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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
COMMISSION FILE NUMBER 1-8300
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WMS INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 36-2814522
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3401 NORTH CALIFORNIA AVE., CHICAGO, IL 60618
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 312-961-1111
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Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.50 par value New York Stock Exchange
5 3/4% Convertible Subordinated Debentures
Due 2002 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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 24,049,710 shares of Common Stock held by
non-affiliates of the registrant on August 30, 1996 was $556,149,544. On such
date, the closing price of the Common Stock on the New York Stock Exchange, Inc.
was $23.125 per share and the number of shares of Common Stock outstanding
(excluding 52,312 shares held as treasury shares) was 24,159,000 shares.
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DOCUMENTS INCORPORATED BY REFERENCE: PART
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Annual Report to Stockholders of Registrant for year ended June 30, 1996.......... I, II, IV
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
WMS Industries Inc. (the "Registrant") was incorporated in Delaware on
November 20, 1974 under the name Williams Electronics, Inc. Registrant's
principal executive offices are located at 3401 North California Avenue,
Chicago, Illinois 60618. During fiscal year 1996 the Registrant, through its
subsidiaries and affiliates (hereinafter, the "Company"), designed, published
and marketed interactive entertainment software played in both the coin-operated
and home video game markets ("Video Games") and was engaged in the design,
manufacture and sale of coin-operated pinball and novelty games ("Pinball &
Novelty Games") and video lottery terminals and slot/video gaming machines
("Gaming Equipment") (the Video Games, Pinball & Novelty Games and Gaming
Equipment operations are collectively referred to herein as "Amusement Games
Operations") as well as the ownership and operation of hotels and casinos in
Puerto Rico ("Hotel & Casino Operations").
On March 29, 1996, a wholly-owned subsidiary of the Company acquired all
the capital stock of Atari Games Corporation ("Atari Games") from Warner
Communications Inc., a subsidiary of Time Warner Inc. Headquartered in Milpitas,
California, Atari Games is engaged in the business of developing, manufacturing,
licensing, publishing and distributing coin-operated video games and interactive
entertainment software for use in the home on all major dedicated platform
hardware systems and on personal computers.
On June 27, 1996, the Company announced restructuring initiatives intended
to, among other things, reduce regulatory burdens and risks, enhance stockholder
value by enabling investors to value three distinct areas of the operations and
reduce expenses of pinball operations. The restructuring will entail a spin-off
of 100% of the Company's Hotel & Casino Operations to the Company's
stockholders; the initial public offering of approximately 15% of the Video
Games business; and the continuation by the Company of the down-sized Pinball &
Novelty Games operations.
On September 13, 1996, Midway Games Inc. (formerly known as Midway
Manufacturing Company) ("Midway"), the Company's subsidiary engaged in the Video
Games business, filed with the Securities and Exchange Commission a Form S-1
Registration Statement in preparation for an initial public offering of
5,100,000 shares of Midway common stock (5,865,000 shares if the underwriters'
over-allotment option is exercised in full) at an anticipated initial offering
price of between $20 and $22 per share. Midway will have outstanding 38,500,000
shares upon completion of the offering (39,265,000 shares if the underwriters'
over-allotment option is exercised in full) of which the Company will own
33,400,000 shares. The managing underwriters of the offering, which is expected
to commence in late October 1996, are Oppenheimer & Co., Inc., Hambrecht & Quist
LLC, UBS Securities LLC and Wasserstein Perella Securities, Inc. Midway intends
to use the proceeds of the offering for working capital and general corporate
purposes, to pay a $50 million dividend note owed to the Company and to repay
seasonal working capital borrowings from the Company.
This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. Discussions containing such
forward-looking statements may be found in the materials set forth under
"Amusement Games Operations" and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's 1996
Annual Report to Stockholders (the "1996 Annual Report"). The Company's actual
results could differ materially from those anticipated in the forward-looking
statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The proposed Hotel & Casino Operations spin-off will split the Company into
two independent public corporations. Accordingly, the financial position,
results of operations and cash flows of that business segment have been reported
as discontinued operations in the Consolidated Financial Statements in the 1996
Annual Report. The balance of the Company's businesses has been reported in the
following three industry segments: Video Games, Pinball & Novelty Games and
Gaming Equipment with financial information about such
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industry segments for the years ended June 30, 1996, 1995 and 1994 appearing at
Note 18 of the Notes to Consolidated Financial Statements in the Company's 1996
Annual Report which information is incorporated herein by reference. Revenues
from the principal products included in the Video Games segment for the years
ended June 30, 1996, 1995 and 1994 were as follows:
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JUNE 30,
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1996 1995 1994
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(IN THOUSANDS)
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Revenues
Home video.................................................. $154,102 $ 60,839 $ 23,959
Coin-operated video......................................... 91,321 119,640 97,923
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Total revenues................................................ 245,423 180,479 121,882
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AMUSEMENT GAMES OPERATIONS
GENERAL
During the fiscal year ended June 30, 1996, the Company was a designer,
manufacturer and marketer of Video Games, Pinball & Novelty Games and Gaming
Equipment. The Company conducts the Video Games business segment through its
subsidiary Midway Games Inc. which markets coin-operated video games under the
Midway(R) and Atari(R) trademarks and which has marketed home video games under
the Williams(R), Tradewest(R), Tengen(R) and Time Warner Interactive(R)
trademarks. Commencing with Midway's fall 1996 product line, home video games
will be marketed under the Midway(R) trademark. The Company's Pinball & Novelty
Games business segment is conducted through its subsidiaries Williams
Electronics Games, Inc. ("Williams") and Fun House Games Inc. ("Fun House
Games") which market products under the Bally(R), FunHouse(R) and Williams(R)
trademarks. The Gaming Equipment business segment is conducted through the
Company's subsidiary WMS Gaming Inc. which markets its products under the
"Williams(R)" trademark. The Company also derives revenue from licensing its
products to others, including the merchandising of audio and visual aspects of
games for motion pictures, television and consumer products.
VIDEO GAMES
Coin-operated Games: Coin-operated video games utilize specialized
technology and hardware platforms and are manufactured in self-contained
cabinetry containing large video screens that display the game. Multiple players
can play the same game simultaneously and games are generally designed to permit
the players to play against each other, in addition to being able to play
against the game itself. Most coin-operated video games cost 50c to play a game
of approximately two minutes in duration. New technologies employed in the
manufacturing of coin-operated video games utilize advanced video platforms in
which digital images are mapped to computer generated polygons that allow for
the creation of three-dimensional graphic images.
The Company is one of the leading developers and marketers of coin-operated
video games, having recently released such titles as Mortal Kombat, Cruis'n USA
and NBA Jam and, through its recently acquired Atari Games subsidiary, such
titles as Area 51 and Primal Rage. During fiscal 1996, four coin-operated video
games were introduced under the Midway name -- NBA Hangtime, Killer Instinct 2,
Wrestlemania and Open Ice and Atari Games released one coin-operated video game
called Area 51. Also during fiscal 1996, the Company introduced TouchMaster, a
touchscreen countertop game containing multiple game options. In fiscal 1997,
the Company plans to release approximately 12 new coin-operated video games,
including Mortal Kombat 4, Cruis'n the World and War Gods. At the March 1996
Amusement Operators Expo, Play Meter Magazine named Cruis'n USA the Best
Dedicated Video Game and Mortal Kombat 3 the Best Video Game Conversion Kit.
Additionally, the American Amusement Machine Association ("AAMA") named the
Company its 1996 Manufacturer of the Year. Midway's Mortal Kombat 3
coin-operated video game conversion kit was awarded the AAMA 1996 Diamond Sales
Achievement Award -- the highest category of award presented in any given year
- -- and several of the Company's other games won Platinum and Gold sales awards
in 1996. At the September 1995 Amusement and Music Operators Association
("AMOA") trade show, Cruis'n USA was named Most Played Dedicated Video Game and
Mortal Kombat 3 was named Most Played Conversion Kit. Additionally, the
Company's Cruis'n USA and Area 51 have been nominated for the
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Most Innovative Video Game Award and its Mortal Kombat 3 and Area 51 have been
nominated for the Most Innovative Conversion Kit Award, which awards will be
presented at the Fall 1996 AMOA trade show.
Home Games: Like coin-operated video games, interactive software programs
for the home allow the consumer to participate actively in the outcome of the
game. 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 converting
software created for the coin-operated version of a game into software for use
on the multiple platforms on which home games are released. The business is
highly dependent on consumer tastes and preferences and on the commercial
success of the hardware platforms for which the software is produced. The
principal types of interactive hardware platforms are dedicated game systems,
such as those manufactured by Nintendo, Sony and Sega, portable game systems and
personal computers. The Company began to publish home video games based on its
own coin-operated video games in September 1995 with the introduction of Mortal
Kombat 3, the best selling home video game in the United States in 1995. In
April 1994 Midway acquired the operating assets and business of three
commonly-owned companies ("Tradewest"): Tradewest, Inc., Tradewest
International, Inc. and The Leland Corporation, a home video game development
and distribution business, and in March 1996 Midway acquired Atari Games, a
leading designer, publisher and marketer of interactive entertainment software.
Midway also significantly increased its research and development expenditures to
$32.5 million in fiscal 1996, up from $14.7 million in fiscal 1995. During
fiscal 1996, the Company published eight video games for the home market,
including Mortal Kombat 3 and two games developed by Atari Games and released
after its acquisition by the Company. In fiscal 1997, the Company plans to
release approximately 20 titles, including Ultimate Mortal Kombat 3, Mortal
Kombat Trilogy, Mortal Kombat Mythologies, NBA Hangtime, Doom 64, Final Doom,
War Gods, Robotron X, The NHLPA & NHL Present Wayne Gretzky's 3D Hockey, Area 51
and several collections of arcade classics.
PINBALL & NOVELTY GAMES
Pinball Games: Based on industry awards with respect to the Company's
coin-operated pinball games and the number of such games sold in comparison to
its competitors, the Company believes it is the world's leading manufacturer of
pinball games, producing pinball games under both the Williams and Bally trade
names. Coin-operated pinball games utilize electromechanical devices such as
flippers to propel steel balls on an intricately designed playing field. These
games are generally designed by members of the Company's internal design staff
but may be designed by outside consultants. During fiscal 1996, the Company
introduced eight new pinball game models -- four for the Williams product line
and four for the Bally product line. The AAMA 1996 Platinum Sales Achievement
Award -- the second highest category of award presented in any given year -- was
given to the Bally pinball game Theatre of Magic and Gold and Silver Sales
Achievement Awards were won by six of the Company's pinball games. The Addams
Family pinball game established a new record by winning the AMOA's Most Played
Pinball Game Award for four consecutive years at the Fall 1995 AMOA trade show.
Williams and Bally pinball games have received three of the five nominations for
Most Innovative Pinball Game to be decided at the Fall 1996 trade show.
Shuffle-Alley and Novelty Games: For over fifty years the Company and its
predecessors have been the industry leader in the design, engineering and
manufacturing of coin-operated shuffle alley games. Shuffle-alley games offer a
simulation of bowling with varied scoring options. During fiscal 1996, the
Company produced League Champs, its newest version of shuffle alley.
Coin-operated novelty redemption games dispense tickets when a certain level of
skill is achieved. Such games comprise a large proportion of games located in
family entertainment centers. Tickets won may be redeemed by the player for
merchandise of nominal value. During fiscal 1996, the Company established Fun
House Games to develop and market novelty games and sold Wheel of Fortune, based
on one of the most successful TV game shows of all time. Additional novelty
games introduced in fiscal 1996 were Safecracker and Ticket-Tac-Toe.
Due to an industry wide decline in demand for pinball games, the Company
has determined to downsize its Pinball & Novelty Games segment operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the 1996 Annual Report.
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GAMING EQUIPMENT
Video Lottery Terminals: The Company's subsidiary WMS Gaming Inc. markets
video lottery terminals under the Williams(R) trademark ("VLT" or "VLTs"). VLTs
offer a wide selection of exciting, menu-driven games, including poker, keno,
blackjack and video slot games. The Williams VLTs feature enhanced viewing
through high-resolution 19" monitors which vividly display digitized images in
up to 256 colors simultaneously as well as compact-disc quality digitally
produced sound effects and music. Game selection and play are initiated by
lightly touching a touch screen which is bonded to the monitor for a clearer
picture and reduced risk of damage. VLTs accept both coins and bills in varying
denominations via an electronic coin validator or high-security bill validator
to insure a high-level of fraud protection. All money handling and storage
compartments, as well as the long-life, programmable printer, are secured with
heavy duty, multiple barrel locks which are accessed separately. A heavy gauge
steel cabinet and innovative drip system protect internal components. Williams
VLTs are equipped with built-in, self diagnostic software to identify problem
areas and to electronically record all aspects of machine operation, including
game play, wagering/payout data and physical breaches such as opening doors,
removing currency, accessing the central processor and disconnecting the power
source. Extensive information storage capacity allows for periodic telephone
polling by the central computer or on-line, real time monitoring. Williams VLTs
communicate with mainframe central site computers and retail validation
terminals through internal modems, master/slave configurations and fiber optic
connections. VLTs are designed for low-stakes entertainment in age-controlled
establishments such as restaurants serving alcoholic beverages and bars.
The Williams Multi-Magic, successor to the popular Midas Touch VLT, is
available in three different model configurations -- one of which provides
unique player comfort through a combination of a slant-top playing surface and
built-in seating. VLTs represent a source of revenue for jurisdictions in
addition to taxes and may be operated as stand-alone units or may interface with
central monitoring computers operated by governmental agencies. To date, VLT
operations are conducted or planned in the United States in Delaware, Louisiana,
Montana, Oregon, Rhode Island, South Carolina, South Dakota and West Virginia
and in Australia, all Provinces of Canada except British Columbia and certain
countries of Europe. WMS Gaming Inc. has been approved as a manufacturer and has
delivered VLTs into ten of such jurisdictions. The Company intends to sell,
lease or operate on a revenue-sharing basis VLTs in all legalized jurisdictions
subject to receipt of necessary licensing approvals.
Slot/Video Gaming Machines: The Company has designed and developed a series
of gaming machines for casinos located in established gaming jurisdictions
including jurisdictions permitting casino gaming on riverboats and on Native
American reservations. The Williams Platinum FX Series casino mechanical slot
machines are designed to attract players with innovative concepts including
stunning visuals, high-quality audio from the Company's proprietary Digital
Compression System ("DCS") sound system and back-lit reels for exciting game
play. Digital sound effects and music are customized to each theme-based game
and, for interactive gaming experience, ReelFX high torque stepper motors allow
operators to select from three speeds of reel spin for a customized rate of game
play as well as provide enhanced reel animations for select games. The Platinum
FX Series slot machine is sold in upright or Quantum slant top configurations.
The Williams Quantum XL Series casino slant top is the first video touch screen
multi-game casino slant-top gaming product to offer a 19" high resolution
monitor. Players can play a variety of games chosen from a full menu of games,
including blackjack, poker, keno and video slot games, without ever needing to
leave the comfort of their seats to search for another machine which allows
casinos to minimize floor space usage. Based on the same technology that drives
the Platinum FX Series slot machine, the Quantum XL Series slant top also
features attractive and entertaining game themes with vibrant, full-color
graphics and custom sound packages. The Company recently introduced a new
generation of slot machines that integrates dotmatrix animation with traditional
games to create a "game within a game" -- the GX Series slot machine which uses
state-of-the-art dotmatrix animation capabilities to create a secondary game
effect for longer, more exciting play. As they play the primary slot game and
achieve certain milestones, players move on to play a secondary game for
additional bonus credits. The secondary game is viewed on a dotmatrix display
which is built into the top box, giving players a sense of "investment" in the
game which contributes to player interest and extended play. The GX
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Series slot machine is also available in upright or Quantum slant top models.
All slot/video gaming machines feature the Williams proprietary DCS sound
system.
In the United States the Company is authorized to sell its gaming machines
in Arizona, Colorado, Connecticut, Illinois, Indiana, Missouri, Minnesota,
Mississippi, Nevada, New Jersey, North Dakota, South Carolina, South Dakota and
Wisconsin as well as to cruise ships operating in international waters. The
Company is also authorized to sell its product directly or through distributors
in several international jurisdictions.
See "Item 3. Legal Proceedings" with respect to certain patent litigation
between the Company and International Game Technology involving reel-type slot
machines.
BUSINESS STRATEGY
General: The Company's overall business strategy is to expand and diversify
its Amusement Games Operations through forming strategic relationships to
promote, and by investing in businesses which complement, existing product lines
in order to provide substantial growth opportunities in future years as well as
to produce games that are the most fun and exciting to play through the
utilization of the creative talents of its experienced game designers. The
Company currently employs approximately 360 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. The
Company believes 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 the
Company to attract and retain the best game designers in the industry. The
design teams are supported by state-of-the-art design technology that allows for
the creation of cutting-edge three-dimensional graphics and advanced audio
effects. The Company has developed its own proprietary hardware and software for
creating digitally texture mapped polygon images, which enable it to produce
games with state-of-the-art visual simulations at cost levels that are
attractive to customers. The Company has 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. The Company believes its proprietary hardware and software
have helped it to achieve and sustain a reputation for developing high quality
products and to position itself for involvement in evolving technologies.
Video Games: The Company's business strategy for Video Games is based upon
the following:
- Create portfolio of exciting games -- The key to success in the video
game business is to produce games that are fun and exciting to play, which
requires the creative talents of experienced game designers. Midway
employs over 250 game design personnel organized in teams comprised of
programmers, artists, mechanical and electrical engineers, musicians and
actors. The design teams are supported by state-of-the-art design
technology that allows for the creation of cutting-edge three-dimensional
graphics and advanced audio effects. Midway produces games in the action,
simulation, adventure and sports categories.
- Exploit coin-operated proving ground -- Midway generally develops its
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 spend 50c almost every
two minutes. Midway considers coin-operated games that sell at least 5,000
units and home games that sell at least 100,000 units per dedicated
platform to be successful games. Midway's experience has been that a
successful coin-operated video game is almost always a success in the home
market. Each of the coin-operated video games released by Midway in the
past four years which has sold at least 5,000 units has then sold at least
100,000 units for each major dedicated platform on which it was released
in the home market. The significant benefits realized by Midway from this
strategic approach are that (i) 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 which
Midway will follow in releasing the game in the home market, (ii) the
knowledge that a particular coin-operated video game is popular with
consumers allows Midway to maximize profitability through simultaneous
publication
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across multiple home platforms thereby spreading developmental,
advertising and promotional costs over a greater number of units and (iii)
a successful coin-operated game promotes sales for the subsequent home
version of the game among the players exposed to the game in arcades and
other coin-operated venues.
- Maintain platform independence -- Midway develops games for all major
dedicated home platforms (Nintendo, Sony and Sega) as well as for the
personal computer. Midway is a leading developer of video games for the
32- and 64-bit game platforms, commonly referred to as "next generation"
platforms, which are currently being marketed by hardware manufacturers.
In fiscal 1997, Midway expects to release more games on the new Nintendo
64 platform than any developer other than Nintendo itself. Because it
produces video games for multiple platforms, Midway is not dependent on
any particular game platform. Midway believes it is well positioned for
the rapid technological evolution that characterizes the home video game
market.
- Exploit franchise and library value -- Midway seeks to exploit its
franchise properties such as Mortal Kombat. In fiscal 1997, Midway plans
to release a new coin-operated game, Mortal Kombat 4, and three additional
home games, Ultimate Mortal Kombat 3, Mortal Kombat Trilogy and an
adventure game tentatively entitled Mortal Kombat Mythologies. An animated
television series based on Mortal Kombat is scheduled to air in the fall
of 1996, and a sequel to the movie version of Mortal Kombat is scheduled
to be released in the summer of 1997. Midway also seeks to utilize its
large library of video games to release "arcade classics" and updated
versions of such classics. For the home market in fiscal 1997, Midway
plans to release three collections of arcade classic games and Robotron X,
a new version of a classic arcade game.
- Develop multi-site game playing network -- Midway is testing its own
proprietary multi-player interactive video game playing network technology
known as Wavenet, allowing players to play against others located at
remote coin-operated locations. This technology has consistently resulted
in greater player utilization and profitability of games. As new on-line
interactive formats develop for game playing, such as over the Internet or
other networks, Midway intends to create a competitive advantage by
exploiting its developing multi-player network technology.
Pinball & Novelty Games: At the close of the 1996 fiscal year the Company
began a downsizing of its pinball design and manufacturing operations as a
result of the industry-wide decline in demand for pinball games. Notwithstanding
this market contraction, the Company believes it will be able to maintain its
share of the worldwide pinball games market as a result of its leadership in
design and engineering which is evidenced by the continued annual achievement
awards bestowed by the AMOA and AAMA. Such leadership enables the Company to
offer its distributors a broad variety of innovative pinball games which result
in greater operator profit through increased player interest, mechanical
reliability and serviceability. The Company's design and engineering staff has
been the industry leader in innovations such as music and other sound effects,
multi-level playing fields, multi-ball releases and in reliability improvements
such as solid state technology and sophisticated diagnostic testing to quickly
locate any malfunction. Many of the Company's pinball and novelty games use
common parts, creating manufacturing efficiencies and assisting customers in
servicing machines and controlling parts inventory costs. In the past, the
Company has generally introduced eight new pinball machines per year in order to
sustain player interest while spreading research, development and manufacturing
expenses to maintain competitive pricing. However, it is anticipated that as a
result of the Company's decision to downsize the Pinball & Novelty Games
segment, the Company will introduce five models in the 1997 fiscal year.
Gaming Equipment: The Company continues to provide VLTs to most of the
jurisdictions which have authorized such gaming. During fiscal 1996, the
Delaware Lottery introduced machine gaming in the form of VLTs and the Ontario
Gaming Commission announced it would be establishing VLT gaming for traditional
VLT venues such as racetracks and other age-controlled environments. The Company
believes its success in designing, manufacturing and selling VLTs will enhance
its recent entry into the gaming machine market for casinos. The Company is
confident that by combining its expertise in VLT design with innovative new
gaming machine product concepts being developed by its designers and by
increasing its employee base to include
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experienced casino/gaming machine personnel, it will continue its expansion in
the casino gaming machine market as well as continue its strong presence in the
VLT market as new jurisdictions legalize such gaming. The Williams slot machine
line offers casinos a variety of game themes, all with original soundtracks, art
and varying paytables. Like amusement games, gaming machines for casinos
emphasize innovation, reliability, price and player appeal all of which are
expected to translate into substantial earnings for casino owners. The Company's
new gaming machines have more advanced technological features than its existing
machines which are expected to elevate excitement for end-users.
MARKETING AND DISTRIBUTION
VIDEO GAMES
Coin-operated Games: Coin-operated video games are sold under the Midway
and Atari trademarks. Coin-operated video games are marketed primarily through
approximately 40 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 the Company's coin-operated video games also to
distribute games produced by other manufacturers. Coin-operated video games are
marketed through trade shows, promotional videotapes and advertising in trade
publications. Midway maintains separate sales and marketing teams for its Midway
and Atari product lines.
Home Games: The Company's home video games have been marketed under the
Williams and Tradewest trademarks and Atari Games home video games have been
marketed under the Tengen and Time Warner Interactive trademarks. Commencing
with Midway's fall 1996 product line, all home video games will be marketed
under the Midway trademark. The Company began to publish home video games based
on its own coin-operated video games in September 1995 with the introduction of
Mortal Kombat 3, the best selling home video game in the United States in 1995.
Prior to that time, the Company had granted Acclaim Entertainment the right to
publish home video game versions of most coin-operated video games released by
the Company.
Home games are marketed in the United States through the Company's internal
sales staff and through independent sales representatives to approximately
15,000 stores domestically, including mass merchandisers, national and regional
retailers, discount store chains, video rental retailers and entertainment
software distributors. The Company's marketing activities include television and
print advertising, retail store promotions, direct mailings and user support
programs. The Company also utilizes a store-oriented marketing approach which
includes point-of-purchase promotions, use of display cards and other forms of
merchandise displays. The Company's sales literature, which features advance
information on new products, encourages potential users to purchase the
Company's products at their local retail outlets, creating retail demand for new
products before their release. The Company provides technical support for its
home products through its customer support department, which is staffed by
personnel trained to respond to customer inquiries.
Midway's principal customers for its home video games are mass
merchandisers such as Toys-R-Us, Wal-Mart and Best Buy. Sales to Toys-R-Us in
fiscal 1996 represented 12.6% of total revenues of Midway. It is customary for
the sales representatives and the distributors of the Midway's home games who
are assigned specific territories to also distribute games produced by other
manufacturers. Midway exploits the worldwide markets for these games through
direct distribution channels and market licensing agreements.
The Company also entered into strategic relationships for the distribution
of home games. In December 1994, the Company appointed GT Interactive as
distributor of certain of its games as adapted for personal computers worldwide.
In March 1995, the Company also appointed GT Interactive as an international
distributor (excluding the U.S., Canada and Mexico) of certain of the Company's
domestically distributed home video games on several of the next generation
platforms now being introduced, such as Sega Saturn and Sony PlayStation. The
Company's personal computer and platform game distribution agreements with GT
Interactive expire in March 2000 and June 2001, respectively, subject to various
conditions under which each
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agreement may be extended if advances remain unrecouped. Games optioned under
these agreements are licensed for varying terms. In March 1996, the Company
entered into agreements with GT Interactive with respect to games developed by
Atari Games, which agreements contain similar expiration and renewal provisions
as the other agreements. Advances under the Atari Games agreements are
recoupable in certain circumstances from royalties payable under the other
agreements. As a result of advances received, the Company does not expect that
it will recognize significant further revenue from the exploitation of its games
in the territories or on the platforms licensed to GT Interactive during at
least the next two years.
In March 1994, the Company formed a joint venture with Nintendo to develop
video games on certain platforms being developed by Nintendo. The joint venture
is owned 50% by each of the Company and Nintendo. In connection with the
formation of the joint venture, the Company also entered into arrangements with
Nintendo for the development of a version of Cruis'n USA for Nintendo 64. The
joint venture has the right to distribute home versions of any coin-operated
sequels of Cruis'n USA developed by the Company and the right of first
negotiation with respect to distribution of home versions of any coin-operated
video games developed by the Company on a new coin-operated platform being
developed by Nintendo. To date, no home video games have been released through
this joint venture.
PINBALL & NOVELTY GAMES
Coin-operated pinball and novelty games are sold under the Williams, Bally
and Fun House trademarks. Pinball and novelty games are marketed through
approximately 50 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 the Company's novelty games also to distribute
games produced by other manufacturers, however, the appointment of distributors
of the Company's pinball games are generally made on an exclusive basis pursuant
to which the distributors are required to handle only the Company's pinball
games and to commit to minimum pinball game purchases. Pinball and novelty games
are marketed through trade shows, promotional videotapes and advertising in
trade publications.
GAMING EQUIPMENT
Video Lottery Terminals: The VLT market is different from both the casino
market and the traditional lottery market. Most VLTs are located in places where
gaming is not the principal attraction and the stakes and payoffs are relatively
low. In certain jurisdictions VLTs are privately owned either by the owners of
the establishments in which the terminals are placed or by route operators or
distributors who contract with establishment owners to install, service and
maintain the terminals. In other jurisdictions,VLTs may be owned by or leased to
the government or its appointed agent or may be provided by the Company to the
governmental agency on a revenue-sharing basis.
Slot/Video Gaming Machines: The slot/video machine market is composed of
casinos located in hotels and other establishments and on cruise ships,
riverboats and Native American reservations. Casinos feature gaming as their
primary attraction. Gaming machines designed for the casino market are normally
sold directly to the casino and on occasion they may be sold to or through
casino management companies or through specialized gaming machine distributors.
Sales may be made in return for full payment or financed through machine revenue
as well as provided on a revenue-sharing basis. The Company employees 12 sales
personnel in offices in several United States locations, retains two
sales/service consultants for the Canadian market and has appointed exclusive
distributors for sales to Native American casinos and to casinos in Europe,
Africa and the Middle East. The Company's agreements with distributors specify
minimum purchase obligations.
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GENERAL
Export sales of all amusement games, primarily to Western Europe, were
approximately $76,337,000 (22.5% of total revenues) for the fiscal year ended
June 30, 1996 compared with $138,530,000 (44% of total revenues) for the fiscal
year ended June 30, 1995 and $144,080,000 (51% of total revenues) for the fiscal
year ended June 30, 1994. Substantially all foreign sales are made in United
States dollars and, therefore, the Company is not generally subject to the risk
of fluctuation of the value of foreign currencies in relation to the dollar. In
the fiscal year ended June 30, 1996, no one customer accounted for greater than
10% of net sales, however, Nova Games Import-Export GmbH & Co. KG and affiliates
accounted for approximately 17% ($52,343,000) of the Company's total revenues
for the fiscal year ended June 30, 1995 and 21% ($58,844,000) of the Company's
total revenues for the fiscal year ended June 30, 1994. In the opinion of the
Company, while the loss of a single distributor could temporarily affect the
distribution of a particular model, it would not have a material adverse effect
on the business of the Company. In any such event, the Company believes it could
make arrangements with alternate distributors for the distribution of the
Company's products.
MANUFACTURING
COIN-OPERATED VIDEO GAMES, PINBALL & NOVELTY GAMES AND GAMING EQUIPMENT
The Company's coin-operated video games, Pinball & Novelty Games and Gaming
Equipment are manufactured in its factories in Illinois. Effective as of July 1,
1996 and in contemplation of the initial public offering of Midway's common
stock, Midway and the Company will enter into a Manufacturing and Services
Agreement pursuant to which, among other things, the Company will continue to
manufacture Midway's coin-operated video games. The Company believes its
facilities are adequate for its current and planned production needs. Production
is generally based on advance purchase orders from distributors with respect to
coin-operated games and from governmental agencies and casinos with respect to
Gaming Equipment and generally no uncommitted finished goods inventory is
maintained. However, at the close of the 1996 fiscal year, a finished goods
inventory of Gaming Equipment was maintained to meet the demands of the Nevada
market upon final equipment approval which was received in July 1996.
The Company believes it is not meaningful to compare backlog orders at the
end of fiscal years since the amount of backlog orders varies from the beginning
to the end of a normal two- to three-month production process of a coin-operated
game and during the on-going production process for certain models of Gaming
Equipment which can extend over a period of years.
Coin-operated video games are warranted for 60 days; most pinball and
novelty games are warranted for a period of 60 to 90 days; slot machines are
warranted for a period of 90 days; and VLTs are warranted for a period of up to
one year. No substantial costs have been incurred by the Company in connection
with such warranties.
The raw materials used in manufacturing coin-operated video, pinball and
novelty games and Gaming Equipment include various metals, plastics, wood and
glass obtained from numerous sources of supply. In addition, numerous component
parts, including electronic subassemblies and video monitors, are purchased from
suppliers. Wood cabinets for amusement games are manufactured by the Company's
subsidiary Lenc-Smith Inc., as well as by outside suppliers. The Company
believes that the sources of supply of component parts and raw materials are
adequate and that substitute sources of materials are available.
HOME VIDEO GAMES
Software Products for Home Games: Manufacturing of home games is usually
performed for the Company by the developer of the game platform (i.e., Nintendo,
Sony or Sega) as required by the applicable platform license. The Company is one
of only a limited number of software publishers who have been granted the right
by Nintendo and Sega to self-manufacture cartridges for their 16-bit platforms.
For such platforms, the Company generally employs contract manufacturing sources
in Mexico. At the time a product is approved for manufacturing, the Company must
provide certain of the platform manufacturers with a purchase order for
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that product and an irrevocable letter of credit for 100% of the purchase price.
Home games traditionally have no backlog of orders.
CD-ROM Based Software Products for Personal Computers: Under the Company's
arrangements with GT Interactive, the Company and GT Interactive share equally
the cost to develop personal computer CD-ROM versions of those of the Company's
coin-operated video games that GT Interactive elects to release to the home
market. Once GT Interactive so elects, it is responsible for and bears the cost
of the manufacture of the CD-ROMs as well as all other costs related to the sale
of these CD-ROMs.
Platform Licenses: Under non-exclusive license agreements with Nintendo,
Sony and Sega, the Company has the right to develop and market software products
for (i) Nintendo's Super Nintendo Entertainment System, Nintendo 64 and Game Boy
platforms, (ii) Sony's PlayStation, and (iii) Sega's Genesis, Saturn and Game
Gear platforms. Generally, no specific hardware license is required for the
development and marketing of personal computer software.
INTELLECTUAL PROPERTY LICENSES
Certain of the Company's products relate to properties licensed from third
parties, such as the NBA, NFL and NHL and their respective players'
associations. Typically, the Company is obligated to make certain minimum
guaranteed royalty payments over the term of the license and to advance payment
against such 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, or
bankruptcy or insolvency of, the Company and certain other events, and, in some
cases, are renewable upon payment of certain minimum guarantees or the
attainment of specified sales levels during the term of the license. Certain
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 for home games.
PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
Each video game software title, pinball and novelty game title and
slot/video gaming machine may embody a number of separately protected
intellectual property rights, including trademarks, copyrights and patents. See
"Item 3. Legal Proceedings" with respect to certain patent litigation between
the Company and International Game Technology involving reel-type slot machines.
Each dedicated home game includes patents, copyrights and trademarks
licensed from the platform manufacturer. Elements of certain of the Company's
titles are owned by third parties and licensed to the Company. The Company
relies on such third parties for protection of such intellectual property
rights. Their failure to adequately protect such rights could have a material
adverse effect on the Company.
The dedicated platform manufacturers have procured patents for certain of
the technology utilized in connection with their respective home game systems.
The dedicated platform manufacturers incorporate security devices in their
cartridges, CD-ROMs and platforms which seek to prevent unlicensed software
products from being played on their platforms. The Company does not own the
trademarks, copyrights or patents, if any, covering the proprietary information
and technology utilized in the dedicated platform manufacturer's cartridges or
CD-ROMs. Accordingly, the Company relies upon each dedicated platform
manufacturer for protection of such intellectual property from infringement and
bears 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 the Company's software products. The Company's
agreements with these outside developers generally require the developers to
indemnify the Company for costs and damages incurred in connection with such
claims. No assurance can be given, however, that such software developers will
have sufficient resources to indemnify the Company fully in respect of any such
claims that may arise.
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GOVERNMENT REGULATION
The manufacture and distribution of Gaming Equipment is subject to
extensive Federal, state, local and foreign regulation. Although the laws and
regulations of the various jurisdictions in which the Company operates vary in
their technical requirements and are subject to amendment from time to time,
virtually all of these jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
devices as well as for the officers, directors, major stockholders and key
personnel of such companies.
NEVADA REGULATIONS
The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada are subject to the Nevada Gaming
Control act and the regulations promulgated thereunder (collectively, "Nevada
Act"). The Company's manufacturing and distribution of gaming devices are
subject to licensing and regulatory control of the Nevada Gaming Commission
("Nevada Commission") and the Nevada State Gaming Control Board ("Nevada
Board"). The Nevada Commission and the Nevada Board are collectively referred to
as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs, and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. A change in such laws, regulations and
procedures could have an adverse effect on the Company's future Nevada
operations.
Certain of the Company's subsidiaries (each a "Gaming Subsidiary" and
collectively the "Gaming Subsidiaries"), which manufacture and distribute gaming
devices or which hold stock of a Company subsidiary which does so, are required
to be licensed or registered by the Nevada Gaming Authorities. The licenses
require periodic payments of fees and taxes and are not transferable. No person
may become a stockholder of, or receive any percentage of profits from, the
Gaming Subsidiaries without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company is registered by the Nevada Commission as
a publicly traded corporation ("Registered Corporation") and as such, it is
required periodically to submit detailed financial and operating reports to the
Nevada Commission and furnish any other information which the Nevada Commission
may require. On August 24, 1995, the Company and certain of its subsidiaries and
Mr. Louis J. Nicastro, Mr. Neil D. Nicastro and Mr. Harold H. Bach, Jr. were
registered, licensed or found suitable by the Nevada Board and the Nevada
Commission, as applicable, as a Registered Corporation, as registered holding
companies, for licensure as a manufacturer and distributor of gaming devices and
as directors, officers and stockholders of such entities as applicable. Such
registrations, licenses and findings of suitability are effective for a period
of two years and terminate in August 1997. On June 26, 1996, Mr. Louis J.
Nicastro resigned his position with WMS Gaming Inc. and certain other amusement
game subsidiaries of the Company in order to assume at the request of the Board
of Directors the position of Chief Executive Officer of the Company's Hotel &
Casino Operations. Prior to the date of the renewal of the registrations,
licenses and findings of suitability, the Company, its subsidiaries, officers
and directors will be required to submit new applications in order to obtain
such registrations, licences and findings of suitability to continue conducting
business in Nevada after August 1997. There can be no assurance that such
registrations, findings of suitability and licenses will be granted or such
persons will be found suitable as licensees.
All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by
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licensed distributors. All gaming devices manufactured for use or play in Nevada
must be approved by the Nevada Commission before distribution or exposure for
play. The approval process for gaming devices includes rigorous testing by the
Nevada Board, a field trial and a determination as to whether the gaming device
meets strict technical standards that are set forth in the regulations of the
Nevada Commission. Associated equipment must be administratively approved by the
Chairman of the Nevada Board before it is distributed for use in Nevada.
The Nevada Commission may investigate any individual who has a material
relationship to, or material involvement with, the Company or the Gaming
Subsidiaries in order to determine whether such individual is suitable or should
be licensed as a business associate of a licensee. Officers, directors and
certain key employees of the Gaming Subsidiaries must file license applications
with the Nevada Gaming Authorities. Officers, directors and key employees of the
Company which are actively and directly involved in activities of the Gaming
Subsidiaries may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation to be found suitable.
The applicant for licensing or a finding of suitability must pay all the costs
of the investigation. Changes in licensed positions must be reported to the
Nevada Gaming Authorities and, in addition to their authority to deny an
application for a finding of suitability or license, the Nevada Commission has
jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Gaming Subsidiaries, the companies involved
would have to sever all relationship with such person. In addition, the Nevada
Commission may require the Company or any of the Gaming Subsidiaries to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company and the Gaming Subsidiaries are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar financing transactions
by the Gaming Subsidiaries must be reported to, or approved by, the Nevada
Commission.
If it were determined that the Nevada Act was violated by the Gaming
Subsidiaries, the licenses they hold could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Gaming Subsidiaries, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. The limitation, conditioning or
suspension of any gaming license or the appointment of a supervisor could and
the revocation of any license would, materially adversely affect the Company's
future operations in Nevada.
Any beneficial holder of the voting securities of the Company, regardless
of the number of shares owned, may be required to file applications, be
investigated and have his, her or its suitability as a beneficial holder of the
Company's voting securities determined if the Nevada Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of the Company's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10% but not more than 15% of the Company's voting securities may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of
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business as an institutional investor and not for the purpose of causing,
directly or indirectly, the election of a majority of the members of the board
of directors of the Company, any change in the Company's corporate charter,
bylaws, management, policies or operations, or any of its gaming affiliates, or
any other action which the Nevada Commission finds to be inconsistent with
holding the Company's voting securities for investment purposes only. Activities
which are not deemed to be inconsistent with holding voting securities for
investment purposes only include: (i) voting on all matters voted on by
stockholders; (ii) making financial and other inquiries of management of the
type normally made by securities analysts for informational purposes and not to
cause a change in its management policies or operations; and (iii) such other
activities as the Nevada Commission may determine to be consistent with such
investment intent. If the beneficial holder of voting securities who must be
found suitable is a corporation, partnership or trust, it must submit detailed
business and financial information including a list of beneficial owners. The
applicant is required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board, may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the common stock of a Registered
Corporation beyond such period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or the
Gaming Subsidiaries, the Company: (i) pays that unsuitable person any dividend
or interest upon voting securities of the Company; (ii) allows that person to
exercise, directly or indirectly, any voting rights conferred through securities
held by that person; (iii) pays remuneration in any form to that person for
services rendered or otherwise; or (iv) fails to pursue all lawful efforts to
require the unsuitable person to relinquish voting securities including, if
necessary, the immediate repurchase of such voting securities for cash at fair
market value.
The Nevada Commission may in its discretion, require holders of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including the loss of its approvals, if, without the prior approval of the
Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest
or any distribution whatsoever; (ii) recognizes any voting right by such
unsuitable person in connection with such securities; (iii) pays the unsuitable
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation or
similar transaction.
The Company is required to maintain a current stock ledger in the State of
Nevada which may be examined by the Nevada Gaming Authorities at any time. If
any securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require that the Company's stock certificates bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
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Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and the Nevada Commission
in a variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses, and Registered Corporations that are
affiliated with those operations, may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate licensees and their affiliates; (ii) preserve
the beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada Commission
before the Company can make exceptional repurchases of voting securities above
the current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by the Company's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purpose of acquiring control of the Registered Corporation.
License fees and taxes computed in various ways depending on the type of
gaming or activity involved are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either quarterly or annually. Annual fees are also payable to
the State of Nevada for renewal of licenses as a manufacturer and distributor.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. A licensee is also subject to
disciplinary action by the Nevada Commission if any such licensee knowingly
violates any laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations, engages
in activities that are harmful to the State of Nevada or its ability to collect
gaming taxes and fees, or employs a person in the foreign operation who has been
denied a license or finding of suitability in Nevada on the ground of personal
unsuitability.
NEW JERSEY REGULATION
The manufacture, distribution, and operation of gaming machines in New
Jersey are regulated by the New Jersey Casino Control Commission (the "New
Jersey Commission") pursuant to the New Jersey Casino Control Act and the
regulations of the New Jersey Commission promulgated thereunder (collectively,
the "New Jersey Act"). Under the New Jersey Act, a company must be licensed as a
gaming related casino service industry ("CSI"), or fulfill other requirements,
in order to manufacture or distribute gaming machines. In order for a CSI
license to be issued or maintained, certain directors, officers, key employees,
and owners of a company must be found by the New Jersey Commission to possess by
clear and convincing evidence good character, honesty and integrity, and
financial stability, integrity and responsibility.
On May 29, 1996, WMS Gaming Inc. was issued a CSI license by the New Jersey
Commission. This license was issued for a two (2) year period and, upon proper
application and satisfaction of the same
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requirements for the initial issuance of a license, may be renewed for four (4)
year periods. However, the New Jersey Commission has the discretion to suspend,
revoke, or refuse to renew a license if a licensee fails to continue to satisfy
the requirements for licensure or violates the New Jersey Act.
In addition, all gaming machines used in a New Jersey casino must be
approved by the New Jersey Commission. In determining whether to approve gaming
machines, the New Jersey Commission will consider various factors, including
design, integrity, fairness, and honesty and may require a field test of the
machine.
FEDERAL REGISTRATION
Any subsidiaries of the Company that are involved in gaming activities are
required to file documents annually with the United States Department of
Justice, Criminal Division, in connection with the sale, distribution or
operation of Gaming Equipment.
REGULATION IN FOREIGN JURISDICTIONS
Certain foreign countries permit the importation, sale or operation of
Gaming Equipment. Where importation is permitted, some countries prohibit or
restrict the payout feature of the traditional slot machine or limit the
operation of slot machines to a controlled number of casinos or casino-like
locations. Certain jurisdictions in which the Company operates require the
licensing of gaming devices, gaming device operators and manufacturers. The
Company, and its products, have been properly licensed or have applied for
licensure in all jurisdictions where the Company's operations require such
licensure, including without limitation, Australia, Canada, Greece and the Czech
Republic.
REGULATORY CHANGES AND LICENSE STATUS
The laws and regulations of the numerous jurisdictions, foreign and
domestic, in which the Company and its subsidiaries do business are subject to
change from time to time. In addition, the license status of the Company and its
subsidiaries with respect to these jurisdictions is subject to change. The
information set forth in this document represents the most current available at
the time of filing. Thus far the Company has never been denied any such
necessary governmental licenses, permits or approvals. No assurances, however,
can be given that such required licenses, permits or approvals will be given or
renewed in the future.
COMPETITION
The Video Games, Pinball & Novelty Games and Gaming Equipment businesses
are intensely competitive and are characterized by the continuous introduction
of new titles and the development of new technologies. The ability of the
Company to compete successfully in these markets is based, in large part, upon
its ability to select and develop new products, to identify and obtain rights to
commercially marketable intellectual properties and to adapt its products for
use with new technologies. In addition, successful competition is also based
upon price, access to retail shelf space in the case of home video games,
product enhancements, new product introductions, marketing support and
distribution systems. The Company's competitors vary in size from very small
companies with limited resources to very large corporations with greater
financial, marketing and product development than those of the Company.
The Company believes that it is the world's leading manufacturer of
coin-operated pinball games and a leading manufacturer of coin-operated video
games and VLTs. In the coin-operated pinball game market, the Company competes
with Capcom and Sega. In the coin-operated video game market, the Company
competes principally with foreign manufacturers such as Capcom, Konami, Namco,
Sega and Taito and in the home video game market, the Company competes with
Nintendo, Sony and Sega, the largest publishers of software for their respective
systems and numerous companies licensed by them. Due to their dominant position
in the home video game industry as primary manufacturers of dedicated platform
hardware and software, Nintendo, Sony and Sega have a competitive advantage with
respect to retail pricing, acquiring intellectual property licenses and securing
shelf space. Additionally, the Company's games which are sold for use on
personal
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computers compete with entertainment software sold by companies such as
Broderbund Software, CUC International, Electronic Arts, GT Interactive, Maxis
and Spectrum Holobyte, among others.
In the Gaming Equipment market the Company competes with International Game
Technologies, G-Tech and Video Lottery Consultants, Inc., based in the United
States, and Spielo, based in Canada with respect to VLTs and with International
Game Technology, Alliance Gaming Corp., Sigma Game, Inc. and Universal
Distributing of Nevada Inc. with respect to slot machines. See "Item 3. Legal
Proceedings" with respect to certain patent litigation between the Company and
International Game Technology involving reel-type slot machines.
DESIGN, RESEARCH AND PRODUCT DEVELOPMENT
The coin-operated video, pinball and novelty games and gaming equipment
which are sold by the Company may be designed by members of its internal design
staff or by independent designers under contract to the Company. The Company
also evaluates coin-operated games designed by others with a view toward
obtaining licenses authorizing it to manufacture and sell such games as well as
for purposes of performing the contract manufacture of such games for sale under
the tradename of others. Home Games designed by or for the Company are
manufactured by others for sale by the Company. The Company currently employs
approximately 360 persons in its research and product development departments.
During the fiscal years ended June 30, 1996, 1995, and 1994, approximately
$45,931,000, $27,079,000 and $19,327,000 respectively, were expended on research
and development with respect to its Amusement Games Operations.
SEASONALITY
The home video game business is highly seasonal and historically has
resulted in higher revenues and net income in the first and second quarters of
the June 30 fiscal year due to customer purchases preceding the year-end retail
holiday selling season. The coin-operated video game, pinball and novelty game
and gaming equipment businesses have not historically been seasonal but
quarterly revenues and net income usually increase when a coin-operated video
game, pinball game, novelty game or gaming machine that achieves significant
player appeal is introduced.
EMPLOYEES
At June 30, 1996, the Company employed approximately 1,300 persons in its
Amusement Games Operations. Approximately 665 of such employees were represented
by the International Brotherhood of Electrical Workers (the "IBEW") and
approximately 121 of such employees were represented by the United Furniture
Workers union (the "UFW"). None of the employees engaged in the home games
business is represented by a union. Collective bargaining agreements with the
IBEW relating to the Chicago and Waukegan, Illinois manufacturing facilities
expire February 15, 1997 (subject to automatic renewal) and March 31, 1998,
respectively. The collective bargaining agreement with the UFW relating to the
Cicero, Illinois manufacturing facility expires June 30, 1998. The Company's
relations with its union employees are satisfactory.
HOTEL & CASINO OPERATIONS
GENERAL
The Company, through its subsidiaries as detailed below, owns and operates
two of the leading hotels and casinos in San Juan, Puerto Rico -- the Condado
Plaza Hotel & Casino (the "Condado Plaza") and the El San Juan Hotel & Casino
(the "El San Juan") -- and has a 23.3% ownership interest in and manages the El
Conquistador Resort (the "El Conquistador Resort") in Las Croabas, Puerto Rico.
Hereinafter, reference to the "Hotel & Casino Operations" include the full
fiscal year operations of the El San Juan and Condado Plaza
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<PAGE> 18
through June 30, 1996 and the full fiscal year operations through March 31, 1996
of the El Conquistador Resort. On June 27, 1996 the Company announced the
planned spin-off of the entire Hotel & Casino Operations to stockholders of the
Company. Completion of the spin-off is subject to, among other things, the
receipt of a ruling from the Internal Revenue Service that the transaction will
be tax free to the Company and its stockholders. The Company anticipates that
the spin-off will be completed during fiscal 1997. The financial position,
results of operations and cash flows of this business segment have been reported
as discontinued operations in the Consolidated Financial Statements in the 1996
Annual Report.
In all, during the fiscal year ended June 30, 1996, the Company owned and
managed 1,870 suites and hotel rooms, 39,300 square feet of casino floor space
containing 120 gaming tables and 940 slot machines and approximately 146,000
square feet of convention and meeting space. These properties also include a
total of 22 restaurants, 36 shops, one showroom, three health and fitness
centers and 25 cocktail and entertainment lounges.
In fiscal 1996, the Condado Plaza casino achieved the highest table game
play and the highest slot machine play and the El San Juan casino achieved the
second highest table game play and the third highest slot machine play in Puerto
Rico.
At August 31, 1996, there were 25 hotels in the San Juan area designated as
"tourist hotels" by the Tourism Company of Puerto Rico offering a total of
approximately 5,205 rooms, of which only ten hotels offered more than 200 rooms;
approximately 3,210 additional rooms were offered in 21 tourist hotels elsewhere
on the island of Puerto Rico. The island also has numerous commercial hotels and
guest houses. Approximately 31 cruise ships operate out of Puerto Rico in the
winter with 16 sailing directly from Puerto Rico and approximately 15 ships
include San Juan as a port of call.
Revenues of the Hotel & Casino Operations for each of the Company's last
three fiscal years appear at Note 4 of the Notes to Consolidated Financial
Statements in the 1996 Annual Report which information is incorporated by
reference herein.
Changes in the provisions of Section 936 of the United States Internal
Revenue Code applicable to domestic corporations, such as pharmaceutical
companies, doing business in Puerto Rico which have been enacted over the past
several years, including changes effective July 1, 1996, may result in such
corporations reducing or closing their Puerto Rico operations and reducing their
re-investments in Puerto Rico. The Company does not yet know the full extent to
which its business will be affected by such tax law changes. However, if the
effect of the changes is to reduce the number of business travelers to Puerto
Rico, such reduction could adversely affect the occupancy and room rates
achievable by the Company's hotels, particularly the Condado Plaza which caters
to the traveling executive. In addition, the tax law change effective July 1,
1996, which will result in the taxation of previously tax-free interest received
from certain Puerto Rico investments by domestic corporations, will result in an
increase in the annual interest rate payable by the E1 Conquistador Resort and
may make future financings more expensive for all Puerto Rico hotels.
STRATEGY AND MARKETING
The Company directs its marketing to three distinct hotel guest customers
- -- the corporate-executive traveler, the individual vacation traveler and the
group and convention traveler. The Company has also directed its efforts toward
local business people and residents of Puerto Rico for its casino, convention,
restaurant, nightclub and bar facilities.
The Company believes the Condado Plaza and the El San Juan are attractive
to the corporate-executive traveler because they are easily accessible from the
San Juan International Airport and from Hato Rey, San Juan's business and
commercial center and include an aggregate of 56,000 square feet of convention
and meeting space. The individual vacation traveler is attracted to all
facilities by the Caribbean climate and resort amenities including casinos,
swimming pools, whirlpools and spas, tennis, golf and water sports facilities,
health clubs and entertainment lounges. The group and convention traveler is
attracted by the combination of business and resort amenities at all facilities.
Because of their emphasis on business-related services and facilities, the
Condado Plaza and the El Conquistador Resort attract groups and conventions
meeting to
17
<PAGE> 19
conduct business in Puerto Rico. The El San Juan, a luxury resort hotel,
attracts small groups and conferences interested in a combination of business,
recreational and social activities while in Puerto Rico. Corporate incentive
groups comprise a significant portion of the El San Juan and El Conquistador
Resort's clientele in this market.
The Company's business strategy includes attracting to its hotel and casino
facilities members of the local business community, residents of Puerto Rico and
vacation travelers who are staying at other hotel and lodging accommodations.
The Company believes a substantial percentage of the restaurant, nightclub and
bar revenues at all facilities are from local clientele. Local business people
entertain in the hotels' restaurants and lounges on a regular basis. Residents
of Puerto Rico frequently utilize the casinos, shops and recreational
facilities. Many local social events and receptions are held in the ballrooms
and banquet facilities of the Company's properties.
The Company's hotel and casino facilities are marketed primarily in the
United States, as well as in Canada, Mexico, Europe and South America. In
addition to its in-house marketing staff of 35 employees, an outside marketing
service which employs 30 employees located primarily in Miami, New York, and
Minneapolis, and other key feeder cities, promotes all three hotels and casinos.
This combined marketing effort is directed to tour operators, meeting planners,
corporate incentive groups, wholesale and retail travel agencies and airlines,
as well as to individuals. In addition, the marketing staff solicits casino
business by identifying and contacting individual players and through the
efforts of commissioned sales representatives. The activities of the sales force
include direct sales promotions, telephone and direct mail solicitations,
participation in trade shows and public relations.
THE CONDADO PLAZA HOTEL & CASINO
The Condado Plaza is owned by Posadas de Puerto Rico Associates,
Incorporated ("Posadas de Puerto Rico"), which is owned 95% by the Company.
Acquired by the Company in 1983, the Condado Plaza has since become one of the
leading hotels in the Caribbean. Located on the Atlantic Ocean in the Condado
area of San Juan, the Condado Plaza is a ten-minute drive from Hato Rey, the
city's business and commercial center. The Condado Plaza has 569 rooms and
consists of two separate structures on a five-acre site, the 13-story main
building, which is owned by Posadas de Puerto Rico, and the 11-story Laguna
Wing, which is leased from the owners of the minority interest in Posadas de
Puerto Rico. In fiscal 1996 the American Automobile Association awarded the
Condado Plaza a "Four Diamond" rating for the ninth consecutive year. Since 1993
the Condado Plaza has been a member of the "Preferred Hotels(R) & Resorts
Worldwide" system, a selective world-wide association of independent luxury
hotels and resorts.
During the fiscal years ended June 30, 1996, 1995, and 1994, the Condado
Plaza's capital expenditures for the purchase of property, plant and equipment
were $1,285,000, $2,487,000 and $7,745,000, respectively.
The Condado Plaza guest accommodations are geared to the needs of traveling
executives and include "The Plaza Club," a hotel-within-a-hotel with 72 deluxe
guest rooms and suites, private lounges and a specially-trained staff providing
concierge services. The Condado Plaza has an executive service center which
offers all necessary business-related services and facilities, conference
facilities which can accommodate groups of up to 1,000, a health and fitness
center and dual pools with spas.
Most restaurants and all of the shops located in the Condado Plaza are
owned and operated by unaffiliated concessionaires which pay the Company rentals
based primarily on a percentage of their revenues. In addition, the water sports
and valet parking are operated as concessions.
The Condado Plaza maintained an average occupancy rate during the fiscal
year ended June 30, 1996 of 87.4% compared with a rate of 84.5% for the fiscal
year ended June 30, 1995 and 85.4% for the fiscal year ended June 30, 1994. The
87.4% occupancy rate was achieved notwithstanding the opening of several new
hotels in the greater San Juan area during recent years. Occupancy rates are
based upon available rooms excluding immaterial numbers of rooms under
renovations or otherwise unavailable for occupancy from time to time.
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<PAGE> 20
THE EL SAN JUAN HOTEL & CASINO
The El San Juan is owned by Posadas de San Juan Associates ("Posadas de San
Juan"), a partnership which is 50% owned by a wholly-owned subsidiary of the
Company and 50% owned by, among others, the owners of the minority interest in
Posadas de Puerto Rico. The Company accounts for its investment in Posadas de
San Juan on the equity method. The El San Juan is located in the Isla Verde area
of metropolitan San Juan on a 13-acre oceanfront site twenty-five minutes from
the shopping and historic sights of Old San Juan. The hotel consists of four
structures of from one to nine stories and contains 388 guest rooms and suites
and conference and meeting space of 36,000 square feet with a seating capacity
of 3,000. With its marble floors, elaborate chandeliers and carved mahogany
ceilings and walls, the El San Juan combines the ambience of a European-style
hotel with the atmosphere of an informal Caribbean resort. The El San Juan is a
member of the "Preferred Hotels(R) & Resorts Worldwide" system and was the first
in Puerto Rico so designated. In fiscal 1996 the El San Juan continued to
maintain its designation, first made in 1990, as a member of "The Leading Hotels
of the World(R)" and was awarded a "Four Diamond" rating by the American
Automobile Association for the tenth year in a row.
During the fiscal years ended June 30, 1996, 1995, and 1994, the El San
Juan's capital expenditures for the purchase of property, plant and equipment
were $3,105,000, $3,310,000 and $2,737,000, respectively.
The El San Juan caters to individual vacation travelers, as well as to
small groups and conferences and corporate-executive travelers. El San Juan
guest rooms and suites have luxury appointments and amenities and, in many of
the guest rooms, private balconies, whirlpools and spas. The Roof Top Health
Spa, two swimming pools and beach area contribute to the attractiveness of this
property.
The El San Juan maintained an average room occupancy rate during the fiscal
year ended June 30, 1996 of 82.3% compared with a rate of 82.4% for the fiscal
year ended June 30, 1995 and a rate of 84.6% for the fiscal year ended June 30,
1994.
The El San Juan also features an indoor shopping arcade designed to
resemble a European village, which features 12 fashionable stores serving resort
guests and community residents. Most of the stores in the El San Juan, the dance
club and all of the restaurants except "La Veranda" are owned and operated by
unaffiliated concessionaires which pay the El San Juan rentals based primarily
on a percentage of their revenues. In addition, the water sports and valet
parking are operated as concessions.
WILLIAMS HOSPITALITY GROUP INC.
Williams Hospitality Group Inc. ("Williams Hospitality") is owned 62% by
the Company and 38% by the owners of the minority interest in Posadas de Puerto
Rico. Williams Hospitality, the Company's subsidiary which provides hotel and
casino management services, has managed the Condado Plaza since 1983, the El San
Juan since 1985 and the El Conquistador Resort since its opening in 1993.
Williams Hospitality has management contracts with all such facilities expiring
in 2003 (Condado Plaza), 2005 (El San Juan), and 2013 (El Conquistador Resort).
It earns basic management fees based on gross revenues and incentive management
fees based on gross operating profits. Williams Hospitality is reimbursed for
certain administrative expenses incurred in connection with its management of
such properties and receives fees with respect to certain centralized services
being rendered for all hotel and casino properties. In addition to supervising
the operations of each of the properties it manages, Williams Hospitality
supervises marketing, sales and promotions and recommends long-term policies.
EL CONQUISTADOR RESORT
On January 12, 1990, Williams Hospitality entered into an agreement with
the El Conquistador Partnership L.P. ("El Con LP") for the management of the El
Conquistador Resort. The El Con LP is 23.3% owned by the Company, 26.7% owned by
certain of the owners of the minority interest in Posadas de San Juan and 50%
owned by Kumagai Caribbean, Inc. ("Kumagai"), an affiliate of Kumagai Gumi Co.,
Ltd., one of the world's leading construction companies. The El Con LP developed
the El Conquistador Resort with
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<PAGE> 21
Kumagai acting as construction manager and Williams Hospitality rendering
technical development services during the construction phase. The completed
Resort opened in November of 1993.
The El Conquistador Resort has 751 guest rooms, an 18-hole championship
golf course, a marina, tennis courts, 90,000 square feet of convention and
meeting facilities, six lounges and night clubs, eight restaurants, a 13,000
square foot casino, a fitness center and five dramatic pool areas, all situated
on a bluff overlooking the convergence of the Atlantic Ocean and the Caribbean
Sea. The Resort also features a secluded beach located on a private island three
miles offshore. In addition, the El Conquistador Resort manages 90 condominium
units known as the Las Casitas. The Las Casitas provides another 167 rooms to
the inventory of luxury rooms available to the Resort.
The El Conquistador Resort finished its second full fiscal year ended March
31, 1996 with an average occupancy rate of 70.9% and revenues of $90,351,000. In
less than two years the Resort has received the prestigious Gold Key Award by
Meetings and Conventions Magazine and the Paragon Award by Corporate Meetings
and Incentives Magazine for excellence in meeting and conventions. The El
Conquistador Resort is also a member of both the exclusive "The Leading Hotels
of the World(R)" and "Preferred Hotels(R) & Resorts Worldwide" system. For the
second consecutive year, the American Automobile Association awarded the Resort
a "Four Diamond" rating.
CASINO CREDIT POLICY
All of the Company's casinos extend credit to qualified players that
satisfy its credit review procedures. The procedures include external credit
verification and internal management level approvals.
Credit play at the Condado Plaza for the fiscal years ended June 30, 1996,
1995, and 1994 represented 36%, 32%, and 46%, respectively, of total play.
Casino credit receivables, net of allowance for doubtful accounts, at the
Condado Plaza at each of the fiscal years ended June 30, 1996, 1995, and 1994
were $463,572, $1,330,000, and $1,956,386, respectively, representing 1.2%,
3.9%, and 3.4% of annual credit play.
Credit play at the El San Juan for the fiscal years ended June 30, 1996,
1995, and 1994 represented 55%, 60%, and 72%, respectively, of total play.
Casino credit receivables, net of allowance for doubtful accounts, at the El San
Juan at each of the fiscal years ended June 30, 1996, 1995, and 1994 were
$473,152, $2,265,000, and $5,859,000, respectively, representing 0.8%, 2.9%, and
4.5% of annual credit play.
Credit play at the El Conquistador Resort has not been significant since
its opening in November 1993.
The credit players represent a major portion of total play at the El San
Juan and Condado Plaza casinos and the Company believes that collection losses
have not been unusual or material to the results of operations, except for the
El San Juan casino where the losses for fiscal 1995 were $3.7 million compared
with $4.2 million in fiscal 1994 and $2.6 million in fiscal 1993. Gaming debts
are enforceable in Puerto Rico and the majority of States in the United States.
Those States that do not enforce gaming debts will nonetheless generally allow
enforcement of a judgment obtained in a jurisdiction such as Puerto Rico. Due to
the unenforceability generally of gaming debts in Latin America, where a
significant number of the Company's players reside, procedures have been
established to obtain promissory notes from most Latin American credit casino
clients.
GOVERNMENT REGULATION AND LICENSING
In 1948, Puerto Rico legalized gambling and the ownership and operation of
casino gaming facilities in Puerto Rico is heavily regulated. The Office of the
Commissioner of Banks and Financial Institutions of Puerto Rico is responsible
for investigating and licensing casino owners. The Gaming Division of the
Tourism Development Company of Puerto Rico (the "Gaming Division") regulates and
supervises casino operations. A government inspector must be on-site whenever a
casino is open. Among its responsibilities, the Gaming Division licenses all
casino employees and enforces regulations relating to method of play and hours
of operation (a maximum of 16 hours per day).
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<PAGE> 22
The Gaming Reform Bill of 1996 was approved by the Legislature and enacted
into law on September 3, 1996. The Bill provides the following improvements to
existing casino operations in Puerto Rico:
1. New permitted table games: Caribbean Stud Poker, Let It Ride (poker),
Pai Gow Poker and Big Six (Wheel).
2. New permitted table maximum bets: Blackjack-$10,000 previously $2,000,
Dice-$10,000 previously $2,000, Mini-Baccarat-$10,000 previously $2,000,
Roulette-$1,000 previously $100 (Straight) and Baccarat-$25,000
previously $4,000.
3. Flexibility to acquire other new table games.
4. Flexibility to change procedures/regulations on existing table games
(i.e. "odds" in "Craps" and "hole card" in Blackjack).
5. New Slot Machines: 1,600 new slot machines to replace all slot machines
that were manufactured prior to 1992 and those slot machines that
subsequently reach five (5) years of age will be replaced on an annual
basis.
6. Slot Machine Ratio to Table Game positions changed from 1:1 to 1.5:1
permitting more slot machines in each casino.
The Company's casinos expect to take full advantage of these changes, which
will enable it to be much more competitive with other gaming jurisdictions in
the Caribbean as well as the new casinos opening in Puerto Rico.
The casinos at the Condado Plaza, the El San Juan and the El Conquistador
Resort are subject to strict internal controls imposed by the Company over all
facets of their operations, including the handling of cash and security
measures. The casino control procedures are similar to those followed by Nevada
and New Jersey casinos. All slot machines at these and all other casinos on the
island are owned and maintained by the Commonwealth of Puerto Rico. Of the
profits from the slot machines, 34% is received by the casino and the remaining
66% is allocated to Puerto Rico government agencies and educational
institutions. Each casino pays the Government a license fee depending on total
play or drop in the casino, which ranges from $100,000 to $200,000. The Condado
Plaza and the El San Juan each pay an annual license fee of $200,000 and the El
Conquistador Resort pays an annual license fee of $100,000 in quarterly
installments. Each casino is required to renew its license each year; and,
unless a change of ownership of a licensee has occurred or the Gaming Division
has reason to believe that reinvestigation of the licensee is necessary, renewal
is generally automatic.
The hotels and casinos are also subject to various local laws and
regulations affecting their business, including provisions relating to fire
safety, sanitation, health and the sale of alcoholic beverages.
SEASONALITY
Tourism in Puerto Rico is at its peak during the months of December through
April. Most hotels, in spite of reducing their room rates during the off-season
months, experience decreased occupancy and lower revenues. By attracting
business travelers and residents of Puerto Rico on a year-round basis, the
Condado Plaza has reduced, to some extent, the seasonality of its operations.
The El San Juan and the El Conquistador Resort expect that group business
developed during the off- and shoulder-seasons will reduce the effect of
seasonality.
Seasonal fluctuations in the tourism industry do not have as much of an
effect on the Condado Plaza as they have on other Caribbean hotels since
approximately 40% of the Condado Plaza's accommodations are booked by business
travelers. As a result, the Condado Plaza's monthly occupancy rate for the
fiscal year ended June 30, 1996 ranged from 78.9% to 96.0% with an average
occupancy rate of 87.4%. The in-season average occupancy figure for December
1995 to April 1996 was 88.6% compared to 87.6% and 87.2% for such periods in the
fiscal years 1995 and 1994, respectively. The Condado Plaza, like other
Caribbean hotels, reduces its rates during the off-season months but, unlike
many other Caribbean hotels, occupancy rates remain at relatively high levels.
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During the fiscal year ended June 30, 1996, the El San Juan's monthly
occupancy rates ranged from 62.2% to 94.9%, with an average occupancy rate of
82.3%. The in-season average occupancy figure for December 1995 to April 1996
was 85.8% compared to 88.3% and 87.7% for such period in the fiscal years 1995
and 1994, respectively.
During the fiscal year ended March 31, 1996, the El Conquistador Resort's
monthly occupancy rates ranged from 50.10% to 88.8% with an average occupancy
rate of 70.9%.
COMPETITION
The hotel and casino business in the Caribbean region is highly
competitive. The Company's facilities compete with each other and with numerous
hotels and resorts on the island of Puerto Rico (including 13 other hotels and
resorts with casinos) and on other Caribbean islands and in the southeastern
United States and Mexico. The Company also competes for hotel and casino
customers to a lesser extent with the Nevada and New Jersey hotels and casinos
as well as other casinos now operating in the United States. The principal
methods of competition for casino players include maintaining promotional
allowance packages that are comparable to other casinos and providing
outstanding service to players in the hotel and casino. The promotional
allowance package will vary depending upon the size of the play and may include
reduced or complimentary hotel and restaurant charges and air fares. Some of
these competing properties are owned or managed by hotel chains possessing
substantially greater financial resources than those of the Company.
The Company believes that Puerto Rico offers many advantages over
geographical areas in which competing properties are located. Unlike most other
Caribbean islands, Puerto Rico is served by many direct air flights from the
continental United States and has a highly developed economy and a well-educated
population. Moreover, Puerto Rico is a Commonwealth of the United States,
freeing mainland visitors from concerns about foreign currencies or customs and
immigration laws. Unlike resort areas in the southeastern United States, Puerto
Rico enjoys a mild subtropical climate throughout the year and offers legalized
gambling.
EMPLOYEES
At June 30, 1996, the Condado Plaza employed approximately 953 persons, 766
of whom are represented by two labor unions (518 employees belong to the hotel
union and 148 employees belong to the casino union). The Condado Plaza's
contract with the Hotel and Restaurant Employees International Union expires
August 31, 1997. The Condado Plaza's contract with the Puerto Rico Association
of Casino Employees expires May 31, 1999.
The El San Juan employs approximately 841 persons of which 220 are casino
employees. The Teamsters Union was certified by the National Labor Relations
Board on May 12, 1995 to represent the 99 non-managerial casino employees and a
contract was signed on May 31, 1996 and expires May 31, 1999.
The El Conquistador Resort employs approximately 1,500 persons and Williams
Hospitality employs approximately 58 persons, including the executive office
staff and the reservation staffs for all operations, none of whom is represented
by a labor union.
The Company considers its current relationships with all employees, union
and non-union, to be satisfactory.
ITEM 2. PROPERTIES.
The following table and footnotes which follow set forth the Company's
principal properties, principal use, approximate floor space and the annual
rental and lease expiration date, where leased, or encumbrances, where owned by
the Company, at June 30, 1996.
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PROPERTIES
<TABLE>
<CAPTION>
PRINCIPAL APPROXIMATE ANNUAL RENT LEASE
HEADQUARTERS USE SQUARE FEET ($) EXP. DATE(1) ENCUMBRANCES
- -------------------------------- ---------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
3401 N. California Ave. ........ Principal 129,400 100% Owned -- --
Chicago, IL Office & by Williams
Gaming Mfg. Electronics
Games, Inc.
VIDEO GAMES
- --------------------------------
675 Sycamore Dr................. Video Game 84,501 593,196 7/31/05 --
Milpitas, CA Design & Dev.,
Sales & Mktg.
10110 Mesa Rim Rd............... Video Game 27,512 250,644 6/01/02 --
San Diego, CA Design & Dev.
2727 W. Roscoe St............... Video Game 47,500 136,000 06/30/98 --
Chicago, IL Design & Dev.
2400 S. Business 45............. Video Office/ 5,000 30,000 05/01/99 --
Corsicana, TX Warehouse
1800 S. Business 45............. Video Sales & 6,000 38,400 09/01/97 --
Corsicana, TX Marketing
2820 Merrell Rd................. Video 28,234 84,702 7/31/99 --
Dallas, TX Warehouse
PINBALL & NOVELTY GAMES
- --------------------------------
800 S. North Point Rd........... Pinball, 186,000 100% Owned -- --
Waukegan, IL Novelty and by Williams
Video Games Mfg. Electronics
Games, Inc.
GAMING EQUIPMENT
- --------------------------------
3465 N. Kimball Ave. ........... Gaming 30,212 128,401 8/30/97 --
Chicago, IL Warehouse
2704 W. Roscoe St............... Gaming Office 28,500 100% Owned -- --
Chicago, IL & R&D by Williams
Electronics
Games, Inc.
1949 Swanson Ct................. Gaming Mfg. & 14,400 82,080 03/31/97 --
Gurnee, IL Warehouse
615 N.W. Business Park Ln....... Gaming Office & 2,000 12,384 4/30/98 --
Riverside, MO Warehouse
181 Main St..................... Gaming Office & 1,000 7,800 11/30/96 --
Tunica, MS Warehouse
945 Vision Oak Blvd............. Gaming Office & 2,000 13,200 6/30/98 --
Gulfport, MS Warehouse
4170 W. Harmon Ave.............. Gaming Office & 26,809 135,120 1/31/99 --
Las Vegas, NV Warehouse
4750 Longley Ln................. Gaming Office & 4,960 34,784 7/31/99 --
Reno, NV Warehouse
350 Commerce Dr................. Gaming Office & 16,500 82,500 9/30/99 --
Pleasantville, NJ Warehouse
</TABLE>
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<PAGE> 25
<TABLE>
<CAPTION>
PRINCIPAL APPROXIMATE ANNUAL RENT LEASE
USE SQUARE FEET ($) EXP. DATE(1) ENCUMBRANCES
---------------- ----------- ----------- ------------ ------------
4616 W. 19th St................. Games Mfg. 105,000 100% Owned -- --
<S> <C> <C> <C> <C> <C>
Cicero, IL by
Lenc-Smith
Inc.
</TABLE>
<TABLE>
<CAPTION>
HOTEL & CASINO PRINCIPAL APPROXIMATE LEASE
OPERATIONS USE SQUARE FEET ANNUAL RENT($) EXP. DATE(1) ENCUMBRANCES
- ---------------------- --------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Las Croabas, PR....... El Conquistador 854,000 23.3% Owned by -- (2)
Resort Company
San Juan, PR.......... Condado Plaza 136,081 95% Owned by -- (3)
Hotel/Casino Company
San Juan, PR.......... Condado Plaza 60,500 684,000(4) 03/31/04 (3)
Laguna Wing
San Juan, PR.......... Condado Plaza 28,611 95% Owned by -- (5)
Parking Lots Company
San Juan, PR.......... Condado Plaza 8,343 95% Owned by -- (5)
Parking Lot Company
San Juan, PR.......... El San Juan 162,500 50% Owned by -- (6)
Hotel/Casino Company
San Juan, PR.......... El San Juan 10,663 62% Owned by -- (7)(5)
Parking Lot Company
San Juan, PR.......... El San Juan 210,000 150,000 11/16/97 --
Parking Lot
San Juan, PR.......... Williams Hosp. 10,000 62% Owned by -- (8)
Admin. Offices Company
</TABLE>
- -------------------------
(1) Under such leases which contain renewal options, additional rentals may be
payable for taxes, insurance, utilities and maintenance.
(2) Subject to a first mortgage lien in the amount of $146,612,000 securing (i)
a $120,000,000 loan from the Puerto Rico Industrial, Medical, Educational
and Environmental Pollution Control Facilities Financing Authority; (ii) a
$120,000,000 letter of credit issued by The Bank of Tokyo-Mitsubishi, Ltd.
which serves as collateral for the loan referred to in (i) above; and (iii)
termination liability up to $20,000,000 under an Interest Rate Swap
Agreement with respect to interest due on the loan referred to in (i) above;
subject to a second mortgage lien securing a $25,000,000 loan from the
Government Development Bank for Puerto Rico; and subject to a third mortgage
lien securing an $8,000,000 loan from the Government Development Bank of
Puerto Rico.
(3) Subject to mortgage liens to secure a $35,500,000 borrowing from Scotiabank
de Puerto Rico under the terms of an Operating Credit and Term Loan
Agreement dated August 30, 1988.
(4) Annual rent of $684,000 is fixed through September 30, 1998; thereafter,
$752,000 to September 30, 2003 and $827,000 to March 31, 2004.
(5) Subject to a mortgage in favor of the Government Development Bank for Puerto
Rico to secure a $4,000,000 loan to WKA El Con Associates which is 50% owned
by the Company.
(6) Subject to a first mortgage lien to secure a loan of $34,000,000 from The
Bank of Nova Scotia under the terms of a Credit Agreement dated as of
January 20, 1993.
(7) Subject to first mortgage liens in the amount of $424,600 to certain
individuals.
(8) Subject to a first mortgage lien to secure a loan of $800,000 from
Scotiabank de Puerto Rico.
Management believes that all of the facilities listed in the foregoing
table are in good repair and are adequate for their respective purposes. The
manufacturing facilities used in the coin-operated Video Games, Pinball &
Novelty Games and Gaming Equipment businesses are suitable and adequate for the
design and
24
<PAGE> 26
production of the Company's products. The Home Games business operates
year-round. Except during the July vacation shutdown, the facilities of the
coin-operated Video Games, Pinball & Novelty Games and Gaming Equipment
businesses are generally operated on a one-shift basis; however, during periods
of increased production, certain portions of the facilities are operated on
multiple shifts. The production levels can be increased or decreased on a
periodic basis to match the level of incoming customer orders.
The Company owns substantially all of the machinery, equipment, tools and
dies, furnishings, goods and fixtures used in its businesses, all of which are
well maintained and satisfactory for the purposes intended. The Company's
personal property utilized in the Condado Plaza, the El San Juan and the El
Conquistador Resort operations is subject to security interests.
ITEM 3. LEGAL PROCEEDINGS.
The action which was commenced on or about July 25, 1995 by Alliance Gaming
Corp. ("Alliance") in the Delaware Court of Chancery against Bally Gaming
International, Inc. ("BGII"), its directors and the Company (the "Alliance
Action") was dismissed by order dated October 24, 1995, upon the motion of
Alliance, as against all defendants, other than the Company. Since that date, no
further proceedings have occurred in this action. The Alliance Action alleged
that in their preferential treatment of the Company regarding the Merger
Agreement dated as of June 21, 1995, between the Company and BGII (the "Merger
Agreement"), the members of the BGII Board of Directors, aided and abetted by
the Company, had violated their fiduciary duties of care, loyalty and candor.
The complaint sought damages and an order requiring that BGII hold an annual
meeting, requiring the directors to give Alliance a fair and equal opportunity
to acquire BGII, setting aside the Merger Agreement and its termination fee and
enjoining sales of assets (including BGII's German operations) out of the
ordinary course of business and actions impeding the operation of market forces
in an open bidding contest for the acquisition of BGII. The Company answered the
complaint, denied the material allegations thereof and asserted affirmative
defenses. On October 18, 1995, BGII terminated the Merger Agreement with the
Company and entered into a merger agreement with Alliance.
The action commenced on or about September 6, 1995, by the Company in the
United States District Court, Southern District of New York (the "WMS Action")
was dismissed without prejudice upon stipulation of the parties on November 16,
1995, after BGII's termination of the Merger Agreement and its entry into a
merger agreement with Alliance. The WMS Action which had been transferred to the
United States District Court for the District of Delaware for the purpose of
consolidation sought to enjoin the tender offer of Alliance for BGII common
stock and to prevent continuing and threatened violations by Alliance of the
federal securities laws and other violations.
On October 23, 1995, the Company commenced an action in New York Supreme
Court, New York County against BGII seeking $4,800,000 as a contractual
termination fee, plus interest and attorneys' fees as a result of BGII having
served written notice of termination of the Merger Agreement on October 18, 1995
and on the same day it entered into a merger agreement with Alliance. The
Company asserts that BGII's termination of the Merger Agreement was pursuant to
the specific provisions of the Merger Agreement which trigger BGII's duty to pay
the Company the $4,800,000 termination fee. Defendant BGII has answered the
Company's complaint and asserted two counterclaims both alleging that the
Company breached the Merger Agreement. BGII seeks damages to be determined at
trial on the counterclaims. The Company has replied to the counterclaims,
denying their material allegations and asserting affirmative defenses. The
Company's motion for summary judgment on its claim for the termination fee and
to dismiss BGII's counterclaims and BGII's cross-motion for summary judgment
were submitted to the Court on April 19, 1996, and are presently awaiting
decision.
In May, 1994, WMS Gaming Inc. ("WGI"), a wholly-owned subsidiary of the
Company, instituted a declaratory judgment action against International Game
Technology ("IGT"), in the United States District Court for the Northern
District of Illinois. The action sought a declaration that a certain patent
issued in 1984 and owned by IGT (the "Telnaes Patent") was invalid, and that
certain reel-type slot machines made by WGI did not infringe the Telnaes Patent.
IGT counterclaimed alleging that the Telnaes Patent was infringed by WGI's
reel-type slot machines. The Telnaes Patent relates to a particular method of
assigning the probability
25
<PAGE> 27
of selecting particular reel stop positions in a computer-controlled reel-type
gaming machine, which increases or decreases the probabilities of winning by
means of the computer's software, not the mechanical reels themselves.
On September 19, 1996, the trial Court rendered a decision in favor of IGT,
finding the Telnaes Patent valid, finding WGI's Model 400 slot machine to
infringe the Telnaes Patent, enjoining WGI, upon entry of judgment, from further
infringement of the Telnaes Patent, awarding damages to IGT in the amount of $50
for each Model 400 slot machine sold by WGI (which damages are to be trebled)
and awarding attorneys' fees. The Court has set October 17 for the entry of
final judgment. WGI intends to appeal the decision immediately and seek a stay
of the injunction. Based upon advice of patent counsel, WGI believes that its
newer model slot machines, which are designed differently from the Model 400, do
not infringe the Telnaes Patent and will not be affected by the Court's
decision. Considering the quantity of its slot machines WGI has sold to date, if
WGI is unsuccessful in its appeal, WGI estimates that maximum damages awarded to
IGT will be between $1 million and $2 million. However, if WGI's newer model
slot machines are found to infringe the Telnaes Patent and if WGI is unable to
develop or acquire non-infringing alternative devices or obtain a license to use
the Telnaes Patent, the development of WGI's reel-type slot machine business
could be adversely affected. The Telnaes Patent does not relate to non-reel
spinning machines such as video lottery terminals and video poker machines.
Other than set forth above, the Company currently and from time to time is
involved in litigation incidental to the conduct of its business. The Company is
not currently a party to any lawsuit or proceeding which, in the opinion of the
Company, is likely to have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Reference is made to "Market for the Company's Common Stock and Related
Security-Holder Matters" set forth in the 1996 Annual Report which information
is incorporated by reference herein.
ITEM 6. SELECTED FINANCIAL DATA.
Reference is made to "Selected Financial Data" set forth in the 1996 Annual
Report which information is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the 1996 Annual Report which
information is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Consolidated Financial Statements and Notes
thereto and Report of Independent Auditors set forth in the 1996 Annual Report
which information is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
26
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. The directors listed in the following
table were elected at the January 1996 Annual Meeting of Stockholders to serve
until the 1997 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualify. All are at present directors of the
Company. Mr. Neil D. Nicastro is the son of Mr. Louis J. Nicastro; otherwise,
there is no family relationship between any of the directors or executive
officers of the Company.
IDENTIFICATION OF DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR OR SHARES OF COMMON PERCENTAGE OF
POSITION WITH COMPANY AND EXECUTIVE STOCK DEEMED TO BE OUTSTANDING
PRINCIPAL OCCUPATION OFFICER OF THE BENEFICIALLY OWNED COMMON
DIRECTOR (AGE) AS OF 8/31/96 COMPANY SINCE 08/31/96(1) STOCK(2)
- ----------------------------- --------------------------- -------------- ------------------ -------------
<S> <C> <C> <C> <C>
Louis J. Nicastro (68)....... Chairman of the Board of 1974 6,433,732(3) 25.8%
Directors of the Company
Neil D. Nicastro (39)........ President, Chief Executive 1986 6,791,100(4) 27.2%
Officer, Chief Operating
Officer and Director of the
Company
Kenneth J. Fedesna (46)...... Vice President & General 1993 130,058(5) *
Manager of Williams
Electronics Games, Inc.,
Executive Vice President of
Midway and Director of the
Company
Norman J. Menell (64)........ Vice Chairman of the Board 1980 52,216(6) *
of Directors of the Company
George R. Baker (66)......... Director of the Company and 1983 50,800(6) *
Private Consultant
William C. Bartholomay
(68)....................... Director of the Company and 1981 68,800(6) *
President, Near North
National Group (Insurance
Brokers)
William E. McKenna (77)...... Director of the Company and 1981 52,594(6) *
General Partner, MCK
Investment Company (Private
Investment Company)
Harvey Reich (68)............ Director of the Company and 1983 51,190(6) *
Attorney, Robinson Brog
Leinwand Greene Genovese &
Gluck, P.C.
Ira S. Sheinfeld (58)........ Director of the Company and 1993 62,000(7) *
Attorney, Squadron,
Ellenoff, Plesent &
Sheinfeld LLP
</TABLE>
- -------------------------
* Less than 1% of the number of outstanding shares of Common Stock on August
31, 1996.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days. Certain of such options as reported herein also
require that the
27
<PAGE> 29
Company's Common Stock attain a market price of $35.00 per share prior to
exercise (herein referred to as "Target Price Options"). It is anticipated that
upon the spin-off of the Hotel & Casino Operations, an appropriate adjustment
will be made to the exercise price and target price of outstanding options.
(2) For purposes of calculating the percentage of shares of Common Stock owned
by each director, shares issuable upon the exercise of his options
exercisable within 60 days have been deemed to be outstanding.
(3) The number of shares reported as beneficially owned includes 5,929,100
shares owned by Sumner M. Redstone and National Amusements, Inc. for which
the reporting person has shared voting power but no dispositive power.
Additionally, the number of shares reported as beneficially owned includes
500,000 shares for which the reporting person has sole voting and sole
dispositive power, all of which may be acquired pursuant to Target Price
Options. For a discussion concerning the shared voting power with respect to
the 5,929,100 shares of Common Stock referred to above, see "Voting Proxy
Agreement" set forth in Item 12.
(4) The number of shares reported as beneficially owned includes 5,929,100
shares owned by Sumner M. Redstone and National Amusements, Inc. for which
the reporting person has shared voting power but no dispositive power.
Additionally, the number of shares reported as beneficially owned includes
862,000 shares for which the reporting person has sole voting and sole
dispositive power, 800,000 of which may be acquired pursuant to stock
options, 500,000 of such options being Target Price Options. For a
discussion concerning the shared voting power with respect to the 5,929,100
shares of Common Stock referred to above, see "Voting Proxy Agreement" set
forth in Item 12.
(5) Includes 130,000 shares of Common Stock which Mr. Fedesna has the right to
acquire upon the exercise of stock options, 100,000 of which are Target
Price Options.
(6) Includes 50,000 shares of Target Price Options.
(7) Includes 62,000 shares of Common Stock which Mr. I. S. Sheinfeld has the
right to acquire upon the exercise of stock options, 50,000 of which are
Target Price Options.
LOUIS J. NICASTRO, Chairman of the Board of Directors of the Company. Mr.
Nicastro has served as Chairman of the Board of Directors of the Company since
its incorporation in 1974. He served as Co-Chief Executive Officer from 1994
until June 26, 1996, having served as Chief Executive Officer (1974-1994),
President (1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986).
NEIL D. NICASTRO, Director, President, Chief Executive Officer and Chief
Operating Officer of the Company. Mr. Nicastro became a director of the Company
in 1986 and was elected President of the Company June 18, 1991, sole Chief
Executive Officer June 26, 1996, Co-Chief Executive Officer August 29, 1994 and
Chief Operating Officer September 30, 1990. He served as Treasurer (1986-1994),
Executive Vice President (1988-1991), Senior Vice President (1987-1988), Vice
President (1986-1987) and Director of Stockholder Relations (1981-1986).
KENNETH J. FEDESNA became a director of the Company on August 23, 1993. He
has served as Vice President and General Manager of Williams Electronics Games,
Inc. and Midway, subsidiaries of the Company, for in excess of five years. On
August 30, 1996, Mr. Fedesna was elected Executive Vice President -- Coin-Op
Video of Midway.
NORMAN J. MENELL became Vice Chairman of the Board of Directors effective
September 30, 1990. He served as President (1988-1990), Chief Operating Officer
(1986-1990) and Executive Vice President (1981-1988) of the Company.
GEORGE R. BAKER is a private consultant. He was a general partner of
Barrington Limited Partners (private investment partnership) (1985-1986), a
special limited partner of Bear, Stearns & Co., Inc. (investment banking)
(1983-1985) and an Executive Vice President of Continental Bank N.A.
(1951-1982). Mr. Baker is a director of The Midland Co., Reliance Group
Holdings, Inc., Reliance Insurance Co. and W. W. Grainger, Inc.
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., Atlanta, Georgia since April 1994 having also held
that
28
<PAGE> 30
office during the period 1976-1992 and having served as a director (1976-1994).
He also served as Vice Chairman of the Board of Directors of Frank B. Hall & Co.
Inc. (1974-1990).
WILLIAM E. MCKENNA has served as a General Partner of MCK Investment
Company, Beverly Hills, California for in excess of five years. He also is a
director of California Amplifier, Inc., Calprop Corporation, Drexler Technology
Corporation and Safeguard Health Enterprises, Inc.
HARVEY REICH has been a member of the law firm of Robinson Brog Leinwand
Greene Genovese & Gluck, P.C., New York, New York and its predecessor firms for
in excess of five years.
IRA S. SHEINFELD became a director of the Company on August 23, 1993. He
has been a member of the law firm of Squadron, Ellenoff, Plesent & Sheinfeld
LLP, New York, New York, for in excess of five years.
(b) Identification of Executive Officers. Unless otherwise indicated below,
the following officers were elected to serve during fiscal 1996 and until the
1997 Annual Meeting of the Board of Directors and until their respective
successors are duly elected and qualify.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Louis J. Nicastro(1)...... 68 Chairman of the Board of Directors
Neil D. Nicastro(1)....... 39 President, Chief Executive Officer and Chief Operating Officer
Harold H. Bach, Jr........ 64 Vice President-Finance, Treasurer, Chief Financial and Chief
Accounting Officer
Barbara M. Norman......... 58 Vice President, Secretary and General Counsel
</TABLE>
- -------------------------
(1) Mr. Louis J. Nicastro and Mr. Neil D. Nicastro served as Co-Chief Executive
Officers of the Company until June 26, 1996.
The current principal occupation or employment of Messrs. Louis J. and Neil
D. Nicastro during the last five years is set forth in Item 10(a) above.
Mr. Bach served as Secretary of the Company from July 5, 1990 to June 15,
1992. He assumed the positions of Treasurer effective September 13, 1994 and
Vice President-Finance, Chief Financial and Chief Accounting Officer effective
September 30, 1990. Prior to joining the Company, Mr. Bach was a partner in the
accounting firms of Ernst & Young (1989-1990) and Arthur Young & Company
(1967-1989).
Ms. Norman has served as Vice President, Secretary and General Counsel of
the Company since June 15, 1992. Prior thereto she was associated with the law
firm of Whitman & Ransom, New York, New York (1990-1992) and served the Company
as Vice President, Secretary and General Counsel (1986-1990).
29
<PAGE> 31
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth the cash compensation paid
by the Company and its subsidiaries for service in all capacities during the
fiscal years ended June 30, 1996, 1995 and 1994 to each of the Company's
executive officers who served during such periods and whose compensation
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION
------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- ------------------------------- ---- ------- ------- ------------ ------------ ------------
(A) (B) (C) (D) (E) (G) (I)
- ------------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Louis J. Nicastro.............. 1996 832,500 -- 6,127(2) -- 629,971(3)
Chairman of the 1995 682,500 300,000 4,775(2) -- 409,784(3)
Board(1) 1994 682,500 600,000 4,173(2) 500,000 327,252(3)
Neil D. Nicastro............... 1996 532,500 267,600 -- -- 35,791(4)
President, CEO & 1995 532,500 489,100 -- -- 35,762(4)
COO(1) 1994 532,500 741,600 -- 800,000 35,742(4)
Harold H. Bach, Jr............. 1996 262,500 67,800 -- -- --
Vice President -- Finance, 1995 250,000 67,800 -- -- --
Treasurer, CFO/CAO 1994 250,000 100,000 -- 75,000 --
Barbara M. Norman.............. 1996 157,500 27,200 -- -- --
Vice President, 1995 150,000 27,200 -- -- --
Secretary & General Counsel 1994 150,000 40,000 -- 75,000 --
</TABLE>
- -------------------------
COLUMN (F) "Restricted Stock" has been omitted since the Company has not awarded
any restricted stock during the last three fiscal years and there was no
restricted stock held by executive officers. COLUMN (H) "Long-term Incentive
Plans Payout" has been omitted as not applicable.
(1) Mr. Louis J. Nicastro and Mr. Neil D. Nicastro served as Co-Chief Executive
Officers of the Company until June 26, 1996.
(2) Amount shown is for tax gross-up payments.
(3) Amount shown is the accrual for contractual retirement benefits for Mr.
Louis J. Nicastro. See "Employment Contracts" below.
(4) Amount shown includes for fiscal 1996, 1995 and 1994 insurance premiums of
$691, $662 and $642, respectively, and $35,100 each for fiscal 1996, 1995
and 1994 accrual for contractual retirement benefits.
30
<PAGE> 32
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted during fiscal year ended June 30, 1996 to the named
executives.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL-YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
(D) (E)
(B) NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES (C) UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED VALUE OPTIONS AT 6/30/96 (#) OPTIONS AT 6/30/96 ($)
(A) ON EXERCISE REALIZED EXERCISABLE(E) EXERCISABLE(E)
NAME (#) ($) UNEXERCISABLE(U)(1) UNEXERCISABLE(U)
- ----------------------------- -------------- -------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Louis J. Nicastro............ -- -- 500,000(U) --(U)
Neil D. Nicastro............. -- -- 300,000(E) 1,981,500(E)
500,000(U) --(U)
Harold H. Bach, Jr........... -- -- 75,000(U) --(U)
Barbara M. Norman............ -- -- 75,000(U) --(U)
</TABLE>
- -------------------------
(1) Notwithstanding that, as set forth in the footnotes to the tables in Items
10, 11 and 12, Target Price Options are deemed to be beneficially owned
pursuant to Rule 13d-3(d)(1) of the Exchange Act, Target Price Options are
reported in the above table as "Unexercisable."
COMPENSATION OF DIRECTORS
The Company pays a fee of $40,000 per annum to each director who is not
also an employee of the Company or its subsidiaries. Each such director who
serves as the chairman of any committee of the Board of Directors receives a
further fee of $5,000 per annum for his services in such capacity and each
member of the Company's Audit and Ethics Committee receives an additional fee of
$5,000 per annum.
During the 1996 fiscal year, each non-employee director of the Company's
95%-owned subsidiary Posadas de Puerto Rico (which includes Messrs. Bartholomay,
Menell and Reich) also received an annual fee of $10,000 for services as a
director and, for those non-employee directors who serve as a member of the
Audit, Ethics and Compensation Committee of such subsidiary's Board of Directors
(which includes Messrs. Bartholomay and Reich), a further fee of $12,500 was
paid. During the 1996 fiscal year, each non-employee director of the Company's
62%-owned subsidiary Williams Hospitality (which includes Messrs. Baker, McKenna
and Menell) also received an annual fee of $22,500 for services as a director.
The Company's 1991 and 1993 Stock Option Plans (the "Option Plans") provide
for the issuance of shares of Common Stock of the Company pursuant to stock
options which may be granted to non-employee directors of the Company at not
less than 100% of the fair market value of such shares on the date of grant.
Under the terms of the Option Plans, non-qualified stock options may be granted
to non-employee directors pursuant to the following formula -- upon the date of
adoption of the Plan by the Board of Directors and on each anniversary thereof,
each non-employee director of the Company is entitled to receive a non-qualified
option to purchase, at 100% of the fair market value of the Company's Common
Stock on such date, such shares of the Company's Common Stock as shall be
determined by multiplying (a) in the case of the 1991 Stock Option Plan, 4,000
times the number of years he or she has served on the Board of Directors
(subject to a maximum of 30,000 shares); and (b) in the case of the 1993 Stock
Option Plan, 10,000 times the number of years he or she has served on the Board
of Directors or as a consultant or adviser (subject to a maximum of 50,000
shares). Upon adoption of the 1991 Stock Option Plan, the following non-employee
directors became entitled to and were granted non-qualified stock options to
purchase 30,000 shares each of the Company's Common Stock at a purchase price of
$7.31 -- Messrs. Baker, Bartholomay, McKenna and Reich. On September 6, 1996,
1995 and 1994, Mr. Sheinfeld was granted a non-qualified option to purchase
12,000, 8,000 and 4,000 shares, respectively, at a price of $23.875, $23.375 and
$19.125 per share, respectively, pursuant to the formula established in the 1991
Option Plan. Upon adoption of the 1993 Stock Option Plan,
31
<PAGE> 33
the following non-employee directors became entitled to and were granted
non-qualified stock options to purchase 50,000 shares each of the Company's
Common Stock at a purchase price of $26.875 each -- Messrs. Baker, Bartholomay,
McKenna, Menell, Reich and Sheinfeld. Options granted under the 1993 Stock
Option Plan require that the Company's Common Stock attain a market price of
$35.00 per share prior to exercise.
Directors also are entitled to participate at the Company's expense in a
medical reimbursement plan which is supplementary to the primary medical
insurance maintained by such individual.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last fiscal year, Mr. William C. Bartholomay served as Chairman
of the Company's Compensation Committee and Mr. William E. McKenna served as the
sole additional member, neither of whom are employees or officers of the Company
or any of its subsidiaries or had any relationship requiring disclosure herein
by the Company.
EMPLOYMENT CONTRACTS
Until June 30, 1996, Mr. Louis J. Nicastro was employed under the terms of
an Amended and Restated Employment Agreement dated October 27, 1994, which was
due to expire July 31, 1999, subject to automatic one-year extensions thereafter
unless notice was given six months prior to any termination date. The agreement
provided for salaried compensation at the rate of $832,500 per annum, or such
greater amount as may be determined by the Board of Directors. The agreement
also provided for full participation in all benefit plans available to senior
executives and for reimbursement of all medical and dental expenses incurred by
Mr. Nicastro and his spouse. Upon Mr. Nicastro's retirement date of July 31,
1999 ("Retirement Date"), or in the event Mr. Nicastro became disabled, the
Company was required to pay Mr. Nicastro until his death an annual benefit equal
to one-half of the aggregate annual base salary being paid to him at the time of
such occurrence, but in no event less than $416,250 per year payable in monthly
installments. Such benefit (to the extent not previously vested) vests ratably
during the period October 27, 1994 through July 31, 1999 (or such earlier date
as Mr. Nicastro's employment may terminate by reason of the Company's violation
of the agreement or the occurrence of a change-in-control of the Company). The
vested amount of such retirement or disability benefit was payable
notwithstanding Mr. Nicastro's termination of employment for any reason,
provided, he was not in material breach of the terms of the agreement and, upon
his death, was payable to his designee or estate. Upon Mr. Nicastro's death
whether during the term of his employment or after his Retirement Date, the
Company agreed to pay in monthly installments to his designee or estate for a
period of fifteen years thereafter, an annual benefit equal to one-half of the
amount of the annual base salary paid to him on his date of death if such death
occurs during his employment or the amount of his retirement benefit but no less
than $416,250 per annum.
In connection with the spin-off of the Hotel & Casino Operations, the Board
of Directors of the Company requested Mr. Nicastro, and Mr. Nicastro agreed, to
become the Chairman of the Board and chief executive officer of the public
hotel/casino corporation and to relinquish his position as co-chief executive
officer of the Company. Effective July 1, 1996, Mr. Nicastro also agreed to the
early termination and full settlement of his employment agreement pursuant to
which, in lieu of all future payments of base salary, bonus, retirement and
death benefits, Mr. Nicastro received a lump sum payment of $9,125,000, with
interest from July 1, 1996.
Mr. Neil D. Nicastro is employed under the terms of a Second Amended and
Restated Employment Agreement dated October 12, 1993. The employment agreement
provides for salaried compensation at the rate of $532,500 per annum, or such
greater amount as may be determined by the Board of Directors, plus bonus
compensation of two percent of the pre-tax income of the Company between the
amounts of $10,000,000 and $50,000,000. The agreement expires December 31, 2000,
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 and for a period of five years thereafter, the Company is
required to pay to Mr. Nicastro or his designee, or if no designation is made,
to his estate, for a period equal to the greater of the balance of the remaining
term of the agreement or five years, an annual benefit equal to one-half of the
annual base salary being paid to him on such retirement or death, as the case
may be, but in no event less than
32
<PAGE> 34
$266,250 per year. Such benefits are payable notwithstanding Mr. Nicastro's
termination of employment for any reason.
The employment agreement of Mr. Neil D. Nicastro provides for, among other
things, full participation in all benefit plans available to senior executives
and for reimbursement of all medical and dental expenses incurred by him or his
spouse and incurred by his children under the age of twenty-one. Additionally,
the Company will provide Mr. Nicastro with $1,000,000 of life insurance coverage
in addition to the standard amount provided to Company employees. The agreement
further provides for full compensation during periods of illness or incapacity;
however, the Company may give 30 days' notice of termination if such illness or
incapacity disables Mr. Nicastro from performing his duties for a period of more
than six months. Such termination notice becomes effective if full performance
is not resumed within 30 days of such notice and maintained for a period of two
months thereafter. The employment agreement may be terminated at the election of
Mr. Nicastro upon the occurrence without his consent or acquiescence of any one
or more of the following events: (i) the placement of Mr. Nicastro in a position
of lesser stature or the assignment to Mr. Nicastro of duties, performance
requirements or working conditions significantly different from or at variance
with those presently in effect; (ii) the treatment of Mr. Nicastro in a manner
which is in derogation of his status as a senior executive; (iii) the cessation
of service of Mr. Nicastro as a member of the Board of Directors of the Company;
(iv) the discontinuance or reduction of amounts payable or personal benefits
available to Mr. Nicastro pursuant to such agreement; or (v) the requirement
that Mr. Nicastro work outside his agreed upon metropolitan area. In any such
event, and in the event the Company is deemed to have wrongfully terminated Mr.
Nicastro's employment agreement under the terms thereof, the Company is
obligated (a) to make a lump sum payment to Mr. Nicastro equal in amount to the
sum of the aggregate base salary during the remaining term of his employment
agreement (but in no event less than three times the highest base salary payable
to him during the one-year period prior to such event), the bonus (assuming all
objectives for payment had been met) and the retirement benefit (assuming the
date of termination was his retirement date) otherwise payable under the terms
of the employment agreement and (b) to purchase at the election of Mr. Nicastro
all stock options held by him with respect to the Company's Common Stock at a
price equal to the spread between the option price and the fair market price of
such stock as defined in the agreement. The employment agreement may also be
terminated at the election of Mr. Nicastro if individuals who presently
constitute the Board of Directors, or successors approved by such Board members,
cease for any reason to constitute at least a majority of the Board. Upon such
an event, the Company may be required to purchase the stock options held by Mr.
Nicastro and make payments similar to those described above.
Mr. Nicastro's employment agreement provides that the Company shall make
quarterly interest free advances against his annual bonus in amounts mutually
agreeable to Mr. Nicastro and the Company. During fiscal 1996, the Company made
advances against Mr. Nicastro's bonus which were in excess of his actual bonus
by $92,400. The Company has treated the excess advances of Mr. Nicastro's bonus
as an interest free loan, which Mr. Nicastro has agreed to repay during the next
fiscal year.
In contemplation of the initial public offering of common stock of Midway
and subject to the completion thereof, the Company and Midway have each entered
into separate employment agreements (each a "New Agreement" and collectively,
the "New Agreements") with Mr. Nicastro to be effective as of July 1, 1996.
Except as discussed below, each of the New Agreements contains provisions
similar to those contained in Mr. Nicastro's Second Amended and Restated
Employment Agreement with the Company discussed above. Each of the New
Agreements provides that Mr. Nicastro will receive salaried compensation at the
rate of $300,000 per annum, or such greater amount as may be determined by the
Board of Directors of the Company or Midway, as applicable. Mr. Nicastro's New
Agreement with Midway provides for bonus compensation in an amount equal to two
percent of the pre-tax income of Midway multiplied by the percentage of Midway
common stock outstanding which is not owned by the Company (which upon
completion of the Midway offering is anticipated to be 13.2% (14.9% if the
underwriters' over-allotment option is exercised in full)). Mr. Nicastro's New
Agreement with the Company also provides for bonus compensation in an amount
equal to two percent of the pre-tax income of the Company. The portion of Mr.
Nicastro's bonus from the Company that is attributable to the pre-tax income of
Midway will be charged to Midway pursuant to the Manufacturing and Services
Agreement between the Company and Midway. Mr. Nicastro's New Agreement with
Midway
33
<PAGE> 35
provides that should the Company fail for any reason to provide the medical,
dental and other employee benefits to be provided to Mr. Nicastro under the
terms of his New Agreement with the Company, Midway will provide such benefits
to him at its expense. Each of the New Agreements provides that Mr. Nicastro may
divide his attention between the business of the Company and the business of
Midway as he shall consider appropriate.
The New Agreements will expire five years from the closing of the Midway
common stock offering, subject to automatic extensions in order that the term of
each of the New Agreements shall at no time be less than three years. Upon
retirement or death and for a period of seven years thereafter, each of the
Company and Midway is required to pay to Mr. Nicastro or his designee, or if no
designation is made, to his estate, for a period equal to the greater of the
balance of the remaining term of the respective New Agreement or seven years, an
annual benefit equal to one-half of the annual base salary being paid to him on
such retirement or death, as the case may be, but in no event less than $150,000
per annum under such New Agreement. Such benefits are payable under each of the
New Agreements notwithstanding Mr. Nicastro's termination of employment with the
Company or Midway, as the case may be, for any reason.
RETIREMENT PLANS
Under the Company's noncontributory pension plan for salaried employees of
the Company and its wholly-owned subsidiaries, the amount of monthly benefits
payable upon attainment of normal retirement age (assumed to be 65) are computed
as follows: $50.00 plus $7.50 per year of credited service to a maximum of 30
years' credited service. Under this plan an employee's benefits vest after five
years of service. The estimated annual benefit payable upon retirement to each
officer listed in the Summary Compensation Table who is entitled to such
benefit, assuming continued employment and retirement at age 65, is as follows:
Mr. Louis J. Nicastro $1,786; Mr. Neil D. Nicastro $1,500; Mr. Harold H. Bach,
Jr. $690; and, for all executive officers as a group, $3,976. The plan was
amended effective September 1, 1990, to discontinue on that date the acceptance
of new participants in the plan and on December 31, 1991 to discontinue the
accrual of future benefits.
TREASURY SHARE BONUS PLAN
On April 19, 1993, the Board of Directors adopted a Treasury Share Bonus
Plan for key employees (the "Bonus Plan"). The shares of Common Stock allocated
to the Bonus Plan consist as of the close of the 1996 fiscal year of 52,312
shares of the Company's Common Stock. Awards are made at no direct cost to the
employees selected by management for awards and vest on dates selected in the
discretion of management. Unvested portions of awards are forfeited upon the
termination of employment by award recipients for any reason other than death,
in which event, shares representing the remaining portion of any award are to be
issued to the executor or administrator of the employee's estate. During the
1996 fiscal year, no additional shares were awarded under the Bonus Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
VOTING PROXY AGREEMENT
In order for the Company to be permitted to manufacture and sell slot
machines in Nevada, the Company and certain of its subsidiaries and Mr. Louis J.
Nicastro and Mr. Neil D. Nicastro were required to be registered, licensed or
found suitable and have been registered, licensed or found suitable by the
Nevada Board and the Nevada Commission, as applicable, as a Registered
Corporation, as registered holding companies, for licensure as a manufacturer
and distributor of gaming devices and as directors, officers and stockholders of
such entities, as applicable. Under applicable Nevada law and administrative
procedure, as a greater than 10% stockholder of the Company, Mr. Sumner M.
Redstone ("SMR") was required to apply and has an application pending with the
Nevada Gaming Authorities for a finding of suitability as a stockholder of the
Company. Pending completion of the processing of SMR's application, SMR and
National Amusements, Inc. ("NAI") have voluntarily granted to Mr. Louis J.
Nicastro and, if he is unable to perform his duties under the Proxy Agreement
(as defined herein), Mr. Neil D. Nicastro, individually, a voting proxy for all
of the shares of Common Stock which they own beneficially or of record.
34
<PAGE> 36
On September 21, 1995, Mr. Louis J. Nicastro and Mr. Neil D. Nicastro
entered into a Voting Proxy Agreement (the "Proxy Agreement") with the Company,
SMR and NAI, pursuant to which Mr. Louis J. Nicastro and, if he is unable to
perform his duties under the Proxy Agreement, Mr. Neil D. Nicastro have been
appointed, individually, as proxy holder with full power of substitution during
and for the term of the voting proxy, to vote all shares of the Company's Common
Stock as the proxy of SMR and NAI at any annual, special or adjourned meeting of
the stockholders of the Company, including the right to execute consents,
certificates or other documents relating to the Company that the law of the
State of Delaware may permit or require on any and all matters which may be
presented to the stockholders of the Company. The term of the Proxy Agreement is
for 10 years commencing August 25, 1995, unless sooner terminated upon 30 days
written notice. The Proxy Agreement will be deemed terminated as to any subject
matter that will be presented for approval, consent or ratification to the
stockholders of the Company if the Company fails to give SMR and NAI 45 days
notice of such subject matter. The Proxy Agreement will also terminate if SMR
and NAI are found suitable as stockholders of the Company by the Nevada Gaming
Authorities or are no longer subject to the provisions of Nevada gaming laws
applicable to holders of more than 10% of the Company's Common Stock. The Proxy
Agreement is not applicable to any shares of the Company's Common Stock sold or
otherwise disposed of by SMR or NAI to any person who is not an affiliate of SMR
or NAI. SMR and NAI have agreed to give notice of any sale or disposition to the
Chairman of the Nevada Board within 10 days after such sale or disposition. The
Proxy Agreement was entered into to assure that the passive investment position
of SMR and NAI relative to the Company will not change without prior
notification to the Nevada Gaming Authorities.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 31, 1996
(except as otherwise footnoted) with respect to persons known to be the
beneficial owner of more than five percent of the Company's Common Stock.
Security ownership of management is set forth under the heading "Identification
of Directors" in Item 10(a) above as supplemented by footnote 9 to the table.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(2)
- ----------------------------------------------- ----------------------- -------------------------
<S> <C> <C>
Sumner M. Redstone and
National Amusements, Inc..................... 5,929,100 shares(3) 24.5%
200 Elm Street
Dedham, MA 02026
FMR Corp....................................... 2,439,579 shares(4) 10.1%
82 Devonshire St.
Boston, MA 02109
The Capital Group Companies, Inc.
and Capital Research and
Management Company........................... 1,902,000 shares(5) 7.9%
333 South Hope St.
Los Angeles, CA 90071
State of Wisconsin Investment Board............ 1,329,200 shares(6) 5.5%
P.O. Box 7842
Madison, WI 53707
Neil D. Nicastro............................... 6,791,100 shares(7) 27.2%
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) COMMON STOCK(2)
- ----------------------------------------------- ----------------------- -------------------------
<S> <C> <C>
shares(8)25.8%WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Directors and officers as a group.............. 7,930,490 shares(9) 30.5%(10)
(eleven persons)
</TABLE>
- -------------------------
(1) Pursuant to Rule 13d-3(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days. Certain of such options as reported herein are
Target Price Options.
(2) For purposes of calculating the percentage of shares of the Common Stock
owned and issuable upon the exercise of his or her options within 60 days
have been deemed to be outstanding.
(3) The number of shares reported is based upon information contained in
Amendment No. 19, dated September 21, 1995, to the Schedule 13D filed by
Mr. Sumner M. Redstone with the Securities and Exchange Commission.
Pursuant to such Schedule, as amended, Mr. Redstone and National
Amusements, Inc., a Maryland corporation, reported beneficial ownership of
and sole investment power with respect to 3,033,800 and 2,895,300 shares,
respectively, of the Common Stock and shared voting power with respect to
such shares pursuant to a Proxy Agreement entered into with the Company,
and Messrs. Louis J. and Neil D. Nicastro (see "Voting Proxy Agreement"
above described). Mr. Redstone is the beneficial owner of 66 2/3% of the
issued and outstanding shares of the common stock of National Amusements,
Inc.
(4) The number of shares reported is based upon information contained in a
Schedule 13G/A dated August 9, 1996 filed with the Securities and Exchange
Commission by FMR Corp. Pursuant to such Schedule, FMR Corp. reported that
Fidelity Management & Research Company, a wholly-owned subsidiary of FMR
Corp. and an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, as amended, is the beneficial owner of
2,439,579 shares or 10.1% of the Common Stock as a result of acting as
investment adviser to various investment companies registered under Section
8 of the Investment Company Act of 1940. FMR Corp. reported it has sole
power to dispose of or direct the disposition of all such shares but no
power to vote such shares.
(5) The number of shares reported is based upon information contained in a
Schedule 13G dated February 9, 1996 filed with the Securities and Exchange
Commission by The Capital Group Companies, Inc. ("CGC"). Pursuant to such
Schedule 13G and accompanying documentation, CGC reported that Capital
Research and Management Company, an Investment Adviser registered under
Section 203 of the Investment Advisers Act of 1940, and Capital Guardian
Trust Company, a bank as defined in Section 3(a)(6) of the Securities
Exchange Act of 1934, as amended, operating subsidiaries of CGC, exercised
as of December 31, 1995, investment discretion with respect to 1,300,000
and 602,000 shares, respectively, or a combined total of 7.9% of the
Company's Common Stock which was owned by various institutional investors
at that time.
(6) The number of shares reported is based upon information contained in a
Schedule 13G dated February 3, 1996 filed with the Securities and Exchange
Commission by the State of Wisconsin Investment Board ("SWIB"), a
governmental agency which manages public pension funds subject to
provisions comparable to ERISA. The SWIB reported it had sole voting and
dispositive power with respect to 1,329,200 shares of the Company's Common
Stock.
(7) The number of shares reported as beneficially owned includes 5,929,100
shares of Common Stock owned by Sumner M. Redstone and National Amusements,
Inc. for which the reporting person has shared voting power but no
dispositive power. Additionally, the number of shares reported as
beneficially owned includes 862,000 shares for which the reporting person
has sole voting and sole dispositive power, 800,000 of which may be
acquired pursuant to stock options, 500,000 of such options being Target
Price
36
<PAGE> 38
Options. For a discussion concerning the shared voting power with respect
to the 5,929,100 shares of Common Stock referred to above, see "Voting
Proxy Agreement" above.
(8) The number of shares reported as beneficially owned includes 5,929,100
shares owned by Sumner M. Redstone and National Amusements, Inc. for which
the reporting person has shared voting power but no dispositive power.
Additionally, the number of shares reported as beneficially owned includes
500,000 shares for which the reporting person has sole voting and sole
dispositive power, all of which may be acquired pursuant to Target Price
Options. For a discussion concerning the shared voting power with respect
to the 5,929,100 shares of Common Stock referred to above, see "Voting
Proxy Agreement" above.
(9) Includes 1,892,000 shares of Common Stock which directors and executive
officers have the right to acquire upon the exercise of stock options,
1,550,000 of which are Target Price Options. Additionally, includes
5,929,100 shares of Common Stock owned by Sumner M. Redstone and National
Amusements, Inc. with respect to which Mr. Louis J. Nicastro and Mr. Neil
D. Nicastro both have shared voting power but no dispositive power. For a
discussion concerning the shared voting power with respect to the 5,929,100
shares of Common Stock referred to above, see "Voting Proxy Agreement"
above. Mr. Bach, Vice President-Finance and Treasurer and Ms. Norman, Vice
President and Secretary of the Corporation, were deemed to own 77,000 and
90,100 shares, respectively, of the Company's Common Stock. In each
instance, 75,000 of such shares are Target Price Options. Each such holding
represents less than 1% of the outstanding shares of the Common Stock.
(10) For purposes of this calculation, the 5,929,100 shares of Common Stock
owned by Sumner M. Redstone and National Amusements, Inc. with respect to
which Mr. Louis J. Nicastro and Mr. Neil D. Nicastro have shared voting
power but no dispositive power have only been counted once. For a
discussion concerning the shared voting power with respect to the 5,929,100
shares of Common Stock referred to above, see "Voting Proxy Agreement"
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN BUSINESS RELATIONSHIPS
Mr. Ira S. Sheinfeld is a member of the law firm of Squadron, Ellenoff,
Plesent & Sheinfeld LLP which the Company has retained to provide tax services
during the last fiscal year and proposes to retain for such services during the
current fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) (1) Financial Statements of Registrant. All financial statements of the
Registrant required to be disclosed in this Item 14(a)(1) appear in
the Financial Statements in the 1996 Annual Report. Such Financial
Statements are incorporated by reference herein.
(2) Financial Statement Schedule of Registrant. See "Index to Financial
Information" on page F-1.
(3) Exhibits.
<TABLE>
<S> <C> <C>
*3(a) Amended and Restated Certificate of Incorporation of the Registrant
dated February 17, 1987; Certificate of Amendment dated January 28,
1993; and Certificate of Correction dated May 4, 1994, incorporated by
reference to Exhibit 3(a) to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1994 (the "1994 10-K").
**3(b) By-Laws of the Registrant, as amended and restated through June 26,
1996.
*4(a) Specimen of Common Stock certificate, incorporated by reference to
Exhibit 4(a) to the 1994 10-K.
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C> <C>
*4(b) Specimen 5 3/4% Convertible Subordinated Debenture Due 2002,
incorporated by reference to Exhibit 4(b) to the 1994 10-K.
*4(c) Form of Indenture dated as of December 1, 1992 between the Registrant
and United States Trust Company of New York, as Trustee, incorporated
by reference to Exhibit 4(c) to the 1994 10-K.
*10(a) Amended and Restated Employment Agreement dated October 27, 1994
between the Registrant and Louis J. Nicastro, incorporated by
reference to Exhibit (a) to Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 1994.
*10(b) Second Amended and Restated Employment Agreement dated as of October
12, 1993, between the Registrant and Neil D. Nicastro, incorporated by
reference to Exhibit (a) to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993.
*10(c) Second Amendment and Restatement of the Registrant's Pension Plan for
Salaried Employees adopted June 24, 1986 and Amendment Nos. 1 to 5
thereof, incorporated by reference to Exhibit 10(c) to the 1994 10-K.
*10(d) Second Amended and Restated Williams Electronics Games, Inc. Group
Annuity Plan for Hourly Employees (effective as of January 1, 1987),
incorporated by reference to Exhibit 10(f) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1988.
*10(e) 1982 Employee Stock Option Plan as amended, incorporated by reference
to Exhibit 10(e) to the 1994 10-K.
*10(f) 1991 Stock Option Plan as amended, incorporated by reference to
Exhibit 10(f) to the 1994 10-K.
*10(g) 1993 Stock Option Plan, incorporated by reference to Exhibit 10(g) to
the 1994 10-K.
*10(h) 1994 Stock Option Plan, incorporated by reference to Appendix A to the
Registrant's Definitive Proxy Statement dated December 12, 1994.
*10(i) Credit Agreement dated as of April 21, 1994 between the Registrant and
Bank of America Illinois (formerly known as Continental Bank N.A.),
incorporated by reference to Exhibit 10(h) to the 1994 10-K.
**10(j) Third Amendment dated as of September 9, 1996 to Credit Agreement
dated April 2, 1994, between the Registrant and Bank of America
Illinois.
*10(k) Joint Venture Agreement dated July 26, 1984 between ESJ Hotel
Corporation, Great American Industries, Inc., IHS Associates, Ltd.,
MILTK, Inc., Midwest Property Corp. and MILTK Associates, as amended,
incorporated by reference to Exhibit 10(i) to the 1994 10-K.
*10(l) Credit Agreement between Posadas de San Juan Associates and the Bank
of Nova Scotia dated January 20, 1993, with respect to $34,000,000
refinancing, incorporated by reference to Exhibit 10(w) to
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1993 (the "1993 10-K").
*10(m) Form of Indemnity Agreement authorized to be entered into between the
Registrant and each officer and director approved by the Board of
Directors, incorporated by reference to Exhibit 10(k) to the 1994
10-K.
*10(n) Operating Credit and Term Loan Agreement between Posadas de Puerto
Rico Associates, Incorporated and Scotiabank de Puerto Rico dated
August 30, 1988, as amended, with respect to $35,500,000 financing,
incorporated by reference to Exhibit 10(l) to the 1994 10-K.
</TABLE>
38
<PAGE> 40
<TABLE>
<S> <C> <C>
*10(o) WKA El Con Associates Joint Venture Agreement dated January 9, 1990,
by and among WMS El Con Corp., International Textile Products of
Puerto Rico, Inc., KMA Associates of Puerto Rico and Hospitality
Investment Group, S.E., incorporated by reference to Exhibit 10(gg)
Registrant's Annual Report on Form 10-K for the fiscal year ended June
30, 1990.
*10(p) First and Second Amendments to the WKA El Con Associates Joint Venture
Agreement dated January 31, 1990 and January 18, 1991 incorporated by
reference to Exhibit 10(gg) to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1991.
*10(q) WMS Industries Inc. 401(k) Retirement Savings Plan for Non-Union
Employees adopted January 1, 1992, incorporated by reference to
Exhibit 10(cc) to the Form 10-K for the fiscal year ended June 30,
1992 (the "1992 10-K").
*10(r) Williams Innovative Technologies, Inc. 401(k) Retirement Savings Plan
(Union Employees) adopted January 1, 1992, incorporated by reference
to Exhibit 10(dd) to the 1992 10-K.
*10(s) WMS Industries Inc. Treasury Share Bonus Plan adopted April 19, 1993,
incorporated by reference to Exhibit 10(ee) to the 1993 10-K.
*10(t) Asset Purchase Agreement dated April 4, 1994 among Tradewest, Inc.,
Tradewest International, Inc., Williams Entertainment Inc., Leland P.
Cook, Byron C. Cook and John R. Rowe and the Registrant and Asset
Purchase Agreement dated April 4, 1994 among the Leland Corporation,
Williams Entertainment Inc., Leland P. Cook, Byron C. Cook and John R.
Rowe and the Registrant, incorporated by reference to Exhibits 2(a)
and 2(b), respectively, to Registrant's Form 8-K Report filed May 7,
1994 and Amendment No. 1 thereto filed July 14, 1994.
*10(u) Voting Proxy Agreement dated September 21, 1995 among Louis J.
Nicastro, Neil D. Nicastro, the Registrant, Sumner M. Redstone and
National Amusements, Inc., incorporated by reference to Exhibit 10(u)
to Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995.
*10(v) Stock Purchase Agreement dated as of February 23, 1996 between Warner
Communications, Inc. and Williams Interactive Inc., incorporated by
reference to Exhibit 2(a) to Registrant's Report on Form 8-K filed
April 12, 1996.
**13 1996 Annual Report to Stockholders
**21 Subsidiaries of the Registrant
**23 Consent of Ernst & Young LLP
**27 Financial Data Schedule (filed with EDGAR version only)
</TABLE>
- -------------------------
* Incorporated by reference
** Filed herewith
(B) REPORTS ON FORM 8-K.
A Form 8-K Report was filed by Registrant on April 12, 1996, reporting
the acquisition of all of the issued and outstanding common stock of
Atari Games Corporation. The Form 8-K included the historical financial
statements of Atari Games Corporation for the three years ended
December 31, 1995. Pro forma financial information was filed by
Amendment No. 1 to Form 8-K on June 7, 1996 which information is
incorporated by reference herein.
39
<PAGE> 41
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 the
20th day of September, 1996.
WMS INDUSTRIES INC.
By: /s/ Neil D. Nicastro
------------------------------------
(Neil D. Nicastro)
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- -------------------
<C> <S> <C>
/s/ Neil D. Nicastro President, Chief Executive September 20, 1996
- ------------------------------------- Officer, Chief Operating Officer
(Neil D. Nicastro) and Director (Principal Executive
Officer)
/s/ Harold H. Bach, Jr. Vice President -- Finance and September 20, 1996
- ------------------------------------- Treasurer (Principal Financial and
(Harold H. Bach, Jr.) Principal Accounting Officer)
/s/ Louis J. Nicastro Chairman of the Board of Directors September 20, 1996
- -------------------------------------
(Louis J. Nicastro)
/s/ Norman J. Menell Vice Chairman of the Board of September 20, 1996
- ------------------------------------- Directors
(Norman J. Menell)
/s/ George R. Baker Director September 20, 1996
- -------------------------------------
(George R. Baker)
/s/ William C. Bartholomay Director September 20, 1996
- -------------------------------------
(William C. Bartholomay)
/s/ Kenneth J. Fedesna Director September 20, 1996
- -------------------------------------
(Kenneth J. Fedesna)
/s/ William E. McKenna Director September 20, 1996
- -------------------------------------
(William E. McKenna)
/s/ Harvey Reich Director September 20, 1996
- -------------------------------------
(Harvey Reich)
/s/ Ira S. Sheinfeld Director September 20, 1996
- -------------------------------------
(Ira S. Sheinfeld)
</TABLE>
40
<PAGE> 42
WMS INDUSTRIES, 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, 1996 and June 30, 1995..................... *
Consolidated statements of income for the years ended June 30, 1996, 1995 and
1994............................................................................. *
Consolidated statements of changes in stockholders' equity for the years ended June
30, 1996, 1995 and 1994.......................................................... *
Consolidated statements of cash flows for the years ended June 30, 1996, 1995 and
1994............................................................................. *
Notes to consolidated financial statements......................................... *
Financial statements schedule VIII -- Valuation and qualifying accounts for the
years ended June 30, 1996, 1995 and 1994......................................... F-3
</TABLE>
- -------------------------
* Incorporated by reference to the 1996 Annual Report 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 consolidated financial statements
and notes thereto.
F-1
<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
WMS Industries Inc.
We have audited the consolidated financial statements of WMS Industries
Inc. and subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K
of WMS Industries Inc. for the year ended June 30, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and related schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and related schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related schedule
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WMS Industries Inc. and subsidiaries at June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
September 12, 1996, except for Note 14, as
to which the date is September 20, 1996
F-2
<PAGE> 44
SCHEDULE VIII
WMS INDUSTRIES INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1995, 1994
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D
----------- ADDITIONS ---------- COLUMN E
BALANCE AT ------------------------- DEDUCTIONS-- -----------
COLUMN A BEGINNING CHARGED TO CHARGED TO AMOUNTS BALANCE AT
- ------------------------------- OF COSTS AND OTHER WRITTEN END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS OFF PERIOD
- ------------------------------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for receivables:
1996......................... $ 1,515,000 $3,790,000 $ -- $3,479,000 $ 1,826,000
=========== ========== =========== ========== ===========
1995......................... $ 500,000 $3,293,000 $ -- $2,278,000 $ 1,515,000
=========== ========== =========== ========== ===========
1994......................... $ 500,000 $ 175,000 $ -- $ 175,000 $ 500,000
=========== ========== =========== ========== ===========
Unrealized holding loss on
noncurrent marketable equity
securities:
1996......................... $ 4,571,000 -- $ 3,750,000 -- $ 8,321,000(1)
=========== ========== =========== ========== ===========
1995......................... $12,258,000 -- $(7,687,000) -- $ 4,571,000(1)
=========== ========== =========== ========== ===========
1994......................... -- -- $12,258,000 -- $12,258,000(1)
=========== ========== =========== ========== ===========
</TABLE>
- -------------------------
(1) Included as a direct reduction of stockholders' equity.
F-3
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- --------------------------------------------------------------------- ------------
<S> <C> <C>
*3(a) Amended and Restated Certificate of Incorporation of the Registrant
dated February 17, 1987; Certificate of Amendment dated January 28,
1993; and Certificate of Correction dated May 4, 1994, incorporated
by reference to Exhibit 3(a) to the Registrant's Annual Report on
Form 10-K for the year ended June 30, 1994 (the "1994 10-K"). .......
**3(b) By-Laws of the Registrant, as amended and restated through June 26,
1996. ...............................................................
*4(a) Specimen of Common Stock certificate, incorporated by reference to
Exhibit 4(a) to the 1994 10-K. ......................................
*4(b) Specimen 5 3/4% Convertible Subordinated Debenture Due 2002,
incorporated by reference to Exhibit 4(b) to the 1994 10-K. .........
*4(c) Form of Indenture dated as of December 1, 1992 between the Registrant
and United States Trust Company of New York, as Trustee, incorporated
by reference to Exhibit 4(c) to the 1994 10-K. ......................
*10(a) Amended and Restated Employment Agreement dated October 27, 1994
between the Registrant and Louis J. Nicastro, incorporated by
reference to Exhibit (a) to Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 1994. ................
*10(b) Second Amended and Restated Employment Agreement dated as of October
12, 1993, between the Registrant and Neil D. Nicastro, incorporated
by reference to Exhibit (a) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993. .................
*10(c) Second Amendment and Restatement of the Registrant's Pension Plan for
Salaried Employees adopted June 24, 1986 and Amendment Nos. 1 to 5
thereof, incorporated by reference to Exhibit 10(c) to the 1994
10-K. ...............................................................
*10(d) Second Amended and Restated Williams Electronics Games, Inc. Group
Annuity Plan for Hourly Employees (effective as of January 1, 1987),
incorporated by reference to Exhibit 10(f) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1988. ...........
*10(e) 1982 Employee Stock Option Plan as amended, incorporated by reference
to Exhibit 10(e) to the 1994 10-K. ..................................
*10(f) 1991 Stock Option Plan as amended, incorporated by reference to
Exhibit 10(f) to the 1994 10-K. .....................................
*10(g) 1993 Stock Option Plan, incorporated by reference to Exhibit 10(g) to
the 1994 10-K. ......................................................
*10(h) 1994 Stock Option Plan, incorporated by reference to Appendix A to
the Registrant's Definitive Proxy Statement dated December 12,
1994. ...............................................................
*10(i) Credit Agreement dated as of April 21, 1994 between the Registrant
and Bank of America Illinois (formerly known as Continental Bank
N.A.), incorporated by reference to Exhibit 10(h) to the 1994
10-K. ...............................................................
**10(j) Third Amendment dated as of September 9, 1996 to Credit Agreement
dated April 2, 1994, between the Registrant and Bank of America
Illinois. ...........................................................
</TABLE>
<PAGE> 46
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- --------------------------------------------------------------------- ------------
<S> <C> <C>
*10(k) Joint Venture Agreement dated July 26, 1984 between ESJ Hotel
Corporation, Great American Industries, Inc., IHS Associates, Ltd.,
MILTK, Inc., Midwest Property Corp. and MILTK Associates, as amended,
incorporated by reference to Exhibit 10(i) to the 1994 10-K. ........
*10(l) Credit Agreement between Posadas de San Juan Associates and the Bank
of Nova Scotia dated January 20, 1993, with respect to $34,000,000
refinancing, incorporated by reference to Exhibit 10(w) to
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993 (the "1993 10-K"). ....................................
*10(m) Form of Indemnity Agreement authorized to be entered into between the
Registrant and each officer and director approved by the Board of
Directors, incorporated by reference to Exhibit 10(k) to the 1994
10-K. ...............................................................
*10(n) Operating Credit and Term Loan Agreement between Posadas de Puerto
Rico Associates, Incorporated and Scotiabank de Puerto Rico dated
August 30, 1988, as amended, with respect to $35,500,000 financing,
incorporated by reference to Exhibit 10(l) to the 1994 10-K. ........
*10(o) WKA El Con Associates Joint Venture Agreement dated January 9, 1990,
by and among WMS El Con Corp., International Textile Products of
Puerto Rico, Inc., KMA Associates of Puerto Rico and Hospitality
Investment Group, S.E., incorporated by reference to Exhibit 10(gg)
Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1990. ......................................................
*10(p) First and Second Amendments to the WKA El Con Associates Joint
Venture Agreement dated January 31, 1990 and January 18, 1991
incorporated by reference to Exhibit 10(gg) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended June 30,
1991. ...............................................................
*10(q) WMS Industries Inc. 401(k) Retirement Savings Plan for Non-Union
Employees adopted January 1, 1992, incorporated by reference to
Exhibit 10(cc) to the Form 10-K for the fiscal year ended June 30,
1992 (the "1992 10-K"). .............................................
*10(r) Williams Innovative Technologies, Inc. 401(k) Retirement Savings Plan
(Union Employees) adopted January 1, 1992, incorporated by reference
to Exhibit 10(dd) to the 1992 10-K. .................................
*10(s) WMS Industries Inc. Treasury Share Bonus Plan adopted April 19, 1993,
incorporated by reference to Exhibit 10(ee) to the 1993 10-K. .......
*10(t) Asset Purchase Agreement dated April 4, 1994 among Tradewest, Inc.,
Tradewest International, Inc., Williams Entertainment Inc., Leland P.
Cook, Byron C. Cook and John R. Rowe and the Registrant and Asset
Purchase Agreement dated April 4, 1994 among the Leland Corporation,
Williams Entertainment Inc., Leland P. Cook, Byron C. Cook and John
R. Rowe and the Registrant, incorporated by reference to Exhibits
2(a) and 2(b), respectively, to Registrant's Form 8-K Report filed
May 7, 1994 and Amendment No. 1 thereto filed July 14, 1994. ........
*10(u) Voting Proxy Agreement dated September 21, 1995 among Louis J.
Nicastro, Neil D. Nicastro, the Registrant, Sumner M. Redstone and
National Amusements, Inc., incorporated by reference to Exhibit 10(u)
to Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995. ......................................................
*10(v) Stock Purchase Agreement dated as of February 23, 1996 between Warner
Communications, Inc. and Williams Interactive Inc., incorporated by
reference to Exhibit 2(a) to Registrant's Report on Form 8-K filed
April 12, 1996. .....................................................
</TABLE>
<PAGE> 47
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- --------------------------------------------------------------------- ------------
<S> <C> <C>
**13 1996 Annual Report to Stockholders...................................
**21 Subsidiaries of the Registrant.......................................
**23 Consent of Ernst & Young LLP.........................................
**27 Financial Data Schedule (filed with EDGAR version only)..............
</TABLE>
- -------------------------
* Incorporated by reference
** Filed herewith
<PAGE> 1
Exhibit 3(b)
[As Amended and Restated
as of June 26, 1996]
BY-LAWS
OF
WMS INDUSTRIES INC.
(Incorporated under the laws of the State of Delaware)
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting. A meeting of the stockholders of the
Corporation shall be held annually for the election of directors
and the transaction of other business on such date in each year as
shall be designated by the Board of Directors.
Section 2. Special Meetings. Special meetings of the
stockholders of the Corporation may be called by the Board of
Directors or by the President and shall be called by the
Board upon the written request of the holders of record of a
majority of the outstanding shares of the Corporation
entitled to vote at the meeting requested to be called. Any such
request shall state the purpose or purposes of the proposed
meeting.
Section 3. Place of Meetings. Meetings of stockholders shall be held at
such place, within or without the State of Delaware, as may be
fixed by the Board of Directors. If no place is so fixed,
such meetings shall be held at the principal office of the
Corporation.
Section 4. Notice of Meetings. Notice of each meeting of stockholders shall
be given in writing and shall state the place, date and hour of
the meeting and the purpose or purposes for which the meeting is
called. Notice of a special meeting shall indicate that it is
being issued by or at the direction of the person or persons
calling or requesting the meeting.
If, at any meeting, action is proposed to be taken which would,
if taken, entitle objecting stockholders to receive payment for
their shares, the notice shall include a statement of that
purpose and to that effect.
1
<PAGE> 2
A copy of the notice of each meeting shall be given, personally
or by first class mail, not less than 10 nor more than 60 days
before the date of the meeting to each stockholder entitled to
vote at such meeting. If mailed, such notice is given when
deposited in the United States mail, with postage thereon
prepaid, directed to the stockholder at his address as it appears
on the records of the Corporation.
When a meeting is adjourned to another time or place, it shall
not be necessary to give any notice of the adjourned meeting if
the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and
at the adjourned meeting any business may be transacted that
might have been transacted on the original date of the meeting.
However, if the adjournment is for more than 30 days, or if after
the adjournment, the Board of Directors fixes a new record date
for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at
the adjourned meeting.
Section 5. Waiver of Notice. Notice of meeting need not be
given to any stockholder who submits a signed waiver of
notice, in person or by proxy, whether before or after the
meeting. The attendance of any stockholder at a meeting, in
person or by proxy, without protesting prior to the conclusion of
the meeting the lack of notice of such meeting, shall constitute
a waiver of notice by him.
Section 6. Inspectors of Election. The Board of Directors, in advance
of any stockholders' meeting, may appoint one or more
inspectors to act at the meeting or any adjournment thereof. If
inspectors are not so appointed, the person presiding at a
stockholders' meeting may, and on the request of any stockholder
entitled to vote thereat shall, appoint two inspectors. In case
any person appointed fails to appear or act, the vacancy may be
filled by appointment made by the Board in advance of the meeting
or at the meeting by the person presiding thereat. Each
inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of
inspector at such meeting with strict impartiality and according
to the best of his ability.
The inspectors shall determine the number of shares outstanding
and the voting power of each, the shares represented at the
meeting, the existence of a quorum,
2
<PAGE> 3
and the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the result,
and do such acts as are proper to conduct the election or vote
with fairness to all stockholders. On request of the person
presiding at the meeting or any stockholder entitled to vote
thereat, the inspectors shall make a report in writing of any
challenge, question or matter determined by them and execute a
certificate of any fact found by them. Any report or certificate
made by them shall be prima facie evidence of the facts stated
and of the vote as certified by them.
Section 7. List of Stockholders at Meetings. A list of stockholders as
of the record date, certified by the Secretary or
any Assistant Secretary or by a transfer agent, shall be prepared
and shall be open to examination of any stockholder as provided
in the General Corporation Law of the State of Delaware. If the
right to vote at any meeting is challenged, the inspectors of
election, or person presiding thereat, shall require such list of
stockholders to be produced as evidence of the right of the
persons challenged to vote at such meeting and all persons who
appear from such list to be stockholders entitled to vote thereat
may vote at such meeting.
Section 8. Qualification of Voters. Unless otherwise provided in the
certificate of incorporation, every stockholder of
record shall be entitled at every meeting of stockholders to
one vote for every share standing in his name on the record of
stockholders.
Treasury shares as of the record date and shares held as of the
record date by another domestic or foreign corporation of any
type or kind, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held as of the
record date by the Corporation, shall not be shares entitled to
vote or to be counted in determining the total number of
outstanding shares.
Shares held by an administrator, executor, guardian,
conservator, committee, trustee or other fiduciary, may, if
properly authorized, be voted by him, either in person or by
proxy, without transfer of such shares into his name.
3
<PAGE> 4
Shares standing in the name of another domestic or foreign
corporation of any type or kind may, if properly authorized, be
voted by such officer, agent or proxy as the by-laws of such
corporation may provide, or, in the absence of such provision, as
the board of directors of such corporation may determine.
A stockholder shall not sell his vote or issue a proxy to vote
to any person for any sum of money or anything of value except as
permitted by law.
Section 9. Quorum of Stockholders. The holders of a majority of the shares
entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at a meeting of stockholders
for the transaction of any business, provided that
when a specified item of business is required to be
voted on by a class or series, voting as a class, the holders of
a majority of the shares of such class or series shall constitute
a quorum for the transaction of such specified item of business.
When a quorum is once present to organize a meeting, it is not
broken by the subsequent withdrawal of any stockholders.
The stockholders who are present in person or by proxy and who
are entitled to vote may, by a majority of votes cast, adjourn
the meeting despite the absence of a quorum.
Section 10. Proxies. Every stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent without a meeting
may authorize another person or persons to act for him by proxy.
Every proxy must be signed by the stockholder or his
attorney-in-fact. No proxy shall be valid after the expiration
of one year from the date thereof unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except as otherwise provided by law.
The authority of the holder of a proxy to act shall not be
revoked by the incompetence or death of the stockholder who
executed the proxy unless before the authority is exercised,
written notice of an adjudication of such incompetence or of such
death is received by the Secretary or any Assistant Secretary.
4
<PAGE> 5
Section 11. Vote or Consent of Stockholders. Directors shall,
except as otherwise required by law, be elected by a plurality of
the votes cast at a neeting of stockholders by the holders of
shares entitled to vote in the election.
Whenever any corporate action, other than the election of
directors, is to be taken by vote of stockholders, it shall,
except as otherwise required by law, be authorized by a majority
of the votes cast at a meeting of stockholders by the holders of
shares entitled to vote thereon.
Whenever stockholders are required or permitted to take any
action by vote, such action may be taken without a meeting,
without prior notice, and without a vote, on written consent,
setting forth the action so taken, signed by the holders of
outstanding stock, having not less than the minimum numbers of
votes that would be necessary to authorize or take such action at
a meeting at which all shares entitled to vote thereon were
present and voted. Written consent thus given by such holders so
entitled to vote shall have the same effect as a vote of
stockholders at a meeting duly called and held. Prompt notice of
the taking of such action without a meeting by less than the
unanimous consent of all stockholders shall be given to those
stockholders who did not consent in writing.
Section 12. Fixing Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to
express consent to or dissent from any proposal without a
meeting, or for the purpose of determining stockholders entitled
to receive payment of any dividend or the allotment of any
rights, or for the purpose of any other action, the Board of
Directors may fix, in advance, a date as the record date for any
such determination of stockholders. Such date shall not be more
than 60 nor less than 10 days before the date of such meeting,
nor more than 60 days prior to any other action.
When a determination of stockholders of record entitled to
notice of or to vote at any meeting of stockholders has been made
as provided in this section, such determination shall apply to
any adjournment thereof, unless the Board of Directors fixes a
new record date for the adjourned meeting.
5
<PAGE> 6
ARTICLE II - BOARD OF DIRECTORS
Section 1. Power of Board and Qualification of Directors. The
business of the Corporation shall be managed by the Board
of Directors. Each director shall be at least 18 years of
age.
Section 2. Number of Directors. The number of directors constituting
the entire Board of Directors shall be the number, not less
than one nor more than 15, fixed from time to time by a
majority of the total number of directors which the
Corporation would have, prior to any increase or decrease,
if there were no vacancies, provided, however, that no
decrease shall shorten the term of an incumbent director.
Until otherwise fixed by the directors, the number of
directors constituting the entire Board shall be three.
Section 3. Election and Term of Directors. At each annual meeting of
stockholders, directors shall be elected to hold office
until the next annual meeting and until their successors
have been elected and qualified or until their respective
deaths, resignations or removals in the manner hereinafter
provided. A majority of the Board, shall at each annual
meeting of directors elect a Chairman of the Board whose
duty shall be to preside at all meetings of the Board and
such other duties as the Board may prescribe.
Section 4. Quorum of Directors and Action by the Board. A majority of
the entire Board of Directors shall constitute a quorum for
the transaction of business, and, except where otherwise
provided by these by-laws, the vote of a majority of the
directors present at a meeting at the time of such vote, if
a quorum is then present, shall be the act of the Board.
Any action required or permitted to be taken by the Board
of Directors or any committee thereof may be taken without
a meeting if all members of the Board or the committee
consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written
consent thereto by the members of the Board or committee
shall be filed with the minutes of the proceedings of the
Board or committee.
Section 5. Meetings of the Board. An annual meeting of the Board of
Directors shall be held in each year directly after the
annual meeting of stockholders. Regular meetings of the
Board shall be held at such times as may be fixed by the
Board. Special meetings of the Board may be held at
6
<PAGE> 7
any time upon the call of the President, any two directors
or by the Secretary at the direction of any of the
foregoing.
Meetings of the Board of Directors shall be held at such
places as may be fixed by the Board for annual and regular
meetings and set forth in the notice of meeting for special
meetings. If no place is so fixed, meetings of the Board
shall be held at the office of the Corporation.
No notice need be given of annual or regular meetings of
the Board of Directors. Notice of each special meeting of
the Board shall be given to each director either by mail
not later than noon, New York time, on the third day prior
to the meeting or by telegram, written message or orally to
the director not later than noon, New York time, on the day
prior to the meeting. Notices are deemed to have been
given: by mail, when deposited in the United States mail;
by telegram at the time of filing; and by messenger at the
time of delivery. Notices by mail, telegram or messenger
shall be sent to each director at the address designated by
him for the purpose, or, if none has been so designated, at
his last known residence or business address.
Notice of a meeting of the Board of Directors need not be
given to any director who submits a signed waiver of notice
whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its
commencement, the lack of notice to him.
A notice, or waiver of notice, need not specify the purpose
of any meeting of the Board of Directors.
A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another time
and place. Notice of any adjournment of a meeting to
another time or place shall be given, in the manner
described above, to the directors who were not present at
the time of the adjournment and, unless such time and place
are announced at the meeting, to the other directors.
Section 6. Resignations. Any director of the Corporation may resign
at any time by giving written notice to the Board of
Directors, President or to the Secretary of the
Corporation. Such resignation shall take effect at the time
specified therein; and unless otherwise specified therein
the acceptance of such resignation shall not be necessary
to make it effective.
7
<PAGE> 8
Section 7. Removal of Directors. Any one or more of the directors may
be removed for cause by action of the Board of Directors.
Any or all of the directors may be removed with or without
cause by vote of the stockholders.
Section 8. Newly Created Directorships and Vacancies. Newly created
directorships resulting from an increase in the number of
directors and vacancies occurring in the Board of Directors
for any reason except the removal of directors by
stockholders may be filled by vote of a majority of the
directors then in office, although less than a quorum
exists. Vacancies occurring as a result of the removal of
directors by stockholders shall be filled by the
stockholders. A director elected to fill a vacancy shall
be elected to hold office for the unexpired term of his
predecessor.
Section 9. Executive and Other Committees of Directors. The Board of
Directors, by resolution adopted by a majority of the
entire Board, may designate from among its members an
executive committee and other committees each consisting of
two or more directors and each of which, to the extent
provided in the resolution and subject to the provisions of
the General Corporation Law of the State of Delaware, shall
have, in addition, the power and authority of the Board.
The executive committee shall have, in addition, the power
and authority to declare a dividend or to authorize the
issuance of capital stock of the Corporation.
The Board of Directors may designate one or more directors
as alternate members of any such committee, who may replace
any absent member or members at any meeting of such
committee.
Unless a greater proportion is required by the resolution
designating a committee, a majority of the entire
authorized number of members of such committee shall
constitute a quorum for the transaction of business, and
the vote of a majority of the members present at a meeting
at the time of such vote, if a quorum is then present,
shall be the act of such committee.
Each such committee shall serve at the pleasure of the
Board of Directors.
Section 10. Compensation of Directors. The Board of Directors shall
have authority to fix the compensation of directors for
services in any capacity.
8
<PAGE> 9
Section 11. Conference Telephone or Like Meetings. Members of the
Board of Directors or any committee thereof may participate
in a meeting of said Board or committee by means of a
conference telephone or similar communications equipment by
means of which all persons participating in the meeting can
hear each other.
ARTICLE III - OFFICERS
Section 1. Officers. The Board of Directors, as soon as may be
practicable after the annual election of directors, shall
elect a President, one or more Vice Presidents, a
Secretary, a Treasurer, and from time to time may elect or
appoint such other officers as it may determine. Any two
or more offices may be held by the same person.
Section 2. Other Officers. The Board of Directors may appoint such
other officers and agents as it shall deem necessary who
shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined
from time to time by the Board.
Section 3. Compensation. The salaries of all officers and agents of
the Corporation shall be fixed by the Board of Directors.
Section 4. Term of Office and Removal. Each officer shall hold office
for the term for which he is elected or appointed, and
until his successor has been elected or appointed and
qualified. Unless otherwise provided in the resolution of
the Board of Directors electing or appointing an officer,
his term of office shall extend to and expire at the
meeting of the Board following the next annual meeting of
stockholders. Any officer may be removed by the Board, with
or without cause, at any time. Removal of an officer
without cause shall be without prejudice to his contract
rights, if any, and the election or appointment of an
officer shall not of itself create contract rights.
Section 5. Powers and Duties.
(a) President: The President shall be the chief executive
officer of the Corporation, shall have general and active
management of the business of the Corporation and shall see
that all orders and resolutions of the Board of Directors
are carried into effect. He shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the
signing and execution
9
<PAGE> 10
thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the
Corporation. The President shall perform such other duties
and have such other responsibilities as may be given from
time to time by the Board of Directors or the By-Laws of
the Corporation.
(b) Vice Presidents: The Vice Presidents, in the order
designated by the Board of Directors, or in the absence of
any designation, then in the order of their election,
during the absence or disability of or refusal to act by
the President, shall perform the duties and exercise the
powers of the President, and shall perform such other
duties as the Board of Directors shall prescribe.
(c) Secretary and Assistant Secretaries: The Secretary
shall attend all meetings of the Board of Directors and all
meetings of the stockholders and record all the proceedings
of the meetings of the Corporation and of the Board of
Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when
required. He shall give, or cause to be given, notice of
all meetings of the stockholders and special meetings of
the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. He shall
have custody of the corporate seal of the Corporation and
he, or an Assistant Secretary, shall have authority to
affix the same to any instrument requiring it and when so
affixed, it may be attested by his signature or by the
signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer
to affix the seal of the Corporation and to attest the
affixing by his signature.
The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board
of Directors (or if there be no such determination, then in
the order of their election), shall, in the absence of the
Secretary or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such
other powers as the Board of Directors may from time to
time prescribe.
(d) Treasurer and Assistant Treasurers: The Treasurer
shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the
10
<PAGE> 11
Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors.
He shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of
Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions
as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, he shall give the
Corporation a bond (which shall be renewed every six years) in
such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration,
retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his
possession or under his control belonging to the Corporation.
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer
or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
Section 6. Books to be Kept. The Corporation shall keep (a) correct and
complete books and records of account, (b) minutes of the
proceedings of the stockholders, Board of Directors and any
committees of directors, and (c) a current list of the directors
and officers and their residence addresses; and the Corporation
shall also keep at its office or at the office of its transfer
agent or registrar if any, a record containing the names and
addresses of all stockholders, the number and class of shares held
by each.
The Board of Directors may determine whether and to what extent
and at what times and places and under what conditions and
regulations any accounts, books, records or other documents of
the Corporation shall be open to inspection, and no creditor,
security holder or other person shall have any right to inspect
any accounts, books, records or other documents of the
Corporation
11
<PAGE> 12
except as conferred by statute or as so authorized by the
Board.
Section 7. Checks, Notes, etc. All checks and drafts on, and
withdrawals from the Corporation's accounts with banks or
other financial institutions, and all bills of exchange,
notes and other instruments for the payment of money,
drawn, made, endorsed, or accepted by the Corporation,
shall be signed on its behalf by the person or persons
thereunto authorized by, or pursuant to resolution of, the
Board of Directors.
Section 8. Execution of Proxies. The President and such other
officers as may be authorized by the Board of Directors are
authorized to execute for and on behalf of the Corporation
proxies with respect to securities owned, directly or
indirectly, by the Corporation.
ARTICLE IV - FORMS OF CERTIFICATES AND LOSS AND TRANSFER OF SHARES
Section 1. Forms of Share Certificates. The shares of the Corporation
shall be represented by certificates, in such forms as the
Board of Directors may prescribe, signed by the Chairman of
the Board, the President or a Vice President and the
Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the
officers upon a certificate may be facsimiles if the
certificate is countersigned by a transfer agent or
registered by a registrar other than the Corporation or its
employee. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate
shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer at the date
of issue.
Each certificate representing shares issued by the
Corporation shall set forth upon the face or back of the
certificate, or shall state that the Corporation will
furnish to any stockholder upon request and without charge,
a full statement of the designation, relative rights,
preferences and limitations of the shares of each class of
shares, if more than one, authorized to be issued and the
designation, relative rights, preferences and limitations
of each series of any class of preferred shares authorized
to be issued so far as the same have been fixed, and the
authority of the Board of Directors to designate and fix
the relative rights, preferences and limitations of other
series.
12
<PAGE> 13
Each certificate representing shares shall state upon the face
thereof:
(1) that the Corporation is formed under the laws of the State
of Delaware;
(2) the name of the person or persons to whom issued; and
(3) the number and class of shares, and the designation of the
series, if any, which such certificate represents.
Section 2. Transfers of Shares. Shares of the Corporation shall be
transferable on the record of stockholders upon presentment to the
Corporation or a transfer agent of a certificate or certificates
representing the shares requested to be transferred, with proper
endorsement on the certificate or on a separate accompanying
document, together with such evidence of the payment of transfer
taxes and compliance with other provisions of law as the
Corporation or its transfer agent may require.
Section 3. Lost, Stolen or Destroyed Share Certificates. No certificate for
shares of the Corporation shall be issued in place of any
certificate alleged to have been lost, destroyed or wrongfully
taken, except, if and to the extent required by the Board of
Directors, upon:
(1) production of evidence of loss, destruction or wrongful
taking;
(2) delivery of a bond indemnifying the Corporation and its
agents against any claim that may be made against it or them on
account of the alleged loss, destruction or wrongful taking of
the replaced certificate or the issuance of the new certificate;
(3) payment of the expenses of the Corporation and its agents
incurred in connection with the issuance of the new certificate;
and
(4) compliance with such other reasonable requirements as may be
imposed.
ARTICLE V - INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as
the same may be amended and
13
<PAGE> 14
supplemented, (i) indemnify all officers and directors of the
Corporation from and against any and all expenses (including
attorneys' fees), liabilities or other matters permitted by said
section, and (ii) advance to each officer and director expenses
(including attorneys' fees) incurred by such officers and
directors in defending a civil or criminal action, suit or
proceeding. The indemnification and advancement of expenses
provided for herein shall not be deemed exclusive of any other
rights of indemnification or advancement of expenses to which any
officer or director may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise,
both as to action in their official capacities and as to action
in another capacity while holding such offices, and shall
continue as to persons who have ceased to be officers or
directors of the Corporation and shall inure to the benefit of
the heirs, executors and administrators of such persons.
ARTICLE VI - OTHER MATTERS
Section 1. Corporate Seal. The Board of Directors may adopt a corporate
seal, alter such seal at its pleasure, and authorize it to be
used by causing it or a facsimile to be affixed or impressed or
reproduced in any other manner.
Section 2. Fiscal Year. The fiscal year of the Corporation shall be such
period as from time to time may be fixed by the Board of
Directors.
Section 3. Amendments. By-laws of the Corporation may be adopted, amended
or repealed by vote of the holders of the shares at the time
entitled to vote in the election of any directors. By-laws may
also be adopted, amended or repealed by the Board of Directors,
but any by-law adopted by the Board may be amended or repealed by
the stockholders entitled to vote thereon as hereinabove
provided.
If any by-law regulating an impending election of directors is
adopted, amended or repealed by the Board of Directors, there
shall be set forth in the notice of the next meeting of
stockholders for the election of directors the by-law so adopted,
amended or repealed, together with a concise statement of the
changes made.
Section 4. Construction. To the extent that the context shall permit, any
masculine pronoun used herein shall be construed to include also
the similar feminine pronoun.
* * *
14
<PAGE> 1
EXHIBIT 10(j)
THIRD AMENDMENT
TO
CREDIT AGREEMENT
THIS THIRD AMENDMENT, dated as of September 9, 1996, amends and modifies a
certain Credit Agreement, dated as of April 21, 1994, as amended pursuant to a
First Amendment to Credit Agreement, dated as of July 17, 1995, and a Second
Amendment to Credit Agreement, dated as of June 30, 1996 (as so amended, the
"CREDIT AGREEMENT"), between WMS INDUSTRIES, INC., a Delaware corporation (the
"BORROWER") and BANK OF AMERICA ILLINOIS (formerly known as Continental Bank
N.A. and hereinafter referred to as the "LENDER"). Capitalized terms not
otherwise expressly defined herein shall have the meanings set forth in the
Credit Agreement.
PRELIMINARY STATEMENT
The Borrower and the Lender desire to amend the Credit Agreement to
increase the Commitment and to amend other provisions of the Credit Agreement
as hereinafter set forth.
NOW THEREFORE, for value received, the Borrower and the Lender agree as
follows:
ARTICLE I - AMENDMENTS TO THE CREDIT AGREEMENT
1.1 DEFINITIONS. The following definitions set forth in Article 1 of the
Credit Agreement are hereby amended as of the date hereof:
(a) COMMITMENT. The definition of the term "Commitment" is hereby
amended to read in its entirety as follows:
"'Commitment' means the Lender's commitment to make Revolving Credit
available to the Borrower in accordance with the terms of this Agreement
in an aggregate amount not to exceed $50,000,000."
(b) TERMINATION DATE. The definition of the terms "Termination Date" is
hereby amended to read in its entirety as follows:
"'Termination Date' means the earlier of the date on which the Lender
makes demand on the Borrower for repayment of all amounts due hereunder,
or August 31, 1997."
1.2 SECTION 2.1. Section 2.1 of the Credit Agreement (Revolving Credit
Commitment) is hereby amended as of the date hereof to read in its entirety as
follows:
"SECTION 2.1. Revolving Credit Commitment. Subject to the terms
and conditions hereof and the other Loan Documents, the Lender agrees to
extend credit to the Borrower under a revolving credit facility (the
"Revolving Credit") which may be availed of by the Borrower in its
discretion on a revolving basis from time to time to and including the
Termination Date. The Revolving Credit, subject to all the terms and
conditions hereof, may be utilized by the Borrower in the form of loans
(the "Revolving Loans") and commercial and standby letters of credit (the
"Letters of Credit") all as more fully hereinafter set forth, provided
that, notwithstanding anything herein to the contrary, the aggregate
amount of Revolving Loans and Letter of Credit Utilization outstanding
at any one time shall not exceed the Commitment and provided further
that, during any calendar year, the aggregate outstanding amount of
Revolving Loans and Letter of Credit Utilization must be reduced to
zero for 60 consecutive calendar days."
<PAGE> 2
1.3 SECTION 2.5. Section 2.5 of the Credit Agreement (Revolving Note) is
hereby amended as of the date hereof to read in its entirety as follows:
"SECTION 2.5. Revolving Note. All Revolving Loans made by the
Lender under this Agreement shall be evidenced by, and repaid with
interest in accordance with, a single promissory note of the Borrower in
substantially the form of Exhibit A to the Third Amendment hereto duly
completed, in the principal amount of Fifty Million Dollars
($50,000,000), dated the date of such Third Amendment and payable to the
Lender (the "Revolving Note"). The Lender is hereby authorized by the
Borrower to record in its records the amount of each Revolving Loan and
each payment of principal received by the Lender on account of the
Revolving Loans, which records shall, in the absence of demonstrable
error, be conclusive as to the outstanding balance of the Revolving Loans
made by the Lender."
1.4 SECTION 5.11. Section 5.11 of the Credit Agreement (Short Term Asset
Management Account) is hereby deleted as of the date hereof in its entirety.
1.5 SECTION 7.1. Section 7.1, subparagraph (3) of the Credit Agreement (Events
of Default) is hereby amended as of the date hereof to read in its entirety as
follows:
"(3) The Borrower or any Subsidiary shall fail to perform or
observe any term, covenant or agreement contained in Sections 2.3, 2.4,
2.5, 2.9, 5.6 through 5.9, 6.3 through 6.5 of this Agreement applicable
thereto;"
1.6 SECTION 9.1. Section 9.1 of the Credit Agreement (Purchasing Letter of
Credit Facility) is hereby amended as of the date hereof to read in its
entirety as follows:
"SECTION 9.1. Purchasing Letter of Credit Facility. Subject to the
terms and conditions hereof and the other Loan Documents, the Lender may,
in its sole and absolute discretion, extend credit to the Borrower under
a purchasing letter of credit facility (the "Purchasing LC Facility")
during the period from the date of the Third Amendment hereto to and
including the Termination Date. The Purchasing LC Facility, subject to
all of the terms and conditions hereof, may be utilized by the Borrower
in the sole discretion of the Lender, to request documentary commercial
letters of credit relating to the purchase of product (the "Purchasing
Letters of Credit") all as more fully hereinafter set forth, provided
that notwithstanding anything herein to the contrary, the aggregate
amount of all issued Purchasing Letters of Credit outstanding at any one
time shall not exceed $30,000,000 and provided further that, commencing
March 31, 1997 and for 60 consecutive days thereafter, the aggregate
amount of all issued Purchasing Letters of Credit outstanding at any one
time shall not exceed $10,000,000."
1.7 SECTION 9.2. Section 9.2 of the Credit Agreement (Purchasing Letters
of Credit) is hereby amended as of the date hereof to delete the
reference to "December 31, 1995" and to insert in lieu thereof the term
"the Termination Date."
1.8 NOTE. A Replacement Note, substantially in the form set forth as
Exhibit A to this Amendment (the "NOTE"), shall be executed and delivered
by the Borrower and shall be and constitute the "Revolving Note" for
purposes of all references thereto in the Credit Agreement.
1.9 CONSTRUCTION. All references in the Credit Agreement to "this
Agreement," "herein" and similar references shall be deemed to refer to
the Credit Agreement as amended by this Amendment.
<PAGE> 3
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Amendment and to make and
maintain the Revolving Loans and Letters of Credit under the Credit
Agreement as amended hereby, the Borrower hereby warrants and represents
to the Lender that it is duly authorized to execute and deliver this
Amendment, and to perform its obligations under the Credit Agreement as
amended hereby, and that this Amendment constitutes the legal, valid and
binding obligation of the Borrower, enforceable in accordance with its
terms.
ARTICLE III - CONDITIONS PRECEDENT
This Amendment shall become effective on the date first set forth
above; provided, however, that the effectiveness of this Amendment is
subject to the satisfaction of each of the following conditions
precedent:
3.1 WARRANTIES. Before and after giving effect to this Amendment, the
representations and warranties in Article 4 of the Credit Agreement shall
be true and correct as though made on the date hereof, except for changes
that are permitted by the terms of the Credit Agreement. The execution
by the Borrower of this Amendment shall be deemed a representation that
the Borrower has complied with the foregoing condition.
3.2 DEFAULTS. Before and after giving effect to this Amendment, no Event
of Default and no event which with the giving of notice or passing of
time shall become an Event of Default shall have occurred and be
continuing under the Credit Agreement. The execution by the Borrower of
this Amendment shall be deemed a representation that the Borrower has
complied with the foregoing condition.
3.3 DOCUMENTS. The following shall have been delivered to the Lender,
each duly executed and dated, or certified, as of the date hereof, as the
case may be:
(a) NOTE. The duly executed Note.
(b) RESOLUTIONS. Certified copies of resolutions of the Board of
Directors of the Borrower authorizing or ratifying the execution,
delivery and performance, respectively, of this Amendment, the Note and
other documents provided for in this Amendment.
(c) CONSENTS. Certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if any)
with respect to this Amendment and the Note.
(d) INCUMBENCY AND SIGNATURES. A certificate of the Secretary or an
Assistant Secretary of the Borrower certifying the names of the officer
or officers of the Borrower authorized to sign this Amendment and the
Note and other documents provided for in this Amendment, together with a
sample of the true signature of each such officer.
(e) CERTIFICATE OF INCORPORATION AND BY-LAWS. A certified copy of any
amendment or restatement of the Certificate or Articles of Incorporation
or the By-laws of the Borrower made or entered following date of the
most recent certified copies furnished to the Lender.
ARTICLE IV - GENERAL
4.1 EXPENSES. The Borrower agrees to reimburse the Lender upon demand for all
reasonable expenses, including reasonable fees of attorneys (including the
allocated cost of in-house counsel to the
<PAGE> 4
Lender) and legal expenses, incurred by the Lender in the preparation,
negotiation and execution of this Amendment and any other document required to
be furnished herewith, and in enforcing the obligations of the Borrower
hereunder, and to pay and save the Lender harmless from all liability for, any
stamp or other taxes which may be payable with respect to the execution or
delivery of this Amendment or the issuance of the Note hereunder, which
obligations of the Borrower shall survive any termination of the Credit
Agreement.
4.2 COUNTERPARTS. This Amendment may be executed in as many counterparts as
may be deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
4.3 SEVERABILITY. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
4.4 LAW. This Amendment shall be a contract made under the laws of the State
of Illinois, which laws shall govern all the rights and duties hereunder.
4.5 SUCCESSORS; ENFORCEABILITY. This Amendment shall be binding upon the
Borrower and the Lender and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Lender and the successors and
assigns of the Lender. Except as hereby amended, the Credit Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed at Chicago, Illinois by their respective officers thereunto duly
authorized as of the date first written above.
WMS INDUSTRIES, INC.
By: /s/ Harold H. Bach, Jr.
----------------------------
Title: VP Finance
-----------------------
Address:
3401 North California Avenue
Chicago, Illinois 60618
Attention: Harold H. Bach, Jr.
Vice President & CFO
Telephone: (312) 728-2300
Fax No.: (312) 539-2099
BANK OF AMERICA ILLINOIS
By: /s/ L. Richard DiDonato
------------------------
Title: Vice President
---------------------
Address:
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Rick DiDonato
Telephone: (312) 828-1995
Fax No.: (312) 828-1974
<PAGE> 5
EXHIBIT A
FORM OF REVOLVING NOTE
$50,000,000
September 9, 1996
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned, WMS INDUSTRIES, INC. (the
"BORROWER"), promises to pay to the order of BANK OF AMERICA ILLINOIS (the
"LENDER") at its principal office in Chicago, Illinois, the principal amount of
FIFTY MILLION AND NO/100 DOLLARS ($50,000,000) or, if less, the aggregate unpaid
principal amount of all Revolving Loans, as such term is defined in the Credit
Agreement (defined below) outstanding, as duly shown in the records of the
Lender, on the Termination Date. Capitalized terms used herein and not
otherwise defined herein shall have the meanings given such terms in the Credit
Agreement.
The Borrower also promises to pay interest on the unpaid principal
amount hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Credit Agreement.
Payments of both principal and interest are to be made in lawful money
of the United States of America in immediately available funds.
This Note is the Revolving Note described in, and is subject to the
terms and provisions of, the Credit Agreement, dated as of April 21, 1994, as
amended pursuant to the First Amendment to Credit Agreement, dated as of July
17, 1995 and a Second Amendment to Credit Agreement, dated as of June 30, 1996,
and a Third Amendment to Credit Agreement, dated as of September 9, 1996 (as
the same may at any time be further amended, modified or supplemented from time
to time, the "CREDIT AGREEMENT"), between the Borrower and the Lender. This
Note is issued in replacement of that certain Revolving Note, dated April 21,
1994, of the Borrower payable to the order of the Lender in the principal
amount of $25,000,000.
Reference is hereby made to the Credit Agreement for a statement of the
prepayment rights and obligations of the Borrower and for a statement of the
terms and conditions under which the due date of this Note may be accelerated.
Upon the occurrence of any Event of Default as specified in the Credit
Agreement, the principal balance hereof and the interest accrued hereon may be
declared to be forthwith due and payable, and any indebtedness of the Lender or
other holder hereof to the Borrower may be appropriated and applied hereon.
In addition to and not in limitation of the foregoing and the
provisions of the Credit Agreement, the Borrower further agrees, subject only
to any limitation imposed by applicable law, to pay all expenses, including
reasonable attorneys' fees and legal expenses, incurred by the holder of this
Note in endeavoring to collect any amounts payable hereunder which are not paid
when due, whether by acceleration or otherwise.
<PAGE> 6
All parties hereto, whether as makers, endorsers, or otherwise,
severally waive presentment for payment, demand, protest and notice of dishonor.
THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW
PRINCIPLES.
WMS INDUSTRIES, INC.
By:
--------------------------
Title:
----------------------
Address:
3401 North California Avenue
Chicago, Illinois 60618
Attention: Harold H. Bach, Jr.
Vice President & CFO
Telephone (312) 728-2300
Fax No: (312) 539-2099
<PAGE> 1
EXHIBIT 13
FINANCIAL INFORMATION
<TABLE>
<S> <C>
Selected Financial Data 10
- ------------------------------------------------------------------------------
Management's Discussion 11
- ------------------------------------------------------------------------------
Market for Company's Common Stock
- ------------------------------------------------------------------------------
and Related Security-Holder Matters 15
- ------------------------------------------------------------------------------
Report of Independent Auditors 15
- ------------------------------------------------------------------------------
Consolidated Balance Sheets 16
- ------------------------------------------------------------------------------
Consolidated Statements of Income 17
- ------------------------------------------------------------------------------
Consolidated Statements of Changes
- ------------------------------------------------------------------------------
in Stockholders' Equity 18
- ------------------------------------------------------------------------------
Consolidated Statements of Cash Flows 19
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 20
- ------------------------------------------------------------------------------
Quarterly Financial Information 27
- ------------------------------------------------------------------------------
Industry Segments 28
- ------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 2
WMS Industries Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SELECTED STATEMENT OF INCOME DATA (4) June 30, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $338,625 $314,494 $282,733 $260,449 $164,656
- ----------------------------------------------------------------------------------------------------------------
Operating income 10,787 33,250 38,930 38,428 19,334
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 11,457 35,087 39,539 39,510 19,555
- ----------------------------------------------------------------------------------------------------------------
Provision (credit) for income taxes 3,980 12,075 13,273 14,573 (2,949)
- ----------------------------------------------------------------------------------------------------------------
Income from continuing operations 7,477 (2) 23,012 26,266 24,937 22,504
Income (loss) - discontinued operations (2,938) (3) (3,805) 2,217 5,772 2,511
- ----------------------------------------------------------------------------------------------------------------
Net income 4,539 19,207 28,483 30,709 25,015
================================================================================================================
Income (loss) per share of common stock
Continuing operations $ .31 (2) $ .96 $ 1.10 $ 1.07 $ 1.09 (1)
Discontinued operations (.12) (3) (.16) .09 .24 .12
- ----------------------------------------------------------------------------------------------------------------
Net income .19 .80 1.19 1.31 1.21 (1)
- ----------------------------------------------------------------------------------------------------------------
Shares used in calculating per share amounts 24,122 24,102 24,016 23,374 20,631
================================================================================================================
SELECTED BALANCE SHEET DATA
Total assets $356,445 $325,500 $274,965 $234,259 $146,196
- ----------------------------------------------------------------------------------------------------------------
Working capital 145,630 140,218 143,091 159,431 75,361
- ----------------------------------------------------------------------------------------------------------------
Long-term debt 65,363 57,500 57,500 57,500 -
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity 210,033 208,571 181,472 152,475 115,386
================================================================================================================
</TABLE>
(1) On July 1, 1991 the Company had a net operating loss carryforward for tax
purposes and could not recognize the expected future tax benefits from
these loss carryforwards under SFAS 109. The tax benefits from the net
operating loss carryforwards were recognized in the year ended June 30,
1992 resulting in a reduced provision for income taxes. Income from
continuing operations and net income per share would have been $.70 and
$.82, respectively, for fiscal 1992 if calculated on a fully taxed basis
comparable to subsequent years.
(2) On June 27, 1996 the Company announced the downsizing of the pinball
machine business. In connection with this action, the Company recorded
restructuring and other after tax charges of $2,091,000, $.09 per share.
(3) Income (loss) - discontinued operations for fiscal 1996 includes an after
tax charge of $5,891,000, $.24 per share, for costs related to the
discontinuance. See Note 4 in the Notes to Consolidated Financial
Statements.
(4) All prior year selected financial data are restated to reflect the hotel
and casino segments as discontinued operations because of the decision to
spin-off the hotel and casino business. See Note 1 in the Notes to
Consolidated Financial Statements
10
<PAGE> 3
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in the forward looking statements.
FINANCIAL CONDITION
Cash flows used by operating, investing and financing activities before
discontinued operations during fiscal 1996 was $19,329,000 as compared with net
cash provided of $17,566,000 during fiscal 1995.
Cash provided by operating activities before changes in operating assets
and liabilities was $16,970,000 during fiscal 1996 and $37,093,000 during
fiscal 1995. The decrease in fiscal 1996 was primarily due to cash used to fund
the loss of the, now restructured, pinball and novelty segment and to a lesser
extent, payment of deferred income taxes.
The changes in operating assets and liabilities, as shown in the
consolidated statements of cash flows, resulted in $42,540,000 of cash outflow
during fiscal 1996 compared with a cash outflow of $12,745,000 during fiscal
1995. Cash outflow in fiscal 1996 was primarily due to increased inventories,
reduction in payables and accruals, and payment of income taxes.
Cash provided by investing activities was $5,814,000 in fiscal 1996
compared with cash used of $6,819,000 in fiscal 1995. Cash used for the
purchase of property, plant and equipment during fiscal 1996 was $11,460,000
compared with $17,408,000 in fiscal 1995. Cash used for the additional purchase
price of Tradewest was $11,476,000 in fiscal 1996 and $3,024,000 in fiscal
1995. On the date of acquisition Atari Games had cash in excess of the amount
used for its acquisition resulting in a $7,996,000 increase in cash during
fiscal 1996.
See the consolidated statements of cash flows on page eleven for further
details of cash flow items.
The home video game business is highly seasonal and significant working
capital is required to finance high levels of inventories and accounts
receivable during certain months of the fiscal year. In addition, certain home
video game manufacturers that supply the Company require letters of credit for
the full purchase price at the time the purchase order is accepted.
WMS Industries Inc. has an uncollateralized bank line of credit which
provides for borrowing up to $50,000,000 and for WMS and its US operating
subsidiaries to have letters of credit up to $80,000,000 outstanding, reduced
for any borrowing on the line of credit. At June 30, 1996, there were no
borrowings from this line of credit but there were outstanding letters of
credit totaling $379,000. Management believes that cash and cash equivalents,
short-term investments, cash flow from operations and amounts available under
the line of credit will be adequate to fund the level of inventories and
receivables required in the operations of the business and the growth thereof
as well as pay any amounts due in fiscal 1997 and 1998 under the Tradewest and
Atari Games acquisitions.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED WITH FISCAL 1995
Segment data discussed below is taken or derived from segment disclosures in
Note 18 to the consolidated financial statements.
Consolidated revenues increased $24,131,000 or 7.7% from $314,494,000 in
fiscal 1995 to $338,625,000 in fiscal 1996. Video games revenue increased
$64,944,000 or 36% in fiscal 1996 primarily because it was the first year the
Company published home video games based on its coin-operated video games.
Gaming revenues increased $15,351,000 or 69.2% in fiscal 1996 primarily because
the Company began selling slot machines during the second half of
fiscal 1996. Pinball and novelty revenues decreased by $56,164,000 or 50.2% in
fiscal 1996 primarily due to an industry wide decline in demand for pinball
games.
Consolidated gross profit increased $15,035,000 or 15.8% from $95,332,000
(30.3% of revenues) in fiscal 1995 to $110,367,000 (32.6% of revenues) in
fiscal 1996. The increase was primarily due to a $26,640,000 increase in video
games gross profit partially offset by a $15,444,000 decrease in pinball and
novelty gross profit.
Consolidated research and development expenses increased $18,852,000 or
69.6% from $27,079,000 (8.6% of revenues) in fiscal 1995 to $45,931,000 (13.6%
of revenues) in fiscal 1996. $17,834,000 of the increase was from the video
game segment and the remaining increase was primarily from the gaming segment.
Consolidated selling and administrative expense increased $18,646,000 or
53.3% from $35,003,000 (11.1% of revenues) in fiscal 1995 to $53,649,000 (15.8%
of revenues) in fiscal 1996. $15,448,000 of
11
<PAGE> 4
WMS INDUSTRIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the increase was from the video game segment and the remaining increase was
primarily from the gaming segment.
Consolidated operating income was $10,787,000 in fiscal 1996 compared to
fiscal 1995 operating income of $33,250,000. The decrease in fiscal 1996
operating income results primarily from the loss incurred by the pinball and
novelty segment in fiscal 1996 along with the $18,852,000 increase in research
and development expense and lower licensing revenues in fiscal 1996 as
mentioned in the video game segment discussion below.
The provision for taxes reflects federal and state income taxes and
resulted in an effective rate of 34.7% in fiscal 1996 and 34.4% in fiscal 1995.
Income from continuing operations decreased $15,535,000 or 67.5% from
$23,012,000 in fiscal 1995 to $7,477,000 in fiscal 1996. Income from continuing
operations includes $14,562,000 in fiscal 1995 and $4,318,000 in fiscal 1996
relating to licensing revenues mentioned in the video game segment discussion
below. Excluding the effect of the licensing revenues, income from continuing
operations was $3,159,000 in fiscal 1996 and $8,450,000 in fiscal 1995. The
Company achieved this result notwithstanding the increase in research and
development expense in fiscal 1996.
VIDEO GAMES
Video game revenues increased $64,944,000 or 36.0% from $180,479,000 in fiscal
1995 to $245,423,000 in fiscal 1996. Video game revenues include $10,000,000 in
fiscal 1996 and $27,000,000 in fiscal 1995 from licensing the distribution of
home video games for use on personal computers, licensing certain foreign
distribution of home video games and certain other licensing revenues.
Excluding these licensing revenues, video game revenues increased $81,944,000
in fiscal 1996. The increase was from home video games that gained $110,263,000
in revenues due to the fact that the Company only began to publish home video
games based on its coin-operated video games in fiscal 1996. Fiscal 1995 home
video game revenues principally included revenue from those home games that
were in process of development by Tradewest at the time it was acquired by the
Company in April 1994. Revenues from coin-operated video games decreased by
23.7% from $119,640,000 in fiscal 1995 to $91,321,000 in fiscal 1996. The
decrease in revenues from coin-operated video was primarily due to delays in
the development of certain video games in fiscal 1996 and higher unit sales of
certain coin-operated video games introduced in fiscal 1995 in comparison to
unit sales of coin-operated video games introduced in fiscal 1996.
Video game segment gross profit increased $26,640,000 or 33.8% from
$78,727,000 (43.6% of video game revenues) in fiscal 1995 to $105,367,000
(42.9% of video game revenues) in fiscal 1996. Excluding the gross profit from
the licensing revenue mentioned above, gross profit increased $43,131,000 or
79.1% from $54,538,000 (35.6% of related video game revenues) in fiscal 1995 to
$97,669,000 (41.5% of related video game revenues) in fiscal 1996. This
increase in gross profit margin was primarily due to a shift in the video game
segment product mix to home video games.
Operating income for the video games segment decreased $6,642,000 or 14.1%
from $47,136,000 (26.1% of segment revenues) in fiscal 1995 to $40,494,000
(16.5% of segment revenues) in fiscal 1996. Operating income includes
$7,135,000 in fiscal 1996 and $23,239,000 in fiscal 1995 from the licensing
revenues mentioned above. Excluding the effects of these licensing revenues
and, notwithstanding the $17,834,000 increase in research and development
expense, operating income increased $9,462,000 or 39.6% from fiscal 1995 to
fiscal 1996, primarily due to the increased sales of home video games. The
increase in research and development is primarily due to an increased number of
games under development, including those of Atari Games in the three months
ended June 30, 1996 and, in part, due to royalties paid to game designers as
part of their compensation.
PINBALL AND NOVELTY
Pinball and novelty revenues decreased $56,164,000 or 50.2% from $111,843,000
in fiscal 1995 to $55,679,000 in fiscal 1996 due to an industry wide decline in
demand for pinball games.
Pinball and novelty cost of sales in fiscal 1996 includes a restructuring
charge of $3,422,000. Excluding the restructuring charge pinball and novelty
gross profit was $2,258,000 in fiscal 1996 compared to gross profit of
$14,280,000 in fiscal 1995. The restructuring charge was incurred to downsize
the pinball and novelty segment operations, which downsizing includes
12
<PAGE> 5
product design and manufacturing and is expected to result in approximately
$10,000,000 of reductions in annual operating expense for the business segment.
The pinball and novelty segment had an operating loss in fiscal 1996 of
$17,093,000 which includes the restructuring charge of $3,422,000. An operating
loss of $2,590,000 was incurred in fiscal 1995. The increase in the operating
loss was due primarily to the decline in revenues mentioned above with no
reduction in operating expense.
GAMING
Gaming revenues increased $15,351,000 or 69.2% from $22,172,000 in fiscal 1995
to $37,523,000 in fiscal 1996 primarily due to the Company commencing sales of
its slot machine product line in various jurisdictions during the second half
of fiscal 1996.
Gaming gross profit increased $3,839,000 or 165% from $2,325,000 in fiscal
1995 to $6,164,000 in fiscal 1996. The increase is due to the increase in
revenues notwithstanding the fourth quarter additional provision of $2,200,000
for obsolete inventory.
Gaming had an operating loss of $9,508,000 in fiscal 1996 compared to a
fiscal 1995 operating loss of $8,036,000. The increased gross profit noted
above was more than offset by increased selling and administrative expense and
increased research and development expense resulting in the decline in
operating results.
FISCAL 1995 COMPARED WITH FISCAL 1994
Consolidated revenues increased $31,761,000 or 11.2% from $282,733,000 in
fiscal 1994 to $314,494,000 in fiscal 1995. Video game revenues increased
$58,597,000 or 48.1% and gaming revenue increased $5,836,000 or 35.7% in fiscal
1996 whereas pinball and novelty revenues decreased $32,672,000 or 22.6%.
Consolidated gross profit increased $14,311,000 or 17.7% from $81,021,000
in fiscal 1994 to $95,332,000 in fiscal 1995. $11,189,000 of the fiscal 1995
increase in gross profit was from certain licensing revenue as discussed in the
video games segment discussion below.
Consolidated research and development expense increased $7,752,000 or
40.1% from $19,327,000 in fiscal 1994 to $27,079,000 in fiscal 1995. $6,243,000
of the fiscal 1995 increase was from the video games segment.
Consolidated selling and administrative expense increased $12,239,000 or
53.8%. $11,382,000 of the fiscal 1995 increase was from the video games
segment.
Consolidated operating income was $33,250,000 in fiscal 1995
compared to fiscal 1994 operating income of $38,930,000. The decrease in
fiscal 1995 was due to the operating loss in the pinball and novelty and gaming
segments more than offsetting the increase in video games segment operating
income in fiscal 1995 that resulted from higher licensing revenue as discussed
below.
Consolidated interest and other income increased by $904,000 in fiscal
1995 primarily due to increased earnings on short-term and cash equivalent
investments.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 34.4% in fiscal 1995 and 33.6% in fiscal 1994.
Income from continuing operations decreased $3,254,000 or 12.4% from
$26,266,000 in fiscal 1994 to $23,012,000 in fiscal 1995. Income from
continuing operations includes $14,562,000 in fiscal 1995 and $8,320,000 in
fiscal 1994 relating to the licensing revenues mentioned in the video game
segment discussion below. Excluding the effect of the licensing revenues income
from continuing operations was $8,450,000 in fiscal 1995 and $17,946,000 in
fiscal 1994. The decrease was primarily from the fact that the home video game
business operated at a loss in fiscal 1995, a lower gross profit on one
licensed coin-operated video game sold in fiscal 1995 and the increased
operating loss in the pinball and novelty and gaming segments.
Video Games
Video game revenues increased $58,597,000 or 48.1% from $121,882,000 in fiscal
1994 to $180,479,000 in fiscal 1995. Video game revenues in fiscal 1995 include
$27,000,000 from licensing the distribution of home video games for use on
personal computers, licensing certain foreign distribution of home video games
and certain other licensing revenues. Video game revenues in fiscal 1994
include net revenues received from the Company's arrangements with Nintendo of
America and Nintendo Co. Ltd. of Japan and certain other licensing revenues
totaling $13,000,000. Excluding the licensing revenues and Nintendo revenues
mentioned above, video game revenues increased $44,597,000 or 41.0% from
$108,882,000 in fiscal 1994 to
13
<PAGE> 6
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
$153,479,000 in fiscal 1995, primarily as a result of the acquisition of
Tradewest and increased coin-operated revenues due to strong sales of three
coin-operated video games introduced in fiscal 1995.
Gross profit of the video game segment increased $19,524,000 or 33.0% from
$59,203,000 (48.5% of video game revenues) in fiscal 1994 to $78,727,000 (43.6%
of video game revenues) in fiscal 1995. Excluding the effects of the licensing
and Nintendo revenues, gross profit would have increased $8,335,000 or 18.0%
from $46,203,000 (42.4% of related revenue) in fiscal 1994 to $54,538,000
(35.6% of related revenue) in fiscal 1995 as a result of increased home video
and coin-operated video game sales. As a percentage of revenue, however, gross
profit (excluding the licensing and Nintendo revenues) decreased from 42.4% of
related revenue in fiscal 1994 to 35.6% of related revenue in fiscal 1995
primarily as a result of significant royalty payments to the developer of one
particular coin-operated video game sold in fiscal 1995.
Operating income for the video games segment increased $1,899,000 or 4.2%
from $45,237,000 (37.1% of segment revenues) in fiscal 1994 to $47,136,000
(26.1% of segment revenues) in fiscal 1995. Operating income in fiscal 1995
includes $23,239,000 from the effect of the licensing revenues mentioned above.
Operating income in fiscal 1994 includes $13,000,000 from the effects of the
1994 Licensing Revenues. Excluding the effects of the licensing revenues in
fiscal 1995 and the licensing and Nintendo revenues in fiscal 1994, operating
income decreased by $8,340,000 or 25.9% from $32,237,000 in fiscal 1994 to
$23,897,000 in fiscal 1995. This decrease was primarily from the fact that the
home video game business operated at a loss in fiscal 1995 and, as mentioned
above, the lower gross profit on one coin-operated video game in fiscal 1995
requiring significant royalty payments.
PINBALL AND NOVELTY
Pinball and novelty revenues decreased $32,672,000 or 22.6% from $144,515,000
in fiscal 1994 to $111,843,000 in fiscal 1995 due to a decline in demand for
pinball games.
Pinball and novelty gross profit declined $3,346,000 in fiscal 1995
compared to fiscal 1994 due to lower revenues.
Pinball and novelty reported an operating loss of $2,590,000 in fiscal
1995 compared with operating income of $790,000 in fiscal 1994 due to lower
gross profit with a continuing level of operating expenses.
GAMING
Gaming revenues increased $5,836,000 or 35.7% from $16,336,000 in fiscal 1994
to $22,172,000 in fiscal 1995. The increased sales were primarily due to
increased unit sales of video lottery terminals.
Gaming gross profit decreased by $1,867,000 in fiscal 1995 primarily due
to increased production cost in fiscal 1995 as compared with fiscal 1994.
Gaming operating loss increased to $8,036,000 in fiscal 1995 from
$3,648,000 in fiscal 1994. The increased loss was due to the decrease in gross
profit and increased selling and administrative and research and development
expenses.
IMPACT OF INFLATION
During the past three years, the general level of inflation affecting the
Company has been relatively low. The ability of the Company to pass on future
cost increases in the form of higher sales prices will continue to be dependent
on the prevailing competitive environment and the acceptance of the Company's
products in the market place.
SEASONALITY
The home video game business is highly seasonal and historically has resulted
in higher revenues and net income in the first and second quarters of the June
30 fiscal year due to customer purchases preceding the year-end retail holiday
selling season. The coin-operated video game business has not historically been
seasonal but quarterly revenues and net income usually increase when a
coin-operated video game that achieves significant player appeal is introduced.
14
<PAGE> 7
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SECURITY-HOLDER MATTERS
The Company's Common Stock, $.50 par value, is traded on the New York Stock
Exchange (ticker symbol -- WMS). The table sets forth the high and low sales
prices of the Common Stock on the New York Stock Exchange for the periods
indicated:
- -----------------------------------------------------------
Calendar Period
- -----------------------------------------------------------
1994 High Low
Third Quarter $ 20 5/8 $ 17
Fourth Quarter 19 3/8 16
- -----------------------------------------------------------
1995
First Quarter $ 24 1/4 $ 16 5/8
Second Quarter 21 18
Third Quarter 23 7/8 19 5/8
Fourth Quarter 24 16
- -----------------------------------------------------------
1996
First Quarter $ 21 1/8 $ 16 1/2
Second Quarter 24 5/8 17 1/4
Third Quarter (through Sept. 13, 1996) 29 1/4 19 1/2
No cash dividends were declared or paid during fiscal 1996 or 1995. The
payment of future cash dividends will depend upon, among other things,
earnings, anticipated expansion and capital requirements and the financial
condition of the Company.
At September 13, 1996, there were approximately 2,000 holders of record of
the Common Stock.
REPORT OF INDEPENDENT AUDITORS
The Stockholders and the Board of Directors
WMS Industries Inc.
We have audited the accompanying consolidated balance sheets of WMS Industries
Inc. and Subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WMS Industries
Inc. and Subsidiaries at June 30, 1996 and 1995, and the consolidated results
of their operations and cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
September 12, 1996, except for Note 14, as to which the date is September 20,
1996
15
<PAGE> 8
WMS Industries Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
June 30, 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $33,550 $42,337
Short-term investments 27,109 47,863
Receivables, net of allowances of $1,826 in 1996 and $1,515 in 1995 76,965 53,586
Inventories
Raw materials and work in progress 40,332 35,863
Finished goods 22,722 5,221
- ---------------------------------------------------------------------------------------------------
63,054 41,084
Deferred income taxes 4,233 -
Other current assets 11,513 5,272
- ---------------------------------------------------------------------------------------------------
Total current assets 216,424 190,142
Investment in marketable equity securities 19,437 23,187
Property, plant and equipment, net 38,522 32,534
Excess of purchase cost over amount assigned to net assets acquired, net 23,765 10,599
Net assets of discontinued operations 42,091 49,792
Other assets 16,206 19,246
- ---------------------------------------------------------------------------------------------------
Total assets $356,445 $325,500
===================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $23,034 $30,341
Accrued compensation and related benefits 8,268 5,290
Income taxes payable - 5,246
Deferred income taxes - 1,819
Accrued payment on 1996 purchase of Atari Games Corporation 3,286 -
Accrued discontinuance costs 10,513 -
Accrued royalties 6,108 1,992
Other accrued liabilities 19,585 5,236
- ---------------------------------------------------------------------------------------------------
Total current liabilities 70,794 49,924
Long-term debt 65,363 57,500
Deferred income taxes 6,548 5,036
Other noncurrent 3,707 4,469
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) - -
Common stock (issued 24,200,062 shares in 1996 and 24,165,612 shares in 1995) 12,100 12,083
Additional paid-in capital 82,496 81,851
Retained earnings 123,906 119,367
- ---------------------------------------------------------------------------------------------------
218,502 213,301
Treasury stock, at cost (52,312 shares in 1996 and 56,312 shares in 1995) (148) (159)
Unrealized loss on noncurrent marketable equity securities (8,321) (4,571)
- ---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 210,033 208,571
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $356,445 $325,500
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 9
WMS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Years ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $338,625 $314,494 $282,733
COSTS AND EXPENSES
Cost of sales (including restructuring charges of $3,422 in 1996) 228,258 219,162 201,712
Research and development 45,931 27,079 19,327
Selling and administrative 53,649 35,003 22,764
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses 327,838 281,244 243,803
- ---------------------------------------------------------------------------------------------------------
Operating income 10,787 33,250 38,930
Interest and other income 4,353 4,691 3,787
Interest expense (3,683) (2,854) (3,178)
- ---------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 11,457 35,087 39,539
Provision for income taxes (3,980) (12,075) (13,273)
- ---------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 7,477 23,012 26,266
Discontinued operations
Income (loss) from discontinued operations, net of tax
provision (credit) of $1,645, ($234) and ($7) 2,953 (3,805) 2,217
Costs related to discontinuance, net of tax (credit) of ($2,795) (5,891) - -
- ---------------------------------------------------------------------------------------------------------
Income (loss) - discontinued operations (2,938) (3,805) 2,217
- ---------------------------------------------------------------------------------------------------------
Net income $ 4,539 $ 19,207 $ 28,483
=========================================================================================================
Income (loss) per share of common stock
Continuing operations $ .31 $ .96 $ 1.10
Discontinued operations (.12) (.16) .09
=========================================================================================================
Net income $ .19 $ .80 $ 1.19
=========================================================================================================
Shares used in calculating per share amounts 24,122 24,102 24,016
=========================================================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 10
WMS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Additional Treasury Unrealized Total
Common paid-in Retained stock, holding stockholders'
stock capital earnings at cost loss equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JUNE 30, 1993 $11,802 $69,177 $71,677 $ (181) $ - $152,475
Net income for the year ended June 30, 1994 - - 28,483 - - 28,483
Issuance of 556,450 shares of common stock
through exercise of options 278 9,970 - - - 10,248
Issuance of 2,000 treasury shares through
the treasury share bonus plan - 40 - 5 - 45
Unrealized holding loss on noncurrent investment
in marketable equity securities - - - - (12,258) (12,258)
Tax benefit from exercise of common stock options - 2,479 - - - 2,479
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1994 12,080 81,666 100,160 (176) (12,258) 181,472
Net income for the year ended June 30, 1995 - - 19,207 - - 19,207
Issuance of 5,000 shares of common stock
through exercise of options 3 34 - - - 37
Issuance of 6,000 treasury shares through
the treasury share bonus plan - 134 - 17 - 151
Reduction of unrealized holding loss on noncurrent
investment in marketable equity securities - - - - 7,687 7,687
Tax benefit from exercise of common stock options - 17 - - - 17
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1995 12,083 81,851 119,367 (159) (4,571) 208,571
Net income for the year ended June 30, 1996 - - 4,539 - - 4,539
Issuance of 34,450 shares of common stock
through exercise of options 17 410 - - - 427
Issuance of 4,000 treasury shares through
the treasury share bonus plan - 89 - 11 - 100
Increase in unrealized holding loss on noncurrent
investment in marketable equity securities - - - - (3,750) (3,750)
Tax benefit from exercise of common stock options - 146 - - - 146
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1996 $12,100 $82,496 $123,906 $ (148) $ (8,321) $210,033
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 11
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Years ended June 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $4,539 $19,207 $28,483
Adjustments to reconcile net income to net cash (used) provided
by operating activities
(Income) loss from discontinued operations (2,953) 3,805 (2,217)
Costs related to discontinuance 5,891 - -
Depreciation and amortization 7,949 5,697 4,078
Receivables provision 3,790 3,293 175
Deferred income taxes (2,392) 5,074 4,242
Tax benefit from exercise of common stock options 146 17 2,479
Increase (decrease) resulting from changes in operating assets and liabilities
Receivables (3,955) (13,170) (7,118)
Inventories (15,187) (14,328) (2,783)
Other current assets (5,685) (1,584) (1,745)
Accounts payable and accruals (7,873) 11,367 3,527
Current income taxes payable (5,246) 5,246 -
Other assets and liabilities not reflected elsewhere (4,594) (276) (1,209)
- ---------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (25,570) 24,348 27,912
INVESTING ACTIVITIES
Purchase of property, plant and equipment (11,460) (17,408) (7,942)
Acquisition of Tradewest operating assets (11,476) (3,024) (14,431)
Cash acquired in acquisition of Atari Games Corporation, net of cash used 7,996 - -
Net change in short-term investments 20,754 15,037 23,650
Purchase of noncurrent marketable equity securities - - (27,758)
Other - (1,424) -
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 5,814 (6,819) (26,481)
FINANCING ACTIVITIES
Cash received on exercise of stock options 427 37 10,248
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 427 37 10,248
- ---------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
Net transfer from (to) discontinued operations and payment of
transaction costs in 1996 10,542 (5,623) (12,043)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,787) 11,943 (364)
Cash and cash equivalents at beginning of year 42,337 30,394 30,758
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $33,550 $42,337 $30,394
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 12
WMS INDUSTRIES Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS OVERVIEW
WMS Industries Inc. ("WMS") is engaged in the design, manufacture and sale of
coin-operated and home video games, coin-operated pinball and novelty games,
and video lottery terminals and gaming devices. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles. Such preparation requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
On June 27, 1996, WMS announced restructuring initiatives intended to,
among other things, reduce regulatory burdens and risks, enhance shareholder
value by enabling investors to value three distinct areas of the operations and
reduce expenses of pinball operations. The restructuring will entail a spin-off
of 100% of WMS' Puerto Rico-based hotel, casino and management businesses to
the WMS stockholders; an initial public offering of approximately 15% of Midway
Games Inc., the coin operated and home video games subsidiary; and the
downsizing of the pinball business. In connection with these actions, the
amusement games business will now be reported in the following three industry
segments: video games, pinball and novelty, and gaming.
NOTE 2: PRINCIPAL ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of WMS and its
majority-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated. The prior years consolidated
financial statements are restated to reflect the hotel and casino segments as
discontinued operations because of the decision to spin-off the hotel and
casino business (see Note 1). The prior years financial statements have also
been reclassified to conform with the current year presentation.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated by the
straight-line method over their estimated useful lives.
EXCESS OF PURCHASE COST OVER AMOUNT ASSIGNED TO NET ASSETS ACQUIRED (GOODWILL)
Goodwill of $22,765,000 (net of accumulated amortization of $2,035,000) at June
30, 1996 arising from acquisitions is being amortized by the straight-line
method over 15 years. Goodwill of $1,000,000 which arose in 1968 is not being
amortized.
INTELLECTUAL PROPERTIES LICENSES
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed. Unit royalties on sales that exceed the guarantee are
recognized as revenue as earned. License and royalty revenue for fiscal 1996,
1995 and 1994 was $18,991,000, $37,577,000 and $23,110,000, respectively.
HOME VIDEO GAME REVENUES
Home video game revenues are recorded when products are shipped to customers.
An allowance for returns and discounts is also recorded based upon management's
evaluation of historical experience as well as current industry trends.
ADVERTISING EXPENSE
The cost of advertising is charged to earnings as incurred and for fiscal 1996,
1995 and 1994 was $14,325,000, $6,757,000 and $1,272,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement on
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which the
Company must adopt in fiscal 1997. SFAS 121 standardizes the accounting
practices for recognition and measurement of impairment losses on certain
long-lived assets. The Company anticipates the adoption of this standard will
have no material impact on the consolidated financial statements.
The Company currently follows the provisions of Accounting Principals
Board (APB) Opinion No. 25, under which no recognition of expense is required
in accounting for its stock options. In 1995, the FASB
20
<PAGE> 13
issued SFAS 123, which allows the Company to elect to continue to follow the
recognition and measurement provisions of APB No. 25, provided that it makes
additional footnote disclosures. The Company intends to make this election,
therefore, adoption of SFAS 123 in fiscal 1997 will require additional footnote
disclosure, but will not result in expense recognition.
NOTE 3: ACQUISITIONS
On March 29, 1996, a WMS subsidiary acquired all the capital stock of Atari
Games Corporation ("Atari Games") from Warner Communications Inc.("Warner"), a
subsidiary of Time Warner Inc. The acquisition is being accounted for by the
purchase method of accounting. The results of operations of Atari Games
subsequent to the acquisition date have been included in the consolidated
statement of income. Headquartered in Milpitas, California, Atari Games is
engaged in the business of developing, manufacturing, licensing, publishing and
distributing coin-operated video games and home video games.
The Company is in the process of assimilating parts of the Atari Games
business into the Company's similar activities and exiting certain activities
that include closing the leased manufacturing plant in California and
transferring the production of future coin-operated video games to the
Company's existing Chicago plants; combining the sales, marketing and
distribution of home video games with the Company's home video operations; the
sale of an Irish subsidiary that produces coin-operated video games; the sale
of a subsidiary in Japan that develops and markets home video games; and
downsizing certain elements of the coin-operated video product development
activities that are duplicative of similar activities in Chicago. A $4,500,000
liability for exit activities was established and includes provisions for
employee severance and relocation, contractual liabilities, direct exit costs
and estimated losses of the two foreign subsidiaries until disposition. Any
significant change in the exit liability or purchase price would result in an
adjustment to negative goodwill.
As of June 30, 1996 costs of $1,612,000 for assimilation and exit
activities related to the acquisition of Atari Games have been incurred.
Additional costs will continue to be incurred until the sale of the
subsidiaries in Ireland and Japan have been completed and the building used for
manufacturing in California has been subleased. The timing and outcome of these
events will determine the adjustment required, if any, to the liability for
exit activities.
The preliminary purchase price for Atari Games is a minimum of $9,863,000
and a maximum of $24,015,000. The preliminary purchase price was computed based
upon the book net assets of Atari Games as of March 29, 1996 with a portion of
the purchase price contingent upon future gross profits, as defined, of Atari
Games.
The preliminary minimum purchase price included cash of $2,000,000 and a
two year non-recourse promissory note (the "Two Year Note") payable on March
29, 1998 for $7,863,000, or 10/28th of the balance of the final maximum
purchase price. Additional purchase price in the form of a four year
non-recourse promissory note (the "Four Year Note") is contingent on any cash
gross profits, as defined, of Atari Games over the next four years and will be
recorded incrementally as gross profits are realized. The preliminary maximum
amount of the Four Year Note is $14,152,000, or 18/28th of the balance of the
maximum final purchase price. Semi-annual installments are to be made on the
Four Year Note equal to 50% of any cash gross profit from the sale or
distribution of certain products as defined in the purchase agreement and
intellectual property with respect thereto owned by Atari Games (the
"Products"). As of June 30, 1996, $3,286,000 was recorded as accrued additional
purchase price under the Four Year Note.
The Two Year Note is collateralized by the capital stock of Atari Games.
The Company's obligations under the Two Year Note may be satisfied by
relinquishing the capital stock of Atari Games to Warner. The Four Year Note
with interest at 7% is secured by the Products. Atari Game's unpaid obligations
under the Four Year Note may be satisfied by transferring the Products
to Warner.
Under the terms of the purchase agreement, Warner is required to make an
additional cash payment of $3,247,000 to Atari Games in order to increase net
current assets to the required amount based upon the Atari Games' final March
29, 1996 balance sheet. A receivable for this amount is included in the
consolidated balance sheet. The final purchase price has not as yet been
accepted by Warner.
21
<PAGE> 14
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The unaudited pro forma consolidated statement of income data of the
Company for fiscal 1996 and 1995 included below was prepared as if Atari Games
was acquired as of July 1, 1995 and July 1, 1994, respectively, and
assimilation and exit activities occurred on that date. This summary does not
purport to be indicative of what would have occurred had the acquisition
occurred as of the dates indicated or of the results which may occur in the
future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Revenues $422,651 $369,384
Income from continuing operations 6,955 10,534
Income (loss) - discontinued operations (2,938) (3,805)
- --------------------------------------------------------------------------------
Net income $ 4,017 $ 6,729
- --------------------------------------------------------------------------------
Income per share
Continuing operations $ .29 $ .44
Discontinued operations (.12) (.16)
- --------------------------------------------------------------------------------
Net Income $ .17 $ .28
- --------------------------------------------------------------------------------
</TABLE>
On April 29, 1994, a WMS subsidiary acquired substantially all of the
operating assets and business of three commonly owned companies ("Tradewest"):
Tradewest, Inc., Tradewest International, Inc. and The Leland Corporation. The
assets acquired are utilized in the video game business of developing,
publishing and distributing home video games in various formats including game
cartridges. The acquisition is being accounted for by the purchase method of
accounting.
The final purchase price will be equal to five times average annual
pre-tax income, as defined, of the acquired business during the four year
period commencing May 1, 1994 subject to a minimum and a maximum. The minimum
purchase price is $14,131,000 and the maximum purchase price is $50,131,000.
Based upon the pre-tax income generated by the acquired business through
May 1996, the Company accrued and paid additional purchase price of
$14,400,000. The additional purchase price was recorded as goodwill in the
consolidated balance sheet and is amortized over the remainder of the 15 year
amortization period. The cumulative amount accrued and paid for the purchase of
Tradewest as of June 30, 1996 is $28,531,000.
The unaudited pro forma consolidated statement of income data for fiscal
1994 included below assumes the Tradewest acquisition occurred July 1, 1993.
This summary does not purport to be indicative of what would have occurred had
the acquisition occurred as of the date indicated or of the results which may
occur in the future.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1994
- --------------------------------------------------------------------------------
<S> <C>
Revenues $304,895
Income from continuing operations 23,814
Income - discontinued operations 2,217
- --------------------------------------------------------------------------------
Net income $ 26,031
- --------------------------------------------------------------------------------
Income per share
Continuing operations $ .99
Discontinued operations .09
- --------------------------------------------------------------------------------
Net income $ 1.08
- --------------------------------------------------------------------------------
</TABLE>
NOTE 4: DISCONTINUED OPERATIONS
As discussed in Note 1, on June 27, 1996, the Company announced a planned
spin-off of its Puerto Rico based hotel, casino and hotel management operations
that will create a new independent public corporation. Accordingly, the
financial position, results of operations and cash flows of these business
segments have been reported as discontinued operations in the consolidated
financial statements.
The new hotel/casino public corporation will include the following: a 95%
interest in Posadas de Puerto Rico Associates, Inc., the owner of the Condado
Plaza Hotel & Casino; a 50% interest in Posadas de San Juan Associates, a
partnership which owns the El San Juan Hotel & Casino; a 23.3% indirect
interest in El Conquistador Partnership L.P. which owns the El Conquistador
Hotel and Casino; and a 62% interest in Williams Hospitality Group, Inc., the
management company for the above hotels and casinos.
Completion of the spin-off, among other things, is subject to the receipt
of a ruling from the Internal Revenue Service that the transaction will be tax
free to the Company and its stockholders. The Company anticipates that the
spin-off will be completed during fiscal 1997.
Costs to be incurred in connection with the spin-off total $8,685,000,
$5,891,000 after tax, and includes the contract settlement payment described
below, as well as $1,500,000 for transaction costs that are included as
discontinued operations in the June 30, 1996 consolidated statement of income.
In connection with the spin-off, the Board of Directors of WMS requested
Louis J. Nicastro, and Mr. Nicastro agreed, to become the Chairman of the Board
and chief executive officer of the new hotel/casino public corporation and to
relinquish his position as co-chief
22
<PAGE> 15
executive officer of WMS. Effective July 1, 1996, Mr. Nicastro also agreed to
the early termination and full settlement of his employment agreement pursuant
to which, in lieu of all future payments of base salary, bonus, retirement and
death benefits, Mr. Nicastro received a lump sum payment of $9,125,000, with
interest from July 1, 1996. As of June 30, 1996, $1,940,000 had previously been
accrued for future payments under his employment agreement. The amount of the
settlement involved present valuing certain future payments.
At June 30 net assets of the discontinued operations are summarized as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 11,098 $ 13,086
Current liabilities (13,445) (13,971)
- -------------------------------------------------------------------------------
Net current liabilities (2,347) (885)
Investment in, receivables and
advances to nonconsolidated affiliates 27,126 26,320
Land, buildings and equipment 50,014 53,755
Excess of purchase cost over amount
assigned to net assets acquired, net 9,109 9,510
Deferred tax (liability) asset (2,291) 948
Other assets 7,387 7,687
Long-term debt, less current maturities (23,555) (26,928)
Other noncurrent liabilities (4,542) (4,252)
Minority interests (18,810) (16,363)
- -------------------------------------------------------------------------------
Net assets of discontinued operations $ 42,091 $ 49,792
- -------------------------------------------------------------------------------
</TABLE>
WMS plans to contribute up to $10,000,000 in cash to the new hotel/casino
public corporation's capital at the date of the spin-off.
For the years ended June 30 the operating results of the discontinued
operations are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $68,694 $70,878 $75,480
Costs and expenses 58,601 70,255 65,122
- -------------------------------------------------------------------------------
Operating income 10,093 623 10,358
Interest expense, net (1,859) (1,752) (3,551)
- -------------------------------------------------------------------------------
Income (loss) before income
taxes and minority interests 8,234 (1,129) 6,807
(Provision) benefit for
income taxes (1,645) 234 7
Minority interests (3,636) (2,910) (4,597)
- -------------------------------------------------------------------------------
Income (loss) from
discontinued operations $ 2,953 $(3,805) $ 2,217
- -------------------------------------------------------------------------------
</TABLE>
NOTE 5: AMUSEMENT GAMES RESTRUCTURING
As discussed in Note 1, on June 27, 1996, a restructuring plan of the amusement
games business segment was initiated. The Company has planned an initial public
offering of approximately 15% of a wholly-owned subsidiary Midway Games Inc.
which develops and distributes coin operated video games and publishes,
licenses and distributes home video games. Midway Games Inc. intends to file a
registration statement with the Securities and Exchange Commission and expects
to complete the offering in the second quarter of fiscal 1997.
As a result of the softness of the worldwide coin-operated pinball games
market, on June 27, 1996, the Board of Directors authorized the downsizing of
the pinball business including the pinball design and manufacturing operations.
The Company incurred restructuring charges of $3,422,000 ($2,091,000 after tax)
for employee severance and inventory provisions. The costs are included as cost
of sales in the June 30, 1996 consolidated statement of income.
NOTE 6: INVESTMENTS IN SECURITIES
All investments are designated as available-for-sale and are recorded at market
value with the holding gain or loss reflected in stockholders' equity. A
summary of securities held at June 30 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Gross
Unrealized Market
(in thousands) Cost Loss Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
- ----------------------
Securities included as part
of cash equivalents $17,343 $ - $17,343
Short-term investments 27,109 - 27,109
Marketable equity
securities noncurrent 27,758 8,321 19,437
1995
- ----------------------
Securities included as part
of cash equivalents $25,843 $ - $25,843
Short-term investments 47,863 - 47,863
Marketable equity
securities noncurrent 27,758 4,571 23,187
</TABLE>
Short-term investments consist principally of money market preferred stocks
that generally have no fixed maturity dates but have dividend reset dates every
49 days or less.
23
<PAGE> 16
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
At June 30 net property, plant and equipment were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,481 $ 3,209
Buildings and improvements 23,447 19,348
Machinery and equipment 33,271 27,314
Furniture and fixtures 2,672 1,540
- --------------------------------------------------------------------------------
62,871 51,411
Less accumulated depreciation (24,349) (18,877)
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 38,522 $ 32,534
- --------------------------------------------------------------------------------
</TABLE>
NOTE 8: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes. Deferred tax assets also include the
future tax benefit from unrealized capital losses.
Significant components of the Company's deferred tax assets and
liabilities at June 30 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets resulting from
Unrealized capital loss $ 3,236 $ 1,800
Inventory valuation 2,089 1,370
Accrued items not
currently deductible 7,505 1,110
Receivable allowance 748 632
Purchased assets cost basis difference 1,853 -
Other 424 1,759
- --------------------------------------------------------------------------------
Total deferred tax assets 15,855 6,671
Valuation allowance for unrealized
capital loss (3,236) (1,800)
- --------------------------------------------------------------------------------
Net deferred tax assets 12,619 4,871
- --------------------------------------------------------------------------------
Deferred tax liabilities resulting from
Tax over book depreciation 1,285 1,467
Revenues deferred in tax reporting 5,672 8,476
Purchase liability basis difference 4,455 -
Deferred items deducted 925 -
Other 2,597 1,783
- --------------------------------------------------------------------------------
Total deferred tax liabilities 14,934 11,726
- --------------------------------------------------------------------------------
Net deferred tax liabilities $ (2,315) $ (6,855)
- --------------------------------------------------------------------------------
</TABLE>
Significant components of the provision for income taxes for the years
ended June 30, 1996, 1995 and 1994 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 5,317 $ 5,939 $ 5,095
State 909 1,045 1,457
- --------------------------------------------------------------------------------
Total current 6,226 6,984 6,552
Deferred
Federal (1,829) 4,261 3,931
State (563) 813 311
- --------------------------------------------------------------------------------
Total deferred (2,392) 5,074 4,242
Provision for tax benefits
resulting from stock options 146 17 2,479
- --------------------------------------------------------------------------------
Provision for income taxes
on continuing operations 3,980 12,075 13,273
(Credit) for income taxes on
discontinued operations (1,150) (234) (7)
- --------------------------------------------------------------------------------
Income tax provision, net $ 2,830 $11,841 $13,266
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes on continuing operations differs from the
amount computed using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 1.9 3.4 3.6
Foreign sales corporation benefits (2.0) (1.7) (2.4)
Utilization of capital loss
carryforwards - (2.9) (3.0)
Other, net (.2) .6 .4
- --------------------------------------------------------------------------------
34.7% 34.4% 33.6%
- --------------------------------------------------------------------------------
</TABLE>
During fiscal 1996, 1995 and 1994 income taxes paid by continuing
operations were $15,674,000, $1,635,000 and $6,378,000, respectively.
NOTE 9: LINE OF CREDIT AND LONG-TERM DEBT
WMS has an uncollateralized bank line of credit which provides for borrowing up
to $50,000,000 and for WMS and its U.S. operating subsidiaries to have letters
of credit up to $80,000,000 outstanding, reduced for any borrowing on the line
of credit. Interest on the initial borrowings will be at a short-term
Eurodollar rate plus .75%. At June 30, 1996, there were no borrowings from this
line of credit but there were outstanding letters of credit totaling $379,000.
24
<PAGE> 17
<TABLE>
<CAPTION>
Long-Term debt at June 30 was:
- ------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------
<S> <C> <C>
Convertible subordinated debentures $57,500 $57,500
Atari Games two year note
due March 1998, 6% interest 7,863 -
- ------------------------------------------------------
$65,363 $57,500
- ------------------------------------------------------
</TABLE>
The $57,500,000 of 5 3/4% convertible subordinated debentures due 2002 are
convertible by the holders into common stock at a conversion price of $29.00
per share. The debentures are redeemable by the Company at 103.6% of principal,
declining to 100% on November 30, 2000.
The amount of interest paid (excluding $485,000 capitalized in fiscal
1995) during fiscal 1996, 1995 and 1994 was $3,316,000, $2,854,000 and
$3,179,000, respectively.
NOTE 10: STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Authorized common stock of the Company consists of 60,000,000 shares of $.50
par value. At June 30, 1996, 6,359,359 shares of common stock were reserved for
possible issuance for the convertible debentures and the stock option plans.
Additionally, there are 5,000,000 shares of $.50 par value preferred stock
authorized. The preferred stock is issuable in series, and the relative rights
and preferences and the number of shares in each series are to be established
by the Board of Directors.
Earnings per share amounts are computed based upon the weighted average
number of outstanding common shares and dilutive common equivalent shares
(relating to stock options). In fiscal 1996, 1995 and 1994, per share amounts
were computed using the weighted average number of outstanding common shares of
24,121,830, 24,102,051 and 24,016,174, respectively.
NOTE 11: COMMON STOCK PLANS
Under the stock option plans the Company may grant both incentive stock options
and nonqualified options on shares of common stock through the year 2004.
Options may be granted to employees and under certain conditions to
non-employee directors. The stock option committee has the authority to fix the
terms and conditions upon which each employee option is granted, but in no
event shall the term exceed ten years or be granted at less than 100% of the
fair market value of the stock at the date of grant.
Under the plans, options were outstanding to acquire 3,156,100 shares
($17.25 to $26.88 per share - 965,600 shares exercisable) and 3,058,050 shares
($1.88 to $26.88 per share) at June 30, 1996 and 1995, respectively. At June
30, 1996 outstanding options include options to acquire 1,600,000 shares at
$26.88 per share that do not become exercisable until the market value of the
Company's common stock reaches $35.00 per share. During fiscal 1996, options
were granted to purchase 155,500 shares ($21.88 to $24.13 per share), options
were cancelled for 23,000 shares, and options were exercised for 34,450 shares
($1.88 to $20.50 per share). At June 30, 1996 and 1995, 1,220,500 and 1,376,000
shares, respectively, were available for the granting of future options under
the plans.
The Company has a Treasury Share Bonus Plan for key employees covering all
the shares of common stock held in the treasury. The vesting and other terms of
the awards are flexible. No awards of treasury stock were outstanding at June
30, 1996.
NOTE 12: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations
of credit and market risk consist primarily of cash equivalents, short-term
investments, trade accounts receivable from the sale of games and marketable
equity securities. By policy, the Company places its cash equivalents and
short-term investments only in high credit quality securities and limits the
amounts invested in any one security. At June 30, 1996, 43% of trade accounts
receivable are from sale of games to the Company's distributors located
primarily throughout the United States and Western Europe and because of the
number and geographic distribution, concentration is limited. Foreign sales are
typically made in U.S. dollars and typically on the basis of a letter of
credit. At times during the fiscal year accounts receivable from certain major
home video customers represent a significant amount of the accounts receivable
then outstanding.
25
<PAGE> 18
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The estimated fair value of financial instruments at June 30, 1996 has
been determined by the Company, using available market information and
valuation methodologies considered to be appropriate. The amounts reported for
cash equivalents, short-term investments and Atari Games two year note payable
are considered to be a reasonable estimate of their fair value. The amount
reported for marketable equity securities is valued at the closing market price
on June 30, 1996.
The $57,500,000 of 5 3/4% convertible subordinated debentures issued in
December 1992 are traded on the New York Stock Exchange and based on the last
trade on June 30, 1996 had a fair value of $57,213,000. The debentures are
callable at a premium and convertible by the holder into common stock at $29.00
per share.
NOTE 13: LEASE COMMITMENTS
The Company leases certain of its office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 1996 as follows:
<TABLE>
<CAPTION>
- -----------------------------
(in thousands)
- -----------------------------
<S> <C>
1997 $ 3,054
1998 2,645
1999 2,497
2000 2,235
2001 2,283
Thereafter 7,635
- -----------------------------
20,349
Less sublease income 6,070
- -----------------------------
$14,279
=============================
</TABLE>
Rent expense for fiscal 1996, 1995 and 1994 was $2,197,000, $1,813,000
and $1,494,000, respectively, and was offset by sublease income of $134,000 for
fiscal 1996. Aggregate future gross lease commitments of $16,619,000 were
guaranteed by Warner prior to the acquisition of Atari Games from Warner. One
facility with a gross lease commitment of $3,953,000 is listed with a realtor
to be sublet - see Note 4.
NOTE 14: SUBSEQUENT EVENT
The U.S. District Court for the Northern District of Illinois on September 19,
1996 rendered a decision in favor of International Game Technology ("IGT") in
the pending litigation between WMS Gaming Inc. and IGT regarding a certain slot
machine component patent. The Court found certain claims of the 1984 Telnaes
patent owned by IGT to be infringed by WMS Gaming's Model 400 reel-type slot
machines and awarded damages and an injunction to IGT. The injunction is not
to become effective until mid-October. WMS Gaming intends to appeal the
decision immediately and seek stay of the injunction. Newer versions of
the WMS slot machines are designed differently from the machine found to
infringe the Telnaes patent, and based upon advice of WMS' patent counsel, WMS
believes such newer machines will not be affected by this decision. Considering
the quantity of slot machines WMS Gaming has sold to date, WMS estimates that
even if its appeal is unsuccessful, maximum damages awarded to IGT will be
between $1 million to $2 million. However, if the newer versions of the WMS
Gaming slot machines are found to infringe the Telnaes patent and if WMS is
unable to develop or acquire non-infringing alternate devices or obtain a
license to use the patent, the development of WMS's reel-type slot machine
business could be adversely affected
NOTE 15: PENSION PLANS
During fiscal 1992 the Company suspended the defined benefit pension plan that
covers salaried employees of the Chicago based amusement game business and
corporate headquarters. The Company continued the defined benefit pension plan
covering certain hourly employees of the Chicago based amusement game business.
The defined benefit plans provide pension benefits that are based on a
flat monthly rate multiplied by the number of years of service. The Company's
funding policy for these plans is to make at least the minimum annual
contributions required by ERISA. Plan assets are invested primarily in
guaranteed insurance contracts.
The components of net periodic pension cost based on an expected long-term
rate of return on plan assets of 9% were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service costs-benefits earned
during the year $ 210 $ 205 $ 187
Interest cost on projected obligation 413 434 414
Actual return on plan assets (153) (209) (268)
Net amortization of unrecognized net
obligation at transition and deferrals (60) (70) (10)
- ----------------------------------------------------------------------------------
Net periodic pension cost for the year $ 410 $ 360 $ 323
- ----------------------------------------------------------------------------------
</TABLE>
The plans' funded status and amounts included in the Company's consolidated
balance sheets at June 30 were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of projected benefit
obligation, including vested obligations of
$4,574 and $4,803, respectively $ (5,207) $ (5,433)
Fair value of plan assets 3,718 3,778
- ---------------------------------------------------------------------------------
Funded status (1,489) (1,655)
Unrecognized net obligations being
recognized over a remaining 6 years 447 519
Unrecognized net loss 243 294
Adjustment required to recognize
minimum liability (694) (739)
- ---------------------------------------------------------------------------------
Accrued pension liability $ (1,493) $ (1,581)
=================================================================================
</TABLE>
The discount rate used to determine the actuarial present value of the
projected benefit obligation was 8% and 7.5% at June 30, 1996 and 1995,
respectively. Other assets include an intangible asset of $694,000 and $739,000
at June 30, 1996 and 1995, respectively, resulting from the adjustment required
to recognize the minimum pension liability.
The Company has four defined contribution employee retirement savings
plans. These defined contribution plans cover certain hourly and salaried
employees of the amusement game business and corporate headquarters. The
Company's contribution to these plans are based on employee participation with
certain limitations. The Company may change any of the factors which determine
the Company's contribution to such plans. A subsidiary is required to make
contributions on behalf of unionized employees to defray part of
26
<PAGE> 19
the costs of the multi-employer pension plan established by its labor union.
Such contributions are computed using a fixed charge per employee.
Contributions to the defined contribution and multi-employer plans for fiscal
1996, 1995 and 1994 were $517,000, $467,000 and $364,000, respectively.
NOTE 16: MERGER COSTS
On October 18, 1995, Bally Gaming International, Inc. (Bally Gaming) reported
the unilateral termination of the June 21, 1995 Agreement and Plan of Merger
(Agreement) with the Company and that it had entered into a merger agreement
with Alliance Gaming Corporation which it subsequently completed. On October
23, 1995, the Company commenced a lawsuit against Bally Gaming for its failure
to pay $4,800,000 in termination fees due the Company under the terms of the
Agreement and for additional damages.
At June 30, 1996, the Company had incurred approximately $2,400,000 in
acquisition costs from the proposed merger, included as noncurrent other assets
in the consolidated balance sheet at June 30, 1996, which will be offset
against the termination fees when received.
NOTE 17: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1996 and 1995 are as
follows (previously reported numbers have been restated to reflect the hotels
and casinos businesses as discontinued operations and to reflect gross profit
instead of income from operations):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(in thousands, except Sept. 30 Dec. 31 Mar. 31 June 30
per share amounts) 1995 1995 1996 1996
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1996 QUARTERS
Revenues $ 84,240 $113,216 $67,500 $73,669
Gross profit 27,841 41,901 23,205 17,420
Research and
development expense 8,821 12,610 8,829 15,671
Income (loss) from
continuing operations 2,991 7,876 3,176 (6,566)
Discontinued operations (2,723) 1,017 3,945 (5,177)
- ---------------------------------------------------------------
Net income (loss) 268 8,893 7,121 (11,743)
PER SHARE OF COMMON STOCK
Income (loss) from
continuing operations .12 .33 .14 (.27)
Discontinued operations (.11) .04 .16 (.22)
- ---------------------------------------------------------------
Net income (loss) .01 .37 .30 (.49)
Shares used 24,109 24,120 24,126 24,130
- ---------------------------------------------------------------
(in thousands, except Sept. 30 Dec. 31 Mar. 31 June 30
per share amounts) 1994 1994 1995 1995
- ---------------------------------------------------------------
FISCAL 1995 QUARTERS
Revenues $66,886 $93,767 $72,715 $81,126
Gross profit 18,480 24,213 26,691 25,948
Research and
development expense 5,999 7,052 6,342 7,686
Income from continuing
operations 1,817 6,179 8,218 6,799
Discontinued operations (2,890) (77) (191) (648)
- ---------------------------------------------------------------
Net income (loss) (1,073) 6,102 8,027 6,151
PER SHARE OF COMMON STOCK
Income from continuing
operations .08 .25 .34 .29
Discontinued operations (.12) - (.01) (.03)
- ---------------------------------------------------------------
Net income (loss) (.04) .25 .33 .26
Shares used 24,098 24,098 24,103 24,108
</TABLE>
The June 30, 1996 quarter included the operations of Atari Games after its
acquisition on March 29, 1996. Research and development expense increased to
$15,671,000 in the June 30, 1996 quarter in comparison to $8,829,000 in the
March 31, 1996 quarter due primarily to inclusion of Atari Games.
The June 30, 1996 quarter also included pinball business downsizing after
tax restructuring charges of $2,091,000, $.09 per share, (see Note 5) and
additional provisions for gaming inventory obsolescence of $2,200,000
($1,344,000 after tax, $.05 per share) that in the aggregate increased the loss
from continuing operations and net loss by $.14 per share.
Revenues for the quarter ended March 31, 1996 included certain licensing
revenue of $10,000,000 that increased income from continuing operations and net
income by $4,318,000, $.18 per share.
Revenues for the quarters ended December 31, 1994, March 31, 1995 and June
30, 1995 included certain licensing revenues of $10,000,000, $15,000,000 and
$2,000,000, respectively, that increased income from continuing operations and
net income by $5,184,000, $.22 per share, $8,130,000, $.34 per share, and
$1,248,000, $.05 per share, respectively.
27
<PAGE> 20
WMS INDUSTIES INC.
NOTES TO CONSOLDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 18: INDUSTRY SEGMENTS
In connection with the Company's restructuring initiative, the amusement games
business is now being reported under the following three industry segments:
video games which consists of only the Midway Games Inc. operations, pinball
and novelty, and gaming (see Note 1). Prior year segment data has been restated
to reflect this change in segment reporting.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Video games $245,423 $180,479 $121,882
Pinball and novelty 55,679 111,843 144,515
Gaming 37,523 22,172 16,336
- --------------------------------------------------------------------------------------------------------
Total revenues $338,625 $314,494 $282,733
========================================================================================================
GROSS PROFIT
Video games $105,367 $ 78,727 $ 59,203
Pinball and novelty (including restructuring charges of $3,422 in 1996) (1,164) 14,280 17,626
Gaming 6,164 2,325 4,192
- --------------------------------------------------------------------------------------------------------
Total gross profit $110,367 $ 95,332 $ 81,021
========================================================================================================
OPERATING INCOME (LOSS)
Video games $ 40,494 $ 47,136 $ 45,237
Pinball and novelty (including restructuring charges of $3,422 in 1996) (17,093) (2,590) 790
Gaming (9,508) (8,036) (3,648)
Unallocated general corporate expenses (3,106) (3,260) (3,449)
- --------------------------------------------------------------------------------------------------------
Total operating income 10,787 33,250 38,930
Interest and other income 4,353 4,691 3,787
Interest expense (3,683) (2,854) (3,178)
- --------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes $ 11,457 $ 35,087 $ 39,539
========================================================================================================
IDENTIFIABLE ASSETS
Video games $118,262 $ 81,106 $ 50,993
Pinball and novelty 53,044 58,634 54,584
Gaming 59,803 20,462 12,302
Corporate 83,245 115,506 109,118
Net assets of discontinued operations 42,091 49,792 47,968
- --------------------------------------------------------------------------------------------------------
Total assets $356,445 $325,500 $274,965
========================================================================================================
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Video games $ 1,974 $ 1,121 $ 287
Pinball and novelty 3,107 2,591 2,278
Gaming 360 168 84
Corporate 31 65 33
- --------------------------------------------------------------------------------------------------------
Total depreciation of property, plant and equipment $ 5,472 $ 3,945 $ 2,682
========================================================================================================
CAPITAL EXPENDITURES
Video games $ 3,107 $ 3,859 $ 754
Pinball and novelty 6,658 12,945 6,720
Gaming 1,678 588 423
Corporate 17 16 45
- --------------------------------------------------------------------------------------------------------
Total capital expenditures $ 11,460 $ 17,408 $ 7,942
========================================================================================================
EXPORT SALES (PRIMARILY TO WESTERN EUROPE)
Video games, pinball and novelty and gaming $ 76,337 $138,530 $144,080
========================================================================================================
SALES TO A MAJOR CUSTOMER
Video games and pinball and novelty $ 23,898 $ 52,343 $ 58,844
========================================================================================================
</TABLE>
28
<PAGE> 1
Exhibit 21
WMS INDUSTRIES INC.
AND
SUBSIDIARIES & AFFILIATES
<TABLE>
<CAPTION>
Date and
Type of % of State Jurisdictions
Name & Tax ID No. Business Ownership Organized Qualified
- ------------------ ------------------ --------------- ----------- --------------------
PARENT:
- ------------------
<S> <C> <C> <C> <C>
WMS Industries Holding company Public 11/20/74 New York-1/18/83
Inc. Delaware Illinois-3/29/91
36-2814522 Mississippi-12/28/94
Nevada-7/27/95
<CAPTION>
SUBSIDIARIES: (HOTELS AND CASINOS)
- --------------------------------------
<S> <C> <C> <C> <C>
El Conquistador Ferryboat Shuttle 100% by WHGI 9/30/93 - -
Ferryboat Inc. Puerto Rico
66-0499293
ESJ Hotel Holding company 100% 6/4/84 - -
Corporation Delaware
13-3237264
Isla Verde Tourism Parking Lot 100% by WHGI 11/6/92 - -
Parking Corp. Concession Holder Puerto Rico
Posadas de Puerto Hotel and casino 95% by 6/13/83 Puerto Rico
Rico Associates, ownership WMS Hotel Delaware 7/15/83
Incorporated
66-0401424
Posadas Finance Holding company 100% by Pos. de 8/12/88 - -
Corporation PR Assoc. Inc. Delaware
52-1635050
WMS El Con Corp. Holding company 100% 10/11/89 - -
06-1288059 Delaware
WMS Hotel Holding company 100% 6/13/83 - -
Corporation Delaware
(Name Change 5/20/87
from Williams Hotel Corporation)
36-3277014
Williams Hotel Holding company 100% 5/20/87 New York-3/1/88
Corporation Delaware Surrendered-3/15/93
13-3408888
Williams Hotel management 62% by 6/13/83 Puerto Rico-7/5/83
Hospitality WMS Hotel Delaware
Group Inc.
(Name Change 11/3/93
from Williams Hospitality Management Corporation)
66-0408507
WMS Property Inc. R.E. Holding Co. 100% 8/27/93 Puerto Rico-9/15/93
36-3906015 Delaware
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Date and
Type of % of State Jurisdictions
Name & Tax ID No. Business Ownership Organized Qualified
----------------- ---------------- --------- --------- -------------------
SUBSIDIARIES: (GAMES)
<S> <C> <C> <C> <C>
Atari Games Manufacturer of 100% by California
Corporation amusement games Midway California
77-0058756 Interactive Inc.
Atari Games Ireland Manufacturer of 100% by Ireland
Limited amusement games Atari Games Ireland
Corporation
Fun House Games Inc. Manufacturer of 100% 9/8/95 Illinois
36-4042546 amusement games Delaware (applied for)
K.K. Time Warner Manufacturer of 100% by Japan
Interactive (Japan) amusement games Atari Games Japan
Corporation
Lenc-Smith Inc. Manufacturer of 100% 3/23/92 Illinois
36-3843629 amusement games Delaware 11/4/92
Midway Manufacturer of 100% by 7/15/88 Illinois
Games amusement games WEG Delaware 8/3/88
Inc.
22-2906244
Midway Home Design, manufacture 100% by 12/16/93 CA - 4/27/94
Entertainment Inc. and sale of amusement Midway Games Delaware TX - 4/22/94
36-3933621 games for home systems Inc.
Midway Interactive Manufacturer of 100% 2/15/96 None
Inc. amusement games Midway Games Delaware
(Not applied for) Inc.
Qingdao Wei Te Indoor family 100% by 4/30/94 - -
Family Playland Co., playgrounds WMS Games People's
Ltd. Asia Limited Republic
of China
Tengen, Inc. Manufacturer of 100% by California
68-0143063 amusement games Atari Games California
Corporation
WMS Games Asia Holding Company 79% by 9/7/93 - -
Limited WMS Games Hong Kong
Bus.Reg.Cert. 17358232-000-09-93-2 1% by WEG
WMS Games Promotion and 100% 11/26/92 - -
(Europe) GmbH Marketing of Games Germany
WMS Games Inc. Holding Company 100% 8/25/88 Mississippi
13-3491757 Delaware
WMS Games Sales Foreign Sales 100% 4/26/93 - -
Corporation Corporation Barbados
98-0132712
WMS Games Parts Amusement games 100% 2/28/90 Illinois
& Service Inc. part sales Delaware 11/8/91
36-3741556
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Date and
Type of % of State Jurisdictions
Name & Tax ID No. Business Ownership Organized Qualified
- ----------------- --------- ---------- --------- -------------
SUBSIDIARIES: (GAMES)
<S> <C> <C> <C> <C>
WMS Gaming Inc. Manufacture of 100% 6/5/91 IL - 6/21/91
36-3770687 Video Lottery Delaware SD - 6/12/91
Terminals and MT - 9/4/91
Gaming Machines OR - 12/12/91
LA - 12/16/91
WV - 2/3/92
RI - 10/1/92
CO - 11/24/92
MS - 2/5/93
NV - 5/10/93
WI - 11/5/93
ND - 5/13/94
MO - 8/26/94
IN - 9/23/94
IO - 9/22/94
NJ - 9/26/94
AZ - 11/4/94
MN - 5/22/95
CT - 6/16/95
WMS Gaming Manufacture of 100% 5/24/93
(Nevada) Inc. Video Lottery WMS Gaming Nevada
36-3895992 Terminals and Inc.
Gaming Machines
Williams Elec- Manufacturer of 100% 4/13/84 Illinois-1/17/86
tronics Games, Amusement games Delaware
Inc.
36-3331124
Williams Innovative Manufacturer of 100% 9/18/84 Illinois
Technologies, Inc. Amusement games Delaware 10/17/84
Williams/ Design, manufacture 50% by WMS 3/15/94 [Illinois
Nintendo Inc. and sale of amusement Games Delaware Pending]
[ID# App. for] games for home systems
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
PARTNERSHIPS:
- -------------------
HOTEL:
- -------------------
<S> <C> <C> <C> <C>
El Conquistador Hotel and casino 50% 01/16/90
Partnership L.P. ownership by WKA Delaware
06-1288145 [23.3% WMS]
Las Casitas El Conquistador 50% by 4/27/93 - -
Development Condominium WKA El Con Puerto Rico
Company I, S development Associates
en C (S.E.)
Posadas de San Hotel and casino 50% by 07/30/84
Juan Associates ownership ESJ Hotel New York
66-041121
WKA Development, Real Estate 98% WHGI 6/1/91 - -
S.E. Holding Company 2% WKA El Con Puerto Rico
66-0476163
(formerly WMS Development, S.E.)
WKA El Con Partner in El 46.54% by 01/09/90
Associates Conquistador L.P. WMS El Con New York
06-1288143
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following (i) Registration
Statement No. 2-82186 on Form S-8 filed March 3, 1983; (ii) Registration
Statement No. 33-37187 on Form S-3 filed February 27, 1991; (iii) Registration
Statement No. 33-48363 on Form S-8 filed June 3, 1992; (iv) Registration
Statement No. 33-79146 on Form S-8 filed May 19, 1994; and (v) Registration
Statement No. 333-06021 on Form S-8 filed June 14, 1996, and in the related
Prospectuses, of our reports with respect to the consolidated financial
statements and schedule of WMS Industries Inc. and subsidiaries included in the
Annual Report (Form 10-K) of WMS Industries Inc. for the year ended June 30,
1996.
Ernst & Young LLP
Chicago, Illinois
September 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1995
<PERIOD-START> JUL-01-1995 JUL-01-1994
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 33,550 42,337
<SECURITIES> 27,109 47,863
<RECEIVABLES> 78,791 55,101
<ALLOWANCES> 1,826 1,515
<INVENTORY> 63,054 41,084
<CURRENT-ASSETS> 216,424 190,142
<PP&E> 62,871 51,411
<DEPRECIATION> 24,349 18,877
<TOTAL-ASSETS> 356,445 325,500
<CURRENT-LIABILITIES> 70,794 49,924
<BONDS> 65,363 57,500
0 0
0 0
<COMMON> 12,100 12,083
<OTHER-SE> 197,933 196,488
<TOTAL-LIABILITY-AND-EQUITY> 356,445 325,500
<SALES> 338,625 314,494
<TOTAL-REVENUES> 338,625 314,494
<CGS> 228,258 219,162
<TOTAL-COSTS> 228,258 219,162
<OTHER-EXPENSES> 45,931 27,079
<LOSS-PROVISION> 675 108
<INTEREST-EXPENSE> 3,683 2,854
<INCOME-PRETAX> 11,457 35,087
<INCOME-TAX> 3,980 12,075
<INCOME-CONTINUING> 7,477 23,012
<DISCONTINUED> (2,938) (3,805)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,539 19,207
<EPS-PRIMARY> .19 .80
<EPS-DILUTED> .19 .80
</TABLE>
