicable only to platforms other
than Designated Multipurpose Computer Platforms or territories outside of the
Licensed Territory.
5.4 Sections 2.7, 2.8, 2.11 (as added in the Second
Amendment), 2.12 (as added in the Second Amendment), and 2.14 (as added in the
Second Amendment) of the GTIS Master PC Agreement shall not apply to Foreign
Rights Only Games and are hereby deleted. Notwithstanding the foregoing,
however, nothing herein or in the GTIS Master PC Agreement shall be deemed to
prevent the Midway Group from electing to terminate development of a Game or a
version of a Game designed for play on a specific Designated Multipurpose
Computer Platform, including a Foreign Rights Game which has theretofore been
the subject of a New Game Option Notice, at any time prior to the First Release
of such Game or Game version if the Midway Group determines in its sole
discretion that further development work is not technically feasible or
economically desirable, provided that, the Midway Group shall not terminate the
development by GTIS of a Section 4 Game. Anything herein or in the GTIS Master
PC Agreement to the contrary notwithstanding, if the Midway Group does not
actually First Release a Game on any platform notwithstanding its original
intention to do so (and whether or not the Midway Group shall theretofore have
furnished a New Game Option Notice to GTIS with respect to such Game), then any
option to license the Game shall terminate and if GTIS has returned a New Game
Option Notice electing to accept such Game, the Midway Group shall notify GTIS
of its decision not to release the Game.
5.5 Anything herein (including without limitation anything in
Section 5.4 above) to the contrary notwithstanding, if the Midway Group elects
to terminate development of a Foreign Rights Only Game version for a Designated
Multipurpose Computer Platform which has therefore been the subject of a New
Game Option Notice and if the Midway Group has theretofore commenced and is then
continuing to develop a version of such Foreign Rights Only Game for release on
another home video game platform in North America, then (unless GTIS shall
theretofore have declined to accept such Foreign Rights Only Game or the period
during which GTIS had the right, pursuant to Sections 2.4 and 2.5 of the GTIS
Master PC Agreement, to accept such Foreign Rights Only Game has expired) the
Midway Group shall so notify GTIS in writing (a "Termination Notice"). GTIS
shall then have the right upon written notice to the Midway Group (a "Notice of
Assumption"), given within 30 days following its receipt of such Termination
Notice, to assume the continued development of such Foreign Rights Only Game for
the Designated Multipurpose Computer Platform (provided that such Foreign Rights
Only Game version is being developed by the Midway Group internally and not
under any license or other agreement with a third party, unless the Midway Group
shall otherwise have the right to permit GTIS to assume the development of such
Foreign Rights Only Game version) which shall thereupon be deemed and shall
become a Section 4 Game. Nothing herein shall be deemed to require the Midway
Group, when it acquires intellectual property or other rights from any third
party in connection with a Foreign Rights Only Game, to also obtain the right to
permit GTIS to assume the continued development of any Foreign Rights Only Game
version for the Designated Multipurpose Computer Platform pursuant to this
Section 5.5. If GTIS shall elect to assume the development of a Foreign Rights
Only Game version for the Designated Multipurpose Computer Platform pursuant to
a Notice of Assumption, the Midway Group shall offer to make available to GTIS
all materials and work in process to date relating to the development of such
Foreign Rights Only Game version for the Designated Multipurpose Computer
Platform, provided that GTIS shall have paid to the Midway Group the amount
10
<PAGE> 11
specified in the Termination Notice which shall represent [*] of the costs of
development of the Foreign Rights Only Game version for the Designated
Multipurpose Computer Platform and any advances of Third Party Fees and
Royalties incurred or paid to the date of such Notice of Assumption. If GTIS
shall be unwilling or fail to pay [*] development costs and advances of Third
Party Fees and Royalties assumed by the Midway Group as specified in the
Termination Notice, the Midway Group shall not be required to make available to
GTIS any materials or work in process relating the development of the Foreign
Rights Only Game version for the Designated Multipurpose Computer Platform. If
GTIS shall have assumed the development of a Foreign Rights Only Game version
for the Designated Multipurpose Computer Platform as provided in this Section
5.5 above, GTIS shall thereafter be solely responsible for payment of [*] Third
Party Fees and Royalties with respect to such Game version.
6. Marketing.
6.1 The Midway Group shall promptly notify GTIS in writing
with respect to the date upon which the Midway Group shall have First Released
an Accepted Game which is a Foreign Rights Only Game in North America for play
on Designated Multipurpose Computer Platforms (the "Delivery Date"). Within
ninety (90) days following its receipt of such notice and a Technically
Acceptable Master Disc with respect to such Foreign Rights Only Game, GTIS shall
notify the Midway Group whether it intends to release such Foreign Rights Only
Game for play on Designated Multipurpose Home Computer Platforms in any or all
of the following countries: Germany, France, the United Kingdom and Australia
("Special Marketing Areas"). Unless GTIS shall have advised the Midway Group
that it does not intend to release such Foreign Rights Only Game in any of such
Special Marketing Areas, GTIS shall commence actively marketing and selling such
Foreign Rights Only Game in reasonable commercial quantities in such Special
Marketing Areas and in all other Marketing Areas within six (6) months following
such Delivery Date. If GTIS shall have notified the Midway Group that it does
not intend to release an Accepted Game which is a Foreign Rights Only Game in
any Special Marketing Areas or other Marketing Areas, or if GTIS or its
sublicensees shall have failed to commence actively marketing and selling an
Accepted Game which is a Foreign Rights Only Game in any Special Marketing Area
or other Marketing Areas as of a date which is not later than six (6) months
following the Delivery Date with respect to such Accepted Game (the "Required
Foreign Release Date"), then the Midway Group shall have the right, in addition
to any other rights which the Midway Group may have hereunder or under any
Midway Home Computer Software Distribution and License Agreement, upon thirty
(30) days written notice to GTIS, to terminate GTIS' or its sublicensee's right
to sell and distribute such Accepted Game in such Special Marketing Area or
other Marketing Area. Notwithstanding the foregoing, if GTIS shall not have
obtained from the Midway Group all key materials (i.e., the Technically
Acceptable Master Disc, previously requested artwork for U.S. advertising,
promotional materials and packaging) and all necessary approvals from third
parties with respect to such Foreign Rights Only Game (despite GTIS' reasonable
efforts to obtain or assist the Midway Group to obtain on GTIS' behalf such
approvals) at least ninety (90) days prior to the Required Foreign Release Date,
then such Required Foreign Release Date shall be extended until ninety (90) days
following the date on which GTIS has obtained all such necessary key materials
and third party approvals with respect to such Foreign Rights Only Game. If the
Midway Group shall terminate GTIS' right to distribute an Accepted Game in a
Special Marketing
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
11
<PAGE> 12
Area or other Marketing Area as provided above, then such Special Marketing
Area or other Marketing Area shall be deemed excluded from the Licensed
Territory with respect to such Accepted Game and the Midway Group shall (a) have
the right to sell and distribute or enter into a sublicense agreement with a
third party to sell and distribute such Accepted Game in such Special Marketing
Area or other Marketing Area and (b) have no obligation to pay over or to
account to GTIS with respect to any portion of the proceeds of sale of such
Accepted Game by the Midway Group or its sublicensees in such Special Marketing
Area or other Marketing Area.
For purposes of documenting compliance with this Section 6, GTIS
shall submit a report, as of a date six (6) months following the Delivery Date,
listing the Special Marketing Areas and any other Marketing Area in which GTIS
has not commenced actively marketing and selling an Accepted Game which is a
Foreign Rights Only Game. Such report shall be sent to the Midway Group within
forty-five (45) days after the end of said six (6) month period, and shall
indicate the status for each Special Marketing Area and any other Marketing Area
(indicating the date of GTIS' First Release and whether a sublicensee has been
appointed). Such summary report shall be made in good faith, using the best
available information as of the date the report is submitted.
6.2 The Midway Group shall notify GTIS within 90 days
following the Delivery Date if the Midway Group does not intend to release an
Accepted Game which is a Foreign Rights Only Game for play on Designated
Multipurpose Home Computer Platforms in Japan. If the Midway Group shall not
have so notified GTIS, but the Midway Group or its licensee shall nonetheless
fail to release and commence actively selling and distributing such a Foreign
Rights Only Game version in Japan within six (6) months following its Delivery
Date, then the Midway Group shall so notify GTIS within 45 days following the
expiration of such six-month period. If the Midway Group shall have notified
GTIS that it does not intend to release an Accepted Game which is a Foreign
Rights Only Game for play on Designated Multipurpose Home Computer Platforms or
that it has failed to release such a Foreign Rights Only Game version in Japan
as provided above (in either case, a "Notice"), then GTIS shall have the right,
upon written notice given within 30 days following its receipt of such Notice
from the Midway Group to elect to sell and distribute, or to enter into
sublicensing arrangements to sell and distribute, such Foreign Rights Only Game
for play on Designated Multipurpose Home Computer Platforms in Japan. Any
distribution by GTIS of such a Foreign Rights Only Game version in Japan shall
be in accordance with all of the terms and conditions of the applicable Home
Computer Software Distribution and License Agreement, except that GTIS shall be
solely responsible for payment of all Third Party Fees and Royalties allocable
to the sale of the Game version in Japan and the costs of localizing the Game
version in a new Technically Acceptable Master Disc. (GTIS shall not be required
to pay costs of encoding which are Midway's responsibility under Section 10 of
the Home Computer Software Distribution and License Agreement). GTIS' or its
sublicensee's right to elect to manufacture, sell and distribute a Foreign
Rights Only Game for play on Designated Multipurpose Home Computer Platforms in
Japan in accordance with this Section shall terminate (and the Licensed
Territory shall cease to include Japan) if GTIS or its sublicensee shall not
have commenced actively marketing such Foreign Rights Only Game version in Japan
within six (6) months following its receipt of the Notice from the Midway Group
referred to above.
7. Reduction in Option and Advance Fee. In consideration for the
termination of GTIS' first option to acquire licenses to manufacture, distribute
and sell versions of the Foreign Rights Only Games in North America
12
<PAGE> 13
and Japan, the Midway Group is paying to GTIS the sum of [*] Dollars (the
"Reduction Amount") by wire transfer of immediately available funds, which sum
shall constitute a reduction of the Option and Advance Fee heretofore paid by
GTIS to WMS Industries Inc. pursuant to Section 3 of the GTIS Master PC
Agreement (as amended by the First Amendment). The amount which GTIS shall be
entitled to recoup out of royalties as provided in the Home Computer Software
Distribution and License Agreements entered into pursuant to the GTIS Master PC
Agreement, as amended, shall be reduced by the Reduction Amount being paid
concurrently herewith.
8. Representations and Warranties. The representations set forth
in Section 5 and 6 of the GTIS Master PC Agreement shall be deemed confirmed
with respect to the GTIS Master PC Agreement as amended by this agreement and
made again as of the date hereof by Midway and Midway Home Entertainment and
GTIS, respectively.
9. Confidential Information. The provisions of Section 7 of the
GTIS Master PC Agreement (as heretofore amended) shall remain in full force and
effect and shall continue to apply to such agreement as amended hereby.
10. Notices. Notices to the Midway Group shall be sent in the
manner set forth in Section 8 of the GTIS Master PC Agreement to:
Midway Games Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (773) 961-1222
Facsimile Number: (773) 961-1099
With copies to:
Midway Home Entertainment Inc.
1800 South Business Highway 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
Midway Home Entertainment Inc.
1800 South Business Highway 45
Corsicana, Texas 75110
Attention: Mr. Eugene Freeman
Telephone Number: (903) 874-2683
Facsimile Number (903) 872-8000
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
13
<PAGE> 14
Notices to GTIS shall also be sent with
a copy to:
GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Stephanie Bhonslay, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
11. Assumption of Obligations. GTIS, Midway, WMS Industries Inc.,
Williams Electronics Games, Inc. and Midway Home Entertainment Inc. hereby
confirm the assumption by Midway and Midway Home Entertainment Inc. of all
rights, obligations and liabilities of WMS Industries Inc. and Williams
Electronics Games, Inc. under the GTIS Master PC Agreement, provided, however,
that WMS Industries Inc. and Williams Electronics Games, Inc. shall continue to
remain liable for their respective obligations under the GTIS Master PC
Agreement or under any Home Computer Software Distribution and License Agreement
entered into pursuant thereto.
12. Other Provisions. Except as otherwise set forth herein, the
GTIS Master PC Agreement shall remain in effect in accordance with its terms.
14
<PAGE> 15
13. Counterparts. This Third Amendment may be executed in
counterparts each of which shall be deemed an original and when taken together
shall be deemed one and the same document.
IN WITNESS WHEREOF, the parties have executed this Third Amendment
as the day and year first above written.
MIDWAY GAMES INC.
By:/s/ Orrin J. Edidin
---------------------------------
Orrin J. Edidin
Vice President & Secretary
MIDWAY HOME ENTERTAINMENT INC.
By:/s/ Orrin J. Edidin
---------------------------------
Orrin J. Edidin
Vice President & Secretary
GT INTERACTIVE SOFTWARE CORP.
By:/s/ Harry M. Rubin
--------------------------------
Harry M. Rubin
President, International Division
Business Affairs
Agreed as to Section 11:
WMS Industries Inc.
By:/s/ Orrin J. Edidin
---------------------------
Orrin J. Edidin
Vice President & Secretary
Williams Electronics Games, Inc.
By:/s/ Orrin J. Edidin
----------------------------
Orrin J. Edidin
Vice President & Secretary
15
<PAGE> 16
Schedule 1
Worldwide Rights Games
<TABLE>
<CAPTION>
Title Platform
- ----- --------
<S> <C>
Super
Karts IBM PC/DOS(1)
Arcade Classics (Arcade's Greatest Hits Williams Vol. 1) IBM PC/DOS(2)
IBM PC/Windows 95(3)
Island Casino IBM PC/DOS(2)
Macintosh(3)
Fun 'n' Games IBM PC/DOS(3)
Mortal Kombat 3 IBM PC/Windows 95(2)
IBM PC/DOS(2)
Open Ice IBM PC/Windows 95(3)
NBA Hangtime IBM PC/Windows 95(1)
War Gods IBM PC/Windows 95(1)
Robotron X IBM PC/Windows 95(1)
Arcade's Greatest Hits Williams Vol. II IBM PC/Windows 95(3)
Mortal Kombat Trilogy(4) IBM PC/Windows 95(3)
</TABLE>
- -------------------
(1) License agreement provided to GTIS; never signed.
(2) License agreement executed.
(3) License agreement not yet provided to GTIS.
(4) DOS version not developed.
16
<PAGE> 17
Schedule 2
New Games First Released Since March 22, 1995(1)
Title Platform of First Release
- ----- -------------------------
Mortal Kombat 3 Coin-op
Wrestlemania Coin-op
Open Ice Coin-op
Killer Instinct II Coin-op
Ultimate Mortal Kombat 3 Coin-op
NBA Hangtime (and "Maximum" upgrade) Coin-op
War Gods Coin-op
Cruis'n World Coin-op
Rampage World Tour Coin-op
Mortal Kombat 4 Coin-op
Off Road Challenge Coin-op
Blitz Coin-op
The Getaway Game Boy
Doom: Special PlayStation Edition PlayStation
Doom SNES
Doom 64 Nintendo 64
Micro Machines V3 PlayStation
Quake 64 Nintendo 64
NBA Fastbreak PlayStation
Gex: Enter the Gecko PlayStation
SuperKarts IBM PC/DOS*
Robotron X IBM PC/Windows 95*
- --------
(1) Excludes Previously Developed Games (on any platform - e.g., Arcades
Greatest Hits - Williams Collection 1 for PlayStation is not included because it
corresponds to Coin-op Classics Combination for PC CD-ROM). Touchmaster, a
coin-operated counter-top device intended for use in bars was released by Midway
after this date. It contains multiple ?simple? games, such as Solitaire,
Solitaire variants and a trivia game.
*Released by GTIS after being optioned under Section 2.5 of the
relevant master agreement. Robotron X was First Released by Midway Home
Entertainment on the PlayStation after March 22, 1995.
17
<PAGE> 18
Arcades Greatest Hits - Williams Vol. II IBM PC/Windows 95(+)
Final Doom PlayStation
Mortal Kombat Trilogy PlayStation
Mortal Kombat Mythologies: Sub-Zero PlayStation
Top Gear Rally Nintendo 64
Pandemonium 2 PlayStation
- --------
+ Offered to GTIS pursuant to letter dated February 6, 1997 under Section 2.4 of
the GTIS Master Option and License Agreement, and optioned by GTIS in accordance
therewith. All games First Released as coin-operated video games before March
22, 1995. Compilation was also released on other platforms by Midway Home
Entertainment.
18
<PAGE> 19
CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED.
EXHIBIT A
HOME COMPUTER SOFTWARE
DISTRIBUTION AND LICENSE AGREEMENT
AGREEMENT made this ___ day of __________, 199__, by and between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation with offices at 417 Fifth
Avenue, New York, New York 10016 (herein called "Licensee") and [MIDWAY GAMES
INC., a Delaware corporation with offices at 3401 North California Avenue,
Chicago, Illinois 60618] [MIDWAY HOME ENTERTAINMENT INC., a Delaware corporation
with offices at 1800 South Business Highway 45, Corsicana, Texas 75110] (herein
called "Licensor").
W I T N E S S E T H:
WHEREAS, Licensor owns or controls the rights in and to the Licensed
Property (which Licensed Property is hereinafter defined on Schedule A attached
hereto);
WHEREAS, Licensee is engaged in the business of manufacturing,
distributing and selling Computer Games (as hereinafter defined; such Computer
Games embodying the Licensed Property shall be hereinafter referred to as the
"Licensed Product");
WHEREAS, Licensee desires to use the Licensed Property in connection
with the manufacture, distribution and sale of the Licensed Product;
WHEREAS, Licensor has obtained rights in and to the Licensed Property
from the following third parties: [insert list](the "Third Parties");
WHEREAS, pursuant to the GTIS Master Agreement (as defined below) this
Agreement, which is in a form agreed upon by the parties for their transactions
under the GTIS Master Agreement generally, is to be modified as required to
comply with Licensor's contracts with the Third Parties relating to the Licensed
Property (the "Third Party Contracts"); and
WHEREAS, SCHEDULE A ATTACHED HERETO CONTAINS MATERIAL LIMITATIONS ON
LICENSEE'S LICENSE TO THE LICENSED PROPERTY UNDER THIS AGREEMENT IMPOSED BY THE
THIRD PARTY CONTRACTS, WHICH CONTRACTS CONTROL OVER THE BODY OF THIS AGREEMENT.
THE BODY OF THIS AGREEMENT HAS BEEN LEFT SUBSTANTIALLY IN THE FORM FOUND
ATTACHED TO THE GTIS MASTER AGREEMENT.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. The term "Computer Game" is herein defined as any
Computer Software designed to operate on IBM PC or Apple Macintosh or other
compatible multipurpose home computers, which utilize floppy disks or CD-ROMs or
other stand alone devices which may hereafter replace or supplement floppy disks
or CD-ROMS in all operating systems now known or hereafter developed or designed
for use on the aforesaid multipurpose home computers. Computer Games shall not
include, among other things, (a) Computer Software designed to operate on
dedicated home game systems, such as those marketed by Nintendo(R), Sega(R),
Atari(R) Sony(R), etc. or (b) On-Line Games.
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1.2. The term "Computer Software" or "Software" shall
mean any computer software containing substantially full and complete
computer game code, including the source code, the assembly code, the object
code and such data files and other files as are deemed necessary for the
Licensed Product to achieve its functional purpose, whereby data and visual
images, with or without sound, can be manipulated, communicated, reproduced or
perceived with the aid of a computer.
1.3. The term "Delivery Date" shall have the meaning
ascribed in Section 6.1 of the Third Amendment to the GTIS Master Agreement.
1.4. The term "Exporter" shall have the meaning
provided in Section 3.3 hereof.
1.5. The term "GTIS Master Agreement" shall mean the GTIS
Master Option and License Agreement dated December 28, 1994, as amended,
between WMS Industries Inc., Williams Electronics Games, Inc., Midway
Manufacturing Company and Williams Entertainment Inc. (as subsequently assigned
to Midway Games Inc.("Midway") and Midway Home Entertainment Inc.)
1.6. The term "Japan Territory Agreement" shall mean the
letter from WMS Industries Inc. to Licensee dated March 27, 1996 captioned
"Japan Territory".
1.7. The term "Japan Territory Period" shall have the
meaning ascribed in the Japan Territory Agreement.
1.8. The term "Licensed Product" shall have the
meaning ascribed in the second Whereas clause of this Agreement, but shall
not include books which communicate game playing tactics and/or strategies
("hint books") specifically prepared for Computer Games and such hint
books shall not be deemed Licensed Products hereunder.
1.9. The term "Licensed Property" shall have the meaning
ascribed in the first Whereas clause of this Agreement.
1.10. The term "Licensed Territory" shall have the meaning
ascribed in Section 3.1 of this Agreement, subject to the provisions of Sections
3.4 and 3.6 hereof.
1.11. The term "Marketing Area" shall mean the areas
set forth on Schedule C hereto.
1.12. The term "North America" shall mean (a) the United
States of America, its territories and possessions, including United States
military installations worldwide, (b) Canada and (c) Mexico.
1.13. The term "On-Line Games" shall have the meaning
ascribed in Section 1.12 of the Third Amendment to the GTIS Master PC Agreement.
1.14. The term "Other GTIS Home Computer Software
Distribution and License Agreements" shall have the meaning ascribed in
Schedule B.
1.15. The term "Required Foreign Release Date" shall have
the meaning ascribed in Section 3.4 hereof.
1.16. The term "Section 4 Game" shall have the meaning
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ascribed in Section 4 of the Third Amendment to the GTIS Master Agreement.
1.17. The term "Special Marketing Area" shall have the
meaning ascribed in Section 3.4 hereof.
1.18. The words "term of this Agreement" or "period of this
Agreement" or "term hereof" or "so long as this Agreement remains in force"
or words of similar connotation shall include the initial period of this
Agreement and the period of all renewals, extensions, substitutions or
replacements of this Agreement.
1.19. The term "Third Party Fees and Royalties" shall mean
all fees, royalties and other participations of any kind or nature payable by
Licensor or its affiliates to any third party, including licensors and others
having intellectual property rights, in connection with the exploitation of the
Licensed Product. There shall be excluded from the term "Third Party Fees and
Royalties" as used herein any fees or royalties payable by Licensor or its
affiliates to "third party developers" or to employees of Licensor or its
affiliates with respect to the development of Licensed Product. For purposes
hereof, a "third party developer" shall refer to a person or an entity who
develops the Licensed Product for or on behalf of Licensor or its affiliates
based substantially upon an intellectual property which Licensor or its
affiliates did not license or otherwise acquire from such third party, or which
Licensor did not otherwise obtain from such third party as a work made for hire.
The term "third party developer" does not include, among other things, any
person or entity (a) who developed materials used in the Licensed Product, but
did not develop the Licensed Product itself (e.g., any person or entity which
developed materials for the coin-operated video game on which the Licensed
Product is based, but who did not perform the development services involved in
the conversion of such coin-operated video game into the Licensed Product) or
(b) from whom Licensor or its affiliates license any trademark or service mark
used in the Licensed Property or any portion of the audiovisual work which is
included in the Licensed Product (e.g., the person or entity develops the
Licensed Product and licenses it to Licensor or its affiliates). If Licensor or
its affiliates acquire from a third party in one transaction the rights to
exploit a Game on multiple platforms, unless Licensee shall otherwise agree,
Licensor shall fund advances, if any, paid to such third party, and any such
advances shall be excluded from the term Third Party Fees and Royalties;
provided, however, that if such advances are recoupable by Licensor or its
affiliates from future royalties payable to such third party, then Third Party
Fees and Royalties shall include such royalties which would otherwise be payable
to such third party were it not for such right of recoupment.
Capitalized terms used, but not defined herein, shall have the
meaning ascribed to such terms in the GTIS Master Agreement.
2. GRANT OF LICENSE.
2.1. Licensor hereby grants and Licensee hereby accepts, for
the term of this Agreement and subject to the terms hereinafter set forth, the
exclusive license to utilize the Licensed Property solely in connection with the
manufacture, distribution and sale of the Licensed Products in the Licensed
Territory. Licensee shall have the right to sublicense any of the rights granted
to Licensee hereunder with Licensor's prior written consent, which consent shall
not be unreasonably withheld or delayed. It is understood that the term Licensed
Products does not include Computer Software designed for play on dedicated home
video game systems, such as those manufactured by Nintendo, Sega, Sony or Atari,
or any other medium of exploitation, including On-Line Games, handheld games,
over the air, cable or fiber-optic transmission
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or any ancillary rights related thereto, all of which remain the sole property
of Licensor. No license is granted hereunder for the manufacture, sale or
distribution of Licensed Products to be used as premiums, in combination sales,
as giveaways or to be disposed of under similar methods of merchandising, except
only that Licensee shall have the right, subject to rights of third parties in
the Licensed Property, to distribute Licensed Products as premiums, combination
sales or giveaways solely (a) subject to Licensor's prior written consent, which
shall not unreasonably be withheld or delayed, in connection with the sale and
distribution of other Computer Games licensed to Licensee by Licensor or its
affiliates under Other GTIS Home Computer Software Distribution and License
Agreements, and (b) with respect to free or promotional goods in the quantities
set forth on Schedule B. No license is granted hereunder for the exploitation of
ancillary merchandising rights to the Licensed Product; Licensor shall be
entitled to exploit such ancillary merchandising rights for its own account and
Licensee shall have no right or interest therein. Licensee shall not be entitled
to exploit or share in profits derived from any exploitation of games whether or
not having the same or similar title or play characteristics or using similar
Computer Software, in other game platforms, such as coin-operated games or
dedicated home game systems, or in any ancillary rights relating thereto.
2.2. This license does not include any rights to subsequent
versions of the Licensed Property (so-called "sequels" or "derivatives"), such
rights being retained by Licensor, except as the same are otherwise required to
be offered to Licensee under the GTIS Master Agreement.
2.3. Notwithstanding the foregoing, Licensor reserves the
exclusive right to license the Licensed Property to third party personal
computer hardware or computer peripheral device (or components thereof)
manufacturers ("Bundlers") who are based or whose principal operations are
located in North America (whether or not license arrangements are also made with
such manufacturers' local or regional affiliates for this purpose) for the
purpose of bundling the Licensed Products together with hardware products,
peripheral devices (or components thereof) for distribution in any country
throughout the world (including, without limitation, in the Licensed Territory).
Licensor also reserves the exclusive right to license the Licensed Property to
Bundlers who are based or whose principal operations are located outside North
America for the purpose of bundling the Licensed Products together with hardware
products, peripheral devices (or components thereof) for distribution within and
without the Licensed Territory, provided that [*] of the revenue from such
license is reasonably expected to be derived from distribution of the bundled
Licensed Products outside of the Licensed Territory. Licensee shall have the
sole right to enter into arrangements with Bundlers who are based and whose
principal operations are located in the Licensed Territory for the distribution
of bundled Licensed Products on a non-exclusive basis within the Licensed
Territory, provided that (a) such arrangements shall, in each case, be subject
to Licensor?s written consent, which consent shall not unreasonably be withheld
and (b) Licensor shall have the right to withhold its consent to any such
proposed bundling arrangements within the Licensed Territory which conflict with
Licensor's existing or contemplated exclusive worldwide bundling arrangements.
If any Bundler which is based or whose principal operations are located in the
Licensed Territory proposes to Licensee an arrangement for the distribution of
bundled Licensed Products outside of the Licensed Territory, such Bundler shall
be referred by Licensee to Licensor and Licensor shall have the sole right to
negotiate
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 23
separate arrangements with such Bundler for the distribution of bundled Licensed
Products outside of the Licensed Territory. Licensor shall consult with and
advise Licensee, to the extent practicable, reasonably in advance, if Licensor
proposes to enter into bundling arrangements for distribution of Licensed
Products within the Licensed Territory and shall, in this connection, advise
Licensee of Licensor's proposed pricing strategy for the sale of such Licensed
Products to Bundlers. Nothing herein shall however be deemed to limit or
restrict Licensor in establishing such pricing and such other terms and
conditions of sale of Licensed Products on an exclusive or non-exclusive basis
to Bundlers as it deems appropriate in its absolute discretion.
3. TERRITORY.
3.1. Licensee shall be entitled to manufacture, distribute
and sell the Licensed Products in all countries outside of North America, except
[(a) in Japan and (b)]* in countries or locations which are excluded under the
terms of any license agreement between Licensor and any third party having
rights to the Licensed Property. [If the Licensed Products are Section 4 Games,
the foregoing sentence shall read "Licensee shall be entitled to manufacture,
distribute and sell the Licensed Products in all countries except countries or
locations which are excluded under the terms of any license agreement between
Licensor and any third party having rights to the Licensed Property.] The
territory in which Licensee shall be entitled to manufacture, sell and
distribute the Licensed Products as specified above is herein referred to as the
"Licensed Territory".
*[3.2. With respect to the exploitation by Licensor of
the Licensed Property in Japan, Licensee shall be entitled to share in [*] of
the net profits derived by Licensor from its sale of Licensed Products in Japan.
For purposes hereof, "net profits" shall be calculated as follows:
(a) If Licensor shall exploit the Licensed Property in Japan other than
through its own direct operations (as defined below) (e.g., pursuant to
a sublicense arrangement), "net profits" shall be calculated by
subtracting from the actual monies received by Licensor from the sale
of Licensed Products in Japan (i) an amount equal to [*] of such
receipts (or [*] if Licensor supplies finished goods), representing
Licensor's allocation of overhead expenses, and (ii) all Third Party
Fees and Royalties payable by Licensor in connection therewith, and
(iii) if Licensor supplies finished goods, all of Licensor's direct
manufacturing and shipping costs. If Licensor is required to localize
the Licensed Products for sale in Japan, Licensor shall also deduct
costs of localization up to [*] of net sales from Licensee's share of
net profits.
(b) If Licensor shall exploit the Licensed Property in Japan through
its own direct operations (i.e., distribution directly by Licensor or
any affiliate of Licensor), "net profits" shall be calculated by
subtracting from the actual monies received by Licensor from the sale
of Licensed Products in Japan (i) an amount equal to [*] of such
receipts,
- --------
* Include bracketed language if Japan is excluded from the Licensed
Territory pursuant to Section 3 of the Third Amendment to the GTIS
Master Option and License Agreement.
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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representing Licensor's allocation of overhead expenses, (ii) all Third
Party Fees and Royalties payable by Licensor in connection
therewith, (iii) all of Licensor's direct manufacturing and shipping
costs. If Licensor is required to localize the Licensed Products for
sale in Japan, Licensor shall also deduct actual costs of localization
up to [*] of net sales from Licensee's share of net profits. Licensor
shall also be entitled to deduct actual advertising costs up to [*] of
net sales from Licensee's share of net profits. Additional advertising
costs in excess of [*] of net sales up to [*] of net sales shall be
shared equally by Licensor and Licensee (and Licensee's share of such
additional advertising costs shall be deducted from Licensee's share of
net profits).
In all cases described above, expenses incurred by an affiliate of Licensor in
connection with the exploitation of the Licensed Product in Japan shall be
deemed to have been incurred by Licensor. Licensor shall account and pay over to
Licensee, not less frequently than quarterly, Licensee's remaining share of net
profits from the sale by Licensor of Licensed Products in Japan. Licensor shall
also inform Licensee of the economic terms of all sublicensing arrangements
under (a) above relating to the exploitation of Licensed Property in Japan.]
3.3. Licensor shall have the exclusive right to license to
third parties or otherwise exploit any of its rights with respect to the
Licensed Property outside of the Licensed Territory (for the sake of clarity,
Licensee acknowledges that any portion of the Licensed Territory in which
Licensee's right to distribute Licensed Products has been terminated in
accordance with Section 3.4 below shall then be deemed outside of the Licensed
Territory), and Licensee shall not manufacture, distribute or sell any Licensed
Products or otherwise exploit the Licensed Property directly or indirectly in
any area other than the Licensed Territory. Without limiting the generality of
the foregoing, Licensee shall not at any time sublicense, distribute or sell any
Licensed Products to any distributor or customer who Licensee knows or could
reasonably expect, based on objective evidence, intends to resell or export the
Licensed Products outside of the Licensed Territory. Except as provided in
Section 2.3 above, Licensor shall not at any time license, distribute or sell
any Licensed Products to any licensee, distributor or customer who Licensor
knows or could reasonably expect, based on objective evidence, intends to resell
or export the Licensed Products within the Licensed Territory (for the sake of
clarity, Licensee acknowledges that Licensor may at any time license, distribute
or sell Licensed Products to any licensee, distributor or customer for
distribution in any portion of the Licensed Territory in which Licensee's right
to distribute Licensed Products has been terminated in accordance with Section
3.4 below). A licensee, sublicensee, distributor or customer who wrongfully
resells or exports Licensed Products from the Licensed Territory to territories
outside the Licensed Territory, or from territories outside the Licensed
Territory to the Licensed Territory, or from a country outside of the Licensed
Territory to Japan, is referred to as an "Exporter." Licensor and Licensee shall
have the right, in addition to any other rights which they may have hereunder,
to require the other to terminate or cause the termination of any license,
distribution agreement or arrangement with any such Exporter who is wrongfully
distributing Licensed Products in violation of the rights of the other party.
Licensor shall also have the right to delay for a period up to three (3) months
the introduction of any new Licensed Products into any country (other
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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than the United Kingdom) in which such Exporter may be located or is operating.
3.4. Within 90 days following its receipt from Licensor of
notice of the Delivery Date and a Technically Acceptable Master Disc with
respect to the Licensed Product, Licensee shall notify Licensor whether it
intends to release the Licensed Product in any or all of the following
countries: Germany, France, the United Kingdom and Australia ("Special Marketing
Areas"). Unless Licensee shall have advised Licensor that it does not intend to
release the Licensed Product in any of the Special Marketing Areas, Licensee
shall commence actively marketing and selling the Licensed Product in reasonable
commercial quantities in such Special Marketing Areas and in all other Marketing
Areas within six (6) months following the Delivery Date. If Licensee shall have
notified Licensor that it does not intend to release the Licensed Product in any
one or more of the Special Marketing Areas or other Marketing Areas, or if
Licensee or its sublicensees shall have failed to commence actively marketing
and selling the Licensed Product in any one or more of the Special Marketing
Areas or other Marketing Areas on or before a date which is not later than six
(6) months following the Delivery Date with respect to such Licensed Product
(the "Required Foreign Release Date"), then Licensor shall have the right, in
addition to any other rights which the Licensor may have hereunder or under the
GT Master PC Agreement, upon thirty (30) days written notice to Licensee, to
terminate Licensee's and its sublicensee's right to manufacture, sell and
distribute the Licensed Product in such Special Marketing Area or other
Marketing Area. Notwithstanding the foregoing, if Licensee shall not have
obtained from the Midway Group all key materials (i.e., the Technically
Acceptable Master Disc, previously requested artwork for U.S. advertising,
promotional materials and packaging) and all necessary third party approvals
with respect to such Licensed Product (despite Licensee's reasonable efforts to
obtain or assist Licensor to obtain the same on Licensee's behalf) at least
ninety (90) days prior to the Required Foreign Release Date, then such Required
Foreign Release Date shall be extended until ninety (90) days following the date
on which Licensee has obtained all such necessary key materials and third party
approvals with respect to such Licensed Product. If Licensor shall terminate
Licensee's right to distribute the Licensed Product in a Special Marketing Area
or other Marketing Area, as provided above, then such Special Marketing Area or
other Marketing Area shall be deemed excluded from the Licensed Territory and
Licensor and its affiliates shall (a) have the right to manufacture, sell and
distribute or enter into a license agreement with a third party to manufacture,
sell and distribute the Licensed Product in such Special Marketing Area or other
Marketing Area and (b) have no obligation to pay over or to account to Licensee
with respect to any portion of the proceeds of sale of the Licensed Product by
Licensor or its affiliates or licensees in such Special Marketing Area or other
Marketing Area.
3.5. For purposes of documenting compliance with Section 3.4
above, Licensee shall submit a report, as of the date six (6) months following
the Delivery Date, listing the Special Marketing Areas or other Marketing Areas
in which Licensee has not commenced actively marketing and selling an Accepted
Game. Such report shall be sent to Licensor within forty-five (45) days after
the expiration of said six (6) month period, and shall indicate the status for
each Special Marketing Area or other Marketing Area listed (indicating the date
that marketing and selling is expected to begin and whether a sublicensee has
been appointed or will be replaced). Such summary report shall be made in good
faith, using the best available information as of the date the report is
submitted.
3.6. Licensor shall notify Licensee within ninety (90) days
following the Delivery Date if Licensor does not intend to release the
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Licensed Product in Japan. If Licensor shall not have so notified Licensee, but
Licensor or its licensees shall nonetheless fail to release and commence
actively selling and distributing the Licensed Product in Japan within six (6)
months following its Delivery Date, then Licensor shall so notify Licensee
within 45 days after the end of such six-month period. If Licensor shall have
notified Licensee that it does not intend to release the Licensed Product in
Japan or that it has failed to release the Licensed Product in Japan within six
months following its Delivery Date, as provided above (in either case, a
"Notice"), then Licensee shall have the right, upon written notice given within
thirty (30) days following its receipt of such Notice from Licensor, to elect to
sell and distribute, or to enter into sublicensing arrangements to sell and
distribute, the Licensed Product in Japan. Any distribution by Licensee of the
Licensed Product in Japan shall be in accordance with all of the terms and
conditions of this Agreement, except that Licensee shall be solely responsible
for payment of all Third Party Fees and Royalties allocable to the sale of the
Licensed Product in Japan and the costs of localizing the Licensed Product in a
new Technically Acceptable Master Disc. (Licensee shall not be required to pay
costs of encoding which are Licensor's responsibility as provided under Section
10 below.) Licensee's and its sublicensee's right to elect to manufacture, sell
and distribute the Licensed Product in Japan in accordance with this Section
shall terminate (and the Licensed Territory shall cease to include Japan) if
Licensee or its sublicensee shall not have commenced to actively sell and
distribute the Licensed Product in Japan within six (6) months following its
receipt of the Notice from Licensor referred to above.
4. TERM.
The license granted hereunder shall be effective on the
date hereof and terminate on the earliest to occur of (a) termination of
Licensor's rights obtained from third parties, (b) five (5) years from the
effective date hereof [for Section 4 Games: five (5) years from the date
of Licensor's approval of the Technically Acceptable Master Disc] or (c) two
years from the effective date hereof if the license granted hereunder shall
apply to a Section 4 Game and Licensee has not delivered to Licensor a completed
and functioning Technically Acceptable Master Disc which shall have been
approved by Licensor within such two-year period.
5. CONSIDERATION.
Licensee shall pay Licensor, with respect to the sale
throughout the Licensed Territory of the Licensed Products, a royalty as
specified in Schedule B annexed hereto on each unit of Licensed Product sold.
6. ACCOUNTINGS.
6.1. Licensee agrees to forward to Licensor, within
forty-five (45) days after the end of each calendar quarter ("Royalty Period"),
commencing with the first calendar quarter during which any unit of the Licensed
Product is sold, a report, in reasonable detail and reported separately, by
Marketing Area, of the number of units and average wholesale price (by sales
bracket, as provided in Schedule B hereof) of the Licensed Products sold within
such Royalty Period and the royalty amount due for the sale of such units
calculated in accordance with Sections 5 and 6.3 hereof and any recoupment
claimed in accordance with Schedule B annexed hereto, and Section 3 of the GTIS
Master Agreement. Such report shall also include a cumulative reconciliation of
the number of units of Licensed Products produced by Licensee to the number of
units on hand. For clarification purposes, such cumulative reconciliation of
units shall be reported separately by Marketing Area to support sales
information and facilitate auditing. Licensee agrees
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that accompanying each such report shall be payment, in U. S. funds, of the
amounts due to Licensor, if any, in respect of such Royalty Period in excess of
any permitted recoupment. Royalties calculated in foreign currencies shall be
converted to U. S. currency at the spot rate of exchange published in the Wall
Street Journal as of the last day of the Royalty Period. Such reports shall be
required to be submitted with respect to sales and distributions of the Licensed
Product whether or not any amounts are due under the terms hereof.
6.2. Licensee agrees to keep accurate books of account and
records with respect to the Licensed Products, covering all sales, purchases and
inventories of Licensed Products and all royalty fees due under this Agreement
at Licensee's offices (or the offices of Licensee's affiliates) and to permit
(or procure the right for) Licensor at its own expense to have accounting
professionals (which may include Licensor's employees who have accounting
degrees) inspect such books of account and records of Licensee or its
sublicensees during reasonable business hours (but not during the first three
weeks of a calendar quarter), upon prior reasonable written notice, for the sole
purpose of verifying the reports to be provided hereunder. Such inspections,
together with inspections of Licensee's books of account and records pertaining
to other Computer Games licensed to Licensee by Licensor or its affiliates under
Other GTIS Home Computer Software Distribution and License Agreements, shall
occur no more frequently than twice during any twelve (12) month period for each
of the Licensee's offices. Licensor's inspectors shall not be physically present
in a specific office of Licensee for more than 10 consecutive business days in
connection with any such inspection, provided that Licensee shall have supplied
all requested information and documentation and responded to questions on a
reasonably prompt basis. Licensee shall promptly furnish to Licensor copies of
any report which Licensee may produce as the result of any audit by Licensee of
the books of account and records of any sublicensee of Licensee. Licensor shall
keep any information obtained from any such inspections in confidence and shall
require that its accounting professionals do so as well. Licensee's books
relating to any particular royalty statement may be examined as aforesaid only
within two (2) years after the date rendered and Licensee shall have no
obligation to permit Licensor to so examine such books relating to any
particular royalty statement more than once for any one statement, unless in
connection with a civil action filed by Licensor against Licensee in connection
with such statement. In the event that any audit by Licensor's accounting
professionals reveals that Licensee has underpaid Licensor by an aggregate of
[*]or more with respect to the specific royalty statements which are the subject
of such audit, Licensee agrees that it shall also reimburse Licensor for the
reasonable documented costs for any such audit (including traveling costs) up to
the amount of the shortfall.
6.3. Not less than [*] of a shipment to a customer shall be
deemed a sale for royalty purposes on the date of shipment. Not less than [*] of
the balance of the shipment, less actual returns, shall be deemed a sale for
royalty purposes six (6) months following the date of shipment, and the balance
of such shipment, less actual returns not already counted, shall be deemed a
sale for royalty purposes twelve (12) months following the date of shipment.
6.4. Licensor shall permit Licensee, at Licensee's own
expense, to have an independent certified public accountant inspect Licensor's
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 28
books and records with respect to the payment by Licensor of Third Party Fees
and Royalties in connection with the Licensed Products, during reasonable hours,
upon prior reasonable written notice and subject to such confidentiality
requirements (including the execution of appropriate confidentiality agreements)
as Licensor may require, for the sole purpose of verifying payment and
calculation by Licensor of such Third Party Fees and Royalties. Licensor's books
and records may be examined by Licensee's representatives not more frequently
than twice in any twelve-month period and Licensee shall otherwise have
substantially the same rights as provided to Licensor under Section 6.2 above.
6.5. In circumstances where Licensor is obligated under
this Agreement to account to Licensee in respect of any entitlement to
Licensor's share of net profits or net proceeds from the exploitation of the
Licensed Product, Licensor shall account substantially in the same manner and in
the same time frame as provided in this Paragraph 6 above. Licensee shall also
have substantially the same rights as provided to Licensor in Section 6.2,
provided, however, that (a) any audit of Licensor's books of account and records
shall be restricted to the areas which are directly applicable to the report(s)
being verified and (b) Licensee shall not have the right to audit the books and
records of any Bundler or licensee of Licensor, provided that any audit by
Licensor of the books and records of its licensee in Japan shall be made by
Licensor's independent certified public accountants and Licensor shall make
available to Licensee the results of such audit as it pertains to Licensee.
6.6. Licensee recognizes that the timely submission of all
reports required to be submitted to Licensor pursuant to Section 6.1 hereof is
critical for Licensor to maintain good relations with its third party licensors
as well as for Licensor's own financial reporting requirements. Licensor
recognizes that its failure to submit timely reports may also affect Licensee's
financial reporting requirements. Therefore, in addition to any other rights and
remedies of Licensor or Licensee, if either party shall be late by more than
five (5) business days with respect to any report and/or royalty payment
required to be submitted to the other party pursuant to Section 6.1 hereof (a
"Late Report"), then the delinquent party shall pay to the other party a late
charge ("Late Charge") at a rate equal to the prime rate designated by Citibank
N.A. on any royalties covered by such Late Report that are actually payable to
the other party or recoupable as provided in Schedule B. Such Late Charge shall
be computed from the 46th day following the last day of the calendar quarter for
which such Late Report is due until the date actually paid. The party entitled
to such report and/or royalty payment may elect to waive payment of any such
Late Charge if the delinquent party shall have provided a reasonable estimate of
royalties due within fifteen (15) days following the end of the calendar quarter
covered by such Late Report.
6.7. At the time that the Licensor shall provide to
Licensee notice of availability of a Game pursuant to Section 2.4 or 2.5 of the
GTIS Master Agreement, Licensor shall provide to Licensee sufficient data to
enable Licensee to calculate Third Party Fees and Royalties payable with respect
to each Licensed Product (without regard to any advances which may have been
made by Licensor). If Licensee is unable to calculate specific Third Party Fees
and Royalties from the data provided, Licensee may request assistance from
Licensor with respect thereto, and Licensor shall use its best efforts to
respond within seven (7) days from the date of such request, but Licensee shall
provide all sales and other data in its possession which are necessary for such
calculations.
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<PAGE> 29
7. QUALITY OF LICENSED PRODUCT.
7.1. The Licensed Products as manufactured, advertised,
sold, distributed or otherwise disposed of by Licensee under this Agreement
shall be of a high quality and shall be sold and distributed in packaging
prescribed by Licensor bearing Licensor's trademarks and trade names. Such
packaging may indicate that the Licensed Products are distributed by Licensee.
Licensor shall have the right to determine in its reasonable discretion whether
the Licensed Product meets Licensor's high standards of merchantability.
Licensee agrees to furnish Licensor free of cost for Licensor's written approval
as to quality and style (which approval shall not be unreasonably withheld),
samples of the Licensed Product, together with its proposed advertising,
packaging and wrapping materials, before its manufacture, sale or distribution
(whichever first occurs) and the Licensed Product shall not be sold or
distributed by Licensee without such written approval. Without limiting the
generality of the foregoing, Licensee shall be required to obtain the prior
written approval of Licensor with respect to all proposed advertising, packaging
and wrapping materials, even if materials for such purposes were furnished, in
whole or in part, by Licensor.
7.2. If Licensor shall disapprove of any item submitted
by Licensee for approval hereunder, Licensor shall furnish at the time notice of
disapproval is given to Licensee an explanation of the reason(s) for such
disapproval and recommendations for suggested changes and Licensee shall
resubmit such item after changes have been made for Licensor's approval.
7.3. In the event that the quality of any Licensed Product
approved by Licensor shall become less than that approved by Licensor and
Licensee shall fail to raise the quality to the approved level within thirty
(30) days after receiving written notice from Licensor, the license granted
under this Agreement for such Licensed Product shall automatically terminate and
shall remain terminated until Licensor shall subsequently renew its approval of
the Licensed product.
7.4. If disapproval is not received by Licensee within
five (5) business days after Licensor's receipt of the item submitted for
approval, Licensor's approval shall be deemed to have been given. Subsequent to
final approval, Licensor may request the Licensee once each quarter to send,
without charge, a reasonable number of production samples (but in any event not
less than [*] copies of each language version) without payment of any Third
Party Fees and Royalties or other royalty hereunder to Licensor to ensure
quality control. Should Licensor require additional samples for any reason other
than resale or any other commercial exploitation by Licensor, Licensee shall be
required to sell such samples to Licensor at its cost (but without payment of
any Third Party Fees and Royalties or other royalty hereunder), but not more
than [*] units of each Licensed Product.
8. TRADEMARK AND COPYRIGHT, ETC.
8.1. "Notice" as used in this Section shall mean the
following statutory copyright notice and notice of registration or application
for registration of the licensed trademark:
[Insert Game specific notice]
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
11
<PAGE> 30
or such other copyright notices and notices of registration as may be required
by any third party licensors. Licensee shall use the "?" or "?" with the
trademarks of Licensor and its licensors and affiliates, as Licensor may
specify.
8.2. Licensee shall furnish to Licensor samples of all
packaging in which the Licensed Products are sold by Licensee. Licensee shall
print, stamp or mold the Notice on all Licensed Products and on the back of each
package or container used in connection therewith, and Licensee shall print the
Notice on each label, advertisement and promotional release concerning any
Licensed Products, all in accordance with instructions from Licensor, providing,
however, that such notice shall be imprinted on the back of the package or
container used in connection therewith, displayed on the title screen of the
Licensed Product, and in the instruction booklet, if any, packaged with the
Licensed Product. Licensee agrees to execute and deliver to Licensor in such
form as Licensor may reasonably request all instruments necessary to effectuate
trademark protection or to record Licensee as a registered user of any
trademarks or to cancel such registration and if Licensee fails to execute such
instruments, Licensee hereby appoints Licensor Licensee's attorney-in-fact to do
so on Licensee's behalf. Licensee shall also furnish Licensor samples of all
advertising or promotional materials bearing the Notice for Licensor's approval.
8.3. Subject to the terms of this Agreement, Licensee
acknowledges and agrees that: All copyrights, trademarks and service marks and
rights to same referred to in this Section 8 in the name of and/or owned by
Licensor shall be and remain the sole and complete property of Licensor; that
all such copyrights, trademarks and service marks and rights to same in the name
of or owned by any copyright proprietor other than Licensor or Licensee shall be
and remain the sole and complete property of such copyright proprietor; that all
trademarks and service marks which, and/or the right to use which, arise out of
the license hereby granted to use the Licensed Property shall be and remain the
sole and complete property of Licensor; that Licensee shall not at any time
acquire or claim any right, title or interest of any nature whatsoever in any
such trademark or service mark by virtue of this Agreement or of Licensee's uses
thereof in connection with the Licensed Products; and that any right, title or
interest in or relating to any such trademark or service mark, which comes into
existence as a result of, or during the term of, the exercise by Licensee of any
right granted to it hereunder shall immediately vest in Licensor.
8.4. Licensee agrees to assist Licensor at Licensor's
expense to the extent necessary in the procurement of any protection or to
protect any of Licensor's right to the Licensed Property. Licensee shall notify
Licensor in writing of any infringements or imitations by others of the Licensed
Property on articles similar to those covered in this Agreement which may come
to the Licensee's attention. Licensor shall have the right to commence action to
enforce its proprietary rights and prosecute any such infringements, and
Licensee agrees to fully cooperate, at Licensor's expense, in any such action.
However, Licensee shall not incur any such expense reimbursable by Licensor
without Licensor's express written approval and all recoveries resulting from
any such action shall belong solely to Licensor. In the event Licensor declines
to pursue any such action, Licensee may, with Licensor's written permission, and
subject to the consent of any third party having rights in the Licensed
Property, institute such an action, and Licensor, at Licensee's expense, shall
cooperate in such action instituted by Licensee and all recoveries resulting
from any such action shall belong solely to Licensee. Licensor shall not
unreasonably withhold or delay its permission to enable Licensee to pursue an
action (if Licensor shall decline to pursue such action) against persons or
entities reasonably believed by Licensee to be
12
<PAGE> 31
counterfeiting or pirating Licensee's Licensed Products in the Licensed
Territory. Licensor shall not unreasonably withhold or delay its permission to
grant to any sublicensee who requires it, at the time of entering into a
sublicense, reasonable rights (without Licensor's prior consent in each
instance) to pursue persons reasonably believed to be engaged in counterfeiting
or piracy of the Licensee Product in the Licensed Territory.
8.5. During the term of this Agreement and thereafter,
Licensee:
(a) will not challenge the ownership or rights of
Licensor in and to the Licensed Property or any copyright or trademark
pertaining thereto developed by or for Licensor, nor attack the validity of the
license granted hereunder or participate in any challenge thereto;
(b) will manufacture, sell and distribute the
Licensed Products in compliance with all applicable laws and governmental
regulations in accordance with the terms of this Agreement;
(c) will not except as set forth in this Agreement,
either directly or indirectly, use or display or authorize others to use or
display, the trademarks, copyrights or proprietary rights of Licensor in
connection with any advertising, assembly, manufacture, distribution, use, sale
or lease of any goods, other than in connection with the manufacture and sale of
the Licensed Products; and
(d) subject to Licensee's best business judgment
Licensee will exercise reasonable efforts to: (i) manufacture sufficient
quantities of the Licensed Product to meet the market demand for same; (ii)
conduct advertising activities to promote the sale of Licensed Product; and
(iii) make any and all arrangements necessary to accomplish such undertakings.
9. MATERIALS.
9.1. Notwithstanding anything contained herein to the
contrary, but subject to Section 4 of the Third Amendment to the GTIS Master
Option and License Agreement regarding Pre-Existing Third Party Materials, all
artwork, designs and computer software or any reproduction thereof, which are
designed, developed and/or created by Licensee hereunder (or any of its
sublicensees, affiliates, subsidiaries or third party contractors), shall be,
and remain Licensor's sole and exclusive property, inclusive of all copyrights
and right to copyright therein and thereto for the life of the copyright
therein; provided that during the term of this Agreement, Licensee shall have
the exclusive (except as otherwise provided in this agreement) right, license
and privilege (without any compensation to Licensor except as provided in
Section 5) to use all such above described materials in connection with its
manufacture, sale and distribution of the Licensed Products in the Licensed
Territory.
9.2. Licensor shall make available to Licensee, at
Licensor's actual out of pocket cost, any artwork relating to the Licensed
Property which Licensor owns and which is reasonably available to Licensor for
Licensee's use in connection with the exploitation of the Licensed Property.
10. TRANSLATIONS.
[Note: This section shall be omitted for Section 4 Games]
In the event that Licensee shall reasonably require the
text
13
<PAGE> 32
associated with any Licensed Product to be translated into a language other than
English, Licensor shall, upon Licensee's written request, provide to Licensee
the text files and the text that appears in bit map files and printed copies of
the script used for audio components of the Licensed Product (the "Text
Materials") and Licensee shall furnish, at its own expense, to Licensor a
translation text thereof. Licensor shall then cause a new Technically Acceptable
Master Disc (as that term is defined in the GTIS Master Agreement) containing
such translation to be encoded, at Licensor's own expense, and delivered to
Licensee. Notwithstanding the foregoing, Licensor shall not be required to
encode Licensee's translation text in a new Technically Acceptable Master Disc
if Licensee shall not have furnished its translation text to Licensor within ten
(10) business days following its receipt from Licensor of complete Text
Materials. Text Materials delivered by Licensor to Licensee shall be deemed
complete unless Licensee shall have notified Licensor in writing that such Text
Materials as delivered are incomplete, specifying in detail the reasons
therefor, within five (5) business days following Licensee?s receipt thereof. In
such case Licensor shall furnish any additional required Text Materials as
promptly as possible and Licensee shall have ten (10) additional business days
from its receipt of such additional Text Materials in which to furnish its
translation text to Licensor.
11. REPRESENTATIONS AND WARRANTIES.
11.1. Licensor hereby represents and warrants that this
Agreement has been duly authorized, executed and delivered by Licensor; Licensor
has the full power and authority to enter into this Agreement and perform its
obligations hereunder; this Agreement constitutes the valid and binding
obligation of Licensor, enforceable in accordance with its terms; the making of
this Agreement does not violate any agreement, right or obligation existing
between Licensor and any other person, firm or corporation; and the Licensed
Property, if used pursuant to the license granted herein, will not infringe upon
or violate any rights of any third party.
11.2. Licensee hereby represents and warrants that this
Agreement has been duly authorized, executed and delivered by Licensee; Licensee
has the full power and authority to enter into and perform its obligations
hereunder; this Agreement constitutes the valid and binding obligation of
Licensee, enforceable in accordance with its terms; the making of this Agreement
does not violate any agreement, right or obligation existing between Licensee
and any other person, firm or corporation; and its manufacture, advertisement,
distribution and sale of the Licensed Products will be in accordance with the
terms of this Agreement so as not to infringe upon or violate any rights of any
third party.
12. INDEMNIFICATION.
12.1. Each party agrees to indemnify and hold the other
(including officers, directors, agents and employees of such party or its
subsidiaries, affiliates and sublicensees) harmless against any loss, damage,
expense or cost (including reasonable attorneys' fees) arising out of any claim,
demand or suit or judgment resulting from any breach of any warranty or
representation set forth in Section 11 above. Each party shall promptly inform
the other of any such claim, demand, suit or judgment.
12.2. In connection with any such claim, demand or suit
referred to above, the party so indemnifying (the "Indemnitor") agrees to
defend, contest or otherwise protect the indemnified party (the "Indemnitee")
against any such suit, action, investigation, claim or proceeding at the
Indemnitor's own cost and expense. The Indemnitee shall have the right, but not
the obligation to participate, at its own expense, in the defense thereof
14
<PAGE> 33
by counsel of its own choice. In the event that the Indemnitor fails timely to
defend, contest or otherwise protect against any such suit, action,
investigation, claim or proceeding, the Indemnitee shall have the right to
defend, contest or otherwise protect against the same, and, upon ten (10) days'
written notice to the Indemnitor, make any compromise or settlement thereof and
recover the entire cost thereof from the Indemnitor, including without
limitation, reasonable attorneys' fees, disbursements and all reasonable amounts
applied as a result of such suit, action, investigation, claim or proceeding or
compromise or settlement thereof. The obligations hereunder shall survive the
termination or expiration of this Agreement.
12.3. Neither Licensor nor Licensee shall be liable for any
incidental, consequential or punitive damages to the other.
13. EVENTS OF DEFAULT AND TERMINATION.
Either party shall be deemed to be in default of this
Agreement in the event either of the following occurs:
(a) Such party fails to make any payment or
furnish any statement in accordance herewith, provided that the defaulting party
shall have been given a first written notice of such default and a period of at
least 15 days in which to cure such default and, if such default shall not have
been cured within such period, the defaulting party shall have been given a
second written notice of such default and a further period of at least 10 days
in which to cure such default; or
(b) Such party fails after thirty (30) days'
written notice to the other party to comply with any other of the defaulting
party?s obligations hereunder.
14. EXPIRATION OR TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement, all
rights granted to Licensee herein shall forthwith revert to Licensor with the
following consequences:
(a) All unpaid royalties shall be due and
payable in accordance with Section 6.1 hereof.
(b) Licensor shall thereafter be free to license
others to use the Licensed Property in connection with the manufacture,
advertisement, distribution and sale of items identical or similar to the
Licensed Products in the Licensed Territory.
(c) In the event of termination or expiration of
this Agreement, other than a termination by Licensor as a result of a material
breach of this Agreement by Licensee, Licensee may continue to sell for a period
of one hundred eighty (180) days after the effective date of termination all
approved copies of the units of the Licensed Product produced prior thereto.
15. CONFIDENTIAL INFORMATION.
Each of the parties shall keep in confidence and shall not
disclose to any third party, without the written permission of the other party,
the terms of this Agreement and the proprietary information of the other party
made known to it under this Agreement. This requirement of confidentiality shall
not apply to information that is (a) in the public
15
<PAGE> 34
domain through no wrongful act of the disclosing party; (b) rightfully received
by the disclosing party from a third party who is not bound by a restriction of
nondisclosure; (c) already in the disclosing party's possession without
restriction as to disclosure; or (d) is required to be disclosed by applicable
rules and regulations of government agencies or judicial bodies. This obligation
of confidentiality: (i) shall survive termination of this Agreement and (ii)
shall extend to any subcontractor of either party and each party agrees to
obtain from each such subcontractor a written agreement to abide by the
foregoing confidentiality requirements. Each of the parties shall be entitled to
seek injunctive or equitable relief to prevent the breach or threatened breach
by the other of the provisions of this Section and to secure its enforcement.
16. NOTICES.
Any notice, consent, approval, request, waiver or statement
to be given, made or provided for under this Agreement shall be in writing and
deemed to have been duly given (i) by its delivery personally or by express
mail; or (ii) five days after its being mailed, air express, registered or
certified, return receipt requested in a U.S. Post Office addressed as follows:
TO LICENSEE: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Mr. Ron Chaimowitz
Telephone Number: (212) 726-6508
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 726-6523
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
WITH A COPY TO: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Stephanie Bhonslay, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
TO LICENSOR: Midway Games Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (773) 961-1222
Facsimile Number: (773) 961-1099
16
<PAGE> 35
WITH A COPY TO: Midway Home Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
WITH A COPY TO: Midway Home Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Eugene Freeman
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
WITH A COPY TO: Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
or such other address as either party may designate by notice given as
aforesaid.
17. MISCELLANEOUS.
17.1. This Agreement is personal to Licensee as one party
and Licensor as the other party. Neither this Agreement nor any party's rights
under it may be assigned, in whole or in part, nor may Licensee's or Licensor's
rights or obligations hereunder be delegated, in whole or in part, to any person
or party without the prior written consent of the other party, except that any
party may assign its rights and delegate obligations to any of its direct or
indirect wholly-owned subsidiaries or affiliates or to any person, firm or
corporation owning or acquiring all or substantially all of the stock or assets
of that party, as long as that party remains fully liable for its obligations
hereunder. Any sale of all or substantially all of the assets of Licensor shall
include a requirement for the assumption by the purchaser of all covenants,
obligations and duties undertaken by Licensor pursuant to the terms of this
Agreement, including its obligations with respect to Licensed Products and the
intellectual property from which they are derived. This Agreement shall bind the
parties, their successors and permitted assignees and delegees. Licensor, as one
party, and Licensee as the other party, are each liable for their respective
obligations under the terms of this Agreement.
17.2. The entire understanding between the parties hereto
relating to the subject matter hereof is contained herein. This Agreement cannot
be changed, modified, amended or terminated except by an instrument in writing
executed by the parties hereto.
17.3. No waiver, modification or cancellation of any term
or condition of this Agreement shall be effective unless executed in writing by
the party charged therewith. No written waiver shall excuse the performance of
any act other than those specifically referred to therein and no waiver shall be
deemed or construed to be a waiver of such terms or conditions for the future or
any subsequent breach thereof.
17.4. This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between Licensor and
Licensee, and neither Licensor nor Licensee shall have any right to obligate or
bind the other in any manner whatsoever, and nothing herein contained shall
17
<PAGE> 36
give or is intended to give any rights of any kind to any third persons.
17.5. This Agreement shall be governed by the laws of the
State of Illinois applicable to contracts made and to be wholly performed in the
State of Illinois.
17.6. If any provision of this Agreement is or becomes or
is deemed invalid, illegal or unenforceable under the applicable laws or
regulations of any jurisdiction, either such provision will be deemed amended to
conform to such laws or regulations without materially altering the intention of
the parties or it shall be stricken and the remainder of this Agreement shall
remain in full force and effect.
17.7. This Agreement may be executed in counterparts each
of which shall be deemed an original and when taken together shall be deemed one
and the same document.
17.8. Notwithstanding anything to the contrary in this
Agreement, the parties agree that this Agreement is deemed amended wherever and
however necessary to conform to the requirements and limitations of the [insert
list of third party contracts]. Material limitations thereof, as well as
information necessary to calculate Third Party Fees and Royalties are set forth
in Schedule A.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
[MIDWAY GAMES INC.
By: ]
---------------------------------
[MIDWAY HOME ENTERTAINMENT INC.
By: ]
---------------------------------
GT INTERACTIVE SOFTWARE CORP.
By:
----------------------------------
18
<PAGE> 37
SCHEDULE A
[Insert description of Licensed Property]
19
<PAGE> 38
SCHEDULE B
ROYALTIES
Licensee shall pay royalties in an amount equal to the following
percentages of the Net Wholesale Sales Price of a Unit sold and not returned:
Net Wholesale Sales Price Royalty %
------------------------- ---------
$[*]or greater [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
At Net Wholesale Sales Prices, as hereafter defined, between [*] and [*] the
above percentages shall be prorated based upon the next highest and next lowest
royalty percentage. For example, at a Net Wholesale Sales Price of [*], the
royalty percentage shall be [*]. Notwithstanding the above, if the Licensed
Products cost [*] or more to develop or acquire ("Premium Products"), the
minimum per unit royalty for such Premium Products shall be calculated as
follows: the minimum per unit royalty during the six-month period commencing on
the date on which the Premium Product was First Released shall be an amount
equal to [*] of the product of (1) the Net Wholesale Sales Price of such Premium
Product as of the date of release multiplied by (2) the royalty percentage which
corresponds to such Net Wholesale Sales Price on the table set forth above
(prorated as appropriate). Thereafter, there shall be no further minimum per
unit royalty.
"Net Wholesale Sales Price" shall be that price invoiced by Licensee to its
customers, less any price discounts, rebates or credits granted at the time of
sale and taxes invoiced to customers (including VAT). Sales made other than at
arm's length to a bona fide unaffiliated third party purchaser shall be deemed
to have been made at the Net Wholesale Sales Price which would have been charged
by Licensee to a bona fide unaffiliated third party purchaser in an arm's length
transaction. No deduction shall be made for bad debts or other uncollected
amounts, advertising allowances, including cooperative advertising, or any other
costs incurred in manufacturing, selling or distributing the Licensed Products.
In the event that Licensee's experience with respect to bad debts and
uncollectible amounts during any calendar year in respect of sales of Licensed
Products under this Agreement and all Other Home Computer Software Distribution
and License Agreements entered into between Licensor and its affiliates and
Licensee under the GTIS Master Agreement, shall exceed [*] of Licensee's
aggregate net sales of Licensed Products under this Agreement and all such Other
Home Computer Software Distribution and License Agreements during such calendar
year ("Excess Bad Debts"), then Licensee shall be entitled to receive a credit
against royalties payable under this Agreement or any Other GTIS Home Computer
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 39
Software Distribution and License Agreement determined as follows: the average
of the weighted Net Wholesale Sales Prices of all Licensed Products sold under
this Agreement and all Other GTIS Home Computer Software Distribution and
License Agreements during such calendar year shall be determined, and the
royalty percentage which corresponds thereto in the table above (prorated as
appropriate) shall be multiplied by the amount of Excess Bad Debts for such
calendar year to determine the amount of such credit.
Royalties for "direct response sales" shall be calculated by multiplying [*] of
the royalty percentages set forth above (prorated as appropriate) times
Licensee's net receipts from such sales and, for purposes of determining the
applicable royalty percentages in the table set forth above, the amount of such
net receipts shall be substituted for "Net Wholesale Sales Price." The minimum
per unit royalty shall be [*] of the minimum per unit royalty applicable to
sales other than "direct response sales" as set forth in the first paragraph of
this Schedule B. Direct response sales shall refer to sales made directly to
consumers other than from a fixed retail location and shall include catalogue
sales, direct mail, print and television sales. Licensee's net receipts from
direct response sales shall be based upon actual monies received, less amounts
separately paid by purchasers as sales taxes and shipping and handling charges.
Where the Licensed Property (whether acquired from a third party or developed by
Licensor or any entity which at any time was or is an affiliate of Licensor) has
not been embodied in a coin-operated video or pinball game, whether distributed
by Licensor or any entity which at any time was or is an affiliate of Licensor,
or will not be embodied in a coin-operated video or pinball game distributed
within 60 days from the release of the Licensed Product, institutional
advertising costs (i.e., radio, television and print advertising to the general
public) will be shared equally ("Shared Institutional Advertising") by Licensee
and Licensor, provided that (a) the portion of the Shared Institutional
Advertising costs to be borne by Licensor shall not exceed [*] of the Net
Wholesale Sales Price of the Licensed Product, and shall only be payable in that
portion of the Licensed Territory in which Licensee itself (and not its
sublicensees) actually pays for institutional advertising costs and (b) all such
Shared Institutional Advertising costs and budgets therefor shall have been
previously approved in writing by Licensor. Licensee at its own cost and expense
shall be solely responsible for all in store and cooperative advertising costs
associated with the sale of Licensed Products in the Licensed Territory.
ADJUSTMENTS TO ROYALTIES
Anything above to the contrary notwithstanding:
1. If Licensor is obligated to pay any Third Party Fees and Royalties
with respect to the sale of Licensed Products, the per unit royalties to be paid
by Licensee to Licensor with respect to such Licensed Products shall be equal to
[*] of all such Third Party Fees and Royalties, plus the greater of (a) the
royalty otherwise payable to Licensor as provided above and (b) the other [*] of
such Third Party Fees and Royalties. In no event shall the per unit royalty on
the sale of Licensed Products be less than [*] of such Third Party Fees and
Royalties.
2. In cases where Licensor has acquired substantially all of the
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
21
<PAGE> 40
Licensed Property from a third party, the per unit royalty on the sale of
Licensed Products shall not be less than (a) [*] of Third Party Fees and
Royalties plus (b) [*] of the Net Wholesale Sales Price, provided that the
total Third Party Fees and Royalties set forth in clause (a) above do not
exceed Licensor's Third Party Fees and Royalties in the United States for
the same Net Wholesale Sales Price.
3. In cases where Licensed Products are sold by non-affiliated third
party sublicensees under sublicenses granted by Licensee in accordance with the
provisions of Section 2.1 above (including any sales under any bundling
arrangement with a non-affiliated third party), royalties payable by Licensee to
Licensor hereunder shall be equal to the sum of (a) all Third Party Fees and
Royalties payable with respect to the sale of such Licensed Products, plus (b)
[*] of the net proceeds received by Licensee from such non-affiliated third
party sublicensees after deducting (i) a fee (the ?Management Fee?) equal to [*]
of such net proceeds (or [*] in the event of a bundling arrangement in which
Licensee is providing finished goods) to Licensee, (ii) an amount equal to all
Third Party Fees and Royalties, and, (iii) in the case of non-affiliated third
party sublicensees to whom Licensee supplies the Licensed Product, Licensee's
direct manufacturing and shipping costs. Net proceeds received by Licensor from
bundling which are allocable to the Licensed Territory shall be shared [*] by
Licensor and [*] by Licensee after deducting (q) an amount equal to all Third
Party Fees and Royalties, (r) Licensor's direct manufacturing and shipping
costs, (s) a Management Fee of [*] of such net proceeds which shall be payable
to Licensor, and (t) an additional fee equal to [*] of such net proceeds which
shall be payable to the one of Licensee or Licensor as is arranging for the
manufacture of the Licensed Products to be bundled. In no event shall the per
unit royalty payable by Licensee to Licensor be less than [*] of such Third
Party Fees and Royalties.
4. Notwithstanding item 3 above, however, in cases where Licensed
Products are sold in the following Marketing Areas: Africa, Middle East,
India/Pakistan, China, Rest of Asia, Brazil, Rest of South America, Central
America and the Caribbean, royalties payable by Licensee to Licensor hereunder
shall be equal to the sum of (A) all Third Party Fees and Royalties payable with
respect to the sale of such Licensed Products, plus (B) [*] of the net proceeds
received by Licensee after deducting (x) a Management Fee equal to [*] of such
net proceeds to Licensee, (y) an amount equal to all Third Party Fees and
Royalties, and (z) in cases where Licensee supplies the Licensed Product,
Licensee's direct manufacturing and shipping costs. In no event shall the per
unit royalty payable by Licensee to Licensor be less than [*] of such Third
Party Fees and Royalties.
Solely with reference to the Marketing Areas set forth in this item 4,
a "sublicensee" is defined as an entity which Licensee authorizes (whether by
express grant of license or otherwise) to exercise any of the rights in respect
of the intellectual property and/or proprietary rights in the Licensed Property
which are licensed to Licensee under this Agreement (e.g., the right under
copyright to reproduce the Licensed Property, the right under trademark law to
apply the trademarks included in the Licensed Property to goods) and which the
law would not otherwise permit an ordinary purchaser of the Licensed Products
for resale to consumers to exercise (e.g.,creating an advertisement to customers
which does not use the Licensed Property or Licensed Product other than a
statement that the goods are available for
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 41
sale, their price and an (unaltered) image of the goods). The fact that an
entity is authorized by Licensee to assemble Licensed Products into their
packaging and wrapping materials (including any box, manuals, inserts, etc.) for
sale to consumers shall not cause the entity to be considered a "sublicensee" if
all copies of the Licensed Product to be so assembled are sold by Licensee to
such entity in the form which will be sold to consumers and such entity does not
modify the same, and all of the packaging and wrapping materials (including any
box, manuals, inserts, etc.) into or with which such copies are assembled fall
under one or more of the following categories: (i) materials which are purchased
from Licensee, (ii) materials which are manufactured by such entity solely and
without modification from a master which may have been localized or translated,
and which has been approved by Licensor and all third parties having approval
rights in the Licensed Property, or (iii) materials which do not embody in any
way the Licensed Product, Licensed Property or any other property of any party
(e.g., a blank white cardboard retainer intended to hold a CD-ROM in place
inside of a box). The fact that an entity is authorized by Licensee to reproduce
advertising or promotional materials for the Licensed Product shall not cause
the entity to be considered a ?sublicensee? if such reproduction is made without
modification from a master which may have been localized and translated and
which has been approved by Licensor and all third parties having approval rights
in the Licensed Property. No implication shall be drawn from the foregoing
definition of sublicensee with respect to other uses of the term "sublicensee"
in other sections of this Agreement.
5. For Licensed Products developed by Licensee pursuant Section 4 or
Section 5.5 (which are deemed to be developed pursuant to Section 4) of the
Third Amendment to the GTIS Master Agreement, the per unit royalty shall be (a)
[*] of the Net Wholesale Sales Price, plus (b) [*] of any Third Party Fees and
Royalties, plus [*] of any developer royalties, payable by Licensor in
connection with the sale of such unit. Sublicensing revenues shall be treated in
the same manner as stated in items 3 and 4 above, however, Licensor's share
shall be (x)[*] of such revenues (instead of [*]) plus (y) [*] of any Third
Party Fees and Royalties, plus [*] of any developer royalties, payable by
Licensor in connection with the sale of such unit.
6. Until Licensee shall have recouped fully the [*] Option and
Advance Fee, as provided below, Licensor shall pay over to Licensee Licensor's
share of (a) net profits from the exploitation of the Licensed Product in Japan,
and (b) net proceeds (after deduction of the costs and fees described in clauses
(q) through (t) of the penultimate sentence of item 3 above) from bundling
allocable to Japan and the Licensed Territory, and all amounts so paid over to
Licensee shall be deemed to constitute additional Recoupable Amounts (as such
term is hereinafter defined) under this Agreement.
RECOUPMENT.
Licensee shall be entitled to apply the aggregate amount by which (a) royalties
applied or accrued under this Agreement (except as provided below with respect
to royalties on sales of Licensed Products which are Section 4 Games) exceed (b)
[*] of the amount of any Third Party Fees and Royalties payable by Licensor to
parties having rights with respect to the sale of Licensed Products (the
"Recoupable Amount") to recoup the Option and Advance Fee paid by Licensee to
WMS Industries Inc. pursuant to Section 3 of the GTIS
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 42
Master Agreement (as reduced by the Reduction Amount in accordance with Section
6 of the Third Amendment to the GTIS Master Agreement), until such Recoupable
Amount together with Recoupable Amounts applied or accrued by Licensee under any
Other GTIS Home Computer Software Distribution and License Agreement entered
into by Licensee pursuant to the GTIS Master Agreement ("Other Home Software
Distribution and License Agreements") equal [*] Dollars. Notwithstanding the
foregoing, however, the Recoupable Amount shall not include any royalties
payable by Licensee to Licensor with respect to the sale of Licensed Products
which are Section 4 Games in North America.
If the Atari Advance has not been fully recouped by Licensee on the date on
which the total of recoupable amounts under this Agreement and other GTIS Home
Computer Software Distribution and License Agreements entered into pursuant to
the GTIS Master Agreement equals the [*] Dollars Option and Advance Fee paid by
the Licensee under the GTIS Master Agreement, then royalties otherwise payable
under this Agreement shall be recoupable against the Atari Advance in the manner
set forth in this Schedule B until the Atari Advance shall be fully recouped. In
determining whether the Atari Advance has been fully recouped, amounts owed by
Licensee but not yet reported, paid or credited to the Licensor, as well as any
unrecouped portion of the Atari Advance which has otherwise actually been paid
to Licensee by Midway or the Midway Group, shall be deemed recouped by Licensee.
If in respect of any royalty payment period royalties are available for
recoupment of the Atari Advance under any one or more of the distribution and
license agreements entered into under the Atari Agreements, the GTIS Master
Agreement and the GTIS Master Option and License Agreement (Home Video Games)
dated March 31, 1995, as amended (the "GTIS Master Home Video Agreement"), the
Atari Advance shall be recouped from royalties in the following order: (1)
royalties payable under distribution and license agreements entered into under
the Atari Agreements; (2) royalties payable under distribution and license
agreements entered into under the GTIS Master Agreement; and (3) royalties
payable under distribution and license agreements entered into under the GTIS
Master Home Video Agreement.
LIMITATIONS ON FREE AND PROMOTIONAL GOODS; CLOSE-OUTS.
Licensee shall be permitted to distribute free and promotional goods without the
payment of any Third Party Fees and Royalties or other royalties thereon,
subject to the provisions of Section 1 above and within the following
territorial and quantity limits:
United Kingdom,
Germany, Scandinavia,
Benelux, Italy, Spain,
Australia, and Japan): [*] units per country
Other Countries: [*] units per country
From and after March 27, 1998, the limit stated above for Japan shall apply to
the distribution of free and promotional goods by Licensor in such country.
No royalties shall be payable by Licensee to Licensor in excess of any Third
Party Fees and Royalties in connection with the sale by Licensee of
"close-outs." For purposes hereof, "close-outs" shall mean any Licensed Products
that are sold for a price no greater than the sum of direct manufacturing and
shipping costs plus any Third Party Fees and Royalties.
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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SCHEDULE C
MARKETING AREAS
The following countries or related groups of countries shall each be
deemed a single Marketing Area:
United Kingdom* and Ireland
France*
Germany*, Switzerland and Austria
Benelux
Spain and Portugal
Italy
Scandinavia
Former Eastern Bloc and the Baltic States (Latvia, Lithuania, Estonia)
Russia and Rest of the CIS
Rest of Europe (including Turkey)
Africa
Middle East
India and Pakistan
China (PRC excluding Hong Kong and Macao)
Rest of Asia
Australia* and New Zealand
Brazil
Rest of South and Central America and the Caribbean
North America - Section 4 Games only, if applicable
Japan - Section 4 Games or Licensed Products pursuant to
Section 3.6 of this Agreement only , if applicable
* Denotes Special Marketing Area
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<PAGE> 1
CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED.
EXHIBIT 10.20
FIRST AMENDMENT TO
GTIS MASTER OPTION AND LICENSE AGREEMENT FOR ATARI PC GAMES
This first amendment agreement (the "First Amendment") is made and
entered into this 12th day of March, 1998, by and between MIDWAY GAMES INC.
("MIDWAY"), a Delaware corporation with offices at 3401 North California Avenue,
Chicago, IL 60618 and GT INTERACTIVE SOFTWARE CORP. ("GTIS"), a Delaware
corporation with offices at 417 Fifth Avenue, New York, New York 10016.
W I T N E S S E T H:
WHEREAS, on March 27, 1996 WMS Industries Inc. ("WMS") and GTIS entered
into a Master Option and License Agreement for Atari PC Games (the "Master Atari
PC Agreement") pursuant to which WMS granted and agreed to cause its subsidiary,
Atari Games Corporation, to grant to GTIS certain rights with respect to the
manufacture, distribution and sale of versions of Games for use on Designated
Multipurpose Computer Platforms; and
WHEREAS, on July 1, 1996 WMS assigned its rights and delegated its
obligations under the Master Atari PC Agreement together with substantially all
other assets and liabilities comprising the video game business of WMS to its
then wholly-owned subsidiary, Midway; and
WHEREAS, GTIS and Midway desire to amend the Master Atari PC Agreement
as provided herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the parties hereto
agree as follows:
1. Definitions. Capitalized terms used, but not otherwise
defined or revised herein, shall have the meanings ascribed to such terms in the
Master Atari PC Agreement or the form of Home Computer Software Distribution and
License Agreement for Atari Games ("Atari Home Computer Software Distribution
and License Agreement") which is annexed to the Master Atari PC Agreement as
Exhibit A.
In addition, Section 1 of the Master Atari PC Agreement shall
be amended to add or replace definitions as follows:
1.1 "Delivery Date" shall have the meaning provided
in Section 6.1 below.
1.2 "Designated Multipurpose Computer Platforms"
shall mean IBM PC or Apple Macintosh or other compatible multipurpose home
computers which utilize floppy disks or CD-ROMS or other stand alone devices
which may hereafter replace or supplement floppy disks or CD-ROMS in all
operating systems now known or hereafter developed or designed for use on the
aforesaid multipurpose home computers. Designated Multipurpose Computer
Platforms shall not for purposes of this Agreement include (a) dedicated home
game systems, such as those marketed by Nintendo(R), Sega(R), Atari(R), Sony(R),
etc. or (b) On-Line Games.
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1.3 "Foreign Rights Only Games" shall have the
meaning provided in Section 3 below.
1.4 "Game" shall mean any coin-operated video game
(including kits), any home video game and any On-Line Game, released by any
member of the Atari Group or by any licensee of the Atari Group for sale in
commercial quantities in the normal course of business. Home video games shall
include games designed for play on dedicated home systems, such as those
marketed by Nintendo, Sega, Atari, Sony, etc. as well as on multipurpose home
computers, such as those marketed by IBM and Apple.
1.5 "Marketing Area" shall have the meaning provided
in Schedule C to the form of Home Computer Software Distribution and License
Agreement annexed as Exhibit A hereto.
1.6 "New Game Option Notice" shall have the meaning
provided in Section 4 below.
1.7 "New Games" shall have the meaning provided in
Section 3 below.
1.8 "New PC Titles" shall have the meaning provided
in Section 3 below.
1.9 "North America" shall mean (a) the United States
of America, its territories, possessions, and United States military
installations worldwide, (b) Canada and (c) Mexico.
1.10 "On-Line Games" shall mean games which require
access to on-line services, including, without limitation, the Internet, as a
substantial element of the game and which may not be played without such on-line
access, whether or not such games also require the use of floppy disks or
CD-ROMS or other stand alone devices or storage media in order to be played.
1.11 "Option Period" shall mean the period commencing
on the Effective Date and ending on the expiration date, including any
extensions thereof, of GTIS' first option to acquire licenses pursuant to
Section 2.1 of the GTIS Master PC Agreement.
1.12 "Reduction Amount" shall have the meaning
provided in Section 7 below.
1.13 "Required Foreign Release Date" shall have the
meaning provided in Section 6.1 below.
1.14 "Section 4 Game" shall have the meaning provided
in Section 4 below.
1.15 "Section 5.6 Game" shall have the meaning
ascribed in Section 5.6 below.
1.16 "Special Marketing Areas" shall have the meaning
provided in Section 6.1 below.
1.17 "Unaccepted PC Projects" shall have the meaning
provided in Section 3 below.
1.18 "Worldwide Rights Games" shall have the meaning
provided in Section 3.5 below.
1.19 "WMS Group" shall be replaced by reference to
"Midway Group," which shall mean Midway or any subsidiary, affiliate or other
entity, a
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<PAGE> 3
majority of whose capital stock is owned directly or indirectly by Midway or
with respect to which during the term of the Master Atari PC Agreement, Midway,
directly or indirectly, has the legal power, without the consent of any third
party, to direct the acquisition of rights to or exploitation of Games on
Designated Multipurpose Computer Platforms. "WMS" shall be replaced by reference
to "Midway." For purposes of clarification, any entity a majority of whose
capital stock is acquired by Midway and any entity a majority of whose capital
stock is acquired by AGC shall not be deemed a member of the Midway Group or the
Atari Group, respectively, with respect to periods preceding the date on which
Midway or AGC, as the case may be, acquired such capital stock, and (i)
coin-operated video games (including kits), home video games or On-Line Games
which were released by such acquired entity prior to its date of acquisition by
the Midway Group or AGC, as the case may be, shall not be deemed to constitute
Games First Released by the Midway Group or the Atari Group, as the case may be,
unless such coin-operated video games, home video games or On-Line Games are
subsequently released by a member of the Midway Group or the Atari Group (which
shall include such acquired entity), respectively, and (ii) coin-operated games
(including kits), home video games or On-Line Games which are released by such
acquired entity on or after its date of acquisition by the Midway Group or AGC
shall be deemed to be Games First Released by the Midway Group or the Atari
Group, as the case may be, (which shall then include such acquired entity), and
shall be available for license by GTIS (subject to all limitations and
contractual agreements theretofore entered into by such acquired entity prior to
the date of its acquisition by the Midway Group or AGC, including any
limitations on the Midway Group's or the Atari Group's right to sublicense or
subdistribute such Games). (As used in the preceding sentence, the term "home
video games" shall have the meaning provided in the second sentence of Section
1.4 above.)
2. Elimination of Early Termination Events. All
references to "Early Termination Event" in the Master Atari PC Agreement are
hereby deleted in their entirety.
3. Termination of Option to License Games for North
America and Japan. Anything in the Master Atari PC Agreement to the contrary
notwithstanding, GTIS shall no longer have a first option to acquire a license
to manufacture, distribute and sell versions of the Games for play on Designated
Multipurpose Computer Platforms (a) in North America and, (b) from and after
March 27, 1998, in Japan (notwithstanding any provisions of the Japan Territory
Agreement to the contrary and without regard to satisfaction of any further
terms or conditions set forth therein), with respect to: (i) multipurpose home
computer games which were not under development by the Atari Group prior to
August 1, 1997, or for which the Atari Group had not made development advances
prior to August 1, 1997 ("New PC Titles"), (ii) Games which were available for
license by GTIS in accordance with Sections 2.4 or 2.5 of the Master Atari PC
Agreement as of the date hereof (i.e., Games which were the subject to a written
notice of availability given by the Atari Group to GTIS prior to the date hereof
and which, as of the date hereof, have not been rejected by GTIS or the period
during which GTIS' option to license such Game has not expired), but which GTIS
had not accepted as of the date hereof ("Unaccepted PC Projects"), or (iii) any
new Games, whether or not GTIS shall have exercised its option to license such
Games prior to the date hereof, First Released by the Atari Group after March 1,
1997 ("New Games"). (New PC Titles, Unaccepted PC Projects and New Games are
hereinafter sometimes referred to collectively as "Foreign Rights Only Games").
Unless the parties shall agree otherwise in writing, there shall be excluded
from Foreign Rights Only Games any New PC Titles, Unaccepted PC Projects and New
Games which have heretofore been offered to GTIS and which GTIS has declined to
accept, or for which the period during which GTIS had the right pursuant to
Sections 2.4 and 2.5 of the Master Atari PC Agreement to accept such Games has
expired. For clarification purposes, notwithstanding the termination of the
Japan Territory
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<PAGE> 4
Period, (i) Home Computer Software Distribution and License Agreement for Atari
Games entered or deemed entered into prior to the termination of the Japan
Territory Period (i.e., on or before March 27, 1998) and still in effect on
March 27, 1998 shall continue for their term, and (ii) Games which are available
for license by GTIS in accordance with this Agreement as of March 27, 1998
(i.e., Games which were subject to a New Game Option Notice given or to be given
to GTIS by the Atari Group prior to March 27, 1998, and which, as of such date,
have not been rejected by GTIS or the period during which GTIS' option to
license such Game has not expired) shall continue to be available for license by
GTIS in Japan in accordance with the terms of this Agreement and the related
Home Computer Software Distribution and License Agreement for Atari Games.
3.1 Section 2.1 of the Master Atari PC Agreement
shall be amended to provide that GTIS shall have a first option to acquire a
license, in the form of the Atari Home Computer Software Distribution and
License Agreement (as amended pursuant to Section 3.3 below), to manufacture,
distribute and sell outside of North America and, from and after March 27, 1998,
outside of Japan, versions of Foreign Rights Only Games which become Accepted
Games during the Option Period for use solely on Designated Multipurpose
Computer Platforms, provided that such Foreign Rights Only Games are First
Released by the Atari Group or its licensees in North America for play on
Designated Multipurpose Computer Platforms during the Option Period.
3.2 Section 2.2 of the Master Atari PC Agreement
shall be amended to provide that the Atari Group shall not grant a license to
any third parties to manufacture, distribute and sell versions of a Foreign
Rights Only Game in the Licensed Territory, if such Foreign Rights Only Game
would be subject to GTIS' first option to manufacture, distribute and sell
versions of such Foreign Rights Only Game in the Licensed Territory on
Designated Multipurpose Computer Platforms, until such time as GTIS shall have
declined to acquire a license, or the option periods specified in Sections 2.4
or 2.5 of the Master Atari PC Agreement, whichever is applicable, shall have
expired or the applicable Atari Home Computer Software License Agreement shall
otherwise permit. GTIS understands, acknowledges and agrees that (a) with
respect to Foreign Rights Only Games manufactured by the Atari Group under
license from or which are purchased or otherwise acquired from third parties,
the rights granted by the Atari Group to GTIS (i) cannot exceed the rights
obtained by the Atari Group with respect to such Foreign Rights Only Games, (ii)
will be limited to the Licensed Territory, and (iii) are subject to all
limitations imposed on the Atari Group and are subject to all contractual
agreements theretofore entered into by such third party licensors or other
transferors, including limitations on the Atari Group?s right to sublicense or
subdistribute, and the form of Atari Home Computer Software License Agreement
will be deemed modified to the extent so required; and (b) although the Atari
Group is developing Games in the normal course of business, the Atari Group is
under no obligation to develop Games or to present any minimum number of Games
to GTIS under the Master Atari PC Agreement. If the Atari Group develops any
Game internally, then the Atari Group shall, subject to all of the provisions of
the Master Atari PC Agreement, including without limitation the provisions of
Sections 2.1, 2.2, 2.4 and 2.5 thereof (as herein amended), and Sections 4 and
5.5 below, offer to license the Game to GTIS for exploitation throughout the
Licensed Territory in accordance with the terms of the Master Atari PC Agreement
as herein amended. The Atari Group also agrees to use its best efforts to
acquire rights to exploit Games on Multipurpose Home Computer Platforms
throughout the Licensed Territory when it acquires rights to exploit Games on
Multipurpose Home Computer Platforms in North America, provided that the Atari
Group shall not be obligated to acquire such rights if it determines, in its
reasonable judgement, that such rights are not available on commercially
acceptable terms or terms which, in the reasonable judgement of the Atari Group,
would make it uneconomical for the Atari Group to acquire and license such
rights to GTIS hereunder, having due regard for economic and other terms
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<PAGE> 5
and conditions generally applicable to the acquisition of similar rights for
comparable Games in the software industry. If the Atari Group shall determine
that rights to exploit a Game for play on Multipurpose Home Computer Platforms
throughout the Licensed Territory are not available in accordance with the
preceding sentence, then the New Game Option Notice delivered by the Atari Group
to GTIS with respect to such Game shall so indicate.
3.3 The form of the Atari Home Computer Software
Distribution and License Agreement with respect to all Foreign Rights Only Games
and Section 4 Games shall be amended and restated as provided in Exhibit A
hereto.
3.4 Anything herein or in the Master Atari PC
Agreement to the contrary notwithstanding, GTIS shall no longer have the first
option to acquire a license to manufacture, distribute and sell versions of any
Games for play on Designated Multipurpose Home Computers which (a) are Projects
in Progress, except only to the extent that such Projects in Progress constitute
Worldwide Rights Games and are listed on Schedule 1 hereto; or (b) are not
Foreign Rights Only Games (including Section 4 Games).
3.5 A list of those Accepted Games with respect to
which GTIS shall continue to be entitled to manufacture, sell and distribute
Licensed Products in all locations worldwide, including North America (subject
to third party territorial limitations) ("Worldwide Rights Games"), pursuant to
Atari Home Computer Software Distribution and License Agreements is annexed
hereto as Schedule 1.
3.6 Midway represents and warrants that set forth on
Schedule 2 annexed hereto is a complete list of all Games First Released (and
the platform upon which the Game was First Released) by the Atari Group for the
coin-operated, home video or On-Line markets after March 29, 1996.
4. Games Which Are Not Developed by the Atari Group for
Play on Designated Multipurpose Computer Platforms. With respect to Foreign
Rights Only Games which have not heretofore been the subject of a written notice
of availability given by the Atari Group to GTIS in accordance with Sections 2.4
or 2.5 of the Master Atari PC Agreement, the Atari Group shall indicate, in its
notice to GTIS pursuant to Section 2.4 or 2.5 of the Master Atari PC Agreement
(a "New Game Option Notice"), in addition to the information otherwise required
to be provided therein (as amended hereby), whether the Atari Group intends to
develop such Game for play in North America on a Designated Multipurpose
Computer Platform (and if so, on which such Designated Multipurpose Computer
Platform(s) (e.g., IBM, Macintosh, etc.) the Atari Group intends to develop such
Game). If the New Game Option Notice shall indicate that the Atari Group does
not intend to develop such Game for play in North America on a Designated
Multipurpose Computer Platform (or on all Designated Multipurpose Computer
Platforms which GTIS desires to license), then, notwithstanding the proviso at
the end of Section 3.1 above, GTIS may elect to exercise its option to license
such Game for play on a Designated Multipurpose Computer Platform by notice
given in the manner and within the time specified in Section 2.4 or 2.5 of the
Master Atari PC Agreement. A Game which the Atari Group has indicated its
intention not to develop for play in North America on a Designated Multipurpose
Computer Platform is hereinafter referred to as a "Section 4 Game". Upon receipt
of such notice from GTIS, the Atari Group will provide to GTIS or to a third
party developer selected by GTIS an IBM PC or compatible and/or Macintosh
readable disc or discs containing the source code for such Section 4 Game and,
if required by GTIS and available, samples of coin-operated game printed circuit
boards, graphics, sound and music data, user instruction materials, and such
other materials and technical support as are applicable and reasonably available
to the Atari Group for the conversion or development of such Section 4 Game for
play on the Designated Multipurpose Computer Platform. The
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<PAGE> 6
obligation of the Atari Group to furnish such materials is subject to the timely
execution of a confidentiality agreement between the Atari Group and each third
party developer, converter and/or translator involved in the development of the
Section 4 Game in accordance with the Atari Group's usual terms and conditions
for confidentiality agreements with its developers and the requirements of any
third party having rights in the Game. GTIS shall be solely responsible for
developing, converting and localizing such Section 4 Games for play on the
Designated Multipurpose Computer Platform and shall bear [*] of the development
costs (including [*] of any advances) and Third Party Fees and Royalties and
out-of-pocket expenses incurred in connection therewith. Without limiting the
generality of the foregoing, GTIS shall be solely responsible for [*] costs of
programming, artwork, music and sound effects and testing, whether such
development work is performed by the Atari Group or third party developers,
including language translation providers, which GTIS elects to engage for such
purpose. None of such development costs and out-of-pocket expenses incurred by
GTIS shall be recoupable or repayable to GTIS in any manner or for any reason.
Any third party developer designated by GTIS to develop, convert and/or localize
the Section 4 Game for play on the Designated Multipurpose Computer Platform
shall be subject to the consent of the Atari Group, which consent shall not
unreasonably be withheld or delayed. Prior to any manufacture, distribution or
release of the Section 4 Game version by GTIS, GTIS shall furnish to the Atari
Group a completed and functioning Technically Acceptable Master Disc (together
with source code and all related development materials) for the Section 4 Game
version for its prior written approval, which shall not unreasonably be withheld
or delayed. The Atari Group shall own all copyrights, trademarks, intellectual
property and code of such Game version, other than "Pre-Existing Third Party
Materials" and generally available commercial software and any agreement between
GTIS and any third party developer shall explicitly so provide. The Atari Group
shall not, however, own the following (collectively, "Pre-Existing Third Party
Materials"): pre-existing utilities which are proprietary to GTIS, its
developers or their respective licensors and modifications thereto created
during development of the Game version by GTIS and not derived from the
intellectual property rights in the Game or any other materials furnished by the
Atari Group. GTIS will grant or cause its third party developer and all
licensors and others having rights to such Pre-Existing Third Party Materials to
grant to the Atari Group an irrevocable, worldwide, non-exclusive license with
respect to such Pre-Existing Third Party Materials, in perpetuity, without
payment of any royalties (except only the same per unit royalties, if any, as
may be payable by GTIS to its unaffiliated third party developers or licensors
for the use of such Pre-Existing Third Party Materials in connection with sales
by GTIS of the Game version), with the right to sublicense, to reproduce,
display, perform, distribute, make derivative works of, make, sell and otherwise
use such Pre-Existing Third Party Materials in connection with the development,
reproduction, manufacture, marketing, sale, distribution, display, performance,
licensing and other exploitation of the Game version and sequels, conversions or
adaptations (e.g., to other game platforms), or other software derivative works
of the Game version or Game, and any agreement between GTIS and any third party
developer shall contain any provisions necessary for GTIS to grant such license.
With respect to any generally available commercial software which is used in
developing the Section 4 Game version, GTIS shall identify such commercially
available software and the means by which it was used in connection with the
Section 4 Game version at the time that GTIS delivers the Technically Acceptable
Master Disc to the Atari Group as provided above, rather
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
6
<PAGE> 7
than providing the source code of such software (or the executable form of such
software other than as found in the Technically Acceptable Master Disc).
5. Development of Foreign Rights Only Games.
5.1 Sections 2.4 and 2.5 of the Master Atari PC
Agreement are amended to provide that, except as provided above with respect to
Section 4 Games, GTIS shall not be required to pay to the Atari Group [*]
portion of the Atari Group's costs of code development for Foreign Rights Only
Games. GTIS shall be solely responsible for contracting with third party
developers (including, without limitation, the Atari Group) and language
translation providers which it elects to engage to translate and localize
Foreign Rights Only Games and, subject to the obligations of the Atari Group to
encode language translations on a new Technically Acceptable Master Disc
pursuant to Section 10 of the Home Computer Software Distribution and License
Agreement, GTIS shall bear [*] of the costs and out-of-pocket expenses incurred
in connection therewith, none of which costs shall be recoupable or repayable to
GTIS in any manner or for any reason. Any third party developer designated by
GTIS to translate and/or localize the Game for play on the Designated
Multipurpose Computer Platform shall be subject to the consent of the Atari
Group, which consent shall not unreasonably be withheld or delayed.
5.2 Anything to the contrary in Sections 2.4 or 2.5
of the Master Atari PC Agreement notwithstanding, all New Game Option Notices
given by the Atari Group to GTIS with respect to Foreign Rights Only Games need
not set forth a proposed budget for developing a Technically Acceptable Master
Disc for such Game for play on Designated Multipurpose Computer Platforms or the
identity of the Atari Group's proposed developer or developers. The Atari Group
shall not be required to afford GTIS an opportunity to consult with the Atari
Group prior to the Atari Group determining the proposed budget, time frame and
developers.
5.3 If the Atari Group shall notify GTIS in writing
that the Atari Group has determined to develop or acquire a Game for play on
Designated Multipurpose Computer Platforms that it has not theretofore developed
or acquired for the coin-operated or dedicated home game player market pursuant
to Section 2.5 of the Master Atari PC Agreement, such notice shall describe in
reasonable detail the proposed characteristics of the Game and shall set forth
an estimated time frame for developing Technically Acceptable Master Discs for
such Game for play on one or more Designated Multipurpose Computer Platforms. No
estimated budgetary information need be given and GTIS shall have no
responsibility to pay to the Atari Group [*] portion of the costs of code
development with respect to the North American version of such Game. Each such
notice given by the Atari Group to GTIS pursuant to Section 2.4 or 2.5 of the
Master Atari PC Agreement relating to a Game the rights to which are derived
from a license or other agreement with a third party shall set forth a summary
of any material limitations upon the scope of the license in respect thereof
which may be granted to GTIS hereunder, and the amount or method of determining
third party royalties payable thereunder, but such notice need not include any
terms of such license or other agreement to the extent that such terms are
applicable only to platforms other than Designated Multipurpose Computer
Platforms or territories outside of the Licensed Territory.
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
7
<PAGE> 8
5.4 Sections 2.7, 2.8, 2.11, 2.12, and 2.14 of the
Master Atari PC Agreement shall not apply to Foreign Rights Only Games and are
hereby deleted. Notwithstanding the foregoing, however, nothing herein or in the
Master Atari PC Agreement shall be deemed to prevent the Atari Group from
electing to terminate development of a Game or a version of a Game designed for
play on a specific Designated Multipurpose Computer Platform, including a
Foreign Rights Game which has theretofore been the subject of a New Game Option
Notice, at any time prior to the First Release of such Game or Game version if
the Atari Group determines in its sole discretion that further development work
is not technically feasible or economically desirable, provided that, the Atari
Group shall not terminate the development by GTIS of a Section 4 Game. Anything
herein or in the Master Atari PC Agreement to the contrary notwithstanding, if
the Atari Group does not actually First Release a Game on any platform
notwithstanding its original intention to do so (and whether or not the Atari
Group shall theretofore have furnished a New Game Option Notice to GTIS with
respect to such Game), then any option to license the Game shall terminate and
if GTIS has returned a New Game Option Notice electing to accept such Game, the
Atari Group shall notify GTIS of its decision not to release the Game.
5.5 Anything herein (including without limitation
anything in Section 5.4 above) to the contrary notwithstanding, if the Atari
Group elects to terminate development of a Foreign Rights Only Game version for
a Designated Multipurpose Computer Platform which has therefore been the subject
of a New Game Option Notice and if the Atari Group has theretofore commenced and
is then continuing to develop a version of such Foreign Rights Only Game for
release on another home video game platform in North America, then (unless GTIS
shall theretofore have declined to accept such Foreign Rights Only Game or the
period during which GTIS had the right, pursuant to Sections 2.4 and 2.5 of the
Master Atari PC Agreement to accept such Foreign Rights Only Game, has expired)
the Atari Group shall so notify GTIS in writing (a "Termination Notice"). GTIS
shall then have the right upon written notice to the Atari Group (a "Notice of
Assumption"), given within 30 days following its receipt of such Termination
Notice, to assume the continued development of such Foreign Rights Only Game for
the Designated Multipurpose Computer Platform (provided that such Foreign Rights
Only Game version is being developed by the Atari Group internally and not under
any license or other agreement with a third party, unless the Atari Group shall
otherwise have the right to permit GTIS to assume the development of such
Foreign Rights Only Game version) which shall thereupon be deemed and shall
become a Section 4 Game. Nothing herein shall be deemed to require the Atari
Group, when it acquires intellectual property or other rights from any third
party in connection with a Foreign Rights Only Game, to also obtain the right to
permit GTIS to assume the continued development of any Foreign Rights Only Game
version for the Designated Multipurpose Computer Platform pursuant to this
Section 5.5. If GTIS shall elect to assume the development of a Foreign Rights
Only Game version for the Designated Multipurpose Computer Platform pursuant to
a Notice of Assumption, the Atari Group shall offer to make available to GTIS
all materials and work in process to date relating to the development of such
Foreign Rights Only Game version for the Designated Multipurpose Computer
Platform, provided that GTIS shall have paid to the Atari Group the amount
specified in the Termination Notice which shall represent [*] of the costs of
development of the Foreign Rights Only Game version for the Designated
Multipurpose Computer Platform and any advances of Third Party Fees and
Royalties incurred or paid to the date of such Notice of Assumption. If GTIS
shall be unwilling or fail to pay [*]
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
8
<PAGE> 9
development costs and advances of Third Party Fees and Royalties assumed by the
Atari Group as specified in the Termination Notice, the Atari Group shall not be
required to make available to GTIS any materials or work in process relating the
development of the Foreign Rights Only Game version for the Designated
Multipurpose Computer Platform. If GTIS shall have assumed the development of a
Foreign Rights Only Game version for the Designated Multipurpose Computer
Platform as provided in this Section 5.5 above, GTIS shall thereafter be solely
responsible for payment of [*] Third Party Fees and Royalties with respect to
such Game version.
5.6 A game project which GTIS may hereafter propose
for development pursuant to Section 2.15 of the Master Atari PC Agreement from
the existing library of Atari Group games set forth in Schedule 2 to the Master
Atari PC Agreement is referred to as a "Section 5.6 Game."
Section 2.15 of the Master Atari PC Agreement shall be
amended to provide that: (a) royalties payable to AGC which are applicable to
the exploitation of a Section 5.6 Game in North America shall not be recoupable
by GTIS; (b) upon completion of a Technically Acceptable Master Disc containing
a Section 5.6 Game, GTIS shall submit such Technically Acceptable Master Disc,
together with all related materials to AGC for approval pursuant to Section 7.1
of the Home Computer Software Distribution and License Agreement for Atari
Games. Within 30 business days following receipt by AGC of a playable demo
comprising at least ninety (90%) percent of the complete game, together with the
following information: (i) applicable per unit third party developer royalties;
(ii) the configuration of the media on which the Section 5.6 Game will be sold
to the consumer; (iii) the required and recommended configurations of the
Designated Multipurpose Computer Platform on which the Section 5.6 Game is to be
played and (iv) a list of all original equipment manufacturer hardware with
which the Section 5.6 Game is compatible, AGC will notify GTIS whether or not
AGC elects to distribute such Section 5.6 Game in North America and Japan; (c)
if AGC shall elect to distribute the Section 5.6 Games in North America or
Japan, (x) AGC will pay applicable unaffiliated third party developer royalties
to GTIS for each unit sold (pursuant to Section 6 of the Home Computer Software
Distribution and License Agreement for Atari Games), provided that such
unaffiliated third party developer royalties shall not exceed GTIS' own
developer royalties paid for units of the Section 5.6 Game which are sold by
GTIS or its affiliates outside North America at the same Net Wholesale Sales
Price; and (y) GTIS will not be required to pay Third Party Fees and Royalties,
advertising or manufacturing costs with respect to exploitation of the Section
5.6 Game in North America or Japan (except as otherwise provided with respect to
Japan).
6. Marketing.
6.1 The Atari Group shall promptly notify GTIS in
writing with respect to the date upon which the Atari Group shall have First
Released an Accepted Game which is a Foreign Rights Only Game in North America
for play on Designated Multipurpose Computer Platforms (the "Delivery Date").
Within ninety (90) days following its receipt of such notice and a Technically
Acceptable Master Disc with respect to such Foreign Rights Only Game, GTIS shall
notify the Atari Group whether it intends to release such Foreign Rights Only
Game for play on Designated Multipurpose Home Computer Platforms in any or all
of the following countries: Germany, France, the United Kingdom and Australia
("Special Marketing Areas"). Unless GTIS shall have advised the Atari
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
9
<PAGE> 10
Group that it does not intend to release such Foreign Rights Only Game in any of
such Special Marketing Areas, GTIS shall commence actively marketing and selling
such Foreign Rights Only Game in reasonable commercial quantities in such
Special Marketing Areas and in all other Marketing Areas within six (6) months
following such Delivery Date. If GTIS shall have notified the Atari Group that
it does not intend to release an Accepted Game which is a Foreign Rights Only
Game in any Special Marketing Areas or other Marketing Areas, or if GTIS or its
sublicensees shall have failed to commence actively marketing and selling an
Accepted Game which is a Foreign Rights Only Game in any Special Marketing Area
or other Marketing Areas as of a date which is not later than six (6) months
following the Delivery Date with respect to such Accepted Game (the "Required
Foreign Release Date"), then the Atari Group shall have the right, in addition
to any other rights which the Atari Group may have hereunder or under any Atari
Home Computer Software Distribution and License Agreement, upon thirty (30) days
written notice to GTIS, to terminate GTIS' or its sublicensee's right to sell
and distribute such Accepted Game in such Special Marketing Area or other
Marketing Area. Notwithstanding the foregoing, if GTIS shall not have obtained
from the Atari Group all key materials (i.e., the Technically Acceptable Master
Disc, previously requested artwork for U.S. advertising, promotional materials
and packaging) and all necessary approvals from third parties with respect to
such Foreign Rights Only Game (despite GTIS' reasonable efforts to obtain or
assist the Atari Group to obtain on GTIS' behalf such approvals) at least ninety
(90) days prior to the Required Foreign Release Date, then such Required Foreign
Release Date shall be extended until ninety (90) days following the date on
which GTIS has obtained all such necessary key materials and third party
approvals with respect to such Foreign Rights Only Game. If the Atari Group
shall terminate GTIS' right to distribute an Accepted Game in a Special
Marketing Area or other Marketing Area as provided above, then such Special
Marketing Area or other Marketing Area shall be deemed excluded from the
Licensed Territory with respect to such Accepted Game and the Atari Group shall
(a) have the right to sell and distribute or enter into a sublicense agreement
with a third party to sell and distribute such Accepted Game in such Special
Marketing Area or other Marketing Area and (b) have no obligation to pay over or
to account to GTIS with respect to any portion of the proceeds of sale of such
Accepted Game by the Atari Group or its sublicensees in such Special Marketing
Area or other Marketing Area.
For purposes of documenting compliance with this Section 6,
GTIS shall submit a report, as of a date six (6) months following the Delivery
Date, listing the Special Marketing Areas and any other Marketing Area in which
GTIS has not commenced actively marketing and selling an Accepted Game which is
a Foreign Rights Only Game. Such report shall be sent to the Atari Group within
forty-five (45) days after the end of said six (6) month period, and shall
indicate the status for each Special Marketing Area and any other Marketing Area
(indicating the date of the Atari Group's First Release and whether a
sublicensee has been appointed). Such summary report shall be made in good
faith, using the best available information as of the date the report is
submitted.
6.2 The Atari Group shall notify GTIS within 90 days
following the Delivery Date if the Atari Group does not intend to release an
Accepted Game which is a Foreign Rights Only Game for play on Designated
Multipurpose Home Computer Platforms in Japan. If the Atari Group shall not have
so notified GTIS, but the Atari Group or its licensee shall nonetheless fail to
release and commence actively selling and distributing such a Foreign Rights
Only Game version in Japan within six (6) months following its Delivery Date,
then the Atari Group shall so notify GTIS within 45 days following the
expiration of such six-month period. If the Atari Group shall have notified GTIS
that it does not intend to release an Accepted Game which is a Foreign Rights
Only Game for play on Designated Multipurpose Home Computer Platforms or that it
has failed to release such Foreign Rights Only Game version in Japan as
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
10
<PAGE> 11
provided above (in either case, a "Notice"), then GTIS shall have the right,
upon written notice given within 30 days following its receipt of such Notice
from the Atari Group to elect to sell and distribute, or to enter into
sublicensing arrangements to sell and distribute, such Foreign Rights Only Game
for play on Designated Multipurpose Home Computer Platforms in Japan. Any
distribution by GTIS of such a Foreign Rights Only Game version in Japan shall
be in accordance with all of the terms and conditions of the applicable Atari
Home Computer Software Distribution and License Agreement, except that GTIS
shall be solely responsible for payment of all Third Party Fees and Royalties
allocable to the sale of the Game version in Japan and the costs of localizing
the Game version in a new Technically Acceptable Master Disc. (GTIS shall not be
required to pay costs of encoding which are Midway's responsibility under
Section 10 of the Home Computer Software Distribution and License Agreement for
Atari Games.) GTIS' or its sublicensee's right to elect to manufacture, sell and
distribute a Foreign Rights Only Game for play on Designated Multipurpose Home
Computer Platforms in Japan in accordance with this Section shall terminate (and
the Licensed Territory shall cease to include Japan) if GTIS or its sublicensee
shall not have commenced actively marketing such Foreign Rights Only Game
version in Japan within six (6) months following its receipt of the Notice from
the Atari Group referred to above.
7. Reduction in Minimum Guaranteed Advance Royalty. In
consideration for the termination of GTIS' first option to acquire licenses to
manufacture, distribute and sell versions of the Foreign Rights Only Games in
North America and Japan, the Midway Group is paying to GTIS the sum of [*]
Dollars (the "Reduction Amount") by wire transfer of immediately available
funds, which sum shall constitute a reduction of the Minimum Guaranteed Advance
Royalty heretofore paid by GTIS to WMS pursuant to the Master Atari PC
Agreement. The amount which GTIS shall be entitled to recoup out of royalties as
provided in (a) the Atari Home Computer Software Distribution and License
Agreements entered into pursuant to the Master Atari PC Agreement, (b) the Atari
Home Video Distribution and License Agreements entered into pursuant to the
Master Atari Home Video Agreement, as amended, and (c) to the extent not so
recouped from those agreements, out of royalties to the extent provided in the
GTIS Master PC Agreement (as amended) and the GTIS Master Home Video Agreement
(as amended) and related license agreements shall be reduced by the Reduction
Amount being paid concurrently herewith.
8. Representations and Warranties. The representations set
forth in Section 4 and 5 of the Master Atari PC Agreement shall be deemed
confirmed with respect to the Master Atari PC Agreement as amended by this
agreement and made again as of the date hereof by Midway and GTIS, respectively.
9. Confidential Information. The provisions of Section 6
of the Master Atari PC Agreement (as heretofore amended) shall remain in full
force and effect and shall continue to apply to such agreement as amended
hereby.
10. Notices. Notices to the Midway Group shall be sent in
the manner set forth in Section 7 of the Master Atari PC Agreement to:
Atari Games Corporation
c/o Midway Games Inc.
3401 North California Avenue
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
11
<PAGE> 12
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (773) 961-1222
Facsimile Number: (773) 961-1099
With copies to:
Midway Home Entertainment Inc.
1800 South Business Highway 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
Midway Home Entertainment Inc.
1800 South Business Highway 45
Corsicana, Texas 75110
Attention: Mr. Eugene Freeman
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
Notices to GTIS shall also be sent with a copy to:
GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Stephanie Bhonslay, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
11. Miscellaneous. The third sentence of Section 10.1 of
the Master Atari PC Agreement is hereby deleted.
12. Assumption of Obligations. The parties and WMS hereby
confirm the assumption by Midway of all rights, obligations and liabilities of
WMS under the Master Atari PC Agreement, provided, however, that WMS shall
continue to remain liable for its obligations under the Master Atari PC
Agreement or under any Atari Home Computer Software Distribution and License
Agreement entered into pursuant thereto.
13. Other Provisions. Except as otherwise set forth
herein, the Master Atari PC Agreement shall remain in effect in accordance with
its terms.
12
<PAGE> 13
14. Counterparts. This amendment agreement may be
executed in counterparts each of which shall be deemed an original and when
taken together shall be deemed one and the same document.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
MIDWAY GAMES INC.
By:/s/ Orrin J. Edidin
-------------------------------
Orrin J. Edidin
Vice President & Secretary
GT INTERACTIVE SOFTWARE CORP.
By:/s/ Harry M. Rubin
-------------------------------
Harry M. Rubin
President, International Division
Business Affairs
Agreed as to Section 12 above:
WMS INDUSTRIES INC.
By:/s/ Orrin J. Edidin
---------------------------------------
Orrin J. Edidin
Vice President & Secretary
13
<PAGE> 14
Schedule 1
Worldwide Rights Games
Title Platform
- ----- --------
T-MEK IBM PC/DOS(1)
Return Fire IBM PC/Windows 95(2)
Area 51 IBM PC/Windows 95(2)
- -------------------
(1) License agreement provided to GTIS; never signed.
(2) License agreement executed.
14
<PAGE> 15
Schedule 2
AGC New Games First Released Since March 29, 1996(1)
<TABLE>
<CAPTION>
Title Platform of First Release
- ----- -------------------------
<S> <C>
The NHLPA & NHL Present Wayne Gretzky's 3D Hockey Nintendo 64 or Coin-op
San Francisco Rush: Extreme Racing Coin-op
Maximum Force Coin-op
Mace: The Dark Age Coin-op
San Francisco Rush: The Rock Coin-op
Surf Planet Coin-op
California Speed Coin-op
The NHL & NHLPA Present Wayne Gretzky's 3D Hockey '98 Nintendo 64
Olympic Hockey Nagano '98 Nintendo 64
Arcade's Greatest Hits - Atari Collection 1 PlayStation
Ms. Pac-Man SNES
Arcade's Greatest Hits - Atari Collection 2 PlayStation
</TABLE>
- --------
(1)Also includes Games included in the Atari Group library on March 29,
1996 but which are re-released with new copyright notices or other changes after
March 29, 1996. Excludes Projects in Process (on any platform - e.g., Area 51
for Saturn is not included because it corresponds to Area 51 for PC CD-ROM).
15
<PAGE> 16
CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED.
EXHIBIT A
HOME COMPUTER SOFTWARE
DISTRIBUTION AND LICENSE AGREEMENT FOR ATARI GAMES
AGREEMENT made this ___ day of __________, 199__, by and between GT
INTERACTIVE SOFTWARE CORP., a Delaware corporation with offices at 417 Fifth
Avenue, New York, New York 10016 (herein called "Licensee") and ATARI GAMES
CORPORATION, a California corporation with offices at c/o Midway Games Inc.,
3401 North California Avenue, Chicago, Illinois 60618 (herein called
"Licensor").
W I T N E S S E T H:
WHEREAS, Licensor owns or controls the rights in and to the Licensed
Property (which Licensed Property is hereinafter defined on Schedule A attached
hereto);
WHEREAS, Licensee is engaged in the business of manufacturing,
distributing and selling Computer Games (as hereinafter defined; such Computer
Games embodying the Licensed Property shall be hereinafter referred to as the
"Licensed Product");
WHEREAS, Licensee desires to use the Licensed Property in connection
with the manufacture, distribution and sale of the Licensed Product;
WHEREAS, Licensor has obtained rights in and to the Licensed Property
from the following third parties: [insert list](the "Third Parties");
WHEREAS, pursuant to the Master Atari PC Agreement (as defined below)
this Agreement, which is in a form agreed upon by the parties for their
transactions under the Master Atari PC Agreement generally, is to be modified as
required to comply with Licensor's contracts with the Third Parties relating to
the Licensed Property (the "Third Party Contracts"); and
WHEREAS, SCHEDULE A ATTACHED HERETO CONTAINS MATERIAL LIMITATIONS ON
LICENSEE'S LICENSE TO THE LICENSED PROPERTY UNDER THIS AGREEMENT IMPOSED BY THE
THIRD PARTY CONTRACTS, WHICH CONTRACTS CONTROL OVER THE BODY OF THIS AGREEMENT.
THE BODY OF THIS AGREEMENT HAS BEEN LEFT SUBSTANTIALLY IN THE FORM FOUND
ATTACHED TO THE MASTER ATARI PC AGREEMENT.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
1.1. The term "Computer Game" is herein defined as any
Computer Software designed to operate on IBM PC or Apple Macintosh or other
compatible multipurpose home computers, which utilize floppy disks or CD-ROMs or
other stand alone devices which may hereafter replace or supplement floppy disks
or CD-ROMS in all operating systems now known or hereafter developed or designed
for use on the aforesaid multipurpose home computers. Computer Games shall not
include, among other things, (a) Computer Software designed to operate on
dedicated home game systems, such as those marketed by Nintendo(R), Sega(R),
Atari(R), Sony(R), etc. or (b) On-Line Games.
1
<PAGE> 17
1.2. The term "Computer Software" or "Software" shall mean
any computer software containing substantially full and complete computer game
code, including the source code, the assembly code, the object code and such
data files and other files as are deemed necessary for the Licensed Product to
achieve its functional purpose, whereby data and visual images, with or without
sound, can be manipulated, communicated, reproduced or perceived with the aid of
a computer.
1.3. The term "Delivery Date" shall have the meaning ascribed
in Section 6.1 of the First Amendment to the Master Atari PC Agreement.
1.4. The term "Exporter" shall have the meaning ascribed in
Section 3.3 hereof.
1.5. The term "Japan Territory Agreement" shall mean the
letter from WMS Industries Inc. to Licensee dated March 27, 1996 captioned
"Japan Territory".
1.6. The term "Japan Territory Period" shall have the meaning
ascribed in the Japan Territory Agreement.
1.7. The term "Licensed Product" shall have the meaning
ascribed in the second Whereas clause of this Agreement, but shall not include
books which communicate game playing tactics and/or strategies ("hint books")
specifically prepared for Computer Games and such hint books shall not be deemed
Licensed Products hereunder.
1.8. The term "Licensed Property" shall have the meaning
ascribed in the first Whereas clause of this Agreement.
1.9. The term "Licensed Territory" shall have the meaning
ascribed in Section 3.1 of this Agreement, subject to the provisions of Sections
3.4 and 3.6 hereof.
1.10. The term "Marketing Area" shall mean the areas set
forth on Schedule C hereto.
1.11. The term "Master Atari PC Agreement" shall mean the
Master Option and License Agreement for Atari PC Games dated March 27, 1996, as
amended, between Licensee and Midway Games Inc.
1.12. The term "North America" shall mean (a) the United
States of America, its territories and possessions, including United States
military installations worldwide, (b) Canada and (c) Mexico.
1.13. The term "On-Line Games" shall have the meaning
ascribed in Section 1.10 of the First Amendment to the Master Atari PC
Agreement.
1.14. The term "Other Atari Home Computer Software
Distribution and License Agreements" shall have the meaning ascribed in Schedule
B.
1.15. The term "Required Foreign Release Date" shall have the
meaning ascribed in Section 3.4 hereof.
1.16. The term "Section 4 Game" shall have the meaning
ascribed in Section 4 of the First Amendment to the Master Atari PC Agreement.
2
<PAGE> 18
1.17. The term "Section 5.6 Game" shall have the meaning
ascribed in Section 5.6 of the First Amendment to the Master Atari PC Agreement.
1.18. The term "Special Marketing Area" shall mean the
meaning ascribed in Section 3.4 hereof.
1.19. The words "term of this Agreement" or "period of this
Agreement" or "term hereof" or "so long as this Agreement remains in force" or
words of similar connotation shall include the initial period of this Agreement
and the period of all renewals, extensions, substitutions or replacements of
this Agreement.
1.20. The term "Third Party Fees and Royalties" shall mean
all fees, royalties and other participations of any kind or nature payable by
Licensor or its affiliates to any third party, including licensors and others
having intellectual property rights, in connection with the exploitation of the
Licensed Product. There shall be excluded from the term "Third Party Fees and
Royalties" as used herein any fees or royalties payable by Licensor or its
affiliates to "third party developers" or to employees of Licensor or its
affiliates with respect to the development of Licensed Product. For purposes
hereof, a "third party developer" shall refer to a person or an entity who
develops the Licensed Product for or on behalf of Licensor or its affiliates
based substantially upon an intellectual property which Licensor or its
affiliates did not license or otherwise acquire from such third party, or which
Licensor did not otherwise obtain from such third party as a work made for hire.
The term "third party developer" does not include, among other things, any
person or entity (a) who developed materials used in the Licensed Product, but
did not develop the Licensed Product itself (e.g., any person or entity which
developed materials for the coin-operated video game on which the Licensed
Product is based, but who did not perform the development services involved in
the conversion of such coin-operated video game into the Licensed Product) or
(b) from whom Licensor or its affiliates license any trademark or service mark
used in the Licensed Property or any portion of the audiovisual work which is
included in the Licensed Product (e.g., the person or entity develops the
Licensed Product and licenses it to Licensor or its affiliates). If Licensor or
its affiliates acquire from a third party in one transaction the rights to
exploit a Game on multiple platforms, unless Licensee shall otherwise agree,
Licensor shall fund advances, if any, paid to such third party, and any such
advances shall be excluded from the term Third Party Fees and Royalties;
provided, however, that if such advances are recoupable by Licensor or its
affiliates from future royalties payable to such third party, then Third Party
Fees and Royalties shall include such royalties which would otherwise be payable
to such third party were it not for such right of recoupment.
Capitalized terms used, but not defined herein, shall have the
meaning ascribed to such terms in the Master Atari PC Agreement.
2. GRANT OF LICENSE.
2.1. Licensor hereby grants and Licensee hereby accepts, for
the term of this Agreement and subject to the terms hereinafter set forth, the
exclusive license to utilize the Licensed Property solely in connection with the
manufacture, distribution and sale of the Licensed Products in the Licensed
Territory. Licensee shall have the right to sublicense any of the rights granted
to Licensee hereunder with Licensor's prior written consent, which consent shall
not be unreasonably withheld or delayed. It is understood that the term Licensed
Products does not include Computer Software designed for play on dedicated home
video game systems, such as those manufactured by
3
<PAGE> 19
Nintendo, Sega, Sony or Atari, or any other medium of exploitation, including
On-Line Games, handheld games, over the air, cable or fiber-optic transmission
or any ancillary rights related thereto, all of which remain the sole property
of Licensor. No license is granted hereunder for the manufacture, sale or
distribution of Licensed Products to be used as premiums, in combination sales,
as giveaways or to be disposed of under similar methods of merchandising, except
only that Licensee shall have the right, subject to rights of third parties in
the Licensed Property, to distribute Licensed Products as premiums, combination
sales or giveaways solely (a) subject to Licensor's prior written consent, which
shall not unreasonably be withheld or delayed, in connection with the sale and
distribution of other Computer Games licensed to Licensee by Licensor or its
affiliates under Other Atari Home Computer Software Distribution and License
Agreements, and (b) with respect to free or promotional goods in the quantities
set forth on Schedule B. No license is granted hereunder for the exploitation of
ancillary merchandising rights to the Licensed Product; Licensor shall be
entitled to exploit such ancillary merchandising rights for its own account and
Licensee shall have no right or interest therein. Licensee shall not be entitled
to exploit or share in profits derived from any exploitation of games whether or
not having the same or similar title or play characteristics or using similar
Computer Software, in other game platforms, such as coin-operated games or
dedicated home game systems, or in any ancillary rights relating thereto.
2.2. This license does not include any rights to subsequent
versions of the Licensed Property (so-called "sequels" or "derivatives"), such
rights being retained by Licensor, except as the same are otherwise required to
be offered to Licensee under the Master Atari PC Agreement.
2.3. Notwithstanding the foregoing, Licensor reserves the
exclusive right to license the Licensed Property to third party personal
computer hardware or computer peripheral device (or components thereof)
manufacturers ("Bundlers") who are based or whose principal operations are
located in North America (whether or not license arrangements are also made with
such manufacturers" local or regional affiliates for this purpose) for the
purpose of bundling the Licensed Products together with hardware products,
peripheral devices (or components thereof) for distribution in any country
throughout the world (including, without limitation, in the Licensed Territory).
Licensor also reserves the exclusive right to license the Licensed Property to
Bundlers who are based or whose principal operations are located outside North
America for the purpose of bundling the Licensed Products together with hardware
products, peripheral devices (or components thereof) for distribution within and
without the Licensed Territory, provided that [*] of the revenue from such
license is reasonably expected to be derived from distribution of the bundled
Licensed Products outside of the Licensed Territory. Licensee shall have the
sole right to enter into arrangements with Bundlers who are based and whose
principal operations are located in the Licensed Territory for the distribution
of bundled Licensed Products on a non-exclusive basis within the Licensed
Territory, provided that (a) such arrangements shall, in each case, be subject
to Licensor's written consent, which consent shall not unreasonably be withheld
and (b) Licensor shall have the right to withhold its consent to any such
proposed bundling arrangements within the Licensed Territory which conflict with
Licensor's existing or contemplated exclusive worldwide bundling arrangements.
If any Bundler which is based or whose principal operations are located in the
Licensed Territory
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
4
<PAGE> 20
proposes to Licensee an arrangement for the distribution of bundled Licensed
Products outside of the Licensed Territory, such Bundler shall be referred by
Licensee to Licensor and Licensor shall have the sole right to negotiate
separate arrangements with such Bundler for the distribution of bundled Licensed
Products outside of the Licensed Territory. Licensor shall consult with and
advise Licensee, to the extent practicable, reasonably in advance, if Licensor
proposes to enter into bundling arrangements for distribution of Licensed
Products within the Licensed Territory and shall, in this connection, advise
Licensee of Licensor's proposed pricing strategy for the sale of such Licensed
Products to Bundlers. Nothing herein shall however be deemed to limit or
restrict Licensor in establishing such pricing and such other terms and
conditions of sale of Licensed Products on an exclusive or non-exclusive basis
to Bundlers as it deems appropriate in its absolute discretion.
3. TERRITORY.
3.1. Licensee shall be entitled to manufacture, distribute
and sell the Licensed Products in all countries outside of North America, except
[(a) in Japan and (b)]* in countries or locations which are excluded under the
terms of any license agreement between Licensor and any third party having
rights to the Licensed Property. [If the Licensed Products are Section 4 Games,
the foregoing sentence shall read "Licensee shall be entitled to manufacture,
distribute and sell the Licensed Products in all countries except countries or
locations which are excluded under the terms of any license agreement between
Licensor and any third party having rights to the Licensed Property.] [If the
Licensed Products are Section 5.6 Games, the foregoing sentence shall read
"Licensee shall be entitled to manufacture, distribute and sell the Licensed
Products in all countries except (a) North America and Japan, if Licensor shall
have elected to distribute such Section 5.6 Game in those territories pursuant
to Section 5.6 of the First Amendment to the Master Atari PC Agreement and (b)
in countries or locations which are excluded under the terms of any license
agreement between Licensor and any third party having rights to the Licensed
Property.] The territory in which Licensee shall be entitled to manufacture,
sell and distribute the Licensed Products as specified above is herein referred
to as the "Licensed Territory".
*[3.2. With respect to the exploitation by Licensor of the
Licensed Property in Japan, Licensee shall be entitled to share in [*] of the
net profits derived by Licensor from its sale of Licensed Products in Japan. For
purposes hereof, "net profits" shall be calculated as follows:
(a) If Licensor shall exploit the Licensed Property in Japan other than
through its own direct operations (as defined below) (e.g., pursuant to
a sublicense arrangement), "net profits" shall be calculated by
subtracting from the actual monies received by Licensor from the sale
of Licensed Products in Japan (i) an amount equal to [*] of such
receipts (or [*] if Licensor supplies finished goods), representing
Licensor's allocation of overhead expenses, and (ii) all Third Party
Fees and Royalties payable by Licensor in connection therewith, and
(iii) if Licensor supplies finished goods, all of Licensor's direct
- --------
* Include bracketed language if Japan is excluded from the
Licensed Territory pursuant to Section 3 of the First
Amendment to the Master Atari PC Agreement.
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
5
<PAGE> 21
manufacturing and shipping costs. If Licensor is required to localize
the Licensed Products for sale in Japan, Licensor shall also deduct
costs of localization up to [*] of net sales from Licensee's share of
net profits.
(b) If Licensor shall exploit the Licensed Property in Japan through
its own direct operations (i.e., distribution directly by Licensor or
any affiliate of Licensor), "net profits" shall be calculated by
subtracting from the actual monies received by Licensor from the sale
of Licensed Products in Japan (i) an amount equal to [*] of such
receipts, representing Licensor's allocation of overhead expenses, (ii)
all Third Party Fees and Royalties payable by Licensor in connection
therewith, (iii) all of Licensor's direct manufacturing and shipping
costs. If Licensor is required to localize the Licensed Products for
sale in Japan, Licensor shall also deduct actual costs of localization
up to [*] of net sales from Licensee?s share of net profits. Licensor
shall also be entitled to deduct actual advertising costs up to [*] of
net sales from Licensee's share of net profits. Additional advertising
costs in excess of [*] of net sales up to [*] of net sales shall be
shared equally by Licensor and Licensee (and Licensee's share of such
additional advertising costs shall be deducted from Licensee's share of
net profits).
In all cases described above, expenses incurred by an affiliate of Licensor in
connection with the exploitation of the Licensed Product in Japan shall be
deemed to have been incurred by Licensor. Licensor shall account and pay over to
Licensee, not less frequently than quarterly, Licensee's remaining share of net
profits from the sale by Licensor of Licensed Products in Japan. Licensor shall
also inform Licensee of the economic terms of all sublicensing arrangements
under (a) above relating to the exploitation of Licensed Property in Japan.]
3.3. Licensor shall have the exclusive right to license to
third parties or otherwise exploit any of its rights with respect to the
Licensed Property outside of the Licensed Territory (for the sake of clarity,
Licensee acknowledges that any portion of the Licensed Territory in which
Licensee's right to distribute Licensed Products has been terminated in
accordance with Section 3.4 below shall then be deemed outside of the Licensed
Territory), and Licensee shall not manufacture, distribute or sell any Licensed
Products or otherwise exploit the Licensed Property directly or indirectly in
any area other than the Licensed Territory. Without limiting the generality of
the foregoing, Licensee shall not at any time sublicense, distribute or sell any
Licensed Products to any distributor or customer who Licensee knows or could
reasonably expect, based on objective evidence, intends to resell or export the
Licensed Products outside of the Licensed Territory. Except as provided in
Section 2.3 above, Licensor shall not at any time license, distribute or sell
any Licensed Products to any licensee, distributor or customer who Licensor
knows or could reasonably expect, based on objective evidence, intends to resell
or export the Licensed Products within the Licensed Territory (for the sake of
clarity, Licensee acknowledges that Licensor may at any time license, distribute
or sell Licensed Products to any licensee, distributor or customer for
distribution in any portion of the Licensed Territory in which Licensee's right
to distribute Licensed Products has been terminated in accordance with Section
3.4 below). A licensee, sublicensee, distributor or customer who wrongfully
resells or exports
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
6
<PAGE> 22
Licensed Products from the Licensed Territory to territories outside the
Licensed Territory, or from territories outside the Licensed Territory to the
Licensed Territory, or from a country outside of the Licensed Territory to
Japan, is referred to as an "Exporter." Licensor and Licensee shall have the
right, in addition to any other rights which they may have hereunder, to require
the other to terminate or cause the termination of any license, distribution
agreement or arrangement with any such Exporter who is wrongfully distributing
Licensed Products in violation of the rights of the other party. Licensor shall
also have the right to delay for a period up to three (3) months the
introduction of any new Licensed Products into any country (other than the
United Kingdom) in which such Exporter may be located or is operating.
3.4. Within 90 days following its receipt from Licensor of
notice of the Delivery Date and a Technically Acceptable Master Disc with
respect to the Licensed Product, Licensee shall notify Licensor whether it
intends to release the Licensed Product in any or all of the following
countries: Germany, France, the United Kingdom and Australia ("Special Marketing
Areas"). Unless Licensee shall have advised Licensor that it does not intend to
release the Licensed Product in any of the Special Marketing Areas, Licensee
shall commence actively marketing and selling the Licensed Product in reasonable
commercial quantities in such Special Marketing Areas and in all other Marketing
Areas within six (6) months following the Delivery Date. If Licensee shall have
notified Licensor that it does not intend to release the Licensed Product in any
one or more of the Special Marketing Areas or other Marketing Areas, or if
Licensee or its sublicensees shall have failed to commence actively marketing
and selling the Licensed Product in any one or more of the Special Marketing
Areas or other Marketing Areas on or before a date which is not later than six
(6) months following the Delivery Date with respect to such Licensed Product
(the "Required Foreign Release Date"), then Licensor shall have the right, in
addition to any other rights which the Licensor may have hereunder or under the
Master Atari PC Agreement, upon thirty (30) days written notice to Licensee, to
terminate Licensee's and its sublicensee's right to manufacture, sell and
distribute the Licensed Product in such Special Marketing Area or other
Marketing Area. Notwithstanding the foregoing, if Licensee shall not have
obtained from the Atari Group all key materials (i.e., the Technically
Acceptable Master Disc, previously requested artwork for U.S. advertising,
promotional materials and packaging) and all necessary third party approvals
with respect to such Licensed Product (despite Licensee's reasonable efforts to
obtain or assist Licensor to obtain the same on Licensee's behalf) at least
ninety (90) days prior to the Required Foreign Release Date, then such Required
Foreign Release Date shall be extended until ninety (90) days following the date
on which Licensee has obtained all such necessary key materials and third party
approvals with respect to such Licensed Product. If Licensor shall terminate
Licensee's right to distribute the Licensed Product in a Special Marketing Area
or other Marketing Area, as provided above, then such Special Marketing Area or
other Marketing Area shall be deemed excluded from the Licensed Territory and
Licensor and its affiliates shall (a) have the right to manufacture, sell and
distribute or enter into a license agreement with a third party to manufacture,
sell and distribute the Licensed Product in such Special Marketing Area or other
Marketing Area and (b) have no obligation to pay over or to account to Licensee
with respect to any portion of the proceeds of sale of the Licensed Product by
Licensor or its affiliates or licensees in such Special Marketing Area or other
Marketing Area.
3.5. For purposes of documenting compliance with Section 3.4
above, Licensee shall submit a report, as of the date six (6) months following
the Delivery Date, listing the Special Marketing Areas or other Marketing Areas
in which Licensee has not commenced actively marketing and
7
<PAGE> 23
selling an Accepted Game. Such report shall be sent to Licensor within
forty-five (45) days after the expiration of said six (6) month period, and
shall indicate the status for each Special Marketing Area or other Marketing
Area listed (indicating the date that marketing and selling is expected to begin
and whether a sublicensee has been appointed or will be replaced). Such summary
report shall be made in good faith, using the best available information as of
the date the report is submitted.
3.6. Licensor shall notify Licensee within ninety (90) days
following the Delivery Date if Licensor does not intend to release the Licensed
Product in Japan. If Licensor shall not have so notified Licensee, but Licensor
or its licensees shall nonetheless fail to release and commence actively selling
and distributing the Licensed Product in Japan within six (6) months following
its Delivery Date, then Licensor shall so notify Licensee within 45 days after
the end of such six-month period. If Licensor shall have notified Licensee that
it does not intend to release the Licensed Product in Japan or that it has
failed to release the Licensed Product in Japan within six months following its
Delivery Date, as provided above (in either case, a "Notice"), then Licensee
shall have the right, upon written notice given within thirty (30) days
following its receipt of such Notice from Licensor, to elect to sell and
distribute, or to enter into sublicensing arrangements to sell and distribute,
the Licensed Product in Japan. Any distribution by Licensee of the Licensed
Product in Japan shall be in accordance with all of the terms and conditions of
this Agreement, except that Licensee shall be solely responsible for payment of
all Third Party Fees and Royalties allocable to the sale of the Licensed Product
in Japan and the costs of localizing the Licensed Product in a new Technically
Acceptable Master Disc. (Licensee shall not be required to pay costs of encoding
which are Licensor's responsibility as provided under Section 10 below.)
Licensee's and its sublicensee's right to elect to manufacture, sell and
distribute the Licensed Product in Japan in accordance with this Section shall
terminate (and the Licensed Territory shall cease to include Japan) if Licensee
or its sublicensee shall not have commenced to actively sell and distribute the
Licensed Product in Japan within six (6) months following its receipt of the
Notice from Licensor referred to above.
4. TERM.
The license granted hereunder shall be effective on the date hereof and
terminate on the earliest to occur of (a) termination of Licensor's rights
obtained from third parties, (b) five (5) years from the effective date hereof
[for Section 4 Games: five (5) years from the date of Licensor's approval of the
Technically Acceptable Master Disc] or (c) two years from the effective date
hereof if the license granted hereunder shall apply to a Section 4 Game and
Licensee has not delivered to Licensor a completed and functioning Technically
Acceptable Master Disc which shall have been approved by Licensor within such
two-year period.
5. CONSIDERATION.
Licensee shall pay Licensor, with respect to the sale throughout the
Licensed Territory of the Licensed Products, a royalty as specified in Schedule
B annexed hereto on each unit of Licensed Product sold.
6. ACCOUNTINGS.
6.1. Licensee agrees to forward to Licensor, within forty-five
(45) days after the end of each calendar quarter ("Royalty Period"), commencing
with the first calendar quarter during which any unit of
8
<PAGE> 24
the Licensed Product is sold, a report, in reasonable detail and reported
separately, by Marketing Area, of the number of units and average wholesale
price (by sales bracket, as provided in Schedule B hereof) of the Licensed
Products sold within such Royalty Period and the royalty amount due for the sale
of such units calculated in accordance with Sections 5 and 6.3 hereof and any
recoupment claimed in accordance with Schedule B annexed hereto, and Section 3
of the Master Atari PC Agreement. Such report shall also include a cumulative
reconciliation of the number of units of Licensed Products produced by Licensee
to the number of units on hand. For clarification purposes, such cumulative
reconciliation of units shall be reported separately by Marketing Area to
support sales information and facilitate auditing. Licensee agrees that
accompanying each such report shall be payment, in U. S. funds, of the amounts
due to Licensor, if any, in respect of such Royalty Period in excess of any
permitted recoupment. Royalties calculated in foreign currencies shall be
converted to U. S. currency at the spot rate of exchange published in the Wall
Street Journal as of the last day of the Royalty Period. Such reports shall be
required to be submitted with respect to sales and distributions of the Licensed
Product whether or not any amounts are due under the terms hereof.
6.2. Licensee agrees to keep accurate books of account and records
with respect to the Licensed Products, covering all sales, purchases and
inventories of Licensed Products and all royalty fees due under this Agreement
at Licensee's offices (or the offices of Licensee's affiliates) and to permit
(or procure the right for) Licensor at its own expense to have accounting
professionals (which may include Licensor's employees who have accounting
degrees) inspect such books of account and records of Licensee or its
sublicensees during reasonable business hours (but not during the first three
weeks of a calendar quarter), upon prior reasonable written notice, for the sole
purpose of verifying the reports to be provided hereunder. Such inspections,
together with inspections of Licensee's books of account and records pertaining
to other Computer Games licensed to Licensee by Licensor or its affiliates under
Other Atari Home Computer Software Distribution and License Agreements, shall
occur no more frequently than twice during any twelve (12) month period for each
of the Licensee's offices. Licensor's inspectors shall not be physically present
in a specific office of Licensee for more than 10 consecutive business days in
connection with any such inspection, provided that Licensee shall have supplied
all requested information and documentation and responded to questions on a
reasonably prompt basis. Licensee shall promptly furnish to Licensor copies of
any report which Licensee may produce as the result of any audit by Licensee of
the books of account and records of any sublicensee of Licensee. Licensor shall
keep any information obtained from any such inspections in confidence and shall
require that its accounting professionals do so as well. Licensee's books
relating to any particular royalty statement may be examined as aforesaid only
within two (2) years after the date rendered and Licensee shall have no
obligation to permit Licensor to so examine such books relating to any
particular royalty statement more than once for any one statement, unless in
connection with a civil action filed by Licensor against Licensee in connection
with such statement. In the event that any audit by Licensor's accounting
professionals reveals that Licensee has underpaid Licensor by an aggregate of
[*] or more with respect to the specific royalty statements which are the
subject of such audit, Licensee agrees that it shall also reimburse Licensor for
the reasonable documented costs for any such audit (including traveling costs)
up to the amount of the shortfall.
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
9
<PAGE> 25
6.3. Not less than [*] of a shipment to a customer shall be deemed
a sale for royalty purposes on the date of shipment. Not less than [*] of the
balance of the shipment, less actual returns, shall be deemed a sale for royalty
purposes six (6) months following the date of shipment, and the balance of such
shipment, less actual returns not already counted, shall be deemed a sale for
royalty purposes twelve (12) months following the date of shipment.
6.4. Licensor shall permit Licensee, at Licensee's own expense, to
have an independent certified public accountant inspect Licensor's books and
records with respect to the payment by Licensor of Third Party Fees and
Royalties in connection with the Licensed Products, during reasonable hours,
upon prior reasonable written notice and subject to such confidentiality
requirements (including the execution of appropriate confidentiality agreements)
as Licensor may require, for the sole purpose of verifying payment and
calculation by Licensor of such Third Party Fees and Royalties. Licensor's books
and records may be examined by Licensee's representatives not more frequently
than twice in any twelve-month period and Licensee shall otherwise have
substantially the same rights as provided to Licensor under Section 6.2 above.
6.5. In circumstances where Licensor is obligated under this
Agreement to account to Licensee in respect of any entitlement to Licensor's
share of net profits or net proceeds from the exploitation of the Licensed
Product, Licensor shall account substantially in the same manner and in the same
time frame as provided in this Paragraph 6 above. Licensee shall also have
substantially the same rights as provided to Licensor in Section 6.2, provided,
however, that (a) any audit of Licensor's books of account and records shall be
restricted to the areas which are directly applicable to the report(s) being
verified and (b) Licensee shall not have the right to audit the books and
records of any Bundler or licensee of Licensor, provided that any audit by
Licensor of the books and records of its licensee in Japan shall be made by
Licensor's independent certified public accountants and Licensor shall make
available to Licensee the results of such audit as it pertains to Licensee.
6.6. Licensee recognizes that the timely submission of all reports
required to be submitted to Licensor pursuant to Section 6.1 hereof is critical
for Licensor to maintain good relations with its third party licensors as well
as for Licensor's own financial reporting requirements. Licensor recognizes that
its failure to submit timely reports may also affect Licensee's financial
reporting requirements. Therefore, in addition to any other rights and remedies
of Licensor or Licensee, if either party shall be late by more than five (5)
business days with respect to any report and/or royalty payment required to be
submitted to the other party pursuant to Section 6.1 hereof (a "Late Report"),
then the delinquent party shall pay to the other party a late charge ("Late
Charge") at a rate equal to the prime rate designated by Citibank N.A. on any
royalties covered by such Late Report that are actually payable to the other
party or recoupable as provided in Schedule B. Such Late Charge shall be
computed from the 46th day following the last day of the calendar quarter for
which such Late Report is due until the date actually paid. The party entitled
to such report and/or royalty payment may elect to waive payment of any such
Late Charge if the delinquent party shall have provided a reasonable estimate of
royalties due within fifteen (15) days following the end of the calendar quarter
covered by
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
10
<PAGE> 26
such Late Report.
6.7. At the time that the Licensor shall provide to Licensee
notice of availability of a Game pursuant to Section 2.4 or 2.5 of the Master
Atari PC Agreement, Licensor shall provide to Licensee sufficient data to enable
Licensee to calculate Third Party Fees and Royalties payable with respect to
each Licensed Product (without regard to any advances which may have been made
by Licensor). If Licensee is unable to calculate specific Third Party Fees and
Royalties from the data provided, Licensee may request assistance from Licensor
with respect thereto, and Licensor shall use its best efforts to respond within
seven (7) days from the date of such request, but Licensee shall provide all
sales and other data in its possession which are necessary for such
calculations.
7. QUALITY OF LICENSED PRODUCT.
7.1. The Licensed Products as manufactured, advertised, sold,
distributed or otherwise disposed of by Licensee under this Agreement shall be
of a high quality and shall be sold and distributed in packaging prescribed by
Licensor bearing Licensor's trademarks and trade names. Such packaging may
indicate that the Licensed Products are distributed by Licensee. Licensor shall
have the right to determine in its reasonable discretion whether the Licensed
Product meets Licensor's high standards of merchantability. Licensee agrees to
furnish Licensor free of cost for Licensor's written approval as to quality and
style (which approval shall not be unreasonably withheld), samples of the
Licensed Product, together with its proposed advertising, packaging and wrapping
materials, before its manufacture, sale or distribution (whichever first occurs)
and the Licensed Product shall not be sold or distributed by Licensee without
such written approval. Without limiting the generality of the foregoing,
Licensee shall be required to obtain the prior written approval of Licensor with
respect to all proposed advertising, packaging and wrapping materials, even if
materials for such purposes were furnished, in whole or in part, by Licensor.
7.2. If Licensor shall disapprove of any item submitted by
Licensee for approval hereunder, Licensor shall furnish at the time notice of
disapproval is given to Licensee an explanation of the reason(s) for such
disapproval and recommendations for suggested changes and Licensee shall
resubmit such item after changes have been made for Licensor's approval.
7.3. In the event that the quality of any Licensed Product
approved by Licensor shall become less than that approved by Licensor and
Licensee shall fail to raise the quality to the approved level within thirty
(30) days after receiving written notice from Licensor, the license granted
under this Agreement for such Licensed Product shall automatically terminate and
shall remain terminated until Licensor shall subsequently renew its approval of
the Licensed product.
7.4. If disapproval is not received by Licensee within five (5)
business days after Licensor's receipt of the item submitted for approval,
Licensor's approval shall be deemed to have been given. Subsequent to final
approval, Licensor may request the Licensee once each quarter to send, without
charge, a reasonable number of production samples (but in any event not less
than [*] copies of each language version) without payment of any Third Party
Fees and Royalties or other royalty hereunder to Licensor to
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
11
<PAGE> 27
ensure quality control. Should Licensor require additional samples for any
reason other than resale or any other commercial exploitation by Licensor,
Licensee shall be required to sell such samples to Licensor at its cost (but
without payment of any Third Party Fees and Royalties or other royalty
hereunder), but not more than [*] units of each Licensed Product.
8. TRADEMARK AND COPYRIGHT, ETC.
8.1. "Notice" as used in this Section shall mean the following
statutory copyright notice and notice of registration or application for
registration of the licensed trademark:
[Insert Game specific notice]
or such other copyright notices and notices of registration as may be required
by any third party licensors. Licensee shall use the "(TM)" or "(TM)" with the
trademarks of Licensor and its licensors and affiliates, as Licensor may
specify.
8.2. Licensee shall furnish to Licensor samples of all packaging
in which the Licensed Products are sold by Licensee. Licensee shall print, stamp
or mold the Notice on all Licensed Products and on the back of each package or
container used in connection therewith, and Licensee shall print the Notice on
each label, advertisement and promotional release concerning any Licensed
Products, all in accordance with instructions from Licensor, providing, however,
that such notice shall be imprinted on the back of the package or container used
in connection therewith, displayed on the title screen of the Licensed Product,
and in the instruction booklet, if any, packaged with the Licensed Product.
Licensee agrees to execute and deliver to Licensor in such form as Licensor may
reasonably request all instruments necessary to effectuate trademark protection
or to record Licensee as a registered user of any trademarks or to cancel such
registration and if Licensee fails to execute such instruments, Licensee hereby
appoints Licensor Licensee's attorney-in-fact to do so on Licensee's behalf.
Licensee shall also furnish Licensor samples of all advertising or promotional
materials bearing the Notice for Licensor's approval.
8.3. Subject to the terms of this Agreement, Licensee acknowledges
and agrees that: All copyrights, trademarks and service marks and rights to same
referred to in this Section 8 in the name of and/or owned by Licensor shall be
and remain the sole and complete property of Licensor; that all such copyrights,
trademarks and service marks and rights to same in the name of or owned by any
copyright proprietor other than Licensor or Licensee shall be and remain the
sole and complete property of such copyright proprietor; that all trademarks and
service marks which, and/or the right to use which, arise out of the license
hereby granted to use the Licensed Property shall be and remain the sole and
complete property of Licensor; that Licensee shall not at any time acquire or
claim any right, title or interest of any nature whatsoever in any such
trademark or service mark by virtue of this Agreement or of Licensee's uses
thereof in connection with the Licensed Products; and that any right, title or
interest in or relating to any such trademark or service mark, which comes into
existence as a result of, or during the term of, the exercise by Licensee of any
right granted to it hereunder shall immediately vest in Licensor.
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
12
<PAGE> 28
8.4. Licensee agrees to assist Licensor at Licensor's expense to
the extent necessary in the procurement of any protection or to protect any of
Licensor's rights to the Licensed Property. Licensee shall notify Licensor in
writing of any infringements or imitations by others of the Licensed Property on
articles similar to those covered in this Agreement which may come to the
Licensee's attention. Licensor shall have the right to commence action to
enforce its proprietary rights and prosecute any such infringements, and
Licensee agrees to fully cooperate, at Licensor's expense, in any such action.
However, Licensee shall not incur any such expense reimbursable by Licensor
without Licensor's express written approval and all recoveries resulting from
any such action shall belong solely to Licensor. In the event Licensor declines
to pursue any such action, Licensee may, with Licensor's written permission, and
subject to the consent of any third party having rights in the Licensed
Property, institute such an action, and Licensor, at Licensee's expense, shall
cooperate in such action instituted by Licensee and all recoveries resulting
from any such action shall belong solely to Licensee. Licensor shall not
unreasonably withhold or delay its permission to enable Licensee to pursue an
action (if Licensor shall decline to pursue such action) against persons or
entities reasonably believed by Licensee to be counterfeiting or pirating
Licensee's Licensed Products in the Licensed Territory. Licensor shall not
unreasonably withhold or delay its permission to grant to any sublicensee who
requires it, at the time of entering into a sublicense, reasonable rights
(without Licensor's prior consent in each instance) to pursue persons reasonably
believed to be engaged in counterfeiting or piracy of the Licensee Product in
the Licensed Territory.
8.5. During the term of this Agreement and thereafter, Licensee:
(a) will not challenge the ownership or rights of Licensor in
and to the Licensed Property or any copyright or trademark pertaining thereto
developed by or for Licensor, nor attack the validity of the license granted
hereunder or participate in any challenge thereto;
(b) will manufacture, sell and distribute the Licensed
Products in compliance with all applicable laws and governmental regulations in
accordance with the terms of this Agreement;
(c) will not except as set forth in this Agreement, either
directly or indirectly, use or display or authorize others to use or display,
the trademarks, copyrights or proprietary rights of Licensor in connection with
any advertising, assembly, manufacture, distribution, use, sale or lease of any
goods, other than in connection with the manufacture and sale of the Licensed
Products; and
(d) subject to Licensee's best business judgment Licensee
will exercise reasonable efforts to: (i) manufacture sufficient quantities of
the Licensed Product to meet the market demand for same; (ii) conduct
advertising activities to promote the sale of Licensed Product; and (iii) make
any and all arrangements necessary to accomplish such undertakings.
9. MATERIALS.
9.1. Notwithstanding anything contained herein to the contrary,
but subject to Section 4 of the First Amendment to the Master Atari PC Agreement
regarding Pre-Existing Third Party Materials, all artwork, designs and computer
software embodying the Licensed Property, or any reproduction thereof, which are
designed, developed and/or created by Licensee hereunder (or any of its
sublicensees, affiliates, subsidiaries or third party contractors), shall be,
and remain Licensor's sole and exclusive property,
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<PAGE> 29
inclusive of all copyrights and right to copyright therein and thereto for the
life of the copyright therein; provided that during the term of this Agreement,
Licensee shall have the exclusive (except as otherwise provided in this
agreement) right, license and privilege (without any compensation to Licensor
except as provided in Section 5) to use all such above described materials in
connection with its manufacture, sale and distribution of the Licensed Products
in the Licensed Territory.
9.2. Licensor shall make available to Licensee, at Licensor's
actual out of pocket cost, any artwork relating to the Licensed Property which
Licensor owns and which is reasonably available to Licensor for Licensee's use
in connection with the exploitation of the Licensed Property.
10. TRANSLATIONS.
[Note: This section shall be omitted for Section 4 Games.]
In the event that Licensee shall reasonably require the text
associated with any Licensed Product to be translated into a language other than
English, Licensor shall, upon Licensee's written request, provide to Licensee
the text files and the text that appears in bit map files and printed copies of
the script used for audio components of the Licensed Product (the "Text
Materials") and Licensee shall furnish, at its own expense, to Licensor a
translation text thereof. Licensor shall then cause a new Technically Acceptable
Master Disc (as that term is defined in the Master Atari PC Agreement)
containing such translation to be encoded, at Licensor's own expense, and
delivered to Licensee. Notwithstanding the foregoing, Licensor shall not be
required to encode Licensee's translation text in a new Technically Acceptable
Master Disc if Licensee shall not have furnished its translation text to
Licensor within ten (10) business days following its receipt from Licensor of
complete Text Materials. Text Materials delivered by Licensor to Licensee shall
be deemed complete unless Licensee shall have notified Licensor in writing that
such Text Materials as delivered are incomplete, specifying in detail the
reasons therefor, within five (5) business days following Licensee's receipt
thereof. In such case Licensor shall furnish any additional required Text
Materials as promptly as possible and Licensee shall have ten (10) additional
business days from its receipt of such additional Text Materials in which to
furnish its translation text to Licensor.
11. REPRESENTATIONS AND WARRANTIES.
11.1. Licensor hereby represents and warrants that this Agreement
has been duly authorized, executed and delivered by Licensor; Licensor has the
full power and authority to enter into this Agreement and perform its
obligations hereunder; this Agreement constitutes the valid and binding
obligation of Licensor, enforceable in accordance with its terms; the making of
this Agreement does not violate any agreement, right or obligation existing
between Licensor and any other person, firm or corporation; and the Licensed
Property, if used pursuant to the license granted herein, will not infringe upon
or violate any rights of any third party.
11.2. Licensee hereby represents and warrants that this Agreement
has been duly authorized, executed and delivered by Licensee; Licensee has the
full power and authority to enter into and perform its obligations hereunder;
this Agreement constitutes the valid and binding obligation of Licensee,
enforceable in accordance with its terms; the making of this Agreement does not
violate any agreement, right or obligation existing between Licensee and any
other person, firm or corporation; and its manufacture, advertisement,
distribution and sale of the Licensed Products
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<PAGE> 30
will be in accordance with the terms of this Agreement so as not to infringe
upon or violate any rights of any third party.
12. INDEMNIFICATION.
12.1. Each party agrees to indemnify and hold the other (including
officers, directors, agents and employees of such party or its subsidiaries,
affiliates and sublicensees) harmless against any loss, damage, expense or cost
(including reasonable attorneys' fees) arising out of any claim, demand or suit
or judgment resulting from any breach of any warranty or representation set
forth in Section 11 above. Each party shall promptly inform the other of any
such claim, demand, suit or judgment.
12.2. In connection with any such claim, demand or suit referred
to above, the party so indemnifying (the "Indemnitor") agrees to defend, contest
or otherwise protect the indemnified party (the "Indemnitee") against any such
suit, action, investigation, claim or proceeding at the Indemnitor's own cost
and expense. The Indemnitee shall have the right, but not the obligation to
participate, at its own expense, in the defense thereof by counsel of its own
choice. In the event that the Indemnitor fails timely to defend, contest or
otherwise protect against any such suit, action, investigation, claim or
proceeding, the Indemnitee shall have the right to defend, contest or otherwise
protect against the same, and, upon ten (10) days' written notice to the
Indemnitor, make any compromise or settlement thereof and recover the entire
cost thereof from the Indemnitor, including without limitation, reasonable
attorneys' fees, disbursements and all reasonable amounts applied as a result of
such suit, action, investigation, claim or proceeding or compromise or
settlement thereof. The obligations hereunder shall survive the termination or
expiration of this Agreement.
12.3. Neither Licensor nor Licensee shall be liable for any
incidental, consequential or punitive damages to the other.
13. EVENTS OF DEFAULT AND TERMINATION.
Either party shall be deemed to be in default of this Agreement in
the event either of the following occurs:
(a) Such party fails to make any payment or furnish any
statement in accordance herewith, provided that the defaulting party shall have
been given a first written notice of such default and a period of at least 15
days in which to cure such default and, if such default shall not have been
cured within such period, the defaulting party shall have been given a second
written notice of such default and a further period of at least 10 days in which
to cure such default; or
(b) Such party fails after thirty (30) days' written notice
to the other party to comply with any other of the defaulting party's
obligations hereunder.
14. EXPIRATION OR TERMINATION OF AGREEMENT.
Upon expiration or termination of this Agreement, all rights
granted to Licensee herein shall forthwith revert to Licensor with the following
consequences:
(a) All unpaid royalties shall be due and payable in
accordance with Section 6.1 hereof.
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<PAGE> 31
(b) Licensor shall thereafter be free to license others to
use the Licensed Property in connection with the manufacture, advertisement,
distribution and sale of items identical or similar to the Licensed Products in
the Licensed Territory.
(c) In the event of termination or expiration of this
Agreement, other than a termination by Licensor as a result of a material breach
of this Agreement by Licensee, Licensee may continue to sell for a period of one
hundred eighty (180) days after the effective date of termination all approved
copies of the units of the Licensed Product produced prior thereto.
15. CONFIDENTIAL INFORMATION.
Each of the parties shall keep in confidence and shall not
disclose to any third party, without the written permission of the other party,
the terms of this Agreement and the proprietary information of the other party
made known to it under this Agreement. This requirement of confidentiality shall
not apply to information that is (a) in the public domain through no wrongful
act of the disclosing party; (b) rightfully received by the disclosing party
from a third party who is not bound by a restriction of nondisclosure; (c)
already in the disclosing party's possession without restriction as to
disclosure; or (d) is required to be disclosed by applicable rules and
regulations of government agencies or judicial bodies. This obligation of
confidentiality: (i) shall survive termination of this Agreement and (ii) shall
extend to any subcontractor of either party and each party agrees to obtain from
each such subcontractor a written agreement to abide by the foregoing
confidentiality requirements. Each of the parties shall be entitled to seek
injunctive or equitable relief to prevent the breach or threatened breach by the
other of the provisions of this Section and to secure its enforcement.
16. NOTICES.
Any notice, consent, approval, request, waiver or statement to be
given, made or provided for under this Agreement shall be in writing and deemed
to have been duly given (i) by its delivery personally or by express mail; or
(ii) five (5) days after its being mailed, air express, registered or certified,
return receipt requested in a U.S. Post Office addressed as follows:
TO LICENSEE: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Mr. Ron Chaimowitz
Telephone Number: (212) 726-6508
Facsimile Number: (212) 679-6850
WITH A COPY TO: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Mr. Harry Rubin
Telephone Number: (212) 726-6523
Facsimile Number: (212) 679-6850
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<PAGE> 32
WITH A COPY TO: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Alan Behr, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
WITH A COPY TO: GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Stephanie Bhonslay, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
TO LICENSOR: Atari Games Corporation
c/o Midway Games Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (773) 961-1222
Facsimile Number: (773) 961-1099
WITH A COPY TO: Midway Home Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
WITH A COPY TO: Midway Home Entertainment Inc.
1800 South Business 45
Corsicana, Texas 75110
Attention: Mr. Eugene Freeman
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
WITH A COPY TO: Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
or such other address as either party may designate by notice given as
aforesaid.
17. MISCELLANEOUS.
17.1. This Agreement is personal to Licensee as one party and
Licensor as the other party. Neither this Agreement nor any party's rights under
it may be assigned, in whole or in part, nor may Licensee's or Licensor's rights
or obligations hereunder be delegated, in whole or in part, to any person or
party without the prior written consent of the other party, except that any
party may assign its rights and delegate obligations to any of its direct or
indirect wholly-owned subsidiaries or affiliates or to any person, firm or
corporation owning or acquiring all or substantially all of the stock or assets
of that party, as long as that party remains fully liable for its obligations
hereunder. Any sale of not less than 50.1% of the stock or assets of Licensor
shall include a requirement for the assumption by the purchaser of all
covenants, obligations and duties undertaken by Licensor pursuant to the terms
of this Agreement, including its obligations with
17
<PAGE> 33
respect to Licensed Products and the intellectual property from which they are
derived. This Agreement shall bind the parties, their successors and permitted
assignees and delegees. Licensor, as one party, and Licensee as the other party,
are each liable for their respective obligations under the terms of this
Agreement.
17.2. The entire understanding between the parties hereto relating
to the subject matter hereof is contained herein. This Agreement cannot be
changed, modified, amended or terminated except by an instrument in writing
executed by the parties hereto.
17.3. No waiver, modification or cancellation of any term or
condition of this Agreement shall be effective unless executed in writing by the
party charged therewith. No written waiver shall excuse the performance of any
act other than those specifically referred to therein and no waiver shall be
deemed or construed to be a waiver of such terms or conditions for the future or
any subsequent breach thereof.
17.4. This Agreement does not constitute and shall not be
construed as constituting a partnership or joint venture between Licensor and
Licensee, and neither Licensor nor Licensee shall have any right to obligate or
bind the other in any manner whatsoever, and nothing herein contained shall give
or is intended to give any rights of any kind to any third persons.
17.5. This Agreement shall be governed by the laws of the State of
Illinois applicable to contracts made and to be wholly performed in the State of
Illinois.
17.6. If any provision of this Agreement is or becomes or is
deemed invalid, illegal or unenforceable under the applicable laws or
regulations of any jurisdiction, either such provision will be deemed amended to
conform to such laws or regulations without materially altering the intention of
the parties or it shall be stricken and the remainder of this Agreement shall
remain in full force and effect.
17.7. This Agreement may be executed in counterparts each of which
shall be deemed an original and when taken together shall be deemed one and the
same document.
17.8. Notwithstanding anything to the contrary in this Agreement,
the parties agree that this Agreement is deemed amended wherever and however
necessary to conform to the requirements and limitations of the [insert list of
third party contracts]. Material limitations thereof, as well as information
necessary to calculate Third Party Fees and Royalties are set forth in Schedule
A.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ATARI GAMES CORPORATION
By:_____________________________
GT INTERACTIVE SOFTWARE CORP.
By:_____________________________
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<PAGE> 34
SCHEDULE A
[Insert description of Licensed Property]
19
<PAGE> 35
SCHEDULE B
ROYALTIES
Licensee shall pay royalties in an amount equal to the following
percentages of the Net Wholesale Sales Price of a Unit sold and not returned:
Net Wholesale Sales Price Royalty %
$[*] or greater [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
[*] [*]
At Net Wholesale Sales Prices, as hereafter defined, between $0.01 and [*] the
above percentages shall be prorated based upon the next highest and next lowest
royalty percentage. For example, at a Net Wholesale Sales Price of [*], the
royalty percentage shall be [*]. Notwithstanding the above, if the Licensed
Products cost [*] or more to develop or acquire ("Premium Products"), the
minimum per unit royalty for such Premium Products shall be calculated as
follows: the minimum per unit royalty during the six-month period commencing on
the date on which the Premium Product was First Released shall be an amount
equal to [*] of the product of (1) the Net Wholesale Sales Price of such
Premium Product as of the date of release multiplied by (2) the royalty
percentage which corresponds to such Net Wholesale Sales Price on the table set
forth above (prorated as appropriate). Thereafter, there shall be no further
minimum per unit royalty.
"Net Wholesale Sales Price" shall be that price invoiced by Licensee to its
customers, less any price discounts, rebates or credits granted at the time of
sale and taxes invoiced to customers (including VAT). Sales made other than at
arm's length to a bona fide unaffiliated third party purchaser shall be deemed
to have been made at the Net Wholesale Sales Price which would have been
charged by Licensee to a bona fide unaffiliated third party purchaser in an
arm's length transaction. No deduction shall be made for bad debts or other
uncollected amounts, advertising allowances, including cooperative advertising,
or any other costs incurred in manufacturing, selling or distributing the
Licensed Products. In the event that Licensee's experience with respect to bad
debts and uncollectible amounts during any calendar year in respect of sales of
Licensed Products under this Agreement and all Other Atari Home Computer
Software Distribution and License Agreements entered into between Licensor and
its affiliates and Licensee under the Master Atari PC Agreement, shall exceed
[*] of Licensee's aggregate net sales of Licensed Products under this Agreement
and all such Other Atari Home Computer Software Distribution and License
Agreements during such calendar year ("Excess Bad
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 36
Debts"), then Licensee shall be entitled to receive a credit against royalties
payable under this Agreement or any Other Atari Home Computer Software
Distribution and License Agreement determined as follows: the average of the
weighted Net Wholesale Sales Prices of all Licensed Products sold under this
Agreement and all Other Atari Home Computer Software Distribution and License
Agreements during such calendar year shall be determined, and the royalty
percentage which corresponds thereto in the table above (prorated as
appropriate) shall be multiplied by the amount of Excess Bad Debts for such
calendar year to determine the amount of such credit.
Royalties for "direct response sales" shall be calculated by multiplying [*] of
the royalty percentages set forth above (prorated as appropriate) times
Licensor's net receipts from such sales and, for purposes of determining the
applicable royalty percentages in the table set forth above, the amount of such
net receipts shall be substituted for "Net Wholesale Sales Price." The minimum
per unit royalty shall be [*] of the minimum per unit royalty applicable to
sales other than "direct response sales" as set forth in the first paragraph of
this Schedule B. Direct response sales shall refer to sales made directly to
consumers other than from a fixed retail location and shall include catalogue
sales, direct mail, print and television sales. Licensee's net receipts from
direct response sales shall be based upon actual monies received, less amounts
separately paid by purchasers as sales taxes and shipping and handling charges.
Where the Licensed Property (whether acquired from a third party or developed by
Licensor or any entity which at any time was or is an affiliate of Licensor) has
not been embodied in a coin-operated video or pinball game, whether distributed
by Licensor or any entity which at any time was an affiliate or a member of the
Atari Group, or will not be embodied in a coin-operated video or pinball game
distributed within 60 days from the release of the Licensed Product,
institutional advertising costs (i.e., radio, television and print advertising
to the general public), will be shared equally ("Shared Institutional
Advertising") by Licensee and Licensor, provided that (a) the portion of the
Shared Institutional Advertising costs to be borne by Licensor shall not exceed
[*] of the Net Wholesale Sales Price of the Licensed Product, and shall only be
payable in that portion of the Licensed Territory in which Licensee itself (and
not its sublicensees) actually pays for institutional advertising costs and (b)
all such Shared Institutional Advertising costs and budgets therefor shall have
been previously approved in writing by Licensor. Licensee at its own cost and
expense shall be solely responsible for all in store and cooperative advertising
costs associated with the sale of Licensed Products in the Licensed Territory.
ADJUSTMENTS TO ROYALTIES
Anything above to the contrary notwithstanding:
1. If Licensor is obligated to pay any Third Party Fees and Royalties
with respect to the sale of Licensed Products, the per unit royalties to be paid
by Licensee to Licensor with respect to such Licensed Products shall be equal to
[*] of all such Third Party Fees and Royalties, plus the greater of (a) the
royalty otherwise payable to Licensor as provided above and (b) the other [*] of
such Third Party Fees and Royalties. In no event shall the per unit royalty on
the sale of Licensed Products be less than [*] of such Third Party Fees and
Royalties.
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 37
2. In cases where Licensor has acquired substantially all of the
Licensed Property from a third party, the per unit royalty on the sale of
Licensed Products shall not be less than (a) [*] of Third Party Fees and
Royalties plus (b) [*] of the Net Wholesale Sales Price, provided that the total
Third Party Fees and Royalties set forth in clause (a) above do not exceed
Licensor's Third Party Fees and Royalties in the United States for the same Net
Wholesale Sales Price.
3. In cases where Licensed Products are sold by non-affiliated third
party sublicensees under sublicenses granted by Licensee in accordance with the
provisions of the Master Atari PC Agreement (including any sales under any
bundling arrangement with a non-affiliated third party), royalties shall be
payable by Licensee to Licensor hereunder shall be equal to the sum of (a) all
Third Party Fees and Royalties payable with respect to the sale of such Licensed
Products, plus (b) [*] of the net proceeds received by Licensee from such
non-affiliated third party sublicensee after deducting (i) a fee (the
"Management Fee") equal to [*] of such net proceeds (or [*] in the event of a
bundling arrangement in which Licensee is providing finished goods) to Licensee,
(ii) an amount equal to all Third Party Fees and Royalties, and, (iii) in the
case of non-affiliated third party sublicensees to whom Licensee supplies the
Licensed Product, Licensee's direct manufacturing and shipping costs. Net
proceeds received by Licensor from bundling which are allocable to the Licensed
Territory shall be shared [*] by Licensor and [*] by Licensee after deducting
(q) an amount equal to all Third Party Fees and Royalties, (r) Licensor's direct
manufacturing and shipping costs, (s) a Management Fee of [*] of such net
proceeds which shall be payable to Licensor, and (t) an additional fee equal to
[*] of such net proceeds which shall be payable to the one of Licensee or
Licensor as is arranging for the manufacture of the Licensed Products to be
bundled. In no event shall the per unit royalty payable by Licensee to Licensor
be less than [*] of such Third Party Fees and Royalties.
4. Notwithstanding item 3 above, however, in cases where Licensed
Products are sold in the following Marketing Areas: Africa, Middle East,
India/Pakistan, China, Rest of Asia, Brazil, Rest of South America, Central
America and the Caribbean, royalties payable by Licensee to Licensor hereunder
shall be equal to the sum of (A) all Third Party Fees and Royalties payable with
respect to the sale of such Licensed Products, plus (B) [*] of the net proceeds
received by Licensee from such non-affiliated third party sublicensees, after
deducting (x) a Management Fee equal to [*] of such net proceeds to Licensee,
(y) an amount equal to all Third Party Fees and Royalties, and (z) in the case
of non-affiliated third party sublicensees to whom Licensee supplies the
Licensed Product, Licensee's direct manufacturing and shipping costs. In no
event shall the per unit royalty payable by Licensee to Licensor be less than
[*] of such Third Party Fees and Royalties.
Solely with reference to the Marketing Areas set forth in this item 4,
a "sublicensee" is defined as an entity which Licensee authorizes (whether by
express grant of license or otherwise) to exercise any of the rights in respect
of the intellectual property and/or proprietary rights in the Licensed Property
which are licensed to Licensee under this Agreement (e.g., the right under
copyright to reproduce the Licensed Property, the right under trademark law to
apply the trademarks included in the Licensed Property to goods) and which the
law would not otherwise permit an ordinary purchaser of
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 38
the Licensed Products for resale to consumers to exercise (e.g.,creating an
advertisement to customers which does not use the Licensed Property or Licensed
Product other than a statement that the goods are available for sale, their
price and an (unaltered) image of the goods). The fact that an entity is
authorized by Licensee to assemble Licensed Products into their packaging and
wrapping materials (including any box, manuals, inserts, etc.) for sale to
consumers shall not cause the entity to be considered a "sublicensee" if all
copies of the Licensed Product to be so assembled are sold by Licensee to such
entity in the form which will be sold to consumers and such entity does not
modify the same, and all of the packaging and wrapping materials (including any
box, manuals, inserts, etc.) into or with which such copies are assembled fall
under one or more of the following categories: (i) materials which are purchased
from Licensee, (ii) materials which are manufactured by such entity solely and
without modification from a master which may have been localized or translated,
and which has been approved by Licensor and all third parties having approval
rights in the Licensed Property, or (iii) materials which do not embody in any
way the Licensed Product, Licensed Property or any other property of any party
(e.g., a blank white cardboard retainer intended to hold a CD-ROM in place
inside of a box). The fact that an entity is authorized by Licensee to reproduce
advertising or promotional materials for the Licensed Product shall not cause
the entity to be considered a "sublicensee" if such reproduction is made without
modification from a master which may have been localized and translated and
which has been approved by Licensor and all third parties having approval rights
in the Licensed Property. No implication shall be drawn from the foregoing
definition of sublicensee with respect to other uses of the term "sublicensee"
in other sections of this Agreement.
5. For Licensed Products developed by Licensee pursuant Section 4 or
Section 5.5 (which are deemed to be developed pursuant to Section 4) of the
First Amendment to the Master Atari PC Agreement, the per unit royalty shall be
(a) [*] of the Net Wholesale Sales Price, plus (b) [*] of any Third Party Fees
and Royalties, plus [*] of any developer royalties, payable by Licensor in
connection with the sale of such unit. Sublicensing revenues shall be treated in
the same manner as stated in items 3 and 4 above, however, Licensor's share
shall be (x) [*] of such revenues (instead of [*]) plus (y) [*] of any Third
Party Fees and Royalties, plus [*] of any developer royalties, payable by
Licensor in connection with the sale of such unit.
6. Until Licensee shall have recouped fully the [*] Minimum Guaranteed
Advance Royalty, as provided below, Licensor shall pay over to Licensee
Licensor's share of (a) net profits from the exploitation of the Licensed
Product in Japan, and (b) net proceeds (after deduction of the costs and fees
described in clauses (q) through (t) of the penultimate sentence of item 3
above) from bundling allocable to Japan and the Licensed Territory, and all
amounts so paid over to Licensee shall be deemed to constitute additional
Recoupable Amounts (as such term is hereinafter defined) under this Agreement.
RECOUPMENT.
Licensee shall be entitled to apply the aggregate amount by which (a) Royalties
applied or accrued under this Agreement (except as provided below with respect
to Royalties on sales of Licensed Products which are Section 4 Games or Section
5.6 Games) exceed (b) [*] of the amount of any Third Party Fees and Royalties
payable by Licensor to parties having rights with respect to the sale of
Licensed Products (the "Recoupable Amount") to recoup the
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
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<PAGE> 39
Minimum Guaranteed Advance Royalty paid by Licensee to WMS Industries Inc.
pursuant to Section 3 of the Master Atari PC Agreement (as reduced by the
Reduction Amount in accordance with Section 7 of the First Amendment to the
Master Atari PC Agreement) and the Master Atari Home Video Agreement (as that
term is defined in the Master Atari PC Agreement), until such Recoupable Amount
together with Recoupable Amounts applied or accrued by Licensee under any Other
Atari Home Computer Software Distribution and License Agreement entered into by
Licensee pursuant to the Master Atari PC Agreement ("Other Home Software
Distribution and License Agreements") and under any Atari Home Video
Distribution and License Agreement entered into by Licensee pursuant to the
Master Atari Home Video Agreement (and, to the extent applicable, amounts which
may be recouped against such Minimum Guaranteed Advance Royalty pursuant to the
GTIS Master Home Video Agreement and the GTIS Master PC Agreement) equal [*]
Dollars. Notwithstanding the foregoing, however, the Recoupable Amount shall not
include any royalties payable by Licensee to Licensor with respect to the sale
of Licensed Products which are Section 4 Games or Section 5.6 Games in North
America.
LIMITATIONS ON FREE AND PROMOTIONAL GOODS; CLOSE-OUTS.
Licensee shall be permitted to distribute free and promotional goods without the
payment of any Third Party Fees and Royalties or other royalties thereon,
subject to the provisions of Section 1 above and within the following
territorial and quantity limits:
United Kingdom,
Germany, Scandinavia,
Benelux, Italy, Spain,
Australia, and Japan: [*] units per country
Other Countries: [*] units per country
From and after March 27, 1998, the limit stated above for Japan shall apply to
the distribution of free and promotional goods by Licensor in such country.
No royalties shall be payable by Licensee to Licensor in excess of any Third
Party Fees and Royalties in connection with the sale by Licensee of
"close-outs." For purposes hereof, "close-outs" shall mean any Licensed Products
that are sold for a price no greater than the sum of direct manufacturing and
shipping costs plus any Third Party Fees and Royalties.
- --------
* Certain information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
24
<PAGE> 40
SCHEDULE C
MARKETING AREAS
The following countries or related groups of countries shall each be
deemed a single Marketing Area:
United Kingdom* and Ireland
France*
Germany*, Switzerland and Austria
Benelux
Spain and Portugal
Italy
Scandinavia
Former Eastern Bloc and the Baltic States (Latvia, Lithuania, Estonia)
Russia and Rest of the CIS
Rest of Europe (including Turkey)
Africa
Middle East
India and Pakistan
China (PRC excluding Hong Kong and Macao)
Rest of Asia
Australia* and New Zealand
Brazil
Rest of South and Central America and the Caribbean
North America - Section 4 Games or Section 5.6 Games only, if
applicable
Japan - Section 4 Games or Section 5.6 Games or Licensed
Products pursuant to Section 3.6 of this Agreement
only, if applicable
- --------
* Denotes Special Marketing Area
25
<PAGE> 1
EXHIBIT 10.21
WMS INDUSTRIES INC.
MIDWAY GAMES INC.
MIDWAY HOME ENTERTAINMENT INC.
WILLIAMS ELECTRONICS GAMES, INC.
3401 NORTH CALIFORNIA AVENUE
CHICAGO, ILLINOIS 60618
March 12, 1998
GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Gentlemen:
Reference is made to the GTIS Master Option and License Agreement (Home
Video Games) dated March 31, 1995, as amended, including Exhibit A thereto (the
"Midway Master Home Video Agreement"), and the Master Option and License
Agreement for Atari Home Video Games dated March 27, 1996, including Exhibit A
thereto (the "Atari Master Home Video Agreement") (collectively, the "Master
Home Video Agreements"). Capitalized terms used herein but not defined herein
shall have the meanings ascribed to those terms in the Master Home Video
Agreements.
Concurrently herewith, the parties are entering into a Third Amendment
to the GTIS Master Option and License Agreement, dated December 28, 1994, as
amended, and a First Amendment to the GTIS Master Option and License Agreement
for Atari PC Games dated March 27, 1996. The parties also desire to amend the
Master Home Video Agreements in order to make certain conforming and other
changes as provided herein.
1. On July 1, 1996, WMS assigned its rights and delegated its
obligations under the Master Home Video Agreements together with substantially
all other assets and liabilities comprising the video game business of WMS to
its then wholly-owned subsidiary, Midway (which was subsequently renamed Midway
Games Inc.). GTIS, Midway, WMS, Williams Electronics Games, Inc. and Midway Home
Entertainment Inc. (formerly, Williams Entertainment Inc.) hereby confirm the
assumption by Midway and Midway Home Entertainment Inc. of all rights,
obligations and liabilities of WMS and Williams Electronics Games, Inc. under
the Midway Master Home Video Agreement and the assumption by Midway of all of
the rights, obligations and liabilities of WMS under the the Atari Master Home
Video Agreement, provided, however, that in each case, WMS and Williams
Electronics Games, Inc. shall continue to remain liable for their obligations
under the Master Home Video Agreements.
2. With respect to periods from and after July 1, 1996, unless the
context shall otherwise require, references to "WMS Group" shall be replaced in
the Master Home Video Agreements by references to "Midway Group", which shall
mean Midway or any subsidiary, affiliate or other entity, a majority of whose
capital stock is owned directly or indirectly by Midway or with respect to which
during the term of the Master Home Video Agreements, Midway, directly or
indirectly, has the legal power, without the consent of any third party, to
direct the acquisition of rights to or exploitation of Games on Designated
Consumer Game Platforms. With respect to periods from and after July 1, 1996,
unless the context shall otherwise require, references to "WMS" shall be
replaced by references to "Midway." For purposes of clarification, any entity
1
<PAGE> 2
a majority of whose capital stock is acquired by Midway and any entity a
majority of whose capital stock is acquired by AGC, as the case may be, shall
not be deemed members of the Midway Group or the Atari Group, respectively, with
respect to periods preceding its date of acquisition by Midway or AGC, as the
case may be, and (i) home video games designed for play on a specific Designated
Consumer Game Platform which were released by such acquired entity prior to its
date of acquisition by Midway or AGC shall not be deemed to constitute Games
First Released by the Midway Group or the Atari Group, as the case may be,
unless such home video games are subsequently released by a member of the Midway
Group or the Atari Group (which shall include such acquired entity),
respectively, and (ii) home video games designed for play on a specific
Designated Consumer Game Platform which are released by such acquired entity on
or after its date of acquisition by Midway or AGC shall be deemed to be Games
First Released by the Midway Group or the Atari Group, as the case may be (which
shall then include such acquired entity), and shall be available for license by
GTIS (subject to all limitations and contractual agreements theretofore entered
into by such acquired entity prior to the date of its acquisition by Midway or
AGC, including any limitations on the Midway Group's or Atari Group's right to
sublicense or subdistribute such Games).
3. Section 2.9 of the Midway Master Home Video Agreement (as added in
the First Amendment to the Midway Master Home Video Agreement) and Section 2.10
of the Atari Master Home Video Agreement are hereby deleted.
4. All references in the Master Home Video Agreements to an "Early
Termination Event" are hereby deleted. Midway, Williams Electronics Games, Inc.,
Midway Home Entertainment Inc. and WMS hereby confirm that Warner
Communications, Inc. has no current or future right to acquire any or all of the
ownership of AGC.
5. Sections 11 of the forms of Home Video Game Distribution and License
Agreement attached as Exhibits A to each of the Master Home Video Agreements
(regarding translations of the text associated with the Licensed Products) are
amended to provide that Licensor shall not be required to encode Licensee's
translation text in a new Technically Acceptable Master Disk if Licensee shall
not have furnished its translation text to Licensor within ten business (10)
days following its receipt from Licensor of the complete Text Materials. Text
Materials delivered by Licensor to Licensee shall be deemed complete unless
Licensee shall have notified Licensor in writing that such Text Materials as
delivered are incomplete, specifying in detail the reasons therefor, within five
(5) business days following Licensee's receipt thereof. In such case Licensor
shall furnish any additional required Text Materials as promptly as possible and
Licensee shall have ten (10) additional business days from its receipt of such
additional Text Materials in which to furnish its translation text to Licensor.
6. Addresses to which notices shall be sent under the Master Home Video
Agreements (including the applicable notice provisions of all applicable Home
Video Game Distribution and License Agreements for Midway and Atari games) shall
be changed as follows:
Midway Games Inc.
3401 North California Avenue
Chicago, Illinois 60618
Attention: Mr. Neil D. Nicastro, President
Telephone Number: (773) 961-1222
Facsimile Number: (773) 961-1099
With copies to:
2
<PAGE> 3
Midway Home Entertainment Inc.
1800 South Business Highway 45
Corsicana, Texas 75110
Attention: Mr. Byron Cook
Telephone Number: (903) 874-2683
Facsimile Number: (903) 872-8000
Midway Home Entertainment Inc.
1800 South Business Highway 45
Corsicana, Texas 75110
Attention: Mr. Eugene Freeman
Telephone Number: (903) 874-2683
Facsimile Number (903) 872-8000
With a copy to:
Jeffrey N. Siegel, Esq.
Shack & Siegel, P.C.
530 Fifth Avenue
New York, New York 10036
Telephone Number: (212) 782-0700
Facsimile Number: (212) 730-1964
Notices to GTIS shall also be sent with a
copy to:
3
<PAGE> 4
GT Interactive Software Corp.
417 Fifth Avenue
New York, New York 10016
Attention: Stephanie Bhonslay, Esq.
Telephone Number: (212) 726-6981
Facsimile Number: (212) 726-4214
Please indicate your agreement to the foregoing by signing this letter
in the place provided below.
Very truly yours,
WMS Industries Inc.
By:/s/ Orrin J. Edidin
----------------------------
Orrin J. Edidin
Vice President & Secretary
Midway Games Inc.
By:/s/ Orrin J. Edidin
----------------------------
Orrin J. Edidin
Vice President & Secretary
Midway Home Entertainment Inc.
By:/s/ Orrin J. Edidin
----------------------------
Orrin J. Edidin
Vice President & Secretary
Williams Electronics Games, Inc.
By:/s/ Orrin J. Edidin
----------------------------
Orrin J. Edidin
Vice President & Secretary
Accepted and Agreed to:
GT Interactive Software Corp.
By:/s/ Harry M. Rubin
-----------------------------------
Harry M. Rubin
President, International Division
Business Affairs
4
<PAGE> 1
CERTAIN INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
PURSUANT TO RULE 24B-2 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS
AMENDED.
EXHIBIT 10.22
MIDWAY GAMES INC.
MIDWAY HOME ENTERTAINMENT INC.
ATARI GAMES CORPORATION
3401 NORTH CALIFORNIA AVENUE
CHICAGO, ILLINOIS 60618
March 12, 1998
GT Interactive Software Corp.
417 Fifth Avenue
New York, NY 10016
Re: Weighted Averaging in Royalty Accounting
Gentlemen:
Reference is made to the GTIS Master Option and License Agreement dated
December 28, 1994, as amended, and the Master Option and License Agreement for
Atari PC Games dated March 27, 1996, as amended (together, the "Master
Agreements"), and the Home Computer Software Distribution and License
Agreements, and the Home Computer Software Distribution and License Agreements
for Atari Games entered into or to be entered into pursuant thereto (together,
the "License Agreements"). Capitalized terms used but not defined herein shall
have the meanings ascribed in the Master Agreements or the License Agreements,
as the case may be.
To date, GTIS has calculated and reported royalties payable or recoupable
pursuant to the License Agreements on the basis of a weighted averaging of Net
Wholesale Sales Prices across all sales brackets (the "GTIS Method"). Midway"s
position is that the License Agreements, however, require a calculation and
reporting of royalties based upon the application of the percentages set forth
in the royalty table included in Schedule B to the License Agreements (the
"Royalty Table") to the Net Wholesale Sales Prices averaged within each of the
sales brackets included within such Royalty Table (the "Midway Method"). The
parties are considering to agree to use the GTIS Method for the purpose of
calculating royalties on a retroactive and prospective basis as described below.
The parties have agreed to undertake a test (the "Test") of the life of the
Licensed Product release entitled "Mortal Kombat 3" for IBM and compatible
personal computers (the "Game"). (The Game was produced in two versions, Windows
"95 and DOS. The parties have agreed that the Test will include both versions of
the Game in order to accurately reflect the life of the Game.)
The Test will use, for each Royalty Period from release of the Game through
December 31, 1997, only (a) the Net Wholesale Sales Prices for the Game during
that Royalty Period as decreased to reflect "price protection credits"
(sell-through to be assumed on a FIFO basis, such that the credits are applied
to the last units shipped) actually given by GTIS to its retail customers to
reflect such customers' inability to sell the Game at the price anticipated at
the time the Game was purchased without regard to the Royalty Period in which
such price protection credits were given ("Adjusted Prices")
1
<PAGE> 2
and (b) actual sales volumes for gross shipments of the Game during that Royalty
Period as adjusted pursuant to Section 6.3 of the License Agreements for the
Game("Adjusted Sales"). For each such Royalty Period, a total royalty figure
shall be calculated by aggregating all of the results obtained by applying the
Royalty Tables for the Game after the Adjusted Prices and Adjusted Sales have
been used to generate weighted averages within each of the sales brackets in the
Royalty Tables. Such royalty calculation shall be made separately for sales of
the Game in North America and sales of the Game outside of North America. The
total royalty so calculated for a given Royalty Period for sales in North
America shall be referred to as the "North America Royalty" and the total
royalty thus calculated for a given Royalty Period for sales outside of North
America shall be referred to as the "Outside Royalty." No other factors, such as
minimum royalties, which might otherwise be taken into account in computing
royalties, will be included in the Test calculations. The intent of the Test is
to focus on the effect of the difference, if any, in royalties resulting from
the application of the GTIS Method and the Midway Method. The Test will not take
into account royalties which are payable under sublicensing arrangements.
In order to conduct the Test, the parties will proceed as follows:
1. GTIS agrees to undertake immediately to perform and produce
all calculations required for the Test (the "Test Calculations")
and to furnish the same to Midway.
2. The Test Calculations and all underlying invoices and other
supporting documentation (the "Supporting Documentation") will
be provided by GTIS to Midway. Reconciliations, if necessary,
between the Supporting Documentation and the quarterly royalty
information showing all sales previously reported by GTIS to
Midway for the Game will also accompany such data.
3. Upon receipt of all Test Calculations and Supporting Documentation
(including reconciliations, as provided above), Midway will review
same within 60 business days. Any questions or requests for
clarification or additional information by Midway will be responded
to by GTIS within 30 business days.
4. Upon written notification by Midway to GTIS that Midway has
accepted the Test Calculations (after any adjustments or
corrections agreed between the parties) as being materially
correct (the "Notice of Acceptance"), then the following steps
will occur:
a. Within 20 business days following receipt of the Notice of
Acceptance from Midway, GTIS will pay to Midway Home
Entertainment the "Difference Total," plus any applicable
additional Third Party Fees and Royalties, together with
interest on all of the foregoing (excluding recoupable amounts
for Royalty Periods from the release of the Game through
December 31, 1997) as set forth in the License Agreements for
the Game calculated from the appropriate dates for each of the
Royalty Periods. The "Difference Total" is the sum of the
following differences calculated for each Royalty Period from
release of the Game through December 31, 1997: (1) the
difference obtained by subtracting the total royalties
previously reported by GTIS (excluding royalties payable under
sublicensing arrangements and Third Party Fees and Royalties)
for the Royalty Period for sales of the Game in North America
(the "GTIS Reported North America Royalties") from the North
America Royalty for
2
<PAGE> 3
that Royalty Period, and (2) the difference obtained by
subtracting the total royalties previously reported by GTIS
(excluding royalties payable under sublicensing arrangements
and Third Party Fees and Royalties) for the Royalty Period for
sales of the Game outside North America (the "GTIS Reported
Outside Royalties") from the Outside Royalty for that Royalty
Period.
b. In order to perform the adjustments set forth below, the
parties shall calculate two types of "Percentages of
Deviation," each based on a territory.
(i) The "North American Percentage of Deviation" shall be for
the territory of North America. The "GTIS North America
Percentage" shall be determined by dividing (1) the total of
all GTIS Reported North America Royalties for the Royalty
Periods from release of the Game through December 31, 1997, by
(2) the total revenues previously reported by GTIS from sales
of the Game in North America for the Royalty Periods from
release of the Game through December 31, 1997, excluding
revenues from sublicensing arrangements. The "Test North
American Percentage" shall be determined by dividing (1) the
total of all North America Royalties for the Royalty Periods
from release of the Game through December 31, 1997, by (2) the
aggregate of the Adjusted Prices for the Adjusted Sales in
North America for the Royalty Periods from release of the Game
through December 31, 1997. The North American Percentage of
Deviation shall be obtained by dividing (x) the difference
obtained by subtracting the GTIS North America Percentage from
the Test North American Percentage by (y) the GTIS North
America Percentage.
(ii) The "Other Percentage of Deviation" shall be for the
territories of the world excluding North America. The "GTIS
Outside Percentage" shall be determined by dividing (1) the
total of all GTIS Reported Outside Royalties for the Royalty
Periods from release of the Game through December 31, 1997, by
(2) the total revenues previously reported by GTIS from sales
of the Game outside North America for the Royalty Periods from
release of the Game through December 31, 1997, excluding
revenues from sublicensing arrangements. The "Test Outside
Percentage" shall be determined by dividing (1) the total of
all Outside Royalties for the Royalty Periods from release of
the Game through December 31, 1997, by (2) the aggregate of
the Adjusted Prices for the Adjusted Sales outside North
America for the Royalty Periods from release of the Game
through December 31,1997. The Other Percentage of Deviation
shall be obtained by dividing (x) the difference generated by
subtracting the GTIS Outside Percentage from the Test Outside
Percentage by (y) the GTIS Outside Percentage.
c. Each Percentage of Deviation calculated as set forth above
will be applied to all Licensed Products other than the Game
which have been distributed by GTIS pursuant to the License
Agreements prior to January 1, 1998. Within 30 business days
following GTIS' receipt of the Notice of Acceptance from
Midway, GTIS will pay the applicable Licensor an amount equal
to the underpayment of royalties, if any, determined using
each Percentage of Deviation (as set forth below) for
3
<PAGE> 4
each of the Licensed Products (other than the Game), plus any
applicable additional Third Party Fees and Royalties, together
with interest on all of the foregoing (excluding recoupable
amounts applicable to Royalty Periods prior to December 31,
1997) calculated from the appropriate dates for each of the
Royalty Periods. The underpayment of royalties for each such
Licensed Product shall be determined by totaling the
adjustments calculated for each of the two Percentages of
Deviation for each Royalty Period from release of the Licensed
Product through December 31, 1997. The adjustments shall be
determined by multiplying the applicable Percentages of
Deviation by the actual royalties previously reported by GTIS
(excluding royalties from sublicensing and Third Party Fees
and Royalties) for sales of the Licensed Product in the
corresponding territory.
d. The Other Percentage of Deviation will be applied to amend all
applicable License Agreements and Exhibit A to each Master
Agreement, effective as of January 1, 1998, to increase all
royalty rates indicated in the Royalty Tables for Foreign
Rights Only Games. (For example, if the Other Percentage of
Deviation is 17%, and the indicated royalty percentage in the
Royalty Table is now stated at [*], such royalty percentage
will be increased to [*] for the corresponding Net Wholesale
Sales Price.)
Such increased royalty percentages will be effective for all
Foreign Rights Only Games and applied retroactively, where
applicable. Within 20 business days after receiving the Notice
of Acceptance, GTIS shall submit restated royalty reports for
all Foreign Rights Only Games from inception through the last
Royalty Period for which GTIS was required to submit a royalty
report prior to its receipt of the Notice of Acceptance along
with all payments (including any additional Third Party Fees
and Royalties) needed to reflect the adjustment made in such
restated royalty reports and interest thereon as set forth in
the License Agreement.
e. Each Percentage of Deviation will be applied to amend all
applicable License Agreements, effective as of January 1,
1998, to increase all royalty rates indicated on the Royalty
Tables for Worldwide Rights Games. This will result in the
amendment of each such License Agreement to replace the
Royalty Table with two separate tables to be derived
therefrom, one of which is the Royalty Table as amended using
the North American Percentage of Deviation (which would be
applied only to sales in North America), and the other of
which is the Royalty Table as amended using the Other
Percentage of Deviation (which would be applied only to sales
outside of North America.) (For example, if the applicable
Percentage of Deviation is 17%, and the indicated royalty
percentage in the Royalty Table is now stated at [*], such
royalty percentage will be increased to [*] for the
corresponding Net Wholesale Sales Price.) If the License
Agreement includes a royalty cap of [*] above the highest rate
of the Royalty Table, such cap shall be
- --------
* Certain information has been omitted and filed separately with the securities
and exchange commission pursuant to a request for confidential treatment
pursuant to rule 24b-2 under the Securities and Exchange Act of 1934, as
amended.
4
<PAGE> 5
increased by the amount of the increase in the highest Royalty
Table percentage. These adjustments will be effective for
royalty reports submitted for Royalty Periods beginning on and
after January 1, 1998, including retroactive restatement, if
necessary, of royalty reports required to be submitted by GTIS
prior to GTIS' receipt of the Notice of Acceptance. GTIS shall
submit such restated royalty reports within 20 business days
after receipt of the Notice of Acceptance, along with all
payments (including any additional Third Party Fees and
Royalties) needed to reflect the adjustment made in such
restated royalty reports and interest thereon as set forth in
the License Agreement.
f. At such time as GTIS has paid to Midway all amounts owed, if
any, with respect to all Royalty Periods for which royalties
are then payable (including amounts payable under Sections
4(a), (c), (d) and (e) after reflecting any increases in
Royalty Table percentages as required herein), then (i) the
parties agree to utilize the GTIS Method in calculating and
paying royalties to become due under the License Agreements,
Section 6.1 of the License Agreements shall be deemed amended
to remove the phase "by sales bracket" occurring in the
parenthetical clause in the first sentence thereof, and GTIS
shall not be deemed in default for its use of the GTIS Method
during prior Royalty Periods and (ii) the Licensors agree that
all notices of default previously issued to GTIS, insofar as
such notices allege the occurrence of defaults as a result of
GTIS" use of the GTIS Method, shall be deemed withdrawn and
such defaults shall be deemed cured and all other claims or
potential claims by Licensors relating solely to the use by
GTIS of the GTIS Method shall be waived, provided, however,
that nothing herein shall be deemed to withdraw or waive any
other alleged default referred to in any such default notices
or any other claims or potential claims by Licensors by reason
of any incomplete or inaccurate data furnished by GTIS for use
in the Test Calculations.
g. To the extent that GTIS would otherwise be able to recoup
royalties against the recoupable balance of the Option and
Advance Fee and the Minimum Guaranteed Advance Royalty, then
"payment" of any increased royalties as provided herein will
be effected by the submission, by GTIS to Midway within the
stated time frame for payment, of revised statements of
unrecouped balances thereof, which reflect the applications of
such increased amounts to reduce the remaining unrecouped
balances.
h. If the calculations made under Sections 4(a) and (c) above
indicate that GTIS has actually overpaid the amount of
royalties due as adjusted hereunder, then the Licensors under
the applicable License Agreements will refund such overpayment
of royalties to GTIS (but not including any Third Party Fees
Tand Royalties previously paid by GTIS to Licensors unless
Licensors are able to recover such overpaid Third Party Fees
and Royalties from the recipients thereof) within 10 business
days following their receipt of restated royalty reports as
required above and payment of such refund shall be effected by
an increase in the applicable unrecouped balances of the
Option and Advance Fee and/or the Minimum Guaranteed Advance
Royalty.
5
<PAGE> 6
If as a result of any royalty audit conducted by Licensors
with respect to any Licensed Product for Royalty Periods prior
to January 1, 1998, it is determined that the actual
underpayment of royalties with respect to a specific Licensed
Product which resulted from the application of the GTIS Method
as provided above is less than the amount paid (including by
reduction of the unrecouped balances of the Option and Advance
Fee and/or the Minimum Guaranteed Advance Royalty) for such
Licensed Product pursuant to Sections 4(a) or 4(c), then an
appropriate refund shall be made by the Licensor by crediting
such refund against any additional amounts shown to be due
from GTIS to Licensor as a result of such audit.
5. TIS and Midway agree to co-operate with each other in completing the
Test. GTIS agrees to deliver to Midway all Test Calculations and
Supporting Documentation (and reconciliations) no later than June 30,
1998. Pending delivery by Midway to GTIS of a Notice of Acceptance
pursuant to Section 4 hereof or a notice cancelling and terminating
Agreement pursuant to Section 6 below, Licensors will not issue to
GTIS any additional notices alleging the occurrence of any default as
a result of GTIS' use of the GTIS Method for Royalty Periods prior to
GTIS' receipt of a Notice of Acceptance or a notice of termination.
6. If Midway has not given to GTIS a Notice of Acceptance by September
15, 1998, then Midway shall upon written notice to GTIS submit, but
not earlier than July 15, 1998, the matter to an independent auditor
(the "Accountant") to be selected from among Price Waterhouse,
Deloitte & Touche or KPMG Peat Marwick, or if none of the foregoing
shall be willing to accept the engagement, then to another
independent nationally recognized accounting firm other than those
then engaged by Midway or GTIS for resolution. If Midway exercises
such right, the parties shall proceed as follows: (i) the Accountant
shall be engaged immediately and instructed to determine whether the
Test Calculations and Supporting Documentation (and reconciliations)
as supplied by GTIS are in fact materially correct and complete. A
determination that the Test Calculations and Supporting Documentation
are materially complete and correct shall be referred to as a
"Favorable Determination". If the Accountant shall be unable to make
a Favorable Determination, the Accountant shall undertake to produce
materially correct and complete Test Calculations and Supporting
Documentation (and reconciliations). The Test Calculations and
Supporting Documentation (and reconciliations) produced by the
Accountant shall be referred to as the "Accountant's Output"). If the
Accountant determines that GTIS has used all reasonable efforts to
cooperate with the Accountant and provide information, access and
materials requested by the Accountant in a prompt fashion, but no
materially correct or complete Test Calculations and Supporting
Documentation (and reconciliations) can be produced, then the
Accountant, if it determines that Test Calculations approximating
materially correct and complete Test Calculations can reasonably be
produced from the available Supporting Documentation, shall produce
such Test Calculations (which shall be referred to as the
"Approximated Calculations"). The Accountant shall be instructed to
complete the foregoing engagement in all events by the later of
September 30, 1998 or within sixty (60) days after engagement (the
"Completion Date"). GTIS shall fully cooperate with the Accountant
and promptly
6
<PAGE> 7
provide such information, access and materials as the Accountant may
request in connection with such engagement. If by the Completion
Date, the Accountant has either (A) made the Favorable Determination,
(B) produced the Accountant's Output or (C) produced the Approximated
Calculations, then the parties shall proceed as if Midway had given a
Notice of Acceptance for the Test Calculations included therein. If
by the Completion Date the Accountant has not made either the
Favorable Determination, produced the Accountant's Output nor
produced the Approximated Calculations, then Midway shall have the
right by giving written notice to GTIS to cancel and terminate this
Agreement which shall then become null and void and of no further
force and effect whatsoever. The parties agree that if this Agreement
is so terminated by Midway, this Agreement, the Test Calculations,
any reconciliations, reports or statements which have been
specifically created for purposes of the Test (but not any invoices
or other Supporting Documents, or other data otherwise required to be
furnished by GTIS or made available to the Licensors in connection
with any audit pursuant to Section 6 of the License Agreements) shall
be deemed to be a confidential negotiation for settlement only and
will not be admissible for any purpose in evidence or usable by any
party for any purpose whatsoever in connection with any notice of
default, suit, action or proceeding in connection with the
enforcement of any rights or remedies of the parties under the Master
Agreements or the License Agreements. If the Accountant makes the
Favorable Determination, then Midway shall pay the Accountant for the
engagement, and if the Accountant does not make the Favorable
Determination, then GTIS shall pay the Accountant for the engagement.
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<PAGE> 8
7. Nothing herein shall be deemed to waive or excuse the performance
by GTIS or any member of the Midway Group or the Atari Group of any
act, term, condition or obligation on its part to be performed
pursuant to the Master Agreements or the License Agreements,
including without limitation, any royalty reporting obligation,
except as specifically provided herein.
If the foregoing is in accordance with your understanding, please sign
below under the words "Agreed To and Accepted".
Very truly yours,
MIDWAY GAMES INC.
By:/s/ Orrin J. Edidin
---------------------------
Orrin J. Edidin
Vice President & Secretary
MIDWAY HOME ENTERTAINMENT INC.
By:/s/ Orrin J. Edidin
---------------------------
Orrin J. Edidin
Vice President & Secretary
ATARI GAMES CORPORATION
By:/s/ Orrin J. Edidin
---------------------------
Orrin J. Edidin
Vice President & Secretary
Agreed to and Accepted:
GT INTERACTIVE SOFTWARE CORP.
By:/s/ Harry M. Rubin
----------------------------------
Harry M. Rubin
President, International Division
Business Affairs
8
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EXHIBIT 10.23
MANUFACTURING AGREEMENT
AGREEMENT dated as of the 6th day of April 1998 between WILLIAMS
ELECTRONICS GAMES, INC. ("WEG"), a Delaware corporation, and MIDWAY GAMES INC.
("Midway"), a Delaware corporation, each with an address at 3401 North
California Avenue, Chicago, Illinois 60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS Industries Inc. ("WMS") is distributing
(the "Distribution") all of its shares of Midway's common stock to holders of
the shares of WMS' common stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, the parties formerly provided for certain arrangements whereby
WEG, an indirect, wholly-owned subsidiary of WMS, has been providing certain
services to Midway and its subsidiaries (collectively, hereinafter, "Midway")
pursuant to a Manufacturing and Services Agreement, dated as of July 1, 1996
(the "1996 Agreement"); and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements under which, following the Distribution, WEG shall continue to
provide certain manufacturing and related services to Midway.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. CERTAIN DEFINITIONS.
1.1 The following terms as used in this Agreement shall have the meanings
set forth below:
1.1.1 "Common Parts" means those parts designated as such from time to
time by Midway and usable by WEG in the manufacture of any of WEG's products.
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1.1.2 "Unique Parts" means video terminals, CPU boards, cabinets and
the other parts designated as such from time to time by Midway.
1.2 Unless the context otherwise requires
1.2.1 Words used in the singular include the plural and words used in
the plural include the singular;
1.2.2 "including" means including without limitation; and
1.2.3 "herein", "hereto" and "hereunder" shall refer to this Agreement
as a whole and not to any particular paragraph or section.
2. EFFECTIVE DATE AND TERM; TERMINATION OF THE 1996 AGREEMENT. This Agreement
is effective as of April 6, 1998 and shall continue in effect for a period of
three years and for successive renewal periods of six months each; provided,
however, that this Agreement may be terminated by either party for any reason
upon six months' prior written notice or otherwise earlier terminated pursuant
to Section 10 hereof. This Agreement supersedes the 1996 Agreement, which is
hereby terminated.
3. COOPERATION. Each of WEG and Midway shall cooperate with the other to
develop an even flow of production and to otherwise effectuate this Agreement
in a manner which will minimize layoffs, rehiring, training and line switching
and which will generally minimize costs and expenses with respect to activities
at WEG's facilities located Waukegan, Illinois (the "Waukegan plant").
4. MANUFACTURING OF COIN-OPERATED VIDEO GAMES.
4.1 Coin-operated video games and kits shall be assembled for Midway by
WEG at the Waukegan plant. Midway shall give WEG purchase orders specifying a
delivery schedule. Within three business days of its receipt of a purchase
order, WEG shall either confirm the delivery schedule or offer an alternative
schedule, which Midway may reject. The parties shall review all open purchase
orders weekly to adjust delivery schedules to permit orderly production
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scheduling.
4.2 Midway may use other sources of manufacture if WEG is unable or
unwilling to meet requested delivery schedules and specifications, industry
standards of quality or competing bona fide quotes.
4.3 WEG shall allocate 65% of its combined production and storeroom square
footage at the Waukegan plant in order to perform its obligations hereunder.
Every six months, the parties shall review the percentage allocation and, if
both parties agree, the percentage to be used with respect to Midway shall be
increased or decreased.
5. INDUSTRIAL ENGINEERING AND ENGINEERING SUPPORT.
5.1 Midway shall conduct its own design and engineering of coin-operated
video games, including programming, graphic design, electrical engineering,
sound engineering and model shop engineering. Midway shall supply to WEG all
designs, artwork, parts lists, blueprints, software and other intellectual
property needed to manufacture the coin-operated video games.
5.2 Certain production engineering activities, such as designing the
process required for the assembly of each game, creating work station profiles
and quality control of incoming parts and the assembly process shall be
provided to Midway by WEG. The costs of these development activities for the
benefit of Midway conducted by WEG employees shall be charged to Midway
pursuant to Section 8 hereof.
5.3 Midway engineers shall generate any engineering change notices
("ECNs") necessary for the modification of the video games and shall be
responsible for communicating these changes to the WEG scheduling managers and
materials planners.
5.4 Notwithstanding anything to the contrary herein, WEG shall bear the
cost of reworking products to the extent that such rework is caused by
manufacturing process errors of WEG. Midway, on the other hand, shall pay the
cost of resources used by WEG to comply with ECNs or otherwise to accommodate
manufacturing process or schedule changes requested by Midway.
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6. PURCHASING, WAREHOUSING AND INVENTORY INSPECTIONS.
6.1 Common Parts shall be purchased by WEG and delivered to the Waukegan
plant on time to meet the schedules set forth in the Midway purchase orders,
confirmed by WEG. Unique Parts shall be purchased by Midway and delivered at
Midway's cost to the Waukegan plant on time to meet the schedules set forth in
the purchase orders. If Midway changes the designation of a Common Part to a
Unique Part, WEG may require Midway to purchase the inventory of such part at
WEG's cost.
6.2 When parts shipments arrive at the Waukegan plant, parts shall be
counted and inspected by WEG on a test basis to ensure that the right number
and quality of parts have been delivered to the plant. WEG shall receive and
warehouse Common Parts and Unique Parts and shall be responsible for tracking
such materials through the completion of assembly. Title to the assembled
video games shall pass to Midway upon the completion of assembly. Midway shall
arrange for warehousing of finished goods promptly after completion. In the
event that Midway and WEG agree that WEG shall warehouse any finished goods,
costs shall be charged to Midway pursuant to Section 8 hereof.
6.3 Upon the request of Midway, WEG shall perform a physical inventory of
Unique Parts on no more than two occasions per fiscal year of WEG. Midway may
perform cycle counts at any and all reasonable times. Midway shall bill WEG
for any shortages discovered. If WEG disputes the accuracy of any such bill,
WEG shall nevertheless pay the invoiced charges on a timely basis, and if such
dispute remains unresolved for 60 days, may submit such dispute to a "Big Six"
accounting firm mutually acceptable to Midway and WEG for resolution, whose
decision shall be final. The cost of such submission shall be borne by WEG;
provided, however, that if such review indicates a discrepancy in WEG's favor
of ten percent (10%) or greater, such cost shall be borne by Midway. If WEG
fails to dispute an annual statement or explanation thereof (of actual
charges) within 60 days after receipt of the statement from Midway, WEG shall
be deemed to accept such charges, provided that WEG shall not be deemed to
accept such charges in the event WEG's dispute thereof is premised upon
Midway's willful misconduct,
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malfeasance or fraud.
7. SHIPPING. WEG shall package the finished games and perform dock services
such as loading trailers and entering the shipment into the bar code-based
finished inventory management system, all in accordance with Midway's
instructions. Midway shall prepare the bills of lading.
8. BILLING AND PAYMENT PROCEDURES.
8.1 Midway shall pay for Common Parts used in video games upon the
completion of assembly at WEG's actual costs plus 9%.
8.2 Midway shall pay for actual direct labor identified to Midway products
plus fringe benefits at WEG's actual rates plus 9%.
8.3 The Waukegan plant's operating costs shall be either identified as
Midway costs and charged to Midway or allocated to Midway based upon the
percentage of the floor space allocated to Midway pursuant to Section 4.3
hereof or shall be otherwise allocated as the parties shall agree. Such
allocated costs include, without limitation, manufacturing costs, materials
management costs, quality assurance costs and administration costs. WEG shall
supply to Midway an annual budget covering such operating costs by June 1 of
each year. The budget shall be updated quarterly on each September 20,
December 20 and March 20. The operating amount included in the payments made
pursuant to Section 8.4 hereof shall be constant during each quarter,
regardless of the actual production during the payment period.
8.4 All costs of WEG to be paid by Midway as described in this Agreement
shall be increased by a 9% fee. Materials, direct labor and fringe benefits
shall be billed on a daily basis, and operating costs shall be billed to Midway
twice per month on the last and 15th day of each month pursuant to a statement
of actual (where known) and estimated charges, based on WEG's good faith
estimates, subject to reconciliations, as described in Section 8.5. The
statement of charges shall include reasonably detailed explanation of such
actual and estimated charges. Midway shall pay all such charges twice per
month within five days of the receipt of the
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statement for operating costs.
8.5 Within 20 days after the end of each of the first three fiscal
quarters of each year, and annually within 10 days after completion of WEG's
independent annual audit, WEG shall provide Midway with a reconciliation
statement reflecting actual costs identified or allocated to Midway during such
quarter or year under this Agreement and payments in respect thereof, together
with a reasonably detailed explanation of such reconciliation. Midway or WEG,
as the case may be, shall pay the amount reflected on such reconciliation
statement within five days after receipt thereof by Midway.
8.6 If Midway disputes the accuracy of any quarterly or annual
reconciliation statement or explanation submitted by WEG, Midway shall
nevertheless pay the invoiced charges on a timely basis, and if such dispute
remains unresolved for 60 days, may submit such dispute to a "Big Six"
accounting firm mutually acceptable to Midway and WEG for resolution, whose
decision shall be final. The cost of such submission shall be borne by Midway;
provided, however, that if such review indicates a discrepancy in Midway's
favor of ten percent (10%) or greater, such costs shall be borne by WEG. If
Midway fails to dispute an annual statement or explanation thereof (of actual
charges) within 60 days after receipt of the statement from WEG, Midway shall
be deemed to accept such charges, provided that Midway shall not be deemed to
accept such charges in the event Midway's dispute thereof is premised upon
WEG's willful misconduct, malfeasance or fraud.
9. DUTY OF CARE; INSURANCE; INDEMNIFICATION.
9.1 WEG shall provide its services hereunder in accordance with its
standard policies, procedures and practices as the same may exist from time to
time and in a professional and workmanlike manner. WEG shall promptly repair,
at WEG's cost, or replace any defective or damaged units where the defect or
damage results from poor workmanship or handling by WEG, and WEG shall promptly
pay or reimburse Midway for any costs resulting from the same, excluding lost
revenues and other consequential damages. WEG shall maintain product liability
and comprehensive general liability insurance in amounts mutually agreeable to
WEG and
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Midway.
9.2 WEG shall not be liable for any loss, damage, claim, action or
proceeding ("Loss") suffered by Midway, unless such Loss arises from or is
caused by WEG's negligence, fraud or willful misconduct, and WEG agrees to
indemnify, defend and hold harmless Midway (and its directors, officers,
employees and agents) from any Loss arising from such negligence, fraud or
willful misconduct.
9.3 Midway agrees to indemnify, defend and hold harmless WEG (and its
directors, officers, employees and agents) from any Loss asserted by or on
behalf of third parties relating to the provision of services hereunder other
than any Loss caused by WEG's negligence, fraud or willful misconduct.
9.4 The party required to indemnify hereunder (the "Indemnitor"), upon
demand by the other party (the "Indemnitee"), at the Indemnitor's sole cost and
expense, shall resist or defend against any Loss arising from this Agreement
that is asserted against the Indemnitee (in the Indemnitee's name, if
necessary), using such attorneys as the Indemnitee shall approve, which
approval shall not be unreasonably withheld or delayed. The Indemnitor shall
not settle or compromise any Loss on behalf of the Indemnitee without the
written consent of the Indemnitee, which consent shall not be unreasonably
withheld or delayed. If, in the Indemnitee's reasonable opinion there exists a
conflict of interest which would make it inadvisable to be represented by
counsel for the Indemnitor, the Indemnitor and the Indemnitee shall jointly
select acceptable attorneys, and the Indemnitor shall pay the reasonable fees
and disbursements of such attorneys.
10. DEFAULT. If either party materially defaults hereunder or under Paragraph
2 of that certain Confidentiality and Non-Competition Agreement between WMS and
Midway dated as of April 6, 1998, the non-defaulting party may terminate this
Agreement effective immediately (subject to the cure periods set forth below)
upon written notice to the defaulting party. The non-defaulting party shall be
entitled to all remedies provided by law or equity (including reasonable
attorneys' fees and costs of suit incurred), except as specifically limited by
the provisions of Section 9 hereof. The following events shall be deemed to be
material defaults hereunder:
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(a) Failure by either party to make any payment required to be made to the
other hereunder, which failure is not remedied within ten days after receipt of
written notice thereof;
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of this
Agreement, which failure is not remedied within 20 days after receipt of
written notice from the other party specifying the nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party; (ii)
filing of an involuntary bankruptcy petition against either party which is not
stayed or dismissed within 60 days; (iii) assignment for the benefit of
creditors made by either party; or (iv) appointment of a receiver for either
party or any material part of its property.
11. FORCE MAJEURE. Except as specifically set forth in this Agreement, WEG and
Midway shall incur no liability to each other, and no default shall be deemed
to occur, due to a failure to perform under the terms and conditions of this
Agreement resulting from fire, flood, war, strike, lock-out, work stoppage or
slow-down, labor disturbance, power failure, major equipment breakdown, riot,
acts of God, acts of United States' enemies, laws, orders or at the insistence
or result of any governmental authority or any other delay beyond each other's
reasonable control.
12. MISCELLANEOUS.
12.1 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such
consent not to be unreasonably withheld, conditioned or delayed, except that
WEG may assign any such rights or delegate any such obligations to WMS or any
of its subsidiaries.
12.2 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
12.3 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No
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person shall be deemed to be a third party beneficiary of this Agreement.
Nothing herein shall be construed to be an admission or waiver of any rights,
claims and defenses the parties may have against third parties, which rights,
claims and defense the parties specifically reserve.
12.4 All notices and other communications hereunder shall be in writing
and shall be delivered by hand, by facsimile or mailed by registered or
certified mail (return receipt requested) to the parties at the addresses set
forth on the first page of this Agreement (or at such other addresses for a
party as shall be specified by like notice) and shall be deemed given on the
date on which such notice is received.
12.5 WMS and Midway each shall take such actions and execute such
documents and instruments as may be reasonably requested by the other party to
implement the terms and provisions of this Agreement.
12.6 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United
States of America, regardless of the laws that might be applied under
applicable principles of conflicts of laws.
12.7 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement
by either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Harold H. Bach, Jr.
____________________________________
Name: Harold H. Bach, Jr.
Title: Sr. Vice President-Finance
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MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
__________________________
Name: Neil D. Nicastro
Title: President
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GUARANTY
WMS Industries Inc. does hereby guaranty all of the performance and
financial obligations of WEG under this Agreement to which this Guaranty is
affixed. This Guaranty is unconditional, irrevocable, continuing and without
limitation, and shall be binding upon the successors and assigns of the
undersigned.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
________________________________
Name: Harold H. Bach, Jr.
Title: Vice President-Finance
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EXHIBIT 10.24
CABINET SUPPLY AGREEMENT
AGREEMENT, dated as of the 6th day of April 1998, between LENC-SMITH INC.
("Supplier"), a Delaware corporation with an address at 4616 West 19th Street,
Cicero, Illinois 60804, and MIDWAY GAMES INC. ("Midway"), a Delaware
corporation with an address at 3401 North California Avenue, Chicago, Illinois
60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS Industries Inc. ("WMS") is distributing
(the "Distribution") all of its shares of Midway's common stock to holders of
the shares of WMS' common stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, the parties formerly provided for certain arrangements whereby
Supplier, an indirect, wholly-owned subsidiary of WMS, has been supplying
cabinets to Midway pursuant to a Manufacturing and Services Agreement between
WMS and Midway, dated as of July 1, 1996, which agreement has been terminated;
and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements under which Supplier will supply cabinets to Midway following the
Distribution.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. SUPPLY OF CABINETS. During the term hereof, Supplier shall supply
cabinets for coin-operated video games to Midway in accordance with the
following procedures:
1.1 Pricing Inquiry. To initiate the purchase of video game cabinets,
Midway will issue a pricing inquiry to Supplier specifying the number of
cabinets to be ordered and the cabinet specifications. Within 5 days
thereafter, Supplier will provide Midway with a formal quote on the pricing
inquiry, and, upon agreement on a final price, a purchase order will be
<PAGE> 2
issued by Midway to Supplier.
1.2 Shipping. Supplier shall arrange for the shipment of the cabinets to
WMS's Waukegan, Illinois manufacturing plant. Supplier shall forward all
shipping invoices to Midway, and Midway shall pay them promptly.
1.3 Delivery; Accelerated or Decelerated Schedule. Upon placement of the
purchase order, Midway and Supplier shall agree upon a delivery schedule, which
shall be coordinated by the parties on a daily basis and by the truckload. In
the event that Midway shall desire to accelerate or decelerate the agreed-upon
delivery schedule, Supplier shall use its best efforts to meet the accelerated
or decelerated delivery schedule. Midway shall be responsible for all
additional costs incurred in accelerating or decelerating the delivery
schedule.
1.4 Order reductions. Midway may reduce the number of cabinets in a
particular purchase order at any time prior to Supplier's commencement of work
to produce the cabinets; provided that Midway shall pay for all raw materials
already purchased by Supplier, at Supplier's cost, except where Supplier is
able to use such raw materials for non-Midway products within 60 days. Midway
may apply such payments against future orders using the materials, and Supplier
shall use reasonable efforts to use such materials in subsequent orders.
Midway shall promptly reimburse Supplier for any cancellation charges incurred
by Supplier as a result of a direction to reduce a purchase order.
1.5 Defective Workmanship. All cabinets supplied by Supplier to Midway
shall meet industry standards of quality and all specifications in the purchase
order. In the event that any cabinets delivered to Midway are defective or
nonconforming, such cabinets are to be repaired or replaced by Supplier
promptly at no cost to Midway.
1.6 Exclusivity of Dealing. Midway may use other sources of supply if
Supplier is unable or unwilling to meet requested production schedules and
specifications, industry standards of quality or competing bona fide quotes.
1.7 Cooperation. Each of the parties shall cooperate in order to develop
an even flow of production and to otherwise effectuate this Agreement in a
manner which will minimize layoffs, rehiring, training and line switching and
which will generally minimize costs and
<PAGE> 3
expenses with respect to activities at Supplier's facilities.
2. BILLING AND PAYMENT PROCEDURES.
2.1 Billing. Supplier shall bill Midway on a daily basis for the prior
day's shipments, and Midway shall pay such charges twice per month within five
days after the 15th and last day of each month with respect to charges for the
immediately preceding half month.
2.2 Within 20 days after the end of each of the first three fiscal
quarters of each year, and annually with 10 days after completion of Supplier's
independent annual audit, Supplier shall provide Midway with a reconciliation
statement reflecting actual additional costs during such quarter or year under
Sections 1.3 and 1.4 and payments received from Midway in respect thereof,
together with a reasonably detailed explanation of such reconciliation. Midway
or Supplier, as the case may be, shall pay the amount reflected on such
reconciliation statement within five days after receipt thereof by Midway.
2.3 If Midway disputes the accuracy of any quarterly or annual
reconciliation statement or explanation submitted by Supplier, Midway shall
nevertheless pay the invoiced charges on a timely basis, and if such dispute
remains unresolved for 60 days, Midway may submit such dispute to a "Big Six"
accounting firm mutually acceptable to Midway and Supplier for resolution,
whose decision shall be final. The cost of such submission shall be borne by
Midway; provided, however, that if such review indicates a discrepancy in
Midway's favor of ten percent (10%) or greater, such cost shall be borne by
Supplier. If Midway fails to dispute a statement or explanation (of actual
charges) within 60 days after receipt of the statement from Supplier, Midway
shall be deemed to accept such charges, provided that Midway shall not be
deemed to accept any such charges in the event Midway's dispute thereof is
premised upon WMS' willful misconduct, malfeasance or fraud.
3. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998
and will continue in effect for a period of three years and for successive
renewal periods of six months each; provided, however, that either party may
terminate this Agreement for any reason upon six
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months' prior written notice or otherwise pursuant to Section 5 hereof.
4. PRODUCT LIABILITY INSURANCE; DUTY OF CARE; INDEMNIFICATION.
4.1 Supplier shall maintain product liability insurance which includes
Midway in amounts mutually agreeable to Supplier and Midway.
4.2 Supplier shall not be liable for any loss, damage, claim, action or
proceeding ("Loss") suffered by Midway, unless such Loss arises from or is
caused by a manufacturing defect in the supplied cabinet, or by Supplier's
negligence, fraud or willful misconduct, and Supplier agrees to indemnify,
defend and hold harmless Midway (and its directors, officers, employees and
agents) from any Loss arising from such negligence, fraud or willful
misconduct.
4.3 Midway agrees to indemnify, defend and hold harmless Supplier (and its
directors, officers, employees and agents) from any Loss asserted by or on
behalf of third parties relating to the provision of services hereunder other
than any Loss caused by a manufacturing defect in the supplied cabinet, or by
Supplier's negligence, fraud or willful misconduct.
4.4 The party required to indemnify hereunder (the "Indemnitor"), upon
demand by the other party (the "Indemnitee"), at the Indemnitor's sole cost and
expense, shall resist or defend against any Loss arising from this Agreement
that is asserted against the Indemnitee (in the Indemnitee's name, if
necessary), using such attorneys as the Indemnitee shall approve, which
approval shall not be unreasonably withheld or delayed. The Indemnitee shall
not settle or compromise any Loss on behalf of the Indemnitee without the
written consent of the Indemnitee, which consent shall not be unreasonably
withheld or delayed. If, in the Indemnitee's reasonable opinion there exists
a conflict of interest which would make it inadvisable to be represented by
counsel for the Indemnitor, the Indemnitor and the Indemnitee shall jointly
select acceptable attorneys, and the Indemnitor shall pay the reasonable fees
and disbursements of such attorneys.
5. DEFAULT. If either party materially defaults hereunder, the non-defaulting
party may terminate this Agreement effective immediately (subject to the cure
periods set forth below) upon written notice to the defaulting party. The
non-defaulting party shall be entitled to all
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remedies provided by law or equity (including reasonable attorneys' fees and
costs of suit incurred), except as specifically limited by the provisions of
Section 4 hereof. The following events shall be deemed to be material defaults
hereunder: (a) Failure by either party to make any payment required to be made
to the other hereunder, which failure is not remedied within ten days after
receipt of written notice thereof; (b) except as otherwise provided herein,
failure by either party substantially to perform in accordance with the terms
and conditions of this Agreement, which failure is not remedied within 30 days
after receipt of written notice from the other party specifying the nature of
such default; (c)(i) filing of a voluntary bankruptcy petition by either party;
(ii) filing of an involuntary bankruptcy petition against either party which is
not dismissed within 60 days; (iii) assignment for the benefit of creditors made
by either party; or (iv) appointment of a receiver for either party or any
material part of its property.
6. FORCE MAJEURE. Except as specifically set forth in this Agreement,
Supplier and Midway shall incur no liability to each other, and no breach shall
be deemed to occur, due to a failure to perform under the terms and conditions
of this Agreement resulting from fire, flood, war, strike, lock-out, work
stoppage or slow-down, labor disturbance, power failure, major equipment
breakdown, riot, acts of God, acts of United States' enemies, laws, orders or at
the insistence or result of any governmental authority or any other delay beyond
each other's reasonable control.
7. MISCELLANEOUS.
7.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
7.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
7.3 In the event that any term or provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or otherwise be
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unenforceable, such provision shall be ineffective in such jurisdiction only to
the extent of such violation without invalidating any other provision hereof.
7.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such
consent not to be unreasonably withheld, conditioned or delayed, except that
Supplier may assign any such rights or delegate any such obligations to WMS or
any of its subsidiaries.
7.5 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
7.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be
an admission or waiver of any rights, claims and defenses the parties may have
against third parties, which rights, claims and defense the parties
specifically reserve.
7.7 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on
the first page of this Agreement (or at such other addresses for a party as
shall be specified by like notice) and shall be deemed given on the date on
which such notice is received.
7.8 The parties each shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
7.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United
States of America, regardless of the laws that might be applied under
applicable principles of conflicts of laws.
7.10 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered
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in this Agreement. No amendment, modification, extension or failure to enforce
any condition of this Agreement by either party shall be deemed a waiver of any
of its rights herein. This Agreement shall not be amended except by a writing
executed by all the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
LENC-SMITH INC.
By: /s/ Harold H. Bach, Jr.
__________________________________
Name: Harold H. Bach, Jr.
Title: Sr. Vice President--Finance
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
__________________________________
Name: Neil D. Nicastro
Title: President
GUARANTY
WMS Industries Inc. does hereby guaranty all of the performance and
financial obligations of Supplier under this Agreement to which this Guaranty is
affixed. This Guaranty is unconditional, irrevocable, continuing and without
limitation, and shall be binding upon the successors and assigns of the
undersigned.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
__________________________________
Harold H. Bach, Jr.
Vice President-Finance
-7-
<PAGE> 1
EXHIBIT 10.25
SPARE PARTS SALES AND SERVICE AGREEMENT
AGREEMENT dated as of the 6th day of April 1998 among WILLIAMS ELECTRONICS
GAMES, INC. ("WEG"), a Delaware corporation with an address at 3401 North
California Avenue, Chicago, Illinois 60618, MIDWAY GAMES INC. ("Midway"), a
Delaware corporation with an address at 3401 North California Avenue, Chicago,
Illinois 60618, and ATARI GAMES CORPORATION ("Atari"), a Delaware corporation
with an address at 675 Sycamore Drive, Milipitas, California 95035.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS Industries Inc. ("WMS") is distributing
(the "Distribution") all of its shares of Midway's common stock to holders of
the shares of WMS' common stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, WEG is an indirect, wholly-owned subsidiary of WMS, and Atari is
an indirect, wholly-owned subsidiary of Midway;
WHEREAS, the parties formerly provided for certain arrangements whereby
WEG has been selling spare parts to Midway and Atari customers and to other
end-users of Midway and Atari products (collectively, the "Customers"); and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements under which WEG shall continue to sell spare parts to the
Customers following the Distribution.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. CERTAIN DEFINITIONS. The following terms as used in this Agreement shall
have the meanings set forth below:
1.1 "Proprietary Parts" means those parts, used in video games, that are
subject to any
<PAGE> 2
Midway patent, trademark, copyright or other intellectual property rights or
manufactured on a tool or die designed for and/or paid for by Midway.
1.2 "Non-Proprietary Parts" means parts, used in video games, that are not
Proprietary Parts.
2. PURCHASE, INVENTORY AND SALE OF SPARE PARTS.
2.1 WEG shall purchase and maintain an adequate inventory of spare parts
needed by the Customers with respect to all Midway and Atari products. Midway
shall sell or arrange for the sale of Proprietary Parts to WEG at such cost as
the parties shall agree. WEG shall purchase Non-Proprietary Parts through its
usual vendor sources or through Midway at negotiated prices.
2.2 Midway and Atari shall refer the Customers exclusively to WEG for
spare parts purchases during the term hereof. Notwithstanding the foregoing,
Midway and Atari may directly sell spare parts to Customers.
2.3 Notwithstanding any other provision in this Agreement, Midway shall
service all of its own warranty customers, and this Agreement shall not include
any warranty service.
3. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998
and shall continue in effect for a period of five years and for successive
renewal periods of six months each; provided, however, that either party may
terminate this Agreement for any reason upon six months' prior written notice
or otherwise pursuant to Section 5 hereof.
4. PRODUCT LIABILITY INSURANCE; DUTY OF CARE; INDEMNIFICATION.
4.1 WEG shall maintain product liability insurance which includes Midway
and Atari in amounts mutually agreeable to the parties.
4.2 WEG shall not be liable for any loss, damage, claim, action or
proceeding ("Loss") suffered by Midway or Atari arising from the sale of spare
parts hereunder unless such Loss arises from or is caused by a manufacturing
defect in the supplied part, or by WEG's negligence, fraud or willful
misconduct, and WEG agrees to indemnify, defend and hold
-2-
<PAGE> 3
harmless Midway and Atari (and their directors, officers, employees and agents)
from any Loss arising from such negligence, fraud or willful misconduct.
4.3 Midway agrees to indemnify, defend and hold harmless WEG (and its
directors, officers, employees and agents) from any Loss asserted by or on
behalf of third parties relating to the provision of services hereunder other
than any Loss caused by a manufacturing defect in the supplied part or by WEG's
negligence, fraud or willful misconduct.
4.4 The party required to indemnify hereunder (the "Indemnitor"), upon
demand by the other party (the "Indemnitee"), at the Indemnitor's sole cost and
expense, shall resist or defend against any Loss arising from this Agreement
that is asserted against the Indemnitee (in the Indemnitee's name, if
necessary), using such attorneys as the Indemnitee shall approve, which approval
shall not be unreasonably withheld or delayed. The Indemnitor shall not settle
or compromise any Loss on behalf of the Indemnitee without the written consent
of the Indemnitee, which consent shall not be unreasonably withheld or delayed.
If, in the Indemnitee's reasonable opinion there exists a conflict of interest
which would make it inadvisable to be represented by counsel for the Indemnitor,
the Indemnitor and the Indemnitee shall jointly select acceptable attorneys, and
the Indemnitor shall pay the reasonable fees and disbursements of such
attorneys.
5. DEFAULT; DISCONTINUANCE OF BUSINESS.
5.1 If either party materially defaults hereunder, the non-defaulting
party may terminate this Agreement effective immediately (subject to the cure
periods set forth below) upon written notice to the defaulting party. The
non-defaulting party shall be entitled to all remedies provided by law or
equity (including reasonable attorneys' fees and costs of suit incurred),
except as specifically limited by the provisions of Section 4 hereof. The
following events shall be deemed to be material defaults hereunder:
(a) Failure by WEG to have an adequate inventory of spare parts or to
respond promptly to Customer requests for spare parts, which failure is not
remedied within ten days after receipt of written notice thereof; provided,
however, that WEG shall not be required to sell spare parts to Customers who
are unable to satisfy WEG's standard credit criteria. In such a case,
-3-
<PAGE> 4
WEG shall immediately notify Midway and Atari that it has refused shipment to
the Customer;
(b) Except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of this
Agreement, which failure is not remedied within 20 days after receipt of
written notice from the other party specifying the nature of such default; or
(c) (i) Filing of a voluntary bankruptcy petition by either party; (ii)
filing of an involuntary bankruptcy petition against either party which is not
stayed or dismissed within 60 days; (iii) assignment for the benefit of
creditors made by either party; or (iv) appointment of a receiver for either
party or any material part of its property.
5.2 If WEG discontinues its business of selling spare parts, this
Agreement shall terminate, and Midway shall have the option to purchase such of
WEG's spare parts inventory, at WEG's cost, as Midway wishes.
6. INSPECTION. Midway and Atari shall have the right to inspect WEG's
inventory for quality defects during reasonable business hours no more
frequently than once per quarter or after receiving repeated Customer complaints
concerning a specified part or parts.
7. FORCE MAJEURE. Except as specifically set forth in this Agreement, the
parties incur no liability to each other, and no default shall be deemed to
occur, due to a failure to perform under the terms and conditions of this
Agreement resulting from fire, flood, war, strike, lock-out, work stoppage or
slow-down, labor disturbance, power failure, major equipment breakdown, riot,
acts of God, acts of United States' enemies, laws, orders or at the insistence
or result of any governmental authority or any other delay beyond each other's
reasonable control.
8. MISCELLANEOUS.
8.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
-4-
<PAGE> 5
8.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
8.3 In the event that any term or provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or otherwise be unenforceable, such provision shall be
ineffective in such jurisdiction only to the extent of such violation without
invalidating any other provision hereof.
8.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such
consent not to be unreasonably withheld, conditioned or delayed, except that
WEG may assign any such rights or delegate any such obligations to WMS or any
of its subsidiaries.
8.5 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
8.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be
an admission or waiver of any rights, claims and defenses the parties may have
against third parties, which rights, claims and defense the parties
specifically reserve.
8.7 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on
the first page of this Agreement (or at such other addresses for a party as
shall be specified by like notice) and shall be deemed given on the date on
which such notice is received.
8.8 Each party hereto shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
-5-
<PAGE> 6
8.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United
States of America, regardless of the laws that might be applied under
applicable principles of conflicts of laws.
8.10 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement
by either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Harold H. Bach, Jr.
___________________________________
Name: Harold H. Bach, Jr.
Title: Sr. Vice President-Finance
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
___________________________________
Name: Neil D. Nicastro
Title: President
ATARI GAMES CORPORATION
By: /s/ Neil D. Nicastro
___________________________________
Name: Neil D. Nicastro
Title: Chief Executive Officer
-6-
<PAGE> 7
GUARANTY
WMS Industries Inc. does hereby guaranty all of the performance and
financial obligations of WEG under this Agreement to which this Guaranty is
affixed. This Guaranty is unconditional, irrevocable, continuing and without
limitation, and shall be binding upon the successors and assigns of the
undersigned.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
__________________________________
Name: Harold H. Bach, Jr.
Title: Vice President-Finance
-7-
<PAGE> 1
EXHIBIT 10.26
SALES AGREEMENT
AGREEMENT, dated as of April 6, 1998, between WILLIAMS ELECTRONICS GAMES,
INC., a Delaware corporation ("WEG"), and MIDWAY GAMES INC., a Delaware
corporation ("Midway"), each with an address at 3401 North California Avenue,
Chicago, Illinois 60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS Industries Inc. ("WMS") is distributing
(the "Distribution") all of its shares of Midway's common stock to holders of
the shares of WMS' common stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, WEG is an indirect, wholly-owned subsidiary of WMS; and
WHEREAS, the parties desire to set forth the terms of arrangements under
which Midway will provide certain sales and market planning services to WEG
following the Distribution.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. SERVICES TO BE SUPPLIED. During the term hereof, Midway will supply the
following services to WEG:
1.1 Sales Testing. Midway shall conduct sales testing for all new
products developed by WEG through placements on behalf of WEG with selected
customers of a limited number of prototype units. Midway shall report on such
testing and recommend modifications to WEG both to maximize sales on a
territory-by-territory (country-by-country) basis and with respect to
manufacture of the products generally, based on the product and customer
testing.
1.2 Marketing. Midway shall coordinate and negotiate with third-party
advertising and media firms in creating and distributing print advertising and
video presentations for
<PAGE> 2
products based upon the budget described in Section 3. WEG may conduct such
additional advertising and marketing outside of the WEG marketing budget as WEG
shall desire.
1.3 Sales. Midway shall negotiate distribution and sales agency
agreements with third-party distributors based on standard contract terms
agreed to by WEG in advance. WEG shall have the sole right to approve in
advance any material variations from the standard terms. Midway shall monitor
and report to WEG regarding the sales performance of each distributor in each
territory. Midway shall also make direct sales based on WEG's standard price
list. WEG shall have the sole right to approve any orders received containing
any variations from WEG's standard price list or any proposed allowances. WEG
may not conduct direct sales, except direct sales to original equipment
manufacturers of non-pinball products.
1.4 Order Entry and Credit Approval. WEG shall have the sole right to
accept an order after evaluating the potential customer's credit. Midway shall
assist WEG in gathering credit information. Midway will send order
acknowledgments using the forms approved by WEG for the customer's and WEG's
signatures. All orders shall be entered into WEG's order entry system by Midway
using the information sets required by WEG.
1.5 Collections and Returns. Midway shall assist WEG in collections and
shall administer all product returns according to WEG's policies.
1.6 Logistics and Traffic. Midway shall provide to WEG the following
additional services: (i) coordination and obtainment of licenses to and from
third parties of trademarks and other intellectual property; (ii) sales
reporting; (iii) finished inventory level monitoring, both in WEG warehouses
and in the field; (iv) design and preparation of shipping schedules; and (v)
preparation of bills of lading.
2. PAYMENT FOR SERVICES. In consideration for the services provided by Midway
pursuant to Section 1 of this Agreement, WEG shall pay Midway at the rate of
$500,000 per year (the "Annual Fixed Fee"), in equal monthly installments in
arrears by the 15th day of each month, plus a commission of 1.5% on the first
$25,000,000 of annual net sales of WEG products made by Midway (sales less
allowances, quantity discounts and returns) and 1% on annual net sales of
<PAGE> 3
WEG products made by Midway exceeding $25,000,000. Such commissions shall also
be paid in arrears by the 15th day of each month based on actual net sales for
the prior month at the applicable commission rate with respect to cumulative net
sales for the year to date. For the period from the date hereof through June
30, 1998, commissions shall be 1.5% on the first $6,250,000 of net sales made by
Midway and 1% thereafter. The parties agree to review the Annual Fixed Fee on
an annual basis and to negotiate in good faith to make adjustments thereto to
the extent necessitated by changes to cost structures or market conditions.
3. BUDGET; NON-BUDGET SERVICES.
3.1 An annual budget for marketing and testing, as set forth in Sections
1.1 and 1.2, shall be developed and agreed upon in advance between the parties
annually and modified quarterly if agreed to by both parties. All third party
contractors engaged pursuant to the budget shall be paid by WEG directly.
3.2 If WEG requests and Midway provides any additional services not
included in the budget, such as creative media work on projects requested or
approved by WEG, Midway shall bill WEG for payroll, overhead and expenses at
Midway's actual cost plus 8%. Midway shall bill WEG at the end of each month
in which the additional services are provided, and WEG shall make payment to
Midway for services provided pursuant to this Section 3 within 15 days after
receipt by WEG of each invoice therefor. The total cost to complete the
additional service shall be estimated and agreed upon in advance, and Midway
shall provide to WEG periodic updates on the remaining costs for completion of
the requested services.
4. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998
and will continue in effect for a period of three years and for successive
renewal periods of six months each; provided, however, that either party may
terminate this Agreement for any reason upon six months' prior written notice.
5. MISCELLANEOUS.
-3-
<PAGE> 4
5.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
5.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
5.3 In the event that any term or provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or otherwise be unenforceable, such provision shall be
ineffective in such jurisdiction only to the extent of such violation without
invalidating any other provision hereof.
5.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such
consent not to be unreasonably withheld, conditioned or delayed, except that
Midway may assign any such rights or delegate any such obligations to any of
its subsidiaries.
5.5 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
5.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be
an admission or waiver of any rights, claims and defenses the parties may have
against third parties, which rights, claims and defense the parties
specifically reserve.
5.7 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on
the first page of this Agreement (or at such other addresses for a party as
shall be specified by like notice) and shall be deemed given on the date on
which such notice is received.
-4-
<PAGE> 5
5.8 The parties each shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
5.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United
States of America, regardless of the laws that might be applied under
applicable principles of conflicts of laws.
5.10 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement
by either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Harold H. Bach, Jr.
________________________________
Name: Harold H. Bach, Jr.
Title: Sr. Vice President-Finance
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
________________________________
Name: Neil D. Nicastro
Title: President
-5-
<PAGE> 6
GUARANTY
WMS Industries Inc. does hereby guaranty all of the performance and
financial obligations of WEG under this Agreement to which this Guaranty is
affixed. This Guaranty is unconditional, irrevocable, continuing and without
limitation, and shall be binding upon the successors and assigns of the
undersigned.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
_______________________________
Name: Harold H. Bach, Jr.
Title: Vice President-Finance
-6-
<PAGE> 1
EXHIBIT 10.27
INFORMATION SYSTEMS SERVICE AGREEMENT
AGREEMENT, dated as of April 6, 1998, between WILLIAMS ELECTRONICS GAMES,
INC., a Delaware corporation ("WEG"), and MIDWAY GAMES INC., a Delaware
corporation ("Midway"), each with an address at 3401 North California Avenue,
Chicago, Illinois 60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS Industries Inc. ("WMS") is distributing
(the "Distribution") all of its shares of Midway's common stock to holders of
the shares of WMS' common stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, the parties formerly provided for certain arrangements whereby
WEG, an indirect, wholly-owned subsidiary of WMS, has been providing certain
information system services to Midway; and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements under which WEG will continue to provide certain information
systems and related services to Midway following the Distribution.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. STANDARD SERVICES TO BE SUPPLIED.
1.1 Computer Systems. WEG shall provide Midway with access to its
computer systems for business applications including, without limitation, order
entry, financial and manufacturing modules, marketing and sales and engineering
(including electronic engineering documentation and blueprint systems) and will
perform all support for the computer systems. In addition, WEG shall modify and
implement the software to be used by Midway in conjunction with such systems at
Midway's request.
<PAGE> 2
1.2 Network Services; Desktop Computers. WEG shall coordinate the
provision and maintenance of cabling, wiring, switching components, routers and
gateway and the purchasing, maintaining and upgrading of network servers for
Midway. In addition, unless Midway directs otherwise, WEG shall coordinate and
negotiate with third-party vendors the purchase and installation of desktop
computers and related hardware and the configuration of software products for
Midway.
1.3 Telecommunications Services. WEG shall provide telecommunications
services to Midway, which will include selection, organization, programming and
maintenance of a PBX system and a service provider for telephone communication.
In addition, unless Midway directs otherwise, WEG shall provide activation and
deactivation functions for cellular telephones and monitor usage of the PBX
system.
1.4 Additional Support Services. WEG shall make available helpdesk
services from 6:00 a.m. to 6:00 p.m. to Midway personnel with respect to any
problems or questions pertaining to telecommunications, infrastructure,
communications, business application systems and desktop
services.
1.5 Consulting Committee. A committee shall be formed consisting of an
equal number of representatives from Midway and WEG, which committee will meet
from time to time to consult, advise and attempt to resolve differences with
respect to prioritization of tasks between the parties, system capacity and
system modifications and enhancements
2. PAYMENT FOR STANDARD SERVICES. In consideration for the services provided
by WEG pursuant to Section 1 of this Agreement, Midway shall pay WEG an amount
equal to the cost to WEG of the services provided plus 6.6% of such cost. Such
cost shall be determined by multiplying WEG's total annual cost for each area
of service described in Sections 1.1, 1.2 and 1.3 for both WMS (and its
subsidiaries) and Midway ("Aggregate Services Cost") by the percentage of
Midway's usage of each such service (the "Midway Percentage"). The Midway
Percentage for: (i) computer systems shall be determined by dividing the number
of Midway passwords to the AS 400 by the total number of passwords to such
system; (ii) network and desktop services shall be determined by dividing the
number of Midway's personal computer
<PAGE> 3
network passwords by the total number of such passwords; (iii)
telecommunications services shall be determined by dividing the number of Midway
telephone hook-ups by the total number of telephone hook-ups. Helpdesk services
shall be included in the above. A semi-annual budget for each of the areas of
services set forth in Sections 1.1, 1.2 and 1.3 hereof shall be developed and
agreed upon in advance by December 15th and June 15th of each year in order to
determine the estimated Aggregate Services Cost. By the end of each month, WEG
shall estimate the Midway Percentage for the previous month. Based upon the
product of (i) one-sixth, (ii) the semi-annual budgeted Aggregate Services Cost,
(iii) the estimated Midway Percentage Usage, and 106.6%, WEG shall bill Midway
prior to the end of each month, and Midway shall pay such bill by the 10th day
of the following month. Within 10 days after the completion of WEG's
independent annual audit, WEG shall calculate the actual Aggregate Services Cost
and the actual Midway Percentage for the prior fiscal year and shall render a
statement of such calculation to Midway. Payment shall be made or offset with
the next monthly payment (or paid by WEG to Midway on the due date of such
payment if the adjustment is larger than the next such monthly payment) to
reconcile the amount billed in the previous year with the actual figures, plus
the 6.6% mark-up. If Midway disputes the accuracy of the reconciliation
statement or explanation submitted by WEG, Midway shall nevertheless pay the
invoiced charges on a timely basis, and if such dispute remains unresolved for
60 days, Midway may submit such dispute to a "Big Six" accounting firm mutually
acceptable to the parties for resolution, whose decision shall be final. The
cost of such submission shall be borne by Midway; provided, however, that if
such review indicates a discrepancy in Midway's favor of ten percent (10%) or
greater, such cost shall be borne by WEG. If Midway fails to dispute a
statement or explanation within 60 days after receipt of the reconciliation
statement from WEG, Midway shall be deemed to accept such charges, provided that
Midway shall not be deemed to accept any such charges in the event Midway's
dispute thereof is premised upon WMS' willful misconduct, malfeasance or fraud.
3. OTHER SERVICES TO BE SUPPLIED.
3.1 System Development. Upon Midway's request, WEG may provide services
to develop the communications, networking, operating and computer systems of
Midway.
3.2 Special Projects. Upon Midway's request, WEG may provide any such
other
<PAGE> 4
services to Midway not specifically described in Section 1 or this Section 3.
3.3 Payment for Requested Services. In consideration for the requested
services provided by WEG pursuant to this Section 3, Midway shall pay WEG an
amount equal to the cost to WEG of the requested service(s) plus 6.6% of such
cost. WEG shall bill such amount to Midway at the end of each month in which
the requested services are provided, and Midway shall make payment to WEG for
services provided pursuant to this Section 3 within 15 days after receipt by
Midway of each invoice therefor. The total cost to complete the requested
service shall be estimated and agreed upon in advance, and WEG shall provide to
Midway periodic updates on the remaining costs for completion of the requested
services.
4. EXCLUSIVITY. Except as specifically provided herein, Midway shall not,
without the prior written consent of WEG, engage any third party to render any
of the services described in Sections 1 and 3, except to the extent of any
service described in Section 3 hereof which is not provided to Midway by WEG.
5. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998
and will continue in effect for a period of three years and for successive
renewal periods of eighteen months each; provided, however, that either party
may terminate this Agreement for any reason upon eighteen months' prior written
notice, or otherwise pursuant to Section 6 hereof.
6. DEFAULT. If either party materially defaults hereunder, the non-defaulting
party may terminate this Agreement effective immediately (subject to the cure
periods set forth below) upon written notice to the defaulting party. The
non-defaulting party shall be entitled to all remedies provided by law or
equity (including reasonable attorneys' fees and costs of suit incurred). The
following events shall be deemed to be material defaults hereunder: (a) failure
by either party to make any payment required to be made to the other hereunder,
which failure is not remedied within ten days after receipt of written notice
thereof; (b) except as otherwise provided herein, failure by either party
substantially to perform in accordance with the terms and conditions of this
Agreement, which failure is not remedied within 30 days after receipt of
written notice from the other party specifying the nature of such default;
(c)(i) filing of a
<PAGE> 5
voluntary bankruptcy petition by either party; (ii) filing of an involuntary
bankruptcy petition against either party which is not dismissed within 60 days;
(iii) assignment for the benefit of creditors made by either party; or (iv)
appointment of a receiver for either party or any material part of its property.
7. MISCELLANEOUS.
7.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
7.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
7.3 In the event that any term or provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or otherwise be unenforceable, such provision shall be
ineffective in such jurisdiction only to the extent of such violation without
invalidating any other provision hereof.
7.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such
consent not to be unreasonably withheld, conditioned or delayed, except that
WEG may assign any such rights or delegate any such obligation to WMS or any of
its subsidiaries.
7.5 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
7.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be
an admission or waiver of any rights, claims and defenses the parties may have
against third parties, which rights, claims and defense the parties
specifically reserve.
7.7 All notices and other communications hereunder shall be in writing and
shall be
<PAGE> 6
delivered by hand, by facsimile or mailed by registered or certified mail
(return receipt requested) to the parties at the addresses set forth on the
first page of this Agreement (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which such
notice is received.
7.8 The parties each shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
7.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United
States of America, regardless of the laws that might be applied under
applicable principles of conflicts of laws.
7.10 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement
by either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Harold H. Bach, Jr.
_________________________________
Name: Harold H. Bach, Jr.
Title: Sr. Vice President-Finance
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
_________________________________
Name: Neil D. Nicastro
Title: President
<PAGE> 7
GUARANTY
WMS Industries Inc. does hereby guaranty all of the performance and
financial obligations of WEG under this Agreement to which this Guaranty is
affixed. This Guaranty is unconditional, irrevocable, continuing and without
limitation, and shall be binding upon the successors and assigns of the
undersigned.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
_________________________________
Name: Harold H. Bach, Jr.
Title: Vice President-Finance
<PAGE> 1
EXHIBIT 10.28
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
AGREEMENT dated as of the 6th day of April 1998 between WMS INDUSTRIES
INC. ("WMS"), a Delaware corporation, and MIDWAY GAMES INC. ("Midway"), a
Delaware corporation, each with an address at 3401 North California Avenue,
Chicago, Illinois 60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS is distributing (the "Distribution") all
of its shares of Midway's common stock to holders of the shares of WMS' common
stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, after the Distribution, the parties shall continue to have various
contractual relationships with and obligations to each other (the "Contractual
Relationships"), which involve the disclosure of confidential and proprietary
information and frequent contact with each other's customers and employees;
WHEREAS, WMS and Midway each recognize that the other is engaged in a
continuous program of research, development, design and production respecting
its business;
WHEREAS, WMS and Midway previously were parties to a confidentiality and
non-competition arrangement pursuant to a Manufacturing and Services Agreement,
dated as of July 1, 1996, which agreement has terminated; and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements under which each party will preserve the other's confidential and
proprietary information and relationships with customers and employees following
the Distribution.
NOW, THEREFORE, in consideration of the Contractual Relationships, the
premises and the mutual covenants herein contained and intending to be legally
bound, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS.
<PAGE> 2
1.1 The following terms as used in this Agreement shall have the meanings
set forth below:
1.1.1 "Person" means an individual, corporation, partnership, limited
liability company, proprietorship, firm, association, trust, estate, joint
venture, unincorporated organization or other business entity or a government or
any agency or political subdivision thereof.
1.1.2 "Midway" include Midway and its subsidiaries, except where the
context otherwise requires.
1.1.3 "WMS" include WMS and its subsidiaries, except where the context
otherwise requires.
1.2 Unless the context otherwise requires
1.2.1 Words used in the singular include the plural and words used in
the plural include the singular; and
1.2.2 "herein", "hereto" and "hereunder" shall refer to this Agreement
as a whole and not to any particular paragraph or section.
2. CONFIDENTIALITY. Either WMS or Midway may from time to time by written
notice to the other designate information regarding its business as confidential
("Confidential Information"). Each party shall use its best efforts to maintain
the confidentiality of the other party's Confidential Information. All
Confidential Information which either party has obtained from the other shall be
returned or destroyed (if the owner of such information so notifies the holder)
upon the expiration or earlier termination of this Agreement. Each party shall
instruct its employees who have access to the Confidential Information of the
other party to keep the same confidential by using the same care and discretion
that it uses with respect to its own confidential property and trade secrets.
The provisions of this Section shall survive expiration or earlier termination
of this Agreement.
3. NON-COMPETITION. For a period of five years from the date hereof, neither
party hereto
-2-
<PAGE> 3
shall, without the prior written consent of the other, directly or indirectly,
individually or in concert with others, own, manage, operate or control any
Person that is engaged in, or participate, invest or engage in, the business
currently conducted by the other party hereto (except that Midway shall have the
right to engage in any business related to video-game manufacturing, cabinet
supply, spare parts sales and video-simulated non-mechanical pinball games), or
for itself, or on behalf of any other Person, be in contact with any customer,
supplier, licensee or licensor of the other party for the purpose of diverting,
taking away from or otherwise interfering with the other party's relationship
with any customer, supplier, licensee or licensor; provided, however, that
nothing in this Section shall be construed to prohibit a party from owning not
more than five (5%) percent of any class of publicly-held voting securities of
any issuer which is subject to the reporting requirements of the Securities and
Exchange Act of 1934, as amended.
4. NON-SOLICITATION. For the greater of (i) a period of two years from the
date hereof or (ii) a period ending one year after the date that any particular
Midway or WMS employee no longer is providing any services to the other party
pursuant to the Contractual Relationships, such other party shall not, without
the prior written consent of the employer, directly or indirectly hire or
solicit the employment of such employee or encourage such employee to leave his
or her employment or induce any such employee to seek, accept or obtain
employment by any Person other than such employer.
5. RIGHTS AND REMEDIES UPON BREACH. If either party hereto breaches or
threatens to commit a breach of, any of the provisions of Sections 2, 3, or 4
hereof, the other party shall have the right and remedy to have such covenants
specifically enforced by any court of competent jurisdiction, it being agreed
that any breach or threatened breach of such covenants would cause irreparable
injury and that money damages alone would not provide an adequate remedy. This
right of specific performance is in addition to, and not in lieu of, any other
rights and remedies available to the respective parties hereto under law or in
equity.
-3-
<PAGE> 4
6. SEVERABILITY OF COVENANT. Each of the parties hereto acknowledges and
agrees that the foregoing covenants are reasonable and valid in geographical and
temporal scope and in all other respects and that it has received full and
adequate consideration therefor. If any court determines that any of such
covenants, or any part thereof, is invalid or unenforceable, the remainder of
such covenants shall not thereby be affected and shall be given full effect,
without regard to the invalid portions. If any court determines that any of the
foregoing covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall have the power
to reduce the duration or scope of such provision as the case may be, and, in
its reduced form, such provision shall then be enforceable.
7. MISCELLANEOUS.
7.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
7.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
7.3 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such consent
not to be unreasonably withheld, conditioned or delayed.
7.4 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
7.5 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be an
admission or waiver of any rights, claims and defenses the parties may have
-4-
<PAGE> 5
against third parties, which rights, claims and defense the parties specifically
reserve.
7.6 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on the
first page of this Agreement (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which such
notice is received.
7.7 The parties each shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
7.8 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United States
of America, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
7.9 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement by
either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
WMS INDUSTRIES INC.
By:/s/ Harold H. Bach, Jr.
-----------------------
Harold H. Bach, Jr.
Vice President-Finance
MIDWAY GAMES INC.
By:/s/ Neil D. Nicastro
------------------------
Neil D. Nicastro
President
-5-
<PAGE> 1
Exhibit 10.29
RIGHT OF FIRST REFUSAL AGREEMENT
AGREEMENT dated as of the 6th day of April 1998 between WMS INDUSTRIES INC.
("WMS"), a Delaware corporation, and MIDWAY GAMES INC. ("Midway"), a Delaware
corporation, each with an address at 3401 North California Avenue, Chicago,
Illinois 60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS is distributing (the "Distribution") all
of its shares of Midway's common stock to holders of the shares of WMS' common
stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, the parties have provided for certain arrangements between
themselves pursuant to a Manufacturing Agreement, a Confidentiality and
Non-Competition Agreement and other agreements, each dated as of the date hereof
(the "Contractual Arrangements"); and
WHEREAS, the parties desire to set forth the terms of an arrangement
pursuant to which Midway shall have a right of first refusal with respect to any
sale by WMS of its manufacturing plant located in Waukegan, Illinois (the
"Waukegan Plant").
NOW, THEREFORE, in consideration of the premises, the Contractual
Arrangements and the mutual covenants herein contained and intending to be
legally bound, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS. The following terms as used in this Agreement shall
have the meanings set forth below:
1.1 "Midway" means Midway and its subsidiaries, except where the context
otherwise requires.
1.2 "WMS" means WMS and its subsidiaries, except where the context
otherwise requires.
<PAGE> 2
2. RIGHT OF FIRST REFUSAL.
2.1 If at any time WMS receives a bona fide offer from a third party to
purchase the Waukegan Plant, or any material part thereof, which offer is not
made in connection with a sale of substantially all of WMS's assets and business
as a going concern or a sale of substantially all of the capital stock of WMS,
and which offer WMS intends to accept, then WMS shall, prior to accepting such
offer, promptly send a written notice setting forth the terms of such offer (the
"Offer Notice") to Midway, and Midway may elect to purchase the Waukegan Plant
on the same terms as those stated in the Offer Notice by notice (the "Acceptance
Notice") given within twenty (20) days after the giving of the Offer Notice,
time being of the essence. Nothing in this Agreement is intended to preclude
Midway from making an offer to purchase the Waukegan Plant at any time.
2.2 In the event that within such 20 day period Midway fails to give the
Acceptance Notice, WMS shall be free to accept the third party's offer on the
terms set forth in the Offer Notice. If WMS fails to complete the sale to such
third party within 180 days after the date of the Offer Notice, then WMS shall
again be subject to the requirements of Section 2.1 before selling the Waukegan
Plant to the same or any other third party.
2.3 In no event shall Midway have any right pursuant to this Agreement to
purchase any greater or lesser part of the Waukegan Plant than that specified in
the Offer Notice.
3. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998 and
shall expire on April 5, 2008.
4. MISCELLANEOUS.
4.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
4.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
-2-
<PAGE> 3
4.3 In the event that any term or provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or otherwise be unenforceable, such provision shall be
ineffective in such jurisdiction only to the extent of such violation without
invalidating any other provision hereof.
4.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such consent
not to be unreasonably withheld, conditioned or delayed.
4.5 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
4.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be an
admission or waiver of any rights, claims and defenses the parties may have
against third parties, which rights, claims and defense the parties specifically
reserve.
4.7 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on the
first page of this Agreement (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which such
notice is received.
4.8 Each party hereto shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
4.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United States
of America, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
4.10 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered
-3-
<PAGE> 4
in this Agreement. No amendment, modification, extension or failure to enforce
any condition of this Agreement by either party shall be deemed a waiver of any
of its rights herein. This Agreement shall not be amended except by a writing
executed by all the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WMS INDUSTRIES INC.
By:/s/ Harold H. Bach, Jr.
------------------------
Harold H. Bach, Jr.
Vice President-Finance
MIDWAY GAMES INC.
By:/s/ Neil D. Nicastro
------------------------
Neil D. Nicastro
President
-4-
<PAGE> 1
EXHIBIT 10.30
THIRD PARTIES AGREEMENT
AGREEMENT dated as of the 6th day of April 1998 between WMS INDUSTRIES INC.
("WMS"), a Delaware corporation, and MIDWAY GAMES INC. ("Midway"), a Delaware
corporation, each with an address at 3401 North California Avenue, Chicago,
Illinois 60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS is distributing (the "Distribution") all
of its shares of Midway's common stock to holders of the shares of WMS' common
stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, the parties formerly provided for certain arrangements with
respect to the matters described below pursuant to a Manufacturing and Services
Agreement between WMS and Midway, dated as of July 1, 1996, which agreement has
been terminated; and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements following the Distribution with respect to the matters described
below.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. CERTAIN DEFINITIONS. The following terms as used in this Agreement shall
have the meanings set forth below:
1.1 "Midway" means Midway and its subsidiaries, except where the context
otherwise requires.
1.2 "WMS" means WMS and its subsidiaries, except where the context
otherwise requires.
2. THIRD PARTY AGREEMENTS. WMS and Midway are party to numerous arrangements
with third parties with respect to game development, the obtainment or grant of
licenses and other
<PAGE> 2
matters which provide for, among other matters, the receipt of payments, the
obligation or guaranty of an obligation to make payments to third parties,
recoupment of prior advances, rights of first refusal and reporting and
monitoring of intellectual property rights ("Third Party Agreements").
Royalties and expenses for external and internal development and fees and
expenses for external licenses applicable to each party's products will be
charged to such party at their cost to the other party. WMS and Midway will
allocate all other rights and obligations under Third Party Agreements, claims,
recoveries, royalties and recoupments, so that Midway will receive the benefit
and bear the burden of such agreements as they relate to video games, and WMS
will receive the benefit and bear the burden of such agreements as they relate
to all other amusement games and gaming devices.
3. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998 and
shall continue in effect for so long as any Third Party Agreement shall remain
outstanding.
4. INDEMNIFICATION.
4.1 Each party agrees to indemnify, defend and hold harmless the other (and
its directors, officers, employees and agents) from any loss, damage, claim,
action or proceeding ("Loss") which arises from actions or the failure to act by
such party, asserted by or on behalf of third parties with respect to Third
Party Agreements, other than any Loss caused by the indemnified party's
negligence, fraud or willful misconduct.
4.2 The party required to indemnify pursuant to this Section 4 (the
"Indemnitor"), upon demand by the indemnified party, at the Indemnitor's sole
cost and expense, shall resist or defend any claim, action or proceeding (in the
indemnified party's name, if necessary), using such attorneys as the indemnified
party shall approve, which approval shall not be unreasonably withheld. If, in
the indemnified party's reasonable opinion, there exists a conflict of interest
which would make it inadvisable to be represented by counsel for the Indemnitor,
the parties shall jointly select acceptable attorneys, and the Indemnitor shall
pay the reasonable fees and disbursements of such attorneys.
-2-
<PAGE> 3
5. MISCELLANEOUS.
5.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
5.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
5.3 In the event that any term or provision of this Agreement shall violate
any applicable statute, ordinance or rule of law in any jurisdiction in which it
is used, or otherwise be unenforceable, such provision shall be ineffective in
such jurisdiction only to the extent of such violation without invalidating any
other provision hereof.
5.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such consent
not to be unreasonably withheld, conditioned or delayed.
5.5 The headings used in this Agreement are inserted only for the purpose of
convenience and reference, and in no way define or limit the scope or intent of
any provision or part hereof.
5.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or implied, shall be construed to give any other person any
legal or equitable rights hereunder. No person shall be deemed to be a third
party beneficiary of this Agreement. Nothing herein shall be construed to be an
admission or waiver of any rights, claims and defenses the parties may have
against third parties, which rights, claims and defense the parties specifically
reserve.
5.7 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on the
first page of this Agreement (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which such
notice is received.
5.8 Each party hereto shall take such actions and execute such documents and
-3-
<PAGE> 4
instruments as may be reasonably requested by the other party to implement the
terms and provisions of this Agreement.
5.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United States
of America, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
5.10 This Agreement, constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement by
either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WMS INDUSTRIES INC.
By:/s/ Harold H. Bach, Jr.
-----------------------
Harold H. Bach, Jr.
Vice President-Finance
MIDWAY GAMES INC.
By:/s/ Neil D. Nicastro
-----------------------
Neil D. Nicastro
President
-4-
<PAGE> 1
EXHIBIT 10.31
TEMPORARY SUPPORT SERVICES AGREEMENT
AGREEMENT, dated as of April 6, 1998, between WMS INDUSTRIES INC., a
Delaware corporation ("WMS"), and MIDWAY GAMES INC., a Delaware corporation
("Midway"), each with an address at 3401 N. California Avenue, Chicago, IL
60618.
W I T N E S S E T H :
WHEREAS, on the date hereof, WMS is distributing (the "Distribution") all
of its shares of Midway's common stock to holders of the shares of WMS' common
stock outstanding on March 31, 1998;
WHEREAS, prior to the Distribution, Midway has been a majority-owned
subsidiary of WMS;
WHEREAS, the parties formerly provided for certain arrangements whereby
WMS and its subsidiaries (collectively, hereinafter, "WMS") had been providing
certain services to Midway; and
WHEREAS, the parties desire to set forth the terms of continuing
arrangements under which WMS will continue to provide such services to Midway
following the Distribution.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and intending to be legally bound, the parties hereby agree as
follows:
1. SERVICES TO BE SUPPLIED. During the term hereof, WMS shall supply all or a
portion of the following services to Midway: (i) administrative services; (ii)
legal and accounting services; (iii) human resources; (iv) maintenance and
janitorial services; and (v) other agreed-upon services, including the use of
space by Midway in any WMS facility, all to the extent requested from time to
time by Midway.
2. PAYMENT FOR SERVICES. In consideration for the services provided by WMS
pursuant to this Agreement, Midway shall pay WMS an amount equal to its direct
or allocated cost (including, without limitation, wages, salaries, fringe
benefits and materials), as indicated on
<PAGE> 2
monthly invoices supplied by WMS. Midway shall make payment to WMS within thirty
(30) days after receipt by Midway of each invoice.
3. EFFECTIVE DATE AND TERM. This Agreement is effective as of April 6, 1998
and will continue in effect for a period of 18 months and for successive renewal
periods of three months each; provided, however, that this Agreement may be
terminated by either party for any reason upon six months' prior written notice,
and each party may, upon at least sixty days' prior written notice, terminate
any one or more of the services provided under Section 1, except the use of
space by Midway in any WMS facility.
4. MISCELLANEOUS.
4.1 No waiver by either party of any default shall be effective unless in
writing, nor shall any such waiver operate as a waiver of any other default or
of the same default on any future occasion.
4.2 Each party warrants and represents that proceeding herewith is not
inconsistent in any material way with any contractual obligations, expressed or
implied, undertaken with any third party.
4.3 In the event that any term or provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or otherwise be unenforceable, such provision shall be
ineffective in such jurisdiction only to the extent of such violation without
invalidating any other provision hereof.
4.4 Neither party shall, without the prior written consent of the other,
assign any rights or delegate any obligations under this Agreement, such consent
not to be unreasonably withheld, conditioned or delayed.
4.5 The headings used in this Agreement are inserted only for the purpose
of convenience and reference, and in no way define or limit the scope or intent
of any provision or part hereof.
4.6 This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns. Nothing
herein, expressed or
<PAGE> 3
implied, shall be construed to give any other person any legal or equitable
rights hereunder. No person shall be deemed to be a third party beneficiary of
this Agreement. Nothing herein shall be construed to be an admission or waiver
of any rights, claims and defenses the parties may have against third parties,
which rights, claims and defense the parties specifically reserve.
4.7 All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by facsimile or mailed by registered or certified
mail (return receipt requested) to the parties at the addresses set forth on the
first page of this Agreement (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which such
notice is received.
4.8 The parties each shall take such actions and execute such documents
and instruments as may be reasonably requested by the other party to implement
the terms and provisions of this Agreement.
4.9 All controversies and disputes arising out of or under this Agreement
shall be determined pursuant to the laws of the State of Illinois, United States
of America, regardless of the laws that might be applied under applicable
principles of conflicts of laws.
4.10 This Agreement constitutes the entire understanding between the
parties hereto (and supersedes all prior written or oral communications)
relating to the subject matter covered in this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement by
either party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by all the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
__________________________
Harold H. Bach, Jr.
Vice President-Finance
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<PAGE> 4
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
__________________________
Neil D. Nicastro
President
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EXHIBIT 10.32
TAX SEPARATION AGREEMENT
THIS TAX SEPARATION AGREEMENT (this "Agreement"), is entered into as of the
6th day of April, 1998, by and between WMS INDUSTRIES INC. ("WMS") and MIDWAY
GAMES INC. ("Midway"), and those subsidiaries of Midway signatory hereto (the
"Midway Subsidiaries").
WHEREAS, Midway and the Midway Subsidiaries are members of an affiliated
group of corporations within the meaning of Section 1504(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), of which WMS is the common parent
(the "WMS Group"), and which files consolidated federal income tax returns as
well as certain consolidated, combined or unitary state tax returns;
WHEREAS, WMS, Midway and the Midway Subsidiaries are parties to a tax
sharing agreement dated as of July 1, 1996 (the "Tax Sharing Agreement");
WHEREAS, WMS is distributing to its stockholders all of the stock of Midway
that it owns (the "Distribution") and;
WHEREAS, the parties desire to set forth their agreements with regard to
their respective liabilities for federal, state and local taxes as well as their
agreements as a result of Midway and the Midway Subsidiaries ceasing to be
members of the WMS Group;
NOW THEREFORE, it is agreed as follows:
1. DEFINITIONS.
For all purposes of this Agreement, the terms defined in this Section 1
shall have the meanings assigned to them in this Section 1.
"Disaffiliation" means the Midway Companies ceasing to be members of the
WMS Group.
"Disaffiliation Date" means the date Disaffiliation shall occur as
determined in conformity with Treasury Regulation Section 1.1502-76(b).
"Midway Companies " means Midway, the Midway Subsidiaries, their respective
divisions and their successors and assigns.
"Return" means any WMS Consolidated Return and any State and Local Return.
"State and Local Returns" shall have the meaning specified in paragraph B
of Section 3 hereof.
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"WMS Consolidated Return" means any consolidated federal income tax return
of the WMS Group which includes one or more of the Midway Companies.
"WMS Consolidated Return Year" means any taxable period of the WMS Group
ending on or before the Disaffiliation Date.
"WMS Subsidiary" means any corporation (other than a Midway Company) the
stock of which is owned directly or indirectly by WMS and which joins WMS in the
filing of State and Local Returns.
2. TAX SHARING AGREEMENT TO CONTINUE IN EFFECT.
Except to the extent that it is expressly modified or supplemented herein,
the Tax Sharing Agreement shall continue in full force and effect. The
provisions of the Tax Sharing Agreement shall fix the rights and obligations of
the parties as to the matters covered thereby whether or not followed for
federal income tax or other purposes by the WMS Group including but not limited
to the computation of earnings and profits for federal income tax purposes.
3. TAX RETURN FILING.
A. FEDERAL RETURNS. If at any time and from time to time WMS so elects,
Midway and each Midway Subsidiary agree to continue to join in the filing of
consolidated federal income tax returns for the taxable year ending June 30,
1998 and for any subsequent taxable periods of WMS ending before, on or after
the Disaffiliation Date for which the WMS Group is eligible to file a
consolidated federal income tax return including any Midway Company with respect
to pre-Disaffiliation operations. WMS shall continue to prepare and file all
consolidated federal income tax returns which are required to be filed by the
WMS Group for all such taxable periods and pay all taxes due thereon. Such
returns shall include all income, gains, losses, deductions and credits of the
Midway Companies. WMS will make all decisions relating to the preparation and
filing of such returns. Midway and each Midway subsidiary further agree to file,
or join in the filing of such authorizations, elections, consents and other
documents and take such other actions as may be necessary or appropriate in the
opinion of WMS to carry out the purposes and intent of this paragraph A of
Section 3. Midway shall furnish WMS at least forty five (45) days before such
return is due (with extensions) with its completed section of each year's
consolidated federal income tax return, prepared in accordance with instructions
from WMS. Midway shall also furnish WMS with workpapers and such other
information and documentation as is requested by WMS.
B. STATE AND LOCAL RETURNS. For the taxable year ending June 30, 1997, and
for any subsequent taxable periods ending before, on or after the Disaffiliation
Date, WMS will prepare and file all combined, consolidated or unitary state or
local income or franchise tax returns (herein "State and Local Returns") which
are required to be filed and which include the pre-Disaffiliation operations of
any Midway Company and WMS or any WMS subsidiary. WMS will pay all taxes due on
such returns, WMS will timely advise Midway of the inclusion of any Midway
Companies in any State and Local Returns and the states and localities in which
such returns will be
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filed. Each of the Midway Companies whose tax information is included in any
State and Local Return will evidence its agreement to be included in such return
on the appropriate form and take such other action as may be appropriate in the
opinion of WMS, to carry out the purposes and intent of this paragraph B of
Section 3. Midway shall furnish WMS with a final copy of the information
necessary for WMS to complete such combined, consolidated or unitary returns at
least forty-five (45) days before such returns are due (with extension).
4. CARRYOVER OF MIDWAY TAX BENEFITS.
WMS shall notify Midway, after Disaffiliation, of any consolidated
carryover item which may be partially or totally attributed to and carried over
by a Midway Company and will notify such Midway Company of subsequent
adjustments which may affect such carryover item.
5. DEDUCTIONS AND CERTAIN TAXES RELATED TO OPTIONS.
The WMS Vice President, Finance shall determine whether the WMS Group or
the Midway Subsidiaries shall file returns claiming (x) the tax deductions
attributable to the exercise of options to purchase stock of WMS which are held
by employees or former employees of the Midway Companies and (y) any other
similar compensation related tax deductions. If it is determined that the WMS
Group shall claim all such tax deductions (i) the WMS Group shall be entitled to
any such tax deductions, (ii) the returns of the WMS Group and the Midway
Subsidiaries shall reflect the entitlement of the WMS Group to such deductions,
and (iii) to the extent any such deductions are disallowed, the Midway
Subsidiaries shall pay to the WMS Group an amount equal to the tax paid by the
WMS Group as a result of such disallowance, provided that such amount shall not
exceed the tax benefit ultimately received by the Midway subsidiaries as a
result of claiming such tax deductions. If it is determined that the Midway
Subsidiaries shall claim all such Tax deductions, (i) the Returns of the WMS
Group and the Midway Subsidiaries shall reflect such determination, (ii) the
Midway Subsidiaries shall pay to the WMS Group an amount equal to the product of
the amount of the related deduction and the Midway Subsidiaries' effective tax
rate for the relevant taxable period, as determined by the Midway Vice
President, Finance, and (iii) to the extent such deduction is disallowed, the
WMS Group shall pay to the Midway Subsidiaries the amount of the additional tax
caused by such disallowance (including interest and penalties). WMS will
indemnify Midway and each Midway Subsidiary against any tax liability of Midway
and each Midway Subsidiary under the Federal Insurance Contributions Act or the
Federal Unemployment Tax Act incurred in connection with the exercise of such an
option or the incurrence of any other event resulting in a compensation related
tax deduction, as the case may be, except to the extent such tax is withheld
from a payment to the employee and remitted to a taxing authority on the
employee's behalf.
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6. NET OPERATING LOSSES.
Notwithstanding any provision of the Tax Sharing Agreement to the contrary,
WMS will pay to any Midway Subsidiary the portion of any benefit WMS receives as
a result of a net operating loss carryback generated in a tax period ending
after the Disaffiliation Date if, as a result of such carryback, such Midway
Subsidiary does not receive the benefit of the carryback of a net operating loss
generated in a taxable period ending subsequent to the Disaffiliation Date. Such
amount will be refunded to the WMS Group to the extent, and in the amount, that
such net operating loss generates a tax benefit to a Midway Subsidiary in a
later year (after consideration of all losses in subsequent years.)
7. AUDIT ADJUSTMENTS.
Pursuant to Article 5(f) of the Tax Sharing Agreement, if a Midway Company
ceases to be a member of the WMS Group, the Tax Sharing Agreement shall apply
with respect to any period in which the income of the terminating member is
included in the WMS Consolidated Return. The terminating member shall remain
liable to WMS for payments required under the Tax Sharing Agreement, including,
but not limited to, payments of tax and estimated tax for periods in which the
member's income is included in the WMS Consolidated Return and payments
attributable to adjustments referred to in Article 2 of the Tax Sharing
Agreements (including interest and penalties). Additionally, the terminating
member shall cooperate and provide reasonable access to books, records and other
information needed in connection with audits, administrative proceedings,
litigation and other similar matters relating to periods in which the member was
a member of the WMS Group. Nothing contained herein or in the Tax Sharing
Agreement shall be construed to prevent Midway and the Midway Subsidiaries from
making an election in a post-Disaffiliation year under Section 172(b)(3) of the
Code or under similar provisions of applicable state law. Any such payments or
reimbursements shall be made in accordance with Article 1 of the Tax Sharing
Agreement. If for any period in which a Midway Company was included in the State
and Local Returns there is a final determination that any Midway Company should
not have been included in one or more of such tax returns, WMS shall refund to
such Midway Company any sums paid by such Midway Company to the WMS Group with
respect to such tax returns which are not credited against such Midway Company's
separate state or local tax liability as well as any interest that the WMS Group
receives from a state or local government with respect to sums paid by such
Midway Company to the WMS Group with respect to such tax returns which are
credited against the WMS Group's separate state or local tax liability, and such
Midway Company shall have no further rights or obligations with respect to such
State and Local Returns, including the right to compensation, reimbursement or
refund with respect to such returns.
8. CONTEST.
If an audit adjustment is proposed or any other claim is made by any taxing
authority with respect to a tax liability of Midway or a Midway Subsidiary with
regard to a WMS Consolidated Return or a State and Local Tax Return, WMS shall
promptly notify Midway of such proposed adjustment or claim (unless Midway
previously was notified directly by the relevant tax authority).
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If Midway so requests and at Midway's expense, WMS shall contest or shall permit
the relevant Midway Company to contest such claim on audit or in a related
administrative or judicial proceeding or by appropriate claim for refund or
credit of taxes, subject, however, to WMS's right to control the prosecution of
any such audit or refund claim or related administrative or judicial proceeding
with respect to those matters which could affect WMS's tax liability, including
its liability under this Agreement and, where deemed necessary by WMS, the
relevant entity shall authorize by appropriate powers of attorney such persons
as WMS shall designate to represent such entity with respect to such audit or
refund claim or related administrative or judicial proceeding.
9. ALLOCATION; INFORMATION AND COOPERATION.
A. ALLOCATION. Federal income taxes will be calculated for the taxable
period ending on the Disaffiliation Date on the basis of allocations made in
accordance with the Tax Sharing Agreement.
B. INFORMATION AND COOPERATION. From and after the Disaffiliation Date,
Midway shall deliver to WMS, as soon as practicable after WMS's request, such
information and data concerning the pre-Disaffiliation operations of Midway and
the Midway Subsidiaries and make available such knowledgeable employees of
Midway or the Midway Subsidiaries as WMS may reasonably request, including
providing the information and data required by WMS's customary internal tax and
accounting procedures, in order to enable WMS to complete and file all tax forms
or reports that it may be required to file with respect to the activities of
Midway and the Midway Subsidiaries for taxable periods ending on, prior to or
including the Disaffiliation Date, to respond to audits by any taxing
authorities with respect to such activities, to prosecute or defend any
administrative or judicial proceeding and to otherwise enable WMS to satisfy its
accounting and tax requirements. From and after the Disaffiliation Date, WMS
shall deliver to Midway a copy of any Return including the operations of a
Midway Company prior to the Disaffiliation Date and as soon as practical after
Midway's requests, such information and data concerning any tax attributes which
were allocated to Midway or the Midway Subsidiaries that is reasonably necessary
in order to enable Midway to complete and file all tax forms or reports that it
may be required to file with respect to such activities of Midway and the Midway
Subsidiaries from and after the Disaffiliation Date, to respond to audits by any
tax authorities with respect to such activities, to prosecute or defend claims
for taxes in any administrative or judicial proceeding, and to otherwise enable
Midway to satisfy its accounting and tax requirements. In addition, WMS shall
make available to Midway such of its knowledgeable employees for such purposes.
10. PAYMENTS.
Payments with respect to any federal or state or local tax shall be made in
accordance with the Tax Sharing Agreement. All payments in excess of $50,000 to
be made hereunder shall be made in immediately available funds. All payments not
made when due hereunder or under the Tax Sharing Agreement shall bear interest
from the due date until paid at a rate per annum equal to one (1) percentage
point above the monthly average of the daily Effective Federal Funds Rate as
stated by The Federal Reserve Bank of New York.
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11. NOTICES.
Any notice, request, instruction or other document to be given under this
Agreement by any party to another party shall be in writing, shall be deemed to
have been duly given if delivered personally, or telecopied (receipt confirmed,
with a copy sent by certified or registered mail as set forth in this Agreement)
or, upon receipt (as indicated by return receipt), when sent by certified or
registered mail, postage prepaid, return receipt requested, or by Federal
Express or other overnight delivery service, to the address of the party set
forth below or to such address as the party to whom notice is to be given may
provide in a written notice to each of the other parties to this Agreement:
If to WMS, to
WMS Industries Inc.
3401 N. California Avenue Chicago,
IL 60618
Telecopier No.: (773) 961-1099
Telephone No.: (773) 961-1111
Attention: Vice President - Finance
If to Midway, to:
Midway Games Inc.
3401 N. California Avenue
Chicago, IL 60618
Telecopier No.: (773) 961-2099
Telephone No.: (773) 961-2222
Attention: Vice President - Finance
12. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of any
successor to the parties hereto as if such successor had been a party to this
Agreement; provided, nothing in this Agreement is intended to confer any rights
or impose any obligations on any third parties.
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13. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Illinois and
shall be construed in accordance with such laws.
14. COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
15. TITLES AND SUBTITLES.
The titles and subtitles used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
16. AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended and the observance of any term of
this Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) only with the written consent of each of
the parties.
17. SEVERABILITY.
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provision shall be excluded from this Agreement and
the balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms to the fullest
extent permitted by law.
18. FURTHER ASSURANCES.
Each of the parties shall, without further consideration, use reasonable
efforts to execute and deliver such additional documents and take such other
action, as the other parties, or any of them may reasonably request to carry out
the intent of this Agreement and the transactions contemplated by this
Agreement.
19. ENTIRE AGREEMENT.
This Agreement and the Tax Sharing Agreement, embody the entire agreement
and understanding of the parties in respect of the actions and transactions
contemplated by this Agreement. There are no restrictions, promises,
inducements, representations, warranties, covenants or undertakings, other then
those expressly set forth or referred to in this Agreement.
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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
WMS INDUSTRIES INC.
By: /s/ Harold H. Bach, Jr.
-------------------------
Title: Vice President - Finance
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MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
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Title: President
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MIDWAY HOME ENTERTAINMENT INC.
By: /s/ Neil D. Nicastro
-------------------------
Title: Chief Executive Officer
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MIDWAY INTERACTIVE INC.
By: /s/ Neil D. Nicastro
-------------------------
Title: President
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ATARI GAMES CORPORATION
By: /s/ Neil D. Nicastro
-------------------------
Title: Chief Executive Officer
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TENGEN, INC.
By: /s/ Neil D. Nicastro
-------------------------
Title: Chief Executive Officer
------------------------
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EXHIBIT 10.33
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (this "Agreement") entered into as of
the 6th day of April, 1998 by and between WMS INDUSTRIES INC. ("WMS"), a
Delaware corporation, and MIDWAY GAMES INC. ("Midway"), a Delaware corporation.
RECITALS:
WHEREAS, WMS is the common parent of an affiliated group of corporations
(the "WMS Group") under Section 1504 of the Internal Revenue Code of 1986, as
amended (the "Code"), and owns shares of common stock, par value $0.01 per share
("Common Stock"), of Midway constituting "control" within the meaning of Section
368(c) of the Code; and
WHEREAS, WMS is distributing to its stockholders all of the stock of Midway
that it owns (the "Distribution"); and
WHEREAS, the IRS issued a private letter ruling (the "Private Letter
Ruling") with respect to the Distribution dated March 2, 1998; and
WHEREAS, the parties hereto are entering into this Agreement to provide for
indemnifications as hereinafter provided in the event the Distribution fails to
qualify under Section 355;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, the parties agree as follows:
1. MIDWAY COVENANTS
1.1 CONTINUED CONDUCT OF BUSINESS. During the two-year period
commencing with the Distribution (the "Restricted Period"), Midway agrees that
it will continue active conduct of an historic trade or business within the
meaning of Section 355(b) of the Code conducted by Midway throughout the five
year period prior to the Distribution.
1.2 STOCK OFFERING OR ISSUANCE. Within one year of the Distribution, Midway
agrees that it will issue shares of common stock (or warrants to acquire such
stock) in the amount and manner described in the Private Letter Ruling.
1.3 CONSENT REQUIREMENT FOR MAJOR TRANSACTIONS UNDERTAKEN BY MIDWAY DURING
THE RESTRICTED PERIOD. Midway agrees that during the Restricted Period it will
not (i) merge or consolidate with or into any other corporation, (ii) liquidate
or partially liquidate (within the meaning of such terms as defined in Section
346 and Section 302, respectively, of the Code), (iii) sell or transfer all or
substantially all its assets (within
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the meaning of Rev. Proc. 77-37, 1977-2 C.B. 568) in a single transaction or
series of related transactions, (iv) redeem or otherwise repurchase any of
Midway's capital stock in a manner contrary to the requirements of Rev. Proc.
96-30, 1996-1 C.B. 696, (v) enter into any transaction or make any change in
equity structure (including stock issuances, pursuant to the exercise of
options, option grants or otherwise, capital contributions, or acquisitions, but
not including the Distribution) which may cause the Distribution to be treated
as a plan pursuant to which one or more persons acquire directly or indirectly
Midway stock representing a "50-percent or greater interest" within the meaning
of Section 355(d)(4) of the Code, or (vi) except in connection with capital
stock issued to the officers, directors or employees of Midway and its
subsidiaries pursuant to employee benefit or compensation plans of Midway, and
except as described in the Private Letter Ruling Request, issue additional
shares of Midway's capital stock, unless Midway first obtains the written
consent of the WMS Vice President-Finance and, in the event of any transaction
as described in clause (v) of this paragraph 1.3 (or clause (iii) of this
paragraph 1.3 in the case of a transaction described in Section 355(e)(3)(B) of
the Code), that person or persons acquiring a "50-percent or greater interest"
have agreed to become jointly and severally liable for payments required to be
made by Midway pursuant to this Agreement.
2. WMS COVENANTS
2.1 CONTINUED CONDUCT OF BUSINESS. During the two-year period commencing
with the Distribution, each member of the WMS Group conducting an active trade
or business relied on in conjunction with the Distribution, will continue active
conduct of an historic trade or business within the meaning of Section 355(b) of
the Code conducted by such member throughout the five-year period prior to the
Distribution.
2.2 CONSENT REQUIREMENT FOR MAJOR TRANSACTIONS UNDERTAKEN BY WMS DURING THE
RESTRICTED PERIOD. WMS and each member of the WMS Group defined as a
Distributing Corporation in the Private Letter Ruling agrees that it will not
(i) merge or consolidate with or into any other corporation, (ii) liquidate or
partially liquidate (within the meaning of such terms as defined in Section 346
and Section 302, respectively, of the Code), (iii) sell or transfer all or
substantially all its assets (within the meaning of Rev. Proc. 77-37, 1977-2
C.B. 568) in a single transaction or series of related transactions, (iv) redeem
or otherwise repurchase any of their capital stock in a manner contrary to the
requirements of Rev. Proc. 96-30, 1996-1 C.B. 696, or (v) enter into any
transaction or make any change in equity structure (including stock issuances,
pursuant to the exercise of options, option grants or otherwise, capital
contributions, or acquisitions, but not including the Distribution) which may
cause the Distribution to be treated as a plan pursuant to which one or more
persons acquire directly or indirectly WMS stock representing a "50-percent or
greater interest" within the meaning of Section 355(d)(4) of the Code, unless
WMS first obtains the written consent of the Midway Vice President-Finance and,
in the event of any transaction as described in clause (v) of this paragraph 2.2
(or clause (iii) of this paragraph 2.2 in the case of a transaction described in
Section 355(e)(3)(B) of the Code), that person or persons acquiring a
"50-percent or greater interest" have agreed to become jointly and severally
liable for payments required to be made by WMS pursuant to this Agreement.
3. INDEMNIFICATION.
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3.1 INDEMNIFICATION BY MIDWAY.
(A) If during the Restricted Period Midway takes any action or enters into
any agreement to take any action, including, without limitation, (i) any
merger or consolidation of Midway with or into another corporation, (ii)
any complete or partial liquidation of Midway (within the meaning of such
terms as defined in Sections 346 and 302, respectively, of the Code), (iii)
a sale or transfer of all or substantially all Midway's assets (within the
meaning of Rev. Proc. 77-37, 1977-2 C.B. 568) in a single transaction or
series of related transactions, (iv) ceasing to actively conduct its trade
or business within the meaning of Section 355 of the Code, (v) redeeming or
otherwise repurchasing any of Midway's outstanding capital stock, (vi)
entering into any transaction or making any change in equity structure
(including stock issuances, pursuant to the exercise of options, option
grants or otherwise, capital contributions or acquisitions, but not
including the Distribution) which could cause the Distribution to be
treated as a plan pursuant to which one or more persons acquire directly or
indirectly Midway stock representing a "50-percent or greater interest"
within the meaning of Section 355(d)(4) of the Code, or (vii) issuing any
additional shares of Midway stock (other than as described in the Private
Letter Ruling), and the Distribution fails to qualify under Section 355 of
the Code primarily as a result of such action or actions; or
(B) Midway does not issue shares of common stock (or warrants to acquire
such stock) in the amount and manner described in the Private Letter Ruling
within one year of the Distribution and the Distribution fails to qualify
under Section 355 primarily as a result;
then Midway shall indemnify and hold harmless WMS and each member of the WMS
Group against any and all federal, state and local taxes, interest, penalties
and additions to tax imposed upon or incurred by the WMS Group, or any member
thereof as a result of the failure of the Distribution to so qualify to the
extent provided herein. WMS and each other member of the WMS Group shall be
indemnified and held harmless under this Paragraph 3.1 without regard to the
fact that WMS or any other member of the WMS Group may have consented to the
action pursuant to Paragraph 2.
3.2 INDEMNIFICATION BY WMS. WMS will indemnify Midway and each member of
the Midway Group against any and all federal, state and local taxes, interest,
penalties and additions to tax resulting from the Distribution, other than any
such liabilities described in paragraph for which Midway is required to
indemnify WMS as described in 3.1.
3.3 INDEMNIFIED LIABILITY. For purposes of this Agreement, the term
"Indemnified Liability" means any liability imposed upon or incurred by the WMS
Group or any member of the WMS Group for which WMS or any other member of the
WMS Group is indemnified and held harmless under Paragraph 3.1, or any liability
imposed upon or incurred by the Midway
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Group or any member of the Midway Group for which Midway or any member of the
Midway Group is indemnified and held harmless under paragraph 3.2, as the case
may be, but shall not refer to the amount of such liability.
3.4 INDEMNIFIED PARTY. For purposes of this Agreement, the term
"Indemnified Party" means the party entitled to be indemnified under paragraph
3.1 or 3.2, as the case may be.
3.5 INDEMNIFYING PARTY. For purposes of this Agreement, the term
"Indemnifying Party" means the party required to indemnify the other party under
paragraph 3.1 or 3.2, as the case may be.
3.6 AMOUNT OF INDEMNIFIED LIABILITY FOR INCOME TAXES. The amount of an
Indemnified Liability for a federal or state tax based on or determined with
reference to income shall be deemed to be the amount of tax computed by
multiplying (i) the taxing jurisdiction's highest marginal tax rate applicable
to taxable income of corporations such as the Indemnified Party of the character
subject to tax as a result of the failure of the Distribution to qualify under
Section 355 of the Code for the taxable period in which the Distribution occurs,
times (ii) the gain or income of the Indemnified Party Group or any member
thereof which is subject to tax in the taxing jurisdiction as a result of the
failure of the Distribution to qualify under Section 355 of the Code, and, in
the case of a state, times (iii) the percentage representing the extent to which
such gain or income is apportioned or allocated to such state; PROVIDED,
HOWEVER, that in the case of a state tax determined as a percentage of federal
income tax liability, the amount of Indemnified Liability shall be deemed to be
the amount of tax computed by multiplying (i) that state's highest percentage
rate applicable to the taxable income of corporations such as the Indemnified
Party of the character subject to tax as a result of the failure of the
Distribution to qualify under Section 355 of the Code for the taxable period in
which the Distribution occurs, times (ii) the amount of deemed federal income
tax (whether or not incurred) imposed upon the Indemnified Party Group or any
member thereof from the failure of the Distribution to qualify under Section 355
of the Code computed in accordance with this Paragraph 3.6, times (iii) the
percentage representing the extent to which the gain or income required to be
recognized on the Distribution is apportioned or allocated to such state.
3.7 INDEMNITY REDUCED BY INCOME TAX BENEFITS FROM INDEMNIFIED LIABILITY. If
any Indemnified Liability is of a type that constitutes a deduction from income
in any taxable period in determining the Indemnified Party Group's or any of its
member's liability for a federal or state tax based upon or determined with
reference to income, the amount that the Indemnified Party would otherwise be
required to pay as indemnification for such Indemnified Liability shall be
reduced by the aggregate deemed reduction, on account of such deduction of the
Indemnified Liability, in the tax liability of the Indemnified Party Group, or
any member to all taxing jurisdictions over all taxable periods in which the
Indemnified Liability is deductible. The deemed reduction in tax liability to a
taxing jurisdiction for any taxable period in which all or a portion of the
Indemnified Liability is deductible shall be deemed to be the amount computed by
multiplying (i) such taxing jurisdiction's highest marginal tax rate applicable
to the taxable income of corporations such as the Indemnified Party of the
character against which the
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Indemnified Liability is deductible, times (ii) the portion of the Indemnified
Liability that constitutes a deduction in such taxing jurisdiction in such
taxable period, and, in the case of a state, times (iii) the percentage
representing the extent to which the deduction for the Indemnified Liability is
apportioned or allocated to such state; PROVIDED, HOWEVER, that in the case of a
state tax determined as a reduction in tax liability to such state for any
taxable period in which all or a portion of the Indemnified Liability is
deductible shall be deemed to be the amount computed by multiplying (i) such
state's highest percentage rate applicable to the taxable income of corporations
such as the Indemnified Party in such taxable period of such character against
which the Indemnified Liability is deductible, times (ii) the deemed reduction
in federal income tax in such taxable period resulting from the deductibility of
the Indemnified Liability computed in accordance with this Paragraph 3.4, times
(iii) the percentage representing the extent to which the deduction for the
Indemnified Liability is apportioned or allocated to such state. The amount of
such reduction in the Indemnified Party's liability shall be unaffected by any
interest paid to the Indemnified Party Group, or any member thereof, by a taxing
authority by reason of any such deduction.
3.8 INDEMNITY AMOUNT. With respect to any Indemnified Liability, the amount
which Midway or WMS, as the case may be, shall pay as indemnification (the
"Indemnity Amount") shall be the amount of the Indemnified Liability, as
determined and adjusted under Paragraphs 3.6 and 3.7.
4. PROCEDURAL MATTERS.
4.1 NOTICE. If either party receives any written notice of deficiency,
claim or adjustment or any other written communication from a taxing authority
that may result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
PROVIDED that any delay by any party so notifying the Indemnifying Party shall
not relieve the Indemnifying Party of any liability hereunder except to the
extent the Indemnifying Party is materially and adversely prejudiced by such
delay, the Indemnified Party undertakes and agrees that from and after such time
as the Indemnified Party obtains knowledge that any representative of a taxing
authority has begun to investigate or inquire into the Distribution (whether or
not such investigation or inquiry is a formal or informal inquiry), the
Indemnified Party shall (i) notify the Indemnified Party thereof, PROVIDED that
any delay by the Indemnified Party in so notifying the Indemnifying Party shall
not relieve the Indemnifying Party of any liability to the Indemnified Party
hereunder, (ii) consult with the Indemnifying Party from time to time as to the
conduct of such investigation or inquiry, (iii) provide the Indemnifying Party
with copies of all correspondence between the Indemnified Party or its
representatives and such taxing authority or any representative thereof
pertaining to such investigation or inquiry and (iv) arrange for a
representative of the Indemnifying Party to be present at (but not participate
in) all meetings with such taxing authority or any representative thereof
pertaining to such investigation or inquiry.
4.2 WRITTEN ACKNOWLEDGMENT. Promptly upon receipt of notice as provided
in Paragraph 4.1, the Indemnifying Party shall confirm in writing to the
Indemnified Party that the liability asserted in the notice of deficiency, claim
or adjustment or other written communication would, if imposed upon or incurred
by the the Indemnified Party Group or any member thereof, be an Indemnified
Liability, unless the Indemnifying Party believes in good faith that such
liability would
5
<PAGE> 6
not be an Indemnified Liability in which case the Indemnifying Party shall set
forth in writing to the Indemnified Party the grounds for such belief.
4.3 TAX PROCEEDINGS CONTROLLED BY THE INDEMNIFYING PARTY. Any tax
proceeding that may result in an Indemnified Liability, which is acknowledged as
such by the Indemnifying Party, shall be conducted in accordance with this
Paragraph 4.3.
Promptly upon the Indemnifying Party's written acknowledgment that the
asserted liability is an Indemnified Liability, the Indemnifying Party shall
assume and direct the defense or settlement of the proceeding. If the
Indemnified Liability is grouped with other unrelated asserted liabilities or
issues in the proceeding, WMS and Midway shall use their respective best efforts
to cause the Indemnified Liability to be the subject of a separate proceeding.
If such severance is not possible, the Indemnifying Party shall assume and
direct and be responsible only for the matters relating to the Indemnified
Liability.
Upon request, during the course of the tax proceedings, the Indemnifying
Party shall from time to time furnish the Indemnified Party with evidence
reasonably satisfactory to the Indemnified Party of its ability to pay the full
amount of the Indemnified Liability. If at any time during such tax proceedings
the Indemnified Party reasonably determined, after due investigation, that the
Indemnifying Party could not pay the full amount of the Indemnified Liability,
if required, then the Indemnified Party may assume control of the tax
proceedings in accordance with Paragraph 4.4.
The Indemnifying Party shall pay all expenses related to the Indemnity
Liability, including but not limited to fees for attorneys, accountants, expert
witnesses or other consultants retained by it. To the extent that any such
expenses have been or are paid by the Indemnified Party, the Indemnifying Party
shall promptly reimburse the Indemnified Party.
The Indemnified Party shall not pay (unless otherwise required by a proper
notice of levy and after prompt notification to the Indemnifying Party of the
Indemnified Party's receipt of notice and demand for payment), settle,
compromise or concede any portion of the Indemnified Liability without the
written consent of the Indemnifying Party. The Indemnified Party shall, at the
Indemnifying Party's sole cost (including but not limited to any reasonable
out-of-pocket costs incurred by the Indemnified Party), take such action as the
Indemnifying Party may reasonably request (including but not limited to the
execution of powers of attorney for one or more persons designated by the
Indemnifying Party, and the filing of a petition, complaint, amended return or
claim for refund) in contesting the Indemnified Liability. The Indemnifying
Party shall, on a timely basis, keep the Indemnified Party informed of all
developments in the proceedings and provide the Indemnified Party with copies of
all pleadings, briefs, orders, and other written papers pertaining thereto.
Subject to satisfaction of the conditions herein set forth, the
Indemnifying Party may direct the Indemnified Party to settle the Indemnified
Liability on such terms and for such amounts as the Indemnifying Party may
direct. The Indemnified Party may condition such settlement on receipt, prior to
the settlement, from the Indemnifying Party of the Indemnity Amount less any
amounts to be paid directly by the Indemnifying Party to the taxing authority.
The Indemnifying Party may direct
6
<PAGE> 7
the Indemnified Party, at the Indemnifying Party's expense, to pay an asserted
deficiency for the Indemnified Liability out of funds provided by the
Indemnifying Party, and to file a claim for refund. If the Indemnifying Party
pays the Indemnified Party the Indemnified Amount pursuant to Paragraph 4.5 and
the Indemnified Party or any other member of the the Indemnified Party receives
a refund of any portion of amounts paid to a taxing jurisdiction in respect of
the Indemnified Liability, the Indemnified Party shall immediately pay any and
all such refund proceeds to the Indemnifying Party.
4.4 TAX PROCEEDINGS CONTROLLED BY THE INDEMNIFIED PARTY. Should the
Indemnifying Party not provide the Indemnified Party with the confirmation
contemplated by Section 4.2 within thirty (30) days following receipt of notice
provided in Section 4.1 or, following such confirmation, should the Indemnifying
Party fail within thirty (30) days following request therefor to furnish to the
Indemnified Party evidence of its ability to pay the full amount of the
Indemnified Liability or should the Indemnified Party reasonably believe after
due investigation that the Indemnifying Party could not pay the full amount of
the Indemnified Liability if required, then the Indemnified Party may assume
control of the tax proceeding upon the following terms: (i) the Indemnified
Party will diligently defend against the claim of any taxing authority that the
Distribution resulted in taxable income to it or any other member of the the
Indemnified Party Group, without regard to the indemnification provided herein,
including the pursuit of the appeal of any adverse determinations to the
appropriate tribunal (unless advised by independent counsel in its reasonable
judgment that the Indemnified Party or such other member of the the Indemnified
Party would not prevail upon any such appeal) and shall employ such resources,
including independent counsel, in conducting such defense as are reasonably
commensurate to the nature and magnitude of the claim; (ii) the Indemnified
Party will consult with the Indemnifying Party as to the conduct of all
proceedings, will provide The Indemnifying Party with copies of all protests,
pleadings, briefs, filings, correspondence and similar materials relative to the
proceedings and will arrange for a representative of the Indemnifying Party to
be present at all meeting with the relevant taxing authorities and all hearings
before any court; and (iii) neither the Indemnified Party nor any other member
of the the Indemnified Party Group will settle, compromise or concede any claim
that would result in an Indemnified Liability unless the Indemnified Party has
made the determination, and has been so advised by independent counsel, that
such settlement is fair to the Indemnifying Party and its stockholders and is
reasonable in the circumstance. Subject to the above, any such tax proceeding
shall be controlled and directed exclusively by the Indemnified Party and may be
contested, defended, paid, settled, compromised or conceded by the Indemnified
Party and any related expenses incurred by the Indemnified Party or any member
of the the Indemnified Party, including but not limited to, fees for attorneys,
accountants, expert witnesses or other consultants shall be reimbursed by the
Indemnifying Party, if the Indemnifying Party admits or is found to have
incorrectly failed to acknowledge the asserted liability as an Indemnified
Liability as provided in Paragraph 4.2; PROVIDED, HOWEVER, that if after the
Indemnified Party's assumption of control of the proceedings, the Indemnifying
Party acknowledges in writing that the asserted liability is an Indemnified
Liability or demonstrates its ability to pay the full amount of the Indemnified
Liability if required, the Indemnifying Party shall (if practical and upon its
request) promptly assume and direct a proceeding which shall thenceforth be
conducted in accordance with Paragraph 4.3, PROVIDED, FURTHER HOWEVER, that the
Indemnified Party will not be required to pursue the claim in federal district
court, Court of Claims or any state court if as a prerequisite to such Court's
jurisdiction, it
7
<PAGE> 8
is required to pay the asserted liability unless the funds necessary to invoke
such jurisdiction are provided by the Indemnifying Party. For purposes of this
paragraph 4.4, the independent counsel shall be jointly selected by both
parties.
4.5 TIME AND MANNER OF PAYMENT. Unless otherwise agreed in writing, the
Indemnifying Party shall pay to the Indemnified Party the Indemnity Amount (less
any amount paid directly by the Indemnifying Party to the taxing authority)
within seven (7) business days after the date payment of the Indemnified
Liability is made, whether by the Indemnified Party or the Indemnifying Party,
to the taxing authority. Such payment shall be paid by the Indemnifying Party to
the Indemnified Party by wire transfer of immediately available funds to an
account designated by the Indemnified Party by written notice to the
Indemnifying Party prior to the due date of such payment. If payment is delayed
beyond the due date hereunder, the Indemnifying Party shall pay interest to the
Indemnified Party on the amount unpaid at the rate of one (1) percentage point
above the monthly average of the daily Effective Federal Funds Rate, as stated
by The Federal Reserve Bank of New York for each day and the actual number of
days for which any amount due hereunder is unpaid; PROVIDED, HOWEVER, that this
provision for interest shall not be construed to give the Indemnifying Party the
right to defer payment beyond the due date hereunder.
4.6 REFUND OF AMOUNTS PAID BY THE INDEMNIFYING PARTY. Should the
Indemnified Party or any other member of the the Indemnified Party Group receive
a refund in respect of amounts paid by the Indemnifying Party to any taxing
authority on the Indemnified Party's behalf, or should any such amounts that
would otherwise be refundable to the Indemnifying Party be applied by the taxing
authority to obligations of the Indemnified Party or any other member of the the
Indemnified Party unrelated to the Distribution, then the Indemnified Party
shall, promptly following receipt (or notification of credit), remit such
refund.
4.7 COOPERATION. WMS and Midway shall cooperate with one another in a
timely manner in any administrative or judicial proceeding involving any matter
that may result in an Indemnified Liability. WMS and Midway agree that such
cooperation shall include, without limitation, making available to the other
party, during normal business hours, all books, records and information,
officers and employees (without substantial interruption of employment)
necessary or useful in connection with any such judicial or administration
proceeding. The party requesting or otherwise entitled to any books, records,
information, officers or employees pursuant to this Paragraph 4.7 shall bear all
reasonable out-of-pocket costs and expenses (except reimbursement of salaries,
employee benefits and general overhead) incurred in connection with providing
such books, records, information, officers or employees.
4.8 DISPUTE RESOLUTION. If an effort to resolve informally and amicably any
claim or controversy arising out of or related to the interpretation or
performance of this Agreement without resorting to litigation, each party shall
first notify the other in writing of its position with respect to any difference
or dispute hereunder that requires resolution. WMS and Midway shall each
designate any employee to investigate, discuss and seek to settle the matter
between them. If the two are unable to settle the matter within 30 days after
the latest such notification (or, if one party gives such notification, within
30 days after such notification), the matter shall be submitted to a senior
8
<PAGE> 9
officer of each of WMS and Midway for consideration. If settlement cannot be
reached through their efforts within an additional 30 days, or such longer time
period as they shall agree upon, the parties shall consider arbitration or other
alternative means to resolve the disputes; PROVIDED, HOWEVER, that the parties
hereby agree that any disputes concerning the calculation of amounts (e.g., an
Indemnity Amount) or similar accounting matter shall be resolved by a nationally
recognized public accounting firm selected by the parties, whose fees and
expenses shall be shared equally by WMS and Midway. With respect to any dispute
concerning other matters, if they are unable to agree on an alternative dispute
resolution mechanism, either party may initiate legal proceedings to resolve
such matter.
5. MISCELLANEOUS.
5.1 NOTICES. Any notice, request, instruction or other document to be given
under this Agreement by any party to another party shall be in writing and shall
be deemed to have been duly given or delivered when delivered personally, or
telecopied (receipt confirmed, with a copy sent by certified or registered mail
as set forth in this Agreement) or, upon receipt (as indicated by return
receipt), when sent by certified or registered mail, postage prepaid, return
receipt requested, or by Federal Express or other overnight delivery service, to
the address of the party set forth below or to such address as the party to whom
notice is to be given may provide in a written notice to the other party to this
Agreement:
9
<PAGE> 10
If to WMS, to
WMS Industries Inc.
3401 N. California Avenue
Chicago, IL 60618
Telecopier No.: (773) 961-1099
Telephone No.: (773) 961-1111
Attention: Vice President - Finance
If to Midway, to:
Midway Games Inc.
3401 N. California Avenue
Chicago, IL 60618
Telecopier No.: (773) 961-2099
Telephone No.: (773) 961-2222
Attention: Vice President - Finance
5.2 GOVERNING LAW; JURISDICTION. This Agreement shall be governed by and
construed under the laws of the State of Illinois as applied to agreements made
and to be performed in the State of Illinois without regard to the conflict of
laws principles thereof. Each of the parties consents to personal jurisdiction
in respect of any action arising under or in connection with this Agreement
instituted in the United States District Court for the Northern District of
Illinois, and to service of process upon it in any manner permitted under the
laws of the State of Illinois.
5.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
5.5 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of each of the parties.
5.6 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its terms
to the fullest extent permitted by law.
5.7 FURTHER ASSURANCE. Each of the parties shall, without further
consideration, use reasonable efforts to execute and deliver such additional
documents and take such other action,
10
<PAGE> 11
as the other parties, or any of them may reasonably request to carry out the
intent of this Agreement and the transactions contemplated by this Agreement.
5.8 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties in respect of the actions and transactions
contemplated by this Agreement. There are no restrictions, promises,
inducements, representations, warranties, covenants or undertakings with respect
to the subject matter hereof, other than those expressly set forth or referred
to in this Agreement.
5.9 PARTIES IN INTEREST. Neither party may assign its rights or delegate
any of its duties under this Agreement (except to another person acquiring
substantially all of the assets of such party by purchase, merger, consolidation
or otherwise) without the prior written consent of the other. This Agreement
shall be binding upon, and shall inure to the benefit of, the parties hereto
and, except as otherwise prohibited, their respective successors and assigns.
Nothing contained in this Agreement, express or implied, is intended to confer
upon any other person or entity any benefits, rights or remedies PROVIDED,
HOWEVER, that other members of the WMS Group shall be deemed third party
beneficiaries of this Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
WMS INDUSTRIES INC. MIDWAY GAMES INC.
By: /s/ Harold H. Bach, Jr. By: /s/ Neil D. Nicastro
---------------------------- --------------------------------
Title: Vice President - Finance Title: President
------------------------- -----------------------------
<PAGE> 1
MIDWAY GAMES INC.
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
...................................................................................................................................
SELECTED STATEMENT OF INCOME DATA JUNE 30, 1998 1997 1996(1) 1995 1994(1)
...................................................................................................................................
<S> <C> <C> <C> <C> <C>
REVENUES
Home video $ 229,732 $ 219,912 $ 154,102 $ 60,839 $ 23,959
Coin-operated video 161,498 168,314 91,321 119,640 97,923
...................................................................................................................................
Total revenues 391,230 388,226 245,423 180,479 121,882
...................................................................................................................................
Gross profit 190,099 166,819 105,367 78,727 59,203
...................................................................................................................................
Operating income 65,075 60,533 40,494 47,136 45,237
...................................................................................................................................
Income before tax provision and extraordinary credit 68,022 62,663 40,765 46,993 45,458
Provision for income taxes (25,900) (23,812) (15,536) (17,854) (17,435)
...................................................................................................................................
Income before extraordinary credit 42,122 38,851 25,229 29,139 28,023
Extraordinary gain on early extinguishment of debt, net -- 3,044 -- -- --
...................................................................................................................................
Net income $ 42,122 $ 41,895 $ 25,229 $ 29,139 $ 28,023
===================================================================================================================================
Basic and diluted per share of common stock
...................................................................................................................................
Income before extraordinary credit $ 1.10 $ 1.06 $ .76 $ .87 $ .84
...................................................................................................................................
Net income $ 1.10 $ 1.14 $ .76 $ .87 $ .84
...................................................................................................................................
Average number of shares outstanding 38,481 36,800 33,400 33,400 33,400
...................................................................................................................................
SELECTED BALANCE SHEET DATA
Total assets $ 227,423 $ 214,318 $ 118,262 $ 81,106 $ 50,993
...................................................................................................................................
Working capital (2) 118,286 86,310 (11,618)(2) 27,327 24,407
...................................................................................................................................
Dividend notes payable -- -- 50,000 -- --
...................................................................................................................................
Long-term debt -- -- 7,863 -- --
...................................................................................................................................
Stockholder's net investment -- -- 5,488 49,752 37,677
...................................................................................................................................
Stockholders' equity 176,649 140,768 -- -- --
===================================================================================================================================
</TABLE>
(1) Includes the results of Midway Home Entertainment Inc., subsequent to its
purchase of Tradewest on April 29, 1994 and the results of Midway
Interactive Inc., subsequent to its purchase of Atari Games Corporation on
March 29, 1996. See Note 5 to the financial statements.
(2) Prior to the Company's initial public offering substantially all of the
excess cash generated by the Company's operations was regularly remitted to
WMS Industries Inc. pursuant to WMS Industries Inc. centralized cash
management system.
(3) The financial statements of Midway Games Inc. for the years through June
30, 1996 are the combined operations of Midway Games Inc. reflecting the
transfer of certain businesses to and from WMS Industries Inc. as of July
1, 1996. See Note 3 to the financial statements.
13
<PAGE> 2
MIDWAY GAMES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion set forth below contains certain forward looking statements
concerning future business conditions and the outlook for the Company based on
currently available information that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward looking statements as a result of certain risks and uncertainties,
including, without limitation, the financial strength of the amusement games
industry, dependence on new product introductions, technological changes,
dependence on dedicated platform manufacturers and other risks more fully
described under "- Factors Affecting Future Performance" in the Company's Annual
Report on Form 10-K.
OVERVIEW
Since its incorporation in 1988 through the date of the initial public offering,
Midway Games Inc. ("Midway") was a wholly-owned subsidiary of WMS Industries
Inc. ("WMS"). Immediately prior to the initial public offering, Midway
effectuated a 33,400 for one stock split resulting in 33,400,000 shares of
common stock being issued and outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable to
WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On April 6, 1998, WMS completed the spin-off, originally announced on August
11, 1997, of its remaining 86.8% ownership interest of 33,400,000 shares of
Midway. The spin-off was completed by means of a tax free pro rata distribution
of the Midway shares to the WMS stockholders.
The Company and WMS entered a Manufacturing and Services Agreement in 1996
under which WMS provided contract manufacturing of coin-operated video games and
several other services to the Company. Effective April 6, 1998, in connection
with the spin-off of the Company by WMS, the 1996 agreement was terminated and
the Company entered into several agreements with WMS under which WMS will, among
other things, perform contract manufacturing of coin-operated video games and
provide information technology services to certain parts of the Company. In
addition, under a separate agreement, the Company will provide selling and
marketing services for the WMS pinball products. These agreements provide for
products or services on an arm's length basis. See Notes 3 and 4 to the
financial statements. It is expected that the overall cost structure of the
Company, at current or expanded levels of coin-operated video game operations,
will not be materially different from that experienced by the Company under the
prior Manufacturing and Services Agreement with WMS.
FINANCIAL CONDITION
The Company received net proceeds of $93,385,000 (after deducting the costs of
issuing the stock) from the initial public offering of 5,100,000 shares of
common stock.
Prior to the initial public offering, the Company, except for its Atari Games
subsidiary, participated in the WMS central cash management system, pursuant to
which all cash receipts were transferred to WMS and all cash disbursements were
made by WMS. Seasonal cash needs were provided by WMS. Shortly after the initial
public offering the Company established its own cash management system and no
longer relied on WMS for its seasonal cash needs.
Cash provided by operating activities before changes in operating assets and
liabilities was $70,117,000 in fiscal 1998 and $51,956,000 in fiscal 1997. The
increase was primarily the result of the change in deferred income taxes and the
non-cash extraordinary gain on early extinguishment of debt which was included
in the fiscal 1997 net income.
The changes in the operating assets and liabilities, as shown in the
statements of cash flows, resulted in a cash outflow of $68,672,000 in fiscal
1998, which outflow was primarily due to increased receivables and other assets
balances and a decreased accounts payable and accruals balance all from the
comparable balances at June 30, 1997. The changes in the operating assets and
liabilities in fiscal 1997 resulted in cash outflow of $13,809,000, primarily
due to an increased receivables balance at June 30, 1997. The increase in
accounts receivable at June 30, 1998 from the balance at June 30, 1997 resulted
primarily from the timing of the initial release of certain home video games
late in the fourth quarter of fiscal 1998 as well as a 79% increase in home
video games revenues in the fourth quarter of fiscal 1998 compared to the prior
year fourth quarter.
Cash used by investing activities was $20,930,000 in fiscal 1998 and
$21,899,000 in fiscal 1997. Cash used for the purchase of property and equipment
decreased to $4,530,000 in fiscal 1998 from $4,699,000 in fiscal 1997. Cash used
for the additional purchase price of Tradewest was $14,400,000 and $ 7,200,000
in fiscal 1998 and fiscal 1997, respectively.
14
<PAGE> 3
MIDWAY GAMES INC.
Cash used by financing activities was $6,241,000 in fiscal 1998 for the
Company's share repurchase program compared with cash provided of $26,415,000 in
fiscal 1997. In fiscal 1997 net proceeds received from the initial public
offering of $93,385,000 were in part used to pay the dividend notes due to WMS
in the amount of $50,000,000. The balance of the proceeds is being used for
working capital. The Company used cash of $16,970,000 in fiscal 1997 to prepay
the promissory notes from the purchase of Atari Games.
See the Statements of Cash Flows on page 22 for further details of cash flow
items.
The home video business is highly seasonal and significant working capital is
required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a purchase order is accepted.
At June 30, 1998, the Company had repurchased 463,200 shares of its common
stock and subsequent thereto purchased 536,800 shares for $8,068,000 under the
initial Board of Directors authorization. The Board of Directors has authorized
an additional purchase, from time to time, depending on market conditions, of up
to one million shares of its common stock.
The Company has established a line of credit for $50,000,000 and an
additional letter of credit line of $30,000,000. The revolving credit agreement
extends to October 31, 1998 and contains usual bank line of credit terms. There
were no borrowings under the credit line at June 30, 1998 and $1,073,000 of
letters of credit were outstanding. Management believes that cash and cash
equivalents, short-term investments, cash flow from operations and amounts
available under the line of credit will be adequate to fund the anticipated
levels of inventories and accounts receivable required in the operation of the
business and the Company's other presently anticipated needs including the
purchase of shares of the Company's common stock.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain items in or
derived from the Company's statements of income expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
............................................................
June 30, 1998 1997 1996
............................................................
<S> <C> <C> <C>
Revenues
Home video 58.7% 56.6% 62.8%
Coin-operated video 41.3% 43.4% 37.2%
............................................................
Total revenues 100.0% 100.0% 100.0%
Cost of sales 51.4% 57.0% 57.1%
............................................................
Gross profit 48.6% 43.0% 42.9%
Research and development
expense 17.3% 14.4% 13.2%
Selling expense 9.8% 7.9% 9.3%
Administrative expense 4.9% 5.1% 3.9%
............................................................
Operating income 16.6% 15.6% 16.5%
Interest and other income, net 0.8% 0.5% 0.1%
............................................................
Income before tax provision
and extraordinary credit 17.4% 16.1% 16.6%
Provision for income taxes 6.6% 6.1% 6.3%
............................................................
Income before
extraordinary credit 10.8% 10.0% 10.3%
Extraordinary gain on early
extinguishment of debt, net 0.0% 0.8% 0.0%
............................................................
Net income 10.8% 10.8% 10.3%
............................................................
</TABLE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues increased $3,004,000 or 0.8% from $388,226,000 in fiscal 1997 to
$391,230,000 in fiscal 1998.
Home video game revenues increased $9,820,000 or 4.5% from $219,912,000 in
fiscal 1997 to $229,732,000 in fiscal 1998. Revenues from the sale of next
generation home video games increased to $215,845,000 in fiscal 1998 from
$152,484,000 in fiscal 1997. Shipments of 32-bit and 64-bit next generation home
video game units increased 90% while next generation home video game revenues
only increased 41.6% due in part to a larger percentage of lower priced Sony
PlayStation sales in the sales mix and in part to the unit sales price decreases
initiated by Nintendo and Sony. Home video game gross profit increased to 54.3%
of revenues in fiscal 1998 compared to 46.6% of revenues in fiscal 1997 due to
the change in sales mix to Sony PlayStation which has a higher gross profit
percentage and because the unit cost of Nintendo 64 cartridges was reduced along
with the decreased sales price in the current fiscal year.
15
<PAGE> 4
MIDWAY GAMES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED
Coin-operated video game revenues decreased by 4.0% from $168,314,000 in
fiscal 1997 to $161,498,000 in fiscal 1998. The decrease in coin-operated video
game revenues was primarily from a shift in the product mix from dedicated video
games to lower priced video kits.
Gross profit increased $23,280,000 or 14.0% from $166,819,000 (43.0% of
revenues) in fiscal 1997 to $190,099,000 (48.6% of revenues) in fiscal 1998. The
increase in gross profit was primarily from an increased percentage of home
video game revenues in total revenues and the increase in the home video game
gross profit margin noted above.
Research and development expenses increased $11,536,000 or 20.6% from
$55,941,000 (14.4% of revenues) in fiscal 1997 to $67,477,000 (17.3% of
revenues) in fiscal 1998. The increase is due in part to an increased number of
internal game development teams and in part to additional externally developed
home video games released during fiscal 1998.
Selling expense increased $7,845,000 or 25.8% from $30,443,000 (7.9% of
revenues) in fiscal 1997 to $38,288,000 (9.8% of revenues) in fiscal 1998. The
increase was primarily due to the change in the revenue mix to the increased
number and level of home video games which have higher selling costs as a
percent of sales.
Administrative expense decreased $643,000 or 3.2% from $19,902,000 (5.1% of
revenues) in fiscal 1997 to $19,259,000 (4.9% of revenues) in fiscal 1998,
notwithstanding increased goodwill amortization and public company expenses in
fiscal 1998.
Operating income increased $4,542,000 or 7.5% from $60,533,000 (15.6% of
revenues) in fiscal 1997 to $65,075,000 (16.6% of revenues) in fiscal 1998
because gross profit increased more than the combined increase in research and
development and selling expenses.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38.1% in fiscal 1998 and 38.0% in fiscal 1997.
Net income increased $227,000 or 0.5% from $41,895,000, $1.14 per share, in
fiscal 1997 to $42,122,000, $1.10 per share, in fiscal 1998. Fiscal 1997 net
income includes $3,044,000, $.08 per share, from an extraordinary gain on early
extinguishment of debt . Excluding the effects of the extraordinary gain in
fiscal 1997, earnings increased $3,271,000 or 8.4% from $38,851,000 in fiscal
1997 to $42,122,000 in fiscal 1998 and per share earnings increased 3.8% from
$1.06 per share to $1.10 per share. The number of shares used in calculating per
share earnings increased by 4.6% to 38,481,000 in fiscal 1998 from 36,800,000 in
fiscal 1997 because of the shares of common stock sold in the October 29, 1996
public offering. The increase in income before extraordinary credit was
primarily the result of the increase in gross profit resulting from the increase
in the percentage of home video game revenues in total revenues and the increase
in the home video game gross profit margin noted above, after absorbing the
increases in research and development and selling expenses.
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues increased $142,803,000 or 58.2% from $245,423,000 in fiscal 1996 to
$388,266,000 in fiscal 1997.
Home video game revenues increased $65,810,000 or 42.7% from $154,102,000 in
fiscal 1996 to $219,912,000 in fiscal 1997. Home video game revenues increased
as a result of an increased number of units shipped primarily due to an increase
in the number of titles sold and an expanded consumer base due to the growth in
the installed base of 32-bit and 64-bit next generation platforms. In fiscal
1997, 60% of the Company's home video game unit sales were for the next
generation platforms and during the last six months of the 1997 fiscal year,
home video game sales for next generation platforms were 87% of the Company's
total home video game unit sales.
Coin-operated video game revenues increased by 84.3% from $91,321,000 in
fiscal 1996 to $168,314,000 in fiscal 1997. Coin-operated video game revenues
increased due to an increased number of "hit" games sold during fiscal 1997 as
well as the inclusion of revenues from coin-operated video game sales of the
Company's subsidiary Atari Games acquired in March 1996.
Gross profit increased $61,452,000 or 58.3% from $105,367,000 (42.9% of
revenues) in fiscal 1996 to $166,819,000 (43.0% of revenues) in fiscal 1997. The
increase in gross profit was primarily from increased revenues.
Research and development expenses increased $23,446,000 or 72.2% from
$32,495,000 (13.2% of revenues) in fiscal 1996 to $55,941,000 (14.4% of
revenues) in fiscal 1997. The increase is primarily due to including the product
development expenses from the Company's subsidiary Atari Games acquired in March
1996 and due to an increase in the number of game development teams.
Selling expense increased $7,628,000 or 33.4% from $22,815,000 (9.3% of
revenues) in fiscal 1996 to $30,443,000 (7.9% of revenues) in fiscal 1997. The
increase was primarily due to increased sales commissions and advertising and
promotion costs for the increased home video game sales.
Administrative expense increased $10,339,000 or 108.1% from $9,563,000 (3.9%
of revenues) in fiscal 1996 to $19,902,000 (5.1% of revenues) in fiscal 1997.
The increase in administrative expense is primarily due to increased goodwill
amortization and depreciation, public company expenses, a new computer system
and computer systems upgrades and the administrative expense of Atari Games
acquired in March 1996.
16
<PAGE> 5
MIDWAY GAMES INC.
Operating income increased $20,039,000 or 49.5% from $40,494,000 (16.5% of
revenues) in fiscal 1996 to $60,533,000 (15.6% of revenues) in fiscal 1997.
Operating income includes $7,135,000 in fiscal 1996 from licensing revenues.
Excluding the effects of licensing revenues and, notwithstanding the $23,446,000
increase in research and development expense, operating income increased
$27,174,000 or 81.5% from fiscal 1996 to fiscal 1997 primarily due to the
increase in revenues from fiscal 1996 to fiscal 1997.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38% in fiscal 1997 and 38.1% in fiscal 1996.
Net income increased $16,666,000 or 66.1% from $25,229,000, $.76 per share,
in fiscal 1996 to $41,895,000, $1.14 per share, in fiscal 1997. Fiscal 1997 net
income includes $3,044,000, $.08 per share, from an extraordinary gain on early
extinguishment of debt while fiscal 1996 net income includes $4,318,000, $.13
per share, relating to licensing revenues. Excluding the effects of the
extraordinary gain in fiscal 1997 and licensing revenues in fiscal 1996,
earnings increased $17,940,000 or 85.8% from $20,911,000 in fiscal 1996 to
$38,851,000 in fiscal 1997 and per share earnings increased 68.3% from $.63 per
share to $1.06 per share. The number of shares used in calculating per share
earnings increased by 10% to 36,800,000 in fiscal 1997 from 33,400,000 in fiscal
1996 because of 5,100,000 shares of common stock sold in the October 29, 1996
initial public offering. The increase in income before extraordinary credit was
primarily the result of the increase in sales of both coin-operated and home
video games, after absorbing the increases in research and development, selling
and administrative expenses.
IMPACT OF INFLATION
During the past three years, the level of inflation affecting the Company has
been relatively low. The ability of the Company to pass on future cost increases
in the form of higher sales prices will continue to be dependent on the
prevailing competitive environment and the acceptance of the Company's products
in the market place.
SEASONALITY
The home video game business is highly seasonal and historically has resulted in
higher revenues and net income in the first and second quarters of the June 30
fiscal year due to customer purchases preceding the year-end retail holiday
selling season. The coin-operated video game business has not historically been
seasonal but quarterly revenues and net income usually increase when a
coin-operated video game that achieves significant player appeal is introduced.
YEAR 2000
The term y2k is used to refer to a worldwide computer-related problem where
software programs and embedded programs in microprocessors will not work
properly when processing a date greater than December 31, 1999. This problem
results from using two digits to denote the third and fourth digit of a
four-digit year and a program assuming 19 to be the first two digits. Many
existing programs will continue to assume a 19 as the first and second digit
while a 20 or greater is required. A method of fixing the problem is for all
years to be denoted in a four-digit field and the program to recognize all four
digits as the year. This y2k problem has resulted in significant worldwide
concern about the future operations of businesses and other institutions.
The systems utilized by the Company, under the information services agreement
with WMS Industries Inc. have been made y2k compliant in an undertaking that
began in 1996. Systems utilized by Atari Games will be made compliant with a
planned software upgrade at a nominal cost. Systems utilized by Midway Home
Entertainment will be made compliant with a planned software upgrade at a
nominal cost.
Management believes that there are no y2k issues with respect to the
functionality of any products sold in the past or expected to be sold in the
future. Management believes that there are no y2k issues with respect to the
functionality of the home video game hardware platforms.
WMS Industries Inc. provides contract-manufacturing services for the Company.
Management has received assurance from WMS Industries Inc. that the systems used
in their contract manufacturing are y2k compliant. WMS Industries Inc. also
asserts that the assembly of the coin-operated video games should not be
affected by malfunctioning tools or equipment using embedded microprocessors as
the assembly process is not heavily reliant on such tools or equipment.
The only known area of y2k related exposure is with the coin-operated video
game component suppliers. Although management has recently began a program of
formal contact with its suppliers so as to assess the potential problem,
management cannot make a determination as to the suppliers' level of y2k
compliance at this time. However management will assess problems, if any, with
the coin-operated component suppliers. If needed, management will adjust the
coin-operated title release dates accordingly and at worst the Company would
expect a short-term delay in shipments. If such delay should occur it is not
expected to have a material effect on operating results for any reportable
period.
17
<PAGE> 6
MIDWAY GAMES INC.
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
SECURITY-HOLDER MATTERS
Midway Games Inc. common stock, par value $.01 per share, began trading on the
New York Stock Exchange on October 29, 1996 under the symbol MWY. The following
table sets forth for the periods indicated the high and low sale prices per
share as reported on the New York Stock Exchange.
<TABLE>
<CAPTION>
........................................................
Calendar Period High Low
........................................................
<S> <C> <C>
1996
Fourth Quarter
(beginning Oct. 29, 1996) $25 1/2 $18 3/8
........................................................
1997
First Quarter $21 $15
Second Quarter 23 1/2 15 1/8
Third Quarter 26 13/16 18 3/8
Fourth Quarter 26 3/4 16 1/2
........................................................
1998
First Quarter $25 1/4 $17 1/8
Second Quarter 25 11/16 12
Third Quarter
(through Sept. 15, 1998) 17 1/8 9 5/16
</TABLE>
The Company paid $50,000,000 of dividend notes due to its former parent, WMS
Industries Inc., from part of the proceeds of the October 1996 initial public
offering. The dividend notes had been previously declared on June 30, 1996. No
other cash dividends with respect to the common stock were declared or paid
during fiscal 1997 or 1998. The payment of future cash dividends will depend
upon, among other things, earnings, anticipated expansion and capital
requirements and the financial condition of the Company.
At September 15, 1998, there were approximately 1,350 holders of record of
the Company's common stock.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors Midway Games Inc.
We have audited the accompanying consolidated balance sheets of Midway Games
Inc. and subsidiaries as of June 30, 1998 and 1997, and the related statements
of income, changes in stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Midway Games Inc.
and subsidiaries at June 30, 1998 and 1997, and the results of their operations
and cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 17, 1998
18
<PAGE> 7
MIDWAY GAMES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands)
.......................................................................................................................
June 30, 1998 1997
.......................................................................................................................
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,136 $ 51,862
Short-term investments 12,000 10,000
.......................................................................................................................
38,136 61,862
Receivables, less allowances of $7,017 in 1998 and $4,940 in 1997 86,198 54,477
Inventories
Raw materials and work in progress 9,441 14,433
Finished goods 13,838 13,525
.......................................................................................................................
23,279 27,958
Deferred income taxes 4,966 5,779
Other current assets 9,607 4,329
.......................................................................................................................
TOTAL CURRENT ASSETS 162,186 154,405
Property and equipment, net 9,620 9,498
Excess of purchase cost over amount assigned to net assets acquired, net 45,228 49,150
Other assets 10,389 1,265
.......................................................................................................................
TOTAL ASSETS $227,423 $214,318
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,358 $ 20,918
Accrued compensation and related benefits 8,776 11,331
Income taxes payable 2,580 3,866
Accrued payment on 1994 purchase of Tradewest - 14,400
Accrued royalties 4,191 6,728
Other accrued liabilities 9,995 10,852
.......................................................................................................................
TOTAL CURRENT LIABILITIES 43,900 68,095
Deferred income taxes 4,434 3,037
Other noncurrent liabilities 2,440 2,418
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 100,000,000 shares authorized, 38,500,000 shares issued 385 385
Additional paid-in capital 98,488 98,488
Retained earnings 84,017 41,895
=======================================================================================================================
182,890 140,768
Treasury stock, at cost (463,200 shares) (6,241) -
.......................................................................................................................
TOTAL STOCKHOLDERS' EQUITY 176,649 140,768
.......................................................................................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $227,423 $214,318
=======================================================================================================================
</TABLE>
See notes to financial statements.
19
<PAGE> 8
MIDWAY GAMES INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
...................................................................................................................................
Years Ended June 30, 1998 1997 1996
CONSOLIDATED Consolidated Combined
...................................................................................................................................
<S> <C> <C> <C>
REVENUES
Home video $ 229,732 $ 219,912 $ 154,102
Coin-operated video 161,498 168,314 91,321
...................................................................................................................................
Total revenues 391,230 388,226 245,423
Cost of sales 201,131 221,407 140,056
...................................................................................................................................
Gross profit 190,099 166,819 105,367
Research and development expense 67,477 55,941 32,495
Selling expense 38,288 30,443 22,815
Administrative expense 19,259 19,902 9,563
...................................................................................................................................
Operating income 65,075 60,533 40,494
Interest and other income 2,947 4,504 1,079
Interest expense -- (2,374) (808)
...................................................................................................................................
Income before tax provision and extraordinary credit 68,022 62,663 40,765
Provision for income taxes (25,900) (23,812) (15,536)
...................................................................................................................................
Income before extraordinary credit 42,122 38,851 25,229
Extraordinary gain on early extinguishment of debt, net of taxes of $2,001 -- 3,044 --
...................................................................................................................................
Net income $ 42,122 $ 41,895 $ 25,229
===================================================================================================================================
Basic and diluted per share of common stock
Income before extraordinary credit $ 1.10 $ 1.06 $ .76
Extraordinary gain on early extinguishment of debt, net -- .08 --
...................................................................................................................................
Net income $ 1.10 $ 1.14 $ .76
===================================================================================================================================
Average number of shares outstanding 38,481 36,800 33,400
===================================================================================================================================
</TABLE>
See notes to financial statements.
20
<PAGE> 9
MIDWAY GAMES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
...................................................................................................................................
Common Stock
.................... Additional Treasury Stockholder's Total
Number Paid-in Retained Stock, Net Stockholders'
of Shares Par Value Capital Earnings At Cost Investment Equity
...................................................................................................................................
<S> <C> <C> <C> <C> <C> <C> <C>
Combined balance at June 30, 1995 $ 49,752
Net income 25,229
Dividends declared (50,000)
Net transactions with WMS Industries Inc. (19,493)
...................................................................................................................................
Combined balance at June 30, 1996 5,488
Formation transactions 33,400 $334 $ 5,154 (5,488) $ 5,488
Net proceeds from initial public offering 5,100 51 93,334 93,385
Net income $41,895 41,895
...................................................................................................................................
Consolidated balance at June 30, 1997 38,500 385 98,488 41,895 - - 140,768
Net income 42,122 42,122
Purchase of treasury stock (463) $(6,241) (6,241)
...................................................................................................................................
CONSOLIDATED BALANCE AT JUNE 30, 1998 38,037 $385 $98,488 $84,017 $(6,241) $ - $176,649
===================================================================================================================================
</TABLE>
See notes to financial statements.
21
<PAGE> 10
MIDWAY GAMES INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
................................................................................................................................
Years Ended June 30, 1998 1997 1996
CONSOLIDATED Consolidated Combined
................................................................................................................................
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 42,122 $ 41,895 $ 25,229
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,913 6,297 3,208
Receivables provision 16,872 14,586 3,358
Deferred income taxes 2,210 (5,777) (2,678)
Extraordinary gain on early extinguishment of debt - (5,045) -
Increase (decrease) resulting from changes in operating assets and liabilities:
Receivables (48,593) (20,112) 8,089
Inventories 4,679 (2,936) (1,072)
Other current assets (5,278) 1,078 (1,253)
Accounts payable and accruals (8,509) 2,289 (479)
Current taxes payable (1,286) 3,354 -
Other assets and liabilities not reflected elsewhere (9,685) 2,518 877
................................................................................................................................
Net cash provided by operating activities 1,445 38,147 35,279
INVESTING ACTIVITIES
Purchase of property and equipment (4,530) (4,699) (3,107)
Payment for Tradewest acquisition (14,400) (7,200) (11,476)
Cash acquired in acquisition of Atari Games Corporation, net of cash used - - 7,996
Net change in short-term investments (2,000) (10,000) -
................................................................................................................................
Net cash used by investing activities (20,930) (21,899) (6,587)
FINANCING ACTIVITIES
Net proceeds from initial public offering - 93,385 -
Purchase of treasury stock (6,241) - -
Dividend notes paid to WMS Industries Inc. - (50,000) -
Payment of notes payable from the purchase of Atari Games Corporation - (16,970) -
................................................................................................................................
Net cash (used) provided by financing activities (6,241) 26,415 -
Net transactions with WMS Industries Inc. - - (19,493)
................................................................................................................................
(Decrease) increase in cash and cash equivalents (25,726) 42,663 9,199
Cash and cash equivalents at beginning of year 51,862 9,199 -
................................................................................................................................
Cash and cash equivalents at end of year $ 26,136 $ 51,862 $ 9,199
================================================================================================================================
</TABLE>
See notes to financial statements.
22
<PAGE> 11
MIDWAY GAMES INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS
Midway Games Inc. ("Midway") and its subsidiaries (the "Company") operates in
one business segment, the design and distribution of coin-operated video games
and publishing, licensing and distribution of home video games (the "Video Game
Business"). Coin-operated video games are sold to distributors worldwide who
sell them to operators and arcades. Home video games are sold to mass merchants,
video rental retailers, and entertainment software distributors in North
America. The Company exploits the other worldwide markets through licensing and
distribution agreements with third parties. Consumers buy or rent the home video
games to use on game systems (Nintendo, Sony and Sega) and on personal
computers.
NOTE 2: INITIAL PUBLIC OFFERING AND WMS DISTRIBUTION
Since its incorporation in 1988 through the date of the initial public offering,
Midway was a wholly-owned subsidiary of WMS Industries Inc. ("WMS"). Immediately
prior to the initial public offering, Midway effectuated a 33,400 for one stock
split resulting in 33,400,000 shares of common stock being issued and
outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable to
WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On April 6, 1998, WMS completed the spin-off, originally announced on August
11, 1997, of its remaining 86.8% ownership interest of 33,400,000 shares of
Midway. The spin-off was completed by means of a tax free pro rata distribution
of the Midway shares to the WMS stockholders.
NOTE 3: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND RELATIONSHIP WITH WMS INDUSTRIES INC.
Since its incorporation in 1988 through July 1, 1996 the Company was the primary
subsidiary in which WMS conducted the coin-operated video games business. From
July 1, 1996 through April 6, 1998, the date of the Midway spin-off, Midway has
been the only WMS subsidiary in the coin-operated video games business.
Subsequent to April 6, 1998, Midway began operating on a stand-alone basis and
all transactions with WMS have been at arm's length.
On July 1, 1996 (the "Transfer Date") WMS transferred out of Midway all of
the operating assets and liabilities relating to the "Bally(R)" pinball business
previously conducted by Midway. On the Transfer Date WMS transferred the
coin-operated video game operating assets and liabilities not previously part of
Midway from other WMS subsidiaries to Midway. Also on the Transfer Date, WMS
transferred 100% of the stock of Midway Home Entertainment Inc. and Midway
Interactive Inc. to Midway. The aforementioned transfers resulted in WMS
concentrating its "Video Game Business" into Midway and its wholly-owned
subsidiaries. WMS's net investment has been reflected as Stockholder's Net
Investment in the combined financial statements through June 30, 1996. The
aforementioned transfers have been reflected in the financial statements for
June 30, 1996 and prior periods, and the revenues and expenses of the Bally
pinball business have been excluded from these financial statements.
The combined financial statements at June 30, 1996 and for periods ending
June 30, 1996 or prior reflect the historical combined financial position and
results of operations of the Video Game Business as if the Company operated the
Video Game Business under the structure implemented on the Transfer Date. The
results of the Video Game Business include the results of Midway Home
Entertainment Inc. and the results of Midway Interactive Inc., subsequent to its
purchase of Atari Games Corporation ("Atari Games") on March 29, 1996. The
Company believes that this is the most meaningful presentation in that it
presents on an historical basis the results of operations and financial
condition of all of the components of the Video Game Business that the Company
owns after giving effect to the structure implemented on the Transfer Date. The
financial statements subsequent to July 1, 1996 are presented on a consolidated
basis.
The financial statements through April 6, 1998 include transfers and
allocations of costs and expenses from WMS or other WMS subsidiaries primarily
for activities relating to the Midway coin-operated video games business. Cost
of sales includes material, labor and labor fringes transferred from the other
WMS subsidiaries at cost based on the standard cost of material adjusted to
estimated actual using engineered bills of material and actual labor with
standard labor fringes applied. Cost of sales also includes allocations of
manufacturing overhead cost incurred in the production of coin-operated video
games for the Company. Research and development expense includes allocations for
certain shared facilities and personnel. Selling and administrative expenses
include certain allocations relating to general management, treasury,
accounting, human resources, insurance and selling and marketing. These
allocations were determined by using various factors such as dollar
23
<PAGE> 12
MIDWAY GAMES, INC.
NOTES TO FINANCIAL STATEMENTS continued
amount of sales, number of personnel, square feet of building space, estimates
of time spent to provide services and other appropriate costing measures. In the
opinion of management these transfers of cost of sales and allocations are made
on a reasonable basis to properly reflect the share of costs incurred by WMS on
behalf of the Company.
The financial statements may not necessarily be representative of results
that would have been attained if the Company operated as a separate independent
entity.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated by the straight-line
method over their estimated useful lives.
EXCESS OF PURCHASE COST OVER AMOUNT ASSIGNED TO NET ASSETS ACQUIRED (GOODWILL)
Goodwill of $45,228,000 and $49,150,000 at June 30, 1998 and 1997, respectively,
(net of accumulated amortization of $8,772,000 and $4,850,000 at June 30, 1998
and 1997, respectively) arising from the acquisitions of Tradewest in April 1994
and Atari Games in March 1996 is being amortized by the straight-line method
over 15 to 20 years.
INTELLECTUAL PROPERTIES LICENSES
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed. Unit royalties on sales that exceed the guarantee are
recognized as revenue as earned. License and royalty revenues primarily from
home video game activities, for fiscal 1998, 1997 and 1996 was $2,572,000,
$6,537,000 and $18,985,000, respectively.
HOME VIDEO GAME REVENUES
Home video game revenues are recorded when products are shipped to customers. An
allowance for returns and discounts is also recorded based upon management's
evaluation of historical experience as well as current industry trends.
ADVERTISING EXPENSE
The cost of advertising is charged to earnings as incurred and for fiscal 1998,
1997 and 1996 was $22,732,000, $16,524,000 and $13,338,000, respectively.
EXPORT SALES AND SALES TO A MAJOR CUSTOMER
Export sales primarily to Western Europe were $42,900,000, $70,367,000 and
$34,945,000 for fiscal 1998, 1997 and 1996, respectively. Sales of home video
games to one mass merchant during fiscal 1998, 1997 and 1996 were $48,914,000,
$40,675,000 and $30,898,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 requires dual
presentation of basic earnings per share ("EPS") and diluted EPS on the face of
all statements of earnings for all public companies with complex capital
structures. SFAS No. 128 also requires restatement of all prior period
statements of earnings using the dual presentation of basic and diluted EPS.
Basic EPS is computed by dividing income by the weighted average number of
shares outstanding for the period. Diluted EPS reflects, on a pro forma basis,
earnings per share for the period assuming the exercise or conversion of all
securities which are exercisable or convertible into common stock and which
would either dilute or not affect basic EPS. The adoption of SFAS No. 128 did
not impact earnings per share.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" generally requires that companies report segment information for
operating segments which are revenue producing components and for which separate
financial information is produced and used internally. The Company plans to
adopt SFAS No. 131 for the June 30, 1999 fiscal year, but has not yet completed
its analysis of the impact of this statement on the financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 4: TRANSACTIONS WITH WMS
The Company, except for Atari Games, for the years prior to fiscal 1998
participated in the WMS central cash management system, pursuant to which all
cash receipts were transferred to WMS and all cash disbursements were made by
WMS. Seasonal cash needs were provided by WMS. After the completion of the
initial public offering the treasury activities of the Video Game Business have
been conducted by the Company.
24
<PAGE> 13
MIDWAY GAMES, INC.
During the four months ended October 31, 1996 and the fiscal year ended June
30, 1996 one subsidiary that has seasonal cash needs was charged interest at
prime and was paid interest at short-term treasury bill rates on the balance of
the intercompany amount with WMS. Due to the seasonal cash flows of this
subsidiary, the intercompany account with WMS alternated between intercompany
accounts payable and receivable. The maximum intercompany amount due to WMS
during this period was $25,700,000. Interest income accrued from WMS and
interest expense accrued to WMS was as follows:
<TABLE>
<CAPTION>
..............................................................
(in thousands) 1997 1996
..............................................................
<S> <C> <C>
Interest income $ - $771
Interest expense 217 442
</TABLE>
Interest expense for fiscal 1997 also included $1,036,000 on the $50,000,000
dividend notes accrued at 6% through October 31, 1996.
The Company has been charged for the specific production costs, excluding
manufacturing overhead, of the coin-operated video games produced by a
subsidiary of WMS that totaled $62,416,000, $93,563,000 and $51,961,000 in the
period to April 6, 1998 and years ended June 30, 1997 and 1996, respectively. In
addition, certain other costs have been allocated to the Company based on the
various factors noted in Note 3. Charges to the Company from WMS and WMS
subsidiaries for the allocations in the period to April 6, 1998 and years ended
June 30, 1997 and 1996 were:
<TABLE>
<CAPTION>
..............................................................
(in thousands) 1998 1997 1996
..............................................................
<S> <C> <C> <C>
Manufacturing overhead $5,366 $5,368 $3,947
Research and
development expense 469 779 1,352
Selling expense 1,477 3,263 1,933
Administrative expense 1,613 3,452 3,433
</TABLE>
The Company entered into a Manufacturing and Services Agreement with WMS in
1996 under which WMS and its subsidiaries agreed to continue performing contract
manufacturing for coin-operated video games for Midway and Atari Games as well
as providing general management, financial reporting, and treasury services to
the Company and general management, accounting, human resources and selling and
marketing services to Midway. The Company was expected to purchase materials and
WMS subsidiaries manufactured the coin-operated video games charging actual
labor with labor fringes and manufacturing overhead allocated. The labor
fringes, manufacturing overhead and other services provided were allocated based
on the various factors noted in Note 3 that were used in the financial
statements.
Effective April 6, 1998, in connection with the spin-off described in Note 2,
the 1996 agreement was terminated and the Company entered into several
agreements with WMS under which WMS will, among other things, perform contract
manufacturing and provide information technology services to certain parts of
the Company. In addition, under a separate agreement, the Company will provide
selling and marketing services for the WMS pinball products. These agreements
provide for prices for products or services on an arm's length basis. It is
expected that the overall cost structure of the Company, at current or expanded
levels of coin-operated video game operations, will not be materially different
from that experienced by the Company under the prior Manufacturing and Services
Agreement with WMS.
See Note 7 for income tax allocations.
NOTE 5: ACQUISITIONS
On March 29, 1996, a wholly-owned subsidiary of the Company, Midway Interactive
Inc., acquired all the capital stock of Atari Games. The acquisition has been
accounted for by the purchase method of accounting and, accordingly, the results
of operations of Atari Games subsequent to the acquisition date have been
included in the statements of income of the Company. Atari Games was engaged in
the business of developing, manufacturing, licensing, publishing and
distributing coin-operated video games and home video games.
The Company assimilated parts of the Atari Games business into the Company's
similar activities and exited certain foreign activities. This included, among
other things, closing the leased manufacturing plant, transferring production of
coin-operated video games to WMS's existing Chicago plant and combining the
sales, marketing and distribution of home video games with the Company's home
video game operations. A $4,500,000 liability for exit activities was
established, the major component of which was $2,500,000 of employee severance
costs. The assimilation and exit activities were completed during fiscal 1997
and no adjustment to the exit liability was required.
The purchase price for Atari Games of $24,015,000 included a cash payment in
March 1996 of $2,000,000 and the balance of $22,015,000 in the form of
promissory notes. A promissory note for $14,152,000 was payable based upon cash
gross profits, as defined, from the sale of specified products of the acquired
business and was recorded, as earned, through the second quarter of fiscal 1997.
Because $10,866,000 of this note was not recorded at June 30, 1996, property and
equipment of Atari Games was recorded at zero and the Company
25
<PAGE> 14
MIDWAY GAMES, INC.
NOTES TO FINANCIAL STATEMENTS continued
recorded negative goodwill from the purchase. At the end of the second quarter
of fiscal 1997, the property and equipment of Atari Games was recorded and the
excess costs over the amount assigned to net assets acquired (goodwill) of
$7,600,000 was recorded and is being amortized over 20 years.
The unaudited pro forma combined statement of income data of the Company for
fiscal 1996 included below was prepared as if Atari Games was acquired as of
July 1, 1995, and assimilation and exit activities occurred on that date. The
summary does not purport to be indicative of what would have occurred had the
acquisition occurred as of the dates indicated or of the results which may occur
in the future.
<TABLE>
<CAPTION>
................................................................................
(in thousands) 1996
................................................................................
<S> <C>
Revenues $329,449
Net income $ 24,707
................................................................................
</TABLE>
NOTE 6: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<TABLE>
<CAPTION>
................................................................................
(in thousands) 1998 1997
................................................................................
<S> <C> <C>
Leasehold improvements $ 2,807 $ 2,332
Furniture, fixtures and engineering equipment 19,023 14,559
................................................................................
21,830 16,891
Less accumulated depreciation (12,210) (7,393)
................................................................................
Net property and equipment $ 9,620 $ 9,498
................................................................................
</TABLE>
Note 7: Income Taxes
The results of the Company up to April 6, 1998, the date of the spin-off, have
been included in the consolidated income tax returns of WMS; however, income
taxes have been recorded based on a calculation of the income taxes that would
have been incurred if the Company operated as an independent combined entity.
WMS and the Company entered into a tax sharing agreement effective July 1, 1996
and ending on the spin-off date that requires a tax calculation, accrual and
payment by the Company as if the Company was filing separate tax returns.
Significant components of the income tax provision on income before
extraordinary credit for the years ended June 30, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
................................................................................
(in thousands) 1998 1997 1996
................................................................................
<S> <C> <C> <C>
Current:
Federal $20,613 $26,010 $15,423
State 3,077 4,091 2,791
................................................................................
Total current 23,690 30,101 18,214
Deferred:
Federal 1,996 (5,265) (2,156)
State 214 (1,024) (522)
................................................................................
Total deferred 2,210 (6,289) (2,678)
................................................................................
Provision for income taxes $25,900 $23,812 $15,536
................................................................................
</TABLE>
The income tax provision on income before extraordinary credit differs from
the amount computed using the statutory federal income tax rate for the years
ended June 30, 1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
................................................................................
1998 1997 1996
................................................................................
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.1 3.2 3.6
Foreign sales corporation benefits (.5) (1.0) (.6)
Other, net .5 .8 .1
................................................................................
38.1% 38.0% 38.1%
................................................................................
</TABLE>
The June 30, 1997 income tax provision of $2,001,000 on the extraordinary
credit is comprised of the federal tax rate of 35% and a composite state tax
rate of 4.66%, net of federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes.
Significant components of the Company's deferred tax assets and liabilities
at June 30 were:
<TABLE>
<CAPTION>
................................................................................
(in thousands) 1998 1997
................................................................................
<S> <C> <C>
Deferred tax assets resulting from:
Inventory valuation $1,002 $1,835
Accrued items not currently deductible 1,154 2,230
Receivable allowance 2,850 2,025
Other - 26
................................................................................
Total deferred tax assets 5,006 6,116
................................................................................
Deferred tax liabilities resulting from:
Tax over book depreciation 633 687
Book over tax basis of domestic subsidiary 2,885 1,845
Other 956 842
................................................................................
Total deferred tax liabilities 4,474 3,374
................................................................................
Net deferred tax assets $ 532 $2,742
................................................................................
</TABLE>
26
<PAGE> 15
MIDWAY GAMES INC.
During fiscal 1998, 1997 and 1996 income taxes paid to WMS were $24,976,000,
$28,236,000 and $18,214,000, respectively.
NOTE 8: LINE OF CREDIT
The Company established a line of credit for $50,000,000 and an additional
letter of credit line of $30,000,000. The revolving credit agreement is for a
one-year term to October 31, 1998 and contains usual bank line of credit terms.
The amount of interest paid during fiscal 1997 and 1996 was $2,740,000 and
$442,000, respectively.
NOTE 9: PREFERRED STOCK AND COMMON STOCK OPTION PLANS
The preferred stock is issuable in series, and the elective rights and
preferences and number of shares in each series are to be established by the
Board of Directors.
At the date of the Midway spin-off by WMS, the Midway Rights Agreement became
effective. Under the Rights Agreement, each share of Midway common stock has an
accompanying Right to purchase, under certain conditions, one one-hundredth of a
share of the Company's Series A Preferred Stock at an exercise price of $100,
permitting each holder to receive $200 worth of the Company's common stock
valued at the then current market price. The Rights are redeemable by the
Company at $.01 per Right, subject to certain conditions, at any time and expire
in 2007. The Rights are intended to assure fair shareholder treatment in any
attempted takeover of the Company and to guard against abusive takeover tactics.
Under the common stock option plans the Company may grant both incentive
stock options and nonqualified options on shares of common stock through the
year 2007. Options may be granted on 2,750,000 shares of common stock to
employees and under certain conditions to non-employee directors and
consultants. The Compensation and Stock Option Committee of the Board of
Directors has the authority to fix the terms and conditions upon which each
option is granted, but in no event shall the term exceed ten years or be granted
at less than 100% of the fair market value of the stock at the date of grant.
The Company accounts for stock options for purposes of determining net income
in accordance with APB Opinion No. 25. No compensation expense has been
recognized in conjunction with the stock option plan. SFAS No. 123 regarding
stock option plans permits the use of APB Opinion No. 25 but requires the
inclusion of certain pro forma disclosures in the footnotes.
Pro forma net income for fiscal 1998 and 1997 adjusted for the expense
provision of SFAS No. 123 was $38,586,000 and $36,892,000 or $1.00 and $1.00 per
share of common stock. No calculation of fiscal 1996 pro forma net income under
SFAS No. 123 is required since all the options were granted in fiscal 1998 and
1997.
For pro forma calculations, the fair value of each option is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for fiscal 1998 and 1997, respectively:
dividend yield of 0% and 0%; expected volatility of .40 and .50; risk free
interest rate of 5.65% and 6.2% and expected life of the option of 6 years and 4
years.
During fiscal 1998 and 1997 options for 475,000 and 1,810,000 shares,
respectively, were granted at an exercise price of $16.50 and $20.00 per share,
respectively, with a weighted average pro forma fair market value using the
Black-Scholes assumptions noted above of $7.92 and $9.09 per share,
respectively. All of the 2,285,000 granted options are outstanding at June 30,
1998 and have a weighted average remaining contractual life of 8.7 years and
have an average exercise price of $19.27. At June 30, 1998 and 1997 options for
956,000 and 505,000 shares, respectively, were exercisable at an average
exercise price of $19.41 and $20.00 per share, respectively. At June 30, 1998,
465,000 shares were available for future grants under the plan.
NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit and market risk consist primarily of cash equivalents, short-term
investments and trade accounts receivable from the sale of games. By policy, the
Company places its cash equivalents and short-term investments only in high
credit quality securities and limits the amounts invested in any one security.
At June 30, 1998, 34% of trade accounts receivable are from sales of
coin-operated video games to the Company's distributors located primarily
throughout the
27
<PAGE> 16
MIDWAY GAMES INC.
NOTES TO FINANCIAL STATEMENTS continued
United States and Western Europe and, because of the number and geographic
distribution, concentration is limited. Foreign sales are typically made in U.S.
dollars and typically on the basis of a letter of credit. At times during the
fiscal year accounts receivable from certain major home video game customers
represent a significant amount of the accounts receivable then outstanding.
Cash equivalents of $11,755,000 and short-term investments of $12,000,000 at
June 30, 1998, which are designated available-for-sale, are recorded at cost
which is equal to market and considered by management to be the fair value of
these financial instruments.
NOTE 11: LEASE COMMITMENTS
The Company leases certain warehouses, office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 1998 as follows:
<TABLE>
<CAPTION>
................................................................................
(in thousands)
................................................................................
<S> <C>
1999 $ 1,895
2000 1,817
2001 1,876
2002 1,668
2003 1,547
Thereafter 2,872
................................................................................
11,675
Less sublease income 4,901
................................................................................
$ 6,774
................................................................................
</TABLE>
Rent expense for fiscal 1998, 1997 and 1996 was $1,872,000, $1,459,000, and
$603,000, respectively, and was offset by sublease income of $633,000 and
$536,000 for fiscal 1998 and 1997, respectively. Aggregate future gross lease
commitments of $10,004,000 were guaranteed, prior to the acquisition of Atari
Games, and continue to be guaranteed by its former parent company.
NOTE 12: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
................................................................................
(in thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1997 1997 1998 1998
................................................................................
<S> <C> <C> <C> <C>
FISCAL 1998 QUARTERS
Revenues $73,740 $125,057 $94,347 $98,086
Gross profit 35,111 63,700 43,369 47,919
Research and
development
expense 14,123 17,952 17,334 18,068
Net income 7,235 18,382 7,007 9,498
Basic and diluted net
income per share $ .19 $ .48 $ .18 $ .25
................................................................................
Average number
of shares
outstanding 38,500 38,500 38,500 38,422
</TABLE>
<TABLE>
<CAPTION>
................................................................................
(in thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1996 1996 1997 1997
................................................................................
<S> <C> <C> <C> <C>
Fiscal 1997 Quarters
Revenues $65,555 $125,519 $99,060 $98,092
Gross profit 34,380 55,203 35,657 41,579
Research and
development
expense 12,003 14,780 13,208 15,950
Income before
extraordinary
credit 6,077 15,107 6,415 11,252
Net income 6,077 15,107 6,415 14,296
Basic and diluted per share:
................................................................................
Income before
extraordinary
credit $ .18 $ .41 $ .17 $ .29
Net income $ .18 $ .41 $ .17 $ .37
................................................................................
Average number
of shares
outstanding 33,400 36,800 38,500 38,500
</TABLE>
Net income for the quarter ended June 30, 1997 included an extraordinary gain
from the early extinguishment of debt, net of taxes, of $3,044,000, $.08 per
share, related to the prepayment, at a discount, of the promissory notes issued
for the acquisition of Atari Games.
28
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------------
<S> <C> <C>
Midway Interactive Inc. Delaware
Midway Home Entertainment Inc. Delaware
Midway/Nintendo Inc. -- 50% owned Delaware
Atari Games Corporation California
Tengen, Inc. California
Midway Games Asia Limited - 79.9% owned by the Registrant and
.1% owned by Midway Home Entertainment Inc. Hong Kong
Qingdao Wei TC Family Playland Co., Ltd. - 100% owned by
Midway Games Asia Limited People's Republic of China
Midway Games Sales Inc. Barbados
Midway Games (Europe) Gmbh Germany
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
No. 333-25757 on Form S-8 filed April 24, 1997, as amended June 24, 1998, of
Midwest Games Inc. and Registration Statement No. 333-57583 on Form S-8 filed
June 24, 1998, and in the related Prospectuses of Midway Games Inc., of our
report dated August 17, 1998, with respect to the financial statements and
schedule of Midway Games Inc. and subsidiaries, included and/or incorporated by
reference, in the Annual Report (Form 10-K) of Midway Games Inc. for the year
ended June 30, 1998.
Ernst & Young LLP
Chicago, Illinois
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 26,136
<SECURITIES> 12,000
<RECEIVABLES> 93,215
<ALLOWANCES> (7,017)
<INVENTORY> 23,279
<CURRENT-ASSETS> 162,186
<PP&E> 21,830
<DEPRECIATION> (12,210)
<TOTAL-ASSETS> 227,423
<CURRENT-LIABILITIES> 43,900
<BONDS> 0
0
0
<COMMON> 385
<OTHER-SE> 176,264
<TOTAL-LIABILITY-AND-EQUITY> 227,423
<SALES> 391,230
<TOTAL-REVENUES> 391,230
<CGS> 201,131
<TOTAL-COSTS> 201,131
<OTHER-EXPENSES> 67,477
<LOSS-PROVISION> 16,872
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 68,022
<INCOME-TAX> 25,900
<INCOME-CONTINUING> 42,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,122
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.10
</TABLE>
