<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
------------------------------------------------
Commission file number 001-12367
MIDWAY GAMES INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2906244
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3401 North California Ave., Chicago, IL 60618
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (773) 961-2222
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by [X] whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 38,052,000 shares of common
stock, $.01 par value, were outstanding at May 3, 1999 after deducting 698,000
shares held as treasury shares.
<PAGE> 2
MIDWAY GAMES INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO
-------
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and nine months ended March 31, 1999 and 1998.................. 2
Condensed Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998..................................... 3-4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 1999 and 1998............................ 5
Notes to Condensed Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 7-10
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings.................................................... 11
ITEM 4. Submission of Matters to a Vote of Security-Holders.................. 11
ITEM 5. Other Information.................................................... 11
ITEM 6. Exhibits and Reports on Form 8-K..................................... 12
SIGNATURE ..................................................................... 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDWAY GAMES INC.
---------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Home video ................................................ $ 39,870 $ 52,916 $ 198,672 $ 169,972
Coin-operated video ....................................... 40,460 41,431 96,658 123,172
--------- --------- --------- ---------
Total revenues ................................................ 80,330 94,347 295,330 293,144
Cost of sales ................................................. 47,904 50,978 153,694 150,964
--------- --------- --------- ---------
Gross profit .................................................. 32,426 43,369 141,636 142,180
Research and development expense .............................. 17,210 17,334 55,416 49,409
Selling expense ............................................... 8,909 10,006 37,311 27,847
Administrative expense ........................................ 4,891 5,629 15,002 14,630
--------- --------- --------- ---------
Operating income .............................................. 1,416 10,400 33,907 50,294
Interest and other income ..................................... 387 902 1,077 2,326
--------- --------- --------- ---------
Income before tax provision ................................... 1,803 11,302 34,984 52,620
Provision for income taxes .................................... (747) (4,295) (13,431) (19,996)
--------- --------- --------- ---------
Net income .................................................... $ 1,056 $ 7,007 $ 21,553 $ 32,624
========= ========= ========= =========
Net income per share of common stock - basic and diluted ...... $ 0.03 $ 0.18 $ 0.58 $ 0.85
========= ========= ========= =========
Weighted average shares outstanding ........................... 37,546 38,500 37,446 38,500
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
MIDWAY GAMES INC.
---------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 51,355 $ 26,136
Short-term investments .................................................... -- 12,000
--------- ---------
51,355 38,136
Receivables, less allowances of $7,558 and $7,017 ......................... 81,002 86,198
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress ..................................... 14,440 9,441
Finished good .......................................................... 17,531 13,838
--------- ---------
31,971 23,279
Deferred income taxes ..................................................... 5,747 4,966
Other current assets ...................................................... 12,884 9,607
--------- ---------
Total current assets ................................................... 182,959 162,186
Property and equipment ......................................................... 25,532 21,830
Less: accumulated depreciation ................................................ (15,725) (12,210)
--------- ---------
9,807 9,620
Excess of purchase cost over amount assigned to net assets acquired, net of
accumulated amortization of $11,713 and $8,772 ............................ 42,287 45,228
Other assets ................................................................... 11,121 10,389
--------- ---------
$ 246,174 $ 227,423
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
MIDWAY GAMES INC.
---------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 26,530 $ 18,358
Accrued compensation and related benefits ................................... 7,319 8,776
Income taxes payable ........................................................ 320 2,580
Accrued royalties ........................................................... 2,220 4,191
Other accrued liabilities ................................................... 9,790 9,995
--------- ---------
Total current liabilities ................................................ 46,179 43,900
Deferred income taxes ............................................................ 4,434 4,434
Other noncurrent liabilities ..................................................... 2,358 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, 38,750,000
and 38,500,000 shares issued ............................................. 388 385
Additional paid-in capital .................................................. 96,447 98,488
Retained earnings ........................................................... 105,570 84,017
--------- ---------
202,405 182,890
Treasury Stock, at cost ( 698,000 and 463,200 shares) ...................... (9,202) (6,241)
--------- ---------
Total stockholders' equity ............................................... 193,203 176,649
--------- ---------
$ 246,174 $ 227,423
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
MIDWAY GAMES INC.
---------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................................... $ 21,553 $ 32,624
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation and amortization ............................................ 8,340 6,115
Receivables provision .................................................... 11,851 9,698
Deferred income taxes .................................................... (781) (1,037)
Decrease resulting from changes in operating assets and liabilities ...... (17,053) (47,918)
-------- --------
Net cash provided (used) by operating activities ................................ 23,910 (518)
INVESTING ACTIVITIES:
Purchase of property and equipment .............................................. (3,843) (3,699)
Net change in short-term investments ............................................ 12,000 (13,800)
-------- --------
Net cash provided (used) used by investing activities ........................... 8,157 (17,499)
Financing activities:
Proceeds from the sale of 750,000 shares of common stock ........................ 6,000 --
Purchase of 984,800 shares of treasury stock..................................... (12,848) --
-------- --------
Net cash used by financing activities ........................................... (6,848) --
-------- --------
Increase (decrease) in cash and cash equivalents ................................ 25,219 (18,017)
Cash and cash equivalents at beginning of period ................................ 26,136 51,862
-------- --------
Cash and cash equivalents at end of period ...................................... $ 51,355 $ 33,845
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 7
MIDWAY GAMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Due to
the seasonality of the Company's businesses, operating results for the
quarter and nine months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending
June 30, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.
2. TRANSACTIONS WITH WMS INDUSTRIES INC. PRIOR TO THE APRIL 6, 1998 SPIN-OFF
The condensed consolidated income statement for the quarter and nine
months ended March 31, 1998 includes transfers and allocations of costs
and expenses from WMS Industries Inc. (WMS) or other WMS subsidiaries
primarily for activities relating to the Midway coin-operated video games
business. Cost of sales includes material, labor and labor fringes
transferred from the other WMS subsidiaries at cost based on the standard
cost of material adjusted to estimated actual using engineered bills of
material and actual labor with standard labor fringes applied. Cost of
sales also includes allocations of manufacturing overhead cost incurred
in the production of coin-operated video games for Midway. Research and
development expenses include 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, 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
were made on a reasonable basis to properly reflect the share of costs
incurred by WMS on behalf of the Company.
The income statement for the quarter and nine months ended March 31, 1998
may not necessarily be representative of results that would have been
attained if the Company operated as a separate independent entity.
The Company has been charged for the specific production costs, excluding
manufacturing overhead, of the coin-operated video games produced by a
subsidiary of WMS that totaled $20,891,000 in the quarter and $62,416,000
in the nine months ended March 31, 1998. In addition, certain other costs
have been allocated to the Company based on various factors noted above.
Charges to the Company from WMS and WMS subsidiaries for the allocations
in the quarter and nine months ended March 31, 1998 were (in thousands):
<TABLE>
<CAPTION>
Three Nine
Months Months
------ ------
<S> <C> <C>
Manufacturing overhead $1,991 $5,366
Research and development expense 150 469
Selling expense 561 1,477
Administrative expense 521 1,613
</TABLE>
3. LITIGATION
See item 1 of part II for the status of litigation.
6
<PAGE> 8
MIDWAY GAMES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains certain forward looking statements
concerning future business conditions and the outlook for the Company based on
currently available information that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward looking statements as a result of certain risks and uncertainties,
including, without limitation, the financial strength of the amusement games
industry, dependence on new product introductions and the ability to maintain
the scheduling of such introductions, technological changes, dependence on
dedicated platform manufacturers, the outcome of certain legal proceedings to
which the Company is a party and other risks more fully described under "Risk
Factors Affecting Future Performance" in the Company's prospectus filed with its
registration statement on Form S-3 on April 1, 1999 (File 333-73347).
FINANCIAL CONDITION
During the nine months ended March 31, 1999 cash provided by operating,
investing and financing activities was $25,219,000 compared with cash used of
$18,017,000 in the nine months ended March 31, 1998.
Cash provided by operating activities before changes in operating assets and
liabilities was $40,963,000 in the nine months ended March 31, 1999 compared to
$47,400,000 in the nine months ended March 31, 1998.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows on page 5, resulted in a cash outflow of $17,053,000 in
the nine months ended March 31, 1999, compared with a cash outflow of
$47,918,000 in the nine months ended March 31, 1998, which outflows were
primarily due to increased receivables and inventories in the March 31, 1999
period and an increase in other long-term assets and increased receivables in
the March 31, 1998 period from their comparable balances at the respective June
30 year ends.
Cash used for the purchase of property and equipment during the nine months
ended March 31, 1999 was $3,843,000 compared with $3,699,000 for the nine months
ended March 31, 1998.
During the nine months ended March 31, 1999, $12,848,000 of cash was used to
acquire 984,800 shares of the Company's common stock held in the treasury. The
Board of Directors authorized the purchase of up to two million shares of which
1,448,000 had been purchased as of March 31, 1999.
During the nine months ended March 31, 1999 the Company received proceeds of
$6,000,000 from the sale of 750,000 shares of common stock under an employee
Stock Incentive Plan which were from treasury shares. Also during the nine
months ended March 31, 1999 the Company sold 250,000 shares of previously
unissued common stock in a public offering which resulted in a net receivable at
March 31, 1999 of $1,849,000 which was collected on April 5, 1999.
The home video game business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a purchase order is accepted.
The Company has established a line of credit for $50,000,000 and an additional
letter of credit line of up to $30,000,000. The revolving credit agreement
extends to October 31, 1999 and contains usual bank line of credit terms. There
were no borrowings under the credit line at March 31, 1999 and $7,391,000 of
letters of credit were outstanding. Management believes that cash and cash
equivalents, short-term investments, cash flow from operations and amounts
available under the line of credit will be adequate to fund the anticipated
levels of inventories and accounts receivable required in the operation of the
business and the Company's other presently anticipated needs including the
purchase of shares of the Company's common stock.
7
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1998
Revenues decreased $14,017,000 from $94,347,000 in the quarter ended March 31,
1998 to $80,330,000 in the quarter ended March 31, 1999.
Home video game revenues decreased to $39,870,000 in the fiscal 1999 third
quarter from $52,916,000 in the prior year period. Revenues for the fiscal 1999
third quarter included $6,663,000 from the sale of video games for the Nintendo
Color Game Boy introduced in the United States by Nintendo in November 1998. The
decrease in home video game revenues is primarily due to fewer titles being
acquired from third party developers for release during the March 31, 1999
quarter and delays in the introduction of certain internally developed home
video games.
During the March 31, 1999 quarter, the Company released seven new home video
game products on three platforms. New products shipped included three for
Nintendo 64, one for Sony PlayStation, and three for Color Game Boy. Midway's
best selling video games during the quarter were NFL Blitz, California Speed,
Rampage2:Universal Tour, 720(degree) skate boarding and Mortal Kombat Trilogy.
Coin-operated video game revenues in the March 31, 1999 quarter were $40,460,000
compared to $41,431,000 in the prior year third quarter. The current year third
quarter included initial sales of HydroThunder, NBA Showtime:NBA on NBC and
War:Final Assault and continuing sales of Carnevil, Guantlet Legends, Site
4:Area 51 and Touchmaster.
Gross profit decreased to $32,426,000 (40.4% of revenues) in the quarter ended
March 31, 1999 from $43,369,000 (46.0% of revenues) in the quarter ended March
31, 1998. The decrease in gross profit was primarily from the change in the mix
of units sold. Home video game gross profit decreased to 49.9% of revenues in
the quarter ended March 31, 1999 compared to 51.1% in the prior year third
quarter because of the change in the mix of units sold. Coin-operated video
games gross profit decreased to 31.0% of revenues in the quarter ended March 31,
1999 compared to 39.4% in the prior year third quarter primarily because of a
change in the mix in games sold in the March 31, 1999 quarter.
Research and development expenses decreased $124,000 from $17,334,000 (18.4% of
revenues) in the quarter ended March 31, 1998 to $17,210,000 (21.4% of revenues)
in the quarter ended March 31, 1999.
Selling expense decreased $1,097,000 from $10,006,000 (10.6% of revenues) in the
quarter ended March 31, 1998 to $8,909,000 (11.1% of revenues) in the quarter
ended March 31, 1999.
Administrative expense decreased $738,000 from $5,629,000 (6.0% of revenues) in
the quarter ended March 31, 1998 to $4,891,000 (6.1% of revenues) in the quarter
ended March 31, 1999.
Operating income in the quarter ended March 31, 1999 decreased $8,984,000 from
$10,400,000 (11.0% of revenues) in the quarter ended March 31, 1998 to
$1,416,000 (1.8% of revenues) in the quarter ended March 31, 1999. The decrease
results primarily from lower revenues and the decrease in gross profit
percentage due to sales mix.
Interest and other income decreased from $902,000 in the March 31, 1998 quarter
to $387,000 in the March 31, 1999 quarter. The decrease is primarily from a
lower level of cash and cash equivalents and short-term investments.
8
<PAGE> 10
Net income was $1,056,000, $0.03 per share, compared with net income of
$7,007,000, $0.18 per share, in the prior year period. The number of shares used
in calculating per share earnings decreased by 2.5% to 37,546,000 in the fiscal
1999 third quarter from the prior year period.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH
NINE MONTHS ENDED MARCH 31, 1998
Revenues increased $2,186,000 from $293,144,000 in the nine months ended March
31, 1998 to $295,330,000 in the nine months ended March 31, 1998.
Home video game revenues increased to $198,672,000 in the fiscal 1999 nine-month
period from $169,972,000 in the prior year period. Revenues for the fiscal 1999
nine-month period included $14,135,000 from the sale of video games for the
Nintendo Game Boy, primarily for the Color Game Boy introduced in the United
States by Nintendo in November 1998. Home video game unit shipments, other than
Game Boy units, increased 10% in the nine-month period of fiscal 1999 compared
to the prior year period with the largest percentage increase from lower priced
Sony PlayStation units.
During the nine months ended March 31, 1999 the Company released seventeen new
home video game products on four platforms. New products shipped included seven
for Nintendo 64, three for Sony PlayStation, six for Color Game Boy, and one for
PCs.. Midway's best selling video games during the nine months were NFL Blitz,
Rush2:Extreme Racing USA, GEX:Enter the Gecko, Wipe Out 64, Twisted Edge Extreme
Snowboarding, Mortal Kombat 4, California Speed, Rampage2:Univesal
Tour, 720(degree) skate boarding and Mortal Kombat Trilogy.
Coin-operated video game revenues in the nine months ended March 31, 1999 were
$96,658,000 compared to $123,172,000 in the prior year nine-month period due to
decreased units shipped and a product mix that included fewer sit down driving
games that have a higher sales price. The current year nine-month period
included initial sales of Carnevil, Guantlet Legends, NFL Blitz '99, Vapor Trax,
Site 4:Area 51, HydroThunder, NBA Showtime:NBA on NBC and War:Final Assault and
continuing sales of Radikal Biker and Touchmaster.
Gross profit was $141,636,000 (48.0% of revenues) in the nine months ended March
31, 1999 from $142,180,000 (48.5% of revenues) in the nine months ended March
31, 1998. Gross profit in the nine months ended March 31, 1999 was increased
because of a $4,225,000 reduction to cost of sales due to a net recovery
relating to purchased parts overcharges from certain coin-operated game
suppliers in prior years. Home video game gross profit increased to 53.2% of
revenues in the nine months ended March 31, 1999 compared to 53.1% in the prior
year.
Research and development expenses increased $6,007,000 or 12.2% from $49,409,000
(16.9% of revenues) in the nine months ended March 31, 1998 to $55,416,000
(18.8% of revenues) in the nine months ended March 31, 1999.
Selling expense increased $9,464,000 from $27,847,000 (9.5% of revenues) in the
nine months ended March 31, 1998 to $37,311,000 (12.6% of revenues) in the nine
months ended March 31, 1999. The increase was primarily due to higher home video
game selling expense needed to support higher home video game revenues plus an
increased level of advertising for NFL Blitz.
Administrative expense increased $372,000 from $14,630,000 (5.0% of revenues) in
the nine months ended March 31, 1998 to $15,002,000 (5.1% of revenues) in the
nine months ended March 31, 1999.
Operating income in the nine months ended March 31, 1999 decreased $16,387,000
from $50,294,000 (17.2% of revenues) in the nine months ended March 31, 1998 to
$33,907,000 (11.5% of revenues) in the nine months ended March 31, 1999.
Operating income in the nine months ended March 31, 1999 was increased by
$4,225,000 because of a reduction to cost of sale as described above. The
decreases result primarily from higher research and development expense and
selling expense on a relatively flat gross profit in the nine months ended March
31, 1999 compared to the nine-month period of the prior year.
Interest and other income decreased from $2,326,000 in the March 31, 1998
nine-month period to $1,077,000 in the March 31, 1999 nine-month period. The
decrease is primarily from a lower level of cash and cash equivalents and
short-term investments.
9
<PAGE> 11
Net income was $21,553,000, $0.58 per share, in the fiscal 1999 nine-month
period compared with net income of $32,624,000, $0.85 per share, in the prior
year period. Net income for the March 31, 1999 nine-month period was increased
by $2,620,000, $0.07 per share, because of a reduction in coin-operated video
game cost of sales described above. The number of shares used in calculating per
share earnings decreased by 2.7% to 37,446,000 in the fiscal 1999 nine-month
period from the prior year nine-month period primarily because of the purchase
of treasury shares pursuant to the previously announced stock repurchase plan.
YEAR 2000 UPDATE (YEAR 2000 READINESS DISCLOSURE)
The term Y2K is used to refer to a world wide computer-related problem where
software programs and embedded programs in microprocessors will not work
properly when processing a date later than December 31, 1999. This problem
results from using only two digits to represent the year in a date and assuming
19 to be the first two digits of the year. Many existing programs will continue
to assume a 19 as the first and second digit while a 20 or greater is required.
A method of fixing the problem is to rewrite the program to provide for a four
digit year field. This Y2K problem has resulted in significant remediation costs
and worldwide concern about the future operations of businesses and other
institutions.
Since 1996, we have worked to make our systems Y2K compliant together with WMS,
our Chicago information services provider. Accounting and finance systems
utilized by our subsidiary, Atari Games Corporation, have been made compliant
with a software upgrade, and testing of the systems is ongoing. In addition,
some personal computers and servers utilized by Atari Games Corporation for game
development will be upgraded by September 1999 at a nominal cost. Accounting and
finance systems utilized by our other major subsidiary, Midway Home
Entertainment Inc. have been made Y2K compliant, and the remaining systems, such
as the customer interface and shipping systems are expected to be made compliant
by July 1999 with a planned software upgrade, each at nominal cost.
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 and 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.
10
<PAGE> 12
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
GT Interactive Software Corp. ("GT Interactive") distributes certain of the
Company's home video games in certain territories, as more fully described in
"Item I. Business" in the Company's Annual Report on Form 10-K for the year
ended June 30, 1998, which descriptions are incorporated herein by this
reference. On January 25, 1999, GT interactive filed suit against the Company
and certain of its subsidiaries in the Supreme Court of the State of New York,
County of New York, alleging breach of contract, tortious interference with
prospective business relations, defamation, and other related claims arising
from the distribution arrangements between GT Interactive and the Company. In
its complaint, GT Interactive seeks compensatory and punitive damages, and
injunctive relief. The Company believes that the claims made by GT Interactive
are without merit and the Company intends to vigorously defend against this
lawsuit and to file substantial counterclaims against GT Interactive.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Annual Meeting of Stockholders of the Company was held on February 3, 1999.
The matters submitted to a vote of the Company's stockholders were (1) the
election of four (4) Class III members to the Board of Directors; (2) the
ratification of the Midway Games Inc. 1999 Stock Option Plan; and (3) the
ratification of the appointment of Ernst & Young LLP as independent auditors for
the 1999 fiscal year.
(1) The Company's stockholders re-elected four (4) Class III Directors, as
follows
<TABLE>
<CAPTION>
Class III Director Nominee For Withheld
----------------------------- ---------- -----------
<S> <C> <C>
Harold H. Bach, Jr 31,820,858 1,210,127
Byron C. Cook 31,823,317 1,207,668
Gerald O. Sweeney, Jr 31,423,277 1,607,758
Richard D. White 31,791,796 1,239,189
</TABLE>
(2) Stockholders voted 27,718,333 shares (77.5% of the shares represented of the
meeting) in favor of ratifying the Midway Games Inc. 1999 Stock Option Plan;
4,170,553 shares (11.25% of the shares represented at the meeting) voted
against approval; 142,099 shares (less than 0.04% of the shares represented
at the meeting) abstained from voting.
(3) Stockholders voted 32,771,168 shares (99.2% of the shares represented at the
meeting) in favor of the ratification of the appointment of Ernst & Young
LLP as independent auditors for the 1999 fiscal year; 186,071 shares (0.56%
of the shares represented at the meeting) voted against approval; 73,746
(less than 0.02% of the shares represented at the meeting) abstained from
voting.
ITEM 5. OTHER INFORMATION
During the fiscal quarter ended March 31, 1999, the Company and Byron C. Cook,
Executive Vice President - Home Video of the Company, entered into an three-year
renewable employment agreement effective as of July 1, 1998, pursuant to which
Mr. Cook's base salary is $325,000 per annum, or such greater amount as may be
determined by the Board of Directors. Mr. Cook has agreed not to engage in
business in competition with the Company for a period of one year after he
leaves the Company. Mr. Cook is also entitled to participate in the Company's
employee benefit plans generally available to executives of the Company. In
11
<PAGE> 13
the event of a change of control of the Company (as defined in the agreement),
Mr. Cook, is entitled, if he terminates his employment within 60 days
thereafter, to a severance payment of up to three times his base annual salary.
The agreement may be terminated by the Company upon 30 days' notice for cause
(as defined in the agreement).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 1 to Credit Agreement dated as of October 15, 1996.
10.2 Employment Agreement between the Registrant and Byron C. Cook.
27 Financial Data Schedule
99 "Item 1-Business" in the Annual Report on Form 10-K of Midway Games
Inc. for the fiscal year ended June 30, 1998 (File No: 001-12367),
is hereby incorporated herein by reference to such Annual Report.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K with the Securities and Exchange
Commission on March 30, 1999 with respect to Item 5.
12
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWAY GAMES INC.
(Registrant)
Dated: May 14, 1999 By: /s/ Harold H. Bach, Jr.
----------------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
13
<PAGE> 15
EXHIBIT INDEX
No. Description
10.1 Amendment No. 1 to Credit Agreement Dated As of October 15, 1996.
10.2 Employment Agreement between the Registrant and Byron C. Cook
27 Financial Data Schedule
99 "Item 1-Business" in the Annual Report on Form 10-K of Midway Games
Inc. for the fiscal year ended June 30, 1998 (File No. : 001-12367),
is hereby incorporated herin by reference to such Annual Report.
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1 TO CREDIT AGREEMENT, DATED AS OF OCTOBER 15,1996
This Amendment No. 1 (this "Amendment"), dated as of November 1,
1998, is made by and between MIDWAY GAMES INC., a Delaware corporation (the
"Company"), and Bank of America National Trust and Savings Association (as
successor by merger to Bank of America Illinois)(in such capacity, the
"Lender"). Terms defined in the Credit Agreement shall have the same respective
meanings when used herein and the provisions of Section 1.1 of the Credit
Agreement shall apply, mutatis mutandis, to this Amendment.
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Credit
Agreement, dated as of October 15, 1996, (as amended or modified and in effect
on the date hereof, the "Existing Credit Agreement" and as amended and modified
by this Amendment, the "Credit Agreement");
WHEREAS, the Company has requested that the Lender agree to amend
and modify the Existing Credit Agreement as described herein; and
WHEREAS, the Lender is willing to amend and modify the Existing
Credit Agreement on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants herein contained and other good and valuable consideration (the
receipt, adequacy and sufficiency of which is hereby acknowledged), the parties
hereto, intending legally to be bound, hereby agree as follows:
1. Amendments. Subject to the satisfaction of the conditions
precedent set forth in Section 5 below, the Existing Credit Agreement is hereby
amended as follows:
(a) Section 1.1 of the Existing Credit Agreement shall
be amended by deleting the definition of Termination Date contained
therein and replacing it with the following:
""Termination Date" means the earlier of the
date on which the Lender makes demand on the Borrower
for repayment of all amounts due hereunder, or October
31, 1999."
(b) Section 2.18 of the Existing Credit Agreement shall
be deleted in its entirety and replaced with the following:
"SECTION 2.18 Clean-Up/Clean-Down
Provisions. Notwithstanding any other provision
contained in this Agreement to the contrary, the
Borrower agrees that from March 31 of each Fiscal Year
during the term of this Agreement, commencing March 31,
1997, and for a period of sixty (60) consecutive days
thereafter the outstanding Revolving Loans shall be zero
(0) and the amount of the outstanding Letters of Credit
issued in respect of the Uncommitted Revolving Credit
<PAGE> 2
shall be less than or equal to $25,000,000. The Borrower
agrees to make any prepayment of the Revolving Loans or
the Uncommitted Revolving Credit which may be necessary
to comply with the terms of this Section 2.18."
(c) Section 5.8 of the Existing Credit Agreement shall
be amended by deleting clause (1) thereto in its entirety and
replacing it with the following:
"(1) Quarterly Financial Statements. As soon
as available and in any event within forty-five (45)
days after the end of each Fiscal Quarter, consolidated
and consolidating balance sheets of the Borrower and its
Subsidiaries as at the end of such Fiscal Quarter,
consolidated and consolidating statements of operations
of the Borrower and the Subsidiaries for the period
commencing at the end of the previous Fiscal Year and
ending with the end of such Fiscal Quarter, and
consolidated statements of cash flows of the Borrower
and the Subsidiaries for the portion of the Fiscal Year
ended with the last day of such Fiscal Quarter, all in
reasonable detail and stating in comparative form the
respective consolidated figures for the corresponding
date and period in the previous Fiscal Year;"
(d) Section 7.2 of the Existing Credit Agreement shall
be deleted in its entirety and replaced with the following:
"SECTION 7.2 [RESERVED]"
(e) Section 7.5 of the Existing Credit Agreement shall
be deleted in its entirety and replaced with the following:
"SECTION 7.5 [RESERVED]"
2. Documents Remain in Effect. Except as amended and modified by
this Amendment, the Existing Credit Agreement remains in full force and effect
and the Company confirms that its representations, warranties, agreements and
covenants contained in, and obligations and liabilities under, the Credit
Agreement and each of the other Loan Documents are true and correct in all
material respects as if made on the date hereof, except where such
representation, warranty, agreement or covenant speaks as of a specified date.
3. References in Other Documents. References to the Existing Credit
Agreement in any other document shall be deemed to include a reference to the
Credit Agreement; whether or not reference is made to this Amendment.
4. Representations. The Company hereby represents and warrants to
the Lender that:
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<PAGE> 3
(a) The execution, delivery and performance of this
Amendment is within the Company's corporate authority, have been
duly authorized by all necessary corporate action, has received all
necessary consents and approvals (if any shall be required), and do
not and will not contravene or conflict with any provision of law or
of the Certificate of Incorporation or By-laws of the Company or its
Subsidiaries, or of any other agreement binding upon the Company or
its Subsidiaries or their respective property;
(b) This Amendment constitutes the legal, valid, and
binding obligation of the Company, enforceable against the Company
in accordance with its terms; and
(c) no Default has occurred and is continuing or will
result from this Amendment and no Default now exists under the
Existing Credit Agreement.
5. Conditions Precedent. The effectiveness of this Amendment is
subject to the receipt by the Lender of each of the following, each
appropriately completed and duly executed as required and otherwise in form and
substance satisfactory to the Agent:
(a) Certified copies of resolutions of the Board of
Directors of the Company authorizing or ratifying the execution,
delivery and performance by the Company of this Amendment;
(b) A certificate of the President or a Vice-President
of the Company that all necessary consents or approvals with respect
to this Amendment have been obtained;
(c) A certificate of the Secretary or Assistant
Secretary of the Company, certifying the name(s) of the officer(s)
of the Company authorized to sign this Amendment, and the documents
related hereto on behalf of the Company; and
(d) Such other instruments, agreements and documents as
the Agent may reasonably request, in each case duly executed as
required and otherwise in form and substance satisfactory to the
Lender.
6. Miscellaneous.
(a) Section headings used in this Amendment are for
convenience of reference only, and shall not affect the construction
of this Amendment.
(b) This Amendment and any amendment hereof or
supplement hereto may be executed in any number of counterparts and
by the different parties on separate counterparts and each such
counterpart shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same
agreement.
-3-
<PAGE> 4
(c) This Amendment shall be a contract made under and
governed by the internal laws of the State of Illinois, without
giving effect to principles of conflicts of laws.
(d) All obligations of the Company and rights of the
Lender, that are expressed herein, shall be in addition to and not
in limitation to those provided by applicable law.
(e) Whenever possible, each provision of this Amendment
shall be interpreted in such manner as to be effective and valid
under applicable law; but if any provision of this Amendment shall
be prohibited by or invalid under applicable law, such provision
shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or
the remaining provisions of this Amendment.
(f) This Amendment shall be binding upon the Company,
the Lender and their respective successors and assigns, and shall
inure to the benefit of the Company, the Lender and their respective
successors and assigns.
* * *
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<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused the execution and
delivery hereof by their respective representatives thereunto duly authorized as
of the date first herein appearing.
MIDWAY GAMES INC.
By: /s/ HAROLD H. BACH JR.
--------------------------------
Name: Harold H. Bach Jr.
------------------------------
Title: Executive VP Finance
-----------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (as successor by merger
to Bank of America Illinois)
By: /s/ MARCIA CLAUSEN
--------------------------------
Name: Marcia Clausen
------------------------------
Title: Senior Vice President
-----------------------------
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
AGREEMENT made as of the 1st day of July, 1998, by and between MIDWAY
GAMES INC., a Delaware corporation (the "Corporation"), and BYRON C. COOK
("Executive").
W I T N E S S E T H:
--------------------
WHEREAS, Executive has been employed as the Executive Vice President -
Home Video of the Corporation pursuant to an Employment Agreement dated April
29, 1994, between Williams Entertainment Inc. (now known as Midway Home
Entertainment Inc.) and Executive, as amended (the "Existing Employment
Agreement"); and
WHEREAS, the Existing Employment Agreement expired by its terms on May
1, 1998; 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
Chairman of the Board or the Board of Directors of the Corporation may from time
to time determine relating to the development, manufacture and distribution of
home video games and other matters appropriate for a senior executive of the
Corporation. During Executive's employment hereunder he shall not be required to
work away from Corsicana, Texas, except for periods of reasonable and customary
business travel commensurate with Executive's duties and position.
2. ACCEPTANCE AND LOYALTY. Executive hereby accepts such employment and
agrees that throughout the period of his employment hereunder, he will devote
his business 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 Chairman of the Board 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 prior written approval of
the Chairman of the Board or Board of Directors of the Corporation; 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 (i) Executive may continue to perform
services for WMS for such period as shall be mutually agreeable to the
Corporation, WMS and Executive and (ii) Executive may continue to serve as a
member of the Board of Directors of Corsicana National bank. 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, 2001 (the "Term"); provided, however,
that Executive's services hereunder may be terminated by either party effective
upon 30 days' prior written notice (i) from the Corporation if such termination
is for "cause" as defined in subsection 8.3 of this Agreement, or (ii) from
Executive if such termination is for "good reason" as defined in subsection 3.3
hereof. Each year of the Term is hereafter referred to as an "Employment Year."
3.2 Notwithstanding the provisions of Section 3.1 hereof, if
Executive is unable substantially to perform the duties of his position with the
Corporation for any prolonged period by reason of physical or mental illness or
injury, Corporation may terminate this Agreement upon 30 days' written notice,
but only after the period of Executive's illness or injury has lasted
continuously for ninety (90) days within any fiscal year during the Term. Until
any such termination by the Corporation, Corporation shall continue to be
obligated to provide to Executive all of the cash and other compensation
provided for in this Agreement, including his bonus, as if he were continuing to
perform all the duties of his position.
3.3 Executive shall have "good reason" to terminate his employment
hereunder upon the occurrence without his consent or acquiescence of any one or
more of the following events: (i) the placement of Executive in a position of
lesser stature or the assignment to Executive of duties, performance
requirements, or working conditions significantly different from or at variance
with those in effect on the date as of which this Agreement has been entered
into; (ii) the treatment of Executive in a manner which is in derogation of his
status as a senior executive of the Corporation; (iii) substantial
discontinuance, disallowance, or reduction of base salary or personal benefits
available to Executive under, or contemplated by, this Agreement; or (iv)
Executive being required to work away from Corsicana, Texas (other than during
periods of reasonable business travel).
3.4 Subject to the provisions of Section 12 hereof, if the
Corporation wrongfully terminates Executive's employment, Executive shall be
entitled to continue to receive all cash compensation which would otherwise be
payable to Executive hereunder, which amounts will
-2-
<PAGE> 3
continue to be paid at regular payroll intervals.
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.
4.2 Executive and Chairman of the Board shall negotiate in good
faith to establish mutually agreeable performance criteria upon which an annual
discretionary bonus for Executive will be based. Executive shall also 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;
provided, however, that Executive shall be reimbursed for his actual cost for
first-class airline travel.
6. VACATION. Executive's vacation shall be taken at times mutually
agreeable to Executive and the Chairman of the Board of the Corporation.
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 Chairman of the Board of the
Corporation may deem necessary or desirable in connection with the purchase and
maintenance of the Key-man Insurance.
-3-
<PAGE> 4
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 Chairman of the Board 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, 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 continues to pay the Executive's base salary to him, 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
-4-
<PAGE> 5
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 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
-5-
<PAGE> 6
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
(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.
-6-
<PAGE> 7
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 any proceedings are commenced by the Corporation against Executive for any
actual or threatened violation of any of said covenants, the non-prevailing
party in such litigation shall be liable to the prevailing party for, and shall
pay to the prevailing party all costs and expenses of any kind, including
reasonable attorneys' fees, which the prevailing party may incur in connection
with such proceedings.
-7-
<PAGE> 8
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. All 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.
-8-
<PAGE> 9
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, Chairman of the Board
If to Executive:
2117 West Park Avenue
Corsicana, TX 75110
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
-9-
<PAGE> 10
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, Chairman of the Board
EXECUTIVE
/s/ BYRON C. COOK
-------------------------------------------
Byron C. Cook
-10-
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