<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
Commission file number 001-12367
---------
MIDWAY GAMES INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2906244
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3401 North California Ave., Chicago, IL 60618
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (773) 961-2222
-----------------------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by 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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 37,257,700 shares of common
stock, $.01 par value, were outstanding at October 27, 1998 after deducting
1,242,300 shares held as treasury shares.
<PAGE> 2
MIDWAY GAMES INC.
____________
INDEX
<TABLE>
<CAPTION>
PAGE NO
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
ITEM 1. Financial Statements:
-------
Condensed Consolidated Statements of Income -
Three months ended September 30, 1998 and 1997 .................... 2
Condensed Consolidated Balance Sheets -
September 30, 1998 and June 30, 1998 .............................. 3-4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1998 and 1997 .................... 5
Notes to Condensed Consolidated Financial Statements .............. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
------- and Results of Operations ......................................... 7-9
PART II. OTHER INFORMATION:
- --------
ITEM 5 Other Information ................................................. 10
-------
ITEM 6 Exhibits and Reports on Form 8-K .................................. 10
-------
SIGNATURE ................................................................... 11
</TABLE>
<PAGE> 3
MIDWAY GAMES INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1998 1997
------ ------
<S> <C> <C>
REVENUES
Home video................................................................. $ 69,690 $ 40,059
Coin-operated video........................................................ 19,649 33,681
-------- --------
Total revenues............................................................... 89,339 73,740
Cost of sales................................................................ 40,112 38,629
-------- --------
Gross profit................................................................. 49,227 35,111
Research and development expense............................................. 15,748 14,123
Selling expense.............................................................. 13,459 6,148
Administrative expense....................................................... 4,517 4,038
-------- --------
Operating income............................................................. 15,503 10,802
Interest and other income.................................................... 373 867
-------- --------
Income before tax provision.................................................. 15,876 11,669
Provision for income taxes................................................... (6,069) (4,434)
-------- --------
Net income................................................................... $ 9,807 $ 7,235
======== ========
Net income per share of common stock - basic and diluted..................... $ 0.26 $ 0.19
======== ========
Weighted average shares outstanding.......................................... 37,648 38,500
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
MIDWAY GAMES, INC.
------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 39,044 $ 26,136
Short-term investments............................................................. - 12,000
--------- ---------
39,044 38,136
Receivables, less allowances of $7,569 and $7,017.................................. 87,371 86,198
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress.............................................. 14,842 9,441
Finished goods.................................................................. 14,063 13,838
--------- ---------
28,905 23,279
Deferred income taxes.............................................................. 5,784 4,966
Other current assets............................................................... 13,851 9,607
--------- ---------
Total current assets............................................................ 174,955 162,186
Property and equipment............................................................. 23,766 21,830
Less: accumulated depreciation.................................................... (13,403) (12,210)
--------- ---------
10,363 9,620
Excess of purchase cost over amount assigned to net assets acquired, net of
accumulated amortization of $9,752 and $8,772................................... 44,248 45,228
Other assets....................................................................... 10,448 10,389
--------- ---------
$ 240,014 $ 227,423
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
MIDWAY GAMES INC.
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
-------------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable................................................................. $ 22,234 $ 18,358
Accrued compensation and related benefits........................................ 7,718 8,776
Income taxes payable............................................................. 6,223 2,580
Accrued royalties................................................................ 7,946 4,191
Other accrued liabilities........................................................ 12,834 9,995
-------------- ----------
Total current liabilities..................................................... 56,955 43,900
Deferred income taxes.............................................................. 4,434 4,434
Other noncurrent liabilities....................................................... 2,424 2,440
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued........ - -
Common stock, $.01 par value, 100,000,00 shares authorized, 38,500,000
shares issued................................................................. 385 385
Additional paid-in capital....................................................... 98,488 98,488
Retained earnings................................................................ 93,824 84,017
--------------- ----------
192,697 182,890
Treasury stock, at cost (1,188,800 and 463,200 shares)........................... (16,496) (6,241)
--------------- ----------
Total stockholders' equity.................................................... 176,201 176,649
--------------- ----------
$ 240,014 $ 227,423
=============== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
MIDWAY GAMES INC.
------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
-------------------
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income....................................................................... $ 9,807 $ 7,235
Adjustment to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 2,754 2,053
Receivables provision....................................................... 4,264 2,299
Deferred income taxes....................................................... (818) (771)
Decrease resulting from changes in operating assets and liabilities......... (2,908) (7,394)
------- -------
Net cash provided by operating activities........................................ 13,099 3,422
INVESTING ACTIVITIES:
Purchase of property and equipment............................................... (1,936) (1,152)
Net change in short-term investments............................................. 12,000 -
------- -------
Net cash provided (used) by investing activities................................. 10,064 (1,152)
FINANCING ACTIVITIES:
Purchase of treasury stock....................................................... (10,255) -
------- -------
Net cash used by financing activities............................................ (10,255) -
------- -------
Increase in cash and cash equivalents............................................ 12,908 2,270
Cash and cash equivalents at beginning of period................................. 26,136 51,862
------- -------
Cash and cash equivalents at end of period....................................... $39,044 $54,132
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 7
MIDWAY GAMES INC.
_____________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Due to
the seasonality of the Company's businesses, operating results for the
quarter ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 1998.
2. TRANSACTIONS WITH WMS INDUSTRIES INC. PRIOR TO THE APRIL 6, 1998 SPIN-OFF
The condensed consolidated income statement for the quarter ended September
30, 1997 includes transfers and allocations of costs and expenses from WMS
Industries Inc. (WMS) or other WMS subsidiaries primarily for activities
relating to the Midway coin-operated video games business. Cost of sales
includes material, labor and labor fringes transferred from the other WMS
subsidiaries at cost based on the standard cost of material adjusted to
estimated actual using engineered bills of material and actual labor with
standard labor fringes applied. Cost of sales also includes allocations of
manufacturing overhead cost incurred in the production of coin-operated
video games for Midway. Research and development expenses includes
allocations for certain shared facilities and personnel. Selling and
administrative expenses includes certain allocations relating to general
management, treasury, accounting, human resources, insurance and selling
and marketing. These allocations were determined by using various factors
such as dollar amount of sales, number of personnel, square feet of
building space, estimates of time spent to provide services and other
appropriate costing measures. In the opinion of management these transfers
of cost of sales and allocations are made on a reasonable basis to properly
reflect the share of costs incurred by WMS on behalf of the Company.
The income statement for the quarter ended September 30, 1997 may not
necessarily be representative of results that would have been attained if
the Company operated as a separate independent entity.
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 $17,177,000 in the quarter ended September
30, 1997. In addition, certain other costs have been allocated to the
Company based on various factors noted above. Charges to the Company from
WMS and WMS subsidiaries for the allocations in the quarter ended September
30, 1997 were (in thousands):
Manufacturing overhead $1,339
Research and development expense 171
Selling expense 945
Administrative expense 868
6
<PAGE> 8
MIDWAY GAMES INC.
_______________
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q 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 and the ability to maintain
the scheduling of such introductions, technological changes, dependence on
dedicated platform manufacturers and other risks more fully described under
"Item 1. Business--Factors Affecting Future Performance" in the Company's
Annual Report on Form 10-K.
FINANCIAL CONDITION
During the quarter ended September 30, 1998 cash provided by operating investing
and financing activities was $12,908,000 compared with cash provided of
$2,270,000 in the quarter ended September 30, 1997.
Cash provided by operating activities before changes in operating assets and
liabilities was $16,007,000 in the quarter ended September 30, 1998 compared to
$10,816,000 in the quarter ended September 30, 1997. The increase in the
current quarter was the result of the higher net income, depreciation and
amortization and the receivables provision.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows on page 5, resulted in a cash outflow of $2,908,000 in
the quarter ended September 30, 1998, compared with a cash outflow of $7,394,000
in the quarter ended September 30, 1997, which outflows were primarily due to
increased receivables in both periods and increased inventories in the September
30, 1998 period, in part offset by higher accounts payable and accruals from
their comparable balances at the respective June 30 year ends and a reduction in
inventories in the September 30, 1997 period.
Cash used for the purchase of property and equipment during the quarter ended
September 30, 1998 was $1,936,000 compared with $1,152,000 for the quarter ended
September 30, 1997.
During the quarter ended September 30, 1998, $10,255,000 was used to acquire
725,600 shares of the Company's common stock held in the treasury. The Board
of Directors authorized the purchase of up to two million shares.
The home video game business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a purchase order is accepted.
The Company has established a line of credit for $50,000,000 and an additional
letter of credit line of up to $30,000,000. The revolving credit agreement
extends to October 31, 1999 and contains usual bank line of credit terms. There
were no borrowings under the credit line at September 30, 1998 and $20,558,000
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.
7
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenues increased $15,599,000 or 21.2% from $73,740,000 in the quarter ended
September 30, 1997 to $89,339,000 in the quarter ended September 30, 1998.
Home video game revenues increased to $69,690,000 in the quarter ended September
30, 1998 from $40,059,000 in the prior year quarter. Revenues from the sale of
next generation home video games increased to $67,109,000 in the quarter ended
September 30, 1998 from $32,595,000 in the prior year quarter. During the
September 30, 1998 quarter, the Company released two new home video game
products on three platforms. New products shipped included two for Nintendo 64,
one for Sony Playstation, and one for PCs. Midway's best selling video games
during the quarter were NFL Blitz, GEX: Enter the Gecko and Mortal Kombat 4.
Coin-operated video game revenues in the September 30, 1998 quarter declined to
$19,649,000 compared to $33,681,000 in the prior year first quarter due to a
decrease in units shipped. The current year first quarter included initial
sales of Blitz '99, Vapor Trax and Site 4: Area 51 and continuing sales of
Radical Bikers and Touchmaster.
Gross profit increased to $49,227,000 (55.1% of revenues) in the quarter ended
September 30, 1998 from $35,111,000 (47.6% of revenues) in the quarter ended
September 30, 1997. The increase in gross profit was primarily from increased
revenues. Home video game gross profit increased to 54.8% of revenues in the
quarter ended September 30, 1998 compared to 51.7% in the prior year first
quarter due to an increase in sales of Sony PlayStation units which carry a
higher gross profit percentage. Gross profit in the quarter ended September 30,
1998 was increased because of a $4,225,000 reduction to cost of sales due to a
net recovery relating to purchased parts overcharges from certain coin-operated
game suppliers in prior years.
Research and development expenses increased $1,625,000 or 11.5% from $14,123,000
(19.2% of revenues) in the quarter ended September 30, 1997 to $15,748,000
(17.6% of revenues) in the quarter ended September 30, 1998.
Selling expense increased $7,311,000 from $6,148,000 (8.3% of revenues) in the
quarter ended September 30, 1997 to $13,459,000 (15.1% of revenues) in the
quarter ended September 30, 1998. The increase was primarily due to higher home
video game selling expense needed to support higher home video game revenues
plus an increased level of advertising for NFL Blitz.
Administrative expense increased $479,000 from $4,038,000 (5.5% of revenues) in
the quarter ended September 30, 1997 to $4,517,000 (5.1% of revenues) in the
quarter ended September 30, 1998.
Operating income in the quarter ended September 30, 1998 increased $4,701,000
from $10,802,000 (14.6% of revenues) in the quarter ended September 30, 1997 to
$15,503,000 (17.4% of revenues) in the quarter ended September 30, 1998.
Operating income in the quarter ended September 30, 1998 was increased
$4,225,000 because of the reduction to cost of sales described above.
Interest and other income decreased from $867,000 in the September 30, 1997
quarter to $373,000 in the September 30, 1998 quarter. The decrease is
primarily from a lower level of cash and cash equivalents and short-term
investments.
8
<PAGE> 10
Net income increased 35.5% to $9,807,000, $0.26 per share, compared with net
income of $7,235,000, $0.19 per share, in the prior year period. Net income for
the September 30, 1998 quarter was increased by $2,620,000, $0.07 per share,
because of a reduction in coin-operated video game cost of sales described
above.
YEAR 2000 UPDATE
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 have been made compliant with a
software upgrade and testing of the systems is ongoing. 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 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. Management has a program of formal contact with its
suppliers so as to assess the potential problem, if any. Management cannot make
a determination as to the suppliers' level of y2k compliance at this time. 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.
9
<PAGE> 11
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 31, 1998, the Company adopted the Midway Games Inc. Executive
Incentive Plan (the "EIP"). Eligible participants in the EIP include the
business unit heads and the Chief Financial Officer and employees reporting
directly to such persons and other key employees selected by the Chief Executive
Officer. The EIP provides the annual bonus award opportunities which are
expressed as a percentage of the participant's base salary. Target awards under
the EIP are 50% of base salary for business unit heads and the Chief Financial
Officer and from 20% to 35% of base salary for employees who directly report to
unit business heads. The maximum award under the EIP for any plan year is two
times the target award. No payments were made under the EIP during fiscal 1998.
The EIP became effective as of July 1, 1998 and expires on June 30, 2000.
Awards under the EIP are calculated based upon increases in operating income (as
defined) for the Company and the particular business unit as compared to average
earnings for the Company and such unit for the prior three-year period;
provided, however, that initial award calculations for the first year of the EIP
are based upon the prior two-year period. Target awards are met if the Company
and the business units achieve a 30% increase in operating income, and no bonus
is paid under the EIP unless at least 5% growth is achieved. Awards may be
increased or decreased in the discretion of the Chief Executive Officer by up to
25% based upon individual participant performance factors, consistency of
quarter-to-quarter business unit earnings growth and other performance elements
determined by the Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement between Harold H. Bach, Jr. and Registrant.
10.2 Executive Incentive Plan
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
10
<PAGE> 12
MIDWAY GAMES INC.
_______________
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWAY GAMES INC.
(Registrant)
Dated: November 10, 1998 By: /S/ Harold H. Bach, Jr.
--------------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
11
<PAGE> 13
Index to Exhibits
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits Description
- -------- -----------
10.1 Employment Agreement between Harold H. Bach, Jr. and Registrant.
10.2 Executive Incentive Plan
27 Financial Data Schedule
12
<PAGE> 1
EXHIBIT 10.2
MIDWAY GAMES INC.
EXECUTIVE INCENTIVE PLAN
Midway Games Inc. (the "Company") and its Controlled Affiliates hereby
establish the Midway Games Inc. Executive Incentive Plan (the "Plan") for
certain executives, managers and other key employees to secure the loyalty and
continued services of and to provide special incentives to such persons, and to
promote profitability and efficiency in the operations of the Company and its
Controlled Affiliates. This Plan is effective as of July 1, 1998.
1. DEFINITIONS:
The terms set forth below have the definitions indicated whenever used in
this Plan.
1.1 "Affiliate": With respect to any Person, any other Person controlling,
controlled by, or under common control with, such Person.
1.2 "Award": The payment made pursuant to Sections 3, 4 and 6 and all other
terms and conditions contained in the Plan.
1.3 "Base Salary": The gross base salary of a Participant exclusive of
royalties, commissions, allowances, bonuses, amounts paid under this Plan or any
other plan sponsored by the Company or any other payments by the Company,
provided, however, that amounts contributed on behalf of a Participant to a plan
qualified under Code Section 401(k), which is sponsored by the Company or an
Affiliate, shall be included.
1.4 "Beneficiary": The Person or Persons designated by the Employee on the
form provided by the Company to receive the amount, if any, that becomes payable
under this Plan upon the death of the participating Employee. The Employee may
change or revoke a Beneficiary
<PAGE> 2
designation at any time by filing a new designation or notice of revocation with
the Company. No notice to, or consent by, any Beneficiary will be required to
effect any change or revocation of designation. If an Employee does not
designate a Beneficiary, the Employee's Beneficiary will be deemed to be the
Employee's spouse, or if single, the Employee's estate and payments required
hereunder will be made accordingly.
1.5 "Business Unit" shall mean each operating business unit of the
Employer, whether consisting of a corporation or a division, as designated by
the Chief Executive Officer of the Company. As of the Effective Date, the
Business Units are: Midway Home Entertainment, Inc.; Atari Games Corporation;
the Chicago Coin-Op Division of Midway Games, Inc.
1.6 "Code": The Internal Revenue Code of 1986, as amended.
1.7 "Company": Midway Games Inc., or any Successor thereto.
1.8 "Controlled Affiliate": Any Person in which all the ownership interests
are owned, directly or indirectly, by the Company or by the Company and its
Affiliates.
1.9 "Disabled": An Employee's permanent and total disability, as defined
under the long term disability plan of the Employer in which the Employee
participates or, if the Employee does not participate in such a plan, "Disabled"
will have the meaning set forth in Section 72(m)(7) of the Code. This definition
also will apply to the term "Disability," as the context requires.
1.10 "Effective Date": July 1, 1998.
1.11 "Employee": (i) An employee or officer of any Employer or (ii) any
other Person designated from time to time by the Chief Executive Officer of the
Company as an Employee for purposes of this Plan.
1.12 "Employer": Each of the Company and any Controlled Affiliate
designated from time
2
<PAGE> 3
to time by the Chief Executive Officer of the Company as an Employer which has
adopted this Plan. The initial Controlled Affiliates designated to participate
in this Plan are Midway Home Entertainment, Inc., Atari Games Corporation and
the Chicago Coin-Op division of Midway Games, Inc.
1.13 "Operating Income": Operating income for the Company or the operating
Business Units as included in the consolidating financial statements of Midway
Games Inc. for each June 30 fiscal year used to prepare the consolidated
financial statements as filed with the Company's Form 10-K. Operating income
excludes provisions for income taxes, interest income, interest expense and
other items of non-operating income and expense. Operating income may be
adjusted for unusual or non-recurring items of income and expense required to be
included in the determination of operating income for external financial
reporting and/or for acquisitions of other businesses if such adjustments are
recommended by the Company's Chief Financial Officer and approved by the
Company's Chief Executive Officer.
1.14 "Participants": Employees selected by the Chief Executive Officer of
the Company to participate in the Plan in accordance with Section 2 hereof.
1.15 "Person": Any human being or any corporation, partnership, trust,
unincorporated organization, association, limited liability company or other
entity.
1.16 "Plan Year": Each twelve-month period ending June 30.
1.17 "Successor": With respect to any Person, the successor in interest to
that Person, as determined by the Chief Executive Officer of the Company.
1.18 "Termination": With respect to any Employee, the complete cessation of
the employment of such Employee for or on behalf of all Employers and
affiliates, whether by reason of
3
<PAGE> 4
the death, Disability, resignation or removal of the Employee or for any other
reason, including the expiration of any applicable employment agreement. This
definition also will apply to the term "Terminated," as the context requires.
1.19 "Termination for Cause": With respect to any Employee , the
Termination of such Employee on account of (i) the engaging by the Employee in
intentional conduct not taken in good faith which has caused demonstrable injury
to the Company, any Affiliate or any Controlled Affiliate, as determined by the
Chief Executive Officer of the Company; (ii) conviction of a felony, as
evidenced by binding and final judgment, order or decree of a court of competent
jurisdiction; or (iii) willful and unreasonable refusal by the Employee to
perform the Employee's duties or responsibilities.
1.20 Other Definitions. The following terms will have the meaning set forth
in the Section indicated:
Term Section
---- -------
Annual Earnings Increase 4.1
Base Period Earnings 4.1
Corporate Employees 4.1
Direct Report 2.2
Maximum Award 3.2
Target Award 3.2
2. ELIGIBILITY
2.1 General: Employees shall be selected to participate in the plan from
time to time by the Chief Executive Officer of the Company. Only employees who
materially contribute to the success of an Employer shall be eligible for
participation in the Plan.
2.2 Participants: The initial Participants in the Plan shall consist of the
Chief Financial Officer of the Company and the heads of each of the Business
Units. Additionally, those Employees designated by the Chief Executive Officer
of the Company who report directly to such persons, may
4
<PAGE> 5
also be Participants (the "Direct Reports"). The Chief Executive Officer of the
Company may also take under advisement the recommendations of the heads of the
operating Business Units in making such determinations and shall determine which
other Employees may participate in the Plan.
3. AWARD OPPORTUNITIES
3.1 Award Guidelines: Each participant shall have designated an award
opportunity which shall be a percentage of the Participant's Base Salary. Each
Participant will have both a Target Award (as defined hereafter) and a Maximum
Award (as defined hereafter).
3.2 Target and Maximum Awards: The Target Award for a Plan Year for the
Chief Financial Officer of the Company and the heads of Business Units shall
equal fifty percent (50%) of Base Salary. The Target Award for a Plan Year for
those Employees who report directly to the heads of the Business Units, shall
equal an amount ranging from twenty percent (20%) to thirty five percent (35%)
of base salary, with the Chief Executive Officer of the Company to set the
percentage Target Award with respect to each such Participant. The Maximum Award
for a Plan Year shall be an amount equal to the Target Award multiplied by two.
4. LEVELS AND MEASURES OF PERFORMANCE:
4.1 Operating Income and Base Period Earnings: In determining the amount of
the Award, the Chief Executive Officer of the Company shall first determine for
a Plan Year the Operating Income of the Business Unit of the Participant and the
Operating Income of the Company. In the initial Plan Year (which ends June 30,
1999), the Base Period Earnings shall equal the annual average of the Operating
Income of the Business Unit and the Operating Income of the Company for the
years ending June 30, 1997 and 1998. For all Plan Years thereafter, the Base
Period Earnings shall equal the annual average of the Operating Income of the
Business Unit and the Operating
5
<PAGE> 6
Income of the Company for the three years preceding the Plan Year. Awards for
any Plan year shall be based on the sum (expressed as a percentage and hereafter
referred to as "Annual Earnings Increase") of (i) seventy percent (70%) of the
percent increase in Business Unit Operating Income over Base Period Earnings for
such Business Unit, plus (ii) thirty percent (30%) of the percent increase in
Company consolidated Operating Income over Base Period Earnings for the Company,
subject to the limitations set forth in Section 6.4 hereof. Notwithstanding the
foregoing, with respect to the Chief Financial Officer of the Company and such
other Participants as are designated by the Chief Executive Officer of the
Company ("Corporate Employees"), the calculations shall be based one hundred
percent (100%) on the percentage increase in Operating Income of the Company
over Base Period Earnings.
4.2 Earnings Growth Standards: Any Award payable to a Participant (up to
the Maximum Award) shall be determined in accordance with the chart annexed
hereto as Appendix A. An example of such determination is annexed hereto as
Appendix B.
4.3 Award Adjustments: Notwithstanding anything contained in this Plan to
the contrary, the amounts payable pursuant to Section 4.2 may be increased or
decreased by the Chief Executive Officer of the Company up to twenty five
percent (25%) of the Award earned pursuant to Section 4.2 based upon individual
Participant performance factors, consistency of quarter-to-quarter Business Unit
earnings growth, growth and development of the Participant, customer
satisfaction or other performance elements proposed by the Business Unit heads
and approved by the Chief Executive Officer of the Company. Additionally, any
Participant who becomes eligible to receive a Target Award other than as of the
beginning of a Plan Year shall be eligible for a full or partial Target or
Maximum Award as determined by the Chief Executive Officer of the Company.
6
<PAGE> 7
5. NATURE OF INTERESTS: ACCOUNTING
5.1 Nature of Interests: The Plan will be entirely unfunded, and nothing
contained in, and no action taken pursuant to, this Plan will create or be
construed to create a trust or funded benefit of any kind in favor of any
Person, or a fiduciary relationship between or among the Employers, any
Employee, any designated Beneficiary or any other Person. Title to and
beneficial ownership of all assets, if any, whether cash or investments, that an
Employer may designate to pay the benefits under this Plan, will at all times
remain in such Employer's general asset account, and neither any Employee nor
any other Person will have any right or property interest whatsoever in any such
asset of the Employer until such amounts are paid to the Employee in accordance
with this Plan. No Employer will be required to pre-fund its obligations under
this Plan in any manner, whether by contributions to a trust fund, deposits in
an escrow account or otherwise. If any Employer in its discretion does deposit
funds in any such fund or account, no Employee or Beneficiary will have any
right or interest in or to such contract, trust or account, and such Employee or
Beneficiary will have only the rights of a general unsecured creditor with
respect to such Employer's unsecured promise to pay the benefits in accordance
with this Plan.
5.2 Plan Expenses and Allocation of Costs: Any Award paid to Employees
under this Plan, and other expenses associated with the establishment,
administration and termination of this Plan, as determined by the Chief
Executive Officer of the Company, will be paid by the Company in accordance with
the terms and conditions set forth herein and, if so determined by the Company,
the costs of such payments and expenses, or a portion thereof, will be charged
by the Company to the Employers under such method of allocation as the Company
deems appropriate.
7
<PAGE> 8
6. PAYMENT OF AWARDS
6.1 Time and Amount of Payment: Except as otherwise provided in this
Section 6, the individual Awards as determined pursuant to Section 4 will be
paid to Participants as follows:
(i) During the 60-day period following the completion of the audit of
the Company's financial statements for the Plan Year, provided the
Participant had not terminated employment on or before the last day of
the Plan Year.
(ii) Notwithstanding the foregoing, any Participant whose employment
has been Terminated for Cause or who engages in competitive activity
with the Company or any of its Affiliates (whether as an employee,
consultant, independent contractor, or through self-employment) shall
forfeit all rights and benefits under this Plan, provided that the
Chief Executive Officer of the Company may make exceptions to this
rule.
(iii) Upon the death of, retirement of, or incurrence of a Disability
by a Participant, the Participant's Beneficiary will be eligible to
receive the individual award determined pursuant to Section 4, in whole
or in part, as determined by the Chief Executive Officer of the
Company.
Payment will be accompanied by a statement explaining the calculation of such
Award.
6.2 Form of Payment: Payment of benefits under Section 6.1 will be made in
cash, subject to such withholding as may be required under the Code or other
applicable laws.
6.3 Payment to Minors or Incapacitated Persons: If the Chief Executive
Officer of the Company determines that any Person to whom any payment is to be
made under this Plan is unable to care for his affairs because of illness or
accident, or is a minor, any payment due will be paid to the duly appointed
guardian or other legal representative of such Person. Payment will be made
under
8
<PAGE> 9
this Section 6.3 only after the receipt by the Company of documentation
satisfactory to the Company evidencing such legal status.
6.4 Limitation on Payments: Notwithstanding anything contained in this Plan
to the contrary, aggregate payments to all Participants of a Business Unit or to
Corporate Employees shall not be made with respect to a Plan Year in excess of
either five percent (5%) of the Operating Income of such Business Unit (or of
the Company for Corporate Employees) for such Plan Year. Partial payments will
be made within the limitations of the foregoing in the ratio that amounts
otherwise payable with respect to a Plan Year for each Participant bears to the
amounts otherwise payable with respect to a Plan Year for all Participants.
7. MISCELLANEOUS.
7.1 Modification and Termination of Plan: Upon the recommendation of the
Chief Executive Officer of the Company and with the approval of the Compensation
Committee of the Board of Directors of the Company, the Company reserves the
right to amend or terminate this Plan, and may suspend the grant of any awards
under this Plan, at any time and from time to time in any manner it determines;
provided that with respect to any termination, amendment or suspension which
occurs other than as of the end of a Plan Year, Participants shall be eligible
for pro-rata awards, determined by the Chief Executive Officer of the Company in
the same manner as awards made as of the end of a Plan Year but pro-rated by the
period of time for which the Plan remained in force prior to such termination.
Notwithstanding any other provision of this Plan, this Plan will terminate on
June 30, 2000, and all awards outstanding will be paid in compliance with the
terms of this Plan. Immediately upon the payment of the awards after any
termination of this Plan, no Person will have any further interest under this
Plan and no Employee or Beneficiary will be entitled to any further
9
<PAGE> 10
payment under this Plan.
7.2 Interest in this Plan Nonassignable: No Employee will have any right to
sell, assign, dispose of, transfer, convey or otherwise alienate ("Transfer")
any benefits, other than by designation of a Beneficiary in accordance with the
terms of this Plan. Any purported Transfer in violation of this Section will be
void and will be given no effect by the Company or any other Employer.
7.3 Termination of Service: Neither this Plan nor any action taken under
this Plan will be construed as giving any Employee any right to be retained in
the employ of any Employer, and the right to dismiss any Employee at any time
with or without cause is specifically reserved to each Employer (subject to the
terms of any separate written employment agreement between such Employee and his
Employer).
7.4 Authority to Interpret this Plan: The Chief Executive Officer of the
Company will have the complete and final authority to administer and interpret
the provisions of this Plan, and the Chief Executive Officer of the Company's
determination will be binding and conclusive on all parties. All
interpretations, decisions and determinations required or permitted to be made
or taken by the Chief Executive Officer of the Company will be made or taken by
the Chief Executive Officer of the Company in his sole and absolute discretion.
All interpretations, decisions and determinations taken by the Chief Executive
Officer of the Company which are made in good faith and are not inconsistent
with the explicit terms of this Plan will be final, binding and conclusive on
the Employers, Employees, Beneficiaries and all other Persons having dealings
with this Plan.
7.5 Effect of this Plan: This Plan will be binding upon and inure to the
benefit of the Employers, their Successors, the Employees and the Beneficiaries.
7.6 Applicable Law: This Plan will be construed in accordance with and
governed by the
10
<PAGE> 11
laws of the State of Illinois without regard to principles of conflicts of laws.
7.7 Counterparts: This Plan may be executed in any number of counterparts,
each of which will be deemed to be an original instrument, but all of which
taken together will constitute but one instrument.
7.8 Complete Agreement: This Plan will constitute the entire understanding
and agreement between an Employer and such Employee with respect to the subject
matter hereof.
7.9 Waiver of Breach: The waiver by any Employer or the Chief Executive
Officer of the Company of a breach or violation of any provision of this Plan
will not operate as, or be construed to be, a waiver of any subsequent breach of
the same or the provisions hereof.
7.10 Severability: If any provision of this Plan, or the application of
such provision to any Person or circumstance, is found by a court of competent
jurisdiction to be unenforceable for any reason, such provision may be modified
or severed from this Plan to the extent necessary to make such provision
enforceable against such Person or in such circumstance. Neither the
unenforceability of such provision nor the modification or severance of such
provision will affect (i) the enforceability of any other provision of this Plan
or (ii) the enforceability of such provision against any Person or in any
circumstance other than those against or in which such provision is found to be
unenforceable.
7.11 Headings: The headings of the Sections of this Plan are solely for
convenience and reference and will not limit or otherwise affect the meaning of
any of the terms or provisions of this Plan.
7.12 Terms: Terms used with initial capital letters will have the meanings
specified, applicable to both singular and plural forms, for all purposes of
this Plan. All pronouns (and any variation) will be deemed to refer to the
masculine, feminine or neuter, as the identity of the Person
11
<PAGE> 12
may require. The singular or plural includes the other, as the context requires
or permits.
7.13 Notices: All notices, claims, requests, demands and other
communications required or given hereunder will be in writing and will be deemed
to be duly given if (a) personally delivered (including delivery by Federal
Express or other nationally recognized overnight carrier) or (b) sent by
telecopy as follows:
(a) If to the Company, to the address set forth on the signature page
attached hereto.
(b) If to an Employee, to the address maintained for such Employee on
the books and records of the Employer of such Employee.
(c) Any person may change the address(es) to which notices are required
to be sent by giving notice of such changes in the manner provided in
this Section; provided that such notice will not be effective until
actual receipt by the addressee.
7.14 Confidentiality: Employees shall keep all information with respect to
this Plan confidential.
12
<PAGE> 13
APPENDIX A
EARNINGS GROWTH STANDARDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AWARD EARNED
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Earnings % of Target Award % of Salary**
Increase* --------------------------------------------------
Business Unit Direct Reports***
Heads
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At or above 40% 200% of target award 100% 70% 40%
- ------------------------------------------------------------------------------------------------------------------------------------
Over 30%, under 40% +10% of target for each + 1% of earnings growth 51 - 99% 36 - 69% 21 - 39%
- ------------------------------------------------------------------------------------------------------------------------------------
30% 100% of target award 50% 35% 20%
- ------------------------------------------------------------------------------------------------------------------------------------
Over 20%, under 30% +5% of target for each +1% of earnings growth 26 - 49% 18 - 34% 11 - 19%
- ------------------------------------------------------------------------------------------------------------------------------------
20% 50% of target award 25% 17.5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
Over 5%, under 20% +2% of target for each 1% of earnings growth 11 - 24% 7 - 17% 5 - 9%
- ------------------------------------------------------------------------------------------------------------------------------------
5% 20% of target award 10% 7% 4%
- ------------------------------------------------------------------------------------------------------------------------------------
Under 5% None (0%) - 0 - - 0 - - 0 -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Percentages will be calculated rounded down to two decimal places.
** Percentages will be rounded down to the next whole number.
*** Applicable maximum determined by CEO; percentages for Direct Reports shall
be extrapolated between the two columns applicable to Direct Reports.
<PAGE> 14
APPENDIX B
AWARDS CALCULATION EXAMPLE (MILLIONS)
<TABLE>
<CAPTION>
Base Period Earnings
(=Three Year 199X
Average Annual Operating Percent
Business Unit Operating Income) Income Increase
- ------------- ----------------- ------ --------
<S> <C> <C> <C>
One $20.4 $35.4 73.53%
Two 12.5 17.0 36.00%
Three 25.5 16.2 0%
Corporate (2.0) (2.0) -
----- -----
Company Consolidated $56.4 $66.6 18.08%
===== =====
</TABLE>
One Business Unit Head
- --- ------------------
73.53% x 70% = 51.47%
18.08% x 30% = 5.42
------
Annual earnings increase = 56.89% achieved 200% of target or award of
100% of base salary
Two
- ---
36.00% x 70% = 25.20%
18.08% x 30% = 5.42
------
Annual earnings increase = 30.62% achieved 106% of target or award of
53% of base salary
Three
- -----
0% x 70% = 0%
18.08% x 30% = 5.42
------
Annual earnings increase = 5.42% achieved 20% of target or award
of 10% of base salary
Company Consolidated Annual Earnings Increase
- ---------------------------------------------
18.08% x 100% = 18.08% achieved 46% of target or award of
23% of base salary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 39,044
<SECURITIES> 0
<RECEIVABLES> 94,940
<ALLOWANCES> (7,569)
<INVENTORY> 28,905
<CURRENT-ASSETS> 174,955
<PP&E> 23,766
<DEPRECIATION> (13,403)
<TOTAL-ASSETS> 240,014
<CURRENT-LIABILITIES> 56,955
<BONDS> 0
0
0
<COMMON> 385
<OTHER-SE> 192,697
<TOTAL-LIABILITY-AND-EQUITY> 240,014
<SALES> 89,339
<TOTAL-REVENUES> 89,339
<CGS> 40,112
<TOTAL-COSTS> 40,112
<OTHER-EXPENSES> 15,748
<LOSS-PROVISION> 4,264
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,876
<INCOME-TAX> 6,069
<INCOME-CONTINUING> 9,807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,807
<EPS-PRIMARY> 9
<EPS-DILUTED> 9
</TABLE>
