<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 1-12367
MIDWAY GAMES INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 22-2906244
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
3401 NORTH CALIFORNIA AVENUE, CHICAGO, 60618
ILLINOIS (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (773) 961-2222
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME ON EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $.01 par value New York Stock Exchange
Stock Purchase Rights pursuant to Rights Agreement New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the 36,805,897 shares of Common Stock held by
non-affiliates of the registrant on September 22, 1999 was $588,894,352. Solely
for purposes of this calculation, all shares held by directors and executive
officers of the registrant have been excluded. This exclusion should not be
deemed an admission that these individuals are affiliates of the registrant. On
that date, the number of shares of Common Stock outstanding, excluding 764,400
shares held as treasury shares, was 37,985,600 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
<TABLE>
<CAPTION>
PARTS
-----
<S> <C>
Annual Report to Stockholders of Registrant for the fiscal II and IV
year ended June 30, 1999..................................
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
As used in this Annual Report on Form 10-K, the terms "we," "us," "our" and
"Midway" mean Midway Games Inc., a Delaware corporation, and its subsidiaries,
unless the context indicates a different meaning, and the term "common stock"
means our common stock, $.01 par value per share.
Midway(R) is our registered trademark. Our product names mentioned in this
report are trademarks of ours, except where they are licensed. Nintendo, Super
Nintendo Entertainment System, Game Boy, Game Boy Color, and Nintendo 64 and N64
are trademarks of Nintendo of America, Inc. Sega, Genesis, Dreamcast and Saturn
are trademarks of Sega Enterprises, Ltd. Sony and PlayStation are trademarks of
Sony Computer Entertainment of America. Other trademarks mentioned in this
report are the property of their respective owners.
This report contains "forward-looking statements," within the meaning of
the federal securities laws, which describe our beliefs concerning future
business conditions and the outlook for Midway based on currently available
information. Wherever possible, we have identified these forward looking
statements by words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," and similar expressions. Our actual results could differ materially
from those contained in the forward-looking statements due to a number of risks
and uncertainties. These risks and uncertainties include the financial strength
of the amusement games industry, the success of planned advertising, marketing
and promotional campaigns, as well as the items set forth under "Item 1.
Business -- Risk Factors." We do not intend to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise. Discussions containing forward looking statements may be found in the
materials set forth under "Item 1. Business" and incorporated by reference in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
PART I
ITEM 1. BUSINESS.
OVERVIEW OF OUR BUSINESS
We are a leading designer, publisher and marketer of interactive
entertainment software played in both the coin-operated and home video game
markets. Since the late 1970s, we have released many of the industry's leading
games, including Mortal Kombat (this line of games has sold over 16 million
copies in the home market), NFL Blitz, Hydro Thunder, Cruis'n USA, Cruis'n
World, Rampage, NBA Jam, Joust, Defender, Pacman and Space Invaders, and,
through our subsidiary, Atari Games Corporation, such leading games as San
Francisco Rush Extreme Racing, Area 51, Gauntlet, Centipede, Asteroids and Pong.
Our games are available for play in arcades and other establishments, such as
restaurants and movie theaters, and on all major dedicated home video game
platforms, including those of Nintendo, Sony and Sega, and personal computers.
Midway began publishing home video games based on its own coin-operated
video games in 1995 with the introduction of Mortal Kombat 3. In preparation for
publication of home versions of its coin-operated video games, in 1994, Midway
acquired a home video game development and distribution business, and in March
1996 Midway acquired Atari Games, a designer, publisher and marketer of
interactive entertainment software. In fiscal 1999, Midway released ten
coin-operated video games and 25 home video games (directly or under licensing
arrangements, including all platforms), compared to eight new coin-operated
video games and 35 new home video games (directly or under licensing
arrangements, including all platforms) in fiscal 1998.
Prior to April 6, 1998, Midway was a subsidiary of WMS Industries Inc. WMS
and its subsidiaries (which are collectively referred to as "WMS" in this
report) design, manufacture and market gaming equipment and coin-operated
pinball games. On April 6, 1998, WMS distributed all of its shares of our common
stock to its stockholders as a dividend. Since this dividend (the "Spin-off"),
WMS continues to provide some administrative, accounting and information
services and facilities to us and acts as a contract
1
<PAGE> 3
manufacturer for our coin-operated video games. We provide pinball sales and
marketing services to WMS. See "Item 13. Certain Relationships and Related
Transactions."
Midway is a Delaware corporation formed in July 1988. Our address is 3401
North California Avenue, Chicago, Illinois 60618, and our telephone number is
(773) 961-2222.
INDUSTRY OVERVIEW
GENERAL
Video games are sold in two primary formats: coin-operated games
distributed to arcades and route operators and home video games for dedicated
hardware platforms (including Nintendo 64, Sony PlayStation and Sega Dreamcast),
handheld game systems (including Nintendo's Game Boy Color) and personal
computers. The home video games are distributed to mass merchandisers, national
and regional retailers, discount store chains, video rental retailers and
entertainment software distributors. A successful video game may present the
opportunity to exploit ancillary rights such as film, television and
merchandising rights. The primary groups that play video games are male
teenagers and young adults.
The video game business has undergone significant consolidation in recent
years, and we believe that significant barriers to entry into the video game
business exist that make it difficult for new entrants to succeed. The video
game business requires specialized creative talent capable of utilizing the
sophisticated technological tools required to design the complex video games
that characterize the business today. The cost of developing video games is high
and likely to increase as technology continues to evolve. In the home video game
business, distribution channels are dominated by a select group of companies,
and access to retail shelf space is a significant competitive factor.
COIN-OPERATED GAMES
Coin-operated video games utilize specialized technology and hardware
platforms that permit greater design flexibility than dedicated home platforms,
which are limited by the design specifications of the particular platform.
Coin-operated video games are manufactured in self-contained cabinetry and
feature large video screens that display the game. Many of our games permit
multiple players to play the same game simultaneously, and games are generally
designed to permit the players to play against each other, in addition to being
able to play against the game itself. Most coin-operated video games cost 50c to
play a game of approximately two minutes in duration. New technologies employed
in the manufacturing of coin-operated video games utilize advanced video
platforms in which digital images are mapped to computer generated polygons that
allow for the creation of three-dimensional graphic images.
Coin-operated games are sold through distributors to two primary
customers -- arcades and route operators. The distributors typically provide
product warranties to their customers and receive a price allowance from the
manufacturer to cover warranty claims. A typical arcade is located in a shopping
mall and operates numerous types of games, including video and pinball games. An
arcade will often purchase multiple units of the most popular games. Route
operators purchase coin-operated video games and provide the games on a revenue
sharing basis to various establishments, such as restaurants, taverns,
convenience stores and movie theaters, which typically install only a few games
and only rarely lease multiple units of the same games for a particular
location.
After introduction, a coin-operated video game will generally experience a
product life cycle for a manufacturer of one to two years, although sales are
generally concentrated in the first six to eight months after introduction.
Coin-operated games are distributed throughout North America, Europe, and to a
lesser extent Australia and countries in Asia and South America.
HOME VIDEO GAMES
The interactive software publishing business involves the creation or
acquisition of titles or intellectual property rights, the development of
interactive software products based on these titles or rights, and the
2
<PAGE> 4
publication, marketing, merchandising, distribution and licensing of the
resulting software products. This process in general involves either converting
software created for the coin-operated version of a game into software for use
on the multiple platforms on which home video games are released or creating
original games for release into the home market. The business is highly
dependent on consumer tastes and preferences and on the commercial success of
the hardware platforms for which the software is produced. The principal types
of interactive hardware platforms are dedicated game systems, such as those
manufactured by Nintendo, Sony and Sega, handheld game systems and personal
computers.
Dedicated Platforms. Historically, no hardware platform or system has
achieved long-term dominance in the interactive entertainment market. In 1986
and 1987 Nintendo and Sega, respectively, introduced 8-bit video game systems
that, compared to existing personal computers available at the time, were low in
price, easy to use and had sophisticated audio-video capabilities. In 1989, Sega
began shipping its Genesis system, a more-powerful 16-bit video game system. In
1991, Nintendo introduced its 16-bit Super Nintendo Entertainment System. Sega
and Sony each began distribution of their 32-bit hardware systems (named Saturn
and PlayStation, respectively) in 1994. Nintendo introduced its 64-bit Nintendo
64 system in the U.S. 1996. By September 1999, the estimated number of units of
the Nintendo 64 system and the PlayStation system owned by users worldwide was
approximately 24 million units and 54 million units, respectively. The newest
platform, Sega's Dreamcast, the first 128-bit platform, was introduced in Japan
in November 1998, in the U.S. in September 1999 and is expected to be introduced
in Europe in October 1999. We believe that content providers with demonstrated
capability for developing successful games will be in a position to develop
games for whichever platforms achieve significant consumer acceptance.
Previously, most software products for dedicated platforms were sold in
cartridge form. However, compact discs have become increasingly popular because
they have substantially lower manufacturing costs than games in cartridge form.
The Sony PlayStation and Sega Dreamcast platforms use disc-based technologies.
The Nintendo 64 system, however, continues to utilize software products in
cartridge form.
Handheld Game Systems. Nintendo's release in 1989 of the Game Boy, an 8-bit
battery-operated, handheld interactive entertainment system, revolutionized the
handheld game machine market. Previously, the only handheld systems available
were dedicated to a single game. Nintendo's new handheld machine, Game Boy
Color, was introduced in 1998 and had already sold 7.6 million units by March
1999.
Personal Computers. The introduction of faster microprocessors, graphics
accelerator chips, greater-capacity hard-drives, enhanced operating systems and
increases in memory have facilitated the development of more cost-effective,
graphically oriented and user-friendly personal computer software, including
video games. As personal computers become more powerful, less expensive and
easier to use, we expect their use in both the home and business environments to
continue to expand.
New Technologies. Recent advances in digital processing, data storage,
graphics, data compression and communications technologies have made possible a
new range of interactive software products and services. We expect that these
advances will accelerate the development of on-line interactive games and
interactive networks for playing video games.
STRATEGY
Our business strategy is based upon the following:
- DESIGN AND PRODUCE EXCITING GAMES -- The key to success in the video game
business is to produce games that are the most fun and exciting to play,
which requires the creative talents of experienced game designers. We
employ approximately 350 game design personnel organized in teams
comprised of programmers, artists, mechanical and electrical engineers,
musicians and actors. The game design teams operate in a studio
environment that encourages creativity, productivity and cooperation
among design teams. We believe that this environment, together with a
compensation structure that rewards design teams for the success of their
games and a policy of providing design teams substantial independence and
flexibility, enables us to attract and retain designers who we believe
are among the best game designers in the industry. The design teams are
supported by state-of-the-art design
3
<PAGE> 5
technology that allows for the creation of cutting-edge,
three-dimensional graphics and advanced audio effects. We produce games
in the action, driving, adventure and sports categories.
- EXPLOIT COIN-OPERATED PROVING GROUND -- We often develop our video games
for initial release in the coin-operated market. To be successful, a
coin-operated video game must be action packed and fun, and provide
enough excitement to encourage players to play the game repeatedly. Our
experience has been that a successful coin-operated game is almost always
a success in the home dedicated-platform market. The significant benefits
that we realize from this strategic approach are threefold: (a) the
results achieved in the initial coin-operated release are a meaningful
indicator of the success the game might realize in the home market and
help to determine the strategy that we will follow in choosing and
releasing games in the home market; (b) the knowledge that a particular
coin-operated video game is popular with consumers allows us to maximize
profitability through simultaneous publication across multiple home
platforms thereby spreading developmental, advertising and promotional
costs over a greater number of units; and (c) a successful coin-operated
game promotes sales for subsequent home versions of the game among the
players exposed to the game in arcades and other coin-operated venues.
- MAINTAIN PLATFORM INDEPENDENCE -- We develop games for all major
dedicated home platforms (Nintendo, Sony and Sega) as well as for the
personal computer and handheld platforms. We are a leading developer of
video games for the 32-bit, 64-bit and 128-bit game platforms which are
currently being marketed by hardware manufacturers. According to TRSTS
reports for fiscal 1999, we were ranked sixth among 63 companies in sales
of 32- and 64-bit home video games. In fiscal 1999, 1998 and 1997, we
released at least as many games on the Nintendo 64 platform as any
developer other than Nintendo itself. Because we produce video games for
multiple platforms, we are not fully dependent on any particular game
platform. We believe that, as a result of our relationships with the
major home platform manufacturers, our game development expertise and our
strategy of investing in advanced technology, we are well positioned for
the rapid technological evolution that characterizes the home video game
market.
- EXPLOIT FRANCHISE AND LIBRARY VALUE -- We seek to exploit our franchise
properties such as Mortal Kombat. We have released five different
coin-operated games under the Mortal Kombat title and published or
licensed home versions of each of those games. We have also licensed two
television and two film adaptations of Mortal Kombat and granted
merchandising licenses in the toy, clothing, comic book, strategy guide
and other product lines. In September 1999, we released the home video
game version of Mortal Kombat Gold. In fiscal 1998, we released the home
video game versions of Mortal Kombat 4 and Mortal Kombat Mythologies:
Sub-Zero. A live action television series based on Mortal Kombat debuted
in fiscal 1999. We also seek to utilize our large library of video games
to release "arcade classics" and updated versions of these classics. For
the home video game market in fiscal 1999, we released a collection of
arcade classic games and seven arcade classics in the handheld market,
and in fiscal 1998, we released two collections of arcade classic games.
Our TouchMaster coin-operated products also incorporate a variety of
games including versions of classic games such as Centipede and Breakout.
In fiscal 1999, we released Gauntlet Legends, a three-dimensional update
of Atari Games' classic Gauntlet, and we introduced a second sequel,
Rampage 2 Universal Tour, to the Midway classic Rampage.
- DEVELOP AND EXPLOIT MULTI-SITE GAME PLAYING NETWORK -- We are developing
our own Internet-based, coin-operated interactive video game playing
network technology, allowing players to play in a tournament format to
compete for prizes. We anticipate that this technology will result in
greater player utilization and profitability of games.
- INVEST IN ADVANCED TECHNOLOGY -- We have developed our own hardware and
software for creating digitally texture-mapped polygon images, which
enable us to produce games with state-of-the-art visual simulations at
cost levels that are attractive to our customers. We have also created
proprietary tools to facilitate the development of new products, the
transfer of game features from one product to another and the transfer of
existing products to additional hardware platforms. We believe that our
4
<PAGE> 6
proprietary hardware and software have helped us to achieve and sustain a
reputation for developing high quality products and to position ourselves to
capitalize on evolving technologies.
OPERATIONS
NEW PRODUCT DEVELOPMENT
Our goal is to produce video games that are action packed and fun, and
provide enough excitement and challenge at various levels of proficiency to
encourage players to play our games repeatedly. Our game design personnel are
organized in teams comprised of programmers, artists, mechanical and electrical
engineers, musicians and actors. The lead designers manage the work of the other
team members and are responsible for the overall design of the game. We may also
evaluate coin-operated games designed by others with a view toward obtaining
licenses authorizing us to manufacture and sell those games. Each concept is
reviewed initially for technical feasibility and evaluated relative to several
factors, including whether the proposed product fits in with our general
strategy and profitability objectives. We produce games in the action, driving,
adventure and sports categories.
The game design teams operate in a studio environment that encourages
creativity, productivity and cooperation among design teams. We believe that
this environment, together with a compensation structure that rewards design
teams for the success of their games and a policy of providing design teams
substantial independence and flexibility, enables us to attract and retain game
designers that are among the best in the industry.
The designers are supported by state-of-the-art design technology that
allows for the creation of cutting-edge, three-dimensional graphics and advanced
audio effects. We have developed and maintain a substantial library of
proprietary software and development tools, including animation and digitally
texture- mapped polygon images. Use of these tools streamlines the development
process, allowing members of the development teams to focus their efforts on the
play and simulation aspects of the product under development. We have also
developed software tools to expedite conversion of software from one hardware
format to another and to provide sound and special visual effects. We
continually create new software and development tools and refine and upgrade our
existing tools.
Development of a new coin-operated video game generally takes 18 months or
longer and typically involves the expenditure of substantial funds for
development, testing and sampling costs. Generally, the basic development costs
of a coin-operated game exceed $2.5 million and, depending on the specific
hardware and software requirements, may cost up to $5.0 million per game.
Because of changing technology, both the time and cost to develop games have
increased during the past few years. Conversion of a coin-operated game to a
home game usually takes six to 12 months, which period may overlap with the
development period of the coin-operated version of the game. We use both
independent third parties and our own personnel to convert coin-operated games
to home video games. We are generally obligated to submit new games to the
dedicated platform manufacturers for approval prior to publishing a game for
their platforms. Additionally, prior to release, each product undergoes careful
quality assurance testing which involves technical review of each component of
the final product and testing on the applicable platforms.
During the fiscal years ended June 30, 1999, 1998 and 1997, we spent
approximately $76.0 million, $67.5 million and $55.9 million, respectively, on
research and development. Some features of our products are protected by
patents, trademarks and copyrights. We are both a licensor and licensee of these
proprietary rights.
From time to time, we have purchased distribution rights to some games
under development by third parties for various home video game platforms and
personal computers. Some of these games are sequels to games which have
previously been successfully released. From time to time we may also purchase
the right to adapt and market games owned by third parties from one platform to
another, where we believe that success on the original platform suggests a
probability of success on the other platform.
5
<PAGE> 7
We endeavor to comply with the rules established by a domestic ratings
board voluntarily established by the home video game and coin-operated video
game industries and some foreign countries' ratings boards, and we label our
products with these ratings. We believe that ratings labels as to the violence
contained in home video games and coin-operated video games will not have an
adverse effect upon us so long as ratings are consistently applied throughout
the industry.
PRODUCTS
Coin-Operated Games. In fiscal 2000, we expect to release 11 coin-operated
game titles. In fiscal 1999, we released ten new coin-operated video games: Area
51 Site 4, Gauntlet Legends, Vapor TRX, War, NFL Blitz '99, Carnevil, Hydro
Thunder, NBA Showtime: NBA on NBC, Road Burners and Touchmaster 7000.
TouchMaster is a touchscreen coin-operated game containing multiple game
options. In fiscal 1998, we released eight new coin-operated video games. During
fiscal 1997, we released seven new coin-operated video games.
At the March 1999 Amusement Showcase International, Play Meter Magazine
named Cruis'n World the Best Video Simulator and NFL Blitz the Best Dedicated
Video. At the March 1998 Amusement Showcase International, Play Meter Magazine
named Cruis'n World the Best Video Simulator and Maximum Force the Best
Dedicated Video. Six of our video games were awarded the American Amusement
Machine Association's ("AAMA") Silver, Gold and Platinum Sales Achievement
Awards during each of fiscal 1999 and fiscal 1998. The AAMA Diamond Sales
Achievement Award -- the highest category of sales award presented in any given
year -- was awarded to California Speed and TouchMaster in fiscal 1999, and to
Cruis'n World and San Francisco Rush in fiscal 1998.
Coin-operated games are sold to distributors at prices ranging from $3,000
to $7,000. We also manufacture kits which can be used by the operator to convert
an existing coin-operated cabinet to a new release. The kits are sold to
distributors at prices ranging from $1,000 to $3,000.
We are developing an Internet-based, interactive coin-operated video game
playing network that will allow players to play in a tournament format to
compete for prizes. We believe that this technology will result in greater
player utilization and profitability.
Home Video Games. In fiscal 2000, we expect to release 27 home video games
for dedicated platforms, comprised of 16 home video game titles. During fiscal
1999, we introduced 17 home video games for dedicated platforms, comprised of 12
titles for the home, including World Driver: Championship, NFL Blitz, California
Speed, Rush 2: Extreme Racing USA, Rampage 2 Universal Tour, Twisted Edge
Extreme Snowboarding and a collection of arcade classics. The fiscal 1998 home
game product line featured 35 home video games for dedicated platforms,
comprised of 20 titles, including Mortal Kombat 4, Mortal Kombat Mythologies:
Sub-Zero, Top Gear Rally, The NHL & NHLPA Present Wayne Gretzky's 3D Hockey '98,
San Francisco Rush Extreme Racing, Rampage World Tour, Mace-The Dark Age, Gex:
Enter the Gecko and Pandemonium 2. During fiscal 1997, we published 29 home
video games for dedicated platforms, comprised of 15 video games for the home
video market. Most titles are published in multiple versions, each of which is
designed for a specific dedicated platform.
We released eight new handheld titles for Game Boy Color during fiscal 1999
and anticipate releasing ten new handheld titles for Game Boy Color during
fiscal 2000.
Most of our home video games for dedicated platforms have suggested retail
prices ranging from $39.95 to $59.95.
6
<PAGE> 8
1999 HOME VIDEO GAME RELEASES
The following table lists the games that were released by us directly or
under licensing arrangements during fiscal 1999 and the platforms on which each
can be played in the home market.
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
- ---- -------- -----------
<S> <C> <C>
Arcade's Greatest Hits -- Atari Classic Personal Computer ("PC")
Collection 2*..........................
Arcade Hits Joust/Defender*.............. Classic Game Boy Color
Arcade Hits Spy Hunter/Moon Patrol*...... Classic Game Boy Color
Assault: Retribution..................... Action PlayStation
Body Harvest............................. Action Nintendo 64
California Speed*........................ Driving Nintendo 64
Gex: Enter the Gecko..................... Action Nintendo 64; PC
Klax*.................................... Classic Game Boy Color
Micro Machines V3........................ Driving Nintendo 64; PC
Mortal Kombat 4*......................... Action Game Boy Color
NFL Blitz*............................... Sports Nintendo 64; PlayStation; Game Boy Color;
PC
Paperboy*................................ Classic Game Boy Color
Rampage World Tour*...................... Action Game Boy Color
Rampage 2 Universal Tour*................ Action Nintendo 64; PlayStation
Rush 2: Extreme Racing USA*.............. Driving Nintendo 64
720(degree)Skateboarding*................ Classic Game Boy Color
Twisted Edge Extreme Snowboarding........ Sports Nintendo 64
Wipe Out 64.............................. Driving Nintendo 64
World Driver: Championship............... Driving Nintendo 64
</TABLE>
- -------------------------
* Based upon one or more previously released coin-operated video games.
1998 HOME VIDEO GAME RELEASES
The following table sets forth the games that were released by us directly
or under licensing arrangements during fiscal 1998 and the platforms on which
each can be played in the home market.
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
- ---- -------- -----------
<S> <C> <C>
Arcade's Greatest Hits -- Atari Classic Super Nintendo Entertainment System
Collection*............................
Arcade's Greatest Hits -- Midway Classic PlayStation; PC
Collection 2*..........................
BioFreaks................................ Action Nintendo 64; PlayStation
Chopper Attack........................... Action Nintendo 64
NBA Fastbreak '98........................ Sports PlayStation
Gex: Enter the Gecko..................... Action PlayStation
Mace -- The Dark Age*.................... Action Nintendo 64
Maximum Force*........................... Action PlayStation; Saturn; PC
Micro Machines V3........................ Driving PlayStation
Mortal Kombat 4*......................... Action Nintendo 64; PlayStation; PC
Mortal Kombat Mythologies: Sub-Zero*..... Action PlayStation; Nintendo 64
Mortal Kombat Trilogy*................... Action Saturn; PC
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
GAME CATEGORY PLATFORM(S)
- ---- -------- -----------
<S> <C> <C>
The NHL & NHLPA Present Wayne Gretzky's Sports Nintendo 64; PlayStation
3D Hockey '98*.........................
Off Road Challenge*...................... Driving Nintendo 64
Olympic Hockey Nagano '98................ Sports Nintendo 64
Open Ice................................. Sports PC
Pandemonium 2............................ Action PlayStation
Quake.................................... Action Nintendo 64
Rampage World Tour*...................... Action PlayStation; Saturn; Nintendo 64; PC
Robotron X............................... Action Nintendo 64
San Francisco Rush Extreme Racing*....... Driving Nintendo 64; PlayStation
Top Gear Rally........................... Driving Nintendo 64
</TABLE>
- -------------------------
* Based upon one or more previously released coin-operated video games.
MARKETING AND DISTRIBUTION
Coin-Operated Games. Coin-operated video games are sold under the Midway
and Atari trademarks. Coin-operated video games are marketed primarily through
approximately 106 independent distributors worldwide. Distributors sell these
products to operators who own and operate the machines and place them in
amusement arcades, restaurants, taverns, convenience stores and movie theaters.
Distributors are primarily responsible for the sale and distribution of these
products in designated territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. It is
customary for distributors of our coin-operated video games also to distribute
games produced by other manufacturers.
Coin-operated games are also marketed through trade shows, promotional
videotapes and advertising in trade publications. We also have an Internet
website featuring our products and upcoming releases, located at www.midway.com.
Service updates and press releases are available on the web site as well as
interactive features, including on-line shopping and access to technical
support.
Export sales of coin-operated games, primarily to Western Europe, were
approximately $26.3 million (7.5% of revenues) for fiscal 1999, compared with
$36.1 million (9.2% of revenues) for fiscal 1998 and $62.4 million (16.1% of
revenues) for fiscal 1997. Substantially all foreign sales are made in United
States dollars, and therefore we are not generally subject to the risk of
fluctuation of the value of foreign currencies in relation to the dollar. We
believe that while the loss of a single distributor could temporarily affect the
distribution of a particular model, it would not have a material adverse effect
on our business. If we were to lose a distributor, we believe that we could make
arrangements with alternate distributors for the distribution of our
coin-operated games.
Home Video Games. Our home video games are marketed under the Midway
trademark. We market through our internal sales staff and through independent
sales representatives to approximately 14,000 stores, including mass
merchandisers; foreign, national and regional retailers; discount store chains;
video rental retailers; and entertainment software distributors and re-sellers.
It is customary for the sales representatives and distributors of our home games
who are assigned specific customers to also distribute games produced by other
manufacturers. Our principal customers for home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Target. Sales to our largest
customer, Wal-Mart, represented 11.8% of our total revenues in fiscal 1999 after
representing less than 10% of revenues in prior years. Sales to our
second-largest customer, Toys-R-Us, represented 10.9% of our total revenues in
fiscal 1999, compared to 12.5% in fiscal 1998 and 10.5% in fiscal 1997.
Our distribution efforts are supported by marketing programs which
emphasize product awareness, brand recognition, dealer merchandising
opportunities and celebrity endorsements. Our marketing activities include
television and print advertising, retail store promotions, direct mailings and
user support programs, as well as
8
<PAGE> 10
our website. We also utilize a store-oriented marketing approach which includes
point-of-purchase promotions, use of display cards and other forms of
merchandise displays. Our sales literature, which features advance information
on new products, encourages potential users to purchase our products at their
local retail outlets, creating retail demand for new products before their
release. We provide technical support for our home products through our customer
support department, which is staffed by personnel trained to respond to customer
inquiries.
Until May 28, 1999, we had various agreements with GT Interactive Software
Corp. ("GTIS") under which we had granted license options and distribution
rights to GTIS relating to many of our home video games. Games optioned by GTIS
under these agreements were licensed for varying terms. Under these agreements,
GTIS had previously paid non-refundable license fees to us in the aggregate
amount of $35.0 million. In March 1998, we purchased the distribution rights for
our personal computer games in North America from GTIS for $8.0 million.
On August 16, 1999, in connection with the settlement of litigation with
GTIS, we reacquired from GTIS all remaining distribution rights for our home
video games. See "Item 3. Legal Proceedings." Under the terms of our former
agreements with GTIS, GTIS was not required to pay to us the revenues and
profits from sales of home video games in territories in which GTIS had
distribution rights until the non-refundable license fees were recouped by GTIS.
The settlement allows us to sell our home video games directly into those
markets and to receive the revenues and profits from these sales. Under the
terms of the settlement, GTIS is allowed up to 180 days to continue to sell off
its inventory of some of the games previously licensed.
In 1994, we formed a joint venture with Nintendo to develop video games on
some platforms being developed by Nintendo. The joint venture is owned 50% by
each of Nintendo and us. In connection with the formation of the joint venture,
we also entered into arrangements with Nintendo for the development of a version
of Cruis'n USA and Cruis'n World for Nintendo 64. The joint venture has the
right to distribute home versions of any coin-operated sequels of Cruis'n USA
that we develop. Nintendo released the first home video game under a licence
from the joint venture, Cruis'n World, in September 1998.
In September 1996, we entered into a master license agreement with Tiger
Electronics, Inc. under which we granted Tiger the right to manufacture and
distribute throughout the world liquid crystal display ("LCD") games based on
some of our coin-operated video games and home video games. The product
categories licensed to Tiger include some LCD game systems, including cartridges
for Tiger's proprietary handheld dot matrix LCD game system, and other
electronic products. The initial term of the agreement with Tiger expires in
December 2001, subject to renewal rights. The license agreements for specific
products optioned under the master license agreement expire upon the later of
the expiration of the master license agreement or 24 months after the prescribed
release date. In March 1998, Tiger assigned the master license agreement to
Hasbro, Inc. in connection with Hasbro's acquisition of Tiger's assets and
business.
MANUFACTURING
Coin-Operated Games. Our coin-operated games are manufactured by WMS under
the Manufacturing Agreement dated as of April 6, 1998 between the parties. See
"Item 13. Certain Relationships and Related Transactions." We believe this
arrangement and WMS's facilities are adequate for our current and planned
production needs. Game production is generally based on advance purchase orders
from distributors with respect to coin-operated games, and generally no
significant inventory of finished goods is maintained.
Since the amount of backlog orders varies from the beginning to the end of
a normal two-to three-month production process of a game, meaningful comparison
of backlog orders can only be made at the same period during a production cycle
and not at the end of fiscal years. We do not consider order backlog to be a
meaningful indicator of future sales.
We warrant most of our coin-operated games for a period of 60 days and home
games for a period of 90 days. Our costs in connection with these warranties
have been insignificant.
The raw materials used in manufacturing coin-operated video games include
various metals, plastics, wood and glass obtained from numerous sources of
supply. In addition, numerous component parts, including
9
<PAGE> 11
electronic subassemblies and video monitors, are purchased from suppliers. We
also purchase our wood cabinets for coin-operated games from WMS under the
Cabinet Supply Agreement dated as of April 6, 1998 or from other suppliers. See
"Item 13. Certain Relationships and Related Transactions." We believe that the
sources of supply of component parts and raw materials are adequate and that
substitute sources of materials are available.
Home Video Games. Manufacturing of home video games for 32- and 64-bit
platforms and Sega Dreamcast is performed for us by the developer of the game
platform (i.e., Nintendo, Sony or Sega) or its designee, as required by the
applicable platform license. We manufacture cartridges for 16-bit platforms
through contract manufacturing sources in Mexico. Platform manufacturers
typically retain the right to limit the number of games and approve timing of
release under manufacturing and licensing arrangements. Home game production is
based upon estimated demand for each specific title, and the level of the
inventory of finished goods depends upon the variance in market demand during
the life of a specific game title. At the time a product is approved for
manufacturing, we must provide some of the platform manufacturers with a
purchase order for that product and an irrevocable letter of credit for 100% of
the purchase price. We purchase most of the products manufactured by the
dedicated platform manufacturers for us on an "as is" and "where is" basis, and
delivery is at our expense and risk. Initial orders generally require 30 to 45
days to manufacture depending on the platform. Reorders of cartridge-based
products require approximately 30 to 40 days to manufacture, while reorders of
disc-based products generally require only 7 to 14 days. Shipping of orders
requires an additional three to 10 days, depending on the mode of transport and
location of manufacturer.
We lease a warehouse facility in Dallas, Texas from which we distribute
home video games to North and South America. Some products are imported into the
United States, inspected by customs agents and transferred to our warehouse
facility, where they are unpacked and shipped to our customers. Some components
of these products are assembled into finished products for us by third parties
prior to their transfer to our warehouse facility. Products ordered for
inventory are stored at the warehouse facility and used to fill additional
orders as received.
We participate in the electronic data interchange program maintained by
most of our large customers for home games. We generally fill re-orders from
inventory within two days. As a result, home video games traditionally have no
backlog of orders.
PRODUCT RETURNS AND PRICE ADJUSTMENTS
In our home video game business, we accept product returns for defective
products and sometimes provide replacements, markdowns or other credits on
varying terms in the event that the customer holds slow-moving inventory of our
home video games. At the time of product shipment, we establish reserves,
including reserves under our policies for price protection and returns of
defective products, which estimate the potential for future returns of products
based on historical return rates, seasonality of sales, retailer inventories of
our products and other factors. See "Risk Factors -- Product returns and price
adjustments could exceed our reserves."
PLATFORM LICENSES
Under non-exclusive license arrangements with Nintendo, Sony and Sega, we
have the right to develop and market software products for (i) Nintendo's Super
Nintendo Entertainment System, Nintendo 64, Game Boy and Game Boy Color
platforms, (ii) Sony's PlayStation, and (iii) Sega's Dreamcast, Genesis and
Saturn platforms. Generally, no specific hardware license is required for the
development and marketing of personal computer software. Some of the platform
license agreements or renewals of existing agreements are in the process of
being finalized with the platform manufacturers. However, Midway and these
platform manufacturers have proceeded as if the formal agreements were in place
by approving new game concepts, manufacturing new home video games and
otherwise. We believe that these informal arrangements are not uncommon in the
home video game business. We do not believe there is any significant risk that
the definitive platform license agreements will not be finalized on terms
acceptable to us.
10
<PAGE> 12
Each dedicated platform manufacturer requires that the software and a
prototype of each title, together with all related artwork and documentation, be
submitted to the dedicated platform manufacturer, as applicable, for
pre-publication approval. This approval is generally discretionary. We bear all
costs and expenses in connection with our development of games under our
agreements with each of the dedicated platform manufacturers. Dedicated platform
manufacturers charge us a fixed amount for each software cartridge or disc that
they manufacture or a royalty if third parties perform the manufacturing. This
charge generally includes a manufacturing, printing and packaging fee, as well
as a royalty for the use of the manufacturer's name and proprietary information
and technology, and may be subject to adjustment by the dedicated platform
manufacturer in its discretion. We are responsible in most cases for resolving,
at our expense, any software warranty or repair claim. To date, we have not
experienced any material software warranty claims.
Some platform license arrangements require that we bear the risk that the
information and technology licensed from the dedicated platform manufacturers
and incorporated into our software may infringe the rights of third parties. We
must indemnify the dedicated platform manufacturers against some claims
resulting from the development, marketing, sale or use of our software products,
including some claims for copyright, patent or trademark infringement that may
be brought against a dedicated platform manufacturer. To date, no dedicated
platform manufacturer has sought indemnity for any liabilities incurred as a
result of these lawsuits or for any legal expenses incurred in defending them.
We cannot assure you, however, that our indemnification obligations under our
license arrangements with the dedicated platform manufacturers will not have a
material adverse effect on our future results of operations or financial
condition.
Upon expiration of a dedicated platform license, we usually have a limited
period to sell off our inventory subject to that license, after which time any
remaining inventory is generally required to be destroyed. Furthermore, there is
no limit to the number of licenses that dedicated platform manufacturers may
grant to others or to the number of titles that they may permit their licensees
to publish or that they themselves may release in the future. Nintendo, Sony and
Sega are the largest publishers of software for use on their respective systems,
and they compete directly with us.
In fiscal 1999, substantially all of our unit sales of software products
were for use on dedicated and handheld game platforms. We expect that a large
portion of our revenues in the coming years will continue to be derived from
dedicated and handheld platforms. See "Risk Factors -- We depend on dedicated
game platform manufacturers."
INTELLECTUAL PROPERTY LICENSES
While we primarily seek to develop original proprietary games, some of our
games are based on properties or trademarks owned by third parties, such as the
National Basketball Association, National Football League, National Hockey
League or their respective players' associations, and licensed to us. Typically,
we are obligated to make minimum guaranteed royalty payments over the term of
the license and to advance payment against these guarantees. License agreements
generally extend for a term of two to three years, are terminable in the event
of material breach (including failure to pay any amounts owing to the licensor
in a timely manner) by us and other events, and, in some cases, are renewable
upon payment of minimum guarantees or the attainment of specified sales levels
during the term of the license. Some licenses are limited to specific
territories or platforms. Each license typically provides that the licensor
retains the right to exploit the licensed property for all other purposes,
including the right to license the property for use with other products and, in
some cases, software for other interactive hardware platforms.
PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
Each software title may embody a number of separately protected
intellectual property rights, including: (i) trademarks associated with elements
of the game (e.g, the NBA team logos in NBA Hangtime); (ii) the trademarks under
which the game is marketed (e.g., Mortal Kombat); (iii) the copyrights for the
game software (including the game's audiovisual elements); (iv) copyrights for
the software associated with the hardware platform; and (v) the patents for
inventions in the game software and hardware platforms. Each
11
<PAGE> 13
dedicated home game includes patents, copyrights and trademarks licensed from
the platform manufacturer. Elements of some of our titles are owned by third
parties and licensed to us. We rely on these third parties for protection of our
licensed intellectual property rights. Their failure to adequately protect these
rights could have a material adverse effect on us.
We have over 1,000 trademark registrations worldwide for our games, and we
apply for trademark protection for all of our game titles, other than those
licensed from third parties. We have registered the copyrights in the video game
software for most of our owned coin-operated titles. Notwithstanding this
protection, preventing unauthorized duplication of software products is
difficult and costly and, in the case of personal computer software,
unauthorized duplication is relatively common. Some of our personal computer
products require the user to refer to materials shipped with the software in
order to use the product. Despite this protection, we believe that these
requirements can be, and in some instances have been, circumvented.
The dedicated platform manufacturers have procured patents for some of the
technology utilized in connection with their respective home game systems. They
also incorporate security devices in their cartridges, discs and platforms which
seek to prevent unlicensed software products from being played on their
platforms. We do not own the trademarks, copyrights or patents covering the
proprietary information and technology utilized in the dedicated platform
manufacturers' cartridges or discs. Accordingly, we rely upon each dedicated
platform manufacturer for protection of this intellectual property from
infringement and bear the risk of claims of infringement brought by third
parties arising from the sale of software with respect to intellectual property
supplied by third party developers and embodied in our software products. Our
agreements with these outside developers generally require the developers to
indemnify us for costs and damages incurred in connection with these claims. We
cannot assure you, however, that these software developers will have sufficient
resources to indemnify us fully for any claims that may arise.
COMPETITION
The video game business is intensely competitive and is characterized by
the continuous introduction of new titles and the development of new
technologies. Our competitors vary in size from very small companies with
limited resources to very large corporations with greater financial, marketing
and product development resources than ours. See "Risk Factors -- Our market is
highly competitive."
In the coin-operated market, we compete principally with foreign
manufacturers such as Capcom, Konami, Namco, Sega and Taito.
In the home market, we compete principally with Nintendo, Sony and Sega,
the largest publishers of software for their respective systems. We also compete
in the United States and Canada with numerous companies licensed by Nintendo,
Sony and Sega to develop software products for use with their respective
systems. These competitors include Acclaim, Activision, Capcom, Eidos,
Electronic Arts, GT Interactive, Konami, Lucas Arts, Namco and THQ.
Additionally, our games which are sold for use on personal computers compete
with entertainment software sold by companies such as Acclaim, Hasbro
Interactive, Havas Interactive, Electronic Arts, GT Interactive, Learning Co.
and Microsoft, among others. The entry and participation of new industries and
companies, including diversified entertainment companies, in markets in which we
compete may adversely affect our performance in these markets.
SEASONALITY
While the coin-operated video game business is not generally seasonal in
nature, the home video game business is highly seasonal. Sales of home video
games are typically significantly higher during the September and December
quarters due to the year-end holiday buying season. Sales in other quarters are
generally lower and vary significantly as a result of new product introductions
and other factors.
EMPLOYEES
At September 17, 1999, we had approximately 630 employees. We believe that
our relations with our employees are satisfactory.
12
<PAGE> 14
RISK FACTORS
Some of the risks and uncertainties which may cause our operating results
to vary from anticipated results or which may materially and adversely affect
our operating results or the value of our common stock are as follows:
WE DEPEND ON MARKET ACCEPTANCE OF NEW PRODUCTS
Our success depends on generating revenue from new products and from
enhancements of existing products. Video game products typically have market
life spans of only three to twelve months. In addition, the process of
developing software products like ours is extremely complex and is expected to
become more complex and expensive in the future as new interactive entertainment
platforms and technologies are introduced. Furthermore, consumer preferences for
video games are difficult to predict, and few video game products achieve
sustained market acceptance. We cannot assure you that the new products that we
introduce will achieve any significant degree of market acceptance, or that the
acceptance will be sustained for any meaningful period. The failure of new
products to gain market acceptance could have a material adverse effect on our
operating results and financial condition.
WE MAY EXPERIENCE DELAYS IN INTRODUCING NEW PRODUCTS
From time to time, we have experienced delays in product introductions. We
depend on a variety of design and technical personnel and other development
components to introduce our new products and enhancements. The timing of a
creative process is difficult to predict, and the increasingly complex products
that we and our competitors introduce require increasing development time. It
usually takes us six to 24 months to complete a new product's development from
the time we approve a concept, and the amount of development time required is
increasing as our products become more complex. We cannot assure you that we
will be able to introduce new products and enhancements on a timely basis.
Unanticipated delays could cause us to miss an important selling season for the
delayed products, and we could schedule product promotions incorrectly. This
could also affect our development schedule for other products. A significant
delay in the introduction of one or more new products or enhancements could have
a material adverse effect on our operating results and financial condition.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
The video game market, both in the coin-operated and home segments,
experiences rapidly changing technology. We must continually anticipate and
adapt our products to emerging technologies, including new hardware platforms,
operating systems and media formats. When we choose to incorporate a new
technology into our products or to publish or develop a product for a new
platform, we may make a substantial development investment one to two years in
advance of initial shipment of these products. We cannot assure you that we will
be able to identify accurately which emerging technologies will gain widespread
acceptance.
If we invest in the development of a video game that does not achieve
significant commercial success, our revenues from that product will be adversely
affected, and we may not recover our development costs. If, on the other hand,
we do not choose to pursue the development of products incorporating new
technology or for new platforms that achieve significant commercial success, our
revenue growth may also be adversely affected. In addition, consumers may defer
purchasing home game software for use on existing platforms following the
announcement of an introduction date for hardware platforms incorporating new
technologies. We may not be able to obtain licenses to use new technologies.
Accordingly, these announcements could adversely affect sales of our existing
software products. We cannot assure you that we will be able to develop or
acquire the expertise necessary to enable us to develop or market products for
emerging technologies.
WE RELY ON OUR MORTAL KOMBAT PRODUCTS
Revenues from Mortal Kombat products accounted for approximately 6.0% of
our total revenues in fiscal 1999, 19.1% in fiscal 1998 and 22.0% in fiscal
1997. If Mortal Kombat products fail to continue to sell, or if we
13
<PAGE> 15
fail to replace the Mortal Kombat products with additional products generating
significant revenues, our business, operating results and financial condition
could be materially and adversely affected.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER
We have experienced and expect to continue to experience significant
quarterly fluctuations in net sales and other operating results due to a variety
of factors, including:
- variations in the level of market acceptance of our products and those of
our competitors;
- delays and timing of product introductions;
- fluctuations in our mix of products with varying profit margins;
- introduction and market penetration of dedicated game platforms;
- development and promotional expenses relating to the introduction of new
products or enhancements of existing products;
- changes in our pricing policies and those of our competitors;
- the accuracy of our and retailers' forecasts of consumer demand; and
- the timing of orders from major customers, order cancellations and delays
in shipment.
Our expense levels are based, in part, on our expectations regarding future
sales and, as a result, operating results would be adversely affected by a
decrease in sales or a failure to meet our sales expectations.
OUR HOME VIDEO GAME BUSINESS EXPERIENCES SEASONAL VARIATIONS
Our home video game business is highly seasonal. Sales of home video games
are typically significantly higher during the September and December quarters
due to the year-end holiday buying season. Sales in other quarters are generally
lower and vary significantly as a result of new product introductions and other
factors. We cannot assure you that we will achieve consistent profitability on a
quarterly or annual basis.
OUR MARKET IS HIGHLY COMPETITIVE
The video game business is intensely competitive and experiences the
continuous introduction of new titles and the development of new technologies.
Our ability to compete successfully in this market is based, in large part, upon
our ability:
- to select and develop popular titles;
- to identify and obtain rights to commercially marketable intellectual
properties; and
- to adapt our products for use with new technologies.
In addition, successful competition in our market is also based upon:
- price;
- access to retail shelf space for home games;
- product enhancements;
- brand recognition;
- marketing support; and
- access to distribution channels.
Our competitors vary in size from very small companies with limited
resources to very large corporations with greater financial, marketing and
product development resources than ours. We are often in competition
14
<PAGE> 16
with the primary platform manufacturers, Nintendo, Sony and Sega, and companies
that we depend upon for distribution or other services. These companies may have
an incentive to promote their own products in preference to ours. In addition,
due to their dominant position in the industry, the manufacturers of dedicated
platform hardware have a competitive advantage with respect to retail pricing,
acquiring intellectual property licenses and securing shelf space.
We believe that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, are increasing their focus on the interactive entertainment market,
which will result in greater competition for us. Midway and many of our
competitors are developing on-line interactive games and interactive networks.
We cannot assure you that we will be able to compete successfully against
current or future competitors. Competitive pressures that we face could
materially and adversely affect our business and financial condition.
PRODUCT RETURNS AND PRICE ADJUSTMENTS COULD EXCEED OUR RESERVES
In our home video game business, we accept product returns for defective
products and sometimes provide replacements, markdowns or other credits on
varying terms in the event that the customer holds slow-moving inventory of our
home games. At the time of product shipment, we establish reserves, including
reserves under our policies for price protection and returns of defective
products. These reserves are established according to estimates of the potential
for future returns of products based on historical return rates, seasonality of
sales, retailer inventories of our products and other factors. Product returns,
markdowns and credits that exceed our reserves could have a material adverse
effect on our business, operating results and financial condition. Although we
maintain reserves which we believe to be adequate with respect to product
returns and price reductions, we cannot assure you that the reserves established
will not be exceeded.
WE DEPEND ON DEDICATED GAME PLATFORM MANUFACTURERS
We depend heavily on the manufacturers of dedicated video game platforms,
who are also our competitors. In fiscal 1999, substantially all of our unit
sales of software products for the home market were for use on dedicated or
handheld game platforms. Our platform licenses can be canceled for breach and
are kept in effect at the sole discretion of the licensor. If the popularity of
home video games on dedicated hardware platforms materially declines, or if we
were to lose our license to publish software from Nintendo, Sega or Sony, our
business would be materially and adversely affected.
We are generally obligated to submit new games to the dedicated platform
manufacturers for approval prior to publication. Rejection or substantial delay
by a dedicated platform manufacturer could have a material adverse effect on our
financial condition and results of operations. We have not experienced any
significant delays in the approval process for any of our games in the past. We
cannot assure you, however, that we will not experience these delays in the
future. The dedicated platform manufacturers may also limit the number of titles
that we can release in any year, which may limit any future growth in sales.
We depend on Nintendo, Sony and Sega for:
- the protection of the intellectual property rights to their respective
hardware platforms and technology;
- their ability to control the proliferation of new titles by licensees and
others; and
- their ability to discourage unauthorized persons from producing software
for the Nintendo, Sony and Sega platforms.
WE DEPEND ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS
We depend on third parties to manufacture the game cartridges and discs for
our home video games. The manufacturing of our coin-operated games is performed
for us by WMS under contracts. We have not experienced any material delays or
interruptions in the delivery of our products due to manufacturing delays or
interruptions. It is possible, however, that manufacturing delays or
interruptions could cause delays or interruptions in product delivery. If any
significant delays occur, and we cannot substitute another manufac-
15
<PAGE> 17
turer in time, delays could materially and adversely affect our business,
operating results and financial condition. Unanticipated price increases from
these manufacturers also could adversely affect our business.
WE RELY ON THIRD PARTIES TO DEVELOP SOME OF OUR HOME VIDEO GAME TITLES
Some of our home video games are designed by third parties. The number of
titles developed by third parties varies from quarter to quarter. The failure to
identify and acquire suitable titles from third party designers could adversely
affect our revenues and business.
WE MAY BE UNABLE TO OBTAIN LICENSES FOR INTELLECTUAL PROPERTY
Some of our games are based on properties or trademarks owned by third
parties, such as the National Basketball Association, National Football League,
National Hockey League or their respective players' associations. Our future
success may also depend upon our ability to obtain licenses for additional
popular intellectual properties. There is competition for these licenses, and we
cannot assure you that we will be successful in acquiring additional
intellectual property rights with significant commercial value.
Our intellectual property licenses generally require that we submit new
products developed under licenses to the licensor for approval prior to release.
This approval is generally discretionary. Rejection or delay in approval of a
product by a licensor could have a material adverse effect on our business,
operating results and financial condition. While we have not experienced any
significant delays in obtaining new product approvals from our licensors in the
past, we cannot assure you that we will not experience delays in the future. The
owners of intellectual property licensed by us generally reserve the right to
protect the intellectual property against infringement.
WE FACE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
We have announced that our growth strategy may include acquiring other
companies. Our success with this strategy depends on our ability to identify and
negotiate attractive investments in businesses that we believe will complement
or enhance our business. We cannot assure you that we will be able to:
- properly identify and evaluate acquisition opportunities;
- control costs and liabilities incurred with the acquisition of the new
businesses or assets;
- effectively manage growth from acquisitions; or
- anticipate and evaluate the numerous risks involved in acquiring and
operating a new business or asset.
The focus on an acquisition strategy could divert our management's
resources from more valuable projects. The acquisition of a costly or
unproductive business or asset could materially and adversely affect our
business.
WE DEPEND ON OUR KEY PERSONNEL
Our success depends to a significant extent upon the performance of senior
management and on our ability to continue to attract, motivate and retain highly
qualified software developers. The loss of the services of senior management,
highly qualified software developers or other key personnel could have a
material adverse effect on us. Competition for highly skilled employees with
technical, management, marketing, sales, product development and other
specialized training is intense, and we cannot assure you that we will be
successful in attracting and retaining these personnel. Specifically, we may
experience increased costs in order to attract and retain skilled employees.
WE MAY HAVE CONFLICTS OF INTEREST WITH WMS
Some of our officers and directors are also officers, directors and
stockholders of WMS and may be subject to various conflicts of interest. These
conflicts include, among others, the performance by the two companies under
their existing agreements with each other, as well as the negotiation of any
agreements
16
<PAGE> 18
required to be entered into in the future between these two parties. We may also
be subject to conflicts of interest arising from the relationship among us and
WMS and our respective affiliates. See "Item 13. Certain Relationships and
Related Transactions."
Neil D. Nicastro, our Chairman of the Board, President, Chief Executive
Officer and Chief Operating Officer is also a director of and a consultant to
WMS. Louis J. Nicastro, one of our directors, is also the Chairman of the Board,
President and Chief Executive Officer of WMS. Neil D. Nicastro is the son of
Louis J. Nicastro. Harold H. Bach, Jr. and Orrin J. Edidin, officers of WMS, are
also officers of Midway. Each of Messrs. Bach and Edidin has duties and
responsibilities with WMS that may conflict with time which might otherwise be
devoted to his duties with us.
WE MAY EXPERIENCE ADVERSE EFFECTS OF THE YEAR 2000 COMPUTER PROBLEM
Many currently installed software programs and embedded programs in
electronic systems will not work properly when processing dates later than 1999.
If any of our systems should fail as a result of any undetected year 2000
problems, we do not have an advance contingency plan. Furthermore, we cannot
determine the effect of any year 2000 failure. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF MIDWAY
Our Board or management could use several charter or statutory provisions
and agreements as anti-takeover devices to discourage, delay or prevent a change
in control of Midway. The use of these provisions and agreements could adversely
affect the market price of our common stock:
Blank Check Preferred Stock. Our certificate of incorporation authorizes
the issuance of 5,000,000 shares of preferred stock with designations, rights
and preferences that may be determined from time to time by the board of
directors. Accordingly, our board has broad power, without stockholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of our common stock. Our board has no current plans, agreements or
commitments to issue any shares of preferred stock.
Rights Plan. Under a rights agreement with The Bank of New York, each share
of our common stock has an accompanying right to purchase, upon acquisitions of
beneficial ownership of 15% or more of our common stock, convertible preferred
stock that permits each holder to receive common stock at half price. We can
redeem the rights at $0.01 per right, subject to certain conditions, at any
time. The rights expire in 2007.
Classified Board. Our certificate of incorporation provides for a
classified board of directors. Upon the expiration of staggered terms,
approximately one third of Midway's directors are elected for three year terms
to succeed those directors whose terms expire. This means that a person could
not obtain control of our board until the second annual stockholders' meeting
after acquiring a majority of the voting stock.
Other Charter Provisions. Our certificate of incorporation also provides
that:
- directors may be removed only for cause and only by an affirmative vote
of at least 80% of outstanding common stock;
- any vacancy on the board may be filled only by a vote of a majority of
the remaining directors then in office;
- there may be no stockholder action by written consent;
- only the President, the Chairman of the Board or the board may call
special meetings of stockholders, and the only business permitted to be
conducted at stockholder meetings is business brought before the meeting
by or at the direction of the board;
- stockholders must follow an advance notice procedure for the submission
of director nominations and other business to be considered at an annual
meetings of stockholders;
17
<PAGE> 19
- either a majority vote of the board or an affirmative vote of at least
80% of outstanding common stock is needed in order to adopt, amend or
repeal our bylaws; and
- an affirmative vote of 80% of outstanding common stock is needed in order
to adopt, amend or repeal the above provisions.
Section 203 of the Delaware General Corporation Law. In general, this
statute prohibits a publicly-held Delaware corporation from engaging in a
business combination with anyone who owns at least 15% of its common stock for a
period of three years after that person has acquired the 15% ownership, unless
the business combination is approved by the board before the person acquires the
15% ownership or later by the board and two-thirds of the stockholders of the
public corporation.
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT THE PRICE OF OUR STOCK
The market price of our common stock has experienced and may continue to
experience wide fluctuations. Factors affecting our stock price may include:
- actual or anticipated variations in our operating results;
- variations in the level of market acceptance of our products;
- delays and timing of product introductions;
- changes in recommendations or earning estimates by securities analysts;
- conditions and trends in our industry;
- general market or economic conditions; or
- other factors.
SHARES AVAILABLE FOR SALE IN THE FUTURE COULD HAVE AN ADVERSE EFFECT ON THE
MARKET PRICE OF OUR COMMON STOCK
We have 100,000,000 authorized shares of common stock, of which 37,985,600
shares were issued and outstanding as of September 24, 1999, excluding 764,400
treasury shares. If all of our issued and outstanding stock options were
exercised as of that date, approximately 43.6 million shares of common stock
would be outstanding. Our board of directors has broad discretion with respect
to the issuance of the remaining authorized but unissued shares, including
discretion to issue shares in compensatory and acquisition transactions. If we
seek financing through the sale of our securities, our then current stockholders
may suffer dilution in their percentage ownership of our common stock. In
addition, the future issuance, or even the potential issuance, of shares at a
price below the then current market price may have a depressive effect on the
future market price of our common stock.
OUTSTANDING STOCK OPTIONS MAY DILUTE OUR COMMON STOCK AND DEPRESS ITS MARKET
PRICE
As of September 24, 1999, we had outstanding options to purchase an
aggregate of approximately 5.6 million shares of common stock exercisable at an
average exercise price of approximately $13.50 per share. Our stock option and
stock incentive plans also authorize the grant of options to purchase
approximately an additional 1.2 million shares of common stock. During the terms
of our outstanding options, the holders are given the opportunity to profit from
a rise in the market price of our common stock. The terms of our outstanding
options currently average approximately eight years. The holders of options
would be most likely to exercise them and purchase our common stock at a time
when we could obtain capital by a new offering of securities on terms more
favorable to us than those provided by the options.
18
<PAGE> 20
ITEM 2. PROPERTIES.
Our principal office is located at 3401 North California Avenue, Chicago,
Illinois in premises owned by WMS. The following table contains information
describing the general character of our other principal properties, all of which
are leased facilities.
<TABLE>
<CAPTION>
APPROXIMATE ANNUAL LEASE
LOCATION PRINCIPAL USE SQUARE FEET RENT ($) EXPIRATION DATE
- -------- ------------- ----------- -------- ---------------
<S> <C> <C> <C> <C>
2727 W. Roscoe Street Video Game Design and 47,500 146,000 06/30/01
Chicago, IL Development
675 Sycamore Drive Video Game Design and 84,501 593,196 07/31/05
Milpitas, CA Development and Offices
800 N. Main Street Video Games Sales and 14,700 77,760 06/01/03
Corsicana, TX Marketing
Dallas Corporate Center #11 Warehouse 56,092 196,322 07/30/04
11550 Newberry, Suite 100
Dallas, TX
Macmillan House 96 Office 390 45,000* 02/23/00
Kensington High Street
London, England
3325 N. California Ave. Video Game Design and 14,500 115,000 01/31/04
Chicago, IL Development/Office/
Warehouse
10110 Mesa Rim Road Video Game Design and 27,512 250,644 06/01/02
San Diego, CA Development
6865 Flanders Drive Video Game Design and 4,187 50,244 06/30/02
San Diego, CA Development
6620 Mesa Ridge Road Video Game Sales and 9,104 98,329 06/30/02
San Diego, CA Marketing
</TABLE>
- -------------------------
* L25,800
We believe that our facilities and equipment are suitable for the purposes
for which they are employed, are adequately maintained and will be adequate for
current requirements and projected growth.
ITEM 3. LEGAL PROCEEDINGS.
On January 25, 1999, GTIS filed suit against Midway, WMS and some of their
subsidiaries in the Supreme Court of the State of New York, County of New York,
alleging breach of contract and other claims arising from agreements between
GTIS and us concerning the distribution of our home video games. On May 28,
1999, we filed an answer denying GTIS's allegations and asserting counterclaims,
including GTIS's breach of the agreements. On August 16, 1999, the parties
settled the lawsuit by mutually agreeing to the dismissal of all claims, by
confirming the termination of GTIS as our distributor and by our payment of $8.5
million to GTIS.
On April 12, 1999, a wrongful death action was commenced against us and
other companies by the administrators for three children who were murdered in
1997 by Michael Carneal at the Heath High School in McCracken County, Kentucky.
The action, entitled James, et al. v. Meow Media, et al. was brought in the U.S.
District Court for the Western District of Kentucky, Paducah Division, Civil
Action No. 5:99CV96-J against 25 defendants. The defendants included 18
companies in the video game business, five companies that produced or
distributed the movie "The Basketball Diaries" and two companies that allegedly
provide obscene Internet content. The complaint alleges, with respect to Midway
and other video game companies, that
19
<PAGE> 21
Carneal, then 14 years old, was influenced by the allegedly violent content of
unspecified video games and that the video game manufacturers and suppliers are
liable for Carneal's conduct. The complaint seeks $10 million in compensatory
damages with respect to each of the three children and $100 million in punitive
damages. The Court has stayed all discovery pending the briefing of motions to
dismiss the complaint. The plaintiffs must respond to the motion to dismiss by
November 1, 1999. Reply briefs are due November 23, 1999. We intend to
vigorously defend this action.
We currently and from time to time are involved in other litigation
incidental to the conduct of our business, none of which, in our opinion, is
likely to have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
20
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference from our
1999 Annual Report to Stockholders, under the heading "Market for the Company's
Common Stock and Related Security-Holder Matters" and is filed with the SEC in
Exhibit 13 to this report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this item is incorporated by reference from our
1999 Annual Report to Stockholders, under the heading "Selected Five-Year
Financial Data" and is filed with the SEC in Exhibit 13 to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is incorporated by reference from our
1999 Annual Report to Stockholders, under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and is filed with
the SEC in Exhibit 13 to this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is incorporated by reference from our
1999 Annual Report to Stockholders and is filed with the SEC in Exhibit 13 to
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. The following table sets forth information
as of September 24, 1999 (except as otherwise footnoted) with respect to each of
our directors. Neil D. Nicastro is the son of Louis J. Nicastro; otherwise,
there is no family relationship between any of our directors or executive
officers. Our Board of Directors is divided into three classes. The term of
office for the Class I directors expires at the Annual Meeting of Stockholders
to be held in 2001; the term of office for the Class II directors expires at the
Annual Meeting of Stockholders to be held in 2000; and the term of office for
the Class III directors expires at the Annual Meeting of Stockholders to be held
in 2002. Directors are elected for staggered three year terms to succeed those
directors whose terms expire.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENTAGE
DIRECTOR OR DEEMED TO BE OF
EXECUTIVE BENEFICIALLY OUTSTANDING
POSITION(S) WITH MIDWAY; OFFICER OF THE OWNED AS OF COMMON
NAME (AGE) PRINCIPAL OCCUPATION AS OF 9/24/99 COMPANY SINCE 9/24/99(1) STOCK(1)
- ---------- ---------------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Class I Directors: term expires at our 2001 Annual Meeting
Neil D. Nicastro (42)........ Chairman of the Board, President, 1988 1,334,908(2) 4.9%
Chief Executive Officer and Chief
Operating Officer
William C. Bartholomay
(71)....................... Director; President of Near North 1996 80,370(3) *
National Group
Norman J. Menell (67)........ Director; Vice Chairman of the 1996 52,506(3) *
Board of WMS
Louis J. Nicastro (71)....... Director; Chairman of the Board, 1988 50,547(3) *
President and Chief Executive
Officer of WMS
Class II Directors: term expires at our 2000 Annual Meeting
Kenneth J. Fedesna (49)...... Executive Vice President -- 1996 172,206(4) *
Coin-Op Video and Director
William E. McKenna (80)...... Director; General Partner, MCK 1996 51,958(3) *
Investment Company
Harvey Reich (70)............ Director; Attorney 1996 51,277(3) *
Ira S. Sheinfeld (61)........ Director; Attorney, Squadron, 1996 56,801(3) *
Ellenoff, Plesent & Sheinfeld LLP
Class III Directors: term expires at our 2002 Annual Meeting
Harold H. Bach, Jr. (67)..... Executive Vice President -- 1990 166,288(4) *
Finance, Treasurer and Chief
Financial Officer and Director;
Vice President -- Finance,
Treasurer, Chief Financial and
Chief Accounting Officer of WMS
Byron C. Cook (45)........... Executive Vice President -- Home 1996 283,574(4) *
Video and Director
Richard D. White (45)........ Director; Managing Director, CIBC 1996 35,000(3) *
Capital Partners
Gerald O. Sweeney, Jr.
(47)....................... Director; Attorney, Lord, Bissell 1996 35,000(3) *
& Brook
</TABLE>
22
<PAGE> 24
- -------------------------
* Less than 1% of the number of outstanding shares of common stock on
September 24, 1999.
(1) Under Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, shares
underlying options are deemed to be beneficially owned if the holder of the
option has the right to acquire those shares within 60 days. For purposes of
calculating percentage ownership, shares underlying stock options granted to
the person and exercisable within 60 days have been deemed to be
outstanding.
(2) Includes 560,000 shares of common stock underlying stock options.
(3) Includes 35,000 share of common stock underlying stock options.
(4) Includes 120,000 shares of common stock underlying stock options.
NEIL D. NICASTRO has been our President and Chief Operating Officer since
July 1, 1991. On July 26, 1996, Mr. Nicastro became Chairman of our Board of
Directors and Chief Executive Officer, having served as Co-Chief Executive
Officer and Chief Operating Officer since December 1, 1994. Mr. Nicastro also
served as our Treasurer from 1988 to 1994 and in other executive positions for
us in the past. Mr. Nicastro has served as a director of WMS since 1986 and as
consultant to WMS since April 6, 1998. Mr. Nicastro became sole Chief Executive
Officer of WMS in June 1996, Co-Chief Executive Officer in 1994, President in
1991, and Chief Operating Officer in 1990. Mr. Nicastro resigned his
officerships with WMS on April 6, 1998, the date of the Spin-off.
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 1994 having also
held that office during the period 1976-1992. Mr. Bartholomay is a director of
WMS.
NORMAN J. MENELL has been Vice Chairman of the Board of Directors of WMS
since 1990 and is a director of WMS. He previously held various executive
offices at WMS from 1981 to 1990, including President.
LOUIS J. NICASTRO has been the President and Chief Executive Officer of WMS
since April 6, 1998 and has served as Chairman of the Board of Directors of WMS
since its incorporation in 1974. Mr. Nicastro has also served WMS as Co-Chief
Executive Officer (1994-1996), Chief Executive Officer (1974-1994), President
(1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986 and 1998). Mr.
Nicastro also served as Chairman of the Board and Chief Executive Officer of WHG
Resorts & Casinos Inc. and its predecessors from 1983 until January 1998. Mr.
Nicastro also served as our Chairman of the Board and Co-Chief Executive Officer
from December 1, 1994 to June 26, 1996, Chairman of the Board and Chief
Executive Officer of Midway from 1988 to 1994 and President between 1988 and
1991.
KENNETH J. FEDESNA became our Executive Vice President -- Coin-Op Video in
August 1996. Mr. Fedesna served as our Vice President and General Manager from
1988 to August 1996. He also served as Vice President and General Manager of
Williams Electronics Games, Inc., a subsidiary of WMS, for over five years until
August 1999.
WILLIAM E. MCKENNA has served as a General Partner of MCK Investment
Company, Beverly Hills, California for over five years. He also is a director of
California Amplifier, Inc., Drexler Technology Corporation and Safeguard Health
Enterprises, Inc. and WMS.
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 over
five years until his retirement from that firm in July 1998. He is a director of
WMS.
IRA S. SHEINFELD has been a member of the law firm of Squadron, Ellenoff,
Plesent & Sheinfeld LLP, New York, New York for over five years. He is a
director of WMS.
HAROLD H. BACH, JR. became our Executive Vice President -- Finance and
Chief Financial Officer in August 1996. Previously, Mr. Bach served as our
Senior Vice President -- Finance and Chief Financial Officer from 1990 to August
1996, and he has served as Treasurer continuously since December 1, 1994.
23
<PAGE> 25
Mr. Bach has also served as Vice President -- Finance, Chief Financial and Chief
Accounting Officer of WMS for over five years. Prior to joining WMS, Mr. Bach
was a partner in the accounting firms of Ernst & Young (1989-1990) and Arthur
Young & Company (1967-1989).
BYRON C. COOK became our Executive Vice President -- Home Video in August
1996. Mr. Cook has been the President and Chief Operating Officer of our
subsidiary, Midway Home Entertainment Inc. Prior to the acquisition, Mr. Cook
was President of Tradewest Inc. from 1988 to 1994, which we acquired in 1994,
and he was a co-founder of that company.
RICHARD D. WHITE has been a Managing Director of CIBC Capital Partners, New
York, New York, an affiliate of CIBC World Markets Corp. and its predecessor,
for over five years. Mr. White is a director of Vestcom International, Inc.
GERALD O. SWEENEY, JR. has been a member of the law firm Lord, Bissell &
Brook, Chicago, Illinois for over five years.
(b) Identification of Executive Officers. The following table sets forth
information with respect to each of our executive officers. Each executive
officer serves until the next annual meeting of our Board of Directors and until
his respective successor is duly elected and qualify.
<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. ...................... 67 Executive Vice President -- Finance, Treasurer and
Chief Financial Officer
Byron C. Cook............................. 45 Executive Vice President -- Home Video
Kenneth J. Fedesna........................ 49 Executive Vice President -- Coin-Op Video
Michael A. Ribero......................... 43 Executive Vice President
Orrin J. Edidin........................... 38 Vice President, Secretary and General Counsel
</TABLE>
The current principal occupation or employment of Messrs. Nicastro, Bach,
Cook and Fedesna during the last five years is set forth in Item 10(a) above.
Mr. Ribero joined us as Executive Vice President in July 1999. From
November 1998 to June 1999, Mr. Ribero was Senior Vice President and General
Manager, EA Sports of Electronic Arts, a video game publisher. From August 1996
to November 1998, he was Chairman and Chief Executive Officer of Radical
Entertainment Ltd., an interactive entertainment company. From February 1995 to
August 1996, he was an Executive Vice President of Sega of America, and from
1988 until February 1995, he was employed by Hilton Hotels Corporation, rising
to the position of Executive Vice President, Marketing & Strategic Planning.
Mr. Edidin has served as our Vice President, Secretary and General Counsel
since June 1997. He has also served as Vice President, Secretary and General
Counsel of WMS since May 1997. Mr. Edidin was Associate General Counsel of Fruit
of the Loom, Inc. from 1992 until May 1997.
(c) Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own more than 10 percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the SEC.
These persons are required by regulation to furnish us with copies of all
Section 16(a) reports that they file. Based on our review of the copies of these
reports received by us, or written representations from the reporting persons
that no Form 5 was required for those persons, we believe that, during fiscal
1998, all filing requirements applicable to our officers, directors and greater
than 10 percent beneficial owners were complied with.
24
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth the cash compensation for
our Chief Executive Officer and our four other most highly compensated executive
officers whose fiscal 1999 salary and bonus exceeded $100,000. The compensation
of our executive officers (other than Neil D. Nicastro and Byron C. Cook) shown
on the table for fiscal 1998 and 1997 was paid by WMS and, for fiscal 1999, by
either WMS or Midway, and the table reflects their compensation for service in
all capacities for both WMS and Midway. The table reflects compensation paid by
Midway to Mr. Cook during fiscal 1999, 1998 and 1997 and, after the date of the
Spin-off, to Mr. Nicastro. Prior to the Spin-off, Mr. Nicastro was paid by both
Midway and WMS under his employment agreements with each company, and the
combined amount is shown on the table. Until the Spin-off, the compensation paid
by WMS to our executive officers (other than Messrs. Nicastro and Cook) was
allocated to us based upon estimates by management of the percentage of time
devoted to us. After the Spin-off, compensation paid to our executive officers
(other than Messrs. Nicastro and Cook) is reimbursed by, or to us in amounts
equal to our allocated cost under the Temporary Support Services Agreement dated
as of April 6, 1998 between WMS and us. See "Item 13. Certain Relationships and
Related Transactions." The results of operations for each of fiscal 1999, 1998
and 1997 include an allocation of the compensation of our executive officers
based on estimates by management, which, from time to time, ranged from 40% to
70%.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------ -----------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)(2)
--------------------------- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Neil D. Nicastro(3).................. 1999 600,000 202,700 911,850 133,521(4)
Chairman of the Board, Chief 1998 575,000 1,387,820 150,000 47,074(4)
Executive Officer, President and 1997 600,000 969,160 500,000 54,632(4)
Chief Operating Officer
Harold H. Bach, Jr. ................. 1999 315,000 -- 43,842 --
Executive Vice
President -- Finance, 1998 300,000 220,000 50,000 --
Treasurer and Chief Financial
Officer 1997 300,000 175,000 100,000 --
Byron C. Cook........................ 1999 325,000 -- 284,955 --
Executive Vice President -- Home 1998 300,000 350,000 50,000 --
Video 1997 300,000 250,000 100,000 --
Kenneth J. Fedesna................... 1999 325,000 -- 29,229 2,500(5)
Executive Vice President -- Coin-Op 1998 310,000 150,000 50,000 2,500(5)
Video 1997 310,000 150,000 100,000 2,500(5)
Orrin J. Edidin...................... 1999 200,000 --(6) 41,304 --
Vice President, Secretary and
General 1998 180,000 75,000 35,000 --
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. Grants of Midway stock options in fiscal 1999 are from the
1998 Stock Incentive Plan, which required certain purchases of our common
stock by these officers, except for 15,000 options granted to Mr. Edidin.
(2) Excludes adjustments to WMS options made under the adjustment plan described
under "WMS Option Adjustment" below.
25
<PAGE> 27
(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 1999, 1998 and
1997 life insurance premiums of $1,679, $1,571 and $1,467, respectively, and
$131,842, $45,503 and $53,165 for fiscal 1999, 1998 and 1997, respectively,
accrual for contractual retirement benefits.
(5) Amount shown for Mr. Fedesna includes life insurance premiums.
(6) Excludes a bonus of $75,000 paid by WMS to Mr. Edidin.
The following table sets forth information with respect to options to
purchase common stock granted during fiscal year 1999 under our stock option
plans for the executive officers named in the Summary Compensation Table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL OPTIONS AT ASSUMED ANNUAL RATE
NUMBER OF GRANTED TO OF STOCK PRICE APPRECIATION
SECURITIES EMPLOYEES IN EXERCISE FOR OPTION TERM(1)
UNDERLYING OPTIONS FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED (#)(2) YEAR (%) ($/SHARE) DATE 5%($) 10%($)
- ---- ------------------ ------------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Neil D. Nicastro..... 911,850(3) 36.2 8.00 01/28/09 4,587,517 11,626,088
Harold H. Bach,
Jr................. 43,842(3) 1.7 8.00 01/28/09 220,569 558,986
Byron C. Cook........ 284,955(3) 11.3 8.00 01/28/09 1,433,609 3,633,176
Kenneth J. Fedesna... 29,229(3) 1.2 8.00 01/28/09 147,051 372,670
Orrin J. Edidin...... 41,304(4) 1.6 (3) (3) 232,565 589,386
</TABLE>
- -------------------------
(1) The assumed appreciation rates are set under the rules and regulations under
the Securities Exchange Act of 1934 and are not derived from the historical
or projected prices of our Common Stock. Total potential stock price
appreciation for all stockholders for the remaining terms of their options,
based on the price of $12.94 per share of common stock on June 30, 1999
would be $309,469,032 and $784,284,903 at assumed rates of stock
appreciation of 5% and 10%, respectively.
(2) Grants of Midway stock options in fiscal 1999 are from the 1998 Stock
Incentive Plan, which required certain purchases of our common stock by
these officers, except for 15,000 options granted to Mr. Edidin.
(3) These options become exercisable on January 29, 2000.
(4) Of these options, 26,304 become exercisable on January 29, 2000, and 15,000
become exercisable up to 10%, 30%, 60% and 100% of that number upon the
first, second, third and fourth anniversaries, respectively, of the date of
the grant. The exercise price per share of 26,304 of these options is $8.00
and of 15,000 of these options is $10.625. 26,304 of these options expire on
January 28, 2009, and 15,000 expire on May 23, 2009.
26
<PAGE> 28
The following table sets forth information with respect to the number and
assumed values of options to purchase common stock owned by the executive
officers named in the Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT 6/30/99(#) 6/30/99($)(1)
ON VALUE EXERCISABLE(E) EXERCISABLE(E)
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ---- ----------- ------------ ---------------------- -----------------------
<S> <C> <C> <C> <C>
Neil D. Nicastro....... -- -- 460,000(E)/1,101,850(U) -- (E)/4,504,539(U)
Harold H. Bach, Jr..... -- -- 100,000(E)/ 93,842(U) -- (E)/ 216,579(U)
Byron C. Cook.......... -- -- 100,000(E)/ 334,955(U) -- (E)/1,407,678(U)
Kenneth J. Fedesna..... -- -- 100,000(E)/ 79,229(U) -- (E)/ 144,391(U)
Orrin J. Edidin........ -- -- 3,500(E)/ 72,804(U) -- (E)/ 164,667(U)
</TABLE>
- -------------------------
(1) Based on the closing price of our common stock on the New York Stock
Exchange on June 30, 1999, which was $12.94.
WMS OPTION ADJUSTMENT
As of the date of the Spin-off, some of our directors and officers held
options to purchase shares of WMS common stock. WMS's stock option plans in
effect prior to the Spin-off provided that in the event of a dividend or other
distribution, such as the Spin-off, 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 intended to
prevent this dilution by giving option holders (a) the same number of options to
acquire shares of WMS common stock after the Spin-off (at adjusted exercise
prices) as these holders held at the time of the Spin-off and (b) compensation
for the lost opportunity value represented by the shares of our common stock
being distributed in the Spin-off. The adjustment plan also provided that this
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 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 in fiscal 1998. Harold H. Bach,
Jr. received WMS common stock valued at $534,722 and cash in the amount of
$1,093,193 in fiscal 1998. Byron C. Cook received WMS common stock valued at
$1,153,488 and cash in the amount of $3,485,699 in fiscal 1998. Kenneth J.
Fedesna received WMS common stock valued at $940,058 and cash in the amount of
$1,921,830 in fiscal 1998. Orrin J. Edidin received cash in the amount of
$49,442 and $105,748 in fiscal 1998 and fiscal 1999, respectively. He will
receive additional cash adjustment payments for the unvested portion of the
options of an aggregate of $343,260 plus interest if he is still serving WMS or
Midway through the end of the vesting period. Payments will be made in the
fiscal years in which these options would have vested. The WMS common stock was
valued at the average of the high and low prices on the New York Stock Exchange
on April 3, 1998, the last day of trading prior to the Spin-off.
COMPENSATION OF DIRECTORS
We pay a fee of $32,500 per year to each director who is not also our
employee. Each director who serves as the chairman of any committee of the Board
of Directors receives a further fee of $2,500 per year for his services in that
capacity and each other member of our Audit Committee receives an additional fee
of $2,500 per year.
Additionally, we have granted market priced options to purchase 35,000
shares of common stock to each of our non-employee directors. See "Stock Option
Plans" below.
27
<PAGE> 29
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our Compensation and Stock Option Committee was an employee or
officer of Midway, and no officer, director or other person had any relationship
required to be disclosed here.
EMPLOYMENT AGREEMENTS
We employ Neil D. Nicastro under the terms of an Employment Agreement dated
as of July 1, 1996. The agreement was amended effective on April 6, 1998, the
date of the Spin-off. Prior to May 1, 1998, the employment agreement provided
for salaried compensation at the rate of $300,000 per year. On May 1, 1998, Mr.
Nicastro's base salary was increased to $600,000. The agreement provides for
bonus compensation in an amount equal to two percent of our pre-tax income. 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, Midway is required to
pay to Mr. Nicastro or his designee, or if no designation is made, to his
estate, for a period of seven years, an annual benefit equal to one-half of the
annual base salary being paid to him upon his retirement or death, as the case
may be, but in no event less than $150,000 per year. These 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 our business and affairs as is reasonably necessary to perform the duties of
his position. Mr. Nicastro may continue to serve as a director of and consultant
to WMS as he deems appropriate.
The employment agreement also provides that Mr. Nicastro may 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 that these expenses are not otherwise
reimbursed by insurance provided by us) and all other employee benefits and
perquisites generally made available to our employees. Additionally, we
currently provide Mr. Nicastro with $2,000,000 of life insurance coverage in
addition to the standard amount provided to our employees.
Mr. Nicastro's employment agreement further provides for full compensation
during periods of illness or incapacity. We may, however, give 30 days' notice
of termination if illness or incapacity disables Mr. Nicastro from performing
his duties for a period of more than six months. The termination notice becomes
effective if full performance is not resumed within 30 days after the notice is
given 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:
- 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;
- the treatment of Mr. Nicastro in a manner which is in derogation of his
status as a senior executive;
- the cessation of service of Mr. Nicastro as a member of our Board of
Directors;
- the discontinuance or reduction of amounts payable or personal benefits
available to Mr. Nicastro under the agreement; or
- the requirement that Mr. Nicastro work outside his agreed upon
metropolitan area.
In any such event, and in the event that we are deemed to have wrongfully
terminated Mr. Nicastro's employment agreement under the terms thereof, we are
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
28
<PAGE> 30
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 that Midway pre-tax income 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 our common stock
at a price equal to the spread between the option price and the fair market
price of the 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 Board members,
cease for any reason to constitute at least a majority of the Board. Upon such
an event, we may be required to purchase the stock options held by Mr. Nicastro
and make payments similar to those described above.
If payments made to Mr. Nicastro under the employment agreement after a
change of control are considered "excess parachute payments" under Section 280G
of the Internal Revenue Code of 1986 (the "Code"), 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. Under Section 4999 of the
Code, 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 us.
Byron C. Cook is employed by us under the terms of an employment agreement
dated as of July 1, 1998. This agreement provides for salaried compensation at
the rate of $325,000 per year, or a greater amount as may be determined by the
Board of Directors. It also provides for, among other things, full participation
in all benefit plans and perquisites generally available to executive employees.
Furthermore, the agreement states that we will negotiate in good faith with Mr.
Cook to establish performance criteria upon which an annual discretionary bonus
for Mr. Cook will be based and that we will provide Mr. Cook with $400,000 in
additional life insurance coverage. The agreement expires on June 30, 2001. We
may terminate the agreement upon 30 days' written notice for cause. We may also
terminate the agreement upon 30 days' written notice if Mr. Cook is
substantially unable to perform the duties of his position due to physical or
mental illness or injury and such illness or injury has lasted for 90 days
during any fiscal year. Mr. Cook may terminate the agreement upon 30 days'
written notice for any of the following reasons: (a) placement of Mr. Cook in a
position of lesser stature or different duties, requirements or working
conditions; (b) treatment of Mr. Cook in derogation of his senior executive
status; (c) substantial discontinuance or reduction of salary or personal
benefits available to Mr. Cook; or (d) requirement of Mr. Cook to work away from
Corsicana, Texas, other than during periods of reasonable business travel. Mr.
Cook may also terminate the agreement if the individuals who presently
constitute the Board of Directors, or successors approved by these Board
members, cease for any reason to constitute at least a majority of the Board. If
this happens, and Mr. Cook gives us notice of termination within 60 days, then
in lieu of any other rights under the agreement, all of Mr. Cook's unvested
stock options will immediately vest, and we will be required to pay him a lump
sum of three times his base salary. If any portion of the amount paid to Mr.
Cook is subject to the excise tax imposed by Section 4999 of the Code, then we
must pay additional compensation to Mr. Cook to the extent necessary to
eliminate the economic effect on him of the resulting excise tax.
Orrin J. Edidin is employed by us under the terms of an employment
agreement dated as of May 24, 1999. This agreement provides for salaried
compensation at the rate of $200,000 per year, or a greater amount as may be
determined by the Board of Directors. It also provides for, among other things,
full participation in all benefit plans and perquisites generally available to
executive employees. The agreement states that we will provide Mr. Edidin with
$400,000 in additional life insurance coverage. The agreement expires on June
30, 2002, subject to automatic extensions so that the term of Mr. Edidin's
employment shall at no time be less than three years. Either party may terminate
the agreement effective upon expiration of the term upon written notice from the
terminating party to the other party dated and received at least three years
prior to the
29
<PAGE> 31
respective termination date. We may terminate the agreement upon 30 days'
written notice for cause. Mr. Edidin may terminate the agreement if the
individuals who presently constitute the Board of Directors, or successors
approved by these Board members, cease for any reason to constitute at least a
majority of the Board. If this happens, and Mr. Edidin gives us notice of
termination within 60 days, then in lieu of any other rights under the
agreement, all of Mr. Edidin's unvested stock options will immediately vest, and
we will be required to pay him a lump sum of three times his base salary. If any
portion of the amount paid to Mr. Edidin is subject to the excise tax imposed by
Section 4999 of the Code, then we must pay additional compensation to Mr. Edidin
to the extent necessary to eliminate the economic effect on him of the resulting
excise tax.
Harold H. Bach, Jr. is employed by us under the terms of an employment
agreement dated as of May 24, 1999. This agreement provides for salaried
compensation at the rate of $315,000 per year, or a greater amount as may be
determined by the Board of Directors. It also provides for, among other things,
full participation in all benefit plans and perquisites generally available to
executive employees. The agreement expires on June 30, 2001, subject to
automatic extensions so that the term of Mr. Bach's employment shall at no time
be less than three years. We may terminate the agreement effective upon
expiration of the term upon written notice from us to Mr. Bach dated and
received at least three years prior to the termination date. We may also
terminate the agreement upon 30 days' written notice for cause. Mr. Bach may
terminate the agreement upon written notice to us dated and received at least
two years prior to the termination date. Mr. Bach may also terminate the
agreement if the individuals who presently constitute the Board of Directors, or
successors approved by these Board members, cease for any reason to constitute
at least a majority of the Board. If this happens, and Mr. Bach gives us notice
of termination within 60 days, then in lieu of any other rights under the
agreement, all of Mr. Bach's unvested stock options will immediately vest, and
we will be required to pay him a lump sum of three times his base salary. If any
portion of the amount paid to Mr. Bach is subject to the excise tax imposed by
Section 4999 of the Code, then we must pay additional compensation to Mr. Bach
to the extent necessary to eliminate the economic effect on him of the resulting
excise tax.
Kenneth J. Fedesna is employed by us under the terms of an employment
agreement dated as of June 1, 1999. This agreement provides for salaried
compensation at the rate of $325,000 per year, or a greater amount as may be
determined by the Board of Directors. It also provides for, among other things,
full participation in all benefit plans and perquisites generally available to
executive employees. The agreement states that we provide Mr. Fedesna with
$400,000 in additional life insurance coverage. The agreement expires on June
30, 2002, subject to automatic extensions so that the term of Mr. Fedesna's
employment shall at no time be less than three years. Either party may terminate
the agreement effective upon expiration of the term upon written notice from the
terminating party to the other party dated and received at least three years
prior to the respective termination date. We may terminate the agreement upon 30
days' written notice for cause. Mr. Fedesna may terminate the agreement if (a)
he is placed in a position of lesser stature; (b) he is assigned duties
significantly different from or incompatible with his position; (c) his
performance requirements or working conditions change; or (d) the business
facility at which he is required to work is relocated more than 50 miles from
our present business location. Mr. Fedesna may also terminate the agreement if
the individuals who presently constitute the Board of Directors, or successors
approved by these Board members, cease for any reason to constitute at least a
majority of the Board. If this happens, and Mr. Fedesna gives us notice of
termination within 60 days, then in lieu of any other rights under the
agreement, all of Mr. Fedesna's unvested stock options will immediately vest,
and we will be required to pay him a lump sum of three times his base salary. If
any portion of the amount paid to Mr. Fedesna is subject to the excise tax
imposed by Section 4999 of the Code, then we must pay additional compensation to
Mr. Fedesna to the extent necessary to eliminate the economic effect on him of
the resulting excise tax.
STOCK OPTION PLANS
We have adopted a 1999 Stock Option Plan, a 1998 Stock Incentive Plan, a
1998 Non-Qualified Stock Option Plan and a 1996 Stock Option Plan (collectively,
the "Plans"). The plans provide for the granting of stock options to our
directors, officers, employees, consultants and advisors. The 1998 Stock
Incentive Plan requires that participants purchase shares of our common stock at
the market price in order to be eligible to receive options. The plans are
intended to encourage stock ownership by our directors, officers, employees,
30
<PAGE> 32
consultants and advisors and thereby enhance their proprietary interest in us.
Subject to the provisions of the plans, the Compensation and Stock Option
Committee determines which of the eligible directors, officers, employees,
consultants and advisors receive stock options, the terms, including applicable
vesting periods, of the options, and the number of shares for which options are
granted.
The total number of shares of our common stock that may be purchased under
stock options under the plans shall not exceed, in the aggregate, 6,750,000
shares. The option price per share with respect to each option are determined by
the Compensation and Stock Option Committee and generally are not less than 100%
of the fair market value of our Common Stock on the date the option is granted
as determined by the Committee. The Plans each have a term of ten years, unless
terminated earlier.
At September 24, 1999, 708,000 options were outstanding under the 1999
Stock Option Plan, none of which were held by the persons named in the Summary
Compensation Table; options to purchase 2,199,063 shares of common stock were
outstanding under the 1998 Stock Incentive Plan, 1,296,180 of which were held by
the persons named in the Summary Compensation Table; options to purchase 734,696
shares of common stock were outstanding under the 1998 Non-Qualified Stock
Option Plan, 335,000 of which were held by the persons named in the Summary
Compensation Table; and options to purchase 1,942,776 shares of common stock
were outstanding under the 1996 Stock Option Plan, 815,000 of which were held by
the persons named in the Summary Compensation Table.
EXECUTIVE INCENTIVE PLAN
On August 31, 1998, we adopted an 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 these persons and other
key employees selected by the Chief Executive Officer. The EIP provides the
annual bonus award opportunities which are expressed as a percentage of the
participant's base salary. Target awards under the EIP are 50% of base salary
for business unit heads and the Chief Financial Officer and from 20% to 35% of
base salary for employees who directly report to unit business heads. The
maximum award under the EIP for any plan year is two times the target award. No
payments were accrued under the EIP for fiscal 1999. The EIP became effective as
of July 1, 1998 and expires on June 30, 2000.
Awards under the EIP are calculated based upon increases in our operating
income and that of the particular business unit as compared to previous average
earnings for the prior three-year period. Target awards are met if Midway 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.
31
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of September 24, 1999 (except
as otherwise footnoted) with respect to persons known to be the beneficial owner
of more than five percent of our common stock, each executive officer who is not
also a director, and our directors and executive officers as a group. Security
ownership of the individual directors, including those who are also executive
officers, is set forth under the heading "Identification of Directors" in Item
10(a) above.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF OUTSTANDING
COMMON STOCK COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) STOCK(1)
------------------------------------ --------------------- -------------
<S> <C> <C>
Sumner M. Redstone and National Amusements, Inc. ........... 9,618,636(2) 25.3%
200 Elm Street
Dedham, MA 02026
Michael A. Ribero(3)........................................ -- --
Orrin J. Edidin(3).......................................... 12,768 *
Directors and Executive Officers as a group (14 persons).... 2,383,203(4) 6.1%
</TABLE>
- -------------------------
* Less than 1% of the number of outstanding shares of Common Stock on
September 24, 1999.
(1) Under Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, shares
underlying options are deemed to be beneficially owned if the holder of the
option has the right to acquire the shares within 60 days. For purposes of
calculating percentage ownership, shares underlying stock options granted to
the person and exercisable within 60 days have been deemed to be
outstanding.
(2) The number of shares reported is based upon information contained in a Form
4 filed with the SEC by Sumner M. Redstone on July 9, 1999. Mr. Redstone and
National Amusements, Inc., a Maryland corporation, reported beneficial
ownership of and sole investment power with respect to 5,495,865 and
4,122,771 shares, respectively, of our 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.
(3) This person has an address c/o Midway Games Inc., 3401 North California
Avenue, Chicago, IL 60618.
(4) Includes an aggregate of 1,203,500 shares of common stock underlying stock
options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIP WITH WMS
As a result of the Spin-off, WMS does not own any of our common stock. A
majority of our directors are also directors of WMS. Additionally, several of
our executive officers are officers of WMS. See "Item 10 -- Directors and
Executive Officers of the Registrant."
We have the following agreements with WMS, all of which became effective on
April 6, 1998:
Manufacturing Agreement. Williams Electronics Games, Inc. ("WEG"), a wholly
owned subsidiary of WMS, manufactures coin-operated video games and kits for us
under this agreement. The agreement has a term of three years and will
automatically renew for successive terms of six months unless terminated (a) by
either party for any reason upon six months' notice or (b) if there is a
material default under the agreement or under the confidentiality provisions of
the Confidentiality and Non-Competition Agreement discussed below, immediately
at the election of the non-defaulting party. The agreement requires WEG to
allocate 65% of its combined production and storeroom square footage at their
Waukegan plant to perform its obligations under the agreement. We design our
coin-operated video games, including programming, graphic design, electrical
engineering, sound engineering and model shop engineering. WEG provides some
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. We supply most of the materials used in the
manufacture of coin-operated video games, but WEG supplies about 5% of the
materials which are common with materials
32
<PAGE> 34
used in the production of WMS' pinball games and charges us their cost plus 9%
for these materials. All labor costs, including fringe benefits, directly
associated with the manufacturing of coin-operated video games are charged to us
at WEG's actual cost plus 9%. The Waukegan plant's operating costs are either
identified as Company costs and charged to us or allocated as agreed between the
parties, plus 9%. The identified or allocated costs include manufacturing costs,
materials management costs, quality assurance costs and administration costs.
The plant operating costs of WEG paid by us under the agreement are increased by
9%.
Cabinet Supply Agreement. Lenc-Smith Inc. ("Lenc-Smith"), a wholly owned
subsidiary of WMS, supplies to us cabinets for coin-operated video games. The
agreement has a term of three years and will automatically renew for successive
terms 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. To initiate the purchase of video
game cabinets, we 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 is issued. Lenc-Smith ships all cabinets to WEG's Waukegan,
Illinois plant for use in the manufacture of coin-operated video games. We may
purchase cabinets from manufacturers other than Lenc-Smith if they do not meet
competitive bona-fide quotes.
Spare Parts Sales and Service Agreement. WEG sells spare parts for our
coin-operated video games. The agreement has the same term and is terminable in
the same manner as the Cabinet Supply Agreement. WEG must purchase and maintain
an adequate inventory of spare parts needed by end-users of coin-operated video
games of Midway and Atari Games. We sell and arrange for the sale of some
specialized parts to WEG. WEG purchases all other parts through its usual vendor
sources or through us at negotiated prices. We are required to refer our
customers to WEG for spare parts purchases during the term of the agreement. The
agreement does not include warranty services, which services we are required to
provide directly to our customers.
Sales Agreement. This agreement was amended as of June 15, 1999. It has the
same term and is terminable in the same manner as the Cabinet Supply Agreement.
We market, sell and field test WEG's new pinball products, coordinating and
negotiating print advertising and video presentations with third-party
advertising and media firms, and negotiating distribution and sales agency
agreements with distributors. For these services, WEG pays us $500,000 per year
or a higher amount if agreed to between the parties. Through December 31, 1999,
WEG has agreed to pay us at the rate of approximately $135,000 per month, plus a
commission of 1.5% on the first $25.0 million of annual net sales by us of WEG
products and 1.0% on annual net sales of WEG products in excess of $25.0
million. An annual budget for marketing and testing is developed and agreed upon
in advance between the parties annually and modified quarterly by mutual
agreement. Additional services that were not included in the budget are provided
at our cost plus 8.0% for payroll, overhead and expense.
Information Systems Service Agreement. This agreement has a term of three
years with successive renewal periods of 18 months and is terminable by either
party (a) upon 18 months' notice or (b) upon a material default, immediately by
the non-defaulting party. WEG provides us with access to its computer systems
for many of our computing needs, including order entry, financial and
manufacturing modules, marketing and sales and engineering (including
engineering documentation and blueprint systems) as well as support for the
computer system. WEG also coordinates the provision and maintenance of cabling,
wiring, switching components, routers and gateway and the purchasing,
maintaining and upgrading of network services for us. These services include
purchasing of desktop computers and related hardware as well as providing some
telecommunications services to us. We may also request WEG to provide services
to develop our communications networking, operating and computer system and
other related services. We pay WEG an amount equal to the cost to WEG for all
services provided plus 6.6%.
Confidentiality and Non-Competition Agreement. Under this agreement, WMS or
we may designate business information as confidential, and the other party must
use its best efforts to keep this information confidential. The agreement also
includes five year non-competition and one year post-employment non-
solicitation clauses.
33
<PAGE> 35
Right of First Refusal Agreement. WMS granted us the right of first refusal
with respect to any offer to WMS to purchase the Waukegan plant, so long as the
offer is not made in connection with the sale of substantially all of WMS' stock
or assets and business as a going concern, if WMS intends to accept the offer.
The term of the agreement expires April 5, 2008.
Third Parties Agreement. This agreement governs the treatment of the
numerous arrangements with third parties with respect to game development,
licensing and other matters. Under the agreement, WMS and we will allocate the
rights and obligations under third party arrangements so that the party
receiving the benefit will bear the burden of those agreements. The agreement
shall remain in effect so long as any prior third party arrangements remain
outstanding.
Temporary Support Services Agreement. WMS supplies a portion of our
administrative, accounting, information services and janitorial and other agreed
upon services, including the use of space by us in any WMS facility, as
requested from time to time by us. In exchange for these services, we pay WMS an
amount equal to its direct or allocated cost (including wages, salaries, fringe
benefits and materials), as indicated on monthly invoices supplied by WMS. The
agreement will continue 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 us in any WMS
facility.
Tax Separation Agreement. We have 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, Midway is jointly and
severally liable for any federal tax liability of the WMS Group. The agreement
sets forth the parties' respective liabilities for federal, state and local
taxes as well as their agreements as a result of Midway and its subsidiaries
ceasing to be members of the WMS Group. The 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 Midway, (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 Midway 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 Midway or any of its
subsidiaries. Some other tax matters are addressed in the Tax Sharing Agreement
described below.
Tax Indemnification Agreement. This agreement provides for indemnification
if the Spin-off fails to qualify under Section 355 of the Internal Revenue Code
of 1986 (the "Code"). Each of the parties agreed, among other things, that for a
period of two years after the Spin-off, each would continue active conduct of
its historic trade or business as conducted by it during the five-year period
prior to the Spin-off. We also agreed that to fund an acquisition, within one
year after the Spin-off, we 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 Internal Revenue Service ("IRS") revenue procedures; (v)
enter into any transaction or make any change in its equity structure which may
cause the Spin-off to be treated as a plan under 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 Midway, except in connection with stock issued under an employee
benefit or compensation plan, and except as described in the private letter
ruling issued in connection with the Spin-off, issue additional shares of its
capital stock, unless that party first obtains the consent of the other party
and, if applicable, the person or persons acquiring a "50 percent or greater
interest" in the party have agreed to become jointly or severally liable for
payments required to be made by that party under the Tax Indemnification
Agreement.
We will indemnify WMS with respect to any action referred to above which it
takes that causes the Spin-off 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. WMS will indemnify
34
<PAGE> 36
Midway and its subsidiaries against federal, state and local taxes, interest,
penalties and additions to tax resulting from the Spin-off, other than
liabilities for which Midway 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.
We also have the following agreements with WMS:
Tax Sharing Agreement. This agreement is dated July 1, 1996 and remains in
effect, except to the extent described in the Tax Separation Agreement referred
to above. Under this agreement, WMS and Midway have agreed upon a method for:
(i) determining the amount which Midway 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 that Midway is required
to pay to WMS for federal income taxes is determined as if Midway 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 these filings are 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 Midway would seek to
enforce any rights it may have against WMS for sharing at a time when WMS is
unable to pay its proportionate share of taxes.
Patent License Agreement. We entered into a patent license agreement dated
July 1, 1996 with WMS under which each party licensed to the other, on a
perpetual, royalty-free basis, some 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
Neil D. Nicastro, our Chairman of the Board, Chief Executive Officer,
President and Chief Operating Officer, entered into a Termination Agreement
under which Mr. Nicastro's employment with WMS was terminated effective at the
time of the Spin-off. Under that 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 us at the time of the Spin-off.
In connection with the Spin-off, WMS also entered into a consulting
agreement with Mr. Nicastro under 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 Spin-off, and is automatically renewable for
successive one year terms unless either party shall give notice of termination
not less than six months prior to the end of the term then in effect. WMS pays
Mr. Nicastro $1,000 per month for his services under the Consulting Agreement.
Mr. Ira S. Sheinfeld, a director of ours, is a member of the law firm of
Squadron, Ellenoff, Plesent & Sheinfeld LLP, which we retained to provide tax
services during fiscal 1999 and 1998, and which we propose to retain for these
services during the current fiscal year.
35
<PAGE> 37
Mr. Richard D. White, a director of ours, is a Managing Director of CIBC
Capital Partners, an affiliate of CIBC World Markets Corp., which renders
financial advisory services to us from time to time, and which was the
underwriter of our 1999 public offering of 250,000 shares of common stock and
1996 initial public offering.
Mr. Gerald O. Sweeney, Jr., a director of ours, is a member of the law firm
of Lord, Bissell & Brook which performs legal services for Midway from time to
time.
36
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. See "Index to Financial Information" on page
F-1.
(2) Financial Statement Schedule. See "Index to Financial Information"
on page F-1.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.1 to the
S-1 Registration Statement.
3.2 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Registrant, incorporated
by reference to Exhibit 2 to the Registrant's Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20,
1998 (the "8-A Registration Statement").
3.3 Form of Certificate of Designations of Series A Preferred
Stock (included as Exhibit A to Exhibit 2.1 hereof),
incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1, File No. 333-11919,
filed on September 13, 1996 (the "S-1 Registration
Statement").
3.4 Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3 to the 8-A Registration Statement.
10.1 Tax Sharing Agreement dated as of July 1, 1996 among WMS
Industries Inc., the Registrant, Midway Home Entertainment
Inc., Midway Interactive Inc., Atari Games Corporation and
Tengen Inc., incorporated by reference to Exhibit 10.2 to
the S-1 Registration Statement.
10.2 Patent License Agreement dated as of July 1, 1996 between
the Registrant and Williams Electronics Games, Inc.,
incorporated by reference to Exhibit 10.4 to the S-1
Registration Statement.
10.3 Employment Agreement dated as of July 1, 1996 between Mr.
Neil D. Nicastro and the Registrant, incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement.
10.4 1996 Stock Option Plan, incorporated by reference to Exhibit
10.7 to the S-1 Registration Statement.
10.5 Form of Indemnity Agreement authorized to be entered into
between the Registrant and each officer and director of the
Registrant, incorporated by reference to Exhibit 10.8 to the
S-1 Registration Statement.
10.6 GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated December 28, 1994,
incorporated by reference to Exhibit 10.9 to the S-1
Registration Statement.*
10.7 Amendment to GTIS Master Option and License Agreement by and
among WMS Industries Inc., Williams Electronics Games, Inc.,
the Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated March 31, 1995,
incorporated by reference to Exhibit 10.10 to the S-1
Registration Statement.*
10.8 Second Amendment to GTIS Master Option and License Agreement
by and among WMS Industries Inc., Williams Electronics
Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT InteractiveSoftware Corp. dated March 27, 1996,
incorporated by reference to Exhibit 10.11 to the S-1
Registration Statement.*
10.9 GTIS Master Option and License Agreement (Home Video Games)
by and among WMS Industries Inc., Williams Electronics
Games, Inc., the Registrant and Midway Home Entertainment
Inc., and GT Interactive Software Corp. dated March 31,
1995, incorporated by reference to Exhibit 10.12 to the S-1
Registration Statement.*
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.10 Amendment to GTIS Master Option and License Agreement (Home
Video Games) by and among WMS Industries Inc., Williams
Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated
March 27, 1996, incorporated by reference to Exhibit 10.13
to the S-1 Registration Statement.*
10.11 Master Option and License Agreement for Atari Home Video
Games dated March 27, 1996, between WMS Industries Inc. and
GT Interactive Software Corp., incorporated by reference to
Exhibit 10.14 to the S-1 Registration Statement.*
10.12 Master Option and License Agreement for Atari PC Games dated
March 27, 1996, between WMS Industries Inc. and GT
Interactive Software Corp., incorporated by reference to
Exhibit 10.15 to the S-1 Registration Statement.*
10.13 Credit Agreement (the "Credit Agreement") dated as of
October 15, 1996 between the Registrant and Bank of America
Illinois, incorporated by reference to Exhibit 10.17 to the
S-1 Registration Statement.
10.14 Letter Agreement dated October 27, 1997 between the
Registrant and Bank of America National Trust and Savings
Association (as successor to Bank of America Illinois)
extending the term of the Credit Agreement, incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1998 (the
"1998 10-K").
10.15 1998 Non-Qualified Stock Option Plan, incorporated by
reference to Exhibit 4.4(a) to the Registrant's Registration
Statement on Form S-8, filed on June 24, 1998 (File No.
333-57583).
10.16 Letter Agreement dated March 5, 1998 between the Registrant
and Mr. Neil D. Nicastro amending Mr. Nicastro's Employment
Agreement with the Company referred to in Exhibit 10.5
above, incorporated by reference to Exhibit 10.18 to the
1998 10-K.
10.17 Third Amendment to GTIS Master Option and License Agreement
among the Registrant, Midway Home Entertainment Inc. and GT
Interactive Software Corp. dated March 12, 1998,
incorporated by reference to Exhibit 10.19 to the 1998
10-K.**
10.18 First Amendment to Master Option and License Agreement for
Atari PC Games dated March 12, 1998 between the Registrant
and GT Interactive Software Corp., incorporated by reference
to Exhibit 10.20 to the 1998 10-K.**
10.19 Letter Agreement dated March 12, 1998 among WMS Industries
Inc., the Registrant, Midway Home Entertainment Inc.,
Williams Electronics Games, Inc. and GT Interactive Software
Corp., incorporated by reference to Exhibit 10.21 to the
1998 10-K.
10.20 Letter Agreement dated March 12, 1998 among the Registrant,
Midway Home Entertainment Inc., Atari Games Corporation and
GT Interactive Software Corp., incorporated by reference to
Exhibit 10.22 to the 1998 10-K.**
10.21 Manufacturing Agreement dated as of April 6, 1998 between
Williams Electronics Games, Inc. and the Registrant and the
Guaranty of the obligations of Williams Electronics Games,
Inc. thereunder by WMS Industries Inc., incorporated by
reference to Exhibit 10.23 to the 1998 10-K.
10.22 Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and the Registrant, incorporated by
reference to Exhibit 10.24 to the 1998 10-K.
10.23 Spare Parts Sales and Service Agreement dated as of April 6,
1998 among Williams Electronics Games, Inc., the
Registration and Atari Games Corporation, incorporated by
reference to Exhibit 10.25 to the 1998 10-K.
10.24 Sales Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and the Registrant, (the "Sales
Agreement") incorporated by reference to Exhibit 10.26 to
the 1998 10-K.
10.25 Information Systems Service Agreement dated as of April 6,
1998 between Williams Electronics Games, Inc. and the
Registrant, incorporated by reference to Exhibit 10.27 to
the 1998 10-K.
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.26 Confidentiality and Non-Competition Agreement dated as of
April 6, 1998 between WMS Industries Inc. and the
Registrant, incorporated by reference to Exhibit 10.28 to
the 1998 10-K.
10.27 Right of First Refusal Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant, incorporated
by reference to Exhibit 10.29 to the 1998 10-K.
10.28 Third Parties Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant, incorporated by
reference to Exhibit 10.30 to the 1998 10-K.
10.29 Temporary Support Services Agreement dated as of April 6,
1998 between WMS Industries Inc. and the Registrant,
incorporated by reference to Exhibit 10.31 to the 1998 10-K.
10.30 Tax Separation Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant, incorporated by
reference to Exhibit 10.32 to the 1998 10-K.
10.31 Tax Indemnification Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant, incorporated
by reference to Exhibit 10.33 to the 1998 10-K.
10.32 Executive Incentive Plan, adopted August 31, 1998,
incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.33 1998 Stock Incentive Plan, incorporated by reference to
Exhibit 4.5(a) to the Registrant's Registration Statement on
Form S-8, filed on December 4, 1998 (File No. 333-68373).
10.34 1999 Stock Option Plan, incorporated by reference to Exhibit
4.6(a) to the Registrant's Registration Statement on Form
S-8, filed on March 5, 1999 (File No. 333-73451).
10.35 Amendment No. 1, dated November 1, 1998, to the Credit
Agreement, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (the "3/31/99 10-Q").
10.36 Employment Agreement dated as of July 1, 1998 between Byron
C. Cook and the Registrant, incorporated by reference to
Exhibit 10.2 to the 3/31/99 10-Q.
10.37 Amended and Restated Employment Agreement dated as of May
24, 1999 between Harold H. Bach, Jr. and the Registrant.
10.38 Employment Agreement dated as of May 24, 1999 between Orrin
J. Edidin and the Registrant.
10.39 Employment Agreement dated as of June 1, 1999 between
Kenneth J. Fedesna and the Registrant.
10.40 Letter agreement dated June 15, 1999 amending the Sales
Agreement, incorporated by reference to Exhibit 99.5 to
Midway's Registration Statement on Form S-3, filed on July
16, 1999 (File No. 333-83021).
10.41 Settlement Agreement among the Registrant, GT Interactive
and others, dated August 16, 1999.
13 Portions of 1999 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- -------------------------
* Portions of this exhibit have been omitted under an order of the SEC granting
confidential treatment under Rule 406 under the Securities Act of 1933.
** Portions of this exhibit have been omitted under an order of the SEC granting
confidential treatment under Rule 24b-2 under the Securities Exchange Act of
1934.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed in the fourth quarter of fiscal 1999.
39
<PAGE> 41
MIDWAY GAMES INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Financial Statements and Financial Statement Schedule.......
Report of independent auditors.............................. F-2
Consolidated Balance Sheets at June 30, 1999 and June 30,
1998...................................................... *
Consolidated Statements of Income for the years ended June
30, 1999, 1998 and 1997................................... *
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997.......... *
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997.............................. *
Notes to Financial Statements............................... *
Financial Statements Schedule II -- Valuation and Qualifying
Accounts for the years ended June 30, 1999, 1998 and
1997...................................................... F-3
</TABLE>
- -------------------------
* Incorporated by reference to the portions of our 1999 Annual Report to
Stockholders filed as Exhibit 13 to this Form 10-K.
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
F-1
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Midway Games Inc.
We have audited the consolidated financial statements of Midway Games Inc.
and subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K of
Midway Games Inc. for the year ended June 30, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). The financial
statements and related schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and related schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related schedule
are free of material misstatements. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Midway Games
Inc. and subsidiaries at June 30, 1999 and 1998, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
June 30, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 25, 1999
F-2
<PAGE> 43
MIDWAY GAMES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- --------------------- ------------------- ----------------------------------- ------------------ -------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS-AMOUNTS BALANCE AT
DESCRIPTION BEGINNING OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS WRITTEN OFF END OF PERIOD
----------- ------------------- ------------------ -------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Allowance for
receivables:
1999................. $7,017,000 $12,668,000 $ -- $14,731,000 $4,954,000
1998................. $4,940,000 $16,872,000 $ -- $14,795,000 $7,017,000
1997................. $ 995,000 $14,586,000 $ -- $10,641,000 $4,940,000
</TABLE>
F-3
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
24th day of September, 1999.
MIDWAY GAMES INC.
By: /s/ NEIL D. NICASTRO
------------------------------------
Neil D. Nicastro
Chairman of the Board, President,
Chief Executive Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ NEIL D. NICASTRO Chairman of the Board, President, September 24, 1999
---------------------------------------- Chief Executive Officer and Chief
Neil D. Nicastro Operating Officer (Principal
Executive Officer) and Director
/s/ HAROLD H. BACH, JR. Executive Vice President -- Finance, September 24, 1999
---------------------------------------- Treasurer and Chief Financial Officer
Harold H. Bach, Jr. (Principal Financial and Principal
Accounting Officer) and Director
/s/ BYRON C. COOK Executive Vice President -- Home September 24, 1999
---------------------------------------- Video and Director
Byron C. Cook
/s/ KENNETH J. FEDESNA Executive Vice President -- Coin-Op September 24, 1999
---------------------------------------- Video and Director
Kenneth J. Fedesna
/s/ LOUIS J. NICASTRO Director September 24, 1999
----------------------------------------
Louis J. Nicastro
/s/ WILLIAM C. BARTHOLOMAY Director September 24, 1999
----------------------------------------
William C. Bartholomay
/s/ WILLIAM E. MCKENNA Director September 24, 1999
----------------------------------------
William E. McKenna
/s/ NORMAN J. MENELL Director September 24, 1999
----------------------------------------
Norman J. Menell
/s/ HARVEY REICH Director September 24, 1999
----------------------------------------
Harvey Reich
/s/ IRA S. SHEINFELD Director September 24, 1999
----------------------------------------
Ira S. Sheinfeld
/s/ RICHARD D. WHITE Director September 24, 1999
----------------------------------------
Richard D. White
/s/ GERALD O. SWEENEY, JR. Director September 24, 1999
----------------------------------------
Gerald O. Sweeney, Jr.
</TABLE>
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.1 to the S-1
Registration Statement.
3.2 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the Registrant, incorporated by reference to
Exhibit 2 to the Registrant's Registration Statement on Form
8-A/A, Amendment No. 1, filed on April 20, 1998 (the "8-A
Registration Statement").
3.3 Form of Certificate of Designations of Series A Preferred Stock
(included as Exhibit A to Exhibit 2.1 hereof), incorporated by
reference to Exhibit 2.2 to the Registrant's Registration
Statement on Form S-1, File No. 333-11919, filed on September
13, 1996 (the "S-1 Registration Statement").
3.4 Amended and Restated By-laws of the Registrant, incorporated by
reference to Exhibit 3 to the 8-A Registration Statement.
10.1 Tax Sharing Agreement dated as of July 1, 1996 among WMS
Industries Inc., the Registrant, Midway Home Entertainment Inc.,
Midway Interactive Inc., Atari Games Corporation and Tengen
Inc., incorporated by reference to Exhibit 10.2 to the S-1
Registration Statement.
10.2 Patent License Agreement dated as of July 1, 1996 between the
Registrant and Williams Electronics Games, Inc., incorporated by
reference to Exhibit 10.4 to the S-1 Registration Statement.
10.3 Employment Agreement dated as of July 1, 1996 between Mr. Neil
D. Nicastro and the Registrant, incorporated by reference to
Exhibit 10.5 to the S-1 Registration Statement.
10.4 1996 Stock Option Plan, incorporated by reference to Exhibit
10.7 to the S-1 Registration Statement.
10.5 Form of Indemnity Agreement authorized to be entered into
between the Registrant and each officer and director of the
Registrant, incorporated by reference to Exhibit 10.8 to the S-1
Registration Statement.
10.6 GTIS Master Option and License Agreement by and among WMS
Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated December 28, 1994, incorporated
by reference to Exhibit 10.9 to the S-1 Registration Statement.*
10.7 Amendment to GTIS Master Option and License Agreement by and
among WMS Industries Inc., Williams Electronics Games, Inc., the
Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated March 31, 1995, incorporated by
reference to Exhibit 10.10 to the S-1 Registration Statement.*
10.8 Second Amendment to GTIS Master Option and License Agreement by
and among WMS Industries Inc., Williams Electronics Games, Inc.,
the Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated March 27, 1996, incorporated by
reference to Exhibit 10.11 to the S-1 Registration Statement.*
10.9 GTIS Master Option and License Agreement (Home Video Games) by
and among WMS Industries Inc., Williams Electronics Games, Inc.,
the Registrant and Midway Home Entertainment Inc., and GT
Interactive Software Corp. dated March 31, 1995, incorporated by
reference to Exhibit 10.12 to the S-1 Registration Statement.*
10.10 Amendment to GTIS Master Option and License Agreement (Home
Video Games) by and among WMS Industries Inc., Williams
Electronics Games, Inc., the Registrant and Midway Home
Entertainment Inc., and GT Interactive Software Corp. dated
March 27, 1996, incorporated by reference to Exhibit 10.13 to
the S-1 Registration Statement.*
</TABLE>
<PAGE> 46
<TABLE>
<S> <C>
10.11 Master Option and License Agreement for Atari Home Video Games
dated March 27, 1996, between WMS Industries Inc. and GT
Interactive Software Corp., incorporated by reference to Exhibit
10.14 to the S-1 Registration Statement.*
10.12 Master Option and License Agreement for Atari PC Games dated
March 27, 1996, between WMS Industries Inc. and GT Interactive
Software Corp., incorporated by reference to Exhibit 10.15 to
the S-1 Registration Statement.*
10.13 Credit Agreement (the "Credit Agreement") dated as of October
15, 1996 between the Registrant and Bank of America Illinois,
incorporated by reference to Exhibit 10.17 to the S-1
Registration Statement.
10.14 Letter Agreement dated October 27, 1997 between the Registrant
and Bank of America National Trust and Savings Association (as
successor to Bank of America Illinois) extending the term of the
Credit Agreement, incorporated by reference to Exhibit 10.16 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998 (the "1998 10-K").
10.15 1998 Non-Qualified Stock Option Plan of the Registrant,
incorporated by reference to Exhibit 4.4(a) to the Registrant's
Registration Statement on Form S-8, filed on June 24, 1998 (File
No. 333-57583).
10.16 Letter Agreement dated March 5, 1998 between the Registrant and
Mr. Neil D. Nicastro amending Mr. Nicastro's Employment
Agreement with the Company referred to in Exhibit 10.5 above,
incorporated by reference to Exhibit 10.18 to the 1998 10-K.
10.17 Third Amendment to GTIS Master Option and License Agreement
among the Registrant, Midway Home Entertainment Inc. and GT
Interactive Software Corp. dated March 12, 1998, incorporated by
reference to Exhibit 10.19 to the 1998 10-K.**
10.18 First Amendment to Master Option and License Agreement for Atari
PC Games dated March 12, 1998 between the Registrant and GT
Interactive Software Corp, incorporated by reference to Exhibit
10.20 to the 1998 10-K.**
10.19 Letter Agreement dated March 12, 1998 among WMS Industries Inc.,
the Registrant, Midway Home Entertainment Inc., Williams
Electronics Games, Inc. and GT Interactive Software Corp,
incorporated by reference to Exhibit 10.21 to the 1998 10-K.
10.20 Letter Agreement dated March 12, 1998 among the Registrant,
Midway Home Entertainment Inc., Atari Games Corporation and GT
Interactive Software Corp, incorporated by reference to Exhibit
10.22 to the 1998 10-K.**
10.21 Manufacturing Agreement dated as of April 6, 1998 between
Williams Electronics Games, Inc. and the Registrant and the
Guaranty of the obligations of Williams Electronics Games, Inc.
thereunder by WMS Industries Inc., incorporated by reference to
Exhibit 10.23 to the 1998 10-K.
10.22 Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and the Registrant, incorporated by reference to
Exhibit 10.24 to the 1998 10-K.
10.23 Spare Parts Sales and Service Agreement dated as of April 6,
1998 among Williams Electronics Games, Inc., the Registration
and Atari Games Corporation, incorporated by reference to
Exhibit 10.25 to the 1998 10-K.
10.24 Sales Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and the Registrant (the "Sales
Agreement"), incorporated by reference to Exhibit 10.26 to the
1998 10-K.
10.25 Information Systems Service Agreement dated as of April 6, 1998
between Williams Electronics Games, Inc. and the Registrant,
incorporated by reference to Exhibit 10.27 to the 1998 10-K.
10.26 Confidentiality and Non-Competition Agreement dated as of April
6, 1998 between WMS Industries Inc. and the Registrant,
incorporated by reference to Exhibit 10.28 to the 1998 10-K.
</TABLE>
<PAGE> 47
<TABLE>
<S> <C>
10.27 Right of First Refusal Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant, incorporated by
reference to Exhibit 10.29 to the 1998 10-K.
10.28 Third Parties Agreement dated as of April 6, 1998 between WMS
Industries Inc. and the Registrant, incorporated by reference to
Exhibit 10.30 to the 1998 10-K.
10.29 Temporary Support Services Agreement dated as of April 6, 1998
between WMS Industries Inc. and the Registrant, incorporated by
reference to Exhibit 10.31 to the 1998 10-K.
10.30 Tax Separation Agreement dated as of April 6, 1998 between WMS
Industries Inc. and the Registrant, incorporated by reference to
Exhibit 10.32 to the 1998 10-K.
10.31 Tax Indemnification Agreement dated as of April 6, 1998 between
WMS Industries Inc. and the Registrant, incorporated by
reference to Exhibit 10.33 to the 1998 10-K.
10.32 Executive Incentive Plan, adopted August 31, 1998, incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
10.33 1998 Stock Incentive Plan, incorporated by reference to Exhibit
4.5(a) to the Registrant's Registration Statement on Form S-8,
filed on December 4, 1998 (File No. 333-68373).
10.34 1999 Stock Option Plan, incorporated by reference to Exhibit
4.6(a) to the Registrant's Registration Statement on Form S-8,
filed on March 5, 1999 (File No. 333-73451).
10.35 Amendment No. 1, dated November 1, 1998, to the Credit
Agreement, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (the "3/31/99 10-Q").
10.36 Employment Agreement dated as of July 1, 1998 between Byron C.
Cook and the Registrant, incorporated by reference to Exhibit
10.2 to the 3/31/99 10-Q.
10.37 Amended and Restated Employment Agreement dated as of May 24,
1999 between Harold H. Bach, Jr. and the Registrant.
10.38 Employment Agreement dated as of May 24, 1999 between Orrin J.
Edidin and the Registrant.
10.39 Employment Agreement dated as of June 1, 1999 between Kenneth J.
Fedesna and the Registrant.
10.40 Letter agreement dated June 15, 1999 amending the Sales
Agreement, incorporated by reference to Exhibit 99.5 to Midway's
Registration Statement on Form S-3, filed on July 16, 1999 (File
No. 333-83021).
10.41 Settlement Agreement among the Registrant, GT Interactive and
others, dated August 16, 1999.
13 Portions of 1999 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
- -------------
* Portions of this exhibit have been omitted under an order of the SEC
granting confidential treatment under Rule 406 under the Securities Act of
1933.
** Portions of this exhibit have been omitted under an order of the SEC
granting confidential treatment under Rule 24b-2 under the Securities
Exchange Act of 1934.
<PAGE> 1
EXHIBIT 10.37
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") made as
of the 24th day of May, 1999, by and between MIDWAY GAMES INC., a Delaware
corporation (the "Corporation"), and HAROLD H. BACH, JR. ("Executive").
W I T N E S S E T H:
WHEREAS, Executive is employed as the Executive Vice President - Finance,
Treasurer and Chief Financial Officer of the Corporation pursuant to that
certain Executive Employment Agreement dated as of July 1, 1998; and
WHEREAS, the parties desire to amend and restate in its entirety such
agreement; and
WHEREAS, the Corporation desires to employ Executive and Executive is
willing to undertake such employment on the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT; DUTIES. The Corporation hereby employs Executive to perform
such duties on behalf of the Corporation and its affiliates as the President or
the Board of Directors of the Corporation may from time to time determine
relating to financial, accounting and other matters appropriate for a senior
executive of the Corporation. During Executive's employment hereunder he shall
not be required to move his place of residence from the Chicago, Illinois
metropolitan area.
2. ACCEPTANCE AND LOYALTY. Executive hereby accepts such employment and
agrees that throughout the period of his employment hereunder, he will devote
his full time, attention, knowledge and skills, faithfully, diligently and to
the best of his ability, in furtherance of the business of the Corporation and
will perform the duties assigned to him pursuant to Section 1 hereof. Executive
shall perform all duties and responsibilities in a professional manner
consistent with the skill, competence and efficiency expected of an executive
employee performing the duties assigned to Executive and subject to the
direction and control of the President and the Board of Directors of the
Corporation. Executive will do such traveling as may be reasonably required of
him in the performance of his obligations hereunder. Executive shall at all
times be subject to,
<PAGE> 2
observe and carry out such rules, regulations, policies, directions and
restrictions as the Corporation shall from time to time establish. During his
employment hereunder, Executive shall not, without the written approval of the
President or the Board of Directors of the Corporation first had and obtained in
each instance, directly or indirectly, accept employment or compensation from or
perform services of any nature for, any business enterprise other than the
Corporation or any of its subsidiaries or affiliates except that Executive may
continue to perform services to WMS Industries Inc. ("WMS") for such period as
shall be mutually agreeable to the Corporation, WMS and Executive. During
Executive's employment hereunder, Executive shall not be entitled to additional
compensation for serving in any office, including as a director, of the
Corporation or any of its subsidiaries or affiliates to which he may be elected.
3. TERM. The term of Executive's employment hereunder shall commence on the
date hereof and terminate on June 30, 2001 (the "Original Term"); provided,
however, that the term of Executive's employment shall be deemed automatically
extended from time to time such that the term of such employment, unless
terminated by Executive as set forth below in this Section 3, shall at no time
be less than three years (the "Extended Term"). Executive's services hereunder
may be terminated by the Corporation (i) effective upon expiration of the
Original Term or the Extended Term upon written notice from the Corporation to
the Executive dated and received at least three years prior to the termination
date or (ii) effective upon 30 days' prior written notice if such termination is
for "cause" as defined in subsection 8.3 of this Agreement. Executive's services
hereunder may be terminated by Executive upon written notice from Executive to
the Corporation dated and received at least two years prior to the termination
date. The Original Term and the Extended Term are hereafter collectively
referred to as the "Term" and each year of the Term is hereafter referred to as
an "Employment Year."
4. COMPENSATION AND BENEFITS.
4.1 The Corporation shall pay to Executive as compensation for his
services and agreements hereunder a base salary at the rate of $315,000 per
annum, or such greater amount as the Board of Directors of the Corporation shall
from time to time determine. Base salary shall be payable in equal installments
in accordance with the Corporation's normal payroll policy, subject to payroll
taxes and withholding requirements.
4.2 Executive shall be entitled to participate, to the extent he is
eligible under the terms and conditions thereof, in any bonus, pension,
retirement, disability, hospitalization, insurance, medical service, or other
employee benefit plan which is generally available to executive employees of the
Corporation and which may be in effect from time to time during the period of
his employment hereunder, including the Exec-U-Care insurance program. The
Corporation shall be under no obligation to institute or continue the existence
of any such employee benefit plan.
5. BUSINESS EXPENSES. The Corporation shall reimburse Executive for all
authorized expenses reasonably incurred by him in accordance with the
Corporation's "Travel and Entertainment Policy and Procedure," and any
amendments thereof that the Corporation may adopt during the Term hereof.
-2-
<PAGE> 3
6. VACATION. Executive shall be entitled to four weeks paid vacation during
each Employment Year. Any such vacations are to be taken at times mutually
agreeable to Executive and the President of the Corporation. Vacation time shall
not be accumulated from year to year, unless Executive is requested by the
President of the Corporation to forego a vacation during any Employment Year.
7. KEY-MAN LIFE INSURANCE. The Corporation may purchase and maintain life
insurance covering the life of Executive ("Key-man Insurance") in an amount
determined by the Corporation. The Corporation shall be the sole owner and
beneficiary of the Key-man Insurance and may apply to the payment of premiums
thereunder any dividends declared and paid thereon. Executive shall submit
himself to such physical examinations as the President of the Corporation may
deem necessary or desirable in connection with the purchase and maintenance of
the Key-man Insurance.
8. NON-COMPETITION AND NON-RAIDING. In consideration of the Corporation's
entering into this Agreement:
8.1 Executive agrees that during the Term hereof and for a period of
one year after termination for "cause" or after Executive terminates his
employment without the written consent of the Corporation, he will not, directly
or indirectly, without the prior written consent of the Corporation, own,
manage, operate, join, control, participate in, perform any services for, invest
in, or otherwise be connected with, in any manner, whether as an officer,
director, employee, consultant, partner, investor or otherwise, any business
entity which is engaged in the design, importation, manufacture and/or sale of
coin-operated video games, home video games or any business entity which is
engaged in any other business in which the Corporation or any affiliate of the
Corporation is engaged. Nothing herein contained shall be deemed to prohibit
Executive from investing his funds in securities of a company if the securities
of such company are listed for trading on a national stock exchange or traded in
the over-the-counter market and Executive's holdings therein represent less than
five percent of the total number of shares or principal amount of other
securities of such company outstanding.
8.2 Executive agrees that during the Term hereof and for a period of
one year thereafter, he will not, directly or indirectly, without the prior
written consent of the Corporation, induce or influence, or seek to induce or
influence, any person who is engaged by the Corporation or any affiliate of the
Corporation as an employee, agent, independent contractor or otherwise, to
terminate his employment or engagement, nor shall Executive directly or
indirectly, through any other person, firm or corporation, employ or engage, or
solicit for employment or engagement, or advise or recommend to any other person
or entity that such person or entity employ or engage or solicit for employment
or engagement, any person or entity employed or engaged by the Corporation or
any affiliate of the Corporation.
8.3 For purposes of this Agreement, "cause" means (i) conviction
(pursuant to a final or non-appealable judgment) of a felony or any other
crime involving fraud, larceny or dishonesty; (ii) failure and refusal to follow
a reasonable direction of the Chief Executive Officer, the President or the
Board of Directors of the Corporation after notice in writing of such failure or
-3-
<PAGE> 4
refusal and a cure period of ten days thereafter; or (iii) commission of any
dishonest, willful or grossly negligent act which has or is reasonably likely to
have a material adverse effect on the Corporation or its customer or trade
relationships.
8.4 In the event that Executive is terminated for reasons other than
"cause," then, for such period (not to exceed one year after termination)
as the Corporation either continues to pay the Executive's base salary to him or
has made a lump-sum payment to him pursuant to Section 12 hereof, Executive
agrees that he will not, directly or indirectly, without the prior written
consent of the Corporation, take any of the actions prohibited under subsection
8.1 of this Agreement.
8.5 Executive acknowledges that the provisions of this Paragraph 8 are
reasonable and necessary for the protection of the Corporation. In the event
that any provision of this Paragraph 8, including any sentence, clause or part
hereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall not
be affected, but shall, subject to the discretion of such court, remain in full
force and effect and any invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same valid and enforceable.
9. CONFIDENTIALITY AGREEMENT.
9.1 As used herein, the term "Confidential Information" shall mean
any and all information of the Corporation and of its affiliates (for purposes
of this paragraph, the Corporation's affiliates shall be deemed included within
the meaning of "Corporation"), including, but not limited to, all data,
compilations, programs, devices, strategies, or methods concerning or related to
(i) the Corporation's finances, financial condition, results of operations,
employee relations, amounts of compensation paid to officers and employees and
any other data or information relating to the internal affairs of the
Corporation and its operations; (ii) the terms and conditions (including prices)
of sales and offers of sales of the Corporation's products and services; (iii)
the terms, conditions and current status of the Corporation's agreements and
relationship with any customer or supplier; (iv) the customer and supplier lists
and the identities and business preferences of the Corporation's actual and
prospective customers and suppliers or any employee or agent thereof with whom
the Corporation communicates; (v) the trade secrets, manufacturing and operating
techniques, price data, costs, methods, systems, plans, procedures, formulas,
processes, hardware, software, machines, inventions, designs, drawings, artwork,
blueprints, specifications, tools, skills, ideas, and strategic plans possessed,
developed, accumulated or acquired by the Corporation; (vi) any communications
between the Corporation, its officers, directors, stockholders, or employees,
and any attorney retained by the Corporation for any purpose, or any person
retained or employed by such attorney for the purpose of assisting such attorney
in his or her representation of the Corporation; (vii) any other information and
knowledge with respect to all products developed or in any stage of development
by the Corporation; (viii) the abilities and specialized training or experience
of others who as employees or consultants of the Corporation during the Term
hereof have engaged in the design or development of any such products; and (ix)
any other matter or thing, whether or not recorded on any medium, (a) by which
the Corporation derives actual or potential economic value from such matter or
thing being not generally known to other persons or entities who might obtain
-4-
<PAGE> 5
economic value from its disclosure or use, or (b) which gives the Corporation an
opportunity to obtain an advantage over its competitors who do not know or use
the same.
9.2 Executive acknowledges and agrees that the Corporation is
engaged in highly competitive businesses and has expended, or will expend,
significant sums of money and has invested, or will invest, a substantial amount
of time to develop and maintain the secrecy of the Confidential Information. The
Corporation has thus obtained, or will obtain, a valuable economic asset which
has enabled, or will enable, it to develop an extensive reputation and to
establish long-term business relationships with its suppliers and customers. If
such Confidential Information were disclosed to another person or entity or used
for the benefit of anyone other than the Corporation, the Corporation would
suffer irreparable harm, loss and damage. Accordingly, Executive acknowledges
and agrees that, unless the Confidential Information becomes publicly known
through legitimate origins not involving an act or omission by Executive:
(i) the Confidential Information is, and at all times hereafter
shall remain, the sole property of the Corporation;
(ii) Executive shall use his best efforts and the utmost
diligence to guard and protect the Confidential Information from
disclosure to any competitor, customer or supplier of the Corporation
or any other person, firm, corporation or other entity;
(iii) unless the Corporation gives Executive prior express
written permission, during his employment and thereafter, Executive
shall not use for his own benefit, or divulge to any competitor or
customer or any other person, firm, corporation, or other entity, any
of the Confidential Information which Executive may obtain, learn
about, develop or be entrusted with as a result of Executive's
employment by the Corporation; and
(iv) except in the ordinary course of the Corporation's business,
Executive shall not seek or accept any Confidential Information from
any former, present or future employee of the Corporation.
9.3 Executive also acknowledges and agrees that all documentary
and tangible Confidential Information including, without limitation, such
Confidential Information as Executive has committed to memory, is supplied or
made available by the Corporation to the Executive solely to assist him in
performing his services under this Agreement. Executive further agrees that
after his employment with the Corporation is terminated for any reason:
(i) Executive shall not remove from the property of the
Corporation and shall immediately return to the Corporation, all
documentary or tangible Confidential Information in his possession,
custody, or control and not make or keep any copies, notes, abstracts,
-5-
<PAGE> 6
summaries, tapes or other record of any type of Confidential
Information; and
(ii) Executive shall immediately return to the Corporation any
and all other property of the Corporation in his possession, custody
or control, including, without limitation, any and all keys, security
cards, passes, credit cards and marketing literature.
10. INVENTION DISCLOSURE. Any invention, improvement, design, development
or discovery conceived, developed, created or made by Executive alone or with
others, during the period of his employment hereunder and applicable to the
business of the Corporation or its affiliates, whether or not patentable or
registrable, shall become the sole and exclusive property of the Corporation.
Executive hereby assigns to the Corporation, all of his rights to any
"intellectual material" created or developed by him during the course of his
employment. As used herein, "intellectual material" shall include, but shall not
be limited to, ideas, titles, themes, production ideas, methods of presentation,
artistic renderings, sketches, plots, music, lyrics, dialogue, phrases, slogans,
catch words, characters, names and similar literary, dramatic and musical
material, trade names, trademarks and service marks and all copyrightable
expressions in audio visual works, computer software, electronic circuitry and
all mask works for integrated circuits. Executive shall disclose the
intellectual material promptly and completely to the Corporation and shall,
during the period of his employment hereunder and at any time and from time to
time hereafter (a) execute all documents requested by the Corporation for
vesting in the Corporation or any of its affiliates the entire right, title and
interest in and to the same, (b) execute all documents requested by the
Corporation for filing and prosecuting such applications for patents, trademarks
and/or copyrights as the Corporation, in its sole discretion, may desire to
prosecute, and (c) give the Corporation all assistance it reasonably requires,
including the giving of testimony in any suit, action or proceeding, in order to
obtain, maintain and protect the Corporation's right therein and thereto. If any
such assistance is required following the termination of this Agreement, the
Corporation shall reimburse Executive for his time and the reasonable expenses
incurred by him in rendering such assistance. Anything contained in this
paragraph to the contrary notwithstanding, this paragraph does not apply to an
invention for which no equipment, supplies, facilities, or trade secret
information of the Corporation or its affiliates was used and which was
developed entirely on the Executive's own time, unless (d) the invention
relates: (i) to the business of the Corporation or its affiliates, or (ii) to
the Corporation's or any of its affiliates' actual or demonstrably anticipated
research or development, or (e) the invention results from any work performed by
the Executive for the Corporation or its affiliates.
11. REMEDIES. Executive acknowledges and agrees that the business of the
Corporation is highly competitive and that violation of any of the covenants
provided for in Paragraphs 8, 9 and 10 of this Agreement would cause immediate,
immeasurable and irreparable harm, loss and damage to the Corporation not
adequately compensable by a monetary award. Accordingly, Executive agrees,
without limiting any of the other remedies available to the Corporation, that
any violation of said covenants, or any one of them, may be enjoined or
restrained by any court of competent jurisdiction, and that any temporary
restraining order or emergency, preliminary or final injunctions may be issued
by any court of competent jurisdiction, without notice and without bond. In the
event
-6-
<PAGE> 7
any proceedings are commenced by the Corporation against Executive for any
actual or threatened violation of any of said covenants and if the Corporation
prevails in such litigation, then, Executive shall be liable to the Corporation
for, and shall pay to the Corporation, all costs and expenses of any kind,
including reasonable attorneys' fees, which the Corporation may incur in
connection with such proceedings.
12. CHANGE OF CONTROL.
12.1 If at any time during the term of this Agreement, individuals who
presently constitute the Board of Directors of the Corporation, or who have been
recommended for election to the Board by two-thirds of the Board consisting of
individuals who are either presently on the Board or such recommended successors
cease for any reason to constitute at least a majority of such Board (such event
being hereafter referred to as a "Change of Control") and Executive gives
written notice to the Corporation within 60 days after such Change of Control of
his election to terminate his employment hereunder, the Corporation shall pay to
Executive within 15 days after Executive's delivery of such notice, as severance
pay and liquidated damages, in lieu of any other rights or remedies which might
otherwise be available to him under this Agreement, and without mitigation of
any kind or amount, whether or not Executive shall seek or accept other
employment, a lump sum payment equal in amount three times the annual base
salary payable to Executive pursuant to subsection 4.1 of this Agreement. In
addition, all unexpired options to purchase securities of the Corporation
granted to Executive before the Change of Control shall, if unvested, vest fully
on the date of the Change of Control, notwithstanding any vesting provisions of
such options. The payments provided for in this Section 12 shall be paid in
full, without discount to present value.
12.2 If it shall be determined that any amount payable under Section
12.1 by the Corporation to or for the benefit of Executive (a "Base Payment")
would be subject to the excise tax (the "Excise Tax") imposed by Section
4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then
Executive shall be entitled to receive an additional payment (the "Gross-Up
Payment") in an amount such that the net amount retained by Executive, after the
calculation and deduction of any Excise Tax on the Base Payment shall be equal
to the Base Payment, less any federal, state and local income taxes. The
Gross-Up Payment shall be reduced by income or Excise Tax withholding payments
made by the Corporation to any federal, state, or local taxing authority with
respect to the Gross-Up Payment that was not deducted from compensation payable
to the Executive. All determinations required to be made under this Section
12.2, including whether and when a Gross-Up Payment is required, the amount of
such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determination, except as specified above, shall be made by the Corporation's
auditors (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Corporation and Executive within fifteen business days
after the receipt of notice from Executive that there should be a Gross-Up
Payment. The determination of tax liability made by the Accounting Firm shall be
subject to review by Executive's tax advisor, and, if Executive's tax advisor
does not agree with the determination reached by the Accounting Firm, then the
Accounting Firm and Executive's tax advisor shall jointly designate a nationally
recognized public accounting firm, which shall make the determination. All fees
and expenses of the accountants retained by the Corporation or jointly
designated and retained shall be borne by the Corporation. Any determination by
a jointly designated public accounting firm shall be binding upon the
Corporation and Executive.
-7-
<PAGE> 8
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties hereto with respect to Executive's employment with the Company and
no amendment or modification hereof shall be valid or binding unless made in
writing and signed by the party against whom enforcement thereof is sought. All
prior agreements relating to Executive's employment with the Company or WMS or
any affiliate of the Company or WMS are hereby terminated and of no further
force and effect.
14. NOTICES. Any notice required, permitted or desired to be given pursuant
to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or sent by
telephone facsimile or sent by certified mail, return receipt requested, or sent
by responsible overnight delivery service, postage and fees prepaid, to the
parties hereto at their respective addresses set forth below. Either of the
parties hereto may at any time and from time to time change the address to which
notice shall be sent hereunder by notice to the other party given under this
Section 14. The date of the giving of any notice sent by mail shall be three
business days following the date of the posting of the mail, if delivered in
person, the date delivered in person, if sent by overnight delivery service, the
next business day following delivery to an overnight delivery service or if sent
by telephone facsimile, the date sent by telephone facsimile.
If to the Corporation:
3401 North California Avenue
Chicago, IL 60618
Facsimile: 312-961-1099
Attn: Mr. Neil D. Nicastro, President
If to Executive:
1555 Astor Street, Unit 24W
Chicago, IL 60610
15. No Assignment. Neither this Agreement nor the right to receive any
payments hereunder may be assigned by Executive. This Agreement shall be binding
upon Executive, his heirs, executors and administrators and upon the
Corporation, its successors and assigns.
16. No Waiver. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
17. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the substantive laws of the State of Illinois
applicable to agreements entered into and to be performed entirely therein.
18. Severability. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any arbitrator or court of competent jurisdiction, such provision
shall be ineffective but shall not in any way invalidate or affect any other
-8-
<PAGE> 9
clause, paragraph, section or part of this Agreement. The parties intend that
all clauses, paragraphs, sections or parts of this Agreement shall be
enforceable to the fullest extent permitted by law.
19. Affiliate. As used in this Agreement, "affiliate" means any person or
entity controlled by or under common control with the Corporation.
20. Counterparts. This Agreement may be executed in one or more
counterparts, each of which counterparts, when taken together, shall constitute
but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
-----------------------------------
Neil D. Nicastro, President
/s/ Harold H. Bach, Jr.
-----------------------------------
Harold H. Bach, Jr.
-9-
<PAGE> 1
EXHIBIT 10.38
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT made as of the 24th day of May, 1999, by and between MIDWAY
GAMES INC., a Delaware corporation (the "Corporation"), and ORRIN J. EDIDIN
("Executive").
W I T N E S S E T H:
WHEREAS, Executive has been employed as the Vice President, Secretary
and General Counsel of the Corporation.
WHEREAS, the Corporation desires to employ Executive and Executive is
willing to undertake such employment on the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT; DUTIES. The Corporation hereby employs Executive to
perform such duties on behalf of the Corporation and its affiliates as the
President or the Board of Directors of the Corporation may from time to time
determine relating to the legal function of the Corporation and other matters
appropriate for a senior executive of the Corporation. During Executive's
employment hereunder he shall not be required to move his place of residence
from the Chicago, Illinois metropolitan area.
2. ACCEPTANCE AND LOYALTY. Executive hereby accepts such employment
and agrees that throughout the period of his employment hereunder, he will
devote his full time, attention, knowledge and skills, faithfully, diligently
and to the best of his ability, in furtherance of the business of the
Corporation and will perform the duties assigned to him pursuant to Section 1
hereof. Executive shall perform all duties and responsibilities in a
professional manner consistent with the skill, competence and efficiency
expected of an executive employee performing the duties assigned to Executive
and subject to the direction and control of the President and the Board of
Directors of the Corporation. Executive will do such traveling as may be
reasonably required of him in the performance of his obligations hereunder.
Executive shall at all times be subject to, observe and carry out such rules,
regulations, policies, directions and restrictions as the Corporation shall from
time to time establish. During his employment hereunder, Executive shall not,
without the written approval of the President or the Board of Directors of the
Corporation first had and obtained in each instance, directly or indirectly,
accept employment or compensation from or perform services of any nature for,
any business enterprise other than the Corporation or any of its subsidiaries or
affiliates except that Executive may continue to perform services for WMS
<PAGE> 2
Industries Inc. ("WMS") and its subsidiaries and affiliates for such period as
shall be mutually agreeable to the Corporation, WMS and Executive. During
Executive's employment hereunder, Executive shall not be entitled to additional
compensation for serving in any office, including as a director, of the
Corporation or any of its subsidiaries or affiliates to which he may be elected.
3. TERM. The term of Executive's employment hereunder shall commence on the
date hereof and terminate on June 30, 2002 (the "Original Term"); provided,
however, that the term of Executive's employment shall be deemed automatically
extended from time to time such that the term of such employment shall at no
time be less than three years (the "Extended Term"); and provided further, that
Executive's services hereunder may be terminated (i) by either party effective
upon expiration of the Original Term or the Extended Term upon written notice
from the terminating party to the other party dated and received at least three
years prior to the respective termination date or (ii) by the Corporation
effective upon 30 days' prior written notice if such termination is for "cause"
as defined in subsection 8.3 of this Agreement. The Original Term and the
Extended Term are hereafter collectively referred to as the "Term" and each year
of the Term is hereafter referred to as an "Employment Year."
4. COMPENSATION AND BENEFITS.
4.1 The Corporation shall pay to Executive as compensation for his
services and agreements hereunder a base salary at the rate of $200,000 per
annum, or such greater amount as the Board of Directors of the Corporation shall
from time to time determine. Base salary shall be payable in equal installments
in accordance with the Corporation's normal payroll policy, subject to payroll
taxes and withholding requirements.
4.2 Executive shall be entitled to participate, to the extent he is
eligible under the terms and conditions thereof, in any bonus, pension,
retirement, disability, hospitalization, insurance, medical service, or other
employee benefit plan which is generally available to executive employees of the
Corporation and which may be in effect from time to time during the period of
his employment hereunder, including the Exec-U-Care insurance program. The
Corporation shall be under no obligation to institute or continue the existence
of any such employee benefit plan. In addition, the Corporation shall provide
Executive with Four Hundred Thousand Dollars ($400,000) in additional life
insurance coverage, payable to such beneficiary as Executive shall designate
from time to time, in such form and manner as the Corporation and Executive
shall determine as appropriate in order to minimize the income tax consequences
of such coverage to Executive. If such insurance is not available at an annual
premium of $3,000 or less, then the Corporation shall provide such lesser amount
of insurance as is available at an annual premium of $3,000.
5. BUSINESS EXPENSES. The Corporation shall reimburse Executive for all
authorized expenses reasonably incurred by him in accordance with the
Corporation's "Travel and Entertainment Policy and Procedure," and any
amendments thereof that the Corporation may adopt during the Term hereof.
-2-
<PAGE> 3
6. VACATION. Executive shall be entitled to four weeks paid vacation during
each Employment Year. Any such vacations are to be taken at times mutually
agreeable to Executive and the President of the Corporation. Vacation time shall
not be accumulated from year to year, unless Executive is requested by the
President of the Corporation to forego a vacation during any Employment Year.
7. KEY-MAN LIFE INSURANCE. The Corporation may purchase and maintain life
insurance covering the life of Executive ("Key-man Insurance") in an amount
determined by the Corporation. The Corporation shall be the sole owner and
beneficiary of the Key-man Insurance and may apply to the payment of premiums
thereunder any dividends declared and paid thereon. Executive shall submit
himself to such physical examinations as the President of the Corporation may
deem necessary or desirable in connection with the purchase and maintenance of
the Key-man Insurance.
8. NON-COMPETITION AND NON-RAIDING. In consideration of the Corporation's
entering into this Agreement:
8.1 Executive agrees that during the Term hereof and for a period of one
year after termination for "cause" or after Executive terminates his employment
without the written consent of the Corporation, he will not, directly or
indirectly, without the prior written consent of the Corporation, own, manage,
operate, join, control, participate in, perform any services for, invest in, or
otherwise be connected with, in any manner, whether as an officer, director,
employee, consultant, partner, investor or otherwise, any business entity which
is engaged in the design, importation, manufacture and/or sale of coin-operated
video games, home video games or any business entity which is engaged in any
other business in which the Corporation or any affiliate of the Corporation is
engaged. Nothing herein contained shall be deemed to prohibit Executive from
investing his funds in securities of a company if the securities of such company
are listed for trading on a national stock exchange or traded in the
over-the-counter market and Executive's holdings therein represent less than
five percent of the total number of shares or principal amount of other
securities of such company outstanding.
8.2 Executive agrees that during the Term hereof and for a period of one
year thereafter, he will not, directly or indirectly, without the prior written
consent of the Corporation, induce or influence, or seek to induce or influence,
any person who is engaged by the Corporation or any affiliate of the Corporation
as an employee, agent, independent contractor or otherwise, to terminate his
employment or engagement, nor shall Executive directly or indirectly, through
any other person, firm or corporation, employ or engage, or solicit for
employment or engagement, or advise or recommend to any other person or entity
that such person or entity employ or engage or solicit for employment or
engagement, any person or entity employed or engaged by the Corporation or any
affiliate of the Corporation.
8.3 For purposes of this Agreement, "cause" means (i) conviction
(pursuant to a final or non-appealable judgment) of a felony or any other crime
involving fraud, larceny or dishonesty; (ii) failure and refusal to follow a
reasonable direction of the Chief Executive Officer, the President or the Board
of Directors of the Corporation after notice in writing of such failure or
-3-
<PAGE> 4
refusal and a cure period of ten days thereafter; or (iii) commission of any
dishonest, willful or grossly negligent act which has or is reasonably likely to
have a material adverse effect on the Corporation or its customer or trade
relationships.
8.4 In the event that Executive is terminated for reasons other than
"cause," then, for such period (not to exceed one year after termination) as the
Corporation either continues to pay the Executive's base salary to him or has
made a lump-sum payment to Executive pursuant to Section 12 hereof, Executive
agrees that he will not, directly or indirectly, without the prior written
consent of the Corporation, take any of the actions prohibited under subsection
8.1 of this Agreement.
8.5 Executive acknowledges that the provisions of this Paragraph 8 are
reasonable and necessary for the protection of the Corporation. In the event
that any provision of this Paragraph 8, including any sentence, clause or part
hereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall not
be affected, but shall, subject to the discretion of such court, remain in full
force and effect and any invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same valid and enforceable.
9. CONFIDENTIALITY AGREEMENT.
9.1 As used herein, the term "Confidential Information" shall mean any
and all information of the Corporation and of its affiliates (for purposes of
this paragraph, the Corporation's affiliates shall be deemed included within the
meaning of "Corporation"), including, but not limited to, all data,
compilations, programs, devices, strategies, or methods concerning or related to
(i) the Corporation's finances, financial condition, results of operations,
employee relations, amounts of compensation paid to officers and employees and
any other data or information relating to the internal affairs of the
Corporation and its operations; (ii) the terms and conditions (including prices)
of sales and offers of sales of the Corporation's products and services; (iii)
the terms, conditions and current status of the Corporation's agreements and
relationship with any customer or supplier; (iv) the customer and supplier lists
and the identities and business preferences of the Corporation's actual and
prospective customers and suppliers or any employee or agent thereof with whom
the Corporation communicates; (v) the trade secrets, manufacturing and operating
techniques, price data, costs, methods, systems, plans, procedures, formulas,
processes, hardware, software, machines, inventions, designs, drawings, artwork,
blueprints, specifications, tools, skills, ideas, and strategic plans possessed,
developed, accumulated or acquired by the Corporation; (vi) any communications
between the Corporation, its officers, directors, stockholders, or employees,
and any attorney retained by the Corporation for any purpose, or any person
retained or employed by such attorney for the purpose of assisting such attorney
in his or her representation of the Corporation; (vii) any other information and
knowledge with respect to all products developed or in any stage of development
by the Corporation; (viii) the abilities and specialized training or experience
of others who as employees or consultants of the Corporation during the Term
hereof have engaged in the design or development of any such products; and (ix)
any other matter or thing, whether or not recorded on any medium, (a) by which
the Corporation derives actual or potential economic value from such matter or
thing being not generally known to other persons or entities who might obtain
-4-
<PAGE> 5
economic value from its disclosure or use, or (b) which gives the Corporation an
opportunity to obtain an advantage over its competitors who do not know or use
the same.
9.2 Executive acknowledges and agrees that the Corporation is engaged in
highly competitive businesses and has expended, or will expend, significant sums
of money and has invested, or will invest, a substantial amount of time to
develop and maintain the secrecy of the Confidential Information. The
Corporation has thus obtained, or will obtain, a valuable economic asset which
has enabled, or will enable, it to develop an extensive reputation and to
establish long-term business relationships with its suppliers and customers. If
such Confidential Information were disclosed to another person or entity or used
for the benefit of anyone other than the Corporation, the Corporation would
suffer irreparable harm, loss and damage. Accordingly, Executive acknowledges
and agrees that, unless the Confidential Information becomes publicly known
through legitimate origins not involving an act or omission by Executive:
(i) the Confidential Information is, and at all times hereafter shall
remain, the sole property of the Corporation;
(ii) Executive shall use his best efforts and the utmost diligence to
guard and protect the Confidential Information from disclosure to any
competitor, customer or supplier of the Corporation or any other person,
firm, corporation or other entity;
(iii) unless the Corporation gives Executive prior express written
permission, during his employment and thereafter, Executive shall not
use for his own benefit, or divulge to any competitor or customer or any
other person, firm, corporation, or other entity, any of the
Confidential Information which Executive may obtain, learn about,
develop or be entrusted with as a result of Executive's employment by
the Corporation; and
(iv) except in the ordinary course of the Corporation's business,
Executive shall not seek or accept any Confidential Information from any
former, present or future employee of the Corporation.
9.3 Executive also acknowledges and agrees that all documentary and
tangible Confidential Information including, without limitation, such
Confidential Information as Executive has committed to memory, is supplied or
made available by the Corporation to the Executive solely to assist him in
performing his services under this Agreement. Executive further agrees that
after his employment with the Corporation is terminated for any reason:
(i) Executive shall not remove from the property of the Corporation and
shall immediately return to the Corporation, all documentary or tangible
Confidential Information in his possession, custody, or control and not
make or keep any copies, notes, abstracts,
-5-
<PAGE> 6
summaries, tapes or other record of any type of Confidential
Information; and
(ii) Executive shall immediately return to the Corporation any and all
other property of the Corporation in his possession, custody or control,
including, without limitation, any and all keys, security cards, passes,
credit cards and marketing literature.
10. INVENTION DISCLOSURE. Any invention, improvement, design,
development or discovery conceived, developed, created or made by Executive
alone or with others, during the period of his employment hereunder and
applicable to the business of the Corporation or its affiliates, whether or not
patentable or registrable, shall become the sole and exclusive property of the
Corporation. Executive hereby assigns to the Corporation, all of his rights to
any "intellectual material" created or developed by him during the course of his
employment. As used herein, "intellectual material" shall include, but shall not
be limited to, ideas, titles, themes, production ideas, methods of presentation,
artistic renderings, sketches, plots, music, lyrics, dialogue, phrases, slogans,
catch words, characters, names and similar literary, dramatic and musical
material, trade names, trademarks and service marks and all copyrightable
expressions in audio visual works, computer software, electronic circuitry and
all mask works for integrated circuits. Executive shall disclose the
intellectual material promptly and completely to the Corporation and shall,
during the period of his employment hereunder and at any time and from time to
time hereafter (a) execute all documents requested by the Corporation for
vesting in the Corporation or any of its affiliates the entire right, title and
interest in and to the same, (b) execute all documents requested by the
Corporation for filing and prosecuting such applications for patents, trademarks
and/or copyrights as the Corporation, in its sole discretion, may desire to
prosecute, and (c) give the Corporation all assistance it reasonably requires,
including the giving of testimony in any suit, action or proceeding, in order to
obtain, maintain and protect the Corporation's right therein and thereto. If any
such assistance is required following the termination of this Agreement, the
Corporation shall reimburse Executive for his time and the reasonable expenses
incurred by him in rendering such assistance. Anything contained in this
paragraph to the contrary notwithstanding, this paragraph does not apply to an
invention for which no equipment, supplies, facilities, or trade secret
information of the Corporation or its affiliates was used and which was
developed entirely on the Executive's own time, unless (d) the invention
relates: (i) to the business of the Corporation or its affiliates, or (ii) to
the Corporation's or any of its affiliates' actual or demonstrably anticipated
research or development, or (e) the invention results from any work performed by
the Executive for the Corporation or its affiliates.
11. REMEDIES. Executive acknowledges and agrees that the business of the
Corporation is highly competitive and that violation of any of the covenants
provided for in Paragraphs 8, 9 and 10 of this Agreement would cause immediate,
immeasurable and irreparable harm, loss and damage to the Corporation not
adequately compensable by a monetary award. Accordingly, Executive agrees,
without limiting any of the other remedies available to the Corporation, that
any violation of said covenants, or any one of them, may be enjoined or
restrained by any court of competent jurisdiction, and that any temporary
restraining order or emergency, preliminary or final injunctions may be issued
by any court of competent jurisdiction, without notice and without bond. In the
event
-6-
<PAGE> 7
any proceedings are commenced by the Corporation against Executive for any
actual or threatened violation of any of said covenants and if the Corporation
prevails in such litigation, then, Executive shall be liable to the Corporation
for, and shall pay to the Corporation, all costs and expenses of any kind,
including reasonable attorneys' fees, which the Corporation may incur in
connection with such proceedings.
12. CHANGE OF CONTROL.
12.1 If at any time during the term of this Agreement, individuals who
presently constitute the Board of Directors of the Corporation, or who have been
recommended for election to the Board by two-thirds of the Board consisting of
individuals who are either presently on the Board or such recommended successors
cease for any reason to constitute at least a majority of such Board (such event
being hereafter referred to as a "Change of Control") and Executive gives
written notice to the Corporation within 60 days after such Change of Control of
his election to terminate his employment hereunder, the Corporation shall pay to
Executive within 15 days after Executive's delivery of such notice, as severance
pay and liquidated damages, in lieu of any other rights or remedies which might
otherwise be available to him under this Agreement, and without mitigation of
any kind or amount, whether or not Executive shall seek or accept other
employment, a lump sum payment equal in amount three times the annual base
salary payable to Executive pursuant to subsection 4.1 of this Agreement. In
addition, all unexpired options to purchase securities of the Corporation
granted to Executive before the Change of Control shall, if unvested, vest fully
on the date of the Change of Control, notwithstanding any vesting provisions of
such options. The payments provided for in this Section 12 shall be paid in
full, without discount to present value.
12.2 If it shall be determined that any amount payable under Section
12.1 by the Corporation to or for the benefit of Executive (a "Base Payment")
would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), then Executive shall
be entitled to receive an additional payment (the "Gross-Up Payment") in an
amount such that the net amount retained by Executive, after the calculation and
deduction of any Excise Tax on the Base Payment shall be equal to the Base
Payment, less any federal, state and local income taxes. The Gross-Up Payment
shall be reduced by income or Excise Tax withholding payments made by the
Corporation to any federal, state, or local taxing authority with respect to the
Gross-Up Payment that was not deducted from compensation payable to the
Executive. All determinations required to be made under this Section 12.2,
including whether and when a Gross-Up Payment is required, the amount of such
Gross-Up Payment, and the assumptions to be utilized in arriving at such
determination, except as specified above, shall be made by the Corporation's
auditors (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Corporation and Executive within fifteen business days
after the receipt of notice from Executive that there should be a Gross-Up
Payment. The determination of tax liability made by the Accounting Firm shall be
subject to review by Executive's tax advisor, and, if Executive's tax advisor
does not agree with the determination reached by the Accounting Firm, then the
Accounting Firm and Executive's tax advisor shall jointly designate a nationally
recognized public accounting firm, which shall make the determination. All fees
and expenses of the accountants retained by the Corporation or jointly
designated and retained shall be borne by the Corporation. Any determination by
a jointly designated public accounting firm shall be binding upon the
Corporation and Executive.
-7-
<PAGE> 8
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties hereto with respect to Executive's employment with the Company
and no amendment or modification hereof shall be valid or binding unless made in
writing and signed by the party against whom enforcement thereof is sought. All
prior agreements relating to Executive's employment with the Company or WMS or
any affiliate of the Company or WMS are hereby terminated and of no further
force and effect.
14. NOTICES. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or sent by
telephone facsimile or sent by certified mail, return receipt requested, or sent
by responsible overnight delivery service, postage and fees prepaid, to the
parties hereto at their respective addresses set forth below. Either of the
parties hereto may at any time and from time to time change the address to which
notice shall be sent hereunder by notice to the other party given under this
Section 14. The date of the giving of any notice sent by mail shall be three
business days following the date of the posting of the mail, if delivered in
person, the date delivered in person, if sent by overnight delivery service, the
next business day following delivery to an overnight delivery service or if sent
by telephone facsimile, the date sent by telephone facsimile.
If to the Corporation:
3401 North California Avenue
Chicago, IL 60618
Facsimile: 312-961-1099
Attn: Mr. Neil D. Nicastro, President
If to Executive:
830 Bermuda Dunes
Northbrook, IL 60062
15. NO ASSIGNMENT. Neither this Agreement nor the right to receive any
payments hereunder may be assigned by Executive. This Agreement shall be binding
upon Executive, his heirs, executors and administrators and upon the
Corporation, its successors and assigns.
16. NO WAIVER. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
17. GOVERNING LAW. This Agreement shall be governed, interpreted and
construed in accordance with the substantive laws of the State of Illinois
applicable to agreements entered into and to be performed entirely therein.
18. SEVERABILITY. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any arbitrator or court of competent jurisdiction, such provision
shall be ineffective but shall not in any way invalidate or affect any other
-8-
<PAGE> 9
clause, paragraph, section or part of this Agreement. The parties intend that
all clauses, paragraphs, sections or parts of this Agreement shall be
enforceable to the fullest extent permitted by law.
19. AFFILIATE. As used in this Agreement, "affiliate" means any person
or entity controlled by or under common control with the Corporation.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which counterparts, when taken together, shall constitute
but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
------------------------------------
Neil D. Nicastro, President
/s/ Orrin J. Edidin
------------------------------------
Orrin J. Edidin
-9-
<PAGE> 1
EXHIBIT 10.39
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT made as of the 1st day of June, 1999, by and between MIDWAY
GAMES INC., a Delaware corporation (the "Corporation"), and KENNETH J. FEDESNA
("Executive").
W I T N E S S E T H:
WHEREAS, Executive has been employed as the Executive Vice President -
Coin-Op Video of the Corporation and the Vice President and General Manager of
Williams Electronics Games, Inc. ("WEG"), a wholly owned subsidiary of WMS
Industries Inc. ("WMS"), pursuant to the terms of an Employment Agreement (the
"Prior Employment Agreement") between Executive, on the one hand, and the
Corporation and WEG, on the other hand; and
WHEREAS, the Corporation desires to employ Executive and Executive is
willing to undertake such employment on the terms and subject to the conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto agree as follows:
1. EMPLOYMENT; DUTIES. The Corporation hereby employs Executive to
perform such duties on behalf of the Corporation and its affiliates as the
President or the Board of Directors of the Corporation may from time to time
determine relating to the development and manufacture of coin-operated amusement
games and other matters appropriate for a senior executive of the Corporation.
During Executive's employment hereunder he shall not be required to move his
place of residence from the Chicago, Illinois metropolitan area. The primary
assignments to be performed by Executive shall be Executive Vice President -
Coin-Op Video and General Manager of the Corporation.
2. ACCEPTANCE AND LOYALTY. Executive hereby accepts such employment and
agrees that throughout the period of his employment hereunder, he will devote
his full time, attention, knowledge and skills, faithfully, diligently and to
the best of his ability, in furtherance of the business of the Corporation and
will perform the duties assigned to him pursuant to Section 1 hereof. Executive
shall perform all duties and responsibilities in a professional manner
consistent with the skill, competence and efficiency expected of an executive
employee performing the duties assigned to Executive and subject to the
direction and control of the President and the Board of Directors of the
Corporation. Executive will do such traveling as may be reasonably required of
him in the performance of his obligations hereunder. Executive shall at all
times be subject to, observe and carry out such rules, regulations, policies,
directions and restrictions as the Corporation shall from time to time
establish. During his employment hereunder, Executive shall not, without
<PAGE> 2
the written approval of the President or the Board of Directors of the
Corporation first had and obtained in each instance, directly or indirectly,
accept employment or compensation from or perform services of any nature for,
any business enterprise other than the Corporation or any of its subsidiaries or
affiliates except that Executive may continue to perform services to WEG and WMS
for such period as shall be mutually agreeable to the Corporation, WMS and
Executive. During Executive's employment hereunder, Executive shall not be
entitled to additional compensation for serving in any office, including as a
director, of the Corporation or any of its subsidiaries or affiliates to which
he may be elected.
3. TERM.
3.1 The term of Executive's employment hereunder shall commence
on the date hereof and terminate on June 30, 2002 (the "Original Term");
provided, however, that the term of Executive's employment shall be deemed
automatically extended from time to time such that the term of such employment
shall at no time be less than three years (the "Extended Term"); and provided
further, that Executive's services hereunder may be terminated by either party
(i) effective upon expiration of the Original Term or the Extended Term upon
written notice from the terminating party to the other party dated and received
at least three years prior to the respective termination date or (ii) effective
upon 30 days' prior written notice if such termination is for "cause" as defined
in subsection 8.3 of this Agreement. The Original Term and the Extended Term are
hereafter collectively referred to as the "Term" and each year of the Term is
hereafter referred to as an "Employment Year."
3.2 Executive may terminate this Agreement and his services to
the Corporation, if, among other things, without his prior written consent:
Executive is placed in any position of lesser stature than that of Executive
Vice President - Coin-Op Video of the Corporation; is assigned duties
inconsistent with such position or duties which, if performed, would result in a
significant change in the nature or scope of powers, authority, functions or
duties inherent in such position on the date hereof; is assigned performance
requirements and working conditions which are at variance with the performance
requirements and working conditions in effect on the date hereof; or if the
business facility at which Employee is required to perform his duties is
relocated more than fifty (50) miles from the present business location of the
Corporation.
4. COMPENSATION AND BENEFITS.
4.1 The Corporation shall pay to Executive as compensation for
his services and agreements hereunder a base salary at the rate of $325,000 per
annum, or such greater amount as the Board of Directors of the Corporation shall
from time to time determine. Base salary shall be payable in equal installments
in accordance with the Corporation's normal payroll policy, subject to payroll
taxes and withholding requirements.
-2-
<PAGE> 3
4.2 Executive shall be entitled to participate, to the extent he
is eligible under the terms and conditions thereof, in any bonus, pension,
retirement, disability, hospitalization, insurance, medical service, or other
employee benefit plan which is generally available to executive employees of the
Corporation and which may be in effect from time to time during the period of
his employment hereunder, including the Exec-U-Care insurance program. The
Corporation shall be under no obligation to institute or continue the existence
of any such employee benefit plan. In addition, the Corporation shall provide
Executive with Four Hundred Thousand Dollars ($400,000) in additional life
insurance coverage, payable to such beneficiary as Executive shall designate
from time to time, in such form and manner as the Corporation and Executive
shall determine as appropriate in order to minimize the income tax consequences
of such coverage to Executive.
4.3 Executive shall be entitled to purchase from the Corporation
each year during the Term hereof two (2) used units of a Game of his choice at a
price of One Hundred Dollars ($100.00) each. Such purchase shall be made for
Executive's personal use and not for resale and shall be conditional on
Executive taking whatever precautions are necessary to insure that information
with respect to such Game is kept confidential as required in Paragraph 9 of
this Agreement.
5. BUSINESS EXPENSES. The Corporation shall reimburse Executive for
all authorized expenses reasonably incurred by him in accordance with the
Corporation's "Travel and Entertainment Policy and Procedure," and any
amendments thereof that the Corporation may adopt during the Term hereof.
6. VACATION. Executive shall be entitled to five weeks paid
vacation during each Employment Year. Any such vacations are to be taken at
times mutually agreeable to Executive and the President of the Corporation.
Vacation time shall not be accumulated from year to year, unless Executive is
requested by the President of the Corporation to forego a vacation during any
Employment Year.
7. KEY-MAN LIFE INSURANCE. The Corporation may purchase and
maintain life insurance covering the life of Executive ("Key-man Insurance") in
an amount determined by the Corporation. The Corporation shall be the sole owner
and beneficiary of the Key-man Insurance and may apply to the payment of
premiums thereunder any dividends declared and paid thereon. Executive shall
submit himself to such physical examinations as the President of the Corporation
may deem necessary or desirable in connection with the purchase and maintenance
of the Key-man Insurance.
8. NON-COMPETITION AND NON-RAIDING. In consideration of the
Corporation's entering into this Agreement:
-3-
<PAGE> 4
8.1 Executive agrees that during the Term hereof and for a
period of one year after termination for "cause" or after Executive terminates
his employment without the written consent of the Corporation, other than
pursuant to Executive's rights under Paragraph 3.2, he will not, directly or
indirectly, without the prior written consent of the Corporation, own, manage,
operate, join, control, participate in, perform any services for, invest in, or
otherwise be connected with, in any manner, whether as an officer, director,
employee, consultant, partner, investor or otherwise, any business entity which
is engaged in the design, importation, manufacture and/or sale of coin-operated
video games, home video games or any business entity which is engaged in any
other business in which the Corporation or any affiliate of the Corporation is
engaged. Nothing herein contained shall be deemed to prohibit Executive from
investing his funds in securities of a company if the securities of such company
are listed for trading on a national stock exchange or traded in the
over-the-counter market and Executive's holdings therein represent less than
five percent of the total number of shares or principal amount of other
securities of such company outstanding.
8.2 Executive agrees that during the Term hereof and for a
period of one year thereafter, he will not, directly or indirectly, without the
prior written consent of the Corporation, induce or influence, or seek to induce
or influence, any person who is engaged by the Corporation or any affiliate of
the Corporation as an employee, agent, independent contractor or otherwise, to
terminate his employment or engagement, nor shall Executive directly or
indirectly, through any other person, firm or corporation, employ or engage, or
solicit for employment or engagement, or advise or recommend to any other person
or entity that such person or entity employ or engage or solicit for employment
or engagement, any person or entity employed or engaged by the Corporation or
any affiliate of the Corporation.
8.3 For purposes of this Agreement, "cause" means (i) conviction
(pursuant to a final or non-appealable judgment) of a felony or any other crime
involving fraud, larceny or dishonesty; (ii) failure and refusal to follow a
reasonable direction of the Chief Executive Officer, the President or the Board
of Directors of the Corporation after notice in writing of such failure or
refusal and a cure period of ten days thereafter; or (iii) commission of any
dishonest, wilful or grossly negligent act which has or is reasonably likely to
have a material adverse effect on the Corporation or its customer or trade
relationships.
8.4 In the event that Executive is terminated for reasons other
than "cause," or Executive exercises his rights under Section 3.2 hereof, then,
for such period (not to exceed one year after termination) as the Corporation
continues to pay the Executive's base salary to him or has made a lump-sum
payment to Executive pursuant to Section 12 hereof, Executive agrees that he
will not, directly or indirectly, without the prior written consent of the
Corporation, take any of the actions prohibited under subsection 8.1 of this
Agreement.
-4-
<PAGE> 5
8.5 Executive acknowledges that the provisions of this Paragraph
8 are reasonable and necessary for the protection of the Corporation. In the
event that any provision of this Paragraph 8, including any sentence, clause or
part hereof, shall be deemed contrary to law or invalid or unenforceable in any
respect by a court of competent jurisdiction, the remaining provisions shall not
be affected, but shall, subject to the discretion of such court, remain in full
force and effect and any invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties hereto, modified, amended and
limited to the extent necessary to render the same valid and enforceable.
9. CONFIDENTIALITY AGREEMENT.
9.1 As used herein, the term "Confidential Information" shall
mean any and all information of the Corporation and of its affiliates (for
purposes of this paragraph, the Corporation's affiliates shall be deemed
included within the meaning of "Corporation"), including, but not limited to,
all data, compilations, programs, devices, strategies, or methods concerning or
related to (i) the Corporation's finances, financial condition, results of
operations, employee relations, amounts of compensation paid to officers and
employees and any other data or information relating to the internal affairs of
the Corporation and its operations; (ii) the terms and conditions (including
prices) of sales and offers of sales of the Corporation's products and services;
(iii) the terms, conditions and current status of the Corporation's agreements
and relationship with any customer or supplier; (iv) the customer and supplier
lists and the identities and business preferences of the Corporation's actual
and prospective customers and suppliers or any employee or agent thereof with
whom the Corporation communicates; (v) the trade secrets, manufacturing and
operating techniques, price data, costs, methods, systems, plans, procedures,
formulas, processes, hardware, software, machines, inventions, designs,
drawings, artwork, blueprints, specifications, tools, skills, ideas, and
strategic plans possessed, developed, accumulated or acquired by the
Corporation; (vi) any communications between the Corporation, its officers,
directors, stockholders, or employees, and any attorney retained by the
Corporation for any purpose, or any person retained or employed by such attorney
for the purpose of assisting such attorney in his or her representation of the
Corporation; (vii) any other information and knowledge with respect to all
products developed or in any stage of development by the Corporation; (viii) the
abilities and specialized training or experience of others who as employees or
consultants of the Corporation during the Term hereof have engaged in the design
or development of any such products; and (ix) any other matter or thing, whether
or not recorded on any medium, (a) by which the Corporation derives actual or
potential economic value from such matter or thing being not generally known to
other persons or entities who might obtain economic value from its disclosure or
use, or (b) which gives the Corporation an opportunity to obtain an advantage
over its competitors who do not know or use the same.
9.2 Executive acknowledges and agrees that the Corporation is
engaged in highly competitive businesses and has expended, or will expend,
significant sums of money and has invested, or will invest, a substantial amount
of time to develop and maintain the secrecy of
-5-
<PAGE> 6
the Confidential Information. The Corporation has thus obtained, or will obtain,
a valuable economic asset which has enabled, or will enable, it to develop an
extensive reputation and to establish long-term business relationships with its
suppliers and customers. If such Confidential Information were disclosed to
another person or entity or used for the benefit of anyone other than the
Corporation, the Corporation would suffer irreparable harm, loss and damage.
Accordingly, Executive acknowledges and agrees that, unless the Confidential
Information becomes publicly known through legitimate origins not involving an
act or omission by Executive:
(1) the Confidential Information is, and at all times hereafter
shall remain, the sole property of the Corporation;
(2) Executive shall use his best efforts and the utmost
diligence to guard and protect the Confidential Information from
disclosure to any competitor, customer or supplier of the
Corporation or any other person, firm, corporation or other
entity;
(3) unless the Corporation gives Executive prior express written
permission, during his employment and thereafter, Executive
shall not use for his own benefit, or divulge to any competitor
or customer or any other person, firm, corporation, or other
entity, any of the Confidential Information which Executive may
obtain, learn about, develop or be entrusted with as a result of
Executive's employment by the Corporation; and
(4) except in the ordinary course of the Corporation's business,
Executive shall not seek or accept any Confidential Information
from any former, present or future employee of the Corporation.
9.3 Executive also acknowledges and agrees that all documentary
and tangible Confidential Information including, without limitation, such
Confidential Information as Executive has committed to memory, is supplied or
made available by the Corporation to the Executive solely to assist him in
performing his services under this Agreement. Executive further agrees that
after his employment with the Corporation is terminated for any reason:
(1) Executive shall not remove from the property of the
Corporation and shall immediately return to the Corporation, all
documentary or tangible Confidential Information in his
possession, custody, or control and not make or keep any copies,
notes, abstracts, summaries, tapes or other record of any type
of Confidential Information; and
-6-
<PAGE> 7
(2) Executive shall immediately return to the Corporation any
and all other property of the Corporation in his possession,
custody or control, including, without limitation, any and all
keys, security cards, passes, credit cards and marketing
literature.
10. INVENTION DISCLOSURE. Any invention, improvement, design,
development or discovery conceived, developed, created or made by Executive
alone or with others, during the period of his employment hereunder and
applicable to the business of the Corporation or its affiliates, whether or not
patentable or registrable, shall become the sole and exclusive property of the
Corporation. Executive hereby assigns to the Corporation, all of his rights to
any "intellectual material" created or developed by him during the course of his
employment. As used herein, "intellectual material" shall include, but shall not
be limited to, ideas, titles, themes, production ideas, methods of presentation,
artistic renderings, sketches, plots, music, lyrics, dialogue, phrases, slogans,
catch words, characters, names and similar literary, dramatic and musical
material, trade names, trademarks and service marks and all copyrightable
expressions in audio visual works, computer software, electronic circuitry and
all mask works for integrated circuits. Executive shall disclose the
intellectual material promptly and completely to the Corporation and shall,
during the period of his employment hereunder and at any time and from time to
time hereafter (a) execute all documents requested by the Corporation for
vesting in the Corporation or any of its affiliates the entire right, title and
interest in and to the same, (b) execute all documents requested by the
Corporation for filing and prosecuting such applications for patents, trademarks
and/or copyrights as the Corporation, in its sole discretion, may desire to
prosecute, and (c) give the Corporation all assistance it reasonably requires,
including the giving of testimony in any suit, action or proceeding, in order to
obtain, maintain and protect the Corporation's right therein and thereto. If any
such assistance is required following the termination of this Agreement, the
Corporation shall reimburse Executive for his time and the reasonable expenses
incurred by him in rendering such assistance. Anything contained in this
paragraph to the contrary notwithstanding, this paragraph does not apply to an
invention for which no equipment, supplies, facilities, or trade secret
information of the Corporation or its affiliates was used and which was
developed entirely on the Executive's own time, unless (d) the invention
relates: (i) to the business of the Corporation or its affiliates, or (ii) to
the Corporation's or any of its affiliates' actual or demonstrably anticipated
research or development, or (e) the invention results from any work performed by
the Executive for the Corporation or its affiliates.
11. REMEDIES. Executive acknowledges and agrees that the business of
the Corporation is highly competitive and that violation of any of the covenants
provided for in Paragraphs 8, 9 and 10 of this Agreement would cause immediate,
immeasurable and irreparable harm, loss and damage to the Corporation not
adequately compensable by a monetary award. Accordingly, Executive agrees,
without limiting any of the other remedies available to the Corporation, that
any violation of said covenants, or any one of them, may be enjoined or
restrained by any court of competent jurisdiction, and that any temporary
restraining order or emergency, preliminary or final injunctions may be issued
by any court of competent jurisdiction, without notice and without bond. In the
-7-
<PAGE> 8
event any proceedings are commenced by the Corporation against Executive for any
actual or threatened violation of any of said covenants and if the Corporation
prevails in such litigation, then, Executive shall be liable to the Corporation
for, and shall pay to the Corporation, all costs and expenses of any kind,
including reasonable attorneys' fees, which the Corporation may incur in
connection with such proceedings.
12. CHANGE OF CONTROL.
12.1 If at any time during the term of this Agreement,
individuals who presently constitute the Board of Directors of the Corporation,
or who have been recommended for election to the Board by two-thirds of the
Board consisting of individuals who are either presently on the Board or such
recommended successors cease for any reason to constitute at least a majority of
such Board (such event being hereafter referred to as a "Change of Control") and
Executive gives written notice to the Corporation within 60 days after such
Change of Control of his election to terminate his employment hereunder, the
Corporation shall pay to Executive within 15 days after Executive's delivery of
such notice, as severance pay and liquidated damages, in lieu of any other
rights or remedies which might otherwise be available to him under this
Agreement, and without mitigation of any kind or amount, whether or not
Executive shall seek or accept other employment, a lump sum payment equal in
amount to three times the annual base salary payable to Executive pursuant to
subsection 4.1 of this Agreement. In addition, all unexpired options to purchase
securities of the Corporation granted to Executive before the Change of Control
shall, if unvested, vest fully on the date of the Change of Control,
notwithstanding any vesting provisions of such options. The payments provided
for in this Section 12 shall be paid in full, without discount to present value.
12.2 If it shall be determined that any amount payable under
Section 12.1 by the Corporation to or for the benefit of Executive (a "Base
Payment") would be subject to the excise tax (the "Excise Tax") imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then
Executive shall be entitled to receive an additional payment (the "Gross-Up
Payment") in an amount such that the net amount retained by Executive, after the
calculation and deduction of any Excise Tax on the Base Payment shall be equal
to the Base Payment, less any federal, state and local income taxes. The
Gross-Up Payment shall be reduced by income or Excise Tax withholding payments
made by the Corporation to any federal, state, or local taxing authority with
respect to the Gross-Up Payment that was not deducted from compensation payable
to the Executive. All determinations required to be made under this Section
12.2, including whether and when a Gross-Up Payment is required, the amount of
such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determination, except as specified above, shall be made by the Corporation's
auditors (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Corporation and Executive within fifteen business days
after the receipt of notice from Executive that there should be a Gross-Up
Payment. The determination of tax liability made by the Accounting Firm shall be
subject to review by Executive's tax advisor, and, if Executive's tax advisor
does not agree with the determination reached by the Accounting Firm,
-8-
<PAGE> 9
then the Accounting Firm and Executive's tax advisor shall jointly designate a
nationally recognized public accounting firm, which shall make the
determination. All fees and expenses of the accountants retained by the
Corporation or jointly designated and retained shall be borne by the
Corporation. Any determination by a jointly designated public accounting firm
shall be binding upon the Corporation and Executive.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties hereto with respect to Executive's employment with the
Company and no amendment or modification hereof shall be valid or binding unless
made in writing and signed by the party against whom enforcement thereof is
sought. All prior agreements relating to Executive's employment with the
Company, WEG or WMS (including without limitation, the Prior Employment
Agreement) or any affiliate of the Company, WEG or WMS are hereby terminated and
of no further force and effect. Executive hereby releases and discharges the
Corporation, WEG and WMS from any claim for payment arising under the Prior
Employment Agreement.
14. NOTICES. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or sent by
telephone facsimile or sent by certified mail, return receipt requested, or sent
by responsible overnight delivery service, postage and fees prepaid, to the
parties hereto at their respective addresses set forth below. Either of the
parties hereto may at any time and from time to time change the address to which
notice shall be sent hereunder by notice to the other party given under this
Section 14. The date of the giving of any notice sent by mail shall be three
business days following the date of the posting of the mail, if delivered in
person, the date delivered in person, if sent by overnight delivery service, the
next business day following delivery to an overnight delivery service or if sent
by telephone facsimile, the date sent by telephone facsimile.
If to the Corporation:
3401 North California Avenue
Chicago, IL 60618
Facsimile: 312-961-1099
Attn: Mr. Neil D. Nicastro, President
If to Executive:
4 Oneida Lane
Hawthorn Woods, IL 60047
15. No Assignment. Neither this Agreement nor the right to receive
any payments hereunder may be assigned by Executive. This Agreement shall be
binding upon Executive, his heirs, executors and administrators and upon the
Corporation, its successors and assigns.
-9-
<PAGE> 10
16. No Waiver. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
17. Governing Law. This Agreement shall be governed, interpreted and
construed in accordance with the substantive laws of the State of Illinois
applicable to agreements entered into and to be performed entirely therein.
18. Severability. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any arbitrator or court of competent jurisdiction, such provision
shall be ineffective but shall not in any way invalidate or affect any other
clause, paragraph, section or part of this Agreement. The parties intend that
all clauses, paragraphs, sections or parts of this Agreement shall be
enforceable to the fullest extent permitted by law.
19. Affiliate. As used in this Agreement, "affiliate" means any
person or entity controlled by or under common control with the Corporation.
20. Counterparts. This Agreement may be executed in one or more
counterparts, each of which counterparts, when taken together, shall constitute
but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on the day and year first above written.
MIDWAY GAMES INC.
By: /s/ Neil D. Nicastro
-----------------------------
Neil D. Nicastro, President
/s/ Kenneth J. Fedesna
-----------------------------
Kenneth J. Fedesna
-10-
<PAGE> 1
EXHIBIT 10.41
SETTLEMENT AGREEMENT
--------------------
SETTLEMENT AGREEMENT made this 16th day of August, 1999, by
and among the parties listed on Schedule 1 hereto. Capitalized terms used herein
but not defined have the meanings ascribed to these terms in the Master
Agreements and Existing License Agreements.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, certain of the parties hereto are plaintiffs or
defendants in the litigations identified on Schedule 2 hereto (the "Pending
Litigations"); and
WHEREAS, certain of the parties hereto are parties to the
agreements listed on Schedule 3 hereto (the "Master Agreements"); and
WHEREAS, pursuant to the Master Agreements, certain of the
parties hereto have entered into or are deemed to have entered into distribution
and license agreements (the "Existing License Agreements") only with respect to
the games listed on Schedule 4 hereto; and
WHEREAS, pursuant to the Pending Litigations and otherwise,
the parties hereto are in dispute with regard to their respective rights and
obligations under the Master Agreements and the Existing License Agreements; and
WHEREAS, the parties desire to settle all disputes between
them on the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Discontinuances of Pending Litigations. All claims and counterclaims
in the Pending Litigations will be dismissed with prejudice, each party to bear
its own costs and attorneys' fees. Contemporaneously herewith, the parties to
the Pending Litigations have executed stipulations of discontinuance in the
forms attached hereto as Exhibits A-1 and A-2 [omitted].
2. Settlement Payment; Recoupment. Within one business day after the
execution and delivery of this Settlement Agreement by all of the parties
hereto, the Midway Entities (as defined in Schedule 1 hereto) will pay to GTIS
(as defined in Schedule 1 hereto) the sum of $8.5 million (the "Settlement Sum")
by wire transfer of immediately available funds. Any Option and Advance Fee,
Minimum Guaranteed Royalty (including the Guaranteed Advance Royalty) and
Minimum Guaranteed Advance Royalty (also referred to as the Atari Advance)
payable or recoupable against royalties otherwise payable under any of the
Existing License Agreements shall be deemed fully recouped and fully paid. The
Midway Entities will wire transfer the Settlement Sum in accordance with the
instruction provided by GTIS contemporaneously herewith. Notwithstanding the
execution of this Settlement Agreement by all of the parties hereto, this
Settlement Agreement shall not become effective unless and until receipt of the
Settlement Sum by GTIS.
3. Releases. Contemporaneously herewith, the parties hereto have
executed releases in the forms attached hereto as Exhibits B-1 and B-2
[omitted].
1
<PAGE> 2
4. Termination of Master Agreements and Existing License Agreements.
All of the Master Agreements shall be deemed to have been terminated effective
May 28, 1999, and all of the Existing License Agreements which are not
identified as "expired" on Schedule 4 hereto shall be deemed to have expired on
August 6, 1999. Following such deemed expiration of the Existing License
Agreements, all rights granted by the Midway Entities to GTIS will forthwith
revert to the Midway Entities, provided that GTIS may continue to sell, for a
period of 180 days (or such shorter Sell Off Period as is indicated on Schedule
4 hereto) after August 6, 1999 (the "Sell Off Periods"), Licensed Products
produced under the Existing License Agreements prior to such date. Sales by GTIS
during the Sell Off Periods shall be (a) made only in the Licensed Territory (to
customers other than Exporters and not for use as premiums or give aways), (b)
reported by GTIS to the Midway Entities in written reports (the "Sell Off
Reports") delivered to the Midway Entities within 45 days following the
expiration of each calendar quarter in which the Sell Off Periods occur setting
forth the following information with respect to Licensed Products sold by GTIS
or its sublicensees during the preceding calendar quarter (including with
respect to the quarter ending September 30, 1999 information with respect to
sales of Licensed Products from July 1,1999): (i) the number of units of the
Licensed Products sold by GTIS or its sublicensees, (ii) the Marketing Areas in
which such Licensed Products were sold (with sales by country indicated where
required by the Existing License Agreement), (iii) the Net Wholesale Sales Price
of all Licensed Products sold (which shall be reported in a manner consistent
with GTIS' Royalty reports submitted to the Midway Entities for the quarter
ended March 31, 1999) and (iv) the amount of any returns of Licensed Products,
which Sell Off Reports shall each be certified as true and correct by Thomas
Heymann, as Chief Executive Officer of GTIS and by the Chief Financial Officer
of GTIS, and (c) subject to the payment by GTIS to the Midway Entities of
Royalties on each unit of Licensed Product sold during the Sell Off Periods, as
specified in Schedule B to the Existing License Agreements, such payment in
United States Funds to accompany each Sell Off Report provided for above. In
addition, on or before August 20, 1999, GTIS shall also furnish to the Midway
Entities a report setting forth all of the information required in the Sell Off
Reports (as provided in clause (b) of the preceding sentence) with respect to
sales of Licensed Products by GTIS or its sublicensees during the calendar
quarter ending June 30, 1999. If, for any reason, Thomas Heymann shall not then
be serving as the Chief Executive Officer of GTIS or if he or the Chief
Financial Officer of GTIS shall be unable or shall fail for any reason to
furnish the certification with respect to the accuracy of the Sell Off Reports,
as provided in clause (b) above, then the Midway Entities shall have the right
to have accounting professionals audit and inspect the books and records of GTIS
or its sublicensees, upon reasonable prior notice, for the purpose of verifying
the accuracy of the Sell Off Reports, provided that the Midway Entities shall
not be entitled to more than one such audit of GTIS and that such audit shall
not last longer than 5 business days. The Midway Entities shall otherwise have
no further right to audit or inspect the books and records of GTIS under the
Existing License Agreements for the purpose of verifying any Royalty statement
or report heretofore submitted by GTIS, unless written demand for such
inspection or audit is made by any third party for the purpose of verifying
Third Party Fees and Royalties payable by the Midway Entities to such third
party on account of sales of Licensed Products by GTIS or its sublicensees (in
which event notice thereof shall be given to GTIS and the Midway Entities or
such third party shall have the right to audit and inspect GTIS' books and
records pertaining to the sale of Licensed Products subject to Third Party Fees
and Royalties payable to such third party solely for the purpose of calculating
the Midway Entities' obligation to such third parties). For purposes of
computing Royalties payable to the Midway Entities, the Option and Advance Fee,
Minimum Guaranteed Royalty (including the Guaranteed Advance Royalty) and
Minimum Guaranteed Advance Royalty (also referred to as the Atari Advance) shall
be deemed to have been fully recouped as of August 6, 1999 and fully paid, and
no portion of the Royalties payable with respect to sales of Licensed Products
during the Sell Off Periods, as provided above, shall be offset or applied on
account of thereof.
2
<PAGE> 3
Within 30 days following the final Sell Off Report under each Existing
License Agreement, GTIS shall destroy and shall furnish to the Midway Entities
an affidavit of a responsible officer of GTIS attesting to the destruction of
all unsold inventory and materials necessary to that sell off of Licensed
Products under such Existing License Agreement. Within 30 days from the date
hereof, except as provided above, GTIS shall destroy and shall furnish to the
Midway Entities an affidavit of a responsible officer of GTIS attesting to the
destruction of all materials heretofore provided by the Midway Entities to GTIS
in connection with the Master Agreements and the Existing License Agreements,
including without limitation, all master disks and game software in any form,
and all artwork and designs embodying the Licensed Property or any packaging or
advertising materials designed, developed and/or created by GTIS (or any of its
sublicensees, affiliates or subsidiaries) which are in GTIS' possession or under
its control. Each of the parties shall keep in confidence and not disclose or
make available to any third party or use any proprietary information of the
other parties heretofore furnished or made known to it under or in connection
with any of the Existing License Agreements or the Master Agreements and such
obligation shall survive the execution of this Settlement Agreement.
Without limiting the generality of any of the foregoing, GTIS will have
no rights whatsoever to sell, distribute or otherwise exploit in any manner any
of the games listed on Schedule 5 hereto or to any other game which is not
listed on Schedule 4 hereto. With regard to the games listed on Schedule 4, GTIS
shall have no rights or obligations under the Existing License Agreements or the
Master Agreements whatsoever, other than those explicitly set forth in this
Settlement Agreement.
5. Expiration of Certain Other Agreements. Those agreements between
GTIS and Midway Home Entertainment Inc. ("MHEI") which are listed in Section II
of Schedule 6 hereto shall be deemed to have expired by their terms as of August
6, 1999. Following such deemed expiration, to the extent either party granted
rights to the other under any such agreement, such rights shall forthwith revert
to the granting party. With respect to the agreements numbered 5 and 6 in
Section II of Schedule 6, GTIS shall have no further payment obligations to
MHEI, but MHEI shall have no obligations regarding returns of Software Packages
or portions thereof. With respect to the agreements numbered 3 and 4 in Section
II of Schedule 6, MHEI will have the same rights and obligations to sell off as
GTIS in Paragraph 4 above and Paragraph 7.2 below, except that (i) MHEI's Sell
Off Reports shall be certified to be true and correct by Neil Nicastro as Chief
Executive Officer of Midway Games Inc. and by the Chief Financial Officer of
Midway Games Inc., and (ii) royalties shall be calculated and paid as provided
by such agreements as exemplified by MHEI's royalty reports to GTIS under such
agreements for the quarter ended March 31, 1999. The Midway Entities shall have
no other rights or obligations whatsoever under such agreements.
6. Future Relationships. The parties will discuss future opportunities
to carry on a "distribution at will" relationship with respect to any games as
may be mutually agreed. The parties shall be under no obligation to so agree.
7. Certain Other Matters.
7.1 Nothing herein shall be deemed to affect any existing
rights or obligations under the GTIS Warrants held by the Midway Entities and
any registration rights agreement between the parties pertaining thereto, except
that the Midway Entities release any and all existing claims with respect to the
Warrants consistent with the Release provided in Exhibit B-2 hereto.
3
<PAGE> 4
7.2 GTIS agrees that all Licensed Products sold by it during
the Sell Off Periods under Existing License Agreements shall continue to be of
high quality and shall be sold and distributed only in packaging (and using
advertisements, labels and promotional materials) heretofore prescribed and
approved by the Midway Entities. Such Licensed Products (and advertisements,
labels and promotional materials) shall also bear the trademarks and trade names
of the Midway Entities and contain such trademark and copyright notices as are
prescribed under the Existing License Agreements. The Midway Entities agree that
all licensed products sold by them, as licensee, during the sell off periods
under any license agreements with GTIS, as licensor, shall continue to be of
high quality and shall be sold and distributed only in packaging (and using
advertisements, labels and promotional materials) heretofore prescribed and
approved by GTIS. Neither GTIS nor the Midway Entities shall have any further
obligations under any license agreement to furnish any artwork or provide
translations in connection with the products being sold during any Sell Off
Periods. Neither party shall have any further obligations to indemnify the other
party with respect to any third party claim, demand, suit or judgment arising in
connection with the Existing License Agreements, except as set forth herein.
There shall be no bundling of Licensed Products by GTIS during the Sell-off
Periods (GTIS shall have the opportunity to cure any breach of the foregoing
covenant within 15 days following written notice thereof from the Midway
Entities) and all sales of Licensed products by GTIS during the Sell-off Periods
shall comply with the applicable laws of all relevant jurisdictions. Anything in
this Settlement Agreement to the contrary notwithstanding, however, GTIS
acknowledges that none of the Midway Entities shall have any continuing
obligation under any of the Master Agreements or the Existing License Agreements
which requires that the Midway Entities make any further payments of any kind or
nature to GTIS or to account to GTIS with respect to any matter, including any
obligation to pay over any portion of net profits or net proceeds with respect
to any Licensed Products or to allow any participation in the exploitation of
any ancillary rights with respect to any Licensed Property.
7.3 Those agreements between GTIS and one or more of the
Midway Entities which are listed in Section I of Schedule 6 hereto are hereby
terminated and of no further force and effect and no party thereto shall have
any further rights or obligations to the other party thereunder.
7.4 GTIS will have sole responsibility for dealing with any
third parties with whom GTIS has contractual arrangements relating to any
Licensed Products, including without limitation GTIS' sublicensees and
subdistributors. GTIS shall defend, indemnify and hold harmless the Midway
Entities from any loss, damage, expense or cost (including reasonable attorneys'
fees) arising out of any claim, demand, suit or judgment by any third parties
(a) relating to the termination of such contractual arrangements or otherwise,
or (b) resulting from any act or omission by GTIS which would constitute a
breach of any Existing License Agreement (other than solely as a consequence of
an act or omission by the Midway Entities as licensor). The Midway Entities will
have sole responsibility for dealing with any third parties with whom the Midway
Entities have contractual arrangements relating to any Licensed Products,
including without limitation the Midway Entities' licensors and developers. The
Midway Entities shall defend, indemnify and hold harmless the GTIS from any
loss, damage, expense or cost (including reasonable attorneys' fees) arising out
of any claim, demand, suit or judgment by any third parties (a) relating to the
termination of such contractual arrangements or otherwise, or (b) resulting from
any act or omission by the Midway Entities (other than solely as a consequence
of an act or omission by GTIS as sublicensee) which would constitute a breach of
any Existing License Agreement.
7.5 This Settlement Agreement constitutes a consensual
settlement of disputed issues and, accordingly, nothing herein shall be
construed as an admission of wrongdoing by any party.
4
<PAGE> 5
7.6 Within seven (7) days after the execution of this
Settlement Agreement, each party shall return to the producing party any
documents produced in the Pending Litigations, including all copies thereof.
7.7 Each party hereto agrees that it shall not voluntarily
assist any person or entity in litigation with any other party to this
Settlement Agreement by, without limitation, providing documents to such person
or entity, except to the extent that such assistance or documentation is
required to be provided by such party under the terms of any existing
contractual agreements to which such party is a party or by which it is bound.
Nothing herein shall be deemed to prevent cooperation or the furnishing of any
documents or assistance at the request of, or in connection with any
investigation, or prosecution by, any governmental authority, judicial or
administrative agency or pursuant to legal process or court order.
8. Representations and Warranties.
8.1 The Midway Entities hereby jointly and severally represent
and warrant to GTIS that the execution and delivery of this Settlement Agreement
and the documents executed in connection herewith have been duly authorized by
all requisite corporate action and constitute binding agreements enforceable
against the Midway Entities in accordance with their terms.
8.2 GTIS hereby represents and warrants to the Midway Entities
that the execution and delivery of this Settlement Agreement and the documents
executed in connection herewith have been duly authorized by all requisite
corporate action and constitute binding agreements enforceable against GTIS in
accordance with their terms.
9. General Provisions.
9.1 This Settlement Agreement and the documents executed in
connection herewith contain the entire agreement among the parties with respect
to the subject matter hereof and may not be modified except as mutually agreed
upon by all of the parties hereto in writing.
9.2 This Settlement Agreement will bind and inure to the
benefit of the assigns, representatives and successors of the parties hereto.
9.3 This Settlement Agreement is knowingly and voluntarily
entered into by the parties hereto after discussion with and upon the advice and
affirmative recommendation of their respective legal counsel.
9.4 This Settlement Agreement shall be governed by the laws of
the State of Illinois applicable to contracts to be performed entirely therein.
9.5 This Settlement Agreement may be executed by the parties
in counterpart originals with the same force and effect as the fully and
simultaneously executed in a single original document.
9.6 The parties hereto agree that this Settlement Agreement is
not an executory accord and that a breach of this Settlement Agreement is not
grounds to reopen any of the litigations set forth on Schedule 2, or relitigate
any of the claims that were brought or could have been brought therein.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands this 13th day of August, 1999.
MIDWAY GAMES INC.
By: /s/ Orrin J. Edidin
---------------------------
MIDWAY HOME ENTERTAINMENT INC.
By: /s/ Orrin J. Edidin
----------------------------
WMS INDUSTRIES INC.
By: /s/ Orrin J. Edidin
----------------------------
WILLIAMS ELECTRONICS GAMES, INC.
By: /s/ Orrin J. Edidin
----------------------------
MIDWAY INTERACTIVE INC.
By: /s/ Orrin J. Edidin
----------------------------
ATARI GAMES CORPORATION
By: /s/ Orrin J. Edidin
----------------------------
GT INTERACTIVE SOFTWARE CORP.
By: /s/ Harry M. Rubin
----------------------------
6
<PAGE> 7
SCHEDULE 1
The following parties, and their subsidiaries and affiliates, are hereinafter
collectively referred to as the "Midway Entities":
Midway Games Inc. 1
Midway Home Entertainment Inc. 2
WMS Industries Inc.
Williams Electronics Games, Inc.
Midway Interactive Inc. 3
Atari Games Corporation
The following party is referred to as "GTIS":
GT Interactive Software Corp. and its subsidiaries and affiliates.
- ----------------------
1 Midway Games Inc. was formerly known as Midway Manufacturing Company.
2 Midway Home Entertainment Inc. was formerly known as Williams
Entertainment Inc.
3 Midway Interactive Inc. was formerly known as Williams Interactive Inc.
7
<PAGE> 8
SCHEDULE 2
1. Litigation pending in the Supreme Court of the State of New York, County of
New York, Index No. 600386/99, entitled GT Interactive Software Corp.,
Plaintiff, vs. Midway Games Inc., Midway Home Entertainment Inc., Midway
Manufacturing Company, WMS Industries Inc., Williams Electronics Games, Inc.,
Williams Entertainment Inc., Williams Interactive Inc., and Atari Games
Corporation, Defendants, including any pending appeals therefrom.
2. Litigation pending in The District Court of Texas, Thirteenth District,
County of Navarro, Court Action No. 99-00-08981-CV, entitled Midway Home
Entertainment Inc., Plaintiff, vs. GT Interactive Software Corp., Defendant.
8
<PAGE> 9
SCHEDULE 3
----------
GTIS Master Option and License Agreement dated December 28, 1994
Amendment to GTIS Master Option and License Agreement dated March 31, 1995
Second Amendment to GTIS Master Option and License Agreement dated
March 27, 1996
Third Amendment to GTIS Master Option and License Agreement dated
March 12, 1998
GTIS Master Option and License Agreement (Home Video Games) dated
March 31, 1995
Amendment to GTIS Master Option and License Agreement (Home Video Games) dated
March 27, 1996
Letter Agreement dated March 12, 1998 regarding "conforming and other changes"
to the "Master Home Video Agreement"
Master Option and License Agreement for Atari Home Video Games dated
March 27, 1996
Master Option and License Agreement for Atari PC Games dated March 27, 1996
First Amendment to GTIS Master Option and License Agreement for Atari PC Games
dated March 12, 1998
9
<PAGE> 10
SCHEDULE 4
Existing License Agreements
1. Home Computer Software Distribution and License Agreements
----------------------------------------------------------
<TABLE>
<CAPTION>
Title Platform Special Notes
<S> <C> <C>
Arcade Classics (Arcade's Greatest Hits Williams Vol. 1) IBM PC/DOS Expired; sell-off over
Arcade Classics (Arcade's Greatest Hits Williams Vol. 1) IBM PC/Windows 95
Arcade's Greatest Hits Williams Volume 2 IBM PC/Windows 95
Fun 'n' Games IBM PC/DOS Expired; sell-off over
Island Casino IBM PC/DOS Expired; sell-off over
Island Casino Macintosh Expired; sell-off over
Mortal Kombat 3 IBM PC/DOS
Mortal Kombat 3 IBM PC/Windows 95
Mortal Kombat 4 IBM PC/Windows 95
Mortal Kombat Trilogy IBM PC/Windows 95
NBA Hangtime IBM PC/Windows 95 Expired; sell-off ends 9/28/99
Open Ice IBM PC/Windows 95 Expired; sell-off ends 9/28/99
Robotron X IBM PC/Windows 95
SuperKarts IBM PC/DOS Expired; sell-off over
War Gods IBM PC/Windows 95
</TABLE>
2. Home Computer Software Distribution and License Agreements for Atari Games
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title Platform Special Notes
<S> <C> <C>
Arcade's Greatest Hits Atari Collection 2 IBM PC/Windows 95
Area 51 IBM PC/Windows 95 Expired; sell-off ends 11/10/99
Maximum Force IBM PC/Windows 95
Return Fire IBM PC/Windows 95 Expired; sell-off over
T-MEK IBM PC/DOS Expired; sell-off ends 11/10/99
</TABLE>
3. Home Video Game Distribution and License Agreements
---------------------------------------------------
<TABLE>
<CAPTION>
Title Platform Special Notes
<S> <C> <C>
Arcade's Greatest Hits Williams Volume 1 PlayStation
Arcade's Greatest Hits Williams Volume 2 PlayStation
BioF.R.E.A.K.S. PlayStation
BioF.R.E.A.K.S. Nintendo 64
Chopper Attack Nintendo 64
Doom 64 Nintendo 64
Final Doom PlayStation
Gex: Enter the Gecko Nintendo 64
Mortal Kombat 4 PlayStation
Mortal Kombat 4 Nintendo 64
Mortal Kombat Mythologies: Sub-Zero PlayStation
Mortal Kombat Mythologies: Sub-Zero Nintendo 64
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C> <C>
Mortal Kombat Trilogy PlayStation
Mortal Kombat Trilogy Saturn
Mortal Kombat Trilogy Nintendo 64
NBA Hangtime Nintendo 64 Expired; sell-off ends 9/28/99
NBA Fastbreak PlayStation Expired; sell-off ends 9/28/99
Off Road Challenge Nintendo 64
Rampage World Tour PlayStation
Rampage World Tour Saturn
Rampage World Tour Nintendo 64
Rampage 2: Universal Tour PlayStation
Rampage 2: Universal Tour Nintendo 64
Robotron X PlayStation
Robotron 64 Nintendo 64
Ultimate MK3 Saturn
War Gods PlayStation
War Gods Nintendo 64
</TABLE>
4. Home Video Game Distribution and License Agreements for Atari Games
-------------------------------------------------------------------
<TABLE>
<CAPTION>
Title Platform Special Notes
<S> <C> <C>
Arcade's Greatest Hits Atari Collection 1 PlayStation
Arcade's Greatest Hits Atari Collection 1 Saturn
Arcade's Greatest Hits Atari Collection 2 PlayStation
Area 51 PlayStation
Area 51 Saturn
California Speed Nintendo 64
The NHLPA & NHL Present Wayne Gretzky's 3D Hockey Nintendo 64 Expired; sell-off over
The NHL & NHLPA Present Wayne Gretzky's 3D Hockey '98 PlayStation Expired; sell-off over
The NHL & NHLPA Present Wayne Gretzky's 3D Hockey '98 Nintendo 64 Expired; sell-off over
Mace: The Dark Age Nintendo 64
Maximum Force PlayStation
Maximum Force Saturn
Olympic Hockey Nagano '98 Nintendo 64 Expired; sell-off over
Return Fire PlayStation Expired; sell-off over
Rush 2: Extreme Racing USA Nintendo 64
San Francisco Rush Extreme Racing Nintendo 64
San Francisco Rush Extreme Racing PlayStation
</TABLE>
11
<PAGE> 12
SCHEDULE 5
----------
Game Title Platform
- ------------------------------- ----------------------------------
Mortal Kombat Special Forces N64, PSX
Mortal Kombat Gold DC
NFL Blitz 2000 N64, PSX
Hydro Thunder N64, DC
NBA Showtime N64
Paperboy N64
Ready 2 Rumble Boxing N64, DC, PSX
Stunt Racer 3000 N64
World Driver: Championship N64
Gauntlet Legends N64
Rush 2: Extreme Racing USA Win 95
12
<PAGE> 13
SCHEDULE 6
----------
List of Certain Agreements between GT Interactive Software Corp. ("GTIS") and
One or More of Midway Games Inc. and its Affiliates
I. AGREEMENTS ANCILLARY TO THE MASTER AGREEMENTS AND THE DISTRIBUTION AND
LICENSE AGREEMENTS THEREUNDER
1. Letter Agreement between GTIS and Midway Home Entertainment Inc. regarding
Wipeout 64 for Nintendo 64
dated October 15, 1998
2. Letter Agreement among GTIS, Midway Games Inc., Midway Home Entertainment
Inc. and Atari Games Corporation captioned Weighted Averaging in Royalty
Accounting dated March 12, 1998
3. Letter Agreement among GTIS, Midway Games Inc. and Midway Home
Entertainment Inc. captioned Japan Territory dated March 12, 1998
4. Letter Agreement among GTIS, Midway Games Inc. and Midway Home
Entertainment Inc. regarding Transition Games dated March 12, 1998
5. Letter Agreement among GTIS, Midway Games Inc. and Midway Home
Entertainment Inc. captioned Distribution Fees and Discounts dated
March 12, 1998
6. Letter Agreement between GTIS and WMS Industries Inc. regarding Inventory of
Atari Games Corporation dated March 27, 1996
7. Letter Agreement between GTIS and WMS Industries Inc. regarding third party
agreements disclosed by Warner Communications Inc. dated March 27, 1996
8. Letter Agreement between GTIS and WMS Industries Inc. captioned Japan
Territory dated March 27, 1996
9. Letter Agreement between GTIS and WMS Industries Inc. regarding Softbank
Corporation and Road Show Entertainment Pty, Ltd. dated March 27, 1996
II. OTHER AGREEMENTS
1. Letter Agreement between GTIS and Midway Home Entertainment Inc. regarding
Top Gear Rally for Nintendo 64 dated October 13, 1997
2. Arrangement between GTIS and Midway Home Entertainment Inc. regarding Twisted
Edge Extreme Snowboarding for Nintendo 64 referenced in letters dated November
21, 1997 and September 24, 1998
3. Distribution Agreement between GTIS and Midway Home Entertainment Inc.
regarding Doom for PlayStation effective November 1, 1995, as amended
4. Distribution Agreement between GTIS and Midway Home Entertainment Inc.
regarding Quake for Nintendo 64 effective January 1, 1997
5. Letter Agreement between GTIS and Midway Home Entertainment Inc. regarding
distribution of computer programs dated June 29, 1998
6. Letter Agreement between GTIS and Midway Home Entertainment Inc. regarding
distribution of computer programs dated August 10, 1998.
13
<PAGE> 1
EXHIBIT 13
Selected Five-Year Financial Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED STATEMENT OF INCOME DATA June 30, 1999 1998 1997 1996(2) 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Home video $ 217,890 $ 229,732 $ 219,912 $ 154,102 $ 60,839
Coin-operated video 133,905 161,498 168,314 91,321 119,640
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues 351,795 391,230 388,226 245,423 180,479
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 159,809 190,099 166,819 105,367 78,727
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 8,328(1) 65,075 60,533 40,494 47,136
- ------------------------------------------------------------------------------------------------------------------------------
Income before tax provision and extraordinary credit 9,914 68,022 62,663 40,765 46,993
Provision for income taxes (3,767) (25,900) (23,812) (15,536) (17,854)
- ------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary credit 6,147 42,122 38,851 25,229 29,139
Extraordinary gain on early extinguishment of debt, net -- -- 3,044 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,147(1) $ 42,122 $ 41,895 $ 25,229 $ 29,139
==============================================================================================================================
Basic and diluted per share of common stock
- ------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary credit $ .16 $ 1.10 $ 1.06 $ .76 .87
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ .16(1) $ 1.10 $ 1.14 $ .76 .87
- ------------------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding 37,597 38,481 36,800 33,400 33,400
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA
Total assets $ 219,259 $ 227,423 $ 214,318 $ 118,262 $ 81,106
- ------------------------------------------------------------------------------------------------------------------------------
Working capital 120,039 118,286 86,310 (11,618)(3) 27,327(3)
- ------------------------------------------------------------------------------------------------------------------------------
Dividend notes payable -- -- -- 50,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt -- -- -- 7,863 --
- ------------------------------------------------------------------------------------------------------------------------------
Stockholder's net investment -- -- -- 5,488 49,752
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 177,576 176,649 140,768 -- --
==============================================================================================================================
</TABLE>
(1) Fiscal 1999 operating income includes charges for settlement of
litigation, restructuring and other unusual items of $13,023,000 which
reduced net income on an after-tax basis by $8,074,000, $ .21 per share.
(2) Includes the results of Midway Interactive Inc., subsequent to its
purchase of Atari Games Corporation on March 29, 1996.
(3) In fiscal 1996 and 1995 substantially all of the excess cash generated by
the Company's operations was regularly remitted to its then parent, WMS
Industries Inc., pursuant to WMS Industries Inc. centralized cash
management system.
(4) The financial data of Midway Games Inc. for 1996 and 1995 are from the
combined operations of Midway Games Inc. reflecting the transfer of
certain businesses to and from, Midway's then parent, WMS Industries Inc.
as of July 1, 1996.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion set forth below contains certain forward looking statements
concerning future business conditions and the outlook for the Company based on
currently available information that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward looking statements as a result of certain risks and uncertainties,
including, without limitation, the financial strength of the amusement games
industry, dependence on new product introductions and the ability to maintain
the scheduling of such introductions, technological changes, dependence on
dedicated platform manufacturers and other risks more fully described under
"Business-Risk Factors" in the Company's Annual Report on Form 10-K.
OVERVIEW
Since its incorporation in 1988 through the date of the initial public offering,
Midway Games Inc. ("Midway") was a wholly-owned subsidiary of WMS Industries
Inc. ("WMS"). Immediately prior to the initial public offering, Midway
effectuated a 33,400 for one stock split resulting in 33,400,000 shares of
common stock being issued and outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable
to WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On April 6, 1998, WMS completed the spin-off, originally announced on August
11, 1997, of its remaining 86.8% ownership interest of 33,400,000 shares of
Midway. The spin-off was completed by means of a tax free pro rata distribution
of the Midway shares to the WMS stockholders.
The Company and WMS entered a Manufacturing and Services Agreement in 1996
under which WMS provided contract manufacturing of coin-operated video games
and several other services to the Company. Effective April 6, 1998, in
connection with the spin-off of the Company by WMS, the 1996 agreement was
terminated and the Company entered into several agreements with WMS under which
WMS, among other things, performs contract manufacturing of coin-operated video
games and provides information technology services to certain parts of the
Company. In addition, under a separate agreement, the Company provides selling
and marketing services for the WMS pinball products. These agreements provide
for products or services on an arm's length basis. See Notes 3 and 4 to the
financial statements. The overall cost structure of the Company, has not been
materially different in fiscal 1999 from that experienced by the Company under
the prior Manufacturing and Services Agreement with WMS.
FINANCIAL CONDITION
Cash provided by operating activities before changes in operating assets and
liabilities was $25,548,000 in fiscal 1999 and $70,117,000 in fiscal 1998. The
decrease was primarily the result of the decrease in net income.
The changes in the operating assets and liabilities, as shown in the
consolidated statements of cash flows, resulted in a cash outflow of $1,706,000
in fiscal 1999, which was primarily due to outflows from increased inventory and
prepaid income taxes, partially offset by inflow from lower receivables. The
changes in the operating assets and liabilities in fiscal 1998 resulted in cash
outflow of $68,672,000, primarily due to increased receivables. The increase in
accounts receivable at June 30, 1998 from the balance at June 30, 1997 resulted
primarily from the timing of the initial release of certain home video games
late in the fourth quarter of fiscal 1998 as well as a 79% increase in home
video games revenues in the fourth quarter of fiscal 1998 compared to the prior
year fourth quarter.
Cash provided by investing activities was $6,788,000 in fiscal 1999
primarily from the sale of short-term investments compared to cash used of
$20,930,000 in fiscal 1998 primarily for the payments of acquisitions. Cash used
for the purchase of property and equipment increased to $5,212,000 in fiscal
1999 from $4,530,000 in fiscal 1998.
Cash used by financing activities was $5,220,000 in fiscal 1999 compared to
$6,241,000 in fiscal 1998. In fiscal 1999, $7,810,000 of cash was received from
the sale of 1,000,000 shares of common stock, net of issuance cost. In fiscal
1999, $13,030,000 of cash was used in the purchase of treasury shares compared
with $6,241,000 in fiscal 1998.
See the Consolidated Statements of Cash Flows on page 18 for further details
of cash flow items.
The home video business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a purchase order is accepted.
<PAGE> 3
At June 30, 1999, the Company had repurchased 1,463,000 shares of its common
stock, under the Board of Directors authorization. The Board of Directors has
authorized the purchase of up to two million shares of common stock from time to
time, depending on market conditions.
The Company has a line of credit for $50,000,000 and an additional letter
of credit line of $30,000,000. The revolving credit agreement extends to October
31, 1999 and contains usual bank line of credit terms. There were no borrowings
under the credit line at June 30, 1999 and $7,802,000 of letters of credit were
outstanding. Management believes that cash and cash equivalents, cash flow
from operations and amounts available under the line of credit will be adequate
to fund the anticipated levels of inventories and accounts receivable required
in the operation of the business and the Company's other presently anticipated
needs including the purchase of shares of the Company's common stock.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain items in or
derived from the Company's statements of income expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
June 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Home video 61.9% 58.7% 56.6%
Coin-operated video 38.1% 41.3% 43.4%
- ------------------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0%
Cost of sales 54.6% 51.4% 57.0%
- ------------------------------------------------------------------------------------------------------
Gross profit 45.4% 48.6% 43.0%
Research and development
expense 21.6% 17.3% 14.4%
Selling expense 12.3% 9.8% 7.9%
Administrative expense 5.2% 4.9% 5.1%
Restructuring expense 0.8% -- --
Litigation and settlement expense 3.1% -- --
- ------------------------------------------------------------------------------------------------------
Operating income 2.4% 16.6% 15.6%
Interest and other income, net 0.4% 0.8% 0.5%
- ------------------------------------------------------------------------------------------------------
Income before tax provision
and extraordinary credit 2.8% 17.4% 16.1%
Provision for income taxes 1.1% 6.6% 6.1%
- ------------------------------------------------------------------------------------------------------
Income before
extraordinary credit 1.7% 10.8% 10.0%
Extraordinary gain on early
extinguishment of debt, net 0.0% 0.0% 0.8%
- ------------------------------------------------------------------------------------------------------
Net income 1.7% 10.8% 10.8%
- ------------------------------------------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED WITH FISCAL 1998
Revenues decreased $39,435,000 or 10.1% from $391,230,000 in fiscal 1998 to
$351,795,000 in fiscal 1999.
Home video game revenues decreased $11,842,000 or 5.2% from $229,732,000 in
fiscal 1998 to $217,890,000 in fiscal 1999. The decrease in home video revenues
was primarily due to a reliance on third party designed games that were
favorably reviewed but did not do well in the market place and a reduced number
of home games converted from coin-op games that generally have higher sales.
Home video game gross profit was 53.0% of revenues in fiscal 1999 compared to
54.3% of revenues in fiscal 1998.
Coin-operated video game revenues decreased $27,503,000 or 17.1% from
$161,498,000 in fiscal 1998 to $133,905,000 in fiscal 1999. The decrease in
coin-operated video game revenues was primarily from a reduced number of sit
down driving games in the product mix and a sharp decrease in demand, during the
latter part of fiscal 1999, for games that incorporate guns or a shooting
theme.
Gross profit decreased $30,290,000 or 15.9% from $190,099,000 (48.6% of
revenues) in fiscal 1998 to $159,809,000 (45.4% of revenues) in fiscal 1999,
primarily due to lower revenues and lower margins on coin-operated games sold
during fiscal 1999.
Research and development expenses increased $8,532,000 or 12.6% from
$67,477,000 (17.3% of revenues) in fiscal 1998 to $76,009,000 (21.6% of
revenues) in fiscal 1999. The increase is due in part to an increased number of
internal game development teams and in part to additional externally developed
home video games released during fiscal 1999.
Selling expense increased $4,976,000 or 13.0% from $38,288,000 (9.8% of
revenues) in fiscal 1998 to $43,264,000 (12.3% of revenues) in fiscal 1999. The
increase was primarily due to increased level of advertising for NFL Blitz home
video game.
Administrative expense decreased $818,000 or 4.2% from $19,259,000 (4.9% of
revenues) in fiscal 1998 to $18,441,000 (5.2% of revenues) in fiscal 1999.
Restructuring expense in fiscal 1999 was $2,742,000 and represents
primarily cost of employee severance. The restructuring eliminates certain
duplicative functions in our Midway and Atari coin-op business units and is
expected to reduce overhead by approximately $5,000,000 per year.
The litigation and settlement expense in fiscal 1999 of $11,025,000 includes
$2,525,000 of professional and legal expense and $8,500,000 for the settlement
of litigation and disputes with GT Interactive resulting from distribution
agreements. The agreements have been terminated and the Company is now able to
sell its home video games directly to markets outside North America.
Operating income decreased $56,747,000 or 87.2% from $65,075,000 (16.6% of
revenues) in fiscal 1998 to $8,328,000 (2.4% of revenues) in fiscal 1999
primarily due to lower sales and decreased gross profit, increased research and
development and selling expenses, coupled with the litigation and settlement
costs and restructuring expenses.
<PAGE> 4
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38.0% in fiscal 1999 and 38.1% in fiscal 1998.
Net income decreased $35,975,000 or 85.4% from $42,122,000, $1.10 per share,
in fiscal 1998 to $6,147,000, $ .16 per share, in fiscal 1999. Fiscal 1999 net
income was reduced by $8,074,000, $ .21 per share, for litigation settlement,
restructuring and other unusual items.
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues increased $3,004,000 or 0.8% from $388,226,000 in fiscal 1997 to
$391,230,000 in fiscal 1998.
Home video game revenues increased $9,820,000 or 4.5% from $219,912,000 in
fiscal 1997 to $229,732,000 in fiscal 1998. Revenues from the sale of next
generation home video games increased to $215,845,000 in fiscal 1998 from
$152,484,000 in fiscal 1997. Shipments of 32-bit and 64-bit next generation home
video game units increased 90% while next generation home video game revenues
only increased 41.6% due in part to a larger percentage of lower priced Sony
PlayStation sales in the sales mix and in part to the unit sales price decreases
initiated by Nintendo and Sony. Home video game gross profit increased to 54.3%
of revenues in fiscal 1998 compared to 46.6% of revenues in fiscal 1997 due to
the change in sales mix to Sony PlayStation which has a higher gross profit
percentage and because the unit cost of Nintendo 64 cartridges was reduced along
with the decreased sales price in the current fiscal year.
Coin-operated video game revenues decreased by 4.0% from $168,314,000 in
fiscal 1997 to $161,498,000 in fiscal 1998. The decrease in coin-operated video
game revenues was primarily from a shift in the product mix from dedicated video
games to lower priced video kits.
Gross profit increased $23,280,000 or 14.0% from $166,819,000 (43.0% of
revenues) in fiscal 1997 to $190,099,000 (48.6% of revenues) in fiscal 1998. The
increase in gross profit was primarily from an increased percentage of home
video game revenues in total revenues and the increase in the home video game
gross profit margin noted above.
Research and development expenses increased $11,536,000 or 20.6% from
$55,941,000 (14.4% of revenues) in fiscal 1997 to $67,477,000 (17.3% of
revenues) in fiscal 1998. The increase is due in part to an increased number of
internal game development teams and in part to additional externally developed
home video games released during fiscal 1998.
Selling expense increased $7,845,000 or 25.8% from $30,443,000 (7.9% of
revenues) in fiscal 1997 to $38,288,000 (9.8% of revenues) in fiscal 1998. The
increase was primarily due to the change in the revenue mix to the increased
number and level of home video games which have higher selling costs as a
percent of sales.
Administrative expense decreased $643,000 or 3.2% from $19,902,000 (5.1% of
revenues) in fiscal 1997 to $19,259,000 (4.9% of revenues) in fiscal 1998,
notwithstanding increased goodwill amortization and public company expenses in
fiscal 1998.
Operating income increased $4,542,000 or 7.5% from $60,533,000 (15.6% of
revenues) in fiscal 1997 to $65,075,000 (16.6% of revenues) in fiscal 1998
because gross profit increased more than the combined increase in research and
development and selling expenses.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38.1% in fiscal 1998 and 38.0% in fiscal 1997.
Net income increased $227,000 or 0.5% from $41,895,000, $1.14 per share, in
fiscal 1997 to $42,122,000, $1.10 per share, in fiscal 1998. Fiscal 1997 net
income includes $3,044,000, $.08 per share, from an extraordinary gain on early
extinguishment of debt. Excluding the effects of the extraordinary gain in
fiscal 1997, earnings increased $3,271,000 or 8.4% from $38,851,000 in fiscal
1997 to $42,122,000 in fiscal 1998 and per share earnings increased 3.8% from
$1.06 per share to $1.10 per share. The number of shares used in calculating per
share earnings increased by 4.6% to 38,481,000 in fiscal 1998 from 36,800,000
in fiscal 1997 because of the shares of common stock sold in the October 29,
1996 public offering. The increase in income before extraordinary credit was
primarily the result of the increase in gross profit resulting from the increase
in the percentage of home video game revenues in total revenues and the increase
in the home video game gross profit margin noted above, after absorbing the
increases in research and development and selling expenses.
<PAGE> 5
IMPACT OF INFLATION
During the past three years, the level of inflation affecting the Company has
been relatively low. The ability of the Company to pass on future cost increases
in the form of higher sales prices will continue to be dependent on the
prevailing competitive environment and the acceptance of the Company's products
in the market place.
SEASONALITY
The home video game business is highly seasonal and historically has resulted in
higher revenues and net income in the first and second quarters of the June 30
fiscal year due to customer purchases preceding the year-end retail holiday
selling season. The coin-operated video game business has not historically been
seasonal but quarterly revenues and net income may increase when a coin-operated
video game that achieves significant player appeal is introduced.
YEAR 2000 (YEAR 2000 READINESS DISCLOSURE)
Since 1996, we have worked to make our systems Y2K compliant together with WMS,
our Chicago information services provider. All critical systems have been made
compliant, however testing is ongoing and some servers and personal computers
may require replacement in non-critical areas.
We believe that there are no Y2K issues with respect to the functionality of
any of our products sold in the past or to be sold in the future. We also
believe that there are no Y2K issues with respect to the functionality of the
hardware platforms for which we sell home video games.
WMS provides contract manufacturing services to us. WMS has assured us in
writing that the systems used in their contract manufacturing are Y2K compliant.
WMS also has notified us that the assembly of the coin-operated video games
should not be affected by malfunctioning tools or equipment using embedded
microprocessors, as the assembly process is not heavily reliant on such tools or
equipment.
We may be exposed to potential Y2K problems because we rely on distributors,
large customers and coin-operated video game component suppliers. We have
contacted certain suppliers and customers to assess the potential problems, if
any.
A determination as to our customers' or suppliers' levels of readiness cannot be
made. However based on the significant level of responses received from
suppliers and customers, it appears that they are either Y2K ready or working
towards becoming Y2K ready. The Company will continue to follow up with those
customers and suppliers who have not responded or indicated their Y2K work is in
process. If needed, to avoid potential Y2K problems detected by our suppliers,
we will adjust the coin-operated title release dates and at worst we would
expect a short-term delay in shipments of our products. If such a delay should
occur, we do not expect to experience a material adverse effect on operating
results for any reportable period.
Midway does not have a contingency plan for undetected Y2K problems. Those
problems, if they occur, will be dealt with immediately upon occurrence. The
effect on Midway of such occurrence cannot be determined at this time.
This discussion of Y2K risks and readiness contains certain forward-looking
statements concerning future conditions and our business outlook based on
currently available information that involve risks and uncertainties. The actual
state of our Y2K readiness and exposure could differ materially from that
anticipated in the forward-looking statements as a result of certain risks and
uncertainties, including, without limitation, the ability to obtain supplies and
energy, make deliveries, communicate with business partners, the Y2K readiness
of customers and other business partners and the other risks described above.
<PAGE> 6
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY-HOLDER MATTERS
Midway Games Inc. common stock, par value $.01 per share, is traded on the New
York Stock Exchange under the symbol MWY. The table sets forth for the periods
indicated the high and low sale prices per share as reported on the New York
Stock Exchange.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Calendar Period High Low
- -------------------------------------------------------------------------------
<S> <C> <C>
1997
Third Quarter $26 13/16 $18 3/8
Fourth Quarter 26 3/4 16 1/2
- -------------------------------------------------------------------------------
1998
First Quarter $25 1/4 $17 1/8
Second Quarter 25 11/16 12
Third Quarter 17 1/8 9 3/8
Fourth Quarter 13 1/16 9
- -------------------------------------------------------------------------------
1999
First Quarter $11 5/16 $ 7 5/8
Second Quarter 12 15/16 8 1/16
Third Quarter (through August 25, 1999) 13 15/16 10 1/2
- -------------------------------------------------------------------------------
</TABLE>
No cash dividends with respect to the common stock were declared or paid during
fiscal 1999 or 1998. The payment of future cash dividends will depend upon,
among other things, earnings, anticipated expansion and capital requirements and
the financial condition of the Company.
At August 12, 1999, there were approximately 1,397 holders of record of the
Company's common stock.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Midway Games Inc.
We have audited the accompanying consolidated balance sheets of Midway Games
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Midway Games
Inc. and subsidiaries at June 30, 1999 and 1998, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young L.L.P.
Chicago, Illinois
August 25, 1999
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
June 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 51,546 $ 26,136
Short-term investments -- 12,000
- ------------------------------------------------------------------------------------------------------------------
51,546 38,136
Receivables, less allowances of $4,954 in 1999 and $7,017 in 1998 46,244 86,198
Inventories
Raw materials and work in progress 9,437 9,441
Finished goods 22,841 13,838
- ------------------------------------------------------------------------------------------------------------------
32,278 23,279
Prepaid income taxes 7,272 --
Deferred income taxes 9,132 4,966
Other current assets 10,757 9,607
- ------------------------------------------------------------------------------------------------------------------
Total current assets 157,229 162,186
Property and equipment, net 10,228 9,620
Excess of purchase cost over amount assigned to net assets acquired, net 41,307 45,228
Other assets 10,495 10,389
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 219,259 $ 227,423
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,457 $ 18,358
Accrued compensation and related benefits 5,601 8,776
Accrued litigation settlement 8,500 --
Income taxes payable -- 2,580
Accrued royalties 2,210 4,191
Other accrued liabilities 7,422 9,995
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 37,190 43,900
Deferred income taxes 4,493 4,434
Other noncurrent liabilities -- 2,440
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, shares issued-38,750,000 in 1999 and 38,500,000 in 1998 388 385
Additional paid-in capital 96,407 98,488
Retained earnings 90,164 84,017
- ------------------------------------------------------------------------------------------------------------------
186,959 182,890
Treasury stock, at cost-713,000 shares in 1999 and 463,200 shares in 1998 (9,383) (6,241)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 177,576 176,649
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 219,259 $ 227,423
- ------------------------------------------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years Ended June 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Home video $217,890 $229,732 $219,912
Coin-operated video 133,905 161,498 168,314
- ---------------------------------------------------------------------------------------------------
Total revenues 351,795 391,230 388,226
Cost of sales 191,986 201,131 221,407
- ---------------------------------------------------------------------------------------------------
Gross profit 159,809 190,099 166,819
Research and development expense 76,009 67,477 55,941
Selling expense 43,264 38,288 30,443
Administrative expense 18,441 19,259 19,902
Restructuring expense 2,742 -- --
Litigation and settlement expense 11,025 -- --
- ---------------------------------------------------------------------------------------------------
Operating Income 8,328 65,075 60,533
Interest and other Income 1,586 2,947 4,504
Interest expense -- -- (2,374)
- ---------------------------------------------------------------------------------------------------
Income before tax provision and extraordinary credit 9,914 68,022 62,663
Provision for income taxes (3,767) (25,900) (23,812)
- ---------------------------------------------------------------------------------------------------
Income before extraordinary credit 6,147 42,122 38,851
Extraordinary gain on early extinguishment of debt,
net of taxes of $2,001 -- -- 3,044
- ---------------------------------------------------------------------------------------------------
Net income $ 6,147 $ 42,122 $ 41,895
- ---------------------------------------------------------------------------------------------------
Basic and diluted per share of common stock
Income before extraordinary credit $.16 $1.10 $1.06
Extraordinary gain on early extinguishment of debt,
net -- -- .08
- ---------------------------------------------------------------------------------------------------
Net income $.16 $1.10 $1.14
===================================================================================================
Average number of shares outstanding 37,597 38,481 36,800
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE> 9
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Common Stock
Additional
Number Par Paid-in
of Shares Value Capital
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Combined balance at June 30, 1996
Formation transactions on July 1, 1996 33,400 $ 334 $ 5,154
Net proceeds from initial public offering 5,100 51 93,334
Net income
- --------------------------------------------------------------------------------------
Balance at June 30, 1997 38,500 385 98,488
Net income
Purchase of treasury stock (463,200 shares)
- --------------------------------------------------------------------------------------
Balance at June 30, 1998 38,500 385 98,488
Net income
Purchase of treasury stock (999,800 shares)
Sale of common stock 250 3 1,807
Treasury shares sold pursuant to employee
incentive plan (750,000 shares) (3,888)
- --------------------------------------------------------------------------------------
Balance at June 30, 1999 38,750 $ 388 $96,407
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Treasury Stockholder's Total
Retained Stock, Net Stockholders'
Earnings At Cost Investment Equity
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Combined balance at June 30, 1996 $ 5,488
Formation transactions on July 1, 1996 (5,488) $ 5,488
Net proceeds from initial public offering 93,385
Net income $41,895 41,895
- ------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 41,895 -- -- 140,768
Net income 42,122 42,122
Purchase of treasury stock (463,200 shares) $ (6,241) (6,241)
- ------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 84,017 (6,241) -- 176,649
Net income 6,147 6,147
Purchase of treasury stock (999,800 shares) (13,030) (13,030)
Sale of common stock 1,810
Treasury shares sold pursuant to employee
incentive plan (750,000 shares) 9,888 6,000
- ------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 $90,164 $ (9,383) $ -- $177,576
- ------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
<PAGE> 10
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 6,147 $ 42,122 $ 41,895
Adjustments to reconcile net Income to net cash provided by operating activities:
Depreciation and amortization 10,840 8,913 6,297
Receivables provision 12,668 16,872 14,586
Deferred income taxes (4,107) 2,210 (5,777)
Extraordinary gain on early extinguishment of debt -- -- (5,045)
Increase (decrease) resulting from changes in operating assets and liabilities:
Receivables 27,286 (48,593) (20,112)
Inventories (8,999) 4,679 (2,936)
Other current assets (1,150) (5,278) 1,078
Accounts payable and accruals (4,130) (8,509) 2,289
Income taxes (9,852) (1,286) 3,354
Other assets and liabilities not reflected elsewhere (4,861) (9,685) 2,518
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,842 1,445 38,147
INVESTING ACTIVITIES
Purchase of property and equipment (5,212) (4,530) (4,699)
Payment for Tradewest acquisition -- (14,400) (7,200)
Net change in short-term Investments 12,000 (2,000) (10,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 6,788 (20,930) (21,899)
FINANCING ACTIVITIES
Net proceeds from initial public offering -- -- 93,385
Net proceeds from sale of common stock 7,810 -- --
Purchase of treasury stock (13,030) (6,241) --
Dividend notes paid to WMS Industries Inc. -- -- (50,000)
Payment of notes payable from the purchase of Atari Games Corporation -- -- (16,970)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (5,220) (6,241) 26,415
- ----------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents 25,410 (25,726) 42,663
Cash and cash equivalents at beginning of year 26,136 51,862 9,199
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 51,546 $ 26,136 $ 51,862
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE> 11
Notes to Financial Statements
NOTE 1: NATURE OF BUSINESS
Midway Games Inc. ("Midway") and its subsidiaries (the "Company") operates in
one operating segment, the design and distribution of coin-operated video games
and publishing, licensing and distribution of home video games (the "Video Game
Business"). Coin-operated video games are sold to distributors worldwide who
sell them to operators and arcades. Home video games are sold to mass merchants,
video rental retailers, and entertainment software distributors in North
America. Prior to June 30, 1999, the Company participated in other worldwide
markets through licensing and distribution agreements with third parties but
will be selling its home video games on a worldwide basis in future years.
Consumers buy or rent the home video games to use on game systems (Nintendo,
Sony and Sega) and on personal computers.
NOTE 2: INITIAL PUBLIC OFFERING AND WMS DISTRIBUTION
Since its incorporation in 1988 through the date of the initial public offering,
Midway was a wholly-owned subsidiary of WMS Industries Inc. ("WMS"). Immediately
prior to the initial public offering, Midway effectuated a 33,400 for one stock
split resulting in 33,400,000 shares of common stock being issued and
outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable to
WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On April 6, 1998, WMS completed the spin-off of its remaining 86.8%
ownership interest of 33,400,000 shares of Midway. The spin-off was completed by
means of a tax free pro rata distribution of the Midway shares to the WMS
stockholders.
NOTE 3: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND RELATIONSHIP WITH WMS INDUSTRIES INC.
Since its incorporation in 1988 through July 1, 1996 the Company was the primary
subsidiary in which WMS conducted the coin-operated video games business. From
July 1, 1996 through April 6, 1998, the date of the Midway spin-off, Midway has
been the only WMS subsidiary in the coin-operated video games business.
Subsequent to April 6, 1998, Midway began operating on a stand-alone basis and
all transactions with WMS have been at arm's length.
On July 1, 1996 (the "Transfer Date") WMS transferred out of Midway all of
the operating assets and liabilities relating to the "Bally(R)" pinball business
previously conducted by Midway. On the Transfer Date WMS transferred the
coin-operated video game operating assets and liabilities not previously part of
Midway from other WMS subsidiaries to Midway. Also on the Transfer Date, WMS
transferred 100% of the stock of Midway Home Entertainment Inc. and Midway
Interactive Inc. to Midway. The aforementioned transfers resulted in WMS
concentrating its "Video Game Business" into Midway and its wholly-owned
subsidiaries. WMS's net investment has been reflected as Stockholder's Net
Investment in statement of changes in stockholders' equity through June 30,
1996.
The consolidated income statement for fiscal 1997 and fiscal 1998, through
April 6, 1998, include transfers and allocations of costs and expenses from WMS
or other WMS subsidiaries primarily for activities relating to the Midway
coin-operated video games business. Cost of sales includes material, labor and
labor fringes transferred from the other WMS subsidiaries at cost based on the
standard cost of material adjusted to estimated actual using engineered bills of
material and actual labor with standard labor fringes applied. Cost of sales
also includes allocations of manufacturing overhead cost incurred in the
production of coin-operated video games for the Company. Research and
development expense includes allocations for certain shared facilities and
personnel. Selling and administrative expenses include certain allocations
relating to general management, treasury, accounting, human resources, insurance
and selling and marketing. These allocations were determined by using various
factors such as dollar amount of sales, number of personnel,
<PAGE> 12
square feet of building space, estimates of time spent to provide services and
other appropriate costing measures. In the opinion of management these
transfers of cost of sales and allocations are made on a reasonable basis to
properly reflect the share of costs incurred by WMS on behalf of the Company.
The results of operations for fiscal 1998 and 1997 may not necessarily be
representative of results that would have been attained if the Company operated
as a separate independent entity.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated by the straight-line
method over their estimated useful lives.
EXCESS OF PURCHASE COST OVER AMOUNT ASSIGNED TO NET ASSETS ACQUIRED (GOODWILL)
Goodwill of $41,307,000 and $45,228,000 at June 30, 1999 and 1998, respectively,
(net of accumulated amortization of $12,693,000 and $8,772,000 at June 30, 1999
and 1998, respectively) arising from the acquisitions of Tradewest in 1994 and
Atari Games in 1996 is being amortized by the straight-line method over 15 to
20 years.
INTELLECTUAL PROPERTIES LICENSES
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed. Unit royalties on sales that exceed the guarantee are
recognized as revenue as earned. License and royalty revenues primarily from
home video game activities, for fiscal 1999, 1998 and 1997 was $4,116,000,
$2,572,000 and $6,537,000, respectively.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Midway and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
HOME VIDEO GAME REVENUES
Home video game revenues are recorded when products are shipped to customers. An
allowance for returns and discounts is also recorded based upon management's
evaluation of historical experience as well as current industry trends.
ADVERTISING EXPENSE
The cost of advertising is charged to earnings as incurred and for fiscal 1999,
1998 and 1997 was $27,272,000, $22,732,000 and $16,524,000, respectively.
EXPORT SALES AND SALES TO MAJOR CUSTOMERS
Export sales were $35,582,000, $42,900,000 and $70,367,000 for fiscal 1999,
1998 and 1997, respectively. Sales of home video games to two mass merchants
during fiscal 1999 were $41,539,000 and $38,183,000, and to one mass merchant
in fiscal 1998 and 1997 were $48,914,000 and $40,675,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumption that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 4: TRANSACTIONS WITH WMS
Interest expense for fiscal 1997 included $1,253,000 of interest charged by WMS
primarily on the $50,000,000 dividend notes accrued at 6% through October 31,
1996.
The Company has been charged for the specific production costs, excluding
manufacturing overhead, of the coin-operated video games produced by a
subsidiary of WMS that totaled $62,416,000 and $93,563,000 in the period to
April 6, 1998 and year ended June 30, 1997, respectively. In addition, certain
other costs have been allocated to the Company based on the various factors
noted in Note 3. Charges to the Company from WMS and WMS subsidiaries for the
allocations in the period to April 6, 1998 and year ended June 30, 1997 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Manufacturing overhead $5,366 $5,368
Research and development expense 469 779
Selling expense 1,477 3,263
Administrative expense 1,613 3,452
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 13
The Company entered into a Manufacturing and Services Agreement with WMS in
1996 under which WMS and its subsidiaries agreed to continue performing
contract manufacturing for coin-operated video games for Midway and Atari Games
as well as providing general management, financial reporting, and treasury
services to the Company and general management, accounting, human resources and
selling and marketing services to Midway. The Company was expected to purchase
materials and WMS subsidiaries manufactured the coin-operated video games
charging actual labor with labor fringes and manufacturing overhead allocated.
The labor fringes, manufacturing overhead and other services provided were
allocated based on the various factors noted in Note 3.
Effective April 6, 1998, in connection with the spin-off described in Note
2, the 1996 agreement was terminated and the Company entered into several
agreements with WMS under which WMS, among other things, performs contract
manufacturing and provides information technology services to certain parts of
the Company. In addition, under a separate agreement, the Company provides
selling and marketing services for the WMS pinball products. These agreements
provide for prices for products or services on an arm's length basis. The
overall cost structure of the Company has not been materially different
in fiscal 1999 from that experienced by the Company under the prior
Manufacturing and Services Agreement with WMS.
See Note 7 for income tax allocations.
NOTE 5: RESTRUCTURING EXPENSE
During fiscal 1999 the Company incurred $2,742,000 of restructuring expense
($1,700,000, $.05 per share, after tax) for severance of 53 employees and other
costs. The restructuring reduced redundancies in sales, marketing, product
development and administration in the Midway and Atari coin-operated business
units.
NOTE 6: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 3,473 $ 2,807
Furniture, fixtures and engineering equipment 23,164 19,023
- -------------------------------------------------------------------------------------------
26,637 21,830
Less accumulated depreciation (16,409) (12,210)
- -------------------------------------------------------------------------------------------
Net property and equipment $ 10,228 $ 9,620
===========================================================================================
</TABLE>
NOTE 7: INCOME TAXES
The results of the Company up to April 6, 1998, the date of the spin-off, have
been included in the consolidated income tax returns of WMS; however, income
taxes have been recorded based on a calculation of the income taxes that would
have been incurred if the Company operated as an independent entity. WMS and the
Company entered into a tax sharing agreement effective July 1, 1996 and ending
on the spin-off date that requires a tax calculation, accrual and payment by
the Company as if the Company was filing separate tax returns.
Significant components of the income tax provision on income before
extraordinary credit for the years ended June 30 were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 6,303 $ 20,613 $ 26,010
State 971 3,077 4,091
- ------------------------------------------------------------------------
Total current 7,874 23,690 30,101
Deferred:
Federal (3,383) 1,996 (5,265)
State (724) 214 (1,024)
- ------------------------------------------------------------------------
Total deferred (4,107) 2,210 (6,289)
- ------------------------------------------------------------------------
Provision for income taxes $ 3,767 $ 25,900 $ 23,812
========================================================================
</TABLE>
The income tax provision on income before extraordinary credit differs from the
amount computed using the statutory federal income tax rate for the years ended
June 30 as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 1.6 3.1 3.2
Foreign sales corporation benefits - (.5) (1.0)
Other, net 1.4 .5 .8
- ----------------------------------------------------------------------------------
38.0% 38.1% 38.0%
==================================================================================
</TABLE>
<PAGE> 14
The June 30, 1997 income tax provision of $2,001,000 on the extraordinary
credit is comprised of the federal tax rate of 35% and a composite state tax
rate of 4.66%, net of federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes.
Significant components of the Company's deferred tax assets and
liabilities at June 30 were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets resulting from:
Inventory valuation $ 3,360 $ 1,002
Accrued items not currently deductible 3,385 1,154
Receivable allowance 2,031 2,850
- ----------------------------------------------------------------------------------------------
Total deferred tax assets 8,776 5,006
- ----------------------------------------------------------------------------------------------
Deferred tax liabilities resulting from:
Tax over book depreciation 457 633
Book over tax basis of domestic subsidiary 2,723 2,885
Other 957 956
- ----------------------------------------------------------------------------------------------
Total deferred tax liabilities 4,137 4,474
- ----------------------------------------------------------------------------------------------
Net deferred tax assets $ 4,639 $ 532
==============================================================================================
</TABLE>
During fiscal 1999 income taxes paid were $17,726,000. During fiscal 1998
and 1997 income taxes paid to WMS were $24,976,000 and $28,236,000,
respectively.
NOTE 8: LINE OF CREDIT
The Company established a line of credit for $50,000,000 and an additional
letter of credit line of $30,000,000. The revolving credit agreement is for a
one-year term to October 31, 1999 and contains usual bank line of credit terms.
The amount of interest paid during fiscal 1997 was $2,740,000.
NOTE 9: PREFERRED STOCK AND COMMON STOCK OPTION PLANS
The preferred stock is issuable in series, and the elective rights and
preferences and number of shares in each series are to be established by the
Board of Directors.
At the date of the Midway spin-off by WMS, the Midway Rights Agreements
became effective. Under the Rights Agreement, each share of Midway common stock
has an accompanying Right to purchase, under certain conditions, one
one-hundredth of a share of the Company's Series A Preferred Stock at an
exercise price of $100, permitting each holder to receive $200 worth of the
Company's common stock valued at the then current market price. The Rights are
redeemable by the Company at $.01 per Right, subject to certain conditions, at
any time and expire in 2007. The Rights are intended to assure fair shareholder
treatment in any attempted takeover of the Company and to guard against abusive
takeover tactics.
Under the common stock option plans the Company may grant both incentive
stock options and nonqualified options on shares of common stock through the
year 2009. The plans authorized options grants on 6,750,000 shares of common
stock to employees and under certain conditions to non-employee directors and
consultants. The Compensation and Stock Option Committee of the Board of
Directors has the authority to fix the terms and conditions upon which each
option is granted, but in no event shall the term exceed ten years of be granted
at less than 100% of the fair market value of the stock at the date of grant.
At June 30, 1999, 6,750,000 shares of common stock were reserved for possible
issuance for stock option plans.
<PAGE> 15
A summary of the status of the Company's stock option plans for the three
years ended June 30, 1999 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Weighted
Shares average
(000) Exercise Price
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1996 -- --
Granted 1,810 $20.00
-----
Outstanding at June 30, 1997 1,810 20.00
Granted 475 16.50
-----
Outstanding at June 30, 1998 2,285 19.27
Granted 2,513 8.43
Forfeited (40) 20.00
-----
Outstanding at June 30, 1999 4,758 13.54
- -------------------------------------------------------------------------
</TABLE>
The following summarizes information about stock options outstanding at
June 30, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices Number Weighted Average Weighted
Outstanding Remaining Average
(000) Contractual Life Exercise Price
in Years
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 8.00 - $ 12.31 2,513 9.6 $ 8.43
16.50 - 20.00 2,245 7.7 19.26
-----
8.00 - 20.00 4,758 8.7 13.54
- --------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999 options for 1,334,000 shares were exercisable at a weighted
average exercise price of $19.39 with a range of $16.50 to $20.00. At June 30,
1998 and 1997 options for 956,000 and 505,000 shares, respectively, were
exercisable at an average exercise price of $19.41 and $20.00 per share,
respectively. At June 30, 1999, 1,992,000 shares were available for future
grants under the plans.
The Company accounts for stock options for purposes of determining net
income in accordance with APB Opinion No. 25. No compensation expense has been
recognized in conjunction with the stock option plan. SFAS No. 123 regarding
stock option plans permits the use of APB Opinion No. 25 but requires the
inclusion of certain pro forma disclosures in the footnotes.
Pro forma net income for fiscal 1999, 1998 and 1997 adjusted for the expense
provision of SFAS No. 123 was $564,000, $38,586,000 and $36,892,000,
respectively, or $.02, $1.00 and $1.00, respectively, per share of common
stock.
For pro forma calculations, the fair value of each option is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for fiscal 1999, 1998 and 1997,
respectively: dividend yield of 0%, 0% and 0%; expected volatility of .70, .40
and .50; risk free interest rate of 5.95%, 5.65% and 6.2% and expected life of
the option of 6 years, 6 years and 4 years.
During fiscal 1999, 1998 and 1997 options granted had a weighted average pro
forma fair market value using the Black-Scholes assumptions noted above of
$5.68, $7.92 and $9.09 per share, respectively.
NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit and market risk consist primarily of cash equivalents, and trade accounts
receivable from the sale of games. By policy, the Company places its cash
equivalents only in high credit quality securities and limits the amounts
invested in any one security. At June 30, 1999, 68% of trade accounts receivable
are from sales of coin-operated video games to the Company's distributors
located primarily throughout the United States and Western Europe and, because
of the number and geographic distribution, concentration is limited. Foreign
sales are typically made in U.S. dollars and typically on the basis of
<PAGE> 16
a letter of credit. At times during the fiscal year accounts receivable from
certain major home video game customers represent a significant amount of the
accounts receivable then outstanding.
Cash equivalents of $28,481,000 at June 30, 1999, which are designated
available-for-sale, are recorded at cost which is equal to market and
considered by management to be the fair value of these financial instruments.
NOTE 11: LEASE COMMITMENTS
The Company leases certain warehouses, office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 1999 as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
(in thousands)
- ----------------------------------------------------------------------------
<S> <C>
2000 $ 2,075
2001 2,006
2002 2,013
2003 1,867
2004 1,752
Thereafter 1,398
- ----------------------------------------------------------------------------
11,111
Less sublease income 4,198
- ----------------------------------------------------------------------------
$ 6,913
- ----------------------------------------------------------------------------
</TABLE>
Rent expense for fiscal 1999, 1998 and 1997 was $2,281,000, $1,872,000, and
$1,459,000, respectively, and was offset by sub-lease income of $702,000,
$633,000 and $536,000 for fiscal 1999, 1998 and 1997, respectively. Aggregate
future gross lease commitments of approximately $8,600,000 were guaranteed,
prior to the acquisition of Atari Games, and continue to be guaranteed by its
former parent company.
NOTE 12: LITIGATION SETTLEMENT
GT Interactive Software Corp. (GT Interactive), on January 25, 1999, filed suit
against the Company for various claims arising from the distribution agreements
between GT Interactive and the Company. The Company subsequently terminated GT
Interactive as a distributor and initiated several counter claims. The settle-
ment of all litigation and disputes requires payment of $8,500,000 to GT
Interactive which was accrued at June 30, 1999. In addition, the Company
incurred $2,525,000 of professional and legal expense relating to this
litigation. The total litigation and settlement costs were $11,025,000
($6,836,000 or $.18 per share, after-tax). This settlement allows the Company to
sell its home video games directly into international markets beginning in
fiscal 2000.
NOTE 13: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
(in thousands, except Sept. 30, Dec. 31, Mar. 31 June 30,
per share amounts) 1998(2) 1998 1999 1999(1)
- ------------------------------------------------------------------------------------------------------------
Fiscal 1999 Quarters
<S> <C> <C> <C> <C>
Revenues $89,339 $125,661 $80,330 $ 56,465
Gross profit 49,227 59,983 32,426 18,173
Research and development
expense 15,748 22,458 17,210 20,593
Net income (loss) 9,807 10,690 1,056 (15,406)
Basic and diluted net
income (loss) per share $ .26 $ .29 $ .03 $ (.40)
- ------------------------------------------------------------------------------------------------------------
Average number of shares
outstanding 37,648 37,145 37,546 38,051
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The June 30, 1999 quarter includes settlement of litigation and
restructuring charges of $13,767,000 as well as other unusual charges of
$3,481,000, primarily relating to inventory writedowns, which total
$17,248,000 and increased net loss by $10,694,000, net of tax, ($.28 per
share).
(2) The September 30, 1998 quarter includes a credit of $4,225,000 from the
recovery of prior year overcharges from certain coin-operated game parts
suppliers. Net income increased by $2,620,000, net of tax, from that credit
($.07 per share).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1997 1997 1998 1998
- ----------------------------------------------------------------------------------------------------------------------
Fiscal 1998 Quarters
<S> <C> <C> <C> <C>
Revenues $ 73,740 $125,057 $ 94,347 $ 98,086
Gross profit 35,111 63,700 43,369 47,919
Research and development
expense 14,123 17,952 17,334 18,068
Net income 7,235 18,382 7,007 9,498
Basic and diluted net
income per share $ .19 $ .48 $ .18 $ .25
- ----------------------------------------------------------------------------------------------------------------------
Average number of shares
outstanding 38,500 38,500 38,500 38,422
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
- ---------- ---------------
<S> <C>
Midway Interactive Inc. Delaware
Midway Home Entertainment Inc. Delaware
Midway/Nintendo Inc. -- 50% owned Delaware
Atari Games Corporation California
Midway Games Asia Limited - 79.9% owned by the Registrant and
.1% owned by Midway Home Entertainment Inc. Hong Kong
Qingdao Wei TC Family Playland Co., Ltd.- 100% owned by
Midway Games Asia Limited People's Republic of China
Midway Games Sales Inc. Barbados
Midway Games (Europe) Gmbh Germany
Midway Games Limited United Kingdom
Midway Amusement Games, LLC Delaware (LLC)
Midway Sales Company, LLC Delaware (LLC)
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement No. 333-73451 on Form S-8, filed March 5, 1999; Registration Statement
No. 333-68373 on Form S-8, filed December 4, 1998; Registration Statement No.
333-25757 on Form S-8, filed April 24, 1997, as amended June 24, 1998; and
Registration Statement No. 333-57583 on Form S-8, filed June 24, 1998, and in
the related Prospectuses of Midway Games Inc., of our report dated August 25,
1999, with respect to the financial statements and schedule of Midway Games Inc.
and subsidiaries, included and/or incorporated by reference, in the Annual
Report (Form 10-K) of Midway Games Inc. for the year ended June 30, 1999.
Ernst & Young LLP
Chicago, Illinois
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 51,546
<SECURITIES> 0
<RECEIVABLES> 51,198
<ALLOWANCES> (4,954)
<INVENTORY> 32,278
<CURRENT-ASSETS> 157,229
<PP&E> 26,637
<DEPRECIATION> (16,409)
<TOTAL-ASSETS> 219,259
<CURRENT-LIABILITIES> 37,190
<BONDS> 0
0
0
<COMMON> 388
<OTHER-SE> 177,188
<TOTAL-LIABILITY-AND-EQUITY> 219,259
<SALES> 351,795
<TOTAL-REVENUES> 351,795
<CGS> 191,986
<TOTAL-COSTS> 191,986
<OTHER-EXPENSES> 76,009
<LOSS-PROVISION> 306
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,914
<INCOME-TAX> 3,767
<INCOME-CONTINUING> 6,147
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,147
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
