<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission Only
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
WMS INDUSTRIES INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
- - --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- - --------------------------------------------------------------------------------
(3) Filing party:
- - --------------------------------------------------------------------------------
(4) Date filed:
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<PAGE> 2
WMS LOGO
WMS INDUSTRIES INC.
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
February 3, 1999
------------------------
To the Stockholders of
WMS INDUSTRIES INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of WMS
Industries Inc. (the "Company") will be held on Wednesday, February 3, 1999 at
1:30 p.m. Central Standard Time at The Standard Club, Chicago Room, 4th Floor,
320 South Plymouth Court, Chicago, Illinois 60604, to consider and act upon the
following matters:
1. Electing a board of eight (8) directors;
2. Ratifying the appointment of Ernst & Young LLP as independent
auditors for the 1999 fiscal year; and
3. Transacting such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The close of business on December 7, 1998 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting and any adjournments thereof. A list of the stockholders entitled to
vote at the Annual Meeting will be open to the examination of any stockholder of
the Company for any purpose germane to the Annual Meeting during regular
business hours at the offices of the Company for the ten-day period prior to the
Annual Meeting.
YOU ARE REQUESTED, WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE ANNUAL
MEETING, TO MARK, DATE, SIGN AND RETURN PROMPTLY THE ACCOMPANYING PROXY IN THE
ENCLOSED ENVELOPE. NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES.
By Order of the Board of Directors,
ORRIN J. EDIDIN
Vice President, Secretary and General
Counsel
Chicago, Illinois
December 11, 1998
<PAGE> 3
ANNUAL MEETING OF STOCKHOLDERS
OF
WMS INDUSTRIES INC.
------------------------
PROXY STATEMENT
------------------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (the "Board") of WMS Industries Inc. (the "Company" or
"WMS") of proxies to be voted at the Annual Meeting of Stockholders to be held
at The Standard Club, Chicago Room, 4th Floor, 320 South Plymouth Court,
Chicago, Illinois 60604, on Wednesday, February 3, 1999 at 1:30 p.m. Central
Standard Time, and at any adjournment or adjournments thereof (the "Annual
Meeting").
All proxies in the accompanying form which are properly executed and duly
returned will be voted in accordance with the instructions specified therein. If
no instructions are given, such proxies will be voted in accordance with the
recommendations of the Board as indicated in this Proxy Statement. A proxy may
be revoked at any time prior to its exercise by written notice to the Company,
by submission of another proxy bearing a later date or by voting in person at
the meeting. Such revocation will not affect a vote on any matters taken prior
thereto. The mere presence at the meeting of the person appointing a proxy will
not revoke the appointment.
The mailing address of the Company's principal executive offices is 3401
North California Avenue, Chicago, Illinois 60618. This Proxy Statement and the
accompanying proxy card are being mailed to stockholders on or about December
11, 1998.
Only holders of the Company's Common Stock, $.50 par value per share (the
"Common Stock"), of record at the close of business on December 7, 1998 (the
"Record Date") will be entitled to vote at the Annual Meeting or any adjournment
or adjournments of such meeting. There were 29,897,860 shares of Common Stock
outstanding on the Record Date (excluding 77,312 treasury shares). Each such
share entitles the holder thereof to one vote.
THE DISTRIBUTION
Prior to April 6, 1998, the Company, through its subsidiary Midway Games
Inc. ("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 (the "Distribution")
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.
On October 26, 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 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
Company continues to provide certain administrative, accounting and information
services and facilities to Midway and acts as a contract manufacturer for the
Midway's coin-operated video games. Midway provides certain sales and marketing
services to the Company. See "Certain Relationships and Related Transactions"
below.
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
<PAGE> 4
Chairman of the Board, 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 "Employment
Agreements." 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the Record Date
(except as otherwise footnoted) concerning persons which, to the knowledge of
WMS, beneficially own more than 5% of the outstanding shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF OF COMMON STOCK PERCENTAGE OF OUTSTANDING
BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2)
------------------- --------------------- -------------------------
<S> <C> <C>
Sumner M. Redstone and
National Amusements, Inc. ........................ 7,155,200(3) 23.9%
200 Elm Street
Dedham, MA 02026
FMR Corp. .......................................... 2,095,000(4) 7.0%
82 Devonshire St
Boston, MA 02109
Neil D. Nicastro.................................... 7,155,214(5) 23.9%
Midway Games Inc.
3401 North California Avenue
Chicago, IL 60618
Louis J. Nicastro................................... 7,659,832(6) 25.2%
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
</TABLE>
- - -------------------------
(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" below).
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 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
2
<PAGE> 5
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 6.1% of the Common Stock. FMR Corp.
reported that it has sole power to dispose of or direct the disposition of
all such shares.
(5) 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 shared voting power but no
dispositive power. Additionally, the number of shares reported as
beneficially owned includes 14 shares for which the reporting person has
sole voting and sole 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" below.
(6) 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" below.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of the Record Date, certain information
concerning beneficial ownership of Common Stock by each director of WMS, each
executive officer of WMS and by all directors and executive officers of WMS as a
group:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK(2)
------------------------ --------------------- ---------------
<S> <C> <C>
Harold H. Bach, Jr....................... 112,530(3) **
William C. Bartholomay*.................. 92,486(4) **
Orrin J. Edidin.......................... 2,500(5) **
William E. McKenna*...................... 76,280(4) **
Norman J. Menell*........................ 75,902(4) **
Louis J. Nicastro*....................... 7,659,832(6) 25.2%
Neil D. Nicastro*........................ 7,155,214(7) 23.9%
Harvey Reich*............................ 74,876(4) **
Ira S. Sheinfeld*........................ 118,930(8) **
David M. Satz, Jr.*...................... 51,000(9) **
Kevin L. Verner.......................... 15,177(10) **
Directors and Executive Officers as a
group (11 persons)..................... 8,279,527(11) 26.8%
</TABLE>
- - -------------------------
* Nominee for Director
** Less than 1%
(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 shares of Common
Stock, shares issuable to such person upon the exercise of stock options
within 60 days have been deemed to be outstanding.
(3) Includes 94,433 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(4) Includes 62,955 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
3
<PAGE> 6
(5) Represents 2,500 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(6) The number of shares reported as beneficially owned include the 7,155,200
shares of Common Stock owned by Sumner M. Redstone and National Amusements,
Inc. for which the reporting person has shared voting power but no
dispositive power. Additionally, the number of shares reported as
beneficially owned includes 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" below.
(7) The number of shares reported as beneficially owned include the 7,155,200
shares of Common Stock owned by Sumner M. Redstone and National Amusements,
Inc. for which the reporting person has shared voting power but no
dispositive power. Additionally, the number of shares reported as
beneficially owned includes 14 shares for which the reporting person has
sole voting and sole 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" below.
(8) Includes 100,728 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(9) Includes 50,000 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(10) Includes 12,591 shares of Common Stock which the reporting person has the
right to acquire upon the exercise of stock options.
(11) Includes an aggregate of 1,012,072 shares of Common Stock which directors
and executive officers have the right to acquire upon the exercise of stock
options. Additionally, includes 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 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" below.
VOTING PROXY AGREEMENT
In order for the Company to be permitted to manufacture and sell slot
machines in Nevada, the Company and certain of its subsidiaries and Mr. Louis J.
Nicastro and Mr. Neil D. Nicastro were required to be registered, licensed or
found suitable and have been registered, licensed or found suitable by the
Nevada State Gaming Control Board and the Nevada Gaming Commission, as
applicable, as a registered corporation, as registered holding companies, for
licensure as a manufacturer and distributor of gaming devices and as directors,
officers and stockholders of such entities, as applicable. Under applicable
Nevada law and administrative procedure, as a greater than 10% stockholder of
the Company, Mr. Sumner M. Redstone ("SMR") was required to apply and has an
application pending with the Nevada Gaming Authorities for a finding of
suitability as a stockholder of the Company. Pending completion of the
processing of SMR's application, SMR and National Amusements, Inc. ("NAI") have
voluntarily granted to Mr. Louis J. Nicastro and, if he is unable to perform his
duties under the Proxy Agreement (as defined herein), Mr. Neil D. Nicastro,
individually, a voting proxy for all of the shares of Common Stock which they
own beneficially or of record.
On September 21, 1995, Mr. Louis J. Nicastro and Mr. Neil D. Nicastro
entered into a Voting Proxy Agreement (the "Proxy Agreement") with the Company,
SMR and NAI, pursuant to which Mr. Louis J. Nicastro and, if he is unable to
perform his duties under the Proxy Agreement, Mr. Neil D. Nicastro have been
appointed, individually, as proxy holder with full power of substitution during
and for the term of the voting proxy, to vote all shares of the Company's Common
Stock as the proxy of SMR and NAI at any annual, special or adjourned meeting of
the stockholders of the Company, including the right to execute consents,
certificates or other documents relating to the Company that the law of the
State of Delaware may permit or require on any and all matters which may be
presented to the stockholders of the Company. The
4
<PAGE> 7
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 State Gaming
Control 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.
Mr. Louis J. Nicastro and Mr. Neil D. Nicastro have advised WMS that they
plan to utilize the voting proxy with respect to the 7,155,200 shares of Common
Stock beneficially owned by SMR and NAI (approximately 23.9% of the outstanding
Common Stock) to vote in favor of the nominees for election as director and FOR
Proposal 2.
PROPOSAL 1 -- ELECTION OF DIRECTORS
Upon the recommendation of the Nominating Committee, eight (8) directors,
constituting the entire Board, are to be elected to serve until the next Annual
Meeting of Stockholders and until their respective successors are duly elected
and qualify. All of the nominees are at present directors of the Company. Mr.
Neil D. Nicastro is the son of Mr. Louis J. Nicastro. Should any of the nominees
be unable to serve or refuse to serve as a director (an event which the Board
does not anticipate), proxies solicited hereunder will be voted in favor of
those nominees who do remain as candidates and may be voted for substituted
nominees.
<TABLE>
<CAPTION>
POSITION WITH COMPANY AND DIRECTOR
NAME OF NOMINEE (AGE) PRINCIPAL OCCUPATION SINCE
--------------------- ------------------------- --------
<S> <C> <C>
Louis J. Nicastro (70)................. President, Chief Executive Officer and 1974
Chairman of the Board of Directors of the
Company.
Neil D. Nicastro (42).................. Director of the Company, and Chairman of 1986
the Board of Directors, President, Chief
Executive Officer and Chief Operating
Officer of Midway Games Inc.
Norman J. Menell (67).................. Vice Chairman of the Board of Directors 1980
of the Company
William C. Bartholomay (70)............ Director of the Company and President of 1981
Near North National Group
William E. McKenna (79)................ Director of the Company and General 1981
Partner of MCK Investment Company
Harvey Reich (69)...................... Director of the Company and Attorney 1983
David M. Satz, Jr. (72)................ Director of the Company and Attorney, 1998
Saiber Schlesinger Satz & Goldstein
Ira S. Sheinfeld (60).................. Director of the Company and Attorney, 1993
Squadron, Ellenoff, Plesent & Sheinfeld
LLP
</TABLE>
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.
5
<PAGE> 8
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.
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.
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.
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.
REQUIRED VOTE
The affirmative vote of a plurality of the shares of Common Stock present
in person or by proxy at the Annual Meeting is required to elect directors.
-------------------------
THESE INDIVIDUALS WILL BE PLACED IN NOMINATION FOR ELECTION TO THE BOARD OF
DIRECTORS. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE NOMINEES FOR ELECTION AS
DIRECTORS
-------------------------
THE BOARD OF DIRECTORS
The Board of Directors is responsible for the overall affairs of the
Company. To assist it in carrying out its duties, the Board has delegated
certain authority to several committees. The majority of the Board, seven of the
eight directors, are directors who are neither officers nor employees of the
Company or its subsidiaries.
During the 1998 fiscal year, the Board of Directors of the Company held 7
meetings. All other action taken by the Board was by the unanimous written
consent of the members after review of proposals presented to each member. Each
director attended at least 75% of the aggregate of meetings of the Board and
committees on which he served during the fiscal year.
6
<PAGE> 9
DIRECTOR COMPENSATION
During the 1998 fiscal year, the Company paid a fee of $40,000 per annum to
each director who was not also an employee of the Company or its subsidiaries.
Each such director who served as the chairman of any committee of the Board of
Directors received 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 received 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.
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 of Common Stock at an average
exercise price of $3.26 (as adjusted for the Distribution). Under the 1993 Plan,
the following non-employee directors each hold options to purchase 62,955 shares
of Common Stock at an exercise price of $3.519 per share (as adjusted for the
Distribution): 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 each such individual.
Pursuant to the Adjustment Plan described below, 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.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit and Ethics Committee is currently composed of three members,
Messrs. McKenna (Chairman), Bartholomay and Sheinfeld. This Committee is charged
with meeting periodically with the independent auditors and Company personnel
with respect to the adequacy of internal accounting controls, receiving and
reviewing the recommendations of the independent auditors, recommending the
appointment of auditors and reviewing the scope of the audit and the
compensation of the independent auditors, reviewing consolidated financial
statements and, generally, reviewing the Company's accounting policies and
resolving potential conflicts of interest. During the 1998 fiscal year this
Committee held 3 meetings.
The Nominating Committee is currently composed of Messrs. L. J. Nicastro
(Chairman) and Bartholomay. This Committee is charged with making
recommendations with respect to the nomination of candidates for election to the
Board and does not accept recommendations from stockholders of the Company.
During the 1998 fiscal year this Committee did not hold any meetings, taking all
actions by the unanimous written consent of the members.
The Stock Option Committee is currently composed of Messrs. Reich
(Chairman) and McKenna. This Committee approves the selection of individuals for
participation in, and determines the timing, pricing and the amount of option
grants under the provisions of, the Company's Stock Option Plans other than
formula awards made to Non-Employee Directors of the Company. During the 1998
fiscal year this Committee held two meetings and took all other action by the
unanimous written consent of the members.
7
<PAGE> 10
The Compensation Committee is currently composed of Messrs. Bartholomay
(Chairman) and McKenna. This Committee is charged with making recommendations
regarding the compensation of senior management personnel. During the 1998
fiscal year this Committee held two meetings and took other action by the
unanimous written consent of the members. The Compensation Committee and Stock
Option Committee jointly report to stockholders on executive compensation items
as required by the Securities and Exchange Commission. Their Report follows
below.
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 herein.
EXECUTIVE OFFICERS
The following individuals were elected to serve in the capacities set forth
until the 1999 Annual Meeting of the Board of Directors or until their
respective successors are duly elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Louis J. Nicastro..................... 70 Chairman of the Board, President and
Chief Executive Officer
Kevin L. Verner....................... 40 Vice President and Chief Operating
Officer
Harold H. Bach, Jr. .................. 66 Vice President -- Finance, Treasurer,
Chief Financial Officer and Chief
Accounting Officer
Orrin J. Edidin....................... 37 Vice President, Secretary and General
Counsel
</TABLE>
The principal occupation and employment of Mr. Louis J. Nicastro during the
last five years is set forth on page 5 hereof. See "Employment Agreements" below
with respect to Mr. 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 WMS Gaming Inc. 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 served as Secretary of the Company from July 5, 1990 to June 15,
1992. He assumed the positions of Treasurer effective September 13, 1994 and
Vice President -- Finance, Chief Financial Officer and Chief Accounting Officer
effective September 30, 1990. 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., an apparel company, from August 1992 until May 1997.
Mr. Edidin has also served as Vice President, Secretary and General Counsel of
Midway since June 30, 1997.
EXECUTIVE COMPENSATION
To provide stockholders with an understanding of the Company's executive
compensation program, the following are presented below: (i) the Summary
Compensation Table; (ii) the Stock Option Tables; (iii) a description of the
Adjustments to Options Resulting from the Midway Spin-Off; (iv) the Joint Report
by the
8
<PAGE> 11
Compensation and Stock Option Committees of the Board of Directors on Fiscal
1998 Executive Compensation; (v) the Corporate Performance Graph; and (vi) a
description of Employment Agreements.
SUMMARY COMPENSATION TABLE
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 $100,000.
Pursuant to the Manufacturing and Services Agreement between the Company and
Midway, after the Offering and until the Distribution the compensation paid by
the Company to the executive officers of the Company (other than Mr. Neil D.
Nicastro) was allocated to Midway based upon estimates by management of the
Company and by management of Midway of the percentage of time devoted to Midway.
After the Distribution, compensation paid by WMS to the executive officers of
the Company is reimbursed by Midway in amounts equal to the Company's allocated
cost pursuant to the Temporary Support Services Agreement between the Company
and Midway. Management of the Company believes that such executive officers
devoted 40% to 70% of their time to Midway during fiscal 1998. See "Certain
Relationships and Related Transactions" below for a description of the
Manufacturing and Services Agreement and the Temporary Support Services
Agreement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION OTHER ANNUAL SECURITIES ALL OTHER
--------------------- COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS(#)(1) ($)
--------------------------- ---- --------- --------- ------------ ------------- ------------
<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 Chief 1996 532,500 267,600 -- -- 35,791(10)
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 -- Finance, 1997 300,000 175,000 -- 94,433(4) --
Treasurer, Chief Financial 1996 262,000 67,800 -- -- --
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.
(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.
9
<PAGE> 12
(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 in respect of the
termination of Mr. Louis J. Nicastro's previous employment agreement with
WMS.
(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.
(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 Agreements" 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.
STOCK OPTION TABLES
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 (other than the 1998 Non-Qualified
Stock Option Plan) may be in the form of options meeting the requirements of
Section 422 of the Internal Revenue Code, as amended ("incentive stock
options"), or, under all Plans, options not meeting the requirements of such
section ("non-qualified stock options").
The purpose of each of the Plans is to encourage key 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.
10
<PAGE> 13
The following table sets forth certain information with respect to options
to purchase Common Stock granted under the Company's Plans in fiscal 1998 to
persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED(#) YEAR(%) ($/SHARE) 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 a total of 27,886,021 shares of Common
Stock outstanding, would be $95,359,000 and $241,660,000 at assumed rates of
stock appreciation of 5% and 10%, respectively.
(2) This option becomes exercisable for up to 10%, 30%, 60% and 100% of the
option grant upon the first, second, third and fourth anniversaries,
respectively, of the date of the grant.
The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock and the number and value of
outstanding options owned by persons named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL-YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES 6/30/98(#) 6/30/98($)(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 difference between the exercise price of in-the-money options
and 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."
11
<PAGE> 14
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 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
12
<PAGE> 15
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 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., Byron C. Cook and 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
13
<PAGE> 16
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.
JOINT REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEES
ON FISCAL 1998 EXECUTIVE COMPENSATION
The Compensation Committee is charged with making recommendations to the
Board of Directors regarding the compensation of senior management personnel. To
the extent stock options form a portion of a compensation package, the
Compensation Committee works together with the Stock Option Committee, which is
responsible for making recommendations regarding stock option grants and awards.
It is the policy of the Compensation and Stock Option Committees to provide
attractive compensation packages to senior management so as to motivate them to
devote their full energies to the success of the Company, to reward them for
their services and to align the interests of senior management with the
interests of stockholders. The Company's executive compensation packages are
comprised primarily of base salaries, annual contractual and discretionary cash
bonuses, stock options and retirement and other benefits. It is the philosophy
of the Compensation Committee that the Company be staffed with a small number of
well compensated senior management personnel.
In general, the level of base salary is intended to provide appropriate
basic pay to senior management taking into account historical contributions to
the Company, each person's unique value and the recommendation of the Chief
Executive Officer. The amount of any discretionary bonus is subjective but is
generally based on the actual financial performance of the Company in the
preceding fiscal year, the special contribution of the executive to such
performance and the overall level of the executive's compensation including
other elements of the compensation package. The Company also has used stock
options, which increase in value only if the Company's Common Stock increases in
value, and which terminate a short time after an executive leaves the Company,
as a means of long-term incentive compensation. The Stock Option Committee
determined the size of stock option grants to the executive officers and to
other employees throughout the Company on an individual, discretionary basis in
consideration of financial corporate results and each recipient's performance,
contributions and responsibilities without assigning specific weight to any of
these factors.
Effective the date of the Distribution, Mr. N. D. Nicastro resigned his
positions with the Company and Mr. L. J. Nicastro rejoined the Company as
Chairman of the Board, Chief Executive Officer and President. The cash bonus
paid to Mr. N. D. Nicastro for the fiscal year 1998 was determined through a
negotiated formula set forth in his employment agreements with the Company and
with Midway which provided for base salary and bonus compensation based on a
percentage of the Company's pre-tax income as fully described under "Employment
Agreements" below. Mr. L. J. Nicastro also negotiated and entered into an
employment agreement with the Company effective on the Date of the Distribution
(which agreement was subsequently replaced with a new agreement) which provides
for salary, bonus of a percentage of the Company's pre-tax income and various
retirement and other benefits. See "Employment Agreements" below. In fiscal
1998, Mr. L. J. Nicastro and Mr. N. D. Nicastro received from the Company
options to purchase 500,000 and 250,000 shares of Common Stock, respectively. In
fiscal 1998, Mr. N.D. Nicastro also received from Midway stock options to
purchase 450,000 shares of Midway common stock and Mr. L. J. Nicastro received
stock options to purchase 10,000 shares of Midway common stock.
Senior executives other than Messrs. N. D. Nicastro and L. J. Nicastro were
granted discretionary bonuses for the 1998 fiscal year. Mr. Edidin also received
from the Company options to purchase 25,000 shares of Common Stock and Messrs.
Bach and Edidin received from Midway options to purchase 50,000 and 35,000
shares of Midway common stock, respectively. The decision to pay such bonuses
and to grant such options was subjective but involved consideration of the
efforts expended by such executives as well
14
<PAGE> 17
as consideration of the financial performance of the Company. For information
with respect to options held by senior management at fiscal year end, see "Stock
Option Tables" set forth above.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") generally
provides that, for fiscal years commencing in 1994, compensation paid by
publicly-held corporations to the chief executive officer and the four most
highly paid senior executive officers in excess of one million dollars per year
per executive will be deductible by the Company only if paid pursuant to
qualifying performance-based compensation plans approved by stockholders of the
Company. Compensation as defined by the Budget Act includes, among other things,
base salary, incentive compensation and gains on stock option transactions.
Since the ultimate value of an option cannot be determined until it is exercised
or until the stock underlying the option is sold, executive compensation
relating to options may, in a given year, exceed one million dollars. The
Compensation Committee intends to consider, on a case by case basis, how the
Budget Act will affect the Company's compensation plans and contractual and
discretionary cash compensation. The Compensation Committee does not intend to
request Mr. L. J. Nicastro or other officers to submit their employment
agreements for stockholder approval. See "Employment Agreements." Depending on
the performance of the Company, payments to Mr. L. J. Nicastro under such
agreement may exceed one million dollars in any particular fiscal year and such
excess payments will not be deductible by the Company.
<TABLE>
<S> <C>
The Compensation Committee The Stock Option Committee
William C. Bartholomay, Chairman Harvey Reich, Chairman
William E. McKenna William E. McKenna
</TABLE>
The foregoing Joint Report of the Compensation and Stock Option Committees
on executive compensation shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates such information by reference.
15
<PAGE> 18
CORPORATE PERFORMANCE GRAPH
The following graph compares for the five years ended June 30, 1998 the
yearly percentage change in cumulative total stockholder return on the Common
Stock with (1) the cumulative total return of the Standard and Poor's 500 Stock
Index ("S & P 500") and (2) the cumulative total return of the Standard and
Poor's Leisure Time Index ("S&P Leisure"). The graph assumes an investment of
$100 on July 1, 1993 in the Common Stock and $100 invested at that time in each
of the indexes and the reinvestment of dividends where applicable. The 1997
spin-off of WHG resulted in an adjustment to total stockholder return as a
reinvested dividend of $2.25. The Midway Distribution resulted in an adjustment
to total stockholder return as a reinvested dividend of $27.10.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WMS $100 $ 66 $ 68 $ 86 $ 98 $103
- - ----------------------------------------------------------------------------------------------------------------------------
S&P 500 $100 $101 $128 $161 $217 $282
- - ----------------------------------------------------------------------------------------------------------------------------
S&P - Leisure $100 $101 $123 $160 $201 $242
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The foregoing table shall not be deemed to be incorporated by reference
into any filing of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the
Company specifically incorporates such information by reference.
EMPLOYMENT AGREEMENTS
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 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
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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 derogation 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 or bonus 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. Louis J. 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, 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. Neil D. 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
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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. 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. 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. Neil D. 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.
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 of
WMS. Additionally, two of the executive officers of Midway, Messrs. Bach and
Edidin, are officers of WMS.
In connection with the Distribution, WMS and Midway entered into the
following agreements:
Manufacturing Agreement. Midway and Williams Electronics Games, Inc.
("WEG"), a wholly owned subsidiary of the Company, 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
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
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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. Midway and Lenc-Smith Inc. ("Lenc-Smith"), a
wholly owned subsidiary of the Company, 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 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
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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. 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
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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 date 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.
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.
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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. 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 "Employment Agreements."
PROPOSAL 2 -- APPOINTMENT OF INDEPENDENT AUDITORS
It is proposed that the stockholders ratify the appointment by the Board of
Directors of Ernst & Young LLP as independent auditors for the Company for the
1999 fiscal year. The Company expects representatives of Ernst & Young LLP to be
present at the Annual Meeting, at which time they will be available to respond
to appropriate questions submitted by stockholders and may make such statements
as they may desire.
Approval by the stockholders of the appointment of independent auditors is
not required, but the Board deems it desirable to submit this matter to the
stockholders. If holders of a majority of the Common Stock present and entitled
to vote on the matter should not approve the selection of Ernst & Young LLP, the
selection of independent auditors will be reconsidered by the Board of
Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF
THE APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS OF THE COMPANY.
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GENERAL
As of the date of this Proxy Statement, the Board has not been informed of
and does not intend to present any other matters for action. However, if any
other matters are properly brought before the meeting, it is intended that the
persons voting the accompanying proxy will vote the shares represented thereby
in accordance with their best judgment.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Stockholder proposals in respect of matters to be acted upon at the
Company's next Annual Meeting of Stockholders should be received by the Company
on or before August 21, 1999 in order that they may be considered for inclusion
in the Company's proxy materials for such meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own greater than
10% of a registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based solely on a review of the forms it has received and on representations
from certain reporting persons that no such forms were required for them, the
Company believes that during fiscal 1998 all Section 16(a) filing requirements
applicable to its officers, directors and 10% beneficial owners were complied
with by such persons.
OTHER MATTERS
THE COMPANY WILL PROVIDE WITHOUT CHARGE A COPY OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998, INCLUDING FINANCIAL
STATEMENTS AND SCHEDULES THERETO, TO EACH OF THE COMPANY'S STOCKHOLDERS OF
RECORD ON DECEMBER 7, 1998, AND EACH BENEFICIAL OWNER OF STOCK ON THAT DATE UPON
RECEIPT OF A WRITTEN REQUEST THEREFOR MAILED TO THE COMPANY'S OFFICES, 3401
NORTH CALIFORNIA AVENUE, CHICAGO, ILLINOIS 60618, ATTENTION: TREASURER. IN THE
EVENT THAT EXHIBITS TO SUCH FORM 10-K ARE REQUESTED, A REASONABLE FEE WILL BE
CHARGED FOR REPRODUCTION OF SUCH EXHIBITS. REQUESTS FROM BENEFICIAL OWNERS OF
COMMON STOCK MUST SET FORTH A GOOD FAITH REPRESENTATION AS TO SUCH OWNERSHIP.
It is important that the accompanying proxy card be returned promptly.
Therefore, whether or not you plan to attend the meeting in person, you are
earnestly requested to mark, date, sign and return your proxy in the enclosed
envelope to which no postage need be affixed if mailed in the United States. The
proxy may be revoked at any time before it is exercised. If you attend the
meeting in person, you may withdraw the proxy and vote your own shares.
MANNER AND EXPENSES OF SOLICITATION
The solicitation of proxies in the accompanying form is made by the Board
and all costs thereof will be borne by the Company. In addition to the
solicitation of proxies by use of the mails, some of the officers, directors and
other employees of the Company may also solicit proxies personally or by mail,
telephone or telegraph, but they will not receive additional compensation for
such services. Brokerage firms, custodians, banks, trustees, nominees or other
fiduciaries holding shares of Common Stock in their names will be requested by
the Company to forward proxy material to their principals and will be reimbursed
for their reasonable out of pocket expenses in such connection.
VOTING PROCEDURES
Inspectors of election will be appointed to tabulate the number of shares
of Common Stock represented at the meeting in person or by proxy, to determine
whether or not a quorum is present and to count all votes
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cast at the meeting. The inspectors of election will treat abstentions and
broker non-votes as shares that are present and entitled to vote for purposes of
determining the presence of a quorum. Votes withheld in connection with the
election of one or more of the nominees for director will not be counted in
determining the votes cast and will have no effect on the vote. With respect to
the tabulation of votes cast on a specific proposal presented to the
stockholders at the meeting, abstentions will be considered as present and
entitled to vote with respect to that specific proposal, whereas broker
non-votes will not be considered as present and entitled to vote with respect to
that specific proposal. Abstentions with respect to each proposal that requires
approval by holders of a majority of the outstanding Common Stock will have the
effect of a vote against the proposal. Broker non-votes will have no effect on
the vote for or against these proposals. Brokers who hold shares in street name
for customers have authority to vote on certain items when they have not
received instructions from beneficial owners, including voting upon election of
directors and the selection of independent auditors.
By Order of the Board of Directors,
ORRIN J. EDIDIN
Vice President, Secretary and General
Counsel
Chicago, Illinois
December 11, 1998
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WMS INDUSTRIES INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
THE UNDERSIGNED, revoking all previous proxies, hereby appoints LOUIS J.
NICASTRO, HAROLD H. BACH, JR. and ORRIN J. EDIDIN, or any of them, as
attorneys, agents and proxies with power of substitution, and with all powers
the undersigned would possess if personally present, to vote all shares of
common stock of WMS Industries Inc. (the "Company") which the undersigned is
entitled to vote at the Annual Meeting of Stockholders of the Company to be
held on February 3, 1999 and at all adjournments thereof. The shares
represented by this Proxy will be voted as indicated below upon the following
matters, all more fully described in the accompanying Proxy Statement.
(1) Election of Directors.
[ ] FOR all nominees listed (except as [ ] WITHHOLD AUTHORITY
marked to the contrary) to vote for nominees listed
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEES, STRIKE
A LINE THROUGH THE NOMINEE'S NAME IN THE LIST BELOW:
Louis J. Nicastro / William C. Bartholomay / William E. McKenna/ Norman J.
Menell / Neil D. Nicastro / Harvey Reich / David M. Satz, Jr. / Ira S.
Sheinfeld
(2) Ratification of appointment of Ernst & Young LLP as independent auditors
for the 1999 fiscal year.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS GIVEN. IF NO INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED BY
THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES FOR DIRECTORS
DESIGNATED BY THE BOARD OF DIRECTORS AND "FOR" ITEM 2.
Dated:________________, 199_
____________________________
(Signature)
____________________________
(Signature)
NOTE: Please sign exactly as your name or names
appear hereon, and when signing as attorney,
executor, administrator, trustee or guardian, give
your full title as such. If signatory is a
corporation, sign the full corporate name by a duly
authorized officer. If shares are held jointly,
each stockholder named should sign.
NOTE: PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY IN THE ENVELOPE ENCLOSED FOR
THIS PURPOSE. NO POSTAGE IS REQUIRED FOR MAILING IN THE UNITED STATES.
