<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for use of the
Commission only
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
MIDWAY GAMES INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[MIDWAY LOGO]
MIDWAY GAMES INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
FEBRUARY 3, 1999
------------------------
To the Stockholders of
MIDWAY GAMES INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Midway
Games Inc. (the "Company" or "Midway") will be held on Wednesday, February 3,
1999 at 10:00 a.m. Central Standard Time at The Standard Club, Chicago Room, 4th
Floor, 320 South Plymouth Court, Chicago, Illinois 60604, to consider and act
upon the following matters:
1. Electing four (4) Class III Directors;
2. Ratifying the Midway Games Inc. 1999 Stock Option Plan;
3. Ratifying the appointment of Ernst & Young LLP as independent auditors for
the 1999 fiscal year; and
4. Transacting such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
The close of business on December 7, 1998 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting and any adjournments thereof. A list of the stockholders entitled to
vote at the Annual Meeting will be open to the examination of any stockholder of
the Company for any purpose germane to the Annual Meeting during regular
business hours at the offices of the Company for the ten-day period prior to the
Annual Meeting.
YOU ARE REQUESTED, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE ANNUAL
MEETING, TO MARK, DATE, SIGN AND RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE
ENCLOSED ENVELOPE. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
By Order of the Board of Directors,
ORRIN J. EDIDIN
Vice President, Secretary and General
Counsel
Chicago, Illinois
December 11, 1998
<PAGE> 3
ANNUAL MEETING OF STOCKHOLDERS
OF
MIDWAY GAMES INC.
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (the "Board") of Midway Games Inc. (the "Company" or
"Midway") of proxies to be voted at the Annual Meeting of Stockholders to be
held at The Standard Club, Chicago Room, 4th Floor, 320 South Plymouth Court,
Chicago, Illinois 60604, on Wednesday, February 3, 1999 at 10:00 a.m. Central
Standard Time, and at any adjournment or adjournments thereof (the "Annual
Meeting").
All proxies in the accompanying form which are properly executed and duly
returned will be voted in accordance with the instructions specified therein. If
no instructions are given, such proxies will be voted in accordance with the
recommendations of the Board as indicated in this Proxy Statement. A proxy may
be revoked at any time prior to its exercise by written notice to the Company,
by submission of another proxy bearing a later date or by voting in person at
the meeting. Such revocation will not affect a vote on any matters taken prior
thereto. The mere presence at the meeting of the person appointing a proxy will
not revoke the appointment.
The mailing address of the Company's principal executive offices is 3401
North California Avenue, Chicago, Illinois 60618. This Proxy Statement and the
accompanying proxy card are being mailed to stockholders on or about December
11, 1997.
Only holders of the Company's Common Stock, $.01 par value per share
("Common Stock"), of record at the close of business on December 7, 1998 (the
"Record Date") will be entitled to vote at the Annual Meeting or any adjournment
or adjournments of such meeting. There were 37,052,000 shares of Common Stock
outstanding on the Record Date (excluding 1,448,000 treasury shares). Each such
share entitles the holder thereof to one vote. The presence, in person or by
proxy, of the holders of a majority of the shares entitled to vote at the Annual
Meeting is necessary to constitute a quorum for the transaction of business at
the Annual Meeting.
THE DISTRIBUTION
On October 29, 1996, the Company completed an initial public offering of
5,100,000 shares of Common Stock, at a price of $20.00 per share (the
"Offering"). 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. 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. 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 "Certain Relationships and
Related Transactions" below.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the Record Date
concerning persons which, to the knowledge of Midway, beneficially own more than
5% of the outstanding shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING
BENEFICIALLY COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED STOCK
------------------------------------ ------------ -------------
<S> <C> <C>
Sumner M. Redstone and National Amusements, Inc............. 8,865,636(1) 23.9%
200 Elm Street
Dedham, MA 02026
</TABLE>
- ---------------
(1) The number of shares reported is based upon information contained in the
Amendment Number One to Schedule 13D filed with the Securities and Exchange
Commission by Sumner M. Redstone on October 22, 1998. Pursuant to such Form,
Mr. Redstone and National Amusements, Inc., a Maryland corporation, reported
beneficial ownership of and sole investment power with respect to 4,692,865
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.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of the Record Date, certain information
concerning beneficial ownership of shares of Common Stock by each director of
Midway, each executive officer of Midway and by all directors and executive
officers of Midway as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING
BENEFICIALLY COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) STOCK(2)
------------------------------------ ------------- -------------
<S> <C> <C>
Harold H. Bach, Jr.*.................................... 121,674(3) **
William C. Bartholomay.................................. 80,370(4) **
Byron C. Cook*.......................................... 158,589(3) **
Orrin J. Edidin......................................... 500 **
Kenneth J. Fedesna...................................... 132,463(3) **
William E. McKenna...................................... 51,958(4) **
Norman J. Menell........................................ 52,506(4) **
Louis J. Nicastro....................................... 50,547(4) **
Neil D. Nicastro........................................ 888,458(5) 2.4%
Harvey Reich............................................ 51,277(4) **
Ira S. Sheinfeld........................................ 56,801(4) **
Gerald O. Sweeney, Jr.*................................. 35,000(4) **
Richard D. White*....................................... 35,000(4) **
Directors and Executive Officers as a group (13
persons).............................................. 1,715,143(6) 4.5%
</TABLE>
- ---------------
* Nominee for Director
** Less than 1%
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days.
2
<PAGE> 5
(2) For purposes of calculating the percentage of outstanding shares of Common
Stock, shares issuable to such person upon the exercise of stock options
within 60 days have been deemed to be outstanding.
(3) Includes 90,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(4) Includes 35,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(5) Includes 430,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(6) Includes an aggregate of 980,000 shares of Common Stock which directors and
executive officers have the right to acquire upon the exercise of stock
options.
PROPOSAL 1 -- ELECTION OF CLASS III DIRECTORS
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; 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.
Upon the recommendation of the Nominating Committee, four (4) persons are
to be elected to serve as Class III Directors for a term of three (3) years and
until their respective successors are duly elected and qualified. All of the
nominees are at present Class III Directors of the Company. Should any of the
nominees be unable to serve or refuse to serve as a director (an event which the
Board does not anticipate), proxies solicited hereunder will be voted in favor
of those nominees who do remain as candidates and may be voted for substituted
nominees.
<TABLE>
<CAPTION>
NAME OF CLASS III DIRECTOR POSITION WITH COMPANY AND DIRECTOR
NOMINEE (AGE) PRINCIPAL OCCUPATION SINCE
-------------------------- ------------------------- --------
<S> <C> <C>
Harold H. Bach, Jr. (66).................. Executive Vice President -- Finance, Treasurer 1996
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 Video and 1996
Director of the Company
Gerald O. Sweeney, Jr. (46)............... Director of the Company and Attorney, Lord, 1996
Bissell & Brook
Richard D. White (44)..................... Director of the Company and Managing Director, 1996
CIBC Wood Gundy Capital Corp.
</TABLE>
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, Treasurer and Chief Financial
Officer of the Company from September 17, 1990 to August 30, 1996, and he has
served as Treasurer continuously since December 1, 1994. Additionally, Mr. Bach
is also the Vice President -- Finance, Chief Financial and Chief Accounting
Officer of WMS. Prior to joining WMS, Mr. Bach was a partner in the accounting
firms of Ernst & Young (1989-1990) and Arthur Young & Company (1967-1989).
BYRON C. COOK became a Director and Executive Vice President -- Home Video
of the Company on August 30, 1996. Mr. Cook is also the President and Chief
Operating Officer of Midway Home Entertainment Inc., a wholly-owned subsidiary
of the Company, positions he assumed upon the acquisition of Tradewest Inc. in
April 1994. Prior to the acquisition, Mr. Cook was President of Tradewest Inc.
(1988-1994) as well as a co-founder thereof.
3
<PAGE> 6
GERALD O. SWEENEY, JR. has been a member of the law firm Lord, Bissell &
Brook, Chicago, Illinois for in excess of five years. He was elected as a
Director of the Company in November 1996.
RICHARD D. WHITE has been a Managing Director of CIBC 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 director of Vestcom International,
Inc.
The remaining incumbent directors, whose terms of office have not expired,
are as follows:
<TABLE>
<CAPTION>
POSITION WITH THE COMPANY AND DIRECTOR
NAME (AGE) PRINCIPAL OCCUPATION SINCE
---------- ----------------------------- --------
<S> <C> <C>
Class I Directors: Term expiring at the Company's 2001 Annual Meeting
Neil D. Nicastro (41)..................... Chairman of the Board of Directors, President, 1988
Chief Executive Officer and Chief Operating
Officer of the Company
William C. Bartholomay (70)............... Director of the Company and President of Near 1996
North National Group
Norman J. Menell (67)..................... Director of the Company and Vice Chairman of the 1996
Board of WMS
Louis J. Nicastro (70).................... Director of the Company and Chairman of the 1988
Board, President and Chief Executive Officer of
WMS
Class II Directors: Term expiring at the Company's 2000 Annual Meeting
Kenneth J. Fedesna (48)................... Executive Vice President -- Coin-Op Video and 1996
Director of the Company and Vice President and
General Manager of Williams Electronics Games,
Inc.
William E. McKenna (79)................... Director of the Company and General Partner, MCK 1996
Investment Company
Harvey Reich (69)......................... Director of the Company and Attorney 1996
Ira S. Sheinfeld (60)..................... Director of the Company and Attorney, Squadron, 1996
Ellenoff, Plesent & Sheinfeld LLP
</TABLE>
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
4
<PAGE> 7
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 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.
REQUIRED VOTE
The affirmative vote of a plurality of the shares of Common Stock present
in person or by proxy at the Annual Meeting is required to elect the Class III
Directors.
THE FOUR INDIVIDUALS NAMED ABOVE WILL BE PLACED IN NOMINATION FOR ELECTION
AS CLASS III DIRECTORS. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEES
FOR ELECTION AS CLASS III DIRECTORS.
THE BOARD OF DIRECTORS
The Board of Directors is responsible for the overall affairs of the
Company. To assist it in carrying out its duties, the Board has delegated
certain authority to several committees. The majority of the Board, eight of the
twelve directors, are neither officers nor employees of the Company or its
subsidiaries.
During the 1998 fiscal year, the Board of directors of the Company held
five meetings. All other action taken by the Board was by the unanimous written
consent of the members after review of proposals presented to each member. Each
director attended more than 75% of the aggregate of meetings of the Board and
committees on which he served during the fiscal year.
DIRECTOR COMPENSATION
The Company pays a fee of $22,500 per annum to each director who is not
also an employee of the Company or any of its subsidiaries. Each such director
who serves as the chairman of any committee of the Board of Directors receives a
further fee of $2,500 per annum for his services in such capacity and each other
member of the Company's Audit Committee receives an additional fee of $2,500 per
annum. Five of the Company's eight non-employee directors also serve on the
Board of Directors of WMS and receive compensation therefor.
5
<PAGE> 8
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 Plans" below.
Pursuant to the Adjustment Plan described below, 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. Under the Adjustment Plan, Mr. Louis J. Nicastro was entitled to
payments valued at $10,406,059 and an adjustment of the exercise price of his
WMS stock options to $3.519 per share. At the request of the Board of Directors
of WMS, in order to raise cash used by WMS in connection with the Adjustment
Plan, shortly before the Distribution, Mr. Nicastro exercised his options to
purchase 629,554 shares of Common Stock. Shortly thereafter, Mr. Nicastro sold
such shares in the public market and received from the Company a payment of
$4,956,640 representing the difference between $10,406,059 and the net amount he
received from the exercise and sale of such shares.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee is currently composed of four members: Messrs. McKenna
(Chairman), Bartholomay, Sheinfeld and White. This Committee is charged with
meeting periodically with the independent auditors and Company personnel with
respect to the adequacy of internal accounting controls, receiving and reviewing
the recommendations of the independent auditors, recommending the appointment of
auditors and reviewing the scope of the audit and the compensation of the
independent auditors, reviewing consolidated financial statements and,
generally, reviewing the Company's accounting policies and resolving potential
conflicts of interest. During the 1998 fiscal year this Committee held three
meetings.
The Nominating Committee is currently composed of Messrs. L. J. Nicastro
(Chairman) and Bartholomay. This Committee is charged with making
recommendations with respect to the nomination of candidates for election to the
Board and does not accept recommendations from stockholders of the Company.
During the 1998 fiscal year this Committee did not hold any meetings, taking all
action by the unanimous written consent of its members.
The Negotiating Committee is currently composed of Messrs. G. O. Sweeney,
Jr. (Chairman) and R. D. White. This Committee is charged with the
responsibility for reviewing and authorizing any agreement to be entered into in
the future, and any modification to any existing agreement between the Company
and WMS. During fiscal 1998 this Committee met three times and took other action
by unanimous written consent of the members.
The Stock Option Committee is currently composed of Messrs. Reich
(Chairman) and McKenna. This Committee approves the selection of individuals for
participation in, and determines the timing, pricing and the amount of option
grants under the provisions of, the Company's 1996 Stock Option Plan and 1998
Stock Option Plan other than formula awards made to Non-Employee Directors of
the Company. During the 1998 fiscal year this Committee did not hold any
meetings, taking all action by the unanimous written consent of the members.
The Compensation Committee is currently composed of Messrs. Bartholomay
(Chairman), McKenna and Reich. This Committee is charged with making
recommendations regarding the compensation of senior management personnel.
During the 1998 fiscal year this Committee held one meeting and took other
action by unanimous written consent of the members.
6
<PAGE> 9
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Compensation Committee or Stock Option Committee
is an employee or officer of the Company, and no officer, director or other
person had any relationship required to be disclosed herein.
EXECUTIVE OFFICERS
The following individuals were elected to serve in the capacities set forth
below until the 1999 Annual Meeting of the Board of Directors and until their
respective successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Neil D. Nicastro...... 42 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 principal occupation and employment of Messrs. Neil D. Nicastro, Bach,
Cook and Fedesna during the last five years is set forth on pages 5 and 6
hereof.
Mr. Edidin has served as Vice President, Secretary and General Counsel of
the Company since June 30, 1997. Mr. Edidin served as Associate General Counsel
of Fruit of the Loom, Inc., an apparel company, from August 1992 until May 1997.
Mr. Edidin has also served as Vice President, Secretary and General Counsel of
WMS since May 30, 1997.
EXECUTIVE COMPENSATION
To provide stockholders with an understanding of the Company's executive
compensation program, the following are presented below: (i) the Summary
Compensation Table; (ii) the Stock Option Tables; (iii) the Joint Report by the
Compensation and Stock Option Committees of the Board of Directors on Fiscal
1998 Executive Compensation; (iv) the Corporate Performance Graph; and (v) a
description of Employment Agreements.
SUMMARY COMPENSATION TABLE
The executive officers of the Company (other than Mr. Neil D. Nicastro and
Mr. Byron C. Cook) received no compensation from the Company during the fiscal
years ended June 30, 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 $100,000. Pursuant to the
Manufacturing and Services Agreement between WMS and the Company, after the
Offering and until the Distribution the compensation paid by WMS to the
executive officers of the Company (other than Messrs. Nicastro and Cook) was
allocated to the Company based upon estimates by management of the Company and
management of WMS of the percentage of time devoted to the Company. After the
Distribution, compensation paid by WMS to the executive officers of the Company
(other than Messrs. Nicastro and Cook) is reimbursed by the Company in amounts
equal to the Company's allocated cost pursuant to the Temporary Support Services
Agreement between WMS and the Company. Management of the Company believes that
such executive officers devoted 40% to 70% of their time to the Company during
fiscal 1998. The results of operations for each of the fiscal years ended June
30, 1998, 1997 and 1996 include
7
<PAGE> 10
an allocation of the compensation of the Company's executive officers based on
estimates by management of WMS. See "Certain Relationships and Related
Transactions" below for a description of the Manufacturing and Services
Agreement and the Temporary Support Services Agreement.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) ($)(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 Executive 1997 600,000 969,160 500,000 54,632(4)
Officer, President and Chief Operating 1996 532,500 267,600 -- 35,791(4)
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 $35,100 for fiscal 1998, 1997 and 1996, respectively,
accrual for contractual retirement benefits.
(5) Amount shown for Mr. Fedesna includes life insurance premiums.
8
<PAGE> 11
STOCK OPTION TABLES
The following table sets forth certain information with respect to options
to purchase Common Stock granted during fiscal year 1998 under the Company's
Stock Option Plans for the executive officers named in the Summary Compensation
Table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL RATE OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM (1)
OPTIONS FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#) YEAR(%) ($/SHARE) DATE 5%($) 10%($)
---- ---------- ------------- --------- ---------- ---------- ----------
<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 $1,012,425,000 at assumed rates of
stock appreciation of 5% and 10%, respectively.
(2) Twenty percent of these options were immediately exercisable upon the date
of the grant. The balance of the options become exercisable up to 40%, 60%,
80% and 100% of the total number of options granted upon the first, second,
third and fourth anniversaries, respectively, of the date of the grant.
(3) This option becomes exercisable up to 10%, 30%, 60% and 100% of the total
number of options granted upon the first, second, third and fourth
anniversaries, respectively, of the date of the grant.
9
<PAGE> 12
The following table sets forth certain information with respect to the
number and assumed values of options to purchase Common Stock owned by the
executive officers named in the Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT 6/30/98(#) 6/30/98($)(1)
ACQUIRED VALUE EXERCISABLE(E) EXERCISABLE(E)
NAME ON EXERCISE(#) 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 difference between the exercise price of in-the-money options
and the closing price of the Common Stock on the New York Stock Exchange on
June 30, 1998, which was $15.625.
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 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 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 November 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 were held by directors and employees of the Company and
10,000 of which were held by advisors and consultants to the Company. At
November 30, 1998, options to purchase 1,997,776 shares of Common Stock
exercisable at prices ranging from $20.00 to $12.00 per share were outstanding
under the 1996 Stock Option Plan, 1,947,776 of which were held by officers,
directors and employees of the Company and 50,000 of which were held by advisors
and consultants to the Company.
10
<PAGE> 13
EXECUTIVE INCENTIVE PLAN
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 for 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 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
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 Awards for the first year of the EIP are
based on 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.
1998 STOCK INCENTIVE PLAN
On November 24, 1998, the Board of directors and the Stock Option Committee
adopted the 1998 Stock Incentive Plan (the "Incentive Plan") intended to provide
a method pursuant to which employees, including officers of the Company and its
subsidiaries, and certain other persons who provided services to the Company,
may purchase an aggregate of up to 750,000 shares of Common Stock and up to an
aggregate of 2,250,000 additional shares of Common Stock issuable pursuant to
the exercise of options.
During one or more offering periods designated by the Stock Option
Committee, the first of which expires on January 29, 1999, each eligible
employee may subscribe for and purchase from the Company shares of Common Stock
under the Incentive Plan ("Purchased Shares") valued at up to 1.5 times his or
her annual compensation. For each Purchased Share, options to purchase an
additional three shares of Common Stock are issued to the purchaser. The total
number of shares of Common Stock that may be purchased and options issued under
the Incentive Plan will be proportionately reduced by the Stock Option Committee
in the event that eligible employees subscribe for more than the maximum number
of shares and options specified above.
The options issued to a purchaser of shares will vest one year after the
applicable offering period if such purchaser remains an employee. The Company
will hold the Purchased Shares in escrow for six months, and during that period,
the employee may not sell any Purchased Shares, take a short position or a put
option in any Common Stock or reduce his investment risk. The exercise price of
each option is the closing stock price of the shares of Common Stock on the New
York Stock Exchange on the date of issuance (the last day of the applicable
offering period). The term of each option issued under the Incentive Plan is ten
years, subject to earlier termination as provided in the Incentive Plan. The
Stock Option Committee or the Board has authority to make certain determinations
under the Incentive Plan, including as to the transferability of options, the
terms of payment upon exercise and the adjustment of options in case of certain
reorganization, distribution or other corporate events.
The Incentive Plan is not subject to the provision of ERISA, and options
issued under the Incentive Plan are not qualified under the provisions of
Section 422 of the Internal Revenue Code of 1986, as amended. The term of the
Incentive Plan ends on November 23, 2008, subject to earlier termination as
provided in the Incentive Plan.
11
<PAGE> 14
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; and 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.
Under the Adjustment Plan, Mr. Louis J. Nicastro was entitled to payments
valued at $10,406,059 and an adjustment of the exercise price of his stock
options to $3.519 per share. At the request of the Board of Directors of WMS, in
order to raise cash used by WMS in connection with the Adjustment Plan, shortly
before the Distribution, Mr. Nicastro exercised his options to purchase 629,554
shares of Common Stock. Shortly thereafter, Mr. Nicastro sold such shares in the
public market and received from the Company a payment of $4,956,640,
representing the difference between his entitlement of $10,406,059 and the net
amount he received from the exercise and sale.
JOINT REPORT OF THE COMPENSATION COMMITTEE AND STOCK OPTION COMMITTEE
ON FISCAL 1998 EXECUTIVE COMPENSATION
The Compensation Committee is charged with making recommendations to the
Board of Directors regarding the compensation of senior management personnel. To
the extent stock options form a portion of a compensation package, the
Compensation Committee works together with the Stock Option Committee, which is
responsible for making recommendations regarding stock option grants and awards.
It is the policy of the Compensation and Stock Option Committees to provide
attractive compensation packages to senior management so as to motivate them to
devote their full energies to the success of the Company, to reward them for
their services and to align the interests of senior management with the
interests of stockholders. The Company's executive compensation packages are
comprised primarily of base salaries, annual contractual and discretionary cash
bonuses, stock options and retirement and other benefits. It is the philosophy
of the Compensation and Stock Option Committees that the Company be staffed with
a small number of well compensated senior management personnel.
In general, the level of base salary is intended to provide appropriate
basic pay to senior management taking into account historical contributions to
the Company and each person's unique value and the recommendation of the Chief
Executive Officer. The amount of any discretionary bonus is subjective but is
generally based on the actual performance of the Company in the preceding fiscal
year, the special contribution of the executive to such performance and the
overall level of the executive's compensation
12
<PAGE> 15
including other elements of the compensation package. The Company also has used
stock options, which increase in value only if the Company's Common Stock
increases in value, and which terminate a short time after an executive leaves
the Company, as a means of long-term incentive compensation. The stock Option
Committee determined the size of the stock option grants to the executive
officers and to other employees throughout the Company on an individual,
discretionary basis in consideration of financial corporate results and each
recipient's performance, contributions and responsibilities without assigning
specific weight to any of these factors.
The salary and cash bonus paid to Mr. Neil D. Nicastro for the fiscal year
1998 was determined through a negotiated formula set forth in his employment
agreements with the Company and with WMS which provided for bonus compensation
as fully described under "Employment Agreements" below. In fiscal 1998, Mr. Neil
D. Nicastro received from the Company options to purchase 150,000 shares of
Common Stock. Senior executives other than Mr. Neil D. Nicastro were granted
discretionary bonuses for the 1998 fiscal year and also received from the
Company options to purchase, in the aggregate, 185,000 shares of Common Stock.
The decisions to pay such bonuses and to grant such stock options were
subjective but involved consideration of the efforts expended by such executives
as well as consideration of the financial performance of the Company. For
information with respect to options held by senior management at fiscal year
end, see "Stock Option Tables" set forth above.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") generally
provides that, for fiscal years commencing in 1994, compensation paid by
publicly-held corporations to the chief executive officer and the four most
highly paid senior executive officers in excess of one million dollars per year
per executive will be deductible by the Company only if paid pursuant to
qualifying performance-based compensation plans approved by stockholders of the
Company. Compensation as defined by the Budget Act includes, among other things,
base salary, incentive compensation and gains on stock option transactions.
Since the ultimate value of an option cannot be determined until it is exercised
or until the stock underlying the option is sold, executive compensation
relating to options may, in a given year, exceed one million dollars. The
Compensation Committee intends to consider, on a case by case basis, how the
Budget Act will affect the Company's compensation plans and contractual and
discretionary cash compensation. The Compensation Committee does not intend to
request Mr. N. D. Nicastro or any other officer to submit their employment
agreements for stockholder approval. See "Employment Agreements" below.
Depending on the performance of the Company, payments to Mr. Nicastro under such
agreement may exceed one million dollars in a particular fiscal year and such
excess payments would not be deductible by the Company.
<TABLE>
<S> <C>
The Compensation Committee The Stock Option Committee
William C. Bartholomay, Chairman Harvey Reich, Chairman
Harvey Reich William E. McKenna
William E. McKenna
</TABLE>
The foregoing Joint Report of the Compensation Committee and Stock Option
Committee on executive compensation shall not be deemed to be incorporated by
reference into any filing of the Company under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the
extent that the Company specifically incorporates such information by reference.
13
<PAGE> 16
CORPORATE PERFORMANCE GRAPH
The following graph compares for the period beginning October 29, 1996 (the
date trading of the Common Stock on the New York Stock Exchange commenced) and
ending June 30, 1998 the annual percentage change in cumulative total
stockholder return on the Common Stock with (1) the cumulative total return of
the Standard and Poor's 500 Stock Index ("S&P 500") and (2) the cumulative total
return of the Standard and Poor's Leisure Time Index ("S&P Leisure"). The graph
assumes an investment of $100 on October 29, 1996 in the Common Stock and $100
invested at that time in each of the indexes and the reinvestment of dividends
where applicable.
PERFORMANCE CHART
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Midway $100 $102 $ 74
- --------------------------------------------------------------------------------------------------------------------
S&P 500 $100 $128 $167
- --------------------------------------------------------------------------------------------------------------------
S&P - Leisure $100 $122 $147
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The foregoing table shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates such information by reference.
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 "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
14
<PAGE> 17
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 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.
15
<PAGE> 18
If payments made to Mr. Nicastro pursuant to the employment agreement after
a wrongful termination of the employment agreement by the Company or after a
change of control are considered "excess parachute payments" under Section 280G
of the Internal Revenue Code of 1986, as amended, additional compensation is
required to be paid to Mr. Nicastro to the extent necessary to eliminate the
economic effect on him of the resulting excise tax. Pursuant to Section 280G, in
addition to income taxes, the recipient is subject to a 20% nondeductible excise
tax on excess parachute payments. An excess parachute payment is a payment in
the nature of compensation which is contingent on a change of ownership or
effective control and which exceeds the portion of the base amount (i.e., the
average compensation for the five-year period prior to the change of control)
allocable to the payment. These rules apply only if the present value of all
payments of compensation (including non-taxable fringe benefits) at the time of
a change of control is at least equal to three times the base amount. Excess
parachute payments are not deductible by the Company.
Midway Home Entertainment Inc. ("Midway Home"), a wholly-owned subsidiary
of the Company, entered into an employment agreement with Mr. Byron C. Cook, the
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 continues to
employ Mr. Cook after expiration of the employment agreement upon similar terms
and conditions.
Effective July 1, 1998, the Company and Mr. Harold H. Bach, Jr., the Chief
Financial Officer of the Company, entered into a three-year renewable employment
agreement, pursuant to which Mr. Bach's base salary is $315,000 per annum, or
such greater amount as may be determined by the Board of Directors. Mr. Bach has
agreed not to engage in any business in competition with the Company for a
period of one year after he leaves the Company. Mr. Bach is also entitled to
participate in the Company's employee benefit plans generally available to
executives of the Company. In the event of a change of control of the Company
(as defined in the agreement), Mr. Bach is entitled, if he terminates his
employment within 60 days thereafter, to a severance payment of up to three
times his base annual salary. The agreement may be terminated by the Company
upon 30 days' notice for cause (as defined in the agreement).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH WMS
Prior to the Offering, the Company was a wholly-owned subsidiary of WMS. As
a result of the Offering, WMS' beneficial ownership of Common Stock was reduced
from 100.0% to 86.8%. 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, two of the executive officers of the Company,
Messrs. Bach and Edidin, are officers of WMS.
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.
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
16
<PAGE> 19
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 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%.
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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; 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.
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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 date of the 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
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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 a Termination
Agreement with WMS, 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 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
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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.
PROPOSAL 2 -- RATIFICATION OF 1999 STOCK OPTION PLAN
On November 5, 1998, the Board of Directors of the Company, subject to the
approval of stockholders, adopted the Company's 1999 Stock Option Plan (the
"Plan") covering an aggregate of 1,750,000 shares of Common Stock.
The Board of Directors has deemed that it is in the best interests of the
Company to establish the Plan so as to provide employees of the Company and its
subsidiaries, as well as directors, independent contractors and consultants of
the Company and/or its subsidiaries an opportunity to acquire a proprietary
interest in the Company by means of grants of options to purchase Common Stock
in order to provide a closer identification of their interests with those of the
Company and its stockholders. It is the opinion of the Board of Directors that
by providing, to persons involved in the success of the Company, the opportunity
to acquire an equity investment in the Company, the Plan will maintain and
strengthen their desire to remain with the Company, stimulate their efforts on
the Company's behalf, and also attract other qualified personnel to become
employed by or otherwise become associated with the Company.
No options have yet been granted pursuant to the Plan, and no specific
grants or grant formulas have been made or established with respect to any
person or class of persons under the Plan. The Board of Directors has directed
that, subject to stockholder ratification of the Plan, the shares underlying the
Plan be listed for trading on the New York Stock Exchange and registered
pursuant to the Securities Act of 1933, and the Company intends to take steps to
file a Registration Statement on Form S-8 to register such shares promptly after
approval of this Proposal 2.
The last sale price of the Common Stock on December 7, 1998 was $10.0625
per share.
SUMMARY OF THE PLAN
The following discussion summarizes certain provisions of the Plan, which
is qualified in its entirety by reference to the text of the Plan, copies of
which are available for examination at the Securities and Exchange Commission
and at the principal office of the Company, 3401 North California Avenue,
Chicago, Illinois 60618. The Plan is intended to provide a method pursuant to
which officers, directors, employees and certain consultants and advisors to the
Company and its subsidiaries may be encouraged to acquire a proprietary interest
in the Company and potentially to realize benefits from an increase in the value
of the Common Stock, to provide such persons with greater incentive for their
continued service to the Company and generally to promote the interests of the
Company and its stockholders. Although the number and identity of individuals
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who will be eligible to participate in the Plan have not been determined, all
directors and employees, including executive officers, of the Company will be
eligible to participate in the Plan. The principal terms and conditions of the
Plan are summarized below.
Administration of the Plan. The Plan is administered by the Stock Option
Committee (the "Committee") of the Board of Directors consisting of two or more
persons who are appointed by, and serve at the pleasure of, the Board and each
of whom is a "non-employee director" as that term is defined in Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). Subject to the express provisions of the Plan, the Committee has
the discretion to make all determinations under the Plan, including to whom
among those eligible, and the time or times at which, options will be granted,
the number of shares to be subject to each option, the manner in and price at
which options may be exercised and whether stock appreciation rights are
associated with such options. In making such determinations, the Committee may
take into account the nature and period of service of eligible employees, their
level of compensation, their past, present and potential contributions to the
Company and such other factors as the Committee in its discretion deems
relevant. Options are designated at the time of grant as either "incentive stock
options" intended to qualify under Section 422 of the Code or "non-qualified
stock options" which do not so qualify.
The Board of Directors may amend, suspend or terminate the Plan at any
time, except that no amendment may be adopted without the approval of
stockholders which would: (i) materially increase the maximum number of shares
which may be issued pursuant to the exercise of options granted under the Plan;
(ii) materially modify the eligibility requirements for participation in the
Plan; (iii) materially increase the benefits provided under the Plan to the
extent that stockholder approval would then be required pursuant to Rule 16b-3
under the Exchange Act; or (iv) adversely affect the rights of a holder without
his or her consent.
Unless the Plan is terminated earlier by the Company Board, the Plan will
terminate on January 25, 2009.
Shares Subject to the Plan. Subject to adjustments resulting from changes
in capitalization, no more than 1,750,000 shares of Common Stock may be issued
pursuant to the exercise of options granted under the Plan. If any option
expires or terminates for any reason, without having been exercised in full, the
unpurchased shares subject to such option will be available again for purposes
of the Plan. No employee may receive options in any calendar year to purchase
more than 500,000 shares, and no one person may receive options covering more
than 50% of the total number of shares subject to the Plan.
The total number of shares of Common Stock that may be allocated pursuant
to options granted under the Plan or that may be allocated to any one employee,
the number of shares subject to outstanding options and stock appreciation
rights, the exercise price for such options and other terms and conditions of
options may be equitably adjusted by the Committee in the event of changes in
the Company's capital structure resulting from certain corporate transactions,
including a dividend or other distribution, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of shares or other securities of the Company
or other corporate transaction, including a change of control, or other similar
event. In addition, if the Company is involved in a merger, consolidation,
acquisition, separation, reorganization, liquidation or other similar corporate
transaction, the options granted under the Plan will be adjusted, assumed, or,
under certain conditions, will terminate, subject to the right of the option
holder to exercise his option, or a comparable option substituted at the
discretion of the Company prior to such event. An incentive stock option may not
be transferred other than by will or by laws of descent and distribution, and
during the lifetime of the option holder may be exercised only by such holder.
The Committee may permit non-qualified stock options to be transferrable under
certain circumstances.
Participation. The Committee is authorized to grant incentive stock options
from time to time to such employees of the Company or its subsidiaries as the
Committee, in its sole discretion, may determine, subject to certain limits.
Employees and directors of the Company or its subsidiaries and consultants and
advisors providing services to the Company or its subsidiaries are eligible to
receive non-qualified stock options under the Plan.
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Transferability. Incentive stock options granted are not transferable
except by will or pursuant to the laws of descent and distribution.
Non-qualified stock options may be transferable, at the discretion of the
Committee, to the extent specified in the Option agreement.
Option Price. The exercise price of each option is determined by the
Committee but may not, in any case, be less than 85% of the fair market value of
the shares of Common Stock on the date of grant or, in the case of incentive
stock options, be less than 100% of the fair market value of the shares of
Common Stock on the date of grant. If an incentive stock option is to be granted
to an employee who owns over 10% of the total combined voting power of all
classes of the Company's stock, then the exercise price may not be less than
110% of the fair market value of the Common Stock covered by the incentive stock
option on the date the option is granted.
Acquisition of Shares. In order to assist an optionee in the acquisition of
shares of Company Common Stock pursuant to the exercise of an option granted
under the Plan, the Committee may authorize, among other things, (i) the
extension of a loan to the optionee by the Company, (ii) the payment by the
optionee of the purchase price of the Common Stock in installments or (iii) the
guarantee by the Company of a loan obtained by the optionee from a third party.
Such loans, installment payments or guarantees may be authorized without
security and, in the case of incentive stock options, the rate of interest may
not be less than the higher of the prime rate of a commercial bank of recognized
standing or the rate of interest imputed under Section 483 of the Code. Subject
to certain holding periods, Common Stock may be used to pay the exercise price
of options.
Terms of Options. The Committee has the discretion to fix the term of each
option granted under the Plan, except that the maximum length of term of each
option is 10 years, subject to earlier termination as provided in the Plan (five
years in the case of incentive stock options granted to an employee who owns
over 10% of the total combined voting power of all classes of the Company's
stock).
Termination of Service or Employment. Upon the termination of an optionee's
service with the Company voluntarily by the optionee or for cause, all
unexercised options or portions thereof held by such optionee shall expire and
be forfeited as of such date. If an optionee quits his or her service with the
written consent of the Company, or if the service of the optionee is terminated
by the Company for reasons other than cause, such optionee may exercise his or
her option within three months following such termination of service. If an
optionee dies while in the service of the Company (or within three months
thereafter for separation under the circumstances given in the previous
sentence) such optionee's estate may exercise his or her option within one year
following such death. The optionee may never exercise his or her option for more
than the number of shares which he or she could have purchased as of the date of
any termination.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal Federal income
tax consequences of the grant and exercise of options and is based on existing
Federal law, which is subject to change, in some cases retroactively. This
discussion is also qualified by the particular circumstances of each optionee,
which may substantially alter or modify the Federal income tax consequences
herein discussed. In addition, this summary does not address state and local tax
consequences of the grant and exercise of options. The Plan is not subject to
the provisions of ERISA.
Non-qualified Options. An individual who is a United States taxpayer who is
granted a non-qualified stock option under the Plan will not realize any income
for Federal income tax purposes on the grant of an option. An optionee will
realize ordinary income for Federal income tax purposes on the exercise of an
option, provided the shares are not then subject to a substantial risk of
forfeiture within the meaning of Section 83 of the Code ("Risk of Forfeiture"),
in an amount equal to the excess, if any, of the fair market value of the shares
of Common Stock on the date of exercise over the exercise price thereof. If the
shares are subject to a Risk of Forfeiture on the date of exercise, the optionee
will realize ordinary income for the year in which the shares cease to be
subject to a Risk of Forfeiture in an amount equal to the excess, if any, of the
fair market value of the shares at the date they cease to be subject to a Risk
of Forfeiture over the exercise price, unless the optionee shall have made a
timely election under Section 83(b) of the Code to include in his income for
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the year of exercise an amount equal to the excess of the fair market value of
the shares of Common Stock on the date of exercise over the exercise price. The
amount realized for tax purposes by an optionee by reason of the exercise of a
non-qualified stock option granted under the Plan is subject to withholding by
the Company, and, except under certain circumstances described below, the
Company is entitled to a deduction in an amount equal to the income so realized
by an optionee.
Provided that an individual who is a United States taxpayer satisfies
certain holding period requirements provided by the Code, such individual will
realize long-term capital gain or loss, as the case may be, if the shares issued
upon exercise of a non-qualified stock option are disposed of more than one year
after (i) the shares are transferred to the individual or (ii) if the shares
were subject to a Risk of Forfeiture on the date of exercise and a valid
election under Section 83(b) of the Code shall not have been made, the date as
of which the shares cease to be subject to a Risk of Forfeiture. The amount
recognized upon such disposition will be the difference between the option
holder's basis in such shares and the amount realized upon such disposition.
Generally, an option holder's basis in the shares will be equal to the exercise
price plus the amount of income recognized upon exercise of the option.
Incentive Stock Options. An incentive stock option holder who meets the
eligibility requirements of Section 422 of the Code will not realize income for
Federal income tax purposes, and the Company will not be entitled to a
deduction, on either the grant or the exercise of an incentive stock option. If
the incentive stock option holder does not dispose of the shares acquired within
two years after the date the incentive stock option was granted to him or within
one year after the transfer of the shares to him, (i) any proceeds realized on a
sale of such shares in excess of the option price will be treated as long-term
capital gain and (ii) the Company will not be entitled to any deduction for
Federal income tax purposes with respect to such shares.
If an incentive stock option holder disposes of shares during the two-year
or one-year periods referred to above (a "Disqualifying Disposition"), the
incentive stock option holder will not be entitled to the favorable tax
treatment afforded to incentive stock options under the Code. Instead, the
incentive stock option holder will realize ordinary income for Federal income
tax purposes in the year the Disqualifying Disposition is made, in an amount
equal to the excess, if any, of the fair market value of the shares of Common
Stock on the date of exercise over the exercise price.
An incentive stock option holder generally will recognize a long-term
capital gain or loss, as the case may be, if the Disqualifying Disposition is
made more than one year after the shares are transferred to the incentive stock
option holder. The amount of any such gain or loss will be equal to the
difference between the amount realized on the Disqualifying Disposition and the
sum of (x) the exercise price and (y) the ordinary income realized by the
incentive stock option holder as the result of the Disqualifying Disposition.
The Company will be allowed in the taxable year of a Disqualifying Disposition a
deduction in the same amount as the ordinary income recognized by the incentive
stock option holder.
Notwithstanding the foregoing, if the Disqualifying Disposition is made in
a transaction with respect to which a loss, if sustained, would be recognized to
the incentive stock option holder, then the amount of ordinary income required
to be recognized upon the Disqualifying Disposition will not exceed the amount
by which the amount realized from the disposition exceeds the exercise price.
Generally, a loss may be recognized if the transaction is not a "wash" sale, a
gift or a sale between certain persons or entities classified under the Code as
"related persons".
Alternative Minimum Tax. For purposes of computing the Federal alternative
minimum tax with respect to shares acquired pursuant to the exercise of
incentive stock options, the difference between the fair market value of the
shares on the date of exercise over the exercise price will be includable in
alternative minimum taxable income in the year of exercise if the shares are not
subject to a Risk of Forfeiture; if the shares are subject to a Risk of
Forfeiture, the amount includable in alternative minimum taxable income will be
taken into account in the year the Risk of Forfeiture ceases and will be the
excess of the fair market value of the shares at the date they cease to be
subject to a Risk of Forfeiture over the exercise price. The basis of the shares
for alternative minimum tax purposes, generally, will be an amount equal to the
exercise price, increased by the amount of the tax preference taken into account
in computing the alternative minimum taxable income. In general, the alternative
minimum tax is the excess of 26% of alternative minimum taxable
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income up to $175,000 and 28% of such income above $175,000 over the regular
income tax, in each case subject to various adjustments and exemptions.
Certain Limitations on Deductions for Federal Income Tax Purposes. Pursuant
to Rule 162(m) of the Code and the regulations promulgated thereunder, the
Company is not able to deduct compensation to certain employees to the extent
compensation exceeds $1.0 million per tax year. Covered employees include the
chief executive officer and the four other highest paid senior executive
officers of the Company for the tax year. Certain performance-based
compensation, including stock options, is exempt from this limitation provided
that (i) the stock options are granted by a committee of the Board which is
comprised solely of two or more "outside directors", (ii) the plan under which
the options are granted is approved by stockholders, (iii) the plan states the
maximum number of shares with respect to which options may be granted during a
specified period to any employee, and (iv) the exercise price of a stock option
is not less than 100% of the fair market value of the Common Stock at the time
of grant.
Required Vote
The Board of Directors believes it to be in the best interest of the
Company that the Plan be ratified and recommends that the Company's stockholders
approve the Plan. The following resolution will be submitted to the stockholders
for approval at the Annual Meeting:
RESOLVED, that the Company's 1999 Stock Option Plan be, and it hereby is,
ratified and adopted.
The affirmative vote of holders of a majority of the shares of Common Stock
present in person or by proxy and entitled to vote on the matter is required for
approval of the Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF
THE 1999 STOCK OPTION PLAN.
PROPOSAL 3 -- APPOINTMENT OF INDEPENDENT AUDITORS
It is proposed that the stockholders ratify the appointment by the Board of
Directors of Ernst & Young LLP as independent auditors for the Company for the
1998 fiscal year. The Company expects representatives of Ernst & Young LLP to be
present at the Annual Meeting, at which time they will be available to respond
to appropriate questions submitted by stockholders and may make such statements
as they may desire.
Approval by the stockholders of the appointment of independent auditors is
not required but the Board deems it desirable to submit this matter to the
stockholders. If a majority of the Common Stock present and entitled to vote on
the matter at the meeting should not approve the selection of Ernst & Young LLP,
the selection of independent auditors will be reconsidered by the Board of
Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS OF THE COMPANY.
GENERAL
As of the date of this Proxy Statement, the Board has not been informed of
and does not intend to present any other matters for action. However, if any
other matters are properly brought before the meeting, it is intended that the
persons voting the accompanying proxy will vote the shares represented thereby
in accordance with their best judgment.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Stockholder proposals in respect of matters to be acted upon at the
Company's next annual meeting of stockholders should be received by the Company
on or before August 21, 1999 in order that they may be considered for inclusion
in the Company's proxy materials for such meeting.
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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.
OTHER MATTERS
THE COMPANY WILL PROVIDE WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998, INCLUDING FINANCIAL
STATEMENTS AND SCHEDULES THERETO, TO EACH OF THE COMPANY'S STOCKHOLDERS OF
RECORD ON DECEMBER 7, 1998, AND EACH BENEFICIAL OWNER OF STOCK ON THAT DATE UPON
RECEIPT OF A WRITTEN REQUEST THEREFOR MAILED TO THE COMPANY'S OFFICES, 3401
NORTH CALIFORNIA AVENUE, CHICAGO, ILLINOIS 60618, ATTENTION: TREASURER. IN THE
EVENT THAT EXHIBITS TO SUCH FORM 10-K ARE REQUESTED, A REASONABLE FEE WILL BE
CHARGED FOR REPRODUCTION OF SUCH EXHIBITS. REQUESTS FROM BENEFICIAL OWNERS OF
COMMON STOCK MUST SET FORTH A GOOD FAITH REPRESENTATION AS TO SUCH OWNERSHIP.
It is important that the accompanying proxy card be returned promptly.
Therefore, whether or not you plan to attend the meeting in person, you are
earnestly requested to mark, date, sign and return your proxy in the enclosed
envelope to which no postage need be affixed if mailed in the United States. The
proxy may be revoked at any time before it is exercised. If you attend the
meeting in person, you may withdraw the proxy and vote your own shares.
MANNER AND EXPENSES OF SOLICITATION
The solicitation of proxies in the accompanying form is made by the Board
and all costs thereof will be borne by the Company. In addition to the
solicitation of proxies by use of the mails, some of the officers, directors and
other employees of the Company may also solicit proxies personally or by mail,
telephone or telegraph, but they will not receive additional compensation for
such services. The Company has retained the services of Corporate Investor
Communications, Inc., a professional proxy solicitation firm, to assist in the
solicitation of proxies at an approximate cost of $4,000. Brokerage firms,
custodians, banks, trustees, nominees or other fiduciaries holding shares of
Common Stock in their names will be requested by the Company to forward proxy
material to their principals and will be reimbursed for their reasonable out of
pocket expenses in such connection.
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VOTING PROCEDURES
Inspectors of election will be appointed to tabulate the number of shares
of Common Stock represented at the meeting in person or by proxy, to determine
whether or not a quorum is present and to count all votes cast at the meeting.
The inspectors of election will treat abstentions and broker non-votes as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum. Votes withheld in connection with the election of one or more of
the nominees for director will not be counted in determining the votes cast and
will have no effect on the vote. With respect to the tabulation of votes cast on
a specific proposal presented to the stockholders at the meeting, abstentions
will be considered as present and entitled to vote with respect to that specific
proposal, whereas broker non-votes will not be considered as present and
entitled to vote with respect to that specific proposal. Abstentions with
respect to each proposal that requires approval by holders of a majority of the
outstanding Common Stock will have the effect of a vote against the proposal.
Broker non-votes will have no effect on the vote for or against these proposals.
In addition, New York Stock Exchange rules require that the total vote cast for
and against Proposal 2 represents over 50% of the Common Stock. Brokers who hold
shares in street name for customers have authority to vote on certain items when
they have not received instructions from beneficial owners, including voting
upon election of directors, ratification of the Plan and the selection of
independent auditors.
By Order of the Board of Directors,
ORRIN J. EDIDIN
Vice President, Secretary and General
Counsel
Chicago, Illinois
December 11, 1998
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APPENDIX A
MIDWAY GAMES INC.
1999 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF THE PLAN
The 1999 Stock Option Plan (the "Plan") is intended to provide a method
whereby "Employees," "Directors" and "Consultants and Advisers" of Midway Games
Inc. (the "Company") and its "Subsidiaries" (as such quoted terms are
hereinafter defined) may be encouraged to acquire a proprietary interest in the
Company and whereby such individuals may realize benefits from an increase in
the value of the shares of Common Stock, $0.01 par value per share (the "Common
Stock"), of the Company; to provide such Employees, Directors and Consultants
and Advisers with greater incentive and to encourage their continued provision
of services to the Company; and, generally, to promote the interests of the
Company and all of its stockholders. Under the Plan, from time to time on or
before February 2, 2009 options to purchase shares of Common Stock and related
Stock Appreciation Rights may be granted to such persons as may be selected in
the manner hereinafter provided on the terms and subject to the conditions
hereinafter set forth. Capitalized terms are defined in Article XV hereof.
ARTICLE II
ADMINISTRATION OF THE PLAN
SECTION 1. Subject to the authority as described herein of the Board of
Directors (the "Board") of the Company, the Plan shall be administered by the
Stock Option Committee of the Company's Board of Directors (the "Committee")
which is composed of at least two members of the Board who are Non-Employee
Directors. The Committee is authorized to interpret the Plan and may from time
to time adopt such rules and regulations for carrying out the Plan as it may
deem best. All determinations by the Committee shall be made by the affirmative
vote of a majority of its members but any determination reduced to writing and
signed by a majority of its members shall be fully enforceable and effective as
if it had been made by a majority vote at a meeting duly called and held.
Subject to any applicable provisions of the Plan, all determinations by the
Committee or by the Board pursuant to the provisions of the Plan, and all
related orders or resolutions of the Committee or the Board, shall be final,
conclusive and binding on all Persons, including the Company and its
stockholders, employees, directors and optionees.
SECTION 2. All authority delegated to the Committee pursuant to the Plan,
may also be exercised by the Board except with respect to matters which under
Section 162(m) of the Code are required to be determined in the absolute
discretion of the Committee. Subject to the foregoing, in the event of any
conflict or inconsistency between determinations, orders, resolutions or other
actions of the Committee and the Board, the actions of the Board shall control.
SECTION 3. With respect to Section 16 of the 1934 Act, transactions under
the Plan are intended to comply with all applicable conditions of Rule 16b-3 or
its successors under the 1934 Act. To the extent any provision of the Plan or
action by the Committee fails to so comply, it shall be deemed null and void to
the extent permitted by law and deemed advisable by the Committee.
ARTICLE III
STOCK SUBJECT TO THE PLAN
SECTION 1. The shares to be issued or delivered upon exercise of options or
rights granted under the Plan shall be made available, at the discretion of the
Board, either from the authorized but unissued shares of
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Common Stock of the Company or from shares of Common Stock reacquired by the
Company, including shares purchased by the Company in the open market or
otherwise obtained.
SECTION 2. Subject to the provisions of Article X hereof, the aggregate
number of shares of Common Stock which may be purchased pursuant to options
granted at any time under the Plan shall not exceed 1,750,000. Such number shall
be reduced by the aggregate number of shares covered by options in respect of
which Stock Appreciation Rights are exercised. The maximum number of shares with
respect to which options may be granted under the Plan in any calendar year to
any one employee shall be 500,000 as such number may be adjusted by the
Committee in accordance with Article X hereof. The Committee shall calculate
such limit in a manner consistent with Section 162(m) of the Code. Shares
subject to any options which are canceled, lapse or are otherwise terminated
shall be immediately available for reissuance under the Plan.
ARTICLE IV
PURCHASE PRICE OF OPTIONED SHARES
In the case of Incentive Stock Options, or unless the Committee shall fix a
greater or lesser purchase price, the purchase price per share of Common Stock
under each option granted to Employees, Directors, Consultants and Advisers
shall not be less than one hundred percent (100%) of the Fair Market Value (as
hereinafter defined) of the Common Stock at the time such option is granted, but
in no case shall such price be less than the greater of the par value of the
Common Stock or 85% of the Fair Market Value of the Common Stock as of the time
of grant; provided, however, that in the case of an Incentive Stock Option
granted to an Employee who, at the time of the grant, owns stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company (a "Ten Percent Stockholder"), such purchase price per
share shall be at least one hundred and ten percent (110%) of the Fair Market
Value.
ARTICLE V
ELIGIBILITY OF RECIPIENTS
Options will be granted only to Persons who are Employees, Directors,
Consultants or Advisers of the Company or a Subsidiary.
ARTICLE VI
DURATION OF THE PLAN
Unless previously terminated by the Committee or the Board, the Plan will
terminate on February 2, 2009. Such termination will not terminate any option or
Stock Appreciation Right then outstanding.
ARTICLE VII
GRANT OF OPTIONS TO EMPLOYEES,
DIRECTORS, CONSULTANTS AND ADVISERS
SECTION 1. Each option granted under the Plan to Employees shall constitute
either an Incentive Stock Option or a Non-Qualified Stock Option, as determined
in each case by the Committee and each option granted under the Plan to
Directors, Consultants and Advisers shall constitute a Non-Qualified Stock
Option. With respect to Incentive Stock Options granted to Employees, to the
extent that the aggregate Fair Market Value (determined at the time an option is
granted) of Common Stock of the Company with respect to which such Incentive
Stock Options are exercisable for the first time by any individual during any
calendar year (under the Plan and any other stock option plan of the Company)
exceeds $100,000, such Incentive Stock Options shall be treated as Non-Qualified
Stock Options to the extent of such excess. The foregoing rule shall be applied
by taking Incentive Stock Options into account in the order in which they were
granted. In the
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event outstanding Incentive Stock Options become immediately exercisable under
the terms hereof, such Incentive Stock Options will, to the extent the aggregate
Fair Market Value thereof exceeds $100,000, be treated as Non-Qualified Stock
Options.
SECTION 2. The Committee shall from time to time determine the Employees,
Directors, Consultants and Advisers to be granted options, it being understood
that options may be granted at different times to the same person, provided,
however, that no one person may receive an option or options under the Plan
covering more than fifty percent (50%) of the total number of shares subject to
the Plan. In addition, the Committee shall determine subject to the terms of the
Plan (a) the number of shares subject to each option, (b) the time or times when
the options will be granted, (c) whether such options shall be Incentive Stock
Options, Non-Qualified Stock Options or both, (d) whether Stock Appreciation
Rights will be granted in connection with the grant of options, (e) the purchase
price of the shares subject to each option, which price shall be not less than
that specified in Article IV hereof, (f) the time or times when each option and
any related Stock Appreciation Rights may be exercised and (g) any other matters
which the Committee shall deem appropriate.
SECTION 3. All instruments evidencing options granted to Employees,
Directors, Consultants and Advisers under the Plan shall be in such form as the
Committee shall from time to time determine, which form shall be consistent with
the Plan and any applicable determinations, orders, resolutions or other actions
of the Committee or the Board.
SECTION 4. The Committee, in its sole discretion, on the granting of an
option to an Employee, Director, Consultant or Adviser under the Plan may also
grant Stock Appreciation Rights relating to any number of shares but, except as
hereinafter provided, not more than fifty percent (50%) of the number of shares
covered by such option shall include Stock Appreciation Rights. Such options
shall be subject to such terms and conditions, not inconsistent with the Plan,
that the Committee shall impose, including the following:
(i) Stock Appreciation Rights may be granted only in writing and only
attached to an underlying option at the time of the grant of the option;
(ii) Stock Appreciation Rights may be exercised only at the time when
the option to which it is attached is exercisable;
(iii) Stock Appreciation Rights shall entitle the optionee (or any
person entitled to act under the provisions of the Plan) to surrender
unexercised all or part of the then exercisable portion of the option to
which the Stock Appreciation Rights are attached to the Company and to
receive from the Company in exchange therefor a payment in cash equal to
the excess, if any, of the then value of one share covered by such portion
over the option price per share specified in such option, multiplied by the
number of shares covered by the portion of the option so surrendered (which
excess is herein called the "Appreciated Value"). For purposes of
computation of the Appreciated Value, the value of one share shall be
deemed to be the average Fair Market Value of such share during the
four-week period immediately preceding the date of notice of exercise of
the Stock Appreciation Rights;
(iv) if Stock Appreciation Rights attached to an option are exercised,
such option shall be deemed to have been canceled to the extent of the
number of shares surrendered on exercise of the Stock Appreciation Rights
and no further options may be granted covering such shares; and
(v) if an option to which Stock Appreciation Rights are attached is
exercised, such Stock Appreciation Rights shall be canceled to the extent
necessary to cause the number of shares to which such Stock Appreciation
Rights relate not to exceed the number of remaining shares subject to such
option.
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ARTICLE VIII
TRANSFERABILITY OF OPTIONS
No Incentive Stock Option or any related Stock Appreciation Rights granted
under the Plan shall be transferable by the optionee otherwise than by will or
by the laws of descent and distribution, and any such Incentive Stock Option or
any related Stock Appreciation Rights shall be exercised during the lifetime of
the optionee solely by him or her. Any Non-Qualified Stock Option granted under
the Plan may be transferable by the optionee to the extent specifically
permitted by the Committee as specified in the instrument evidencing the option
as the same may be amended from time to time. Except to the extent permitted by
such instrument, no Non-Qualified Stock Option shall be transferable except by
will or by the laws of descent and distribution.
ARTICLE IX
EXERCISE OF OPTIONS
SECTION 1. Each option (and any related Stock Appreciation Rights) granted
under the Plan shall terminate on the date specified by the Committee which date
shall be not later than the expiration of ten years from the date on which it
was granted; provided, however, that in the case of an Incentive Stock Option
granted to an Employee who, at the time of the grant is a Ten Percent
Stockholder, such period shall not exceed five (5) years from the date of grant.
SECTION 2. A person electing to exercise an option or Stock Appreciation
Rights then exercisable shall give written notice to the Company of such
election and, if electing to exercise an option, of the number of shares of
Common Stock such person has elected to purchase. A person exercising an option
shall at the time of purchase tender the full purchase price of such shares,
which tender, except as provided in Section 3 of this Article IX, shall be made
in cash or cash equivalent (which may be such person's personal check) or, to
the extent permitted by applicable law, in shares of Common Stock already owned
by such person (which shares shall be valued for such purpose on the basis of
their Fair Market Value on the date of exercise), or in any combination thereof;
provided, however, that payment in shares of common stock already owned shall
not be permitted unless the chief financial officer of the Company determines
that such payment will not require the Company to recognize a compensation
expense under applicable accounting rules. In the event of payment in shares of
Common Stock already owned, such shares shall be appropriately endorsed for
transfer to the Company. The Company shall have no obligation to deliver shares
of Common Stock pursuant to the exercise of any option, in whole or in part,
until such payment in full of the purchase price therefor is received by the
Company. No optionee, or legal representative, legatee, distributee or
transferee of such optionee, shall be or be deemed to be a holder of any shares
of Common Stock subject to such option or entitled to any rights of a
stockholder of the Company in respect of any shares of Common Stock covered by
such option until such shares have been paid for in full and issued or delivered
by the Company.
SECTION 3. In order to assist an optionee in the exercise of an option
granted under the Plan, the Committee or Board may, in its discretion,
authorize, either at the time of the grant of the option or thereafter (a) the
extension of a loan to the optionee by the Company, (b) the payment by the
optionee of the purchase price of the Common Stock in installments, (c) the
guarantee by the Company of a loan obtained by the optionee from a third party
or (d) make such other reasonable arrangements to facilitate the exercise of
options in accordance with applicable law. The Committee or Board shall
authorize the terms of any such loan, installment payment arrangement or
guarantee, including the interest rate (which, in the case of incentive stock
options, shall be not less than the higher of (i) the "prime rate" as from time
to time in effect at a commercial bank of recognized standing, and (ii) the rate
of interest from time to time imputed under Section 483 of the Code) and terms
of repayment thereof, and shall cause the instrument evidencing any such option
to be amended, if required, to provide for any such extension of credit. Loans,
installment payment arrangements and guarantees may be authorized without
security, and the maximum amount of any such loan or guarantee shall be the
purchase price of the Common Stock being acquired, plus related interest
payments.
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SECTION 4. Each option shall be subject to the requirement that if at any
time the Board shall in its discretion determine that the listing, registration
or qualification of the shares of Common Stock subject to such option upon any
securities exchange or under any state or Federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of or in connection with, the granting of such option or the issuance
or purchase of shares thereunder, such option may not be exercised in whole or
in part unless such listing, registration, qualification, consent or approval
shall have been effected or obtained free from any conditions not reasonably
acceptable to the Board. Unless at the time of exercise of an option and the
issuance of Common Stock so purchased, there shall be in effect as to such
Common Stock a registration statement under the Act, the holder of such option
shall deliver a certification (a) acknowledging that such shares of Common Stock
may be "restricted securities" as defined in Rule 144 promulgated under the Act;
and (b) containing such optionee's agreement that such Common Stock may not be
sold or otherwise disposed of except in compliance with applicable provisions of
the Act. In the event that the Common Stock is then listed on a national
securities exchange, the Company shall use its best efforts to cause the listing
of the shares of Common Stock subject to options upon such exchange.
SECTION 5. The Company may establish appropriate procedures to provide for
payment or withholding of such income or other taxes as may be required by law
to be paid or withheld in connection with the exercise of options or any other
matters under the Plan, and to ensure that the Company receives prompt advice
concerning the occurrence of any event which may create, or affect the timing or
amount of, any obligation to pay or withhold any such taxes or which may make
available to the Company any tax deduction resulting from the occurrence of such
event.
ARTICLE X
ADJUSTMENTS
SECTION 1. New option rights may be substituted for the options granted
under the Plan, or the Company's duties as to options outstanding under the Plan
may be assumed, by a corporation other than the Company, or by a parent or
subsidiary of the Company or such corporation, in connection with any merger,
consolidation, acquisition, separation, reorganization, liquidation or other
similar corporate transaction in which the Company is involved. Notwithstanding
the foregoing or the provisions of this Article X, in the event such
corporation, or parent or subsidiary of the Company or such corporation, does
not substitute new option rights for, and substantially equivalent to, the
options granted hereunder, or assume the options granted hereunder, the options
granted hereunder shall terminate and thereupon become null and void (i) upon
dissolution or liquidation of the Company, or similar occurrence, (ii) upon any
merger, consolidation, acquisition, separation, reorganization, or similar
occurrence, where the Company will not be a surviving entity or (iii) upon a
transfer of substantially all of the assets of the Company or more than 80% of
the outstanding Common Stock in a single transaction; provided, however, that
each optionee shall have the right immediately prior to or concurrently with
such dissolution, liquidation, merger, consolidation, acquisition, separation,
reorganization or other similar corporate transaction, to exercise any unexpired
option granted hereunder whether or not then exercisable.
SECTION 2. In the event that the Committee determines that any dividend or
other distribution (whether in the form of cash, shares, other securities, or
other property), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of shares or other securities of the Company, issuance
of warrants or other rights to purchase shares or other securities of the
Company, or other corporate transaction or event affects the shares such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then, the Committee shall, in such manner as it
may deem equitable, adjust any or all of (i) the number of shares of Common
Stock or other securities of the Company (or number and kind of other securities
or property) with respect to which options may be granted and any limitations
set forth in the Plan, (ii) the number of shares of Common Stock or other
securities of the Company (or number and kind of other securities or property)
subject to outstanding options and (iii) the grant or exercise or target price
with respect to any option or, if deemed appropriate, make provision for a cash
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payment to the holder of an outstanding option including, if necessary, the
termination of such an option; provided, in each case, that with respect to
Incentive Stock Options no such adjustment shall be authorized to the extent
that such authority would cause the Plan to violate Section 422 of the Code.
Without limiting the generality of the foregoing, any such adjustment shall be
deemed to have prevented any dilution and enlargement of an optionee's rights if
such optionee receives in any such adjustment rights which are substantially
similar (after taking into account the fact that the optionee has not paid the
applicable exercise price) to the rights the optionee would have received had he
exercised his outstanding options and become a stockholder of the Company
immediately prior to the event giving rise to such adjustment.
SECTION 3. Adjustments and elections under this Article X shall be made by
the Committee whose determination as to what adjustments, if any, shall be made
and the extent thereof shall be final, binding and conclusive. Adjustments
required under this Article X shall also be deemed to increase by a like number
the aggregate number of shares authorized for purchase pursuant to options
granted under the Plan as set forth in Section 2 of Article III hereof.
ARTICLE XI
PRIVILEGES OF STOCK OWNERSHIP
No optionee shall be entitled to the privileges of stock ownership as to
any shares of Common Stock not actually issued and delivered to him or her.
ARTICLE XII
TERMINATION OF SERVICE OR EMPLOYMENT
SECTION 1. In the event that an optionee shall cease his or her
relationship with the Company or a Subsidiary by voluntarily terminating such
relationship without the written consent of the Company or a Subsidiary, or if
the Company or a Subsidiary shall terminate for cause such relationship, unless
otherwise provided in the instrument evidencing such option, the option and any
associated Stock Appreciation Rights held by such optionee shall terminate
forthwith.
SECTION 2. If the holder of an option shall voluntarily terminate his or
her relationship with the Company or a Subsidiary with the written consent of
the Company, which written consent expressly sets forth a statement to the
effect that options which are exercisable on the date of such termination shall
remain exercisable, or if the optionee's relationship with the Company or a
Subsidiary shall have terminated by the Company or a Subsidiary for reasons
other than cause, unless otherwise provided in the instrument evidencing such
option, such optionee may exercise his or her option to the extent exercisable
at the time of such termination, at any time prior to the expiration of three
months after such termination or the date of expiration of the option as fixed
at the time of grant, whichever shall first occur. Options granted under the
Plan to Employees shall not be affected by any change in the position of
employment so long as the holder thereof continues to be an Employee or a
Director.
SECTION 3. Should an optionee die during the existence of the optionee's
relationship with the Company or after the cessation of the optionee's
relationship with the Company, unless otherwise provided in the instrument
evidencing such option, all of the optionee's options shall be terminated,
except that any option (and any related Stock Appreciation Rights), to the
extent exercisable by the optionee at the time of such death, may be exercised
within one year after the date of such death but not later than the expiration
of the option solely in accordance with all of the terms and conditions of the
Plan by the optionee's personal representatives or by the person or persons to
whom the optionee's rights under the option shall pass by will or by the
applicable laws of descent and distribution.
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ARTICLE XIII
AMENDMENTS TO PLAN
The Board may at any time terminate or from time to time amend, modify or
suspend the Plan; provided, however, that no such amendment or modification
without the approval of the stockholders of the Company shall:
(i) materially increase the benefits accruing to participants under
the Plan;
(ii) materially increase the maximum number (determined as provided in
the Plan) of shares of Common Stock which may be purchased pursuant to
options granted under the Plan; or
(iii) materially modify the requirements as to eligibility for
participation in the Plan.
The amendment or termination of the Plan shall not, without the written consent
of an optionee, adversely affect any rights or obligations under any option
theretofore granted to such optionee under the Plan.
ARTICLE XIV
EFFECTIVE DATE OF PLAN
The Plan shall be effective on February 3, 1999, subject to the
ratification of the Plan by the stockholders of the Company.
ARTICLE XV
DEFINITIONS
For the purposes of this Plan, the following terms shall have the meanings
indicated:
Act: The Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
Code: The Internal Revenue Code of 1986, as amended and the regulations
promulgated thereunder.
Committee: Such term is defined in Article II, Section 1 hereof.
Common Stock: Such term is defined in Article I hereof.
Consultants and Advisers: Such term includes any third party retained or
engaged by the Company or any Subsidiary to provide services to the Company or
such Subsidiary, including any employee of such third party providing such
services.
Director: Such term includes any director of the Company.
Employee: Such term includes any officer as well as any full-time salaried
executive, managerial, professional, administrative or other employee of the
Company or a Subsidiary. Such term also includes an employee on approved leave
of absence provided such employee's right to continue employment with the
Company or a Subsidiary upon expiration of such employee's leave of absence is
guaranteed either by statute or by contract with or by a policy of the Company
or a Subsidiary and any consultant, independent contractor, professional advisor
or other person who is paid by the Company or a Subsidiary for rendering
services or furnishing materials or goods to the Company or a Subsidiary.
Fair Market Value: The fair market value as of any date shall be determined
by the Committee or Board after giving consideration to the price of the Common
Stock in the public market and shall be determined otherwise in a manner
consistent with the provisions of the Code.
Incentive Stock Option: An option intended to qualify under Section 422 of
the Code.
1934 Act: The Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
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<PAGE> 37
Non-Employee Director: Any director of the Company who is a Non-Employee
Director as that term is defined in Rule 16b-3 promulgated under the 1934 Act
and who also qualifies as an outside director within the meaning of Section
162(m) and the related regulations under the Code, except as otherwise
determined by the Board of Directors.
Non-Qualified Stock Option: An option which does not qualify under Section
422 of the Code.
Person: Such term shall have the meaning ascribed to it under the 1934 Act.
Plan: Such term is defined in Article I hereof and includes all amendments
hereof.
Stock Appreciation Rights: The rights granted by the Committee pursuant to
Section 4 of Article VII hereof.
Subsidiary: A "Subsidiary Corporation" of the Company as defined in Section
424 of the Code.
Ten Percent Stockholder: Such term is defined in Article IV hereof.
8
<PAGE> 38
MIDWAY GAMES INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
THE UNDERSIGNED, revoking all previous proxies, hereby appoints NEIL D.
NICASTRO, HAROLD H. BACH, JR. and ORRIN J. EDIDIN, or any of them, as
attorneys, agents and proxies with power of substitution, and with all powers
the undersigned would possess if personally present, to vote all shares of
common stock of Midway Games Inc. (the "Company") which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Company to be
held on February 3, 1999 and at all adjournments thereof. The shares
represented by this Proxy will be voted as indicated below upon the following
matters, all more fully described in the accompanying Proxy Statement.
(1) Election of four (4) Class III Directors.
[ ] FOR all nominees listed (except as [ ] WITHHOLD AUTHORITY
marked to the contrary) to vote for nominees listed
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEES, STRIKE
A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW:
Harold H. Bach, Jr. / Byron C. Cook / Gerald O. Sweeney, Jr. / Richard D. White.
(2) Ratification of the Company's 1999 Stock Option Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
(3) Ratification of the appointment of Ernst & Young LLP as independent
auditors for the 1999 fiscal year.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN. IF NO INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES FOR DIRECTORS
DESIGNATED BY THE BOARD OF DIRECTORS AND "FOR" ITEMS 2 AND 3.
Dated:________________, 199_
____________________________
(Signature)
____________________________
(Signature)
NOTE: Please sign exactly as your name or names
appear hereon, and when signing as attorney,
executor, administrator, trustee or guardian, given
your full title as such. If signatory is a
corporation, sign the full corporate name by a duly
authorized officer. If shares are held jointly,
each stockholder named should sign.
NOTE: PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY IN THE ENVELOPE ENCLOSED FOR
THIS PURPOSE. NO POSTAGE IS REQUIRED FOR MAILING IN THE UNITED STATES.
