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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 1-8300
WMS INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 36-2814522
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3401 NORTH CALIFORNIA AVE., CHICAGO, ILLINOIS 60618
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (773) 961-1111
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.50 par value New York Stock Exchange
Stock Purchase Rights pursuant to Rights Agreement New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 27,849,495 shares of Common Stock held by
non-affiliates of the registrant on September 15, 1998 was $193,206,000. Solely
for purposes of this calculation, all shares held by directors and executive
officers of the registrant have been excluded. Such exclusion should not be
deemed an admission that such individuals are affiliates of the registrant. On
such date, the number of shares of Common Stock outstanding (excluding 52,312
shares held as treasury shares) was 27,986,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
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PART
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Annual Report to Stockholders of Registrant for the fiscal
year ended June 30, 1998.................................. I, II, IV
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PART I
This Annual Report on Form 10-K contains forward looking information and
describes the beliefs of WMS Industries Inc. (the "Company" or "WMS") concerning
future business conditions and the outlook for the Company based on currently
available information. Wherever possible, the Company has identified these
forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: the Company's
loss from continuing operations, the financial strength of the gaming and
amusement games industries, the expansion of legalized gaming into new markets,
the ability of the Company to qualify for and maintain licenses and approvals
from the governing bodies having jurisdiction over the Company's gaming machine
business, the ability of the Company to develop new technologies on a timely
basis and to design, introduce and market successful new game titles, the
success of planned advertising, marketing and promotional campaigns and the
outcome of certain legal proceedings to which the Company is a party, as well as
the items set forth under "Item 1. Business -- Factors Affecting Future
Performance." The Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise. Discussions containing such forward looking statements may be found
in the materials set forth under "Item 1. Business -- The Company," "--
Operations" and "-- Factors Affecting Future Performance" and "Item 3. Legal
Proceedings" contained herein and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's 1998
Annual Report to Stockholders (the "1998 Annual Report").
ITEM 1. BUSINESS.
THE COMPANY
WMS was incorporated in Delaware on November 20, 1974 under the name
Williams Electronics, Inc. The Company's principal executive offices are located
at 3401 North California Avenue, Chicago, Illinois 60618, telephone number (773)
961-1111. During fiscal year 1998 the Company, through its subsidiaries and
affiliates, was engaged in the design, manufacture and sale of slot/video gaming
machines and video lottery terminals ("Gaming"), coin-operated pinball and
novelty games and wooden cabinets for coin-operated games ("Pinball, Novelty and
Cabinets") and the contract manufacture of video games ("Contract
Manufacturing").
Until April 6, 1998, the Company also engaged in the design, distribution
and sale of interactive entertainment software played in both the coin-operated
and home markets through its subsidiary, Midway Games Inc. ("Midway"). On such
date, the Company distributed to its stockholders through a dividend (the
"Distribution") all of the shares of common stock of Midway owned by the
Company, which shares constituted 86.8% of the outstanding stock of Midway. On
October 29, 1996, Midway completed an initial public offering of 5,100,000
shares of Midway common stock (the "Offering"), which comprised the remaining
13.2% of Midway shares. The Distribution provided the Company's stockholders
with 1.19773 shares of Midway common stock for each owned share of the Company's
common stock, par value $.50 ("Common Stock"). Fractional shares were sold and
the net proceeds thereof paid in cash. The distribution ratio reflected
27,886,021 shares of Common Stock outstanding on the record date for the
Distribution. On the date of the Distribution, the Company's rights plan became
effective. See "The Distribution" below.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Distribution, which was proposed during 1997, split the Company and
Midway into two independent public corporations. Accordingly, the financial
position, results of operations and cash flows of the Company's video games
business segment are reported as discontinued operations in the 1998 Annual
Report. The Company's businesses are reported in the following three industry
segments: (i) Gaming; (ii) Pinball, Novelty and Cabinets; and (iii) Contract
Manufacturing. Financial information for the years ended June 30, 1998,
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1997 and 1996 with respect to these segments appears at Note 16 of the Notes to
Consolidated Financial Statements in the 1998 Annual Report, which information
is incorporated herein by reference.
OPERATIONS
GENERAL
During the fiscal year ended June 30, 1998, the Company was a designer,
manufacturer and marketer of gaming equipment, pinball and novelty games and
wooden cabinets for coin-operated games and a contract manufacturer of
coin-operated video games. The Gaming business segment is conducted through the
Company's subsidiary, WMS Gaming Inc. ("WGI") which markets its products under
the Williams(TM) and WMS Gaming(TM) trademarks. The Pinball, Novelty and
Cabinets business segment is conducted through its subsidiaries Williams
Electronics Games, Inc. ("Williams" or "WEG") and Fun House Games Inc. ("Fun
House Games") which market products under the Bally(R), FunHouse(R) and
Williams(R) trademarks and the Company's subsidiary, Lenc-Smith Inc.
("Lenc-Smith"). The Contract Manufacturing business segment is conducted through
WEG.
GAMING
Slot/Video Gaming Machines: The Company has designed, developed and
manufactured a series of gaming machines for casinos located in established
gaming jurisdictions, including jurisdictions permitting land based casinos and
casino gaming on riverboats and in casinos owned by Native American nations, as
well as in government sponsored gaming jurisdictions such as Canada. The
Company's newest generation of slot machines integrates video or dotmatrix
animation with traditional games to create a "game within a game" 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 gives players a sense of "investment" in the game
which contributes to player interest and extended play. The Company's newest
reel machines include Jackpot Party, X-Factor, Top Cat, Pharaoh's Fortune, Big
Bang Piggy Bankin' and Winning Streak. Each of these games features engaging and
entertaining themes. With the special Dotmation dotmatrix animation features, a
player's game experience is enhanced with animated sequences of mermaids diving
into the ocean or genies emerging from magic lamps to present the top awards.
Like all Williams games, these reel slots feature high-end sound, utilizing the
Company's proprietary Digital Compression System ("DCS"), and exciting glass
designs and visuals. At the September 1998 World Gaming Congress Exposition, the
Company expects to introduce at least eight new reel spinning games and six new
video gaming devices -- all with new themes and graphics.
The Company's innovations in video technology have given rise to some of
the industry's leading video gaming device concepts which utilize second-screen
bonusing features, including Reel 'Em In, Filthy Rich, Boom!, Jackpot Party and
Life of Luxury. These games are designed to attract players with greater visual
excitement through state-of-the art graphics and bigger monitors, high-end DCS
sound and engaging game themes. With the Company's multi-game Multi-Pay Plus,
the Company premiered an innovative cabinet design that accommodates a bigger,
high-resolution monitor in the same footprint of games with smaller, low
resolution monitors. Both the upright 17" and slant-top 19" versions of the game
incorporate this new cabinet design. Multi-Pay Plus offers the player a varied
menu of games on a single machine, including video poker, keno, blackjack and
video reel games. The Williams video gaming devices feature enhanced viewing
through high-resolution 19" or 17" monitors which vividly display digitized
images in up to 256 colors simultaneously as well as compact-disc quality
digitally produced sound effects and music. These devices accept both coins and
bills in varying denominations via an electronic coin validator or high-security
bill validator to ensure a high-level of fraud protection. Reel 'Em In, Filthy
Rich, Boom!, Jackpot Party and Life of Luxury also utilize the same superior
cabinet design with a clever recreational fishing theme, farming theme, Fourth
of July picnic theme, festive party theme and material extravagance theme,
respectively.
The Company is authorized to sell its gaming machines in Arizona, Colorado,
Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan,
Missouri, Minnesota, Mississippi, Montana, Nevada,
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New Jersey, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, West
Virginia and Wisconsin. The Company is also authorized to sell its gaming
machines directly or through distributors in certain foreign jurisdictions and
to several Native American nations.
See "Item 3. Legal Proceedings" with respect to certain patent litigation
between the Company and International Game Technology involving reel-type slot
machines.
Video Lottery Terminals: WGI markets video lottery terminals ("VLT" or
"VLTs") under the Williams(TM) and WMS Gaming(TM) trademarks. VLTs, purchased,
leased or operated on a revenue sharing basis by state lottery agencies to
increase lottery revenues, 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" or 17" 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 attached to the
monitor. VLTs accept both coins and bills in varying denominations via an
electronic coin validator or high-security bill validator to ensure 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 record
electronically 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.
The Williams Multi-Magic VLT, 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. WGI is currently
approved as a manufacturer of VLTs in Delaware, Oregon, Rhode Island and West
Virginia, and the Canadian Provinces of Alberta, New Brunswick, New Foundland
and Nova Scotia.
PINBALL, NOVELTY AND CABINETS
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 1998, the Company
introduced four new pinball game models -- two for the Williams product line and
two for the Bally product line. In fiscal 1998, four of the Company's pinball
games received American Amusement Machine Association ("AAMA") Silver and Gold
Sales Achievement Awards. In addition, the Amusement and Music Operators
Association ("AMOA") named the Company's The Adams Family Most Played Pinball
Game at its Fall 1997 trade show. Williams and Bally pinball games have received
three nominations for Most Played Pinball Game to be decided at the Fall 1998
trade show.
Shuffle-Alley and Novelty Games: Shuffle-alley games offer a simulation of
bowling with varied scoring options. During fiscal 1996, the Company introduced
League Champs, its most recent 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. The Company did not introduce any new novelty games in fiscal 1998. In
fiscal 1997, the Company introduced Aaahh!! Real Monsters based on the popular
children's
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cartoon. During fiscal 1996, the Company established Fun House Games to develop
and market novelty games. Additional novelty games introduced in fiscal 1996
were Safecracker and Ticket-Tac-Toe.
Cabinets: Lenc-Smith sells wooden pinball cabinets to WEG and wooden
cabinets and other wooden products to Midway, pursuant to a Cabinet Supply
Agreement, and to other companies from time to time, primarily for coin-operated
video games. See "Item 13. Certain Relationships and Related Transactions --
Relationship with Midway -- Cabinet Supply Agreement."
Due to an industry wide decline in demand for pinball games in recent
years, the Company determined to downsize its Pinball, Novelty and Cabinets
segment operations in fiscal 1996. See Note 4 to the Notes to Consolidated
Financial Statements contained in the 1998 Annual Report.
CONTRACT MANUFACTURING
The Company manufactures coin-operated video games and kits for Midway
pursuant to the Manufacturing Agreement described under the heading "Item 13.
Certain Relationships and Related Transactions -- Relationship with
Midway -- Manufacturing Agreement." From time to time, the Company may also
perform contract manufacturing for other parties.
BUSINESS STRATEGY
GENERAL
The Company's overall business strategy is to increase both market share
and profitability by offering an expanding library of high-earning games for
each key segment of the market. The Company intends to accomplish this by
building on the Company's track record of creating the most innovative,
entertaining games available and by increasing sales penetration in major
markets. The Company utilizes the creative talents of 89 experienced game
designers organized in teams comprised of programmers, artists and mechanical
and electrical engineers.
GAMING
The Williams slot machine and video gaming device lines offer casinos a
variety of game themes, all with original soundtracks, art and varying
paytables. The Company's Gaming machines 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.
PINBALL, NOVELTY AND CABINETS
During fiscal 1997, the Company completed 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 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. 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,
as a result of the Company's decision to downsize the Pinball, Novelty and
Cabinets segment, the Company introduced four models during fiscal 1997, four
models in fiscal 1998 and expects to introduce four games in fiscal 1999.
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CONTRACT MANUFACTURING
Contract manufacturing for Midway is conducted pursuant to the
Manufacturing Agreement. The Company does not currently plan to seek additional
manufacturing contracts. From time to time, however, the Company may perform
contract manufacturing for other parties.
MARKETING AND DISTRIBUTION
Slot/Video Gaming Machines. The slot/video machine market is composed of
casinos located in hotels and other establishments, riverboats, in Native
American nations and on cruise ships. 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 employs 12 sales
personnel in offices in several United States locations and retains two
sales/service consultants for the Canadian market.
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. 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.
Pinball and 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 53 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. Pinball and novelty games are marketed through trade shows, promotional
videotapes and advertising in trade publications.
Export Sales. Export sales of the Company's products, primarily of pinball
games to Western Europe, were approximately $24.4 million (25.0% of total
revenues) for the fiscal year ended June 30, 1998 compared with $33.7 million
(44.0% of total revenues) for the fiscal year ended June 30, 1997 and $41.4
million (44.0% of total revenues) for the fiscal year ended June 30, 1996.
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.
Customers/Distributors. In the fiscal year ended June 30, 1998, no one
customer accounted for greater than 10% of revenues of the Company. However,
Nova Games Import-Export GmbH & Co. KG and affiliates accounted for
approximately 16.0% ($12.1 million) of the Company's total revenues for fiscal
1997 and 15.0% ($14.0 million) of the Company's total revenues for fiscal 1996.
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
The Company's products are manufactured in its factories in Illinois.
Effective as of July 1, 1996 and in connection with the Offering, Midway and the
Company entered into a Manufacturing and Services Agreement dated as of July 1,
1996 (the "Manufacturing and Services Agreement") pursuant to which,
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among other things, the Company continued to manufacture Midway's coin-operated
video games. Effective as of April 6, 1998, in connection with the Distribution,
Midway and the Company and/or certain of its subsidiaries entered into various
agreements, including, among others, the Manufacturing Agreement and a Cabinet
Supply Agreement dated as of April 6, 1998 (the "Cabinet Supply Agreement")
pursuant to which the Company continues to manufacture Midway's coin-operated
video games and cabinets therefor. Effective April 6, 1998, the Manufacturing
Agreement superseded the Manufacturing and Services Agreement. For a description
of the Manufacturing and Services Agreement, the Manufacturing Agreement and the
Cabinet Supply Agreement, see "Item 13. Certain Relationships and Related
Transactions". The Company believes its facilities are adequate for its current
and planned production needs. Production is generally based on advance purchase
orders from Midway with respect to Contract Manufacturing, from governmental
agencies with respect to VLT's and from distributors or Midway with respect to
Pinball, Novelty and Cabinets.
As a result of the patent litigation, the Company was enjoined from
manufacturing or selling certain older models of its reel-type slot machines.
Consequently, the Company has a significant inventory of potentially excess and
unusable slot machines of such particular models that are written down to the
cost of salvageable parts therein. See "Item 3. Litigation" and "Note 13:
Litigation" contained in the Company's Consolidated Financial Statements in the
1998 Annual Report.
The Company believes that 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.
Slot machines are warranted for a period of 90 days; VLTs are warranted for
a period of up to one year; and most pinball and novelty games are warranted for
a period of 60 to 90 days. No substantial costs have been incurred by the
Company in connection with such warranties.
The raw materials used in manufacturing the Company's products 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, 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.
The Company has a long cycle from purchase of inventory to collection of
cash on the sale of its gaming machines which is typical in the industry.
Component parts are purchased and assembled into finished goods which are
inventoried in order to be able to quickly fulfill customer orders. Finished
gaming machines are often installed in casinos on a "trial" basis and, only
after a successful trial period, the machines are sold to the casinos. The sale
may have extended payment terms if competitive forces so require.
INTELLECTUAL PROPERTY LICENSES
While the Company primarily seeks to develop original proprietary games,
certain of the Company's games and gaming devices are based on properties
licensed from third parties, such as Hasbro, Inc. and the National Basketball
Association. 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 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.
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.
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PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
Each slot/video gaming machine and pinball and novelty game title 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 certain older models of reel-type slot machines.
GOVERNMENT REGULATION
GENERAL
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.
WGI has obtained the required regulatory licenses to manufacture and sell
its products to land based casinos, riverboats, racetracks, lotteries and Native
American casinos in the following domestic gaming jurisdictions: Arizona,
Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana,
Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North
Dakota, Oregon, Rhode Island, South Dakota, West Virginia, Wisconsin, Bad River
Band of Chippewa, Bay Mills Indian Community, Chitimacha Tribe of Louisiana,
Coushatta Tribe of Louisiana, Fond du Lac Band of Lake Superior Chippewa, Fort
McDowell Mohave-Apache Indian Community, Grand Portage Band of Chippewa, Grand
Traverse Band of Ottawa & Chippewa Indians, Hannahville Indian Community,
Ho-Chunk Nation, Lac du Flambeau Band of Lake Superior Chippewa Indians, Lac
Vieux Desert Band of Lake Superior Chippewa Indians, Leech Lake Band of
Chippewa, Lower Sioux Indian Community, Mashantucket Pequot Tribe, Menominee
Indian Tribe of Wisconsin, Mille Lacs Band of Ojibwe Indians, Mississippi Band
of Choctaw Indians, Mohegan Tribe of Indians, Omaha Tribe of Nebraska, Oneida
Tribe of Indians of Wisconsin, Prairie Band of Potawatomi Nation, Prairie Island
Indian Community, Pueblo of Isleta, Pueblo of Santa Ana, Pueblo of Tesuque, Red
Cliff Band of Lake Superior Chippewa, Red Lake Band of Chippewa Indians, Sac &
Fox Tribe of Mississippi in Iowa, Sault Ste. Marie Tribe of Chippewa Indians,
Shakopee Mdewakanton Sioux (Dakota) Community, Sisseton Wahpeton Sioux Tribe,
Spirit Lake Sioux Tribe, St. Croix Chippewa Indians of Wisconsin, Standing Rock
Sioux Tribe, Tunica-Biloxi Tribe of Louisiana, Upper Sioux Community, Ute
Mountain Ute Tribe, White Earth Nation, White Mountain Apache Tribe,
Yavapai-Apache Nation.
WGI is also licensed in the Canadian provinces of Alberta, British
Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Quebec
and Saskatchewan, and in the Bahamas, Greece and Puerto Rico.
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, the
"Nevada Act"). The Company's manufacturing and distribution of gaming devices
are subject to licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission") and the Nevada State Gaming Control Board (the "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
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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 to furnish any other information which the Nevada
Commission may require. On August 21, 1997, the Nevada Commission approved the
Company's application for an amendment to its Order of Registration by removing
the limitation which, if not removed, would have caused the Order of
Registration to expire in August 1997. Also on that date, the Gaming
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 Commission,
as applicable, as a Registered Corporation, as registered holding companies, for
licensure as a manufacturer and distributor of gaming devices, as an operator of
a slot machine route and as directors, officers and stockholders of such
entities. There can be no assurance that such registrations, findings of
suitability and licenses will not be revoked, suspended, limited or conditioned
or that such persons will continue to 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 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 who 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. 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 relationships 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
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financing transactions by the Gaming Subsidiaries must be reported to, and
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 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 those of 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 by the Nevada
Commission or the Chairman of the Nevada Board, 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.
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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 with 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.
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.
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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 by
the Nevada Board of their participation in such foreign gaming operations. 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. The Nevada Board may require a
Licensee to file an application for a finding of suitability to be made by the
Nevada Commission concerning an actual or intended activity or association of
the Licensee in a foreign gaming operation. 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, integrity and financial
stability.
WGI has been issued a CSI license by the New Jersey Commission. This
license was issued for a two-year period and, upon proper application and
satisfaction of the same requirements for the initial issuance of a license, may
be renewed for four-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 New Jersey casinos 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.
MISSISSIPPI
The manufacture, sale and distribution of gaming devises for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). Such
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission (collectively referred to as the "Mississippi Gaming
Authorities"). Although not identical, the Mississippi Act is similar to the
Nevada Act.
The Company and the Gaming Subsidiaries have received the various
registrations, approvals, permits and licenses in order to engage in
manufacturing and distribution of gaming equipment in Mississippi. The license
to manufacture and distribute gaming equipment in Mississippi is not
transferable, is issued for a two-year period and must be renewed every two
years thereafter.
Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Gaming Subsidiaries, including, but not
limited to, record or beneficial holders of any of the voting securities of the
Company or the Gaming Subsidiaries and any other person whom the Mississippi
Commission determines exercises a significant influence upon the management or
affairs of the Company. The Company and the Gaming Subsidiaries are
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required to maintain a current stock ledger in Mississippi which may be examined
by the Mississippi Commission at any time. The Company believes that all
required findings of suitability currently required have been applied for or
obtained. Any applicant for a finding of suitability must pay all investigative
fees and costs of the Mississippi Commission in connection with such an
investigation.
The Mississippi Act requires any person who acquires beneficial ownership
of more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Mississippi
Commission for a finding of suitability. The Mississippi Commission exercises
its discretion to require a finding of suitability of any beneficial owner of
more than 5% of a Registered Corporation's common stock. Under certain
circumstances, an "institutional investor," which acquires more than 5%, but not
more than 10%, of the Registered Corporation's voting securities may apply to
the Mississippi Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only
and otherwise meets the regulatory requirements of the institutional investor
waiver provisions.
The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes. All
loans by the Company must be reported to the Mississippi Commission and certain
loans and other stock transactions must be approved in advance.
If it were determined that the Mississippi Act was violated by the Company
or the Gaming Subsidiaries, the licenses they hold could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures, which action, if taken, could materially adversely
affect the Company's manufacturing and distribution of gaming devices.
FEDERAL REGISTRATION
Any subsidiaries of the Company that are involved in gaming activities are
required to register annually with the United States Department of Justice,
Criminal Division, in connection with the sale, distribution or operation of
Gaming. The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver or receive gaming
machines, gaming machine type devices and components across state lines or to
operate gaming machines unless that person has first registered with the
Attorney General of the United States. The Company is required to register and
renew its registration annually. The Company has complied with such registration
requirements. In addition, various record keeping and equipment identification
requirements are imposed by the Federal Act. Violation of the Federal Act may
result in seizure and forfeiture of the equipment, as well as other penalties.
REGULATION IN FOREIGN JURISDICTIONS
Certain foreign countries permit the importation, sale and/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 gaming machines have been properly licensed and approved or have
applied for licensure and approval in all jurisdictions where the Company's
operations require such licensure and approval.
NATIVE AMERICAN GAMING REGULATION
Numerous Native American tribes have become engaged in or have licensed
gaming activities on Indian lands as a means of generating tribal governmental
revenue. The Company manufactures and supplies gaming equipment for Native
American tribes. Gaming on Native American lands, including the terms and
conditions under which gaming equipment can be sold or leased to Native American
tribes, is or may be subject to regulation under the laws of the tribes, the
laws of the host state, the Indian Gaming Regulatory Act of 1988
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("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Secretary of the U.S. Department of the Interior (the
"Secretary"), and also may be subject to the provisions of certain statutes
relating to contracts with Native American tribes, which are administered by the
Secretary. As a precondition to gaming involving gaming machines, IGRA requires
that the tribe and the state enter into a written agreement (a "tribal-state
compact") that specifically authorizes such gaming, and that has been approved
by the Secretary, with notice of such approval published in the Federal
Register. Tribal-state compacts vary from state to state. Many require that
equipment suppliers meet ongoing registration and licensing requirements of the
state and/or the tribe and some impose background check requirements on the
officers, directors and shareholders of gaming equipment suppliers. Under IGRA,
tribes are required to regulate all commercial gaming under ordinances approved
by the NIGC. Such ordinances may impose standards and technical requirements on
main hardware and software and may impose registration, licensing and background
check requirements on gaming equipment suppliers and their officers, directors
and shareholders.
REGULATORY CHANGES AND LICENSE STATUS
The laws and regulations of the numerous jurisdictions, foreign and
domestic, in which the Company and its Gaming Subsidiaries do business are
subject to change from time to time. In addition, the license status of the
Company and its Gaming Subsidiaries with respect to these jurisdictions is
subject to change. The information set forth in this Annual Report on Form 10-K
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 Gaming and Pinball, Novelty and Cabinets 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,
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 a leading manufacturer of slot/video gaming
machines and VLTs and the world's leading manufacturer of coin-operated pinball
games. In the slot/video gaming machine market, the Company competes with
International Game Technology, Alliance Gaming Corp., Sigma Game, Inc., Casino
Data Systems, Inc., Video Lottery Consultants, Inc., Silicon Gaming, Inc.,
Atronics, Inc. and Aristocrat, Inc. In the VLT market, the Company competes
primarily with International Game Technology, G-Tech and Video Lottery
Consultants, Inc., each based in the United States, and Spielo, based in Canada.
See "Item 3. Legal Proceedings" with respect to certain patent litigation
between the Company and International Game Technology involving certain older
models of reel-type slot machines. In the coin-operated pinball game market, the
Company competes with Sega Pinball. See "Factors Affecting Future
Performance -- Competition" below.
During the term of the Manufacturing Agreement, WMS will not experience
competition for the manufacture of Midway's coin-operated video games; however,
the Manufacturing Agreement may be terminated on six months' notice. Midway may,
at any time, seek and accept superior competing third-party bids for cabinets
under the Cabinet Supply Agreement. No assurance can be given that Midway will
continue to employ the Company's services and keep these agreements in effect.
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DESIGN, RESEARCH AND PRODUCT DEVELOPMENT
The gaming equipment and pinball and novelty games 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. Cabinets are made to
customer specifications, and manufacturing under the Manufacturing Agreement is
based on Midway's designs and specifications. 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 trademarks
of others. The Company currently employs approximately 89 persons in its
research and product development departments. During the fiscal years ended June
30, 1998, 1997, and 1996, approximately $12,908,000, $12,882,000 and
$13,436,000, respectively, were expended on research and development with
respect to the Company's Gaming and Pinball, Novelty and Cabinets businesses.
SEASONALITY
None of the Company's business segments has historically been seasonal, but
quarterly revenues and net income usually increase when a coin-operated gaming
machine, pinball game or novelty game that achieves significant player appeal is
introduced.
EMPLOYEES
At June 30, 1998, the Company employed approximately 1,100 persons.
Approximately 550 of such employees were represented by the International
Brotherhood of Electrical Workers (the "IBEW") and approximately 145 of such
employees were represented by the United Furniture Workers union (the "UFW").
Collective bargaining agreements with the IBEW relating to the Chicago and
Waukegan, Illinois manufacturing facilities both expire June 30, 2000. The
collective bargaining agreement with the UFW relating to the Cicero, Illinois
manufacturing facility owned by Lenc-Smith expired June 30, 1998, and the
Company is currently in negotiations with the UFW to renew such agreement.
Non-salaried Lenc-Smith employees are currently on strike, but the Company does
not believe that the strike will have an adverse effect on the Company's
business, as the Company has been purchasing cabinets from alternative
suppliers. The Company believes that its relations with its other employees are
satisfactory.
THE DISTRIBUTION
In addition to the Company's businesses, the Company previously, through
Midway and Midway's subsidiaries and affiliates, designed, published and
marketed interactive entertainment software played in both the coin-operated and
home markets. On April 6, 1998, the Company distributed to its stockholders
through a dividend all of the Midway common stock which it owned, which stock
represented 86.8% of the outstanding common stock of Midway. The Distribution
provided the Company's stockholders with 1.19773 shares of Midway common stock
for each share of Common Stock held by such stockholders on the Distribution
record date of March 31, 1998. Fractional shares were sold and the net proceeds
thereof paid in cash. The distribution ratio reflected 27,886,021 shares of
Common Stock outstanding on March 31, 1998. The Company first announced its
intentions to complete the Distribution on August 11, 1997. On the date of the
Distribution, pursuant to the Company's Stock Option Plans, the stock options
held by directors, officers and other employees of the Company were adjusted,
and adjustment payments were made to holders of such options. See "Item 11.
Executive Compensation."
The financial position, results of operations and cash flows of Midway are
reported as discontinued operations in the 1998 Annual Report.
In November 1997, the Board of Directors adopted a rights plan pursuant to
the Rights Agreement dated as of March 5, 1998 between the Company and The Bank
of New York, as Rights Agent, which became effective on the date of the
Distribution. The Rights Agreement provides that one preferred stock purchase
right (a "Right") will attach to each share of the Common Stock issued. The
Rights will expire at the close of
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business on April 6, 2007 unless previously redeemed by the Company for nominal
consideration prior to exercisability. The Rights will not be exercisable,
transferable separately or trade separately from the shares of Common Stock,
until (a) the tenth business day after the date of a public announcement that a
person or group is an "Acquiring Person" or (b) the tenth business day (or such
later day as the Board, with the concurrence of a majority of Continuing
Directors (as defined), determines) after a person or group announces a tender
or exchange offer, which, if consummated, would result in such person or group
beneficially owning 15% or more of the Common Stock. In general, any person or
group of affiliated persons who, after the date of adoption of the Rights
Agreement, acquires beneficial ownership of 15% or more of the Common Stock will
be considered an "Acquiring Person." If a person or group of affiliated persons
becomes an Acquiring Person, then each Right (other than Rights owned by such
Acquiring Person and its affiliates and associates) will entitle the holder
thereof to purchase, for the exercise price, a number of shares of the Common
Stock having a then current market value of twice the exercise price.
Accordingly, at the original exercise price, each Right would entitle its
registered holder to purchase $200.00 worth of Common Stock for $100.00. A more
complete summary of the terms of the Rights Agreement is hereby incorporated
herein by reference to Exhibit 1 to the Company's Registration Statement on Form
8-A (File No. 1-8300) filed March 25, 1998.
The Distribution was also accompanied by certain director and executive
officer changes. Prior to the Distribution, in June 1996, Mr. Louis J. Nicastro
had resigned from his position with WMS and certain amusement game subsidiaries
of the Company in order to assume, at the request of the Board of Directors of
the Company, the position of Chief Executive Officer of WHG Resorts & Casinos
Inc. ("WHG") in contemplation of the distribution by the Company of all the
common stock of WHG to the Company's stockholders. In early January 1998, WHG
was merged with a large resort and casino company. The Board of Directors, in
view of Mr. Nicastro's experience with the Company and in the industry, invited
him to return as Chief Executive Officer and President, effective on the date of
the Distribution, when the former Chief Executive Officer and President, Mr.
Neil D. Nicastro, was scheduled to resign from the Company in order to devote
substantially all of his business time to Midway. See "Item 11. Executive
Compensation -- Employment Contracts." In addition, Mr. Kenneth J. Fedesna
resigned as a director of the Company, David M. Satz, Jr. joined the Board of
Directors and Kevin L. Verner became Vice President and Chief Operating Officer
shortly after the Distribution.
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FACTORS AFFECTING FUTURE PERFORMANCE
Some of the risks and uncertainties that may cause the Company's operating
results to vary from anticipated results or that may that adversely affect its
operating results are as follows:
LOSSES FROM CONTINUING OPERATIONS
The Company, apart from its discontinued operations, has not generated net
income during its last three fiscal years and may not generate net income for
the current fiscal year.
GAMING
Patent Litigation. WGI is party to certain patent litigation between WGI
and International Game Technology with respect to certain older model reel-type
slot machines. In the event that it is ultimately determined in these actions
that the Company's older model slot machines infringe on International Game
Technology's patent and if the Company is unable to develop or acquire
non-infringing alternative devices or obtain licenses to use the patent, the
development of the Company's reel-type slot machine business may be adversely
affected. For a description of the patent litigation, see "Item 3. Legal
Proceedings."
Ability to Maintain Regulatory Approvals. 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. The Company
is authorized to sell its gaming machines in Arizona, Colorado, Connecticut,
Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan, Missouri,
Minnesota, Mississippi, Nevada, New Jersey, New Mexico, North Dakota, Oregon,
Rhode Island, South Dakota, West Virginia and Wisconsin, as well as to cruise
ships operating in international waters. The Company is also authorized to sell
its gaming machines directly or through distributors in several international
jurisdictions and to many Native American nations. 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.
Application of Future or Additional Regulatory Requirements. In the future
the Company intends to seek the necessary registrations, licenses, approvals and
findings of suitability for the Company, its products and its personnel in other
U.S. and foreign jurisdictions in which the Company identifies significant sales
potential for its products. However, there can be no assurance that such
registrations, licenses, approvals or findings of suitability will be obtained
and will not be revoked, suspended or conditioned or that the Company will be
able to obtain the necessary approvals for its future products as they are
developed in a timely manner, or at all. If a registration, license, approval or
finding of suitability is required by a regulatory authority and the Company
fails to seek or does not receive the necessary registration, license, approval
or finding of suitability, the Company may be prohibited from selling its
products for use in the respective jurisdiction or may be required to sell its
products through other licensed entities at a reduced profit to the Company.
PINBALL, NOVELTY AND CABINETS
During fiscal 1997, the Company completed 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, and it expects to introduce a new generation of pinball games in late
1998, tentatively entitled "Pinball 2000." However, no assurance can be given as
to the likelihood of success and consumer acceptance of Pinball 2000 nor whether
the decline in demand for pinball games generally will abate.
16
<PAGE> 18
CONTRACT MANUFACTURING
The Manufacturing Agreement may be terminated on six months' notice. No
assurance can be given that Midway will continue to employ the Company's
services and keep this agreement in effect. In the event that Midway terminates
the Manufacturing Agreement, the Company's business and financial condition
could be adversely affected.
GENERAL
Conflicts of Interest With Midway. Certain of WMS' officers and directors
are also officers, directors and stockholders of Midway, and may be subject to
various conflicts of interest including, among others, the performance by the
two companies under their existing agreements with each other as well as the
negotiation of any agreements required to be entered into in the future between
these two parties. Additionally, WMS may be subject to various conflicts of
interest arising from the relationship among it and Midway and their respective
affiliates.
Mr. Louis J. Nicastro, the President, Chief Executive Officer and Chairman
of the Board of WMS is also a Director of Midway. Mr. Neil D. Nicastro, the son
of Louis J. Nicastro and a Director of and a consultant to WMS, is also the
Chairman of the Board, President, Chief Executive Officer and Chief Operating
Officer of Midway. Mr. Harold H. Bach, Jr., Mr. Kenneth J. Fedesna and Mr. Orrin
J. Edidin, officers and employees of WMS and/or various of its affiliates, are
also officers of Midway. Mr. Bach and Mr. Fedesna are also Directors of Midway.
Each of these key employees will devote such time to the business and affairs of
the Company as the Board of Directors deems appropriate. However, each such
person has other duties and responsibilities with Midway that may conflict with
time which might otherwise be devoted to his duties with WMS. The Company
anticipates that Messrs. Bach, Fedesna and Edidin will resign their positions
with the Company by the end of fiscal 1999.
Competition. The Gaming and Pinball, Novelty and Cabinets 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, 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. See
"Operations -- Competition" above. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures faced by the Company will not adversely affect its
business and financial condition.
17
<PAGE> 19
ITEM 2. PROPERTIES.
The following table sets forth the Company's principal properties,
principal use, approximate floor space and the annual rental and lease
expiration date, where leased by the Company, at June 30, 1998.
<TABLE>
<CAPTION>
LEASE
PRINCIPAL APPROXIMATE ANNUAL EXPIRATION
LOCATION USE SQUARE FEET RENT($) DATE(1)
-------- --------- ----------- ------- ----------
<S> <C> <C> <C> <C>
3401 N. California Principal Office 129,400 100% Owned --
Ave. ...................
Chicago, IL & Gaming Mfg. by Williams
313 1/2 Worth Ave., Administrative Office 665 16,625 03/31/00
#B-1....................
Palm Beach, FL
13820 West Business....... Gaming Warehouse and 54,107 221,838 07/31/00
Center Drive Distribution Center
Green Oaks, IL
2704 W. Roscoe St. ....... Gaming Office/R&D 28,500 100% Owned --
Chicago, IL by Williams
4170 W. Harmon Ave........ Gaming Office/Warehouse 26,809 135,120 01/31/99
Las Vegas, NV
350 Commerce Dr. ......... Gaming Office/Warehouse 16,500 82,500 09/30/99
Pleasantville, NJ
3950 N.E. 33rd Terrace.... Gaming Office/Warehouse 6,600 38,280 04/31/01
Suites 10 and 11
Kansas City, MO
12450 Short Cut Rd. ...... Gaming Office/Warehouse 5,750 24,000 07/31/02
Biloxi, MS
6590 S. Bermuda Rd. ...... Gaming Warehouse 15,000 30,000 month-to-month
Las Vegas, NV
4750 Longley Ln. ......... Gaming Office/Warehouse 4,960 34,784 07/31/99
Reno, NV
420 Corporate Cir......... Gaming Office/Warehouse 1,500 18,105 01/15/02
Suite C
Golden, CO
800 S. North Point Rd. ... Pinball, Novelty and 236,000 100% Owned --
Waukegan, IL Video Games Mfg. by Williams
4616 W. 19th St. ......... Cabinet Mfg. 105,000 100% Owned by --
Cicero, IL Lenc-Smith Inc.
2033 Swanson Ct........... Warehouse 15,000 14,000 09/30/98
Gurnee, IL
</TABLE>
- -------------------------
(1) Under leases that contain renewal options, additional amounts may be
payable for taxes, insurance, utilities and maintenance.
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 by the Company are suitable and adequate for the
design and production of the Company's products and for its contract
manufacturing. Except during the July vacation shutdown, the manufacturing
facilities 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.
18
<PAGE> 20
The Company owns substantially all of the machinery, equipment, tools and
dies, furnishings and fixtures used in its businesses, all of which are well
maintained and satisfactory for the purposes intended.
ITEM 3. LEGAL PROCEEDINGS.
In May 1994, WGI instituted a declaratory judgment action (the "Model 400
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 then 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 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, and enjoining WGI from further infringement of the
Telnaes Patent. On February 28, 1997, after a hearing on IGT's alleged damages,
the Court awarded judgment in favor of IGT and against WGI in the amount of
$32,845,189. Subsequently, the Court granted WGI's motion for a stay of
proceedings to enforce the money judgment pending disposition of WGI's motion
for a new trial and a similar stay pending appeal. On March 14, 1997, WGI filed
a motion seeking a new trial based on newly discovered evidence. A hearing on
the motion and the newly discovered evidence was concluded on September 18, 1997
and the Court disposed of this post-judgment motion on October 1, 1997 by
denying WGI's request for a new trial. WGI filed a notice of appeal on October
20, 1997. A bond having been previously filed by WGI, enforcement of the money
judgment has been stayed pending the disposition of the appeal. The appeal is
now pending before the United States Court of Appeals for the Federal Circuit.
On November 26, 1996, IGT commenced an action against WGI in the United
States District Court for the Northern District of Illinois (the "Model 401
Action"). In this action, IGT seeks a judgment declaring that WGI's Model 401
slot machine also infringes the Telnaes Patent. The complaint seeks a
preliminary and permanent injunction and treble damages. On December 18, 1996,
the Court granted IGT's motion for a preliminary injunction and enjoined WGI
from the manufacture, use and sale of the Model 401 slot machine. On April 10,
1997, WGI filed a motion to vacate the previously entered preliminary injunction
based upon the newly discovered evidence. On May 5, 1998, the Court denied the
motion to vacate the preliminary injunction. WGI filed a notice of appeal on May
7, 1998. The appeal of the preliminary injunction order is now pending before
the United States Court of Appeals for the Federal Circuit.
In the event that it is ultimately determined in the Model 400 Action and
in the Model 401 Action that such slot machines infringe upon 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 machines business may be adversely affected. The Telnaes Patent relates
only to reel spinning slot machines and does not relate to VLTs, video poker
machines and other video gaming devices.
Other than set forth above, the Company currently and from time to time is
involved in litigation incidental to the conduct of its business, none of 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.
19
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'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 1998 Annual Report, which information
is incorporated by reference herein.
ITEM 6. SELECTED FINANCIAL DATA.
Reference is made to "Selected Five-Year Financial Data" set forth in the
1998 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 1998 Annual Report, which
information is incorporated by reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
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 1998 Annual Report,
which information is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Identification of Directors. Except as set forth below, the directors
listed in the following table were elected at the January 1998 Annual Meeting of
Stockholders to serve until the 1999 Annual Meeting of Stockholders and until
their respective successors are duly elected and qualify. All are present
directors of the Company. Mr. Kenneth J. Fedesna, who was also elected as a
director of the Company at the January 1998 Annual Meeting of Stockholders,
resigned as a director on April 6, 1998. On April 6, 1998, Mr. David M. Satz,
Jr. was elected as a director of the Company to serve until the 1999 Annual
Meeting of Stockholders and until his successor has been duly elected and
qualifies. Mr. Satz was elected to fill the vacancy resulting from the
resignation of Mr. Fedesna. 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.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENTAGE
DIRECTOR OR DEEMED TO BE OF
POSITION WITH EXECUTIVE BENEFICIALLY OUTSTANDING
COMPANY AND PRINCIPAL OFFICER OF THE OWNED AT COMMON
DIRECTOR (AGE) OCCUPATION AS OF 09/15/98 COMPANY SINCE 09/15/98(1) STOCK(2)
-------------- ------------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Louis J. Nicastro (70)............ Chairman of the Board of
Directors, President and
Chief Executive Officer of
the Company 1974 7,659,832(3) 26.9%
Neil D. Nicastro (41)............. Director of the Company,
former President, Chief
Executive Officer and Chief
Operating Officer of the
Company and Chairman of the
Board of Directors,
President, Chief Executive
Officer and Chief Operating
Officer of Midway 1986 8,437,500(4) 28.9%
Norman J. Menell (66)............. Vice Chairman of the Board of
Directors of the Company 1980 75,902(5) *
William C. Bartholomay (70)....... Director of the Company and
President of Near North
National Group 1981 92,486(5) *
William E. McKenna (79)........... Director of the Company and
General Partner, MCK
Investment Company 1981 76,280(5) *
Harvey Reich (69)................. Director of the Company and
Attorney 1983 74,876(5) *
Ira S. Sheinfeld (60)............. Director of the Company and
Attorney, Squadron, Ellenoff,
Plesent & Sheinfeld LLP 1993 118,930(6) *
David M. Satz, Jr. (72)........... Director of the Company and
Attorney, Saiber Schlesinger
Satz & Goldstein 1998 51,000(7) *
</TABLE>
- -------------------------
* Less than 1% of the number of outstanding shares of Common Stock on September
15, 1998.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days.
(2) For purposes of calculating the percentage of outstanding Common Stock owned
by each director, shares issuable upon the exercise of options exercisable
within 60 days have been deemed to be outstanding.
21
<PAGE> 23
(3) The number of shares reported as beneficially owned includes 7,155,200
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
504,632 shares for which the reporting person has sole voting and sole
dispositive power, 500,000 of which may be acquired upon the exercise of
options. For a discussion concerning the shared voting power with respect to
the 7,155,200 shares of Common Stock referred to above, see "Item 12.
Security Ownership of Certain Beneficial Owners and Management -- Voting
Proxy Agreement."
(4) The number of shares reported as beneficially owned includes 7,155,200
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
1,282,300 shares for which the reporting person has sole voting and sole
dispositive power, 1,257,286 of which may be acquired pursuant to stock
options. For a discussion concerning the shared voting power with respect to
the 7,155,200 shares of Common Stock referred to above, see "Item 12.
Security Ownership of Certain Beneficial Owners and Management -- Voting
Proxy Agreement."
(5) Includes 62,955 shares of Common Stock which such person has the right to
acquire upon the exercise of stock options.
(6) Includes 100,728 shares of Common Stock which Mr. Sheinfeld has the right to
acquire upon the exercise of stock options.
(7) Includes 50,000 shares of Common Stock which Mr. Satz has the right to
acquire upon the exercise of stock options.
LOUIS J. NICASTRO has been the President and Chief Executive Officer of the
Company since April 6, 1998 and was Chief Operating Officer of the Company from
April 6, 1998 to May 14, 1998. He has served as Chairman of the Board of
Directors of the Company since its incorporation in 1974. Mr. Nicastro also
served as Co-Chief Executive Officer of the Company (1994-1996), Chief Executive
Officer (1974-1994), President (1985-1988 and 1990-1991) and Chief Operating
Officer (1985-1986 and 1998). Mr. Nicastro is also a Director of Midway, and he
held various executive positions for Midway from 1988 until 1996.
NEIL D. NICASTRO is a Director of and a consultant to the Company and he
was the President, Chief Executive Officer and Chief Operating Officer of the
Company until his resignation from such positions on April 6, 1998. 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). Mr. Nicastro is Chairman of the Board,
President, Chief Executive Officer and Chief Operating Officer of Midway. Mr.
Nicastro has held various other executive positions for Midway since 1988.
NORMAN J. MENELL has been Vice Chairman of the Board of Directors since
1990 and a Director of the Company since 1980. He also served as President
(1988-1990), Chief Operating Officer (1986-1990) and Executive Vice President
(1981-1988) of the Company. Mr. Menell is also a Director of Midway.
WILLIAM C. BARTHOLOMAY is President of Near North National Group, Chicago,
Illinois (insurance brokers) and Chairman of the Board of the Atlanta Braves
(National League Baseball). He has served as Vice Chairman of Turner
Broadcasting System, Inc., a division of Time Warner Inc., since April 1994
having also held that office during the period 1976-1992 and having served as a
Director (1976-1994). He also served as Vice Chairman of the Board of Directors
of Frank B. Hall & Co. Inc. (1974-1990). Mr. Bartholomay was elected a Director
of the Company in 1981. Mr. Bartholomay is also a Director of Midway.
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 Midway, California Amplifier, Inc., Drexler Technology Corporation
and Safeguard Health Enterprises, Inc. Mr. McKenna has served as a Director of
the Company since 1981.
22
<PAGE> 24
HARVEY REICH was a member of the law firm of Robinson Brog Leinwand Greene
Genovese & Gluck, P.C., New York, New York and its predecessor firms for in
excess of five years until his retirement in July 1998. Mr. Reich was elected a
Director of the Company in 1983. Mr. Reich is also a Director of Midway.
IRA S. SHEINFELD became a director of the Company in 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. Mr. Sheinfeld is also a Director of
Midway.
DAVID M. SATZ JR. became a Director of the Company on April 6, 1998. Mr.
Satz has been a member of the law firm Saiber Schlesinger Satz & Goldstein,
Newark, New Jersey, for in excess of five years. Mr. Satz is also a Director of
the Atlantic City Racing Association.
(b) Identification of Executive Officers. The following officers will serve
until the 1999 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.................... 70 Chairman of the Board, President and Chief Executive
Officer
Kevin L. Verner...................... 39 Vice President and Chief Operating Officer
Harold H. Bach, Jr. ................. 66 Vice President -- Finance, Treasurer, Chief Financial
and Chief Accounting Officer
Orrin J. Edidin...................... 37 Vice President, Secretary and General Counsel
</TABLE>
The principal occupation or employment of Mr. Louis J. Nicastro during the
last five years is set forth in Item 10(a) above. See also "Item 11. Executive
Compensation -- Employment Contracts" with respect to Mr. Louis J. Nicastro's
employment arrangements with the Company.
Mr. Verner has served as Vice President and Chief Operating Officer of the
Company since May 14, 1998, and as Executive Vice President and General Manager
of WGI since February 18, 1997. Previously, Mr. Verner served as Vice President
and Director of New Business Development of R.J. Reynolds Tobacco Company from
February 1993 until February 1997.
Mr. Bach assumed the positions of Treasurer effective September 13, 1994
and Vice President-Finance, Chief Financial and Chief Accounting Officer
effective September 30, 1990. He also served as Secretary of the Company from
July 5, 1990 to June 15, 1992. Additionally, Mr. Bach has served as Executive
Vice President -- Finance, Chief Financial Officer and a Director of Midway
since August 30, 1996. Previously, he served as Senior Vice President -- Finance
and Chief Financial Officer of Midway from September 17, 1990 to August 30,
1996, and he has served as Treasurer of Midway continuously since December 1,
1994. 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).
Mr. Edidin has served as Vice President, Secretary and General Counsel of
the Company since May 30, 1997. Mr. Edidin served as Associate General Counsel
of Fruit of the Loom, Inc. from August 1992 until May 1997. Mr. Edidin has also
served as Vice President, Secretary and General Counsel of Midway since June 30,
1997.
23
<PAGE> 25
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth the compensation paid by
the Company and Midway for service in all capacities during the fiscal years
ended June 30, 1998, 1997 and 1996 to each of the Company's executive officers
who served during such periods and whose compensation exceeded $100,000.
Pursuant to the Manufacturing and Services Agreement, after the Offering and
until the Distribution the compensation paid by the Company to the executive
officers of the Company (other than Mr. Neil D. Nicastro) was allocated to
Midway based upon estimates by management of the Company and by management of
Midway of the percentage of time devoted to Midway. After the Distribution,
compensation paid by WMS to the executive officers of the Company is reimbursed
by Midway in amounts equal to the Company's allocated cost pursuant to the
Temporary Support Services Agreement dated as of April 6, 1998 between the
Company and Midway (the "Temporary Support Services Agreement"). Management of
the Company believes that such executive officers devoted 40% to 70% of their
time to Midway during fiscal 1998. See "Item 13. Certain Relationships and
Related Transactions" for a description of the Manufacturing and Services
Agreement and the Temporary Support Services Agreement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
---------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS COMPENSATION($) OPTIONS(#)(1) COMPENSATION($)
- --------------------------- ---- --------- ----- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Louis J. Nicastro........ 1998 107,308 -- -- 500,000 4,956,640(2)
Chairman of the Board, 1997 -- -- -- 629,554(3) 9,261,503(4)
President and Chief 1996 832,500 -- 6,127(6) -- 629,971(7)
Executive Officer(5)
Neil D. Nicastro......... 1998 575,000 1,387,820 -- 250,000 2,547,074(8)(9)(10)
Former President, Chief 1997 600,000 969,160 -- 1,007,286(4) 54,632(10)
Executive Officer and 1996 532,500 267,600 -- -- 35,791(10)
Chief Operating
Officer(11)
Kevin L. Verner.......... 1998 250,000 100,000 -- -- 50,100(8)(12)
Vice President and Chief
Operating Officer(13)
Harold H. Bach, Jr. ..... 1998 300,000 220,000 -- -- --(8)
Vice President -- 1997 300,000 175,000 -- 94,433(4) --
Finance, Treasurer, 1996 262,000 67,800 -- -- --
Chief Financial Officer
and Chief Accounting
Officer
Orrin J. Edidin.......... 1998 180,000 75,000 -- 25,000 --(8)
Vice President, Secretary
and General Counsel(14)
</TABLE>
- -------------------------
(1) Does not include Midway stock options, all of which were granted at an
exercise price equal to market value on the date of grant. In fiscal 1998,
Mr. Louis J. Nicastro received options to purchase 10,000 shares of Midway
common stock, Mr. Neil D. Nicastro received options to purchase 150,000
shares of Midway common stock, Mr. Bach received options to purchase 50,000
shares of Midway common stock and Mr. Edidin received options to purchase
35,000 shares of Midway common stock. In fiscal 1997, Mr. Neil D. Nicastro
received options to purchase 500,000 shares of Midway common stock, Mr.
Louis J. Nicastro received an option to purchase 25,000 shares of Midway
common stock and Mr. Bach received options to purchase 100,000 shares of
Midway common stock.
24
<PAGE> 26
(2) Represents a payment made to Mr. Louis J. Nicastro to compensate him in
lieu of adjusting his WMS stock options in connection with the
Distribution. See "Adjustment to Options Resulting from the Distribution"
below.
(3) Reflects the adjusted amount (total number) of stock options previously
granted by the Company, which number of options and the exercise price
thereof were adjusted pursuant to the distribution of the WHG common stock.
(4) Represents a termination payment received in fiscal 1997. See "Item 1.
Business -- The Distribution" and Note 3 to the Notes to Consolidated
Financial Statements.
(5) Mr. Louis J. Nicastro was elected President, Chief Executive Officer and
Chief Operating Officer of the Company on April 6, 1998 and resigned from
the position of Chief Operating Officer on May 14, 1998. Mr. Louis J.
Nicastro has been Chairman of the Board of Directors since 1974. He also
served as Co-Chief Executive Officer in fiscal 1996 until June 26, 1996.
See "Item 1. Business -- The Distribution."
(6) Represents tax gross-up payments.
(7) Represents the accrual for contractual retirement benefits for Mr. Louis J.
Nicastro.
(8) Excludes the value of adjustments to stock options of these holders
pursuant to the Distribution. These amounts are found under "Adjustment to
Options Resulting from the Distribution" below.
(9) Includes Mr. Nicastro's termination payment in the amount of $2,500,000. He
also received an option to purchase 250,000 shares of Common Stock and a
WMS consulting agreement. See "Employment Contracts" below.
(10) Includes life insurance premiums of $1,571, $1,467 and $691 for fiscal
1998, 1997 and 1996, respectively, and accrual for contractual retirement
benefits of $45,503, $53,165 and $35,100 for fiscal 1998, 1997 and 1996,
respectively.
(11) Mr. Nicastro served as President, Chief Executive Officer and Chief
Operating Officer of the Company during fiscal 1998 until his resignation
from such positions on April 6, 1998.
(12) Includes $50,100 paid to Mr. Verner in consideration of his forfeiture of
performance units granted by his previous employer.
(13) Mr. Verner was elected Vice President and Chief Operating Officer of the
Company on May 14, 1998.
(14) Mr. Edidin joined the Company as Vice President, Secretary and General
Counsel on May 30, 1997.
The following table sets forth certain information with respect to options
to purchase Common Stock granted in fiscal 1998 under the Company's stock option
plans to persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------- VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF STOCK
OPTIONS PRICE APPRECIATION FOR
NUMBER OF SECURITIES GRANTED OPTION TERM(1)
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE PRICE -----------------------
NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) EXPIRATION DATE 5%($) 10%($)
---- -------------------- ---------------- -------------- --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Louis J. Nicastro.... 500,000 47.68 5.4375 04/06/08 1,711,250 4,331,250
Neil D. Nicastro..... 250,000 23.84 5.4375 04/06/08 855,625 2,165,625
Kevin L. Verner...... -- -- -- -- -- --
Harold H. Bach, Jr. . -- -- -- -- -- --
Orrin J. Edidin(2)... 25,000 2.38 4.4375 05/28/08 69,813 176,813
</TABLE>
- -------------------------
(1) The assumed appreciation rates are set pursuant to the rules and regulations
promulgated under the Securities Exchange Act of 1934, as amended, and are
not derived from the historical or projected prices of the Company's Common
Stock. Total potential stock price appreciation from April 6, 1998 to April
6, 2008 for all stockholders, based on the price of $5.4375 per share of
Common Stock on April 6, 1998 and
25
<PAGE> 27
a total of 27,886,021 shares of Common Stock outstanding, would be
$95,359,000 and $241,660,000 at assumed rates of stock appreciation of 5%
and 10%, respectively.
(2) This option become exercisable for up to 10%, 30%, 60% and 100% of the
option grant upon the first, second, third and fourth anniversaries,
respectively, of the date of the grant.
The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock and the number and value of
outstanding options owned by persons named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL-YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT 6/30/98(#) AT 6/30/98($)(1)
ACQUIRED ON VALUE EXERCISABLE(E) EXERCISABLE(E)
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(U) UNEXERCISABLE(U)
---- ----------- ----------- --------------------- --------------------
<S> <C> <C> <C> <C>
Louis J. Nicastro.................. 629,554 5,449,419(2) 500,000(E) --(E)
Neil D. Nicastro................... -- -- 1,257,286(E) 1,111,162(E)
Kevin L. Verner.................... -- -- 12,591(E) 13,768(E)
113,320(U) 123,915(U)
Harold H. Bach, Jr................. -- -- 94,433(E) 63,128(E)
Orrin J. Edidin.................... -- -- 47,500(U) 19,091(U)
2,500(E) 2,121(E)
</TABLE>
- -------------------------
(1) Based on the closing price of Common Stock on the New York Stock Exchange on
June 30, 1998, which was $4.1875.
(2) Excludes a $4,956,640 payment to compensate Mr. Louis J. Nicastro for the
full amount to which he would otherwise have been entitled under the
Adjustment Plan described below under the heading "Adjustment to Options
Resulting from the Distribution."
ADJUSTMENT TO OPTIONS RESULTING FROM THE DISTRIBUTION
As of the date of the Distribution, Midway had 38,500,000 shares
outstanding of which the Company owned 33,400,000 shares, representing
approximately 86.8% of the outstanding shares of Midway common stock.
In August 1997, the Company announced that its Board of Directors had
approved the Distribution in principle. The Distribution was conditioned upon
several requirements, including the receipt of a ruling from the Internal
Revenue Service that the transaction be tax free to the Company and its
stockholders. The Company completed the Distribution on April 6, 1998.
Each of the Company's four Stock Option Plans in effect prior to the
Distribution provided that in the event of a dividend or other distribution,
such as the Distribution, outstanding options were to be adjusted so as to
prevent dilution of the benefits or potential benefits intended to be made
available by the options in such manner as the Board of Directors deems
equitable. Several adjustment method alternatives were considered by the Board.
Some companies that have implemented a spin-off of a subsidiary have followed a
strategy where existing option holders were given replacement options in both
the parent and the subsidiary. However, since Midway was already a public
company with 13.2% of its stock held by stockholders other than the Company, the
Board concluded that it would not be appropriate for the Company to cause Midway
to issue options to satisfy the Company's obligations to its option holders.
The Board also considered adjusting the number and exercise price of the
options so that their intrinsic value after the Distribution would equal the
intrinsic value of the options before the Distribution. Such an adjustment would
be accompanied by both reducing the exercise price of the options and increasing
the
26
<PAGE> 28
number of shares issuable upon exercise of the options. However, in light of the
significant value of Midway to the Company as a whole, such an approach would
have resulted in the issuance of options to acquire more than twice the number
the shares of Common Stock outstanding, which the Board believed would not be in
the best interests of stockholders.
Instead, the Board adopted an approach that would give option holders the
same number of options to acquire shares of Common Stock after the Distribution
(at the exercise price described below) as such holders held at the time of the
Distribution and to compensate option holders for the lost opportunity value
represented by the shares of common stock of Midway being distributed in the
Distribution to stockholders of the Company which option holders would not
participate in. In order to preserve the Company's cash resources, the Board
also provided that such compensation be paid through a combination of cash and
shares of Common Stock and would be capped.
The Board also believed it was desirable to advise the Company's
stockholders at the earliest time of the minimum number of Midway shares they
would receive as a result of the Distribution. Such number would have varied by
reason of the exercise of any options prior to the completion of the
Distribution. The Board believed that it was therefore in the interest of
stockholders to obtain an undertaking from each option holder not to exercise
his or her options prior to the completion of the Distribution.
After considering all of the foregoing and in consultation with its
financial advisors, the Board approved and proposed to option holders the plan
described below (the "Adjustment Plan"). The Adjustment Plan was accepted by
holders of all outstanding options under the Company's four Stock Option Plans
then in effect, including each of the persons listed in the Summary Compensation
Table. The implementation of the Distribution was subject to the receipt of an
opinion from the Company's financial advisors, CIBC Oppenheimer Corp., that the
Distribution, including the adjustments to stock options resulting from the
Distribution, was fair to the Company and its stockholders.
Pursuant to the Adjustment Plan, each option holder agreed not to exercise
his or her outstanding options until the earliest of (i) the record date of the
Distribution which was March 31, 1998, (ii) the date the Company publicly
announces that is has abandoned its plan to complete the Distribution, (iii) the
termination of employment of such holder by the Company for any reason, or (iv)
June 30, 1998. In consideration for such agreement, each option holder was
afforded one of two choices, at their election, which election was made shortly
before the Distribution, in the event the Distribution was completed:
(1) Each option holder became entitled to receive a guaranteed minimum
payment for all of his or her options in an amount equal to the spread
between the trading price of shares of Common Stock on September 22, 1997
($30.00), the date the Adjustment Plan was approved by the Board, and the
exercise price of the option, plus a premium which represented the value of
the option holder's commitment not to exercise the options, determined
using the Black-Scholes method of determining option values; or
(2) At the time of the Distribution, the option holder could elect to
receive: (a) an ongoing option (the "Surviving Option") to purchase the
same number of shares of Common Stock as they then held at an exercise
price determined by multiplying the exercise price of the applicable
options by a fraction, the numerator of which was the projected value of
shares of Common Stock after the date on which shares of Common Stock
traded ex-dividend (i.e. without entitlement to the Midway shares being
spun off), as determined by the Board upon advice of its financial
advisors, and the denominator of which was the average closing price of
shares of Common Stock on the New York Stock Exchange for a period of time
prior to the Distribution determined by the Board and (b) payment for the
lost opportunity value of options to purchase the number of shares of
common stock of Midway that such optionee would have received prior to the
Distribution (the "Phantom Midway Options"). The number of shares subject
to the Phantom Midway Options was determined by multiplying the number of
options by the ratio of shares of Common Stock (the "Distribution Ratio").
The exercise price of the Phantom Midway Options was determined by
subtracting the exercise price of the applicable Surviving Option from the
exercise price of the applicable option and dividing the result by the
Distribution Ratio. The Phantom
27
<PAGE> 29
Midway Options were then valued using the Black-Scholes methodology,
utilizing such assumptions approved by the Board and its financial
advisors, and were purchased by the Company.
Payments by the Company for either the minimum guarantee or the Phantom
Midway Options was initially approved by the Board to be paid in cash up to
maximum of $30.0 million and in shares of Common Stock up to a maximum of
2,000,000 shares. Shortly before the Distribution, the Board became concerned
that, after payment of taxes, optionees would have little cash remaining and
might be inclined, for investment concentration or other reasons, to sell shares
of Midway common stock received in the Distribution, which sales might have a
depressive effect on the market price of such stock. The Board believed that
this concern would be alleviated if $5.0 million of additional cash were
available to pay to optionees so that optionees would receive at least 70% of
their adjustment payments in cash.
In order to raise the additional $5.0 million in cash as well as additional
cash of approximately $8.5 million used to pay expenses of the Distribution and
for additional working capital, the Company requested that Mr. Louis J.
Nicastro, Chairman of the Board of the Company, forego his entitlement under the
Adjustment Plan, to receive payments valued at $10,406,059 and an adjustment of
the exercise price of his stock options to $3.519 per share. Instead, at the
request of the Board, shortly before the Distribution, Mr. Nicastro exercised
his options to purchase 629,554 shares of Common Stock, sold such shares in the
public market and received from the Company a payment of $4,956,640 representing
the difference between $10,406,059 and the net amount he received from the
exercise and sale. When Mr. Nicastro exercised his options, the Company received
an aggregate exercise price of $13,437,200. The Company used $5.0 million of the
proceeds from the aforementioned exercise, together with $30.0 million, to pay
the 1998 cash portion of the adjustment to the other option holders. In
consideration of the Company making increased cash available to holders, each of
Messrs. Neil D. Nicastro, Harold H. Bach, Jr., Kenneth J. Fedesna, officers
and/or directors of the Company and/or Midway, agreed to refrain from selling or
disposing of shares of Midway common stock received by them in the Distribution
for a period of six months after the Distribution.
The consideration paid under the Adjustment Plan in fiscal 1998 to the
persons named in the Summary Compensation Table is in addition to the amounts
set forth therein and is as follows: Mr. Neil D. Nicastro received $12,428,476
in cash and Common Stock valued at $6,079,497. Mr. Kevin L. Verner received
$175,615 in cash and Common Stock valued at $85,904. Mr. Verner will receive
additional cash adjustment payments, up to a total of $2,256,605 if he is still
serving the Company through the end of the vesting period, on the dates that his
options would have vested. Mr. Harold H. Bach, Jr. received $1,093,193 in cash
and Common Stock valued at $534,722. Mr. Orrin J. Edidin received $49,442 in
cash. He will receive additional cash adjustment payments, up to a total of
$441,335 if he is still serving the Company or Midway through the end of the
vesting period, on the dates that his options would have vested. The Common
Stock was valued at the average of the high and low sale prices on the New York
Stock Exchange on April 3, 1998, the last day of trading prior to the
Distribution.
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.
Each Director of the Company who was not also an employee of the Company or
its subsidiaries prior to the Distribution (which at that time included Mr.
Louis J. Nicastro) was also a non-employee Director of Midway. All such persons
continue to serve on the Midway Board of Directors. During the 1998 fiscal year,
Midway paid a fee of $22,500 per annum to each such Midway Director. Each such
Director who serves as the chairman of any committee of the Midway Board of
Directors receives a further fee of $2,500 per annum for his services in such
capacity and each other member of Midway's Audit Committee receives an
additional fee of $2,500 per annum. Each such director was also eligible to
receive, and has received, options to purchase Midway common stock.
28
<PAGE> 30
The Company's 1991 and 1993 Stock Option Plans and 1998 Non-Qualified Stock
Option Plan (each, a "Plan") provide for the issuance of shares of Common Stock
of the Company pursuant to non-qualified stock options which may be granted to
non-employee directors of the Company, generally at not less than 100% of the
fair market value of such shares on the date of grant. Under the 1991 Plan, Mr.
Sheinfeld holds options to purchase 37,773 shares (as adjusted) of Common Stock
at an average exercise price of $3.26 (as adjusted). Under the 1993 Plan, the
following non-employee directors each hold options to purchase 62,955 shares (as
adjusted) of Common Stock at an exercise price of $3.519 per share (as
adjusted): Messrs. Bartholomay, McKenna, Menell, Reich and Sheinfeld. Under the
1998 Plan, Mr. Satz holds options to purchase 50,000 shares of Common Stock at
an exercise price of $4.4375 per share.
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 and in certain stock option plans of the
Company. See "Stock Option Plans" below.
Pursuant to the Adjustment Plan described above, Mr. Sheinfeld received
18,202 shares of Common Stock valued at $604,648 and cash in the amount of
$1,236,277, and Messrs. Reich, Menell, McKenna and Bartholomay each received
10,731 shares of Common Stock valued at $356,470 and cash in the amount of
$728,799.
STOCK OPTION PLANS
The Company currently has the following five stock option plans in effect:
the 1982 Employee Stock Option Plan; the 1991 Stock Option Plan; the 1993 Stock
Option Plan; the 1994 Stock Option Plan; and the 1998 Non-Qualified Stock Option
Plan (collectively, the "Stock Option Plans" or "Plans"). The Plans provide for
the issuance of shares of Common Stock pursuant to options which may be granted
thereunder. Options granted under the Plans may be in the form of options
meeting the requirements of Section 422 of the Internal Revenue Code, as amended
("incentive stock option", except in the case of the 1998 Plan), or options not
meeting the requirements of such section ("non-qualified stock options").
The purpose of each of the Plans is to encourage employees of the Company
and its subsidiaries and, under certain of the Plans, non-employee directors,
consultants and advisers of the Company to acquire a proprietary interest in the
Company and to enable such individuals to realize benefits from an increase in
the value of the Common Stock, to provide such individuals with greater
incentive and to encourage their continued provision of services to the Company
and, generally, to promote the interests of the Company and all of its
stockholders.
Under the 1982 Plan, there are 220,270 options outstanding, and no further
options are available for grant. Under the 1991 Plan, there are 963,217 options
outstanding and 88,445 options available for grant through September 6, 2001.
Under the 1993 Plan, there are 1,474,905 outstanding options, and no further
options are available for grant. Under the 1994 Plan, there are 1,450,326
options outstanding and 191,296 options available for grant through June 20,
2004. Under the 1998 Plan, there are 291,000 options outstanding and 709,000
options available for grant through May 13, 2008. The average exercise price of
the outstanding exercisable options at September 15, 1998, was approximately
$3.66. Of the 4,399,718 options outstanding, 2,430,178 were held by officers and
directors of the Company (including 500,000 held by Mr. Louis J. Nicastro and
1,257,286 held by Mr. Neil D. Nicastro).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Company's Compensation Committee or Stock Option Committee
is an employee or officer of the Company, and no officer, director or other
person had any relationship required to be disclosed here.
EMPLOYMENT CONTRACTS
Mr. Louis J. Nicastro is employed by the Company under the terms of an
Employment Agreement dated as of April 6, 1998. The employment agreement
provides for salaried compensation at the rate of $450,000 per
29
<PAGE> 31
annum, or such greater amount as may be determined by the Board of Directors.
The agreement expires June 30, 2000, subject to automatic extensions in order
that the term of Mr. Nicastro's employment shall at no time be less than two
years; provided that either party may terminate the agreement effective upon
expiration of the original term or the extended term upon written notice from
the terminating party to the other party dated and received at least two years
prior to the respective termination date.
The employment agreement of Mr. Louis J. Nicastro provides for, among other
things, full participation in all benefit plans and perquisites generally
available to senior executives and for reimbursement of all medical and dental
expenses incurred by him or his spouse during their lives to the extent such
expenses are not otherwise reimbursed by insurance provided by the Company.
Additionally, Mr. Nicastro is entitled to receive such special bonuses as may be
determined from time to time by the Board of Directors. The employment agreement
may be terminated at the election of Mr. Nicastro upon the occurrence without
his prior written consent of any one or more of the following events: (i) the
placement of Mr. Nicastro in a position of lesser status, the assignment to Mr.
Nicastro of duties inconsistent with his positions with the Company or duties
which, if performed, would result in a significant change in the nature or scope
of powers, authority, functions or duties inherent in such positions presently
in effect, the assignment to Mr. Nicastro of performance requirements or working
conditions which are at variance with the performance requirements or working
conditions presently in effect, or the treatment of Mr. Nicastro in a manner
which is in deregation of his status as a senior executive; (ii) the cessation
of service of Mr. Nicastro as a member of the Board of Directors of the Company;
(iii) the discontinuance or reduction (from the highest level in effect during
the term of the employment agreement) of amounts payable for base salary payable
to Mr. Nicastro pursuant to the agreement; and (iv) the discontinuance or
reduction (from the level in effect on the date of the employment agreement) of
the perquisites or fringe benefits inherent in Mr. Nicastro's position on the
date of the employment agreement. In 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 pay Mr. Nicastro a lump sum
payment equal in amount to three times Mr. Nicastro's base salary at the highest
annual rate in effect during the one-year period immediately preceding
termination and (b) to purchase at the election of Mr. Nicastro all stock
options held by him with respect to the Company's Common Stock and options to
purchase the securities of any other company at least 20% of the voting
securities of which are owned by the Company at a price equal to the spread
between the option price and the fair market price of such stock as defined in
the employment 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
will be required to make payments and purchase the stock options held by Mr.
Nicastro as set forth above.
If payments made to Mr. Nicastro pursuant to the employment agreement after
a change of control are considered "excess parachute payments" under Section
280G of the Internal Revenue Code of 1986, as amended, additional compensation
is required to be paid to Mr. Nicastro to the extent necessary to eliminate the
economic effect on him of the resulting excise tax. Pursuant to Section 280G, in
addition to income taxes, the recipient is subject to a 20% nondeductible excise
tax on excess parachute payments. An excess parachute payment is a payment in
the nature of compensation which is contingent on a change of ownership or
effective control and which exceeds the portion of the base amount (i.e., the
average compensation for the five-year period prior to the change of control)
allocable to the payment. These rules apply only if the present value of all
payments of compensation (including non-taxable fringe benefits) at the time of
a change of control is at least equal to three times the base amount. Excess
parachute payments are not deductible by the Company.
In contemplation of the Offering of common stock of Midway, the Company and
Midway each entered into separate employment agreements (the "1996 Agreements")
with Mr. Neil D. Nicastro effective as of July 1, 1996. On March 5, 1998 in
connection with the Distribution and at the request of the Board of Directors of
the Company, the Company and Mr. Nicastro entered into an agreement (the
"Termination Agreement") pursuant to which Mr. Nicastro's employment with the
Company terminated effective at the time of the Distribution. Pursuant to the
Termination Agreement, at the time of the Distribution,
30
<PAGE> 32
Mr. Nicastro resigned as President, Chief Executive Officer and Chief Operating
Officer of the Company to devote his full time to Midway.
Each of the 1996 Agreements provided that Mr. Nicastro would receive
salaried compensation at the rate of $300,000 per annum, or such greater amount
as may have been determined by the Board of Directors of the Company or Midway,
as applicable. Mr. Nicastro's 1996 Agreement with Midway provided 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 was not
owned by the Company (which was 13.2%). Mr. Nicastro's 1996 Agreement with the
Company also provided 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 was attributable to the pre-tax income of Midway was charged to
Midway pursuant to the Manufacturing and Services Agreement between the Company
and Midway. The 1996 Agreement with the Company provided 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 Mr.
Nicastro or his spouse and incurred by his children under the age of twenty-one.
Additionally, the Company and Midway each provided Mr. Nicastro with $1,000,000
of life insurance coverage in addition to the standard amount provided to
Company employees. Each of the 1996 Agreements provided that Mr. Nicastro could
divide his attention between the business of the Company and the business of
Midway as he would consider appropriate. The 1996 Agreements further provided
for certain benefits upon the termination of Mr. Nicastro's employment.
Pursuant to the Termination Agreement, as full consideration for payments
that would otherwise have been made to Mr. Nicastro under the 1996 Agreement
with the Company with respect to base salary, bonus, retirement and death
benefits, Mr. Nicastro was paid a lump sum of $2,500,000, and he was granted a
10-year option to purchase 250,000 shares of Common Stock at an exercise price
of $5.4375. Additionally, the $1,000,000 of life insurance coverage provided by
the Company under such 1996 Agreement was transferred to Midway at the time of
the Distribution.
In connection with the Distribution, the Company also entered into a
consulting agreement (the "Consulting Agreement") with Mr. Nicastro pursuant to
which Mr. Nicastro agreed to make himself reasonably available at the Company's
request, to render such services concerning the Company as the Board of
Directors or the Chairman of the Board and Chief Executive Officer of the
Company may reasonably request. The term of the Consulting Agreement is for five
years from the date of the Distribution, and is automatically renewable for
successive one year terms unless either party shall give notice of termination
not less than six months prior to the end of the term then in effect. The
Company pays Mr. Nicastro $1,000 per month for his services under the Consulting
Agreement.
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 its Gaming 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 below), Mr. Neil D. Nicastro, individually, a voting proxy for all
of the shares of Common Stock which they own beneficially or of record.
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
31
<PAGE> 33
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 September 15, 1998
(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, each
Executive Officer of the Company who is not also a Director of the Company, and
Directors and Executive Officers of the Company as a group. Security ownership
of the individual Directors of the Company is set forth under the heading
"Identification of Directors" in Item 10(a) above.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON PERCENTAGE OF
STOCK BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) COMMON STOCK(2)
------------------------------------ ------------------ ---------------
<S> <C> <C>
Sumner M. Redstone and National Amusements, Inc. ........... 7,155,200(3) 25.5%
200 Elm Street
Dedham, MA 02026
Boston Partners Asset Management, L.P. ..................... 1,633,700(4) 5.8%
One Financial Center, 43rd Floor
Boston, MA 02111
FMR Corp. .................................................. 2,095,000(5) 7.5%
82 Devonshire St.
Boston, MA 02109
Neil D. Nicastro............................................ 8,437,500(6) 28.8%
Midway Games Inc.
3401 North California Avenue
Chicago, IL 60618
Louis J. Nicastro........................................... 7,659,832(7) 26.8%
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Harold H. Bach, Jr. ........................................ 112,530(8) *
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON PERCENTAGE OF
STOCK BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) COMMON STOCK(2)
------------------------------------ ------------------ ---------------
<S> <C> <C>
Kevin L. Verner............................................. 15,177(9) *
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Orrin J. Edidin............................................. 2,500(10) *
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Directors and executive officers as a group (eleven
persons).................................................. 9,561,813(11) 31.6%(12)
</TABLE>
- -------------------------
* Less than 1% of the number of outstanding shares of Common Stock on
September 15, 1998.
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
amended, shares underlying options are deemed to be beneficially owned if
the holder of the option has the right to acquire beneficial ownership of
such shares within 60 days.
(2) For purposes of calculating the percentage of outstanding Common Stock,
shares issuable upon the exercise of options within 60 days have been
deemed to be outstanding.
(3) The number of shares reported is based upon information contained in
Amendment No. 20, dated January 7, 1997, to the Schedule 13D filed by Mr.
Sumner M. Redstone with the Securities and Exchange Commission and a Form
4, dated July 9, 1998, filed by Mr. Redstone with the Securities and
Exchange Commission. Pursuant to such filings, Mr. Redstone and National
Amusements, Inc., a Maryland corporation, reported beneficial ownership of
and sole investment power with respect to 3,671,300 and 3,483,900 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). As a result of his stock ownership in National Amusements, Inc. Mr.
Redstone is deemed the beneficial owner of the shares of Common Stock owned
by National Amusement, Inc.
(4) The number of shares reported is based upon information contained in
Schedule 13G, dated February 9, 1998, filed by Boston Partners Asset
Management, L.P. ("BPAM"), Boston Partners, Inc. ("Boston Partners") and
Desmond John Heathwood ("Heathwood", and collectively with BPAM and Boston
Partners, the "Reporting Persons"). Each of the Reporting Persons may be
deemed to own beneficially 1,633,700 shares of Common Stock. As sole
general partner of BPAM, Boston Partners may be deemed to own beneficially
all of the shares of Common Stock that BPAM may be deemed to own. As
principal stockholder of Boston Partners, Heathwood may be deemed to own
beneficially all of the Common Stock that Boston Partners may be deemed to
own beneficially. BPAM holds all the above 1,633,700 shares under
management for its clients, who have the right to direct the receipt of
dividends, to receive dividends from such shares and to receive the
proceeds from the sale of such shares. Boston Partners and Heathwood
expressly disclaimed beneficial ownership of any shares of Common Stock in
the Schedule 13G.
(5) The number of shares reported is based upon a written certification
delivered by Fidelity Management & Research Company, a wholly-owned
subsidiary of FMR Corp., stating that it is the beneficial owner of the
shares as a result of acting as investment adviser to various investment
companies registered under Section 8 of the Investment Company Act of 1940
and that Fidelity Advisor Strategic Opportunities Fund, one of such
investment companies, is the beneficial owner of 1,825,100 shares or 6.5%
of the Common Stock. FMR Corp. reported that it has sole power to dispose
of or direct the disposition of all such shares.
(6) The number of shares reported as beneficially owned includes 7,155,200
shares of Common Stock owned by Sumner M. Redstone and National Amusements,
Inc. for which the reporting person has
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shared voting power but no dispositive power. Additionally, the number of
shares reported as beneficially owned includes 1,282,300 shares for which
the reporting person has sole voting and sole dispositive power, 1,257,286
of which may be acquired upon the exercise of stock options. For a
discussion concerning the shared voting power with respect to the 7,155,200
shares of Common Stock referred to above, see "Voting Proxy Agreement"
above.
(7) The number of shares reported as beneficially owned includes 7,155,200
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
504,632 shares for which the reporting person has sole voting and sole
dispositive power, 500,000 of which may be acquired upon the exercise of
stock options. For a discussion concerning the shared voting power with
respect to the 7,155,200 shares of Common Stock referred to above, see
"Voting Proxy Agreement" above.
(8) Includes 94,433 shares of Common Stock which Mr. Harold H. Bach, Jr. has
the right to acquire upon the exercise of stock options.
(9) Includes 12,591 shares of Common Stock which Mr. Kevin L. Verner has the
right to acquire upon the exercise of stock options.
(10) Includes 2,500 shares of Common Stock which Mr. Orrin J. Edidin has the
right to acquire upon the exercise of stock options.
(11) Includes 2,269,358 shares of Common Stock which directors and executive
officers have the right to acquire upon the exercise of stock options.
Additionally, includes 7,155,200 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 7,155,200 shares of Common Stock referred to above, see
"Voting Proxy Agreement" above.
(12) For purposes of this calculation, the 7,155,200 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 7,155,200
shares of Common Stock referred to above, see "Voting Proxy Agreement"
above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIP WITH MIDWAY
Prior to the Offering, Midway was a wholly-owned subsidiary of WMS. As a
result of the Offering, WMS' beneficial ownership of Midway common stock was
reduced from 100.0% to 86.8%. As a result of the Distribution, WMS does not own
any Midway common stock. A majority of Midway's directors are also directors
and/or officers of WMS. Additionally, several of the executive officers of
Midway are officers and/or directors of WMS. See "Item 10 -- Directors and
Executive Officers of the Registrant."
In connection with the Distribution, WMS and Midway entered into the
following agreements:
Manufacturing Agreement. WEG and Midway entered into the Manufacturing
Agreement with respect to the manufacture of coin-operated video games and kits.
The Manufacturing Agreement became effective as of April 6, 1998 and will
continue in effect for a period of three years and for successive renewal
periods of six months each unless terminated (a) by either party for any reason
upon six months' notice or (b) in the event of a material default under the
Manufacturing Agreement or under the Confidentiality provisions of the
Confidentiality and Non-Competition Agreement discussed below, immediately at
the election of the non-defaulting party. Pursuant to this Agreement, all of
Midway's coin-operated video games are manufactured by WEG at its facility in
Waukegan, Illinois.
WEG is required to allocate 65% of its combined production and storeroom
square footage at the Waukegan plant to perform its obligations under the
Manufacturing Agreement. Midway conducts its own design and engineering of
coin-operated video games, including programming, graphic design, electrical
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engineering, sound engineering and model shop engineering. Certain production
engineering activities, such as the design process for the assembly of each
game, creating work station profiles and quality control of incoming parts and
the assembly process are provided to Midway by WEG. Materials used in the
manufacture of coin-operated video games which are unique to such games are
purchased by Midway from third party vendors. Materials used in the manufacture
of coin-operated video games which are common with materials used in the
production of pinball and novelty games sold by WEG are purchased by WEG
(estimated to be 5% of materials costs) and charged to Midway at actual cost
plus 9.0%. All labor costs, including fringe benefits, directly associated with
the manufacturing of coin-operated video games are charged to Midway at WEG's
actual cost plus 9.0%. The Waukegan plant's operating costs are either
identified as Midway costs and charged to Midway or allocated as agreed between
the parties. Such identified or allocated costs include, without limitation,
manufacturing costs, materials management costs, quality assurance costs and
administration costs. Plant operating costs of WEG paid by Midway under the
Manufacturing Agreement are increased by 9.0%. The obligations of WEG under the
Manufacturing Agreement are guaranteed by WMS.
Cabinet Supply Agreement. Lenc-Smith and Midway entered into the Cabinet
Supply Agreement with respect to the supply of cabinets for coin-operated video
games. The Cabinet Supply Agreement became effective as of April 6, 1998 and
will continue in effect for a period of three years and for successive renewal
periods of six months each unless terminated (a) by either party for any reason
upon six months' notice or (b) in the event of a material default, immediately
at the election of the non-defaulting party.
The Cabinet Supply Agreement provides that to initiate the purchase of
video game cabinets, Midway shall issue a pricing inquiry to Lenc-Smith
specifying the number of cabinets to be ordered and the cabinet specifications.
Lenc-Smith then provides a formal quote on the pricing inquiry, and, upon
agreement on a final price, a purchase order will be issued. Lenc-Smith ships
all cabinets to WEG's Waukegan, Illinois plant for use in the manufacture of
coin-operated video games. Midway may purchase cabinets from manufacturers other
than Lenc-Smith if Lenc-Smith does not meet competitive bona-fide quotes.
Spare Parts Sales and Service Agreement. WEG entered into the Spare Parts
and Sales Service Agreement with Midway and Atari Games Corporation, a
wholly-owned subsidiary of Midway ("Atari Games"), pursuant to which WEG sells
spare parts for coin-operated video games produced on behalf of Midway and Atari
Games. The agreement became effective as of April 6, 1998 and has the same term
and is terminable in the same manner as the Cabinet Supply Agreement. Pursuant
to the agreement, WEG must purchase and maintain an adequate inventory of spare
parts needed by end-users of coin-operated video games of Midway and Atari
Games. To the extent any parts are proprietary to Midway, Midway will sell or
arrange for the sale of such parts to WEG. WEG will purchase all non-proprietary
parts through its usual vendor sources or through Midway at negotiated prices.
Midway and Atari Games are required to refer their customers to WEG for spare
parts purchases during the term of the agreement. The agreement does not include
warranty services, which services Midway is required to provide to its
customers.
Sales Agreement. WEG entered into the Sales Agreement with Midway effective
April 6, 1998. The term of the agreement is the same as the term of the Cabinet
Supply Agreement. During the term of the agreement, Midway will supply WEG with
certain sales services, including sales testing for all new products developed
by WEG, coordinating and negotiating print advertising and video presentations
with third-party advertising and media firms, and negotiating distribution and
sales agency agreements with third-party distributors. In consideration for such
services, WEG will pay Midway $500,000 per annum plus a commission of 1.5% on
the first $25.0 million of annual net sales of WEG products made by Midway and
1.0% on annual net sales of WEG products made by Midway in excess of $25.0
million. The commission for the period April 6, 1998 through June 30, 1998 was
1.5% of the first $6,250,000 of net sales made by Midway and 1.0% thereafter. An
annual budget for marketing and testing will be developed and agreed upon in
advance between the parties annually and modified quarterly upon mutual
agreement. To extent additional services are provided which were not included in
the budget, certain additional charges will be applicable for payroll, overhead
and expense at Midway's cost plus 8.0%.
Information Systems Service Agreement. WEG and Midway entered into an
Information Systems Service Agreement effective as of April 6, 1998 for a term
of three years with successive renewal periods of
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18 months. The agreement is terminable by either party (a) upon 18 months'
notice or (b) upon a material default, immediately by the non-defaulting party.
Pursuant to the agreement, WEG provides Midway with access to its computer
systems for business applications, including, without limitation, order entry,
financial and manufacturing modules, marketing and sales and engineering
(including electronic engineering documentation and blueprint systems) as well
as support for the computer system. The agreement also provides that WEG will
coordinate the provision and maintenance of cabling, wiring, switching
components, routers and gateway and the purchasing, maintaining and upgrading of
network services for Midway. These services include purchasing of desktop
computers and related hardware as well as providing certain telecommunications
service to Midway. Midway may also request WEG to provide services to develop
the communications networking, operating and computer system of Midway and other
related services. Midway pays WEG an amount equal to the cost to WEG for all
services provided plus 6.6% of such cost.
Confidentiality and Non-Competition Agreement. WMS entered into the
Confidentiality and Non-Competition Agreement with Midway effective as of April
6, 1998. Pursuant to the agreement, either party may designate information
regarding its business as confidential, which each party will use its best
efforts to keep confidential. For a period of five years from the date of the
agreement, neither party shall engage, directly or indirectly, in the business
currently conducted by the other party (except that Midway may engage in any
business related to coin-operated video game manufacturing, cabinet supply,
spare parts sales and video-simulated non-mechanical pinball games).
Additionally, for the greater of (i) the period from the date of the agreement
until April 5, 2000 or (ii) a period ending one year after the date that any
particular employee of Midway or WMS no longer is providing services to the
other party pursuant to any of the agreements entered into in connection with
the Distribution, such other party shall not, directly or indirectly, hire or
solicit the employment of such employee or encourage such employee to leave his
or her employment or induce any such employee to seek, accept or obtain
employment by any person other than such employer.
Right of First Refusal Agreement. WMS and Midway entered into the Right of
First Refusal Agreement as of April 6, 1998 pursuant to which Midway was granted
the right of first refusal with respect to any offer to WMS to purchase the
Waukegan plant, or any material part thereof, which offer is not made in
connection with the sale of substantially all of WMS' assets and business as a
going concern or a sale of substantially all of the capital stock of WMS, and
which WMS intends to accept. The term of the agreement is for 10 years expiring
April 5, 2008.
Third Parties Agreement. WMS entered into the Third Parties Agreement with
Midway on April 6, 1998. The agreement governs the treatment of the numerous
arrangements with third parties that WMS and Midway are party to with respect to
game development, the obtaining or grant of licenses and other matters, which
provide for, among other matters, the receipt of payments, the obligation or
guaranty of an obligation to make payments to third parties, recoupment of prior
advances, rights of first refusal and reporting and monitoring of intellectual
property rights. The parties will allocate all other rights and obligations
under third party arrangements so that the party receiving the benefit will bear
the burden of such agreements. The agreement shall remain in effect so long as
any third party arrangements remain outstanding.
Temporary Support Services Agreement. WMS and Midway entered into a
Temporary Support Services Agreement which provides, among other things, that
WMS will supply all or a portion of Midway's administrative, legal and
accounting, information services, and janitorial and other agreed upon services,
including the use of space by Midway in any WMS facility, as requested from time
to time by Midway. In consideration for the services provided by WMS, Midway
will pay WMS an amount equal to its direct or allocated cost (including, without
limitation, wages, salaries, fringe benefits and materials), as indicated on
monthly invoices supplied by WMS. The agreement was effective as of April 6,
1998 and will continue for a period of 18 months and for successive renewal
periods of three months each; provided, however, that the agreement may be
terminated by either party upon six months' notice, and each party may, upon 60
days' notice, terminate any one or more of the services provided, except the use
of space by Midway in any WMS facility.
Tax Separation Agreement. Midway has been a member of the consolidated
group of corporations of which WMS was the common parent for federal income tax
purposes (the "WMS Group") since 1988.
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Therefore, Midway is jointly and severally liable for any federal tax liability
incurred by the WMS Group. Midway and WMS entered into the Tax Separation
Agreement as of April 6, 1998. The agreement sets forth the parties respective
liabilities for federal, state and local taxes as well as their agreements as a
result of Midway and its subsidiaries ceasing to be members of the WMS Group.
The Tax Separation Agreement governs, among other things, (i) the filing of tax
returns with federal, state and local authorities, (ii) the carryover of any tax
benefits of Midway, (iii) the treatment of the deduction attributable to the
exercise of stock options to purchase Common Stock which are held by employees
or former employees of Midway and any other similar compensation related tax
deductions, (iv) the treatment of certain net operating loss carrybacks, (v) the
treatment of audit adjustments, (vi) procedures with respect to any proposed
audit adjustment or other claim made by any taxing authority with respect to a
tax liability of Midway or any of its subsidiaries. Certain other tax matters
are addressed in the Tax Sharing Agreement which was entered into in connection
with the Offering and which remains in full force and effect. See "Tax Sharing
Agreement" below.
Tax Indemnification Agreement. WMS entered into the Tax Indemnification
Agreement with Midway effective as of April 6, 1998 providing for
indemnifications in the event the Distribution fails to qualify under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"). Each of the
parties agreed that for a period of two years after the Distribution, each would
continue active conduct of its historic trade or business as conducted by it
during the five-year period prior to the Distribution. Midway also agreed that,
to fund an acquisition, within one year after the Distribution, it would either
(i) raise cash through an offering of shares of its common stock or debentures
with detachable warrants to purchase shares of its common stock or (ii) use
shares of its common stock as acquisition consideration. Additionally, each
party agreed not to: (i) merge or consolidate with another entity; (ii)
liquidate or partially liquidate; (iii) sell or transfer all or substantially
all its assets in a single transaction or a series of transactions; (iv) redeem
or otherwise repurchase any of its capital stock in a manner contrary to certain
Internal Revenue Service ("IRS") revenue procedures; (v) enter into any
transaction or make any change in its equity structure which may cause the
Distribution to be treated as a plan pursuant to which one or more persons
acquire directly or indirectly its common stock representing a "50 percent or
greater interest" within the meaning of Section 355(d)(4) of the Code; or (vi)
in the case of Midway except in connection with stock issued pursuant to an
employee benefit or compensation plan and except as described in the private
letter ruling issued in connection with the Distribution issue additional shares
of its capital stock, unless such party first obtains the consent of the other
party and, if applicable, the person or persons acquiring a "50 percent or
greater interest" in such party have agreed to become jointly or severally
liable for payments required to be made by such party pursuant to the Tax
Indemnification Agreement.
Midway will indemnify WMS with respect to any action referred to above
which it takes or if it fails to issue Midway common stock as set forth above
which causes the Distribution to fail to qualify under Section 355 of the Code,
against any federal, state and local taxes, interest, penalties and additions to
tax imposed upon or incurred by the WMS Group or any member thereof. WMS will
indemnify Midway and its subsidiaries against any and all federal, state and
local taxes, interest, penalties and additions to tax resulting from the
Distribution, other than any such liabilities for which Midway is required to
indemnify WMS. The agreement also governs the procedures for indemnification,
calculation of the amount of indemnified liability for income taxes and
reduction of indemnity by income tax benefits from indemnified liabilities.
In connection with the Offering, WMS and Midway entered into the following
agreements:
Manufacturing and Services Agreement. WMS and Midway entered into the
Manufacturing and Services Agreement with respect to various aspects of their
relationship after the Offering. As of the Distribution, the Manufacturing
Agreement referred to above superseded and replaced the Manufacturing and
Services Agreement. The Manufacturing and Services Agreement became effective as
of July 1, 1996. The Manufacturing and Services Agreement provided, among other
things, for WMS to provide Midway with management, legal and administrative
services and certain services for its coin-operated video games including,
without limitation: (i) manufacturing; (ii) engineering support; (iii) sales and
marketing; (iv) warranty and field services; and (v) creative services.
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Materials used in the manufacture of coin-operated video games were
purchased by Midway at its expense. Certain other manufacturing costs were
allocated based upon units produced for Midway and the other amusement games
businesses of WMS. All labor costs associated with the manufacturing of coin-
operated video games were charged to Midway at actual cost to WMS. Certain
management, legal and administrative expenses and sales and marketing expenses
were allocated based upon the revenues of and/or units produced for Midway and
the other amusement games businesses of WMS or other methods appropriate for the
allocation of the particular expense.
Tax Sharing Agreement. WMS and Midway entered into a Tax Sharing Agreement
(the "Tax Sharing Agreement") (which remains in effect, except as provided in
the Tax Separation Agreement referred to above) whereby WMS and Midway have
agreed upon a method for: (i) determining the amount which Midway must pay to
WMS in respect of federal income taxes; (ii) compensating any member of the WMS
Group for use of its net operating losses, tax credits and other tax benefits in
arriving at the WMS Group tax liability as determined under the federal
consolidated return regulations; and (iii) providing for the receipt of any
refund arising from a carryback of net operating losses or tax credits from
subsequent taxable years and for payments upon subsequent adjustments. The
amount Midway is required to pay to WMS in respect of federal income taxes is
determined as if Midway was filing a separate tax return. If any two or more
members of the WMS Group are required to elect, or WMS elects to cause two or
more members of the WMS Group to file combined or consolidated income tax
returns under state or local income tax law, the financial consequences of such
filings among such members shall be determined in a manner as similar as
practicable to those provided for under the Tax Sharing Agreement for federal
taxes. The Tax Sharing Agreement is not binding on the IRS or upon state, local
or foreign taxing authorities. The effectiveness of the Tax Sharing Agreement is
therefore dependent on each member of the WMS Group having the ability to pay
its relative share of taxes. Because the IRS or other taxing authorities can be
expected to seek payment from WMS prior to seeking payment from the individual
group members, it is likely that Midway would seek to enforce any rights it may
have against WMS for sharing at a time when WMS was unable to pay its
proportionate share of taxes.
Patent License Agreement. WMS and Midway entered into a patent license
agreement which remains in effect, pursuant to which WMS and Midway each
licensed to the other, on a perpetual, royalty-free basis, certain patents used
in the development and manufacture of both coin-operated video games and video
lottery terminals and other gaming machines.
OTHER RELATED PARTY TRANSACTIONS
Mr. Ira S. Sheinfeld, a Director of the Company, 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.
The Company pays Mr. Neil D. Nicastro $1,000 per month for his services
under the Consulting Agreement. See "Item 11. Executive Compensation --
Employment Contracts."
Pursuant to the Termination Agreement, as full consideration for payments
that would otherwise have been made to Mr. Neil D. Nicastro under the 1996
Agreement with the Company with respect to base salary, bonus, retirement and
death benefits, Mr. Nicastro was paid a lump sum of $2,500,000, and he was
granted a 10-year option to purchase 250,000 shares of Common Stock at an
exercise price of $5.4375. See "Item 11. Executive Compensation -- Employment
Contracts."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements of the Company. See "Index to Financial
Information" on page F-1.
(2) Financial Statement Schedule of the Company. See "Index to Financial
Information" on page F-1.
(3) Exhibits.
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2(a) Plan of Reorganization and Distribution Agreement dated as
of March 20, 1997 among the Company, Williams Hotel
Corporation and WHG, incorporated by reference to Exhibit
2.1 to the Company's Report on Form 8-K filed May 5, 1997
(the "1997 Form 8-K").
3(a) Amended and Restated Certificate of Incorporation of the
Company 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 Company's Annual Report on Form 10-K for the year ended
June 30, 1994 (the "1994 10-K").
3(b) Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on February
25, 1998, incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred
Stock (included as Exhibit A to the Rights Agreement
referred to in Exhibit 4(b) hereto).
3(d) By-Laws of the Company, as amended and restated through June
26, 1996, incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended June
30, 1996.
4(a) Specimen of Common Stock certificate, incorporated by
reference to Exhibit 4(a) to the 1994 10-K.
4(b) Rights Agreement dated as of March 5, 1998 between the
Company and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A (File No. 1-8300) filed
March 25, 1998.
4(c) Form of Rights Certificate (included as Exhibit B to the
Rights Agreement referred to in Exhibit 4(b) hereto).
10(a) Third Amended and Restated Employment Agreement dated as of
July 1, 1996 between the Company and Neil D. Nicastro,
incorporated by reference to Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended June
30, 1997.
10(b) Second Amendment and Restatement of the Company'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(c) 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 Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1988.
10(d) 1982 Employee Stock Option Plan, as amended, incorporated by
reference to Exhibit 10(e) to the 1994 10-K.
10(e) 1991 Stock Option Plan, as amended, incorporated by
reference to Exhibit 10(f) to the 1994 10-K.
10(f) 1993 Stock Option Plan, incorporated by reference to Exhibit
10(g) to the 1994 10-K.
10(g) 1994 Stock Option Plan, incorporated by reference to
Appendix A to the Company's Definitive Proxy Statement dated
December 12, 1994.
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10(h) Form of Indemnity Agreement authorized to be entered into
between the Company and each officer and director approved
by the Board of Directors, incorporated by reference to
Exhibit 10(k) to the 1994 10-K.
10(i) 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(j) 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(k) WMS Industries Inc. Treasury Share Bonus Plan adopted April
19, 1993, incorporated by reference to Exhibit 10(ee) to the
Annual Report on Form 10-K for the fiscal year ended June
30, 1993.
10(l) Voting Proxy Agreement dated September 21, 1995 among Louis
J. Nicastro, Neil D. Nicastro, the Company, Sumner M.
Redstone and National Amusements, Inc., incorporated by
reference to Exhibit 10(u) to Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995.
10(m) Manufacturing and Services Agreement dated as of July 1,
1996 between the Company and Midway, incorporated by
reference to Exhibit 10.1 to the Midway Registration
Statement on Form S-1, File No. 333-11919, filed on
September 13, 1996 (the "Midway S-1").
10(n) Tax Sharing Agreement dated as of July 1, 1996 among the
Company, Midway, Midway Home Entertainment Inc., Midway
Interactive Inc., Atari Games and Tengen, Inc., incorporated
by reference to Exhibit 10.2 to the Midway S-1.
10(o) Patent License Agreement dated as of July 1, 1996 between
Williams and Midway, incorporated by reference to Exhibit
10.4 to the Midway S-1.
10(p) Tax Sharing Agreement, dated as of March 20, 1997, between
the Company, Williams Hotel Corporation, WHG, ESJ Hotel
Corporation, WMS Property Inc. and WHG El Con Corp., as
amended April 15, 1997, incorporated by reference to Exhibit
10.1 to the 1997 Form 8-K.
10(q) Amendment to Article III, Section 3 (Option Adjustments) of
1982 Employee Stock Option Plan, incorporated by reference
to Proposal No. 2 to the Company's Definitive Proxy
Statement on Schedule 14A as filed with the Commission on
December 11, 1996.
10(r) Amendment to Article III, Section 3 (Option Adjustments) of
1991 Stock Option Plan, incorporated by reference to
Proposal No. 2 to the Company's Definitive Proxy Statement
on Schedule 14A as filed with the Commission on December 11,
1996.
10(s) Amendment to Article III, Section 3 (Option Adjustments) of
1993 Stock Option Plan, incorporated by reference to
Proposal No. 2 to the Company's Definitive Proxy Statement
on Schedule 14A as filed with the Commission on December 11,
1996.
10(t) Amendment to Article III, Section 3 (Option Adjustments) of
1994 Stock Option Plan, incorporated by reference to
Proposal No. 2 to the Company's Definitive Proxy Statement
on Schedule 14A as filed with the Commission on December 11,
1996.
10(u) 1998 Non-Qualified Stock Option Plan, incorporated by
reference to Exhibit 4.6(a) to the Company's Registration
Statement No. 333-57585 on Form S-8 filed with the
Commission on June 24, 1998 (the "1998 S-8").
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10(v) Severance Agreement dated March 5, 1998 between the Company
and Neil D. Nicastro, incorporated by reference to Exhibit 2
to the Report on Form 8-K filed April 17, 1998 (the "April
1998 8-K").
10(w) Consulting Agreement dated as of April 6, 1998 between the
Company and Neil D. Nicastro, incorporated by reference to
Exhibit 3 to the April 1998 8-K.
10(x) Employment Agreement dated as of April 6, 1998 between the
Company and Louis J. Nicastro, incorporated by reference to
Exhibit 1 to the April 1998 8-K.
10(y) Manufacturing Agreement dated as of April 6, 1998 between
Williams Electronics Games, Inc. and Midway and the Guaranty
of the obligations of Williams Electronics Games, Inc.
thereunder by the Company, incorporated by reference to
Exhibit 10.23 to the Midway Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (the "Midway 1998
10-K").
10(z) Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and Midway, incorporated by reference to
Exhibit 10.24 to the Midway 1998 10-K.
10(aa) Spare Parts Sales and Service Agreement dated as of April 6,
1998 among Williams Electronics Games, Inc., Midway and
Atari Games Corporation, incorporated by reference to
Exhibit 10.25 to the Midway 1998 10-K.
10(bb) Sales Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and Midway, incorporated by
reference to Exhibit 10.26 to the Midway 1998 10-K.
10(cc) Information Systems Service Agreement dated as of April 6,
1998 between Williams Electronics Games, Inc. and Midway,
incorporated by reference to Exhibit 10.27 to the Midway
1998 10-K.
10(dd) Confidentiality and Non-Competition Agreement dated as of
April 6, 1998 between the Company and Midway, incorporated
by reference to Exhibit 10.28 to the Midway 1998 10-K.
10(ee) Right of First Refusal Agreement dated as of April 6, 1998
between the Company and Midway, incorporated by reference to
Exhibit 10.29 to the Midway 1998 10-K.
10(ff) Third Parties Agreement dated as of April 6, 1998 between
the Company and Midway, incorporated by reference to Exhibit
10.30 to the Midway 1998 10-K.
10(gg) Temporary Support Services Agreement dated as of April 6,
1998 between the Company and Midway, incorporated by
reference to Exhibit 10.31 to the Midway 1998 10-K.
10(hh) Tax Separation Agreement dated as of April 6, 1998 between
the Company and Midway, incorporated by reference to Exhibit
10.32 to the Midway 1998 10-K.
10(ii) Tax Indemnification Agreement dated as of April 6, 1998
between the Company and Midway, incorporated by reference to
Exhibit 10.33 to the Midway 1998 10-K.
13 Portions of 1998 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
</TABLE>
A Report on Form 8-K was filed by the Company on April 17, 1998, reporting
completion of the Distribution and certain related matters under Items 2 and 7.
41
<PAGE> 43
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
24th day of September, 1998.
WMS INDUSTRIES INC.
By: /s/ LOUIS J. NICASTRO
------------------------------------
Louis J. Nicastro
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LOUIS J. NICASTRO Chairman of the Board, President, Chief September 24, 1998
- --------------------------------------- Executive Officer and Director
Louis J. Nicastro (Principal Executive Officer)
/s/ HAROLD H. BACH, JR. Vice President -- Finance, Chief September 24, 1998
- --------------------------------------- Financial Officer and Treasurer
Harold H. Bach, Jr. (Principal Financial and Principal
Accounting Officer)
/s/ NORMAN J. MENELL Vice Chairman of the Board of Directors September 24, 1998
- ---------------------------------------
Norman J. Menell
/s/ WILLIAM C. BARTHOLOMAY Director September 24, 1998
- ---------------------------------------
William C. Bartholomay
/s/ WILLIAM E. MCKENNA Director September 24, 1998
- ---------------------------------------
William E. McKenna
/s/ NEIL D. NICASTRO Director September 24, 1998
- ---------------------------------------
Neil D. Nicastro
/s/ HARVEY REICH Director September 24, 1998
- ---------------------------------------
Harvey Reich
/s/ DAVID M. SATZ, JR. Director September 24, 1998
- ---------------------------------------
David M. Satz, Jr.
/s/ IRA S. SHEINFELD Director September 24, 1998
- ---------------------------------------
Ira S. Sheinfeld
</TABLE>
42
<PAGE> 44
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, 1998 and June 30,
1997...................................................... *
Consolidated statements of income for the years ended June
30, 1998, 1997 and 1996................................... *
Consolidated statements of changes in stockholders' equity
for the years ended June 30, 1998, 1997 and 1996.......... *
Consolidated statements of cash flows for the years ended
June 30, 1998, 1997 and 1996.............................. *
Notes to consolidated financial statements.................. *
Financial statements schedule II -- Valuation and Qualifying
Accounts for the years ended June 30, 1998, 1997 and
1996...................................................... F-3
</TABLE>
-------------------------
* Incorporated by reference to the portions of the Company's 1998 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> 45
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, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
The financial statements and related schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and related schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related schedule
are free of material 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 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, 1998 and 1997, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 17, 1998
F-2
<PAGE> 46
SCHEDULE II
WMS INDUSTRIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
-------- ----------- -------------------------- -------- --------
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING TO TO DEDUCTIONS-- AT
OF COSTS AND OTHER AMOUNTS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITTEN OFF PERIOD
----------- ---------- --------- -------- ------------ ------
<S> <C> <C> <C> <C> <C>
Allowance for receivables:
1998........................ $ 5,439,000 $ 581,000 $ -- $3,623,000 $ 2,397,000
1997........................ $ 831,000 $5,285,000 $ -- $ 677,000 $ 5,439,000
1996........................ $ 437,000 $ 432,000 $ -- $ 38,000 $ 831,000
Unrealized holding loss on
noncurrent marketable equity
securities:
1998........................ $12,758,000 $ -- $(12,758,000) $ -- $ --
1997........................ $ 8,321,000 $ -- $ 4,437,000 $ -- $12,758,000(1)
1996........................ $ 4,571,000 $ -- $ 3,750,000 $ -- $ 8,321,000(1)
</TABLE>
- -------------------------
(1) Included as a direct reduction of stockholders' equity.
F-3
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2(a) Plan of Reorganization and Distribution Agreement dated as
of March 20, 1997 among the Company, Williams Hotel
Corporation and WHG, incorporated by reference to Exhibit
2.1 to the Company's Report on Form 8-K filed May 5, 1997
(the "1997 Form 8-K").
3(a) Amended and Restated Certificate of Incorporation of the
Company 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 Company's Annual Report on Form 10-K for the year ended
June 30, 1994 (the "1994 10-K").
3(b) Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Company, as filed with
the Secretary of State of the State of Delaware on February
25, 1998, incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred
Stock (included as Exhibit A to the Rights Agreement
referred to in Exhibit 4(b) hereto).
3(d) By-Laws of the Company, as amended and restated through June
26, 1996, incorporated by reference to Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended June
30, 1996.
4(a) Specimen of Common Stock certificate, incorporated by
reference to Exhibit 4(a) to the 1994 10-K.
4(b) Rights Agreement dated as of March 5, 1998 between the
Company and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A (File No. 1-8300) filed
March 25, 1998.
4(c) Form of Rights Certificate (included as Exhibit B to the
Rights Agreement referred to in Exhibit 4(b) hereto).
10(a) Third Amended and Restated Employment Agreement dated as of
July 1, 1996 between the Company and Neil D. Nicastro,
incorporated by reference to Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended June
30, 1997.
10(b) Second Amendment and Restatement of the Company'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(c) 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 Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1988.
10(d) 1982 Employee Stock Option Plan, as amended, incorporated by
reference to Exhibit 10(e) to the 1994 10-K.
10(e) 1991 Stock Option Plan, as amended, incorporated by
reference to Exhibit 10(f) to the 1994 10-K.
10(f) 1993 Stock Option Plan, incorporated by reference to Exhibit
10(g) to the 1994 10-K.
10(g) 1994 Stock Option Plan, incorporated by reference to
Appendix A to the Company's Definitive Proxy Statement dated
December 12, 1994.
10(h) Form of Indemnity Agreement authorized to be entered into
between the Company and each officer and director approved
by the Board of Directors, incorporated by reference to
Exhibit 10(k) to the 1994 10-K.
10(i) 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").
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10(j) 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(k) WMS Industries Inc. Treasury Share Bonus Plan adopted April
19, 1993, incorporated by reference to Exhibit 10(ee) to the
Annual Report on Form 10-K for the fiscal year ended June
30, 1993.
10(l) Voting Proxy Agreement dated September 21, 1995 among Louis
J. Nicastro, Neil D. Nicastro, the Company, Sumner M.
Redstone and National Amusements, Inc., incorporated by
reference to Exhibit 10(u) to Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1995.
10(m) Manufacturing and Services Agreement dated as of July 1,
1996 between the Company and Midway, incorporated by
reference to Exhibit 10.1 to the Midway Registration
Statement on Form S-1, File No. 333-11919, filed on
September 13, 1996 (the "Midway S-1").
10(n) Tax Sharing Agreement dated as of July 1, 1996 among the
Company, Midway, Midway Home Entertainment Inc., Midway
Interactive Inc., Atari Games and Tengen, Inc., incorporated
by reference to Exhibit 10.2 to the Midway S-1.
10(o) Patent License Agreement dated as of July 1, 1996 between
Williams and Midway, incorporated by reference to Exhibit
10.4 to the Midway S-1.
10(p) Tax Sharing Agreement, dated as of March 20, 1997, between
the Company, Williams Hotel Corporation, WHG, ESJ Hotel
Corporation, WMS Property Inc. and WHG El Con Corp., as
amended April 15, 1997, incorporated by reference to Exhibit
10.1 to the 1997 Form 8-K.
10(q) Amendment to Article III, Section 3 (Option Adjustments) of
1982 Employee Stock Option Plan, incorporated by reference
to Proposal No. 2 to the Company's Definitive Proxy
Statement on Schedule 14A as filed with the Commission on
December 11, 1996.
10(r) Amendment to Article III, Section 3 (Option Adjustments) of
1991 Stock Option Plan, incorporated by reference to
Proposal No. 2 to the Company's Definitive Proxy Statement
on Schedule 14A as filed with the Commission on December 11,
1996.
10(s) Amendment to Article III, Section 3 (Option Adjustments) of
1993 Stock Option Plan, incorporated by reference to
Proposal No. 2 to the Company's Definitive Proxy Statement
on Schedule 14A as filed with the Commission on December 11,
1996.
10(t) Amendment to Article III, Section 3 (Option Adjustments) of
1994 Stock Option Plan, incorporated by reference to
Proposal No. 2 to the Company's Definitive Proxy Statement
on Schedule 14A as filed with the Commission on December 11,
1996.
10(u) 1998 Non-Qualified Stock Option Plan, incorporated by
reference to Exhibit 4.6(a) to the Company's Registration
Statement No. 333-57585 on Form S-8 filed with the
Commission on June 24, 1998 (the "1998 S-8").
10(v) Severance Agreement dated March 5, 1998 between the Company
and Neil D. Nicastro, incorporated by reference to Exhibit 2
to the Report on Form 8-K filed April 17, 1998 (the "April
1998 8-K").
10(w) Consulting Agreement dated as of April 6, 1998 between the
Company and Neil D. Nicastro, incorporated by reference to
Exhibit 3 to the April 1998 8-K.
10(x) Employment Agreement dated as of April 6, 1998 between the
Company and Louis J. Nicastro, incorporated by reference to
Exhibit 1 to the April 1998 8-K.
10(y) Manufacturing Agreement dated as of April 6, 1998 between
Williams Electronics Games, Inc. and Midway and the Guaranty
of the obligations of Williams Electronics Games, Inc.
thereunder by the Company, incorporated by reference to
Exhibit 10.23 to the Midway Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (the "Midway 1998
10-K").
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10(z) Cabinet Supply Agreement dated as of April 6, 1998 between
Lenc-Smith Inc. and Midway, incorporated by reference to
Exhibit 10.24 to the Midway 1998 10-K.
10(aa) Spare Parts Sales and Service Agreement dated as of April 6,
1998 among Williams Electronics Games, Inc., Midway and
Atari Games Corporation, incorporated by reference to
Exhibit 10.25 to the Midway 1998 10-K.
10(bb) Sales Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and Midway, incorporated by
reference to Exhibit 10.26 to the Midway 1998 10-K.
10(cc) Information Systems Service Agreement dated as of April 6,
1998 between Williams Electronics Games, Inc. and Midway,
incorporated by reference to Exhibit 10.27 to the Midway
1998 10-K.
10(dd) Confidentiality and Non-Competition Agreement dated as of
April 6, 1998 between the Company and Midway, incorporated
by reference to Exhibit 10.28 to the Midway 1998 10-K.
10(ee) Right of First Refusal Agreement dated as of April 6, 1998
between the Company and Midway, incorporated by reference to
Exhibit 10.29 to the Midway 1998 10-K.
10(ff) Third Parties Agreement dated as of April 6, 1998 between
the Company and Midway, incorporated by reference to Exhibit
10.30 to the Midway 1998 10-K.
10(gg) Temporary Support Services Agreement dated as of April 6,
1998 between the Company and Midway, incorporated by
reference to Exhibit 10.31 to the Midway 1998 10-K.
10(hh) Tax Separation Agreement dated as of April 6, 1998 between
the Company and Midway, incorporated by reference to Exhibit
10.32 to the Midway 1998 10-K.
10(ii) Tax Indemnification Agreement dated as of April 6, 1998
between the Company and Midway, incorporated by reference to
Exhibit 10.33 to the Midway 1998 10-K.
13 Portions of 1998 Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
WMS Industries Inc.
SELECTED FIVE-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED STATEMENT OF INCOME DATA June 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 98,990 $ 76,596 $ 93,202 $ 134,015 $ 160,851
- -----------------------------------------------------------------------------------------------------------------------------------
Operating loss (78,664) (79,316) (29,707) (13,886) (6,307)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes (74,254) (77,098) (29,308) (11,906) (5,919)
- -----------------------------------------------------------------------------------------------------------------------------------
Credit for income taxes (25,430) (30,301) (11,556) (5,779) (4,162)
- -----------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (48,824)(1) (46,797)(2) (17,752)(3) (6,127) (1,757)
Discontinued operations, net of applicable income taxes:
Video games segment
Income from discontinued operations - net 26,746 35,804 25,229 29,139 28,023
Gain on initial public offering of subsidiary -- 47,771 -- -- --
Hotel and casino segments
Income (loss) from discontinued operations - net -- 3,917 (2,938) (3,805) 2,217
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (22,078) $ 40,695 $ 4,539 $ 19,207 $ 28,483
===================================================================================================================================
Basic and diluted per share of common stock:
Loss from continuing operations $ (1.85)(1) $ (1.92)(2) $ (.74)(3) $ (.25) $ (.07)
===================================================================================================================================
Net income (loss) $ (.84) $ 1.67 $ .19 $ .80 $ 1.19
===================================================================================================================================
Average number of shares outstanding 26,446 24,334 24,122 24,102 24,016
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 207,522 $ 306,915 $ 295,071 $ 294,190 $ 262,148
- -----------------------------------------------------------------------------------------------------------------------------------
Working capital 112,066 103,910 157,248 112,891 118,684
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt -- 57,500 57,500 57,500 57,500
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 155,291 196,000 210,033 208,571 181,472
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Loss from continuing operations for fiscal 1998 includes an after-tax charge
of $39,917,000, $1.51 per share, from the Midway Games Inc. spin-off related
adjustment to the WMS common stock purchase options outstanding at the date
of the spin-off.
(2) Loss from continuing operations for fiscal 1997 includes an after-tax loss
provision of $37,361,000, $1.54 per share, related to WMS Gaming Inc. patent
litigation. See Note 13 in the Notes to Consolidated Financial Statements.
(3) Loss from continuing operations for fiscal 1996 includes pinball business
downsizing after-tax restructuring charges of $2,091,000, $.09 per share,
and additional after-tax provisions for gaming inventory obsolescence of
$1,344,000, $.05 per share.
7
<PAGE> 2
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion set forth below contains certain forward looking statements
concerning future business conditions and the outlook for the Company based on
currently available information that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward looking statements as a result of certain risks and uncertainties,
including, without limitation, the Company's loss from continuing operations,
financial strength of the gaming and pinball industries, the expansion of
legalized gaming into new markets, the development and success of new games and
new technologies, the ability of the Company to qualify for and maintain gaming
licenses and approvals, the outcome of certain legal proceedings to which the
Company is a party and other risks more fully described under "- Factors
Affecting Future Performance" in the Company's Annual Report on Form 10-K.
FINANCIAL CONDITION
Cash flows provided by operating, investing and financing activities before
discontinued operations during fiscal 1998 was $39,390,000 as compared with net
cash used of $60,580,000 during fiscal 1997.
Cash used by operating activities before changes in operating assets and
liabilities was $23,403,000 during fiscal 1998 compared with cash provided of
$297,000 during fiscal 1997.
The changes in operating assets and liabilities, as shown in the consolidated
statements of cash flows, resulted in $17,787,000 of cash outflow during fiscal
1998 compared with a cash outflow of $15,875,000 during fiscal 1997. Cash
outflow in fiscal 1998 was primarily due to increased inventories, receivables
and the income tax receivable as compared to cash outflow in fiscal 1997 which
was primarily due to increased inventories and receivables.
Cash provided by investing activities was $66,425,000 in fiscal 1998 compared
with cash used of $46,362,000 in fiscal 1997. Cash used for the purchase of
property, plant and equipment during fiscal 1998 was $6,192,000 compared with
$3,471,000 in fiscal 1997. Net cash provided by the sales of short-term
investments and marketable equity securities was $72,617,000 in fiscal 1998
compared with net cash used for the purchase of short-term investments of
$42,891,000 in fiscal 1997.
Cash provided by financing activities from the exercise of common stock
options was $14,333,000 in fiscal 1998 compared to $1,360,000 in fiscal 1997.
Cash used for discontinued operations in fiscal 1998 of $4,300,000 included
the payment of transaction costs for the Midway Games Inc. spin-off. Cash from
discontinued operations in fiscal 1997 of $38,082,000 included the collection of
the dividend notes from Midway Games Inc. of $50,000,000, net of the hotel and
casino segments uses of $11,918,000.
See the consolidated statements of cash flows on page 15 for further details
of cash flow items.
Management believes that cash and cash equivalents and short-term investments
will be adequate to fund the anticipated levels of inventories and accounts
receivable required in the operation of the business as well as cash required to
fund future operating losses, if any, and the Company's other presently
anticipated needs. See Note 13 to the consolidated financial statements
regarding patent litigation.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED WITH FISCAL 1997
Segment data discussed below is taken or derived from segment disclosures in
Note 16 to the consolidated financial statements.
Consolidated revenues increased to $98,990,000 in fiscal 1998 from
$76,596,000 in fiscal 1997. Gaming revenues in fiscal 1998 increased 68.9% to
$56,788,000 from $33,613,000 in fiscal 1997. Pinball, novelty and cabinets
revenues decreased 11.0% to $38,251,000 in fiscal 1998 from $42,983,000 in
fiscal 1997 primarily due to the continuing industry wide decline in demand for
pinball games. After the April 6, 1998 spin-off of Midway Games Inc. (See Note 1
to the consolidated financial statements), the Company continues to manufacture
under a contract the coin-operated video games designed and sold by Midway Games
Inc. ("Midway"). Revenues of the new business segment, contract manufacturing,
for fiscal 1998 were $3,951,000.
8
<PAGE> 3
WMS Industries, Inc.
Consolidated gross profit increased to $22,019,000 in fiscal 1998 from
$16,450,000 in fiscal 1997 due primarily to increased Gaming revenues which
generated increased gross profit and an increase in the Gaming gross profit
margin due to spreading certain fixed costs over greater production.
In fiscal 1998 the Company recorded a pre-tax charge of $59,890,000 for the
adjustment to WMS Industries Inc. ("WMS") outstanding common stock options to
compensate the holders for the lost opportunity value represented by the shares
of Midway distributed in the spin-off which option holders did not participate
in. In fiscal 1997 the Company recorded a provision of $61,925,000 relating to
patent litigation. See Note 13 to the consolidated financial statements.
Loss from continuing operations was $48,824,000, $1.85 per share, in fiscal
1998 compared with $46,797,000, $1.92 per share, in fiscal 1997. Fiscal 1998
loss from continuing operations included an after-tax charge of $39,917,000,
$1.51 per share, from the adjustments to the WMS outstanding common stock
options. Fiscal 1997 loss from continuing operations included after-tax
provisions relating to Gaming patent litigation of $37,361,000, $1.54 per share.
After excluding these after tax items, loss from continuing operations was
$8,907,000, $0.34 per share and $9,436,000, $0.39 per share, in fiscal 1998 and
1997, respectively. The decreased loss was primarily from the increased Gaming
gross profit, after absorbing the increased selling and administrative expenses.
PINBALL, NOVELTY AND CABINETS
Pinball, novelty and cabinets revenues decreased 11.0% to $38,251,000 in fiscal
1998 from $42,983,000 in fiscal 1997. The decreased revenues were primarily due
to the continuing industry wide decline in demand for pinball games.
The pinball, novelty and cabinets segment operating loss increased to
$7,761,000 in fiscal 1998 from $2,997,000 in fiscal 1997. The increase resulted
primarily from lower gross profit due to reduced unit sales prices and continued
development expense for the next generation of pinball.
GAMING
Gaming revenues increased 68.9% to $56,788,000 in fiscal 1998 from $33,613,000
in fiscal 1997. Gaming revenues increased primarily from the increase in the
number of gaming devices sold during the year. Fiscal 1998 revenues included
recently released reel spinning and video gaming devices including slot machines
and video lottery terminals. Fiscal 1997 revenues included primarily old model
reel spinning slot machines and video lottery terminals.
CONTRACT MANUFACTURING
Contract manufacturing segment revenues of $3,951,000 and operating income of
$347,000 includes operations for the period April 6, 1998 to June 30, 1998 from
the assembly of coin-operated video games for Midway.
FISCAL 1997 COMPARED WITH FISCAL 1996
Consolidated revenues decreased to $76,596,000 in fiscal 1997 from $93,202,000
in fiscal 1996. Gaming revenues in fiscal 1997 decreased 10.4% or $3,910,000
from fiscal 1996. Pinball, novelty and cabinets revenues decreased by
$12,696,000 or 22.8% in fiscal 1997 primarily due to the continuing industry
wide decline in demand for pinball games.
Consolidated gross profit increased to $16,450,000 in fiscal 1997 from
$8,422,000 (excluding the $3,422,000 in fiscal 1996 pinball restructuring
charges) in fiscal 1996 due primarily to lower cost of sales in fiscal 1997
resulting from the restructuring of the pinball business.
In fiscal 1997 the Company recorded a provision of $61,925,000 relating to
Gaming patent litigation. See Note 13 to the consolidated financial statements.
The increase in interest and other income was primarily from an increase in
interest income on short-term investments and cash and cash equivalents because
of the higher amount available for investment.
9
<PAGE> 4
WMS Industries Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Loss from continuing operations was $46,797,000, $1.92 per share, in fiscal
1997 compared with $17,752,000, $.74 per share, in fiscal 1996. Excluding the
after-tax provisions relating to Gaming patent litigation of $37,361,000, loss
from continuing operations was $9,436,000, $.39 per share in fiscal 1997. The
decreased loss was primarily from the reduced pinball, novelty and cabinets
segment operating loss.
PINBALL, NOVELTY AND CABINETS
Pinball, novelty and cabinets revenues decreased 22.8% to $42,983,000 in fiscal
1997 from $55,679,000 in fiscal 1996. The decreased revenues were primarily due
to the continuing industry wide decline in demand for pinball games.
The pinball, novelty and cabinets segment operating loss decreased 82.5% to
$2,997,000 in fiscal 1997 from $17,093,000 in fiscal 1996. The change resulted
primarily from the cost reductions resulting from June 1996 downsizing of this
segment's operations.
GAMING
Gaming revenues decreased to $33,613,000 in fiscal 1997 from $37,523,000 in
fiscal 1996. Gaming revenues were lower primarily from the negative impact on
revenues of the Gaming patent litigation.
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.
YEAR 2000
The term y2k is used to refer to a worldwide computer-related problem where
software programs and embedded programs in microprocessors will not work
properly when processing a date greater than December 31, 1999. This problem
results from using two digits to denote the third and fourth digit of a
four-digit year and a program assuming 19 to be the first two digits. Many
existing programs will continue to assume a 19 as the first and second digit
while a 20 or greater is required. A method of fixing the problem is for all
years to be denoted in a four-digit field and the program to recognize all four
digits as the year. This y2k problem has resulted in significant worldwide
concern about the future operations of businesses and other institutions.
The Company began addressing this problem in 1996. Management believes that
most of the systems utilized for the internal operations of the Company have
been made y2k compliant at an estimated cost of $1,000,000. The remainder, which
is primarily the upgrading of network servers, is to be made y2k compliant, at a
cost estimated to be under $500,000. Management also believes that there are no
y2k issues with respect to the functionality of any products sold in the past or
expected to be sold in the future.
Management also believes that the assembly of products should not be affected
by malfunctioning tools or equipment using embedded microprocessors as the
assembly process is not heavily reliant on such tools or equipment.
The only known area of y2k related exposure is with the suppliers of
components for gaming devices and pinball games. Although management has
recently began a program of formal contact with its suppliers so as to assess
the potential problem, management cannot make a determination as to the
suppliers' level of y2k compliance at this time. However, management will assess
problems, if any, with the suppliers. If needed, management will adjust the
shipping dates accordingly and at worst the Company would expect a short-term
delay in shipments. If such delay should occur it is not expected to have a
material effect on operating results for any reportable period.
10
<PAGE> 5
WMS Industries Inc.
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 and no adjustment has been made for the two significant tax-free
dividend distributions of common stock noted below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Calendar Period High Low
- --------------------------------------------------------------------------------
1996
<S> <C> <C>
Third Quarter $29 1/4 $19 1/2
Fourth Quarter 27 7/8 19 1/2
- --------------------------------------------------------------------------------
1997
First Quarter $24 3/8 $18 3/4
Second Quarter (through April 21) 20 18 1/8
Second Quarter (after April 21) 25 1/2 15 1/4
Third Quarter 30 3/16 23 5/8
Fourth Quarter 30 3/8 18
- --------------------------------------------------------------------------------
1998
First Quarter $32 1/4 $ 19 1/16
Second Quarter (through April 6) 33 3/4 31 1/8
Second Quarter (after April 6) 5 5/8 2 1/2
Third Quarter (through Sept. 16) 7 5/8 3 1/2
</TABLE>
A tax-free dividend in the form of 1.19773 shares of Midway common stock
(ticker symbol on the New York Stock Exchange - MWY) for every share of the
Company's Common Stock was distributed on April 6, 1998.
A tax-free dividend in the form of one share of WHG Resorts & Casinos Inc.
for every four shares of the Company's Common Stock was distributed on April 22,
1997 (WHG was acquired by Patriot American Hospitality, Inc. in January 1998).
No cash dividends were declared or paid during fiscal 1998 or 1997. 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 16, 1998, there were approximately 1,350 holders of record of
the Common Stock.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
WMS Industries Inc.
We have audited the accompanying consolidated balance sheets of WMS Industries
Inc. and subsidiaries as of June 30, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
June 30, 1998, in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Chicago, Illinois
August 17, 1998
11
<PAGE> 6
WMS Industries Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------
June 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,943 $ 1,853
Short-term investments 26,000 70,000
- --------------------------------------------------------------------------------------------------------
62,943 71,853
Receivables, net of allowances of $2,397 in 1998 and $5,439 in 1997 30,432 27,275
Income tax receivable 10,114 --
Inventories
Raw materials and work in progress 17,523 22,087
Finished goods 22,097 11,502
- --------------------------------------------------------------------------------------------------------
39,620 33,589
Deferred income taxes 18,155 21,013
Other current assets 769 1,259
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 162,033 154,989
Investment in marketable equity securities -- 15,000
Property, plant and equipment, net 32,607 30,744
Net assets of discontinued operations - video games segment -- 90,713
Other assets 12,882 15,469
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $207,522 $306,915
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,818 $ 5,920
Accrued compensation and related benefits 3,020 3,223
Accrued discontinuance costs -- 1,650
Accrued liability related to WMS Gaming Inc. patent litigation 35,372 37,208
Other accrued liabilities 3,757 3,078
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 49,967 51,079
Long-term debt -- 57,500
Deferred income taxes 869 629
Other noncurrent 1,395 1,707
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) -- --
Common stock (issued 28,032,766 shares in 1998 and 24,270,166 shares in 1997) 14,016 12,135
Additional paid-in capital 170,418 84,673
Retained earnings (deficit) (28,995) 112,098
- --------------------------------------------------------------------------------------------------------
155,439 208,906
Treasury stock, at cost (52,312 shares in 1998 and 1997) (148) (148)
Unrealized loss on noncurrent marketable equity securities -- (12,758)
- --------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 155,291 196,000
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $207,522 $306,915
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 7
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
Years ended June 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 98,990 $ 76,596 $ 93,202
COST AND EXPENSES
Cost of sales (including restructuring charges of $3,422 in 1996) 76,971 60,146 88,202
Research and development 12,908 12,882 13,436
Selling and administrative 27,885 20,959 21,271
Adjustment to common stock options 59,890 -- --
Provisions related to WMS Gaming Inc. patent litigation -- 61,925 --
- -----------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 177,654 155,912 122,909
- -----------------------------------------------------------------------------------------------------------------------------
Operating loss (78,664) (79,316) (29,707)
Interest and other income 4,410 5,661 3,705
Interest expense -- (3,443) (3,306)
- -----------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (74,254) (77,098) (29,308)
Credit for income taxes (25,430) (30,301) (11,556)
- -----------------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (48,824) (46,797) (17,752)
Discontinued operations, net of applicable income taxes:
Video games segment
Income from discontinued operations 28,302 34,813 25,229
Extraordinary gain on early extinguishment of debt -- 2,641 --
Costs related to discontinuance, net (1,556) (1,650) --
Gain on initial public offering of subsidiary -- 47,771 --
Hotel and casino segments
Income from discontinued operations -- 4,742 2,953
Costs related to discontinuance -- (825) (5,891)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (22,078) $ 40,695 $ 4,539
=============================================================================================================================
Basic and diluted per share of common stock:
Loss from continuing operations $ (1.85) $ (1.92) $ (.74)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (.84) $ 1.67 $ .19
- -----------------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding 26,446 24,334 24,122
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 8
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Additional Retained Treasury Unrealized Total
Common paid-in earnings stock, holding stockholders'
stock capital (deficit) at cost loss equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Net income for the year ended June 30, 1997 -- -- 40,695 -- -- 40,695
Issuance of 70,104 shares of common stock
through exercise of options 35 1,325 -- -- -- 1,360
Increase in unrealized holding loss on noncurrent
investment in marketable equity securities -- -- -- -- (4,437) (4,437)
Tax benefit from exercise of
common stock options -- 147 -- -- -- 147
Adjustment to common stock options for
distribution of subsidiary -- 705 -- -- -- 705
Distribution of subsidiary as a tax-free dividend -- -- (52,503) -- -- (52,503)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1997 12,135 84,673 112,098 (148) (12,758) 196,000
Net loss for the year ended June 30, 1998 -- -- (22,078) -- -- (22,078)
Issuance of 758,385 shares of common stock
through exercise of stock options 379 13,954 -- -- -- 14,333
Issuance of 2,488,855 shares of common stock
in conversion of subordinated debentures 1,244 55,090 -- -- -- 56,334
Issuance of 515,360 shares of common stock
relating to adjustment of
common stock options 258 14,717 -- -- -- 14,975
Decrease in unrealized loss on noncurrent
investment in marketable equity securities -- -- -- -- 12,758 12,758
Tax benefit from exercise of
common stock options -- 1,984 -- -- -- 1,984
Distribution of subsidiary as a tax-free dividend -- -- (119,015) -- -- (119,015)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1998 $14,016 $170,418 $ (28,995) $(148) $ -- $ 155,291
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 9
WMS Industries Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Years ended June 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(22,078) $ 40,695 $ 4,539
Adjustments to reconcile net income (loss) to net cash used by operating
activities:
Income from discontinued operations - video games segment (28,302) (37,454) (25,229)
Income from discontinued operations - gain on initial public
offering of subsidiary - video games segment -- (47,771) --
Income from discontinued operations - hotel and casino segments -- (4,742) (2,953)
Costs related to discontinuance 1,556 2,475 5,891
Gain on sale of marketable equity securities (859) -- --
Depreciation and amortization 5,642 6,279 4,741
Receivables provision 581 335 432
WMS common stock issued in common stock option adjustment 14,975 -- --
Provisions related to Gaming patent litigation -- 60,875 --
Deferred income taxes 3,098 (21,247) 286
Stock option compensation expense -- 705 --
Tax benefit from exercise of common stock options 1,984 147 146
Increase (decrease) resulting from changes in operating assets and liabilities
Receivables (3,738) (4,505) (12,044)
Income tax receivable (10,114) -- --
Inventories (6,031) (12,207) (14,115)
Other current assets 490 3,972 (4,432)
Accounts payable and accruals 2,369 (2,608) (7,394)
Current income taxes payable -- -- (5,246)
Other assets and liabilities not reflected elsewhere (763) (527) (5,471)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (41,190) (15,578) (60,849)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,192) (3,471) (8,353)
Net change in short-term investments 44,000 (42,891) 20,754
Proceeds from sale of marketable equity securities 28,617 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 66,425 (46,362) 12,401
FINANCING ACTIVITIES
Cash received on exercise of stock options 14,333 1,360 427
Redemption of long-term debt (178) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,155 1,360 427
DISCONTINUED OPERATIONS
Net transfer from discontinued operations and payment of
transaction costs in 1998 - video games segment (4,300) 50,000 19,493
Net transfer from (to) discontinued operations and payment
of transaction costs - hotel and casino segments -- (11,918) 10,542
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by discontinued operations (4,300) 38,082 30,035
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 35,090 (22,498) (17,986)
Cash and cash equivalents at beginning of year 1,853 24,351 42,337
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 36,943 $ 1,853 $ 24,351
==============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 10
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS OVERVIEW
WMS Industries Inc. ("WMS") operates in three business segments: the gaming
segment which is engaged in the design, manufacture and sale of slot machines
(video and reel type), video lottery terminals and other gaming devices; the
pinball, novelty and cabinets segment which is engaged in the design,
manufacture and sale of coin-operated pinball and novelty games and cabinets;
and the contract manufacturing segment which continues to manufacture under a
contract the coin-operated video games designed and sold by Midway Games Inc.
("Midway"). 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 April 6, 1998, WMS completed the spin-off, originally announced on August
11, 1997, of its 86.8% ownership interest in Midway consisting of 33,400,000
shares of Midway common stock, to the WMS stockholders. The activities of
Midway, which was the video game segment of WMS, were included as discontinued
operations at June 30, 1997.
On April 22, 1997, WMS completed the spin-off, originally announced on June
26, 1996, of 100% of WMS' Puerto Rico based hotel, casino and hotel management
business, WHG Resorts & Casinos Inc. ("WHG Resorts & Casinos"), to the WMS
stockholders. Its activities were included as discontinued operations at June
30, 1996.
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. Certain prior year balances have
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.
ADVERTISING EXPENSE
The cost of advertising is charged to earnings as incurred and for fiscal 1998,
1997 and 1996 was $633,000, $590,000 and $987,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 requires dual
presentation of basic earnings per share ("EPS") and diluted EPS on the face of
all statements of earnings for all public companies with complex capital
structures. SFAS No. 128 also requires restatement of all prior period
statements of earnings using the dual presentation of basic and diluted EPS.
Basic EPS is computed by dividing income by the weighted average number of
shares outstanding for the period. Diluted EPS reflects, on a pro forma basis,
earnings per share for the period assuming the exercise or conversion of all
securities which are exercisable or convertible into common stock and which
would either dilute or not affect basic EPS.
Dilutive securities would have included common stock options and convertible
subordinated debentures, which were redeemed during the four months ended
October 31, 1997 (see Note 8). In accordance with SFAS No. 128, the incremental
shares from these dilutive securities were not included in the denominator of
the diluted earnings per share calculation since there was a loss from
continuing operations in the periods. The WMS loss from continuing operations in
fiscal 1997 previously reported fully diluted EPS. Under SFAS No. 128, the
fiscal 1997 loss from continuing operations and net income was restated to
$(1.92) and $1.67, respectively, from fully diluted EPS calculated using the
prior method of $(1.65) and $1.58, respectively.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" generally requires that companies report segment information for
operating segments which are revenue producing components and for which separate
financial information is produced and used internally. The Company plans to
adopt SFAS No. 131 for the June 30, 1999 fiscal year, but has not yet completed
its analysis of the impact of this statement on the financial statements.
NOTE 3: DISCONTINUED OPERATIONS
As discussed in Note 1, on April 6, 1998, the Company completed a spin-off of
its 86.8% interest in Midway. Accordingly, the financial position, results of
operations and cash flows of Midway have been reported as discontinued
operations in the consolidated financial statements. Net assets of the video
games segment of $119,015,000 at the time of spin-off were included as a
reduction of retained earnings from the tax-free dividend.
16
<PAGE> 11
WMS Industries Inc.
In conjunction with the Midway spin-off, at the request of the Board of
Directors, on April 6, 1998 Neil D. Nicastro resigned as President, Chief
Executive Officer and Chief Operating Officer of WMS to devote his full time to
Midway as Chairman of the Board, President, Chief Executive Officer and Chief
Operating Officer. Neil D. Nicastro agreed to the early termination and full
settlement of his employment agreement with WMS pursuant to which, in lieu of
all future payments of base salary, bonus, retirement and death benefits, he
received a payment of $2,500,000 and a 10 year option to purchase 250,000 shares
of the Company's common stock. The payment less income tax benefit of $861,000
and amounts previously accrued under his employment agreement are included in
discontinuance costs in fiscal 1998. Other discontinuance costs of $150,000 were
accrued in connection with the Midway spin-off in addition to the $1,650,000
accrued June 30, 1997.
The condensed balance sheet for Midway at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(in thousands) 1997
- -------------------------------------------------------------
<S> <C>
ASSETS
Current assets:
Cash and short-term investments $ 61,862
Receivables, net 54,477
Inventories 27,958
Other current assets 10,108
- -------------------------------------------------------------
Total current assets 154,405
Property and equipment, net 9,498
Excess of purchase cost over amount
assigned to net assets acquired, net 49,150
Other assets 1,265
- -------------------------------------------------------------
Total assets $214,318
=============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 20,918
Accrued payment on 1994 purchase
of Tradewest 14,400
Accrued liabilities 32,777
- -------------------------------------------------------------
Total current liabilities 68,095
Other noncurrent liabilities 5,455
Stockholders' equity 140,768
- -------------------------------------------------------------
Total liabilities and stockholders' equity $214,318
=============================================================
</TABLE>
The June 30, 1997 net assets of discontinued operations of the video games
segment of $90,713,000 included in the WMS consolidated balance sheet is
comprised of the Company's 86.8% ownership interest in Midway stockholders'
equity of $140,768,000, or $122,121,000, less $31,408,000 of deferred tax
liability on the book to tax difference on the investment in Midway Games Inc.
The condensed income statement for Midway for the nine months ended March 31,
1998 and for the fiscal years ended June 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(in thousands) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Revenues $293,144 $388,266 $245,423
Cost and expenses 242,850 327,693 204,929
- ------------------------------------------------------------
Operating income 50,294 60,533 40,494
Interest and other
income, net 2,326 2,130 271
- ------------------------------------------------------------
Income before tax
provision and
extraordinary credit 52,620 62,663 40,765
Provision for
income taxes (19,996) (23,812) (15,536)
- ------------------------------------------------------------
Income before
extraordinary credit 32,624 38,851 25,229
Extraordinary gain, net -- 3,044 --
- ------------------------------------------------------------
Net income $ 32,624 $ 41,895 $ 25,229
============================================================
</TABLE>
The income from discontinued operations of the video games segment for the
nine months ended March 31, 1998 and fiscal 1997 and 1996 shown in the WMS
consolidated statements of income is equal to income before extraordinary credit
of Midway for each year, except that the nine months ended March 31, 1998 and
the fiscal 1997 is reduced by minority interest in income of $4,322,000 and
$4,038,000, respectively. The extraordinary gain is reduced by minority interest
of $403,000. WMS recognized an after tax gain of $47,771,000 on the Midway
initial public offering completed on October 29, 1996.
On April 22, 1997 the Company completed a spin-off of WHG Resorts & Casinos.
Accordingly, the results of operations and cash flows of these business segments
have been reported as discontinued operations in the consolidated financial
statements for fiscal 1997 and 1996. Net assets of the hotel and casino segments
of $52,503,000 at the time of spin-off were included as a reduction of retained
earnings from the tax-free dividend.
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 WHG Resorts & Casinos and to relinquish his
position as co-chief 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
17
<PAGE> 12
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payments. Transaction costs incurred in connection with the spin-off were
$825,000 in fiscal 1997 and costs incurred in fiscal 1996 were $5,891,000,
including the contract settlement payment as well as estimated transaction costs
of $1,500,000. The fiscal 1996 costs are net of a $2,794,000 tax benefit.
Income from discontinued operations includes the results of WHG Resorts &
Casinos for the nine months ended March 31, 1997 and for the fiscal year ended
June 30, 1996 as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Revenues $ 41,206 $ 68,694
Costs and expenses 30,384 58,601
- -------------------------------------------------------------
Operating income 10,822 10,093
Interest expense, net (846) (1,859)
- -------------------------------------------------------------
Income before income
taxes and minority interests 9,976 8,234
Provision for income taxes (2,302) (1,645)
Minority interests (2,932) (3,636)
- -------------------------------------------------------------
Income from
discontinued operations $ 4,742 $ 2,953
- -------------------------------------------------------------
</TABLE>
NOTE 4: PINBALL BUSINESS DOWNSIZING
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 5: 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>
1998
- ----
Securities included as part
of cash equivalents $ 9,407 $ -- $ 9,407
Short-term investments 26,000 -- 26,000
1997
- ----
Securities included as part
of cash equivalents $ 54 $ -- $ 54
Short-term investments 70,000 -- 70,000
Marketable equity securities
noncurrent 27,758 12,758 15,000
============================================================
</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.
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
At June 30 net property, plant and equipment were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(in thousands) 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Land $ 3,481 $ 3,481
Buildings and improvements 25,113 21,866
Machinery and equipment 26,626 24,490
Furniture and fixtures 2,107 2,005
- ----------------------------------------------------------------
57,327 51,842
Less accumulated depreciation (24,720) (21,098)
- ----------------------------------------------------------------
Net property, plant and equipment $ 32,607 $ 30,744
================================================================
</TABLE>
NOTE 7: 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) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Deferred tax assets resulting from
Unrealized capital loss $ -- $ 5,382
Inventory valuation 2,335 1,444
Accrued items not
currently deductible 989 1,240
Accruals relating to
Gaming litigation 18,275 22,892
Other -- 192
- -------------------------------------------------------------
Total deferred tax assets 21,599 31,150
- -------------------------------------------------------------
Valuation allowance for unrealized
capital loss -- (5,382)
- -------------------------------------------------------------
Net deferred tax assets 21,599 25,768
Deferred tax liabilities resulting from
Tax over book depreciation 924 1,091
Federal tax on deferred state tax 1,682 1,460
Other 1,707 2,833
- -------------------------------------------------------------
Total deferred tax liabilities 4,313 5,384
- -------------------------------------------------------------
Net deferred tax assets $17,286 $20,384
=============================================================
</TABLE>
18
<PAGE> 13
WMS Industries Inc.
Significant components of the provision (credit) for income taxes for the
years ended June 30, 1998, 1997 and 1996 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(in thousands) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $(26,753) $ (7,754) $(10,106)
State (3,759) (1,447) (1,882)
- -------------------------------------------------------------
Total current (30,512) (9,201) (11,988)
Deferred
Federal 2,679 (17,297) 327
State 419 (3,950) (41)
- -------------------------------------------------------------
Total deferred 3,098 (21,247) 286
Provision for tax benefits
resulting from
stock options 1,984 147 146
- -------------------------------------------------------------
Credit for income taxes on
continuing operations (25,430) (30,301) (11,556)
Provision for income taxes
on discontinued operations
extraordinary gain -- 2,001 --
Provision for income taxes
on discontinued
operations 19,135 57,522 14,386
- -------------------------------------------------------------
Income tax (credit)
provision, net $ (6,295) $ 29,222 $ 2,830
=============================================================
</TABLE>
The credit for income taxes on continuing operations differs from the amount
computed using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal effect 2.7 4.6 4.3
Option adjustment cost
not deductible (3.5) -- --
Other, net -- (0.3) 0.1
- -------------------------------------------------------------
34.2% 39.3% 39.4%
=============================================================
</TABLE>
NOTE 8: LONG-TERM DEBT
During fiscal 1998, as a result of a call for redemption on September 22, 1997
of 33% of the $57,500,000 in outstanding debentures and a call for redemption on
October 29, 1997 of the remaining outstanding debentures, debentures with an
aggregate principal amount of $57,322,000 were converted into 2,488,855 shares
of WMS common stock and $178,000 of such debentures were redeemed.
The amount of interest paid during fiscal 1997 and 1996 was $3,443,000 and
$3,306,000, respectively.
NOTE 9: STOCKHOLDERS' EQUITY
Authorized common stock of the Company consists of 100,000,000 shares of $.50
par value. At June 30, 1998, 5,394,765 shares of common stock were reserved for
possible issuance for 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.
At the date of the Midway spin-off the WMS Rights Agreement became effective.
Under the Rights Agreement, each share of WMS common stock has an accompanying
Right to purchase, under certain conditions, one one-hundredth of a share of the
Company's Series A Preferred Stock at an exercise price of $100, permitting each
holder to receive $200 worth of the Company's common stock valued at the then
current market price. The Rights are redeemable by the Company at $.01 per
Right, subject to certain conditions, at any time and expire in 2007. The Rights
are intended to assure fair shareholder treatment in any attempted takeover of
the Company and to guard against abusive takeover tactics.
NOTE 10: 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 2008.
Options may be granted to employees and under certain conditions to non-employee
directors and consultants. 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 generally be granted at less than 100%
of the fair market value of the stock at the date of grant.
On September 30, 1997, the Company entered into an agreement with each of the
holders of all of the common stock options then outstanding, which were
exercisable into 4,089,011 shares of WMS common stock, regarding option
adjustment in connection with the Midway spin-off. Each option holder agreed not
to exercise their stock option through the date of the Midway spin-off (see Note
1). On the spin-off record date of March 31, 1998, the Company recorded a
pre-tax charge of $59,890,000 for the adjustment to stock options, pursuant to
the anti-dilution provision of the Company's stock option plans, to compensate
the holders for the lost opportunity value represented by the shares of Midway
distributed in the spin-off which option holders did not participate in. Of that
amount, cash payments on April 6, 1998 totaled $35,001,000, and 515,360 pre
spin-off shares of WMS common stock were issued valued at $14,974,000. An
additional $4,179,000 was paid in the fourth quarter of fiscal 1998 and $779,000
was accrued for the Company's portion of payroll tax. Expense related to the
adjustment of stock options not vested in the current fiscal
19
<PAGE> 14
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
year will be recorded and paid in future years consistent with the options'
vesting schedule. At June 30, 1998, the maximum additional future pre-tax
expense related to non-vested stock options is $7,253,000 plus interest.
At the request of the Board of Directors, in lieu of receiving from the
Company the adjustment to stock option payment, Louis J. Nicastro, Chairman of
the Board, exercised all of his 629,554 WMS common stock options and sold the
shares of common stock on March 19, 1998. The cash received by the Company of
$13,437,000 from exercise of these options was then available for the stock
option adjustment payments. Louis J. Nicastro received $4,957,000 from the
Company as compensation for the difference between what the Company would have
paid him for his stock option adjustment and the net he received from exercise
and sale.
The Company accounts for stock options for purposes of determining net income
in accordance with APB No. 25. During fiscal 1997, $705,000 was recognized as
stock option compensation in connection with the modification by the Board of
Directors of the outstanding stock option terms because of the spin-off of the
Company's hotel and casino segments.
A summary of the status of the Company's stock option plans for the three
years ended June 30, 1998 was as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Weighted
Shares average
(000) Exercise Price
- -------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1995 3,058 $24.44
Granted 156 22.31
Exercised (34) 12.39
Forfeited (24) 20.50
-----
Outstanding at June 30, 1996 3,156 24.50
Granted 215 23.62
Exercised (53) 20.48
Forfeited (50) 21.63
-----
Outstanding at modification
date (4/22/97) 3,268 24.54
-----
Activity after 4/22/97 modification:
Outstanding as modified 4,114 19.49
Granted 25 20.25
Exercised (17) 16.07
-----
Outstanding at June 30, 1997 4,122 19.51
Exercised (663) 21.22
-----
Outstanding at modification
date (4/6/98) 3,459 19.18
-----
Activity after 4/6/98 modification:
Outstanding as modified 3,459 3.16
Granted 1,041 5.16
Exercised (94) 2.57
-----
Outstanding at June 30, 1998 4,406 3.65
==========================================================
</TABLE>
The weighted average remaining contractual life of outstanding options on
June 30, 1998 was 6.7 years. At June 30, 1998, 3,799,000 options with a weighted
average exercise price of $3.66 per share were exercisable, outstanding options
have exercise prices that range from $2.26 to $5.44 and 989,000 shares were
available for future grants under the plans. At June 30, 1997, 3,506,000 options
with a weighted average exercise price of $19.70 per share were exercisable,
outstanding options had exercise prices that ranged from $13.70 to $21.34.
On April 6, 1998, the Board of Directors reduced the exercise price of each
option by approximately 83.5% to reflect the initial post Midway spin-off
trading price of WMS common stock. This modification did not result in any
additional pro forma compensation expense.
On April 22, 1997, the Board of Directors increased the number of outstanding
stock options by approximately 26% for each option holder and reduced the
exercise price of each option by approximately 20% to reflect the dilution to
the outstanding stock options for the distribution of WHG Resorts & Casinos Inc.
to the shareholders of WMS.
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, 1998 and 1997.
SFAS No. 123 regarding stock option plans permits the use of APB 25 but
requires the inclusion of certain pro forma disclosures in the footnotes. Pro
forma net income (loss) and net income (loss) per share adjusted for the pro
forma expense provisions of SFAS 123 were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net
income (loss) $(25,850,000) $28,367,000 $4,398,000
Pro forma basic and
diluted net income
(loss) per share $ (0.98) $ 1.17 $ 0.18
=================================================================
</TABLE>
The fiscal 1997 pro forma net income includes an after tax charge of
$7,985,000 relating to the modification of options because of the spin-off of
the hotel and casino segments. The fiscal 1998 and 1997 pro forma net income
includes an after tax charge of $1,747,000 and $4,343,000 respectively, for the
granting of Midway options.
The pro forma fair value of each option grant, and in 1997 the modification,
is estimated on the date of grant or modification using the Black-Scholes option
pricing model with the following weighted average assumptions used for
modifications and grants in fiscal 1998, 1997 and 1996: dividend yield 0% for
all three years, expected volatility of .37 for all three years; risk free
interest rates
20
<PAGE> 15
WMS Industries Inc.
of 5.65% in 1998 and 6.1% for 1997 and 1996 and expected life of the options of
six years for 1998 and three years for 1997 and 1996. The weighted average pro
forma fair value, using the Black-Scholes assumptions noted above, of the
options granted during fiscal 1998 and 1997 was $2.36 and $5.33, respectively.
NOTE 11: 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 and trade notes and accounts receivable. 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, 1998, 20% 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. The accounts and notes receivable
from the sale of gaming devices are generally from a large number of customers
with no significant concentration other than in Nevada.
The amounts reported for cash equivalents and short-term investments are
considered to be a reasonable estimate of their fair value.
NOTE 12: 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, 1998 as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------
<S> <C>
1999 $ 956
2000 577
2001 291
2002 35
- -------------------------------------------------------------
$1,859
=============================================================
</TABLE>
Rent expense for fiscal 1998, 1997 and 1996 was $1,699,000, $1,414,000 and
$1,594,000, respectively.
NOTE 13: PATENT LITIGATION
The Company's subsidiary, WMS Gaming Inc. ("WGI"), is currently involved in
patent infringement litigation with its competitor International Game Technology
("IGT") regarding a certain slot machine component patent. During fiscal 1997,
the U.S. District Court for the Northern District of Illinois ruled that WMS
Gaming's Model 400 reel spinning slot machine infringed IGT's patent and issued
a permanent injunction prohibiting the sale of Model 400 and entered a judgment
in favor of IGT and against WGI in the amount of $32,845,000 in the Model 400
slot machine action. The same District Court issued a preliminary injunction
prohibiting the sale of WMS Gaming's reel spinning slot machine Model 401. The
Model 400 and Model 401 operate differently and each machine is based on
separate and distinct methods of operation, each corresponding to separate
patents granted by the U.S. Patent and Trademark Office to WGI. WGI has appealed
the decisions of the District Court to the U.S. Court of Appeals for the Federal
Circuit. However, due to the fact that obtaining a reversal before the Federal
Circuit occurs in only a minority of the patent cases it reviews, as of December
31, 1996, management accrued $61,925,000 to provide for the judgment and other
costs and losses noted below.
The $61,925,000 loss provision, as adjusted, provides for the judgment award
of $32,845,000 and among other things realization of inventory, receivables and
legal fees. The major components of the balance of the provision were $6,950,000
for sales returns and uncollectible receivables and $16,300,000 for excess and
unusable reel spinning slot machine inventory. Through June 30, 1998,
$15,162,000 has been charged to the provisions primarily for uncollectible
receivables, inventory and legal fees.
The slot machines component which is the subject of the litigation is only
used in reel spinning slot machines and not in video lottery terminals and other
video gaming machines. If the Company is unable to obtain a reversal of the
District Court judgment and preliminary injunction on appeal, and is unable to
develop or acquire non-infringing alternate devices or obtain a license to use
the patent, further development of the Company's reel spinning slot machine
business may be adversely affected.
NOTE 14: PENSION PLANS
During fiscal 1992 the Company suspended the defined benefit pension plan that
covers salaried employees of the amusement game and gaming businesses and
corporate headquarters. During fiscal 1998 the Company suspended the defined
benefit pension plan covering certain hourly employees of the gaming business.
The suspended 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.
21
<PAGE> 16
WMS Industries Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Service costs-benefits earned
during the year $ 107 $ 185 $ 210
Interest cost on
projected obligation 372 395 413
Actual return on plan assets (155) (185) (153)
Net amortization of
unrecognized net obligation
at transition and deferrals (43) (13) (60)
- -------------------------------------------------------------
Net periodic pension cost
for the year $ 281 $ 382 $ 410
=============================================================
</TABLE>
The plans' funded status and amounts included in the Company's consolidated
balance sheets at June 30 were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
Actuarial present value of projected
benefit obligation, including vested
obligations of $4,059 and $4,114,
respectively $(4,441) $(4,724)
Fair value of plan assets 2,789 3,184
- -------------------------------------------------------------
Funded status (1,652) (1,540)
Unrecognized net obligations being
recognized over a remaining 5 years 305 376
Unrecognized net loss 755 356
Adjustment required to recognize
minimum liability (1,031) (725)
- -------------------------------------------------------------
Accrued pension liability $(1,623) $(1,533)
=============================================================
</TABLE>
The discount rate used to determine the actuarial present value of the
projected benefit obligation was 7.5% at June 30, 1998 and 1997. Other assets
include an intangible asset of $1,031,000 and $725,000 at June 30, 1998 and
1997, respectively, resulting from the adjustment required to recognize the
minimum pension liability.
The Company has two defined contribution employee retirement savings plans.
These defined contribution plans cover certain hourly and salaried employees of
the amusement game and gaming businesses and corporate headquarters. The
Company's contributions 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 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 1998, 1997 and 1996
were $207,000, $181,000 and $215,000, respectively.
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(in thousands, except Sept. 30 Dec. 31 Mar. 31 June 30
per share amounts) 1997 1997 1998 1998
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998 QUARTERS
Revenues $20,035 $23,397 $ 20,511 $35,047
Gross profit 5,350 5,767 4,308 6,594
Loss from continuing
operations (2,989) (1,502) (43,350) (983)
Discontinued operations
Video games segment 6,277 15,947 4,522 --
- --------------------------------------------------------------
Net income (loss) $ 3,288 $14,445 $(38,828) $ (983)
Basic and diluted per share of common stock:
- --------------------------------------------------------------
Loss from continuing
operations $ (.12) $ (.06) $ (1.62) $ (.04)
- --------------------------------------------------------------
Net income (loss) $ .13 $ .54 $ (1.45) $ (.04)
Average number of
shares outstanding 24,549 26,471 26,843 27,944
- --------------------------------------------------------------
</TABLE>
The June 30, 1998 quarter includes an after-tax gain of $530,000, $0.02 per
share, on the sale of non current marketable securities.
The March 31, 1998 quarter includes an after-tax charge of $39,917,000, $1.49
per share, for the spin-off related adjustment to WMS outstanding common stock
options.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(in thousands, except Sept. 30 Dec. 31 Mar. 31 June 30
per share amounts) 1996 1996 1997 1997
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1997 QUARTERS
Revenues $15,016 $18,623 $18,608 $24,349
Gross profit 2,965 4,127 4,551 4,807
Loss from continuing
operations (2,507) (39,712) (2,381) (2,197)
Discontinued operations
Video games segment 6,077 13,409 5,566 10,752
Gain on initial
public offering
of subsidiary -- 47,771 -- --
Hotel and
casino segments -- -- 3,917 --
- -------------------------------------------------------------
Net income $ 3,570 $21,468 $ 7,102 $ 8,555
Basic and diluted per share of common stock:
- -------------------------------------------------------------
Loss from continuing
operations $ (.10) $ (1.64) $ (.10) $ (.09)
- -------------------------------------------------------------
Net income $ .15 $ .89 $ .29 $ .35
Average number of
shares outstanding 24,156 24,193 24,199 24,449
=============================================================
</TABLE>
The December 31, 1996 quarter includes an after-tax charge of $37,361,000, $1.54
per share, for a loss provision related to WMS Gaming Inc. patent litigation.
(See Note 13).
22
<PAGE> 17
WMS Industries Inc.
NOTE 16: INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Gaming $ 56,788 $ 33,613 $ 37,523
Pinball, novelty and cabinets 38,251 42,983 55,679
Contract manufacturing 3,951 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 98,990 $ 76,596 $ 93,202
==============================================================================================================================
OPERATING INCOME (LOSS)
Gaming $ (9,590) $(12,510) $ (9,508)
Pinball, novelty and cabinets (including restructuring charges of $3,422 in 1996) (7,761) (2,997) (17,093)
Contract manufacturing 347 -- --
Provisions related to WMS Gaming Inc. patent litigation (Note 13) -- (61,925) --
Adjustment to common stock options (Note 10) (59,890) -- --
Unallocated general corporate expenses (1,770) (1,884) (3,106)
- ------------------------------------------------------------------------------------------------------------------------------
Total operating (loss) (78,664) (79,316) (29,707)
Interest and other income 4,410 5,661 3,705
Interest expense -- (3,443) (3,306)
- ------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations before income taxes $(74,254) $(77,098) $(29,308)
==============================================================================================================================
IDENTIFIABLE ASSETS
Gaming $ 70,517 $ 53,225 $ 59,803
Pinball, novelty and cabinets 30,855 51,930 53,044
Contract manufacturing 14,940 -- --
Corporate 91,210 111,047 134,645
Net assets of discontinued operations - hotel and casino segments -- -- 42,091
Net assets of discontinued operations - video games segment -- 90,713 5,488
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $207,522 $306,915 $295,071
==============================================================================================================================
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Gaming $ 846 $ 612 $ 360
Pinball, novelty and cabinets 2,967 3,448 3,107
Contract manufacturing 203 -- --
Corporate 15 23 31
- ------------------------------------------------------------------------------------------------------------------------------
Total depreciation of property, plant and equipment $ 4,031 $ 4,083 $ 3,498
==============================================================================================================================
CAPITAL EXPENDITURES
Gaming $ 1,847 $ 1,499 $ 1,678
Pinball, novelty and cabinets 4,315 1,953 6,658
Contract manufacturing -- -- --
Corporate 30 19 17
- ------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 6,192 $ 3,471 $ 8,353
==============================================================================================================================
Export sales (primarily to Western Europe) $ 24,364 $ 33,731 $ 41,392
- ------------------------------------------------------------------------------------------------------------------------------
Sales to major customers $ 7,960 $ 12,099 $ 13,984
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of
Subsidiary Incorporation
WMS Games Inc. Delaware
WMS Gaming Inc. Delaware
WMS Gaming (Nevada) Inc. Nevada
WMS Gaming (Canada) Ltd. New Brunswick, Canada
Fun House Games Inc. Delaware
Lenc-Smith Inc. Delaware
Williams Electronics Games Inc. Delaware
WMS Finance Inc. Delaware
<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; (v)
Registration Statement No. 333-06021 on Form S-8 filed June 14, 1996; (vi)
Registration Statement No. 333-48697 on Form S-8 filed March 26, 1998; and (vii)
Registration Statement No. 333-57585 on Form S-8 filed June 24, 1998, and in the
related Prospectuses, of our report dated August 17, 1998 with respect to the
consolidated financial statements and schedule of WMS Industries Inc. and
subsidiaries, included and/or incorporated by reference, in the Annual Report
(Form 10-K) of WMS Industries Inc. for the year ended June 30, 1998.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 36,943
<SECURITIES> 26,000
<RECEIVABLES> 32,829
<ALLOWANCES> (2,397)
<INVENTORY> 39,620
<CURRENT-ASSETS> 162,033
<PP&E> 57,327
<DEPRECIATION> (24,720)
<TOTAL-ASSETS> 207,522
<CURRENT-LIABILITIES> 49,967
<BONDS> 0
0
0
<COMMON> 14,016
<OTHER-SE> 141,275
<TOTAL-LIABILITY-AND-EQUITY> 207,522
<SALES> 98,990
<TOTAL-REVENUES> 98,990
<CGS> 76,971
<TOTAL-COSTS> 76,971
<OTHER-EXPENSES> 12,908
<LOSS-PROVISION> 581
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (74,254)
<INCOME-TAX> (25,430)
<INCOME-CONTINUING> (48,824)
<DISCONTINUED> 26,746
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,078)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
