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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 1-12367
MIDWAY GAMES INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 22-2906244
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
3401 NORTH CALIFORNIA AVENUE, CHICAGO, 60618
ILLINOIS (Zip Code)
(Address of principal executive offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (773) 961-2222
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME ON EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Stock Purchase Rights pursuant to Rights Agreement New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the 36,530,396 shares of Common Stock held by
non-affiliates of the registrant on September 22, 2000 was $253,520,970. 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 1,178,500
shares held as treasury shares, was 37,710,725 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
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PARTS
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Annual Report to Stockholders of Registrant for the fiscal II and IV
year ended June 30, 2000..................................
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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 Midway, except where they are licensed. Nintendo, Super
Nintendo Entertainment System, Game Boy, Game Boy Color, Nintendo 64 and N64 are
trademarks of Nintendo of America, Inc. Sega, Genesis, Dreamcast and Saturn are
trademarks of Sega Enterprises, Ltd. Sony, PlayStation and PlayStation 2 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 described 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.
DEVELOPMENT 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 17 million
copies in the home market), NFL Blitz, Hydro Thunder, Cruis'n USA, Cruis'n
World, Rampage, NBA Jam, Joust, Defender, Pacman, Space Invaders, and Ready 2
Rumble Boxing and, through our subsidiary, Midway Games West Inc. (formerly,
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.
In fiscal 2000, we released ten coin-operated video games and 34 home video
games (directly or under licensing arrangements, including all platforms),
compared to ten new coin-operated video games and 25 new home video games
(directly or under licensing arrangements, including all platforms) in fiscal
1999.
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. On April 6, 1998, WMS
distributed all of its shares of our common stock to its stockholders. Since
this distribution (the "Spin-off"), WMS continues to provide some information
services and facilities to us and, until September 30, 2000, to act as a
contract manufacturer for our coin-operated video games. 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.
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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 there are significant barriers to entry into the
video game business that make it difficult for new entrants to succeed. For
instance, 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
$1.00 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
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
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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, video game systems have been low in
price, easy to use and had sophisticated audio-video capabilities, compared to
personal computers available at the time. In 1986 and 1987 Nintendo and Sega,
respectively, introduced 8-bit game systems. In 1989 and 1991 Sega and Nintendo,
respectively, introduced more powerful 16-bit systems. 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. in 1996. Sega's Dreamcast, the first 128-bit platform, was introduced in
Japan in 1998 and in the U.S. and Europe in 1999. Sony's PlayStation 2 was
introduced in Japan in March 2000 and is expected to be released in the U.S. and
Europe in October and November 2000, respectively. Additional 128-bit systems
are expected to be released by Nintendo and Microsoft in 2001. We estimate that
the number of units of Dreamcast, Nintendo 64, PlayStation and PlayStation 2
systems owned by users worldwide is currently about six million units, 24
million units, 72 million units and four million units, respectively. Sony
estimates that approximately three million PlayStation 2 systems will be sold in
the U.S. and Europe within the first six months after introduction. 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, disc-based systems have become increasingly popular
because they have substantially lower manufacturing costs than games in
cartridge form. The Sony PlayStation and PlayStation 2 and Sega Dreamcast
platforms use disc-based technologies. The Nintendo 64 and Game Boy Color
systems, however, continue 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. Nintendo has announced the release of its next
generation handheld machine, Game Boy Advance, scheduled to be available in
fiscal 2001. As of June 2000, Nintendo reported that shipments of these handheld
systems had surpassed 100 million units worldwide.
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.
OUR BUSINESS 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
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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) 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 2000, we
were ranked fourth among 73 companies in sales of 32-, 64- and 128-bit
home video games. In fiscal 2000, no company other than Sega sold more
units of games for the Dreamcast platform than we did, and only two
companies other than Nintendo released more titles for the Nintendo 64
than we we did. In fiscal 1999 and 1998, 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 fiscal 2000, we released the home video
games, Mortal Kombat Gold and Mortal Kombat Special Forces. 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 2000, we have released two collections of arcade classic games
and three individual arcade classics in the handheld market. Also in
fiscal 2000, for the first time, we introduced Internet play of ten of
our classic games under a license with Shockwave.com. We also released
Gauntlet Dark Legacy, a new sequel to our classic Gauntlet, and we
introduced a third sequel, Rampage Through Time, to our classic Rampage.
- DEVELOP AND EXPLOIT MULTI-SITE GAME PLAYING NETWORK -- We are developing
the Midway Tournament Network, 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
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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.
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
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, 2000, 1999 and 1998, we spent
approximately $89.4 million, $76.0 million and $67.5 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.
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
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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 released ten new coin-operated
video games: NFL Blitz 2000 Gold, San Francisco Rush 2049, NBA Showtime Gold,
Off Road Thunder, Touchmaster Infinity, Cruis'n Exotica, Skins Game, Gauntlet:
Dark Legacy, Touchmaster 8000 and C.A.R.T. Fury. TouchMaster Infinity and
Touchmaster 8000 are touchscreen coin-operated games containing multiple game
options. In fiscal 1999, we released ten new coin-operated video games. During
fiscal 1998, we released eight new coin-operated video games. In fiscal 2001, we
expect to release five coin-operated game titles.
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 the Midway Tournament Network, 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 of games.
Home Video Games. During fiscal 2000, we introduced 26 home video games for
dedicated platforms, comprised of 15 titles for the home, including NFL Blitz
2000, Ready 2 Rumble Boxing, Hydro Thunder, NBA Showtime, Gauntlet Legends,
Mortal Kombat Gold, Paperboy and Rampage Through Time. In 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. In fiscal 2001, we expect to release 26 home video games for
dedicated platforms, comprised of 18 home video game titles. 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 2000
and eight during fiscal 1999. We anticipate releasing six new handheld titles
for Game Boy Color during fiscal 2001.
Most of our home video games for dedicated platforms have suggested retail
prices ranging from $39.95 to $49.95. Suggested retail prices for Game Boy Color
are usually $29.95.
2000 HOME VIDEO GAME RELEASES
The following table lists the games that were released by us directly or
under licensing arrangements during fiscal 2000 and the platforms on which each
can be played in the home market.
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GAME CATEGORY PLATFORM(S)
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Arcade Party Pak*........................ Classic PlayStation
Billy Bob's Huntin' n Fishin'............ Action Game Boy Color
Colony Wars III: Red Sun................. Action PlayStation
4 Wheel Thunder.......................... Driving Dreamcast
Gauntlet Legends*........................ Action Dreamcast; PlayStation; Nintendo 64
Hydro Thunder*........................... Driving Dreamcast; PlayStation; Nintendo 64
Jackie Chan Stuntmaster.................. Action PlayStation
Kurt Warner's Arena Football Unleashed... Sports PlayStation
Marble Madness*.......................... Classic Game Boy Color
Midway's Greatest Arcade Hits -- Vol. Classic Dreamcast
1*.....................................
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GAME CATEGORY PLATFORM(S)
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Mortal Kombat Gold*...................... Action Dreamcast
Mortal Kombat Special Forces*............ Action PlayStation
NBA Showtime: NBA on NBC*................ Sports Dreamcast; PlayStation; Nintendo 64; Game
Boy Color
NFL Blitz 2000*.......................... Sports Dreamcast; PlayStation; Nintendo 64; Game
Boy Color; PC
Paperboy*................................ Action Nintendo 64
Rampage 2: Universal Tour*............... Action Game Boy Color
Rampage Through Time*.................... Action PlayStation
Rampart*................................. Classic Game Boy Color
Ready 2 Rumble Boxing.................... Sports Dreamcast; PlayStation; Nintendo 64; Game
Boy Color
Toobin'*................................. Classic Game Boy Color
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* Based upon one or more previously released coin-operated video games.
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.
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GAME CATEGORY PLATFORM(S)
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Arcade's Greatest Hits--Atari Collection Classic Personal Computer ("PC")
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(LOGO) Skateboarding*................. Classic Game Boy Color
Twisted Edge Extreme Snowboarding........ Sports Nintendo 64
Wipe Out 64.............................. Driving Nintendo 64
World Driver: Championship............... Driving Nintendo 64
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* Based upon one or more previously released coin-operated video games.
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MARKETING AND DISTRIBUTION
Coin-Operated Games. Coin-operated video games are sold under the Midway
trademark. Coin-operated video games are marketed primarily through over 100
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. We do not believe that the loss of a distributor would
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.
Coin-operated games are also marketed through trade shows, promotional
videotapes or CD-ROMs 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.
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 13.6% of our total revenues in fiscal 2000.
Sales to our second-largest customer, Toys-R-Us, represented 10.7% of our total
revenues in fiscal 2000.
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 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 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
under a settlement agreement under which we paid GTIS $8.5 million. 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. In the first
quarter of fiscal 2000, we opened an office in the United Kingdom to conduct
foreign sales.
In 1994, we formed a joint venture with Nintendo to develop video games on
some platforms 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
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license from the joint venture, Cruis'n World, in fiscal 1999. We released a
coin-operated sequel to this game, Cruis'n Exotica, in fiscal 2000, and we
expect to release home versions of this game for the Nintendo 64 and Color Game
Boy in fiscal 2001.
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.
Export Sales. Our sales to customers located outside the United States,
primarily to Western Europe, were $45.3 million (13.6% of revenues) for fiscal
2000, compared with $35.6 million (10.1% of revenues) for fiscal 1999 and $42.9
million (11.0% of revenues) for fiscal 1998.
MANUFACTURING
Coin-Operated Games. Our coin-operated games have been manufactured by WMS
under a Manufacturing Agreement dated as of April 6, 1998 between the parties.
See "Item 13. Certain Relationships and Related Transactions." We have made
arrangements to use other manufacturers beginning in the second quarter of
fiscal 2001. 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 electronic
subassemblies, video monitors and wooden cabinets, are purchased from suppliers.
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 dedicated and
handheld platforms is generally 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. Platform manufacturers typically retain the right
to approve the games to be released 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 ten days, depending
on the mode of transport and location of manufacturer.
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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 PlayStation 2 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.
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 costs from 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 lawsuits of this kind or related legal expenses.
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.
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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 2000, 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 licensed from third party developers or based on trademarks and other
rights and properties owned by third parties, such as the National Basketball
Association and the National Football 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 Showtime); (ii) the trademarks
under which the game is marketed (e.g., Mortal Kombat); (iii) the copyrights for
the game software (including the game's audiovisual elements); (iv) copyrights
for the software associated with the hardware platform; and (v) the patents for
inventions in the game software and hardware platforms. Each dedicated home game
includes patents, copyrights and trademarks licensed from the platform
manufacturer. Elements of 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.
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.
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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, Infogrames, Konami,
Lucas Arts, Namco, THQ and 3DO, among others. 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, Infogrames, 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 22, 2000, we had approximately 775 employees. We believe that
our relations with our employees are satisfactory.
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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.
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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.
WE EXPERIENCE SEASONAL VARIATIONS IN THE SALE OF OUR HOME VIDEO GAMES.
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 often do not 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 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
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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. 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.
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. If product
returns, markdowns and credits exceed our reserves on our business, operating
results and financial condition could be materially and adversely affected.
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 2000, 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 by the licensor
for breach and may be renewed only at the 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. 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 our coin-operated games and the
game cartridges and discs for our home video games. 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 manufacturer 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.
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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 and National Football
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. 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 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.
Our Chief Executive Officer and six of our other directors are also
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 required to be entered into in the future between
these two parties. 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 a director of and a consultant to WMS.
Louis J. Nicastro, one of our directors, is also the Chairman of the Board and
Chief Executive Officer of WMS. Neil D. Nicastro is the son of Louis J.
Nicastro.
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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;
- 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;
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- 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
approximately 37.7 million shares were issued and outstanding as of September
22, 2000, excluding approximately 1.2 million treasury shares. If all of our
outstanding stock options were exercised as of that date, approximately 44.0
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 22, 2000, we had outstanding options to purchase an
aggregate of approximately 6.3 million shares of common stock. 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.
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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 Design and development 47,500 146,000 06/30/01
Chicago, IL
3325 N. California Ave. Design and development 14,500 115,000 01/31/04
Chicago, IL
675 Sycamore Drive Design and development and 84,501 593,196 07/31/05
Milpitas, CA offices
800 N. Main Street Sales and offices 14,700 77,760 06/01/03
Corsicana, TX
10110 Mesa Rim Road Design and development 27,512 250,644 06/01/02
San Diego, CA
6865 Flanders Drive Design and development 4,187 50,244 06/30/02
San Diego, CA
6620 Mesa Ridge Road Sales and marketing 9,104 98,329 06/30/02
San Diego, CA
86 Albrecht Sales and development and 45,646 257,890 10/14/04
Lake Bluff, IL parts sales
Dallas Corporate Center Warehouse 56,092 196,322 07/30/04
#11
11850 Newberry, Suite 100
Dallas, TX
Macmillan House Office 2,010 205,000* month-to-month
96 Kensington High Street
London, England
</TABLE>
-------------------------
* L134,820
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 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 alleged, with respect to Midway
and other video game companies, that Carneal, then 14 years old, was influenced
by the allegedly violent content of unspecified video games and that the video
game manufacturers and suppliers were liable for Carneal's conduct. The
complaint sought $10 million in compensatory damages with respect to each of the
three children and $100 million in punitive damages.
The action was dismissed against all defendants by order entered April 6,
2000. The plaintiffs have appealed this order to the United States Court of
Appeals for the Sixth Circuit. We have received plaintiffs'
19
<PAGE> 21
appellate brief. The defendants' appellate response brief is due October 19,
2000. Plaintiffs' reply brief is due November 2, 2000. As of September 22, 2000,
no oral argument has been scheduled.
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
2000 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
2000 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
2000 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
2000 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 22, 2000 (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 2003; 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 PERCENTAGE
DIRECTOR OR COMMON STOCK OF
EXECUTIVE DEEMED TO BE OUTSTANDING
POSITION(S) WITH MIDWAY; OFFICER OF THE BENEFICIALLY COMMON
NAME (AGE) PRINCIPAL OCCUPATION COMPANY SINCE OWNED(1) STOCK(1)
---------- ------------------------ -------------- ------------ -----------
<S> <C> <C> <C> <C>
Class I Directors: term expires at our 2001 Annual Meeting
Neil D. Nicastro (43)........ Chairman of the Board, 1988 2,306,758(2) 5.9%
President, Chief Executive
Officer and Chief Operating
Officer
William C. Bartholomay
(72)....................... Director; President of Near 1996 90,370(3) *
North National Group
Norman J. Menell (68)........ Director; Vice Chairman of 1996 62,506(3) *
the Board of WMS
Louis J. Nicastro (72)....... Director; Chairman of the 1988 60,547(3) *
Board and Chief Executive
Officer of WMS
Class II Directors: term expires at our 2003 Annual Meeting
Kenneth J. Fedesna (50)...... Executive Vice President -- 1996 221,435(4) *
Product Development and
Director
William E. McKenna (81)...... Director; General Partner, 1996 61,958(3) *
MCK Investment Company
Harvey Reich (71)............ Director; Attorney 1996 61,277(3) *
Ira S. Sheinfeld (62)........ Director; Attorney, 1996 66,801(3) *
Squadron, Ellenoff, Plesent
& Sheinfeld LLP
Class III Directors: term expires at our 2002 Annual Meeting
Harold H. Bach, Jr. (68)..... Executive Vice President -- 1990 230,130(5) *
Finance, Treasurer and Chief
Financial Officer and
Director
Byron C. Cook (46)........... Vice-Chairman of the Board 1996 597,253(6) 1.6%
Richard D. White (46)........ Director; Managing Director, 1996 45,000(3) *
CIBC Capital Partners
Gerald O. Sweeney, Jr.
(48)....................... Director; Attorney, Lord, 1996 45,000(3) *
Bissell & Brook
</TABLE>
-------------------------
* Less than 1%.
(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. Percentages are
based on 37,710,725 shares outstanding as of September 22, 2000.
22
<PAGE> 24
(2) Includes 1,531,850 shares of common stock underlying stock options.
(3) Includes 45,000 shares of common stock underlying stock options.
(4) Includes 169,229 shares of common stock underlying stock options.
(5) Includes 183,842 shares of common stock underlying stock options.
(6) Includes 424,955 shares of common stock underlying stock options.
NEIL D. NICASTRO has been our President and Chief Operating Officer since
1991. In July 1996, Mr. Nicastro became Chairman of the Board and Chief
Executive Officer, having served as Co-Chief Executive Officer and Chief
Operating Officer since 1994. Mr. Nicastro also served 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 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 in April 1998, at the time 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 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 Chief Executive Officer of WMS since April
1998 and was also its President from April 1998 to April 2000. He has served as
Chairman of the Board of WMS since its incorporation in 1974. Mr. Nicastro also
served WMS as Chief Executive Officer or Co-Chief Executive Officer from 1974 to
June 1996 and as President (1985-1988, 1990-1991), among other executive
positions. 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. He also served as our Chairman of the Board and Chief Executive
Officer or Co-Chief Executive Officer from 1988 to June 1996 and our President
from 1988 to 1991.
KENNETH J. FEDESNA became our Executive Vice President--Product Development
in May 2000 and was Executive Vice President--Coin-Op Video from August 1996
until May 2000. 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
Drexler Technology Corporation 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 1994. Mr. Bach also served as Vice
President--Finance, Chief Financial and Chief Accounting Officer of WMS for over
five years until September 1999. 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 Vice-Chairman of the Board in May 2000 and served
as our Executive Vice President--Home Video from August 1996 to May 2000. Mr.
Cook was the President and Chief Operating Officer of our subsidiary, Midway
Home Entertainment Inc. from 1994 to May 2000. Prior to our acquisition
23
<PAGE> 25
of Tradewest, Inc. in 1994, Mr. Cook was President of Tradewest from 1988
to1994, 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............... 43 Chairman of the Board, President, Chief Executive Officer
and Chief Operating Officer
Michael A. Ribero.............. 44 Executive Vice President--Publishing
Harold H. Bach, Jr............. 68 Executive Vice President--Finance, Treasurer and Chief
Financial Officer
Byron C. Cook.................. 46 Vice-Chairman of the Board
Kenneth J. Fedesna............. 50 Executive Vice President--Coin-Op Video
Deborah K. Fulton.............. 37 Vice President, Secretary and General Counsel
</TABLE>
The current principal occupation or employment of Messrs. Nicastro, Bach,
Cook and Fedesna during the last five years is set forth in Item 10(a) above.
Mr. Ribero joined us as Executive Vice President in July 1999 and was named
Executive Vice President--Publishing in May 2000. 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 1995 to August 1996, he was an Executive
Vice President of Sega of America.
Ms. Fulton has served as our Vice President, Secretary and General Counsel
since May 2000. She was employed by us as Senior Counsel from 1994 until May
2000. Formerly, she was employed by the law firm of Gardner Carton & Douglas
from 1988 until 1994.
(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 ten 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
2000, all filing requirements applicable to our officers, directors and greater
than ten percent beneficial owners were complied with.
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 2000 salary and bonus exceeded $100,000. The compensation
of Messrs. Bach and Fedesna shown on the table for fiscal 1998 was paid by WMS
and, for fiscal 2000 and 1999, by either WMS or Midway, and the table reflects
their compensation for service in all capacities for both WMS and Midway. The
table reflects compensation paid by Midway to Mr. Cook for fiscal 2000, 1999 and
1998, to Mr. Nicastro after the date of the Spin-off, and to Mr. Ribero for
fiscal 2000. Prior to the Spin-off, Mr. Nicastro was paid by both Midway and WMS
under his
24
<PAGE> 26
employment agreements with each company, and the combined amount is shown on the
table. Until the Spin-off, the compensation paid by WMS to Messrs. Bach and
Fedesna was allocated to us based upon estimates by management of the percentage
of time devoted to us. After the Spin-off, compensation paid to these executive
officers was reimbursed by, or to us in amounts equal to our allocated cost
under an agreement between WMS and us. We believe that during fiscal 1999 and
1998, each of Messrs. Bach and Fedesna, from time to time, devoted from 40% to
70% of their efforts to Midway. In fiscal 2000, these executive officers, from
time to time, devoted from 30% to 100% of their efforts to Midway.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------------ -----------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION($)(2)
--------------------------- ---- --------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Neil D. Nicastro................... 2000 600,000 --(3) 450,000(4) 136,111(5)
Chairman of the Board and Chief 1999 600,000 202,700 911,850 133,521(5)
Executive Officer, President and 1998 575,000 1,387,820 150,000 47,074(5)
Chief Operating Officer
Michael A. Ribero.................. 2000 380,000 -- 200,000 250,000(6)
Executive Vice
President--Publishing
Harold H. Bach, Jr................. 2000 315,000 -- 50,000 --
Executive Vice
President--Finance, 1999 315,000 -- 43,842 --
Treasurer and Chief Financial
Officer 1998 300,000 220,000 50,000 --
Byron C. Cook...................... 2000 325,000 -- 50,000 3,950(7)
Vice-Chairman of the Board 1999 325,000 -- 284,955 3,423(7)
1998 300,000 350,000 50,000 3,799(7)
Kenneth J. Fedesna................. 2000 325,000 -- 50,000 2,500(8)
Executive Vice President--Product 1999 325,000 -- 29,229 2,500(8)
Development 1998 310,000 150,000 50,000 2,500(8)
</TABLE>
-------------------------
(1) Grants of Midway stock options in fiscal 1999 were from the 1998 Stock
Incentive Plan, which required certain purchases of our common stock by
these officers.
(2) Excludes adjustments to WMS options made under the adjustment plan described
under "WMS Option Adjustment" below.
(3) Mr. Nicastro's employment agreement with us permits him to receive advances
against estimated bonus payments. Advances were made in the first six months
of fiscal 2000 for bonuses accrued that were reversed in the second six
months of fiscal 2000 totaling $984,000. Mr. Nicastro will repay these
advances out of future compensation that Mr. Nicastro becomes entitled to
receive. See "Item 13. Certain Relationships and Related
Transactions -- Other Related Party Transactions."
(4) On May 4, 2000, our board granted to Mr. Nicastro an option to purchase
300,000 shares of our common stock in lieu of his salary for fiscal 2001,
which he has waived. The option is exercisable on or after June 30, 2001 or
earlier upon a change in control and expires on June 30, 2005. The exercise
price is $7.00 per share.
(5) Includes for fiscal 2000, 1999 and 1998, life insurance premiums of $1,811,
$1,679 and $1,571, respectively, and accrual for contractual retirement
benefits of $134,300, $131,842 and $45,503, respectively. See "Employment
Agreements" below. Mr. Nicastro also received severance payments from WMS in
fiscal 1998 consisting of $2,500,000 in addition to 10-year options to
purchase 250,000 shares of WMS common stock at an exercise price of $5.4375
per share.
(6) Represents a sign-on bonus.
(7) Represents matching contributions to Mr. Cook's 401(K) account.
(8) Represents life insurance premiums.
25
<PAGE> 27
The following table sets forth information with respect to options to
purchase common stock granted during fiscal year 2000 under our stock option
plans for the executive officers named in the Summary Compensation Table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
TOTAL OPTIONS AT ASSUMED ANNUAL RATE
NUMBER OF GRANTED TO OF STOCK PRICE APPRECIATION
SECURITIES EMPLOYEES IN EXERCISE FOR OPTION TERM(1)
UNDERLYING OPTIONS FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED (#) YEAR (%) ($/SHARE) DATE 5%($) 10%($)
---- ------------------ ------------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Neil D. Nicastro..... 300,000(2) 15.7 $ 7.00 6/30/05 879,000 1,281,000
150,000(3) 7.9 $13.50 1/30/10 1,273,500 3,228,000
MichaelA. Ribero..... 50,000(3) 2.6 $13.50 1/30/10 424,500 1,076,000
150,000(4) 7.9 $12.88 6/30/09 1,214,552 3,077,915
Harold H. Bach,
Jr................. 50,000(3) 2.6 $13.50 1/30/10 424,500 1,076,000
Byron C. Cook........ 50,000(3) 2.6 $13.50 1/30/10 424,500 1,076,000
Kenneth J. Fedesna... 50,000(3) 2.6 $13.50 1/30/10 424,500 1,076,000
</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 a ten year option period based on the
price of $8.5625 per share of common stock on June 30, 2000 would be
$525,926,000 and $837,450,000 at assumed rates of stock appreciation of 5%
and 10%, respectively.
(2) These options vest on 6/30/01.
(3) 20% of these options are exercisable, and an additional 20% become
exercisable on each January 31 until fully vested on 1/31/04.
(4) 10% of these options are exercisable, an additional 20% become exercisable
on 6/30/01, an additional 30% become exercisable on 6/30/02, and an
additional 40% become exercisable on 6/30/03.
The following table sets forth information with respect to the number and
assumed values of options to purchase common stock owned by the executive
officers named in the Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT 6/30/00(#) 6/30/00($)(1)
ON VALUE EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- ------------ ---------------------- -----------------------
<S> <C> <C> <C> <C>
Neil D. Nicastro..... -- -- 1,531,850(E)/480,000(U) 512,916(E)/468,750(U)
Michael A. Ribero.... -- -- 10,000(E)/190,000(U) --(E)/ --(U)
Harold H. Bach, -- -- 183,842(E)/ 60,000(U) 24,661(E)/ --(U)
Jr.................
Byron C. Cook........ -- -- 424,955(E)/ 60,000(U) 160,287(E)/ --(U)
Kenneth J. Fedesna... -- -- 169,229(E)/ 60,000(U) 16,441(E)/ --(U)
</TABLE>
-------------------------
(1) Based on the closing price of our common stock on the New York Stock
Exchange on June 30, 2000, which was $8.5625 per share.
26
<PAGE> 28
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 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. 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 45,000
shares of common stock to each of our non-employee directors. See "Stock Option
Plans" below.
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 on March 5, 1998, November 5, 1999
and May 4, 2000. 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 30, 2004, 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 ten years, an annual benefit equal to one-half of (a)
the annual base salary being paid to him upon, and (b) average bonus for the
three years immediately prior to, his retirement or death, as the case may be,
but in no event less than $300,000 per year or more than his base salary at the
date of his retirement or death. 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
27
<PAGE> 29
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 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 aggregate 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 any of the last
five 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 any portion of the amount paid to Mr. Nicastro is subject to the excise
tax imposed by Section 4999 of the Code, then we must pay additional
compensation to Mr. Nicastro to the extent necessary to eliminate the economic
effect on him of the resulting excise tax.
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
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<PAGE> 30
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.
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 requires 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.
Michael A. Ribero is employed by us under the terms of an employment
agreement dated as of March 1, 2000. This agreement provides for salaried
compensation at the rate of $380,000 per year, or a greater amount as may be
determined by the board of directors. It provides that Mr. Ribero shall not be
required to move away from the San Francisco/San Jose areas. It also provides
for, among other things, full participation in all benefit plans and perquisites
generally available to executive employees. The agreement requires that we
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<PAGE> 31
provide Mr. Ribero with $400,000 in additional life insurance coverage and
advance $500,000 to Mr. Ribero. The agreement expires on January 31, 2002. We
may terminate the agreement upon 30 days' written notice for cause or after a
90-day period of disability. Mr. Ribero may terminate the agreement upon 30
days' written notice for "good reason," including a significant change to the
scope of his authority. Mr. Ribero 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. Ribero gives us notice of
termination within 60 days, then in lieu of any other rights under the
agreement, all of Mr. Ribero's unvested stock options will immediately vest, and
we will be required to pay him a lump sum of two times his base salary. If any
portion of the amount paid to Mr. Ribero is subject to the excise tax imposed by
Section 4999 of the Code, then we must pay additional compensation to Mr. Ribero
to the extent necessary to eliminate the economic effect on him of the resulting
excise tax.
STOCK OPTION PLANS
We have adopted a 2000 Non-Qualified Stock Option Plan, 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, 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, 7,750,000
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 22, 2000, no options were outstanding under the 2000
Non-Qualified Stock Option Plan; 1,613,000 options were outstanding under the
1999 Stock Option Plan, 650,000 of which were held by the persons named in the
Summary Compensation Table; options to purchase 2,037,364 shares of common stock
were outstanding under the 1998 Stock Incentive Plan, 1,269,876 of which were
held by the persons named in the Summary Compensation Table; options to purchase
750,000 shares of common stock were outstanding under the 1998 Non-Qualified
Stock Option Plan, 450,000 of which were held by the persons named in the
Summary Compensation Table; and options to purchase 1,898,075 shares of common
stock were outstanding under the 1996 Stock Option Plan, 800,000 of which were
held by the persons named in the Summary Compensation Table.
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<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of September 22, 2000 (except
as otherwise footnoted) with respect to persons known to be the beneficial owner
of more than five percent of our common stock, each officer listed on the
Summary Compensation Table 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............. 10,366,436(2) 27.5%
200 Elm Street
Dedham, MA 02026
Capital Group International, Inc............................ 2,831,400(3) 7.5%
and Capital Guardian Trust Company
11100 Santa Monica Blvd.
Los Angeles, CA 90025
Gilder Gagnon Howe & Co. LLC................................ 2,110,875(4) 5.6%
1775 Broadway, 26th Floor
New York, NY 10019
Michael A. Ribero........................................... 25,000(5) *
3401 North California Avenue
Chicago, IL 60618
Directors and Executive Officers as a group (14 persons).... 3,895,666(6) 9.6%
</TABLE>
-------------------------
* Less than 1%.
(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. Percentages are
based on 37,710,725 shares outstanding as of September 22, 2000.
(2) The number of shares reported is based upon information contained in
Amendment No. 3 to Schedule 13D filed with the SEC by Sumner M. Redstone on
May 1, 2000. Mr. Redstone and National Amusements reported sole investment
power with respect to 6,243,665 and 4,122,771 shares, respectively, of our
common stock. As a result of his stock ownership in National Amusements, Mr.
Redstone is deemed the beneficial owner of the shares of our common stock
owned by National Amusements.
(3) The number of shares reported is based upon information contained in
Amendment No. 1 to Schedule 13G filed with the SEC by Capital Group
International, Inc. and its wholly-owned subsidiary, Capital Guardian Trust
Company on February 14, 2000. Capital Guardian Trust Company reported sole
power with respect to 2,180,600 shares and sole dispositive power with
respect to 2,831,400 shares as a result of its serving as the investment
manager of various institutional accounts.
(4) The number of shares reported is based upon information contained in
Schedule 13G filed with the SEC by Gilder Gagnon Howe & Co. LLC on April 10,
2000. The filer reported shared dispositive power with respect to the
shares, which are held in customer accounts.
(5) Includes 25,000 shares of common stock underlying stock options.
(6) Includes an aggregate of 2,715,337 shares of common stock underlying stock
options.
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<PAGE> 33
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, including Chairman and
Chief Executive Officer. See "Item 10. -- Directors and Executive Officers of
the Registrant."
In connection with the Spin-off, we entered into a number of agreements
with WMS, each dated as of April 6, 1998. In connection with the termination of
our manufacturing relationship with WMS, notice has been given to terminate
several of the 1998 agreements early. In addition, the parties are negotiating
with respect to our purchase of specified WMS equipment and spare parts and for
our lease of WMS's building at 2704 Roscoe Street in Chicago Illinois, to begin
in 2001, among other matters. The material agreements between WMS and us, each
dated as of April 6, 1998, as amended in some cases, are described below:
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. We supply most of the materials used in the manufacture of
coin-operated video games, but WEG supplies a small amount of the materials 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 agreement has been noticed for termination
on September 30, 2000. We are negotiating to purchase specified equipment from
WMS remaining on hand on September 30, 2000.
Spare Parts Sales and Service Agreement. WEG sells spare parts for our
coin-operated video games. The agreement does not include warranty services,
which services we provide directly to our customers. The agreement has been
noticed for termination on September 30, 2000. We are negotiating to purchase
specified parts and equipment from WMS remaining on hand on September 30, 2000.
Information Systems Service Agreement. 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%. The agreement has been noticed for termination as
of December 31, 2000, except with respect to the AS-400 system and related
services, which we anticipate will terminate as of December 31, 2001.
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.
Right of First Refusal Agreement. WMS granted us the right of first refusal
with respect to any offer to WMS to purchase specified WMS facilities, 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. 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
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<PAGE> 34
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
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. Until the Spin-off, 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 for
the period that we were part 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
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
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<PAGE> 35
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
In connection with the Spin-off, WMS entered into a consulting agreement
with Neil D. Nicastro under which Mr. Nicastro agreed to make himself reasonably
available at WMS's request, to render such services concerning WMS as the board
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.
In addition, under his employment agreement with us, Mr. Nicastro received
$984,000 of advances for a bonus accrued in the first six months of Fiscal 2000
and later reversed. This amount will be repaid, without interest, out of future
compensation to which Mr. Nicastro becomes entitled.
In March 2000, we loaned $500,000 to Mr. Ribero in connection with the
relocation of his residence. The loan is due in March 2005, together with
interest at the rate of 6% annually, and is secured by a junior mortgage on Mr.
Ribero's home. Under the terms of the loan, Mr. Ribero is required to make
prepayments out of future bonuses to which he becomes entitled.
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 2000 and 1999, and which we propose to retain for these
services during the current fiscal year.
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 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.
William C. Bartholomay, one of our directors, is President of Near North
National Group, insurance brokers, which we retained to provide insurance
services during the last fiscal year and propose to retain for insurance
services during the current fiscal year.
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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
Registrant's Registration Statement on Form S-1, File No.
333-11919, filed on September 13, 1996 (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 incorporated by reference to Exhibit A to the Rights
Agreement filed as Exhibit 2.2 to the S-1 Registration
Statement.
3.4 Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3 to the 8-A Registration Statement.
4.1 Rights Agreement dated as of October 24, 1996 between the
Registrant and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 2.1 to the S-1
Registration Statement.
4.2 First Amendment to Rights Agreement, dated as of November 6,
1997 between the Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to Exhibit 8 to the
8-A Registration Statement.
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 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 (Removed)
10.7 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).
10.8 Letter Agreement dated March 5, 1998 between the Registrant
and Neil D. Nicastro amending Mr. Nicastro's Employment
Agreement with the Company, incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (the "1998 10-K").
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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).
10.19 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).
10.20 Employment Agreement dated as of July 1, 1998 between Byron
C. Cook and the Registrant, incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1999.
10.21 Amended and Restated Employment Agreement dated as of May
24, 1999 between Harold H. Bach, Jr. and the Registrant,
incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 (the "1999 10-K").
10.22 Employment Agreement dated as of May 24, 1999 between Orrin
J. Edidin and the Registrant, incorporated by reference to
Exhibit 10.38 to the 1999 10-K.
10.23 Employment Agreement dated as of June 1, 1999 between
Kenneth J. Fedesna and the Registrant, incorporated by
reference to Exhibit 10.39 to the 1999 10-K.
10.24 Settlement Agreement among the Registrant, GT Interactive
and others, dated August 16, 1999, incorporated by reference
to Exhibit 10.41 to the 1999 10-K.
10.25 Letter Agreement dated November 5, 1999 between the
Registrant and Neil D. Nicastro further amending Mr.
Nicastro's Employment Agreement with the Registrant,
incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2000 (the "3/31/00 10-Q").
10.26 Employment Agreement dated as of March 1, 2000 between
Michael A. Ribero and the Registrant, incorporated by
reference to Exhibit 10.2 to the 3/31/00 10-Q.
10.27 Letter Agreement dated May 4, 2000 between the Registrant
and Neil D. Nicastro further amending Mr. Nicastro's
Employment Agreement with the Registrant.
10.28 2000 Non-Qualified Stock Option Plan.
10.29 Credit Agreement dated as of September 20, 2000 among the
Registrant and Bank of America N.A., among other lenders.
13 Portions of 2000 Annual Report to Stockholders.
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed in the fourth quarter of fiscal 2000.
37
<PAGE> 39
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, 2000 and June 30,
1999...................................................... *
Consolidated Statements of Income for the years ended June
30, 2000, 1999 and 1998................................... *
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2000, 1999 and 1998.......... *
Consolidated Statements of Cash Flows for the years ended
June 30, 2000, 1999 and 1998.............................. *
Notes to Financial Statements............................... *
Financial Statement Schedule II--Valuation and Qualifying
Accounts for the years ended June 30, 2000, 1999 and
1998................................................... F-3
</TABLE>
-------------------------
* Incorporated by reference to the portions of our 2000 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> 40
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, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States. 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 22, 2000, except for note 7,
as to which the date is September 20, 2000
F-2
<PAGE> 41
MIDWAY GAMES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
-------- -------- ---------------------- -------- --------
BALANCE AT CHARGED TO CHARGED DEDUCTIONS- BALANCE
BEGINNING COSTS AND TO OTHER AMOUNTS AT END
YEAR DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITTEN OFF OF PERIOD
---- ----------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
2000 accounts:....................... $1,138,000 $ 1,726,000 $-- $ 2,043,000 $ 821,000
Allowance for price protection,
returns and discounts:.......... $3,816,000 $23,128,000 $-- $21,910,000 $5,034,000
---------- ----------- --- ----------- ----------
Total:............................ $4,954,000 $24,854,000 $-- $23,953,000 $5,855,000
1999 Allowance for doubtful accounts: $1,316,000 $ 306,000 $-- $ 484,000 $1,138,000
Allowance for price protection,
returns and discounts:.......... 5,701,000 12,362,000 $-- 14,247,000 3,816,000
---------- ----------- --- ----------- ----------
Total:............................ $7,017,000 $12,668,000 $-- $14,731,000 $4,954,000
Allowance for doubtful
1998 accounts:....................... $1,066,000 $ 428,000 $-- $ 178,000 $1,316,000
Allowance for price protection,
returns and discounts:.......... 3,874,000 16,444,000 $-- 14,617,000 5,701,000
---------- ----------- --- ----------- ----------
Total:............................ $4,940,000 $16,872,000 $-- $14,795,000 $7,017,000
</TABLE>
F-3
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
25th day of September, 2000.
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, Chief September 25, 2000
---------------------------------------- Executive Officer and Chief Operating
Neil D. Nicastro Officer (Principal Executive Officer)
and Director
/s/ HAROLD H. BACH, JR. Executive Vice President -- Finance, September 25, 2000
---------------------------------------- Treasurer and Chief Financial Officer
Harold H. Bach, Jr. (Principal Financial and Principal
Accounting Officer) and Director
/s/ BYRON C. COOK Vice-Chairman of the Board and Director September 25, 2000
----------------------------------------
Byron C. Cook
/s/ KENNETH J. FEDESNA Executive Vice President -- Product September 25, 2000
---------------------------------------- Development and Director
Kenneth J. Fedesna
/s/ LOUIS J. NICASTRO Director September 25, 2000
----------------------------------------
Louis J. Nicastro
/s/ WILLIAM C. BARTHOLOMAY Director September 25, 2000
----------------------------------------
William C. Bartholomay
/s/ WILLIAM E. MCKENNA Director September 25, 2000
----------------------------------------
William E. McKenna
/s/ NORMAN J. MENELL Director September 25, 2000
----------------------------------------
Norman J. Menell
/s/ HARVEY REICH Director September 25, 2000
----------------------------------------
Harvey Reich
/s/ IRA S. SHEINFELD Director September 25, 2000
----------------------------------------
Ira S. Sheinfeld
/s/ RICHARD D. WHITE Director September 25, 2000
----------------------------------------
Richard D. White
/s/ GERALD O. SWEENEY, JR. Director September 25, 2000
----------------------------------------
Gerald O. Sweeney, Jr.
</TABLE>
<PAGE> 43
EXHIBIT INDEX
<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
Registrant's Registration Statement on Form S-1, File No.
333-11919, filed on September 13, 1996 (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 incorporated by reference to Exhibit A to the Rights
Agreement filed as Exhibit 2.2 to the S-1 Registration
Statement.
3.4 Amended and Restated By-laws of the Registrant, incorporated
by reference to Exhibit 3 to the 8-A Registration Statement.
4.1 Rights Agreement dated as of October 24, 1996 between the
Registrant and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 2.1 to the S-1
Registration Statement.
4.2 First Amendment to Rights Agreement, dated as of November 6,
1997 between the Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to Exhibit 8 to the
8-A Registration Statement.
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 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 (Removed)
10.7 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).
10.8 Letter Agreement dated March 5, 1998 between the Registrant
and Neil D. Nicastro amending Mr. Nicastro's Employment
Agreement with the Company, incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1998 (the "1998 10-K").
10.9 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.
10.10 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.
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.18 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).
10.19 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).
10.20 Employment Agreement dated as of July 1, 1998 between Byron
C. Cook and the Registrant, incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1999.
10.21 Amended and Restated Employment Agreement dated as of May
24, 1999 between Harold H. Bach, Jr. and the Registrant,
incorporated by reference to Exhibit 10.37 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999 (the "1999 10-K").
10.22 Employment Agreement dated as of May 24, 1999 between Orrin
J. Edidin and the Registrant, incorporated by reference to
Exhibit 10.38 to the 1999 10-K.
10.23 Employment Agreement dated as of June 1, 1999 between
Kenneth J. Fedesna and the Registrant, incorporated by
reference to Exhibit 10.39 to the 1999 10-K.
10.24 Settlement Agreement among the Registrant, GT Interactive
and others, dated August 16, 1999, incorporated by reference
to Exhibit 10.41 to the 1999 10-K.
10.25 Letter Agreement dated November 5, 1999 between the
Registrant and Neil D. Nicastro further amending Mr.
Nicastro's Employment Agreement with the Registrant,
incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2000 (the "3/31/00 10-Q").
10.26 Employment Agreement dated as of March 1, 2000 between
Michael A. Ribero and the Registrant, incorporated by
reference to Exhibit 10.2 to the 3/31/00 10-Q.
10.27 Letter Agreement dated May 4, 2000 between the Registrant
and Neil D. Nicastro further amending Mr. Nicastro's
Employment Agreement with the Registrant.
10.28 2000 Non-Qualified Stock Option Plan.
10.29 Credit Agreement dated as of September 20, 2000 among the
Registrant and Bank of America N.A., among other lenders.
13 Portions of 2000 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
