<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1999
REGISTRATION NO. 333-83021
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
WMS INDUSTRIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-2814522
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
3401 NORTH CALIFORNIA AVENUE, CHICAGO, ILLINOIS 60618 (773) 961-1111
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ORRIN J. EDIDIN, ESQ.
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
WMS INDUSTRIES INC.
3401 NORTH CALIFORNIA AVENUE, CHICAGO, ILLINOIS 60618 (773) 961-1111
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JEFFREY N. SIEGEL, ESQ HOWARD L. SHECTER, ESQ.
SHACK & SIEGEL, P.C. MORGAN, LEWIS & BOCKIUS LLP
530 FIFTH AVENUE 101 PARK AVENUE
NEW YORK, NY 10036 NEW YORK, NY 10178
(212) 782-0700 (212) 309-6000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
3,500,000 SHARES
[WMS LOGO]
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------------
WMS Industries Inc. is offering 3,500,000 shares of common stock by means of
this prospectus. This is a firm commitment underwriting.
Our common stock is listed on the New York Stock Exchange under the symbol
"WMS." On September 8, 1999, the last reported sale price of our common stock on
the New York Stock Exchange was $12 1/16 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Price to the public.................................. $ $
Underwriting discount................................
Proceeds to WMS......................................
</TABLE>
WMS has granted an over-allotment option to the underwriters. Under this option,
the underwriters may elect to purchase a maximum of 525,000 additional shares
from WMS within 30 days following the date of this prospectus to cover
over-allotments.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NEITHER THE NEVADA GAMING COMMISSION, THE NEVADA STATE GAMING CONTROL BOARD, THE
MISSISSIPPI GAMING COMMISSION, NOR ANY OTHER GAMING REGULATORY AUTHORITY HAS
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS OR THE INVESTMENT MERITS
OF OUR COMMON STOCK. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CIBC WORLD MARKETS PRUDENTIAL SECURITIES
The date of this prospectus is September , 1999.
<PAGE> 3
[Collage of color photos of WMS gaming and pinball machines]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Forward-Looking Statements.................................. i
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Use of Proceeds............................................. 10
Capitalization.............................................. 11
Common Stock Market Price Data.............................. 12
Selected Consolidated Financial Data........................ 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Business.................................................... 19
Government Regulation....................................... 29
Management.................................................. 36
Certain Relationships and Related Transactions.............. 38
Underwriting................................................ 40
Legal Matters............................................... 41
Experts..................................................... 41
Where You Can Find More Information......................... 42
Index to Consolidated Financial Statements.................. F-1
</TABLE>
---------------------------
As used in this prospectus, the terms "we," "us," "our" and "WMS" mean WMS
Industries Inc., a Delaware corporation, and its subsidiaries, unless the
context indicates a different meaning, and the term "common stock" means our
common stock, $0.50 par value per share. Unless we indicate otherwise, the
information in this prospectus assumes that the underwriters will not exercise
the over-allotment option.
WMS Gaming(R) is a trademark of our subsidiary, WMS Gaming Inc. Our product
names mentioned in this prospectus are trademarks of WMS Gaming Inc., except
where they are licensed. Williams(R), Pinball 2000(TM), DCS Sound System(R),
Dotmation(TM) and Revenge from Mars(TM) are trademarks of our subsidiary,
Williams Electronics Games, Inc. Monopoly(R), Chance(R) and Community Chest(R)
are trademarks of Hasbro, Inc. Star Wars(R) is a trademark of Lucasfilm Ltd. The
other trademarks mentioned in this prospectus are the property of their
respective owners.
The underwriters are offering the shares of common stock subject to various
conditions and may reject all or part of any order. The shares should be ready
for delivery on or about , 1999 against payment in immediately
available funds. See "Underwriting."
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains "forward-looking statements"
within the meaning of the federal securities laws. These statements may be found
under the headings "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," among others. These statements describe our beliefs
concerning the future based on currently available information. We do not intend
to update the forward-looking statements included in this prospectus. Our actual
results could differ materially from those contained in the forward-looking
statements due to a number of risks and uncertainties. Forward-looking
statements typically are identified by the use of terms such as "may," "will,"
"expect," "anticipate," "believe," "estimate," and similar words, although some
forward-looking statements are expressed differently. Important factors that
could cause our actual results to differ materially from our expectations
expressed in the forward-looking statements are set forth under the caption
"Risk Factors" and in other sections of this prospectus.
i
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, as well as our financial statements and the accompanying notes that
appear elsewhere in this prospectus. You should also read the information
incorporated by reference in this prospectus. See "Where You Can Find More
Information."
ABOUT WMS
We are a leading designer, manufacturer and marketer of innovative video and
reel spinning gaming machines, video lottery terminals and pinball games. Our
primary focus is the growth of our gaming machine business. We seek to develop
gaming machines that offer greater entertainment value than traditional slot
machines and generate greater revenues for casinos and other gaming machine
operators. Our gaming machines incorporate secondary bonus rounds, advanced
graphics, digital sound and engaging game themes, some of which include popular
songs and recognized trademarks. Our gaming machines are installed in all of the
major gaming jurisdictions in North America and in several foreign
jurisdictions. Our gaming machine revenues increased 121.8% from $56.8 million
in fiscal 1998, to $126.0 million in fiscal 1999.
In June 1997, we introduced Reel 'Em In, our first single-themed multi-coin,
multi-line video gaming machine that incorporates a secondary bonus game. Our
multi-coin, multi-line gaming machines accept up to 90 coins at a time and have
up to nine distinct pay lines, giving the players more ways to win. In addition,
secondary bonusing creates a "game-within-a-game" that rewards players by
offering them a chance to advance from the primary game to a secondary game. The
secondary game also gives the players additional payoff opportunities and allows
them to interact with the game by choosing from various entertaining options in
the bonus round. The success of Reel 'Em In led to our introduction of a series
of video gaming machines based on this new-generation design. This series
includes Winning Bid, Top Banana, Filthy Rich, Jackpot Party, Life of Luxury,
Boom! and Instant Winner, each featuring a unique and entertaining theme. The
multi-coin, multi-line and secondary bonus features and our highly-entertaining
themes are designed to attract new players, encourage repeat play and increase
the average wager per play.
In the fall of 1998, we introduced a series of four Monopoly-themed gaming
machines that were named the "Most Innovative Gaming Product for 1999" at the
American Gaming, Lodging and Leisure Summit. We are the exclusive worldwide
licensee of the widely-recognized Monopoly trademark for use on gaming machines.
Since their introduction, these machines have typically generated average daily
revenue significantly in excess of the average daily revenue of the casinos'
other gaming machines. For example, in Nevada during the first six months of
1999, these machines generated average daily revenue of more than twice the
casinos' average daily revenue per machine. As a result of their superior
earnings, we have been able to offer our Monopoly-themed gaming machines to
casino operators on a revenue participation or daily lease basis. This allows us
to share in the superior earnings of these gaming machines and to generate
recurring revenues. As of August 31, 1999, we had installed over 3,000
Monopoly-themed gaming machines.
We are also the world's leading pinball game designer and manufacturer. We
recently developed Pinball 2000, which is a new-generation platform for pinball
games that integrates a fully-interactive video monitor with the traditional
playfield. We introduced our first Pinball 2000 game, Revenge From Mars, in
March 1999, and we introduced our second Pinball 2000 game, Star Wars: Episode
I, in July 1999. We also manufacture coin-operated video amusement games for
Midway Games Inc., our former subsidiary.
1
<PAGE> 5
OUR BUSINESS STRATEGY
Our business strategy is primarily focused on the growth of our gaming machine
business. We seek to increase our market share and profitability by offering an
expanding portfolio of entertaining gaming machines with superior earning
potential. This strategy includes the following elements:
- Leverage our strength in developing gaming machines with enhanced
entertainment value: For 53 years we have been designing successful
arcade-style amusement games with creative and compelling content and
the latest technology. We believe that this experience allows us to
create gaming machines that offer significantly greater entertainment
value than traditional gaming machines. Our gaming machine development
teams combine the talents of 95 engineers, designers, artists and
musicians. We believe that we are well-positioned to develop gaming
machines that have superior entertainment value and generate higher
revenue for our customers. We are currently developing numerous
innovative and entertaining gaming machines, some of which we expect to
offer only on a recurring revenue basis.
- Maximize the potential of our exclusive license for use of the Monopoly
theme on gaming machines: As the exclusive licensee of the Monopoly name
for use with gaming machines, we have converted a popular trademark into
a successful line of four superior-earning gaming machines. The success
of these Monopoly-themed gaming machines has allowed us to lease them to
casino operators, generating recurring revenues for us. We are currently
developing two new gaming machines based on the Monopoly theme, and we
anticipate introducing additional gaming machines based on this theme.
- Focus on the multi-coin, multi-line video gaming machine market: We
believe that the fastest growing product on the casino floor is the
multi-coin, multi-line video gaming machine. We believe that the growth
of this type of gaming machine will continue because it offers more
interactive entertainment value and because casino managers wish to
increase the diversity of the gaming machines on their slot floors. Our
portfolio of multi-coin, multi-line video gaming machines has
established us as a leading supplier of this type of video gaming
machine. We are developing a number of additional multi-coin, multi-line
video gaming machines and expect to increase the rate at which we
introduce these machines in the future.
The pinball market has declined significantly in recent years due to the growth
of competition from video and other amusement games. Historically, however, the
pinball market has been cyclical, recovering when a new generation of pinball
technology is introduced. We intend to continue to evaluate the market potential
of Pinball 2000 to determine whether this new platform has succeeded in
stimulating a recovery in the pinball market.
Our principal executive offices are located at 3401 North California Avenue,
Chicago, IL 60618. Our telephone number is (773) 961-1111.
2
<PAGE> 6
THE OFFERING
Common stock offered by WMS................ 3,500,000 shares(1)
Common stock to be outstanding after the
offering................................... 33,919,200 shares(1)(2)
Use of proceeds............................ - General corporate purposes
- New product development and
rollout
- Potential strategic
acquisitions of businesses,
intellectual property or other
assets
- Working capital
NYSE symbol................................ WMS
(1) Excludes 525,000 shares of our common stock that the underwriters have the
option to purchase to cover over-allotments, if any.
(2) Based on 30,419,200 shares outstanding on September 8, 1999. Excludes 77,312
treasury shares and 2,260,898 shares issuable upon the exercise of stock
options outstanding at September 8, 1999.
3
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------ -----------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OTHER DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues:
Gaming...................... $ 8,234 $ 10,841 $ 15,678 $ 22,035 $ 18,844 $ 25,575 $ 34,665 $ 46,872
Pinball and cabinets........ 11,801 12,556 4,833 9,061 5,031 8,904 10,495 21,679
Contract manufacturing...... -- -- -- 3,951 2,924 4,512 3,794 3,995
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues............ $ 20,035 $ 23,397 $ 20,511 $ 35,047 $ 26,799 $ 38,991 $ 48,954 $ 72,546
======== ======== ======== ======== ======== ======== ======== ========
Operating income (loss):
Gaming...................... $ (4,219) $ (3,125) $ (2,609) $ 363 $ (665) $ 1,568 $ 4,818 $ 11,065
Pinball and cabinets........ (385) (385) (3,526) (3,465) (2,565) (3,404) (2,042) 1,023
Contract manufacturing...... -- -- -- 347 235 407 333 282
Charges related to stock
option adjustment(1)...... -- -- (59,890) -- -- (601) (539) (1,897)
Unallocated general
corporate
expenses.................. (365) (354) (416) (635) (578) (880) (553) (1,060)
-------- -------- -------- -------- -------- -------- -------- --------
Total operating income
(loss).................. (4,969) (3,864) (66,441) (3,390) (3,573) (2,910) 2,017 9,413
Interest and other income..... 589 920 1,015 1,805 922 917 946 740
Interest expense.............. (441) 522 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes....................... (4,821) (2,422) (65,426) (1,585) (2,651) (1,993) 2,963 10,153
Credit (provision) for income
taxes....................... 1,832 920 22,076 602 1,007 758 (1,126) (3,858)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations.................. (2,989) (1,502) (43,350) (983) (1,644) (1,235) 1,837 6,295
Income from discontinued
operations, net............. 6,277 15,947 4,522 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............. $ 3,288 $ 14,445 $(38,828) $ (983) $ (1,644) $ (1,235) $ 1,837 $ 6,295
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per
share of common stock:
Income (loss) from
continuing operations..... $ (0.12) $ (0.06) $ (1.62)(2) $ (0.04) $ (0.06) $ (0.04) $ 0.06 $ 0.20
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss)........... $ 0.13 $ 0.54 $ (1.45)(2) $ (0.04) $ (0.06) $ (0.04) $ 0.06 $ 0.20
======== ======== ======== ======== ======== ======== ======== ========
Diluted number of shares...... 25,549 26,471 26,843 27,944 27,988 29,039 30,055 31,168
OTHER DATA (EXCLUDES VLTS)
Gaming machines sold.......... 546 1,289 2,020 2,897 2,335 3,078 3,688 4,481
Gaming machines on lease at
end of period............... -- -- -- -- -- 501 1,814 2,715
Pinball games sold............ 3,659 3,743 1,003 1,929 1,399 2,358 2,240 5,818
BALANCE SHEET DATA
Total assets.................. $315,095 $335,428 $256,147 $207,522 $207,026 $215,939 $225,506 $238,079
Working capital............... 74,541 100,672 87,448 112,066 107,877 110,337 104,211 110,040
Long-term debt................ 27,254 -- -- -- -- -- -- --
Stockholders' equity.......... 230,416 276,541 155,336 155,291 153,914 158,122 159,990 172,079
</TABLE>
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(1) Charges related to adjustment to previously outstanding WMS stock options
made in connection with the Midway spinoff. At June 30, 1999, the maximum
additional future pre-tax expense related to these stock options was $2.9
million, plus interest. See Note 9 to the Consolidated Financial
Statements on page F-12.
(2) Includes an after-tax charge of $1.49 per share related to the adjustment
described in footnote (1) above.
4
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RISK FACTORS
You should carefully consider the following factors and the other information in
this prospectus before deciding to invest in the shares.
WE HAVE EXPERIENCED LOSSES FROM CONTINUING OPERATIONS.
We have experienced operating losses (excluding discontinued businesses) in two
of our last three fiscal years due to a variety of factors, including:
- market acceptance of our products;
- development costs and promotional expenses relating to the introduction
of our new generations of gaming machines and pinball games;
- adverse litigation rulings that prevented us from selling our older reel
spinning slot machine models; and
- the decline of the pinball industry and related reorganization costs.
Although we had operating income in our most recent fiscal year, we cannot
assure you that we will sustain profitability.
WE DEPEND ON INTRODUCING NEW GAMING MACHINES THAT ACHIEVE AND MAINTAIN MARKET
ACCEPTANCE.
Our success depends on developing and successfully marketing new gaming machines
with strong and sustained player appeal. A new machine will be accepted by
casino operators only if we can show that the machine is likely to produce more
revenues to the operator than other machines. Gaming machines are often
installed in casinos on a trial basis, and only after a successful trial period
are the machines purchased by the casinos. If a new product does not achieve
significant market acceptance, we may not recover our development and promotion
costs. In addition, we must continually adapt our products to emerging
technologies. We cannot assure you that we will be able to develop products
using emerging technologies. We cannot assure you that the new products that we
introduce will achieve any significant degree of market acceptance or that the
acceptance will be sustained for any meaningful period.
OUR GROWTH INCREASINGLY DEPENDS ON RECURRING REVENUE LEASE ARRANGEMENTS, RATHER
THAN ON OUTRIGHT SALES OF GAMING MACHINES.
In October 1998 we began to enter into recurring revenue arrangements, which are
either participation leases or other short-term lease arrangements with casinos
for our Monopoly-themed machines, rather than selling the machines to the casino
operators. Approximately $16.6 million, or 13.2%, of our gaming revenues for
fiscal 1999 were derived from these leases, and we expect that lease revenues
will constitute an increasing share of our future revenues. Gaming machines
under recurring revenue arrangements are replaced by the casinos if they do not
meet and sustain revenue expectations. Therefore, these machines are
particularly susceptible to pressure from competitors, declining popularity and
changes in economic conditions and are at risk of replacement by the casinos,
ending the recurring revenues from these machines. We cannot assure you that our
gaming machines will continue to meet the casinos' revenue requirements. In
addition, casinos in certain jurisdictions have sought and may continue to seek
legislation prohibiting or restricting recurring revenue arrangements. We cannot
assure you that the various gaming jurisdictions will continue to permit
recurring revenue arrangements.
THE GAMING MACHINE MARKET IS INTENSELY COMPETITIVE, AND SOME OF OUR COMPETITORS
HAVE ADVANTAGES OVER US.
The gaming machine business is intensely competitive and is characterized by the
rapid development of new technologies and the continuous introduction of new
products. Some of our competitors are large companies with greater financial,
marketing and product development resources than ours. In addition, new
competitors may enter our key markets. Obtaining space and favorable placement
on casino gaming floors
5
<PAGE> 9
is a competitive factor in our industry. Competitors with a larger installed
base of gaming machines have an advantage in retaining the most space and best
placement. These competitors may also have the advantage of being able to
convert their installed machines to newer models in order to maintain their
share of casino floor space.
PATENT INFRINGEMENT CLAIMS COULD LIMIT OR AFFECT OUR ABILITY TO MARKET SOME OF
OUR CURRENT OR NEW GAMING MACHINES.
Our competitors have been granted patents covering various gaming machine
features. If our products use processes or other subject matter that is claimed
under these existing patents, or if other companies obtain patents claiming
subject matter that we use, those companies may bring infringement actions
against us. We might then be forced to discontinue the affected products or be
required to obtain licenses from the company holding the patent, if it is
willing to give us a license, to develop, manufacture or market our products. We
also might then be limited in our ability to market new products. We are
currently involved in two lawsuits in federal court regarding patent
infringement claims concerning products that we no longer manufacture. See
"Business -- Legal Proceedings."
WE MAY BE UNABLE TO OBTAIN LICENSES TO USE INTELLECTUAL PROPERTIES AND MAY
EXPERIENCE DELAYS IN OBTAINING LICENSORS' APPROVALS OF NEW PRODUCTS.
Some of our most popular gaming machines and pinball games are based on
trademarks and other intellectual properties licensed from third parties. Our
future success may depend upon our ability to obtain and maintain licenses for
popular intellectual properties. There is competition for these licenses, and we
cannot assure you that we will be successful in acquiring and maintaining
intellectual property rights with significant commercial value on acceptable
terms.
Our intellectual property licenses generally require that we submit new products
developed under licenses to the licensor for approval prior to release. This
approval is generally discretionary. Rejection or delay in approval of a product
by a licensor could have a material adverse effect on our business, operating
results and financial condition.
WE RELY ON OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS.
Our success may depend in part on our ability to obtain trademark protection for
the names or symbols under which we market our products and to obtain copyright
and patent protection of our proprietary software and other game innovations. We
cannot assure you that we will be able to build and maintain goodwill in our
trademarks or obtain trademark or patent protection, that any trademark,
copyright or issued patent will provide competitive advantages for us or that
our intellectual properties will not be successfully challenged or circumvented
by competitors.
We also rely on trade secrets and proprietary know-how. We generally enter into
confidentiality agreements with our employees regarding our trade secrets and
proprietary information, but we cannot assure you that the obligation to
maintain the confidentiality of our trade secrets or proprietary information
will be honored. Despite various confidentiality agreements and other trade
secret protections, our trade secrets and proprietary know-how could become
known to, or independently developed by, competitors.
OUR GAMING MACHINE BUSINESS IS HEAVILY REGULATED, AND WE DEPEND ON OUR ABILITY
TO OBTAIN AND MAINTAIN REGULATORY APPROVALS.
The manufacture and distribution of gaming machines are subject to extensive
federal, state, local and foreign regulations and taxes, and the governments of
the various gaming jurisdictions amend these regulations from time to time.
Virtually all of these jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for manufacturers and distributors of gaming machines and for their
officers, directors, major stockholders and key personnel. The gaming
authorities in some jurisdictions may investigate any individual who has a
material relationship with us and any stockholder to determine whether the
individual or stockholder is acceptable to those gaming authorities. Each of our
gaming machines must be approved in each jurisdiction in which it is
6
<PAGE> 10
placed, and we cannot assure you that a particular game will be approved in any
jurisdiction. Licenses, approvals or findings of suitability may be revoked,
suspended or conditioned. The revocation or denial of a license in a particular
jurisdiction could adversely affect our ability to obtain or maintain licenses
in other jurisdictions.
If we fail to seek or do not receive a necessary registration, license, approval
or finding of suitability, we may be prohibited from selling our gaming machines
for use in the jurisdiction or may be required to sell them through other
licensed entities at a reduced profit to us. Some jurisdictions require gaming
manufacturers to obtain government approval before engaging in some
transactions, such as business combinations. Obtaining licenses and approvals
can be time consuming and costly. We cannot assure you that we will be able to
obtain all necessary registrations, licenses, permits, approvals or findings of
suitability in a timely manner, or at all. Similarly, we cannot assure you that
our current registrations, licenses, approvals or findings of suitability will
not be revoked, suspended or conditioned. See "Government Regulation."
The National Gambling Impact Study Commission (the "NGIC") was created by the
U.S. Congress in August 1996 to conduct a comprehensive legal and factual study
of the social and economic impacts of gaming on federal, state, local and Native
American tribal governments and on communities and social institutions. The NGIC
issued a report to the President, Congress, state governors and tribal leaders
containing its findings and conclusions, together with recommendations for
legislation and administrative actions in June 1999. The NGIC report calls for a
pause in the growth of legalized gambling and encourages state and local
governments to form their own gambling study commissions. Although the NGIC has
no regulatory or enforcement powers, its recommendations could result in the
enactment of new laws and the adoption of new regulations that could adversely
impact the gaming industry in general.
THE PINBALL MARKET HAS CONTRACTED AND MAY NOT GROW AGAIN.
During fiscal 1997, we completed a downsizing of our pinball design and
manufacturing operations in response to the industry-wide decline in demand for
pinball games over the past few years. Nevertheless, our pinball operations
continued to generate an operating loss in fiscal 1998 and fiscal 1999. Pinball
games face increased competition from video games and other amusement games for
space in their traditional locations, such as arcades and bars, and from home
amusement systems. We cannot assure you that demand in the pinball market will
increase or that our pinball business will return to profitability. In our
experience, it has been essential to introduce new technologies and product
innovations in order to stimulate demand for pinball games. We cannot assure you
that we will be able to develop successful new pinball technologies in the
future. In addition, we may not recover our development costs for a new pinball
game unless it achieves significant market acceptance. We cannot assure you that
our new pinball games will achieve or sustain consumer acceptance.
WE FACE RISKS ASSOCIATED WITH POTENTIAL BUSINESS ACQUISITIONS.
We may seek to grow through acquiring other companies, intellectual property or
other assets. Our success with this strategy will depend on our ability to
identify and negotiate attractive investments that will complement or enhance
our business. We cannot assure you that we will be able to:
- properly identify and evaluate acquisition opportunities;
- control costs and liabilities incurred with the acquisition of the new
businesses or assets;
- effectively manage growth of operations; or
- anticipate and evaluate the numerous risks involved in acquiring and
operating a new business or asset.
The focus on potential acquisitions could divert our management's resources. The
acquisition of a costly or unproductive business or asset could materially and
adversely affect our business. We are not currently in discussions with any
acquisition candidate.
7
<PAGE> 11
WE DEPEND ON OUR KEY PERSONNEL.
Our success depends to a significant extent upon the performance of senior
management and on our ability to continue to attract, motivate and retain highly
qualified game developers. Competition for highly skilled employees with
technical, management, marketing, sales, product design and development and
other specialized training is intense. We cannot assure you that we will be
successful in attracting and retaining these employees. We may also experience
increased costs in order to attract and retain skilled employees.
OUR CONTRACT MANUFACTURING BUSINESS DEPENDS ON ONE CUSTOMER.
We manufacture coin-operated video games for Midway, which is currently our only
contract manufacturing customer. Midway may cancel our contract by giving us six
months' notice. Midway would then be free to use one or more of our competitors
to fulfill its manufacturing needs. We earned approximately $1.3 million of
operating income from contract manufacturing in fiscal 1999. We cannot assure
you that Midway will continue to employ our services and keep our agreement in
effect. In addition, if Midway were to cancel the contract, we would continue to
incur the fixed costs of maintaining our Waukegan, Illinois manufacturing
facility.
WE MAY HAVE CONFLICTS OF INTEREST WITH MIDWAY.
Most of our directors are also directors and stockholders of Midway. In
addition, Louis J. Nicastro, our Chairman of the Board, President and Chief
Executive Officer, is also a director of Midway. Neil D. Nicastro, one of our
directors and a consultant to WMS, is also the Chairman of the Board, President,
Chief Executive Officer and Chief Operating Officer of Midway. Neil D. Nicastro
is the son of Louis J. Nicastro. Kenneth J. Fedesna, who heads our pinball
operations, is also an officer and director of Midway. In addition, Harold H.
Bach, Jr., our Chief Financial Officer and Orrin J. Edidin, our General Counsel,
are also officers of Midway. Each of these officers has duties and
responsibilities with Midway that may conflict with time that might otherwise be
devoted to his duties with WMS.
These officers must also administer the various contracts and arrangements in
effect between Midway and us. For instance, these officers must decide whether
to terminate or permit to continue in force various operating agreements between
Midway and us that either party may terminate upon six months' notice, including
the manufacturing agreement, the cabinet supply agreement and the pinball sales
agreement. See "Certain Relationships and Related Transactions." In addition,
these officers may be called upon to negotiate new agreements to be entered into
in the future between Midway and us.
WE MAY EXPERIENCE ADVERSE EFFECTS AS A RESULT OF THE YEAR 2000 COMPUTER PROBLEM.
Many currently installed software programs and embedded programs in electronic
systems throughout the world will not work properly when processing dates later
than 1999. If we experience any Year 2000 failures, or if any suppliers or
customers experience a Year 2000 problem affecting us, shipments or orders of
our affected products might be delayed. We cannot assure you that we will be
free from exposure to legal actions, loss of sales or other unforseen costs
relating to the Year 2000 problem. For information about our Year 2000
information system readiness, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SUMNER REDSTONE OWNS OR CONTROLS OVER 20% OF OUR COMMON STOCK AND MAY DISPOSE OF
IT AT ANY TIME.
After this offering is completed, Sumner Redstone will own or control 7,180,200
shares, or approximately 21.2%, of our common stock. Mr. Redstone could sell any
or all of these shares at any time on the open market or otherwise. In addition,
although Mr. Redstone has stated that he has no plans to acquire control of WMS,
he may sell his stock to a person who wishes to acquire control of WMS. We
cannot assure you that any such person will agree with our strategy and business
goals described in this prospectus. The sale by Mr. Redstone of a large number
of shares could have an adverse effect on the market price of our common stock.
See "Certain Relationships and Related Transactions."
8
<PAGE> 12
OUR BOARD OF DIRECTORS COULD USE OUR RIGHTS PLAN AND BLANK CHECK PREFERRED STOCK
TO INHIBIT THE ACQUISITION OF WMS.
Rights plan. Under an agreement with The Bank of New York, as rights agent, each
share of our common stock has an accompanying right to purchase convertible
preferred stock that permits each holder to receive shares of our common stock
at half price. The rights become exercisable if any person or entity that did
not, before the plan was adopted, own 15% or more of our common stock acquires
beneficial ownership of 15% or more of our common stock. We can redeem the
rights at $0.01 per right, subject to certain conditions, at any time. The
rights expire in 2007. Our board of directors could use this agreement as an
anti-takeover device to discourage, delay or prevent a change in control of WMS.
The existence of this agreement could adversely affect the market price of our
common stock.
Blank check preferred stock. Our certificate of incorporation authorizes the
issuance of five million shares of preferred stock with designations, rights and
preferences that may be determined from time to time by the board of directors.
Accordingly, our board has broad power, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
our common stock. Our board of directors could use preferred stock to
discourage, delay or prevent a change in control. Our board has no current
plans, agreements or commitments to issue any shares of preferred stock. The
existence of the blank check preferred stock, however, could adversely affect
the market price of our common stock.
THE SUBSTANTIAL NUMBER OF SHARES AVAILABLE FOR SALE IN THE FUTURE COULD HAVE AN
ADVERSE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK.
We have 100,000,000 authorized shares of common stock, of which 30,419,200
shares were issued and outstanding as of September 8, 1999, excluding 77,312
treasury shares. On that date, we also had outstanding options to purchase an
aggregate of approximately 2,261,000 shares of our common stock issuable at an
average exercise price of approximately $5.00 per share. If all of our issued
and outstanding stock options were exercised as of that date, approximately
32,680,000 shares of our common stock would be outstanding. Our board of
directors has broad discretion to issue authorized but unissued shares,
including discretion to issue shares in compensatory and acquisition
transactions. In addition, if we seek financing through the sale of our
securities, our then current stockholders may suffer dilution in their
percentage ownership of our common stock. The future issuance, or even the
potential issuance, of shares at a price below the then current market price may
have a depressive effect on the future market price of our common stock.
OUR STOCK PRICE MAY BE VOLATILE.
Our stock price fluctuated between a low of $3.50 and a high of $17.00 in fiscal
1999. We may continue to experience volatility in our stock price.
9
<PAGE> 13
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common stock we
are offering will be approximately $39.2 million. If the underwriters exercise
their over-allotment option in full, the net proceeds will be approximately
$45.1 million. For the purpose of estimating net proceeds, we are assuming that
the public offering price will be $12.00 per share. "Net proceeds" is what we
expect to receive after paying the underwriting discount and the other expenses
of this offering.
We expect to use the net proceeds for general corporate purposes, new product
development and rollout, potential strategic acquisitions of businesses,
intellectual property or other assets, and working capital. The timing and
amount of our actual expenditures will be based on many factors, including the
level of our research, development and promotional activities, identification
and availability of satisfactory acquisition opportunities and the amount of
cash flow from operations. Until we use the net proceeds of the offering, we
will invest them in money market securities or other appropriate short-term
investments.
10
<PAGE> 14
CAPITALIZATION
The following table sets forth our capitalization, at June 30, 1999:
- on an actual basis; and
- as adjusted to reflect the sale of 3,500,000 shares that we are offering
by means of this prospectus at an assumed offering price of $12.00 per
share and the application of the proceeds, net of the estimated
underwriting discounts and our estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 58,669 $ 97,859
======== ========
Long-term debt.............................................. $ -- $ --
Stockholders' equity:
Preferred stock (5,000,000 shares authorized; none
issued)................................................ -- --
Common stock (100,000,000 shares authorized; 30,428,621
shares issued, actual and 33,928,621 shares issued, as
adjusted).............................................. 15,214 16,964
Additional paid-in capital................................ 180,989 218,429
Retained earnings (deficit)............................... (23,742) (23,742)
Less -- treasury stock, at cost (77,312 shares)........... (382) (382)
-------- --------
Total stockholders' equity............................. 172,079 211,269
-------- --------
Total capitalization................................... $172,079 $211,269
======== ========
</TABLE>
11
<PAGE> 15
COMMON STOCK MARKET PRICE DATA
Our common stock is traded publicly on the New York Stock Exchange under the
symbol "WMS." The following table shows the high and low sale prices of our
common stock for the periods indicated as reported on the NYSE:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................. 30 3/16 23 5/8
Second Quarter............................................ 30 3/8 18
Third Quarter............................................. 32 1/4 19 1/16
Fourth Quarter (through April 6)(1)....................... 33 3/4 31 1/8
Fourth Quarter (after April 6)(1)......................... 5 5/8 2 1/2
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter............................................. 8 13/16 3 1/2
Second Quarter............................................ 10 3/8 5
Third Quarter............................................. 9 7/8 6 15/16
Fourth Quarter............................................ 17 7 1/2
</TABLE>
- ---------------------------
(1) On April 6, 1998, we distributed a tax-free dividend of 1.19773 shares
of Midway common stock for each share of our common stock.
On September 8, 1999, the last reported sale price of our common stock on the
NYSE was $12.06 per share. On that date, there were approximately 1,215 holders
of record of our common stock.
12
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the statement of income data for the fiscal years ended June 30,
1997, 1998 and 1999, and balance sheet data as of June 30, 1998 and 1999 from
the audited financial statements in this prospectus. Those financial statements
were audited by Ernst & Young LLP, independent auditors. We derived the
statement of income data for the fiscal years ended June 30, 1995 and 1996 and
the balance sheet data as of June 30, 1995, 1996 and 1997 from audited financial
statements that are not included in this prospectus. Historical results are not
necessarily indicative of results of operations to be expected in the future.
You should read the following Selected Consolidated Financial Data together with
our Consolidated Financial Statements and notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues:
Gaming.................................................... $ 22,172 $ 37,523 $ 33,613 $ 56,788 $125,956
Pinball and cabinets...................................... 111,843 55,679 42,983 38,251 46,109
Contract manufacturing.................................... -- -- -- 3,951 15,225
-------- -------- -------- -------- --------
Total revenues.......................................... $134,015 $ 93,202 $ 76,596 $ 98,990 $187,290
======== ======== ======== ======== ========
Operating income (loss):
Gaming.................................................... $ (8,036) $ (9,508) $(12,510) $ (9,590) $ 16,786
Pinball and cabinets...................................... (2,590) (17,093) (2,997) (7,761) (6,988)
Contract manufacturing.................................... -- -- -- 347 1,257
Provisions related to WMS Gaming Inc. patent litigation... -- -- (61,925) -- --
Charges related to stock option adjustment(1)............. -- -- -- (59,890) (3,037)
Unallocated general corporate expenses.................... (3,260) (3,106) (1,884) (1,770) (3,071)
-------- -------- -------- -------- --------
Total operating income (loss)........................... (13,886) (29,707) (79,316) (78,664) 4,947
Interest and other income................................... 4,801 3,705 5,661 4,410 3,525
Interest expense............................................ (2,821) (3,306) (3,443) -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... (11,906) (29,308) (77,098) (74,254) 8,472
(Provision) credit for income taxes......................... 5,779 11,556 30,301 25,430 (3,219)
-------- -------- -------- -------- --------
Income (loss) from continuing operations.................... (6,127) (17,752) (46,797) (48,824) 5,253
Income from discontinued operations, net.................... 25,334 22,291 87,492 26,746 --
-------- -------- -------- -------- --------
Net income (loss)........................................... $ 19,207 $ 4,539 $ 40,695 $(22,078) $ 5,253
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per share of common stock:
Income (loss) from continuing operations.................. $ (0.25) $ (0.74)(2)$ (1.92)(3) $ (1.85)(4)$ 0.18(5)
======== ======== ======== ======== ========
Net income (loss)......................................... $ 0.80 $ 0.19(2) $ 1.67(3) $ (0.84)(4)$ 0.18(5)
======== ======== ======== ======== ========
Average number of shares outstanding........................ 24,102 24,122 24,334 26,446 29,308
OTHER DATA (EXCLUDES VLTS)
Gaming machines sold........................................ 273 4,241 1,907 6,752 13,582
Gaming machines on lease at end of year..................... -- -- -- -- 2,715
Pinball games sold.......................................... 38,068 16,583 12,575 10,334 11,815
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................................................ $294,190 $295,071 $306,915 $207,522 $238,079
Working capital............................................. 112,891 157,248 103,910 112,066 110,040
Long-term debt.............................................. 57,500 57,500 57,500 -- --
Stockholders' equity........................................ 208,571 210,033 196,000 155,291 172,079
</TABLE>
- ---------------------------
(1) Charges related to adjustment to previously outstanding WMS stock
options made in connection with the Midway spin-off. At June 30, 1999,
the maximum additional future pre-tax expense related to these stock
options was $2.9 million, plus interest. See Note 9 to the Consolidated
Financial Statements on page F-12.
13
<PAGE> 17
(2) Includes after-tax restructuring charges related to pinball business
downsizing of $2.1 million, or $0.09 per share, and additional after-tax
provisions for gaming inventory obsolescence of $1.3 million, or $0.05
per share.
(3) Includes an after-tax charge of $1.54 per share related to patent
litigation. See Note 12 to the Consolidated Financial Statements on page
F-15.
(4) Includes an after-tax charge of $1.51 per share in fiscal 1998 related
to the adjustment described in footnote (1) above.
(5) Includes an after-tax charge of $0.06 per share in fiscal 1999 related
to the adjustment described in footnote (1) above.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
WMS was incorporated in Delaware on November 20, 1974 under the name Williams
Electronics, Inc. and succeeded to the business of designing and manufacturing
pinball games, which had been conducted for almost 30 years by our predecessors.
Our current businesses are reported in the following three operating segments:
gaming; pinball and cabinets; and contract manufacturing. In our gaming
business, we design, manufacture and market video and reel spinning gaming
machines and video lottery terminals. In our pinball and cabinets business, we
design and manufacture coin-operated pinball games and manufacture cabinets for
coin-operated games. In our contract manufacturing business, we manufacture
coin-operated video games.
We conduct our gaming machine business through our subsidiary WMS Gaming Inc.,
which markets its products under the Williams(R) and WMS Gaming(TM) trademarks.
We conduct our pinball and cabinets business through our subsidiary Williams
Electronics Games, Inc. ("WEG"), which markets products under the Bally(R) and
Williams(R) trademarks, and through our cabinet manufacturing subsidiary, Lenc-
Smith Inc. We conduct our contract manufacturing business through WEG.
In April 1997, we distributed to our stockholders all of our stock in our former
subsidiary, WHG Resorts & Casinos Inc., a Puerto Rico-based hotel, casino and
hotel management business.
In April 1998, we distributed to our stockholders all of our stock in our former
subsidiary, Midway Games Inc., a coin-operated and home video game design,
marketing and publishing business. Since this distribution, we manufacture,
under a contract, the coin-operated video games designed and sold by Midway.
Our fiscal year begins on July 1 and ends on June 30.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED WITH FISCAL 1998
Consolidated revenues increased $88.3 million, or 89.2%, to $187.3 million in
fiscal 1999 from $99.0 million in fiscal 1998. Consolidated gross profit
increased to $56.7 million in fiscal 1999 from $22.0 million in fiscal 1998 due
primarily to increased gaming machine sales and participation and lease revenue,
particularly from our Monopoly-themed gaming machines introduced in fiscal 1999,
and a higher gaming gross profit margin percentage. Gross profit margin
increased to 30.3% in fiscal 1999 from 22.2% in fiscal 1998, primarily because
of the higher gross margin generated by participation and lease arrangements,
compared with the gross margin on product sales. Consolidated operating income
increased to $4.9 million in fiscal 1999 from an operating loss of $18.8 million
in fiscal 1998, after excluding a $59.9 million common stock option adjustment
expense in fiscal 1998 that compensated option holders for the lost opportunity
value represented by the shares of Midway stock distributed in the spin-off, in
which distribution option holders did not participate.
Income from continuing operations was $5.3 million, or $0.18 per share, in
fiscal 1999, compared to a loss from continuing operations of $48.8 million, or
$1.85 per share, in fiscal 1998. Net income (loss), which in fiscal 1998
included discontinued operations, was $5.3 million, or $0.18 per share, for
fiscal 1999 compared to net loss of $22.1 million, or $0.84 per share, for
fiscal 1998. Income from continuing operations and net income for fiscal 1999
were decreased by $950,000, or $0.03 per share, after taxes, due to costs from a
strike at our cabinet manufacturing facility that was settled during the third
quarter of fiscal 1999 and were also decreased by $1.9 million, or $0.06 per
share, after taxes, from the adjustments to previously outstanding WMS stock
options that vested during fiscal 1999. Income from continuing operations and
net income for fiscal 1999 were increased by $790,000, or $0.03 per share, after
taxes, from a net recovery relating to purchased parts overcharges primarily
from certain pinball games suppliers in prior
15
<PAGE> 19
years. Loss from continuing operations and net loss for fiscal 1998 included an
after tax charge of $39.9 million, or $1.51 per share, related to the common
stock option adjustment.
Gaming. Gaming revenues increased $69.2 million, or 121.8%, to $126.0 million
in fiscal 1999 from $56.8 million in fiscal 1998. Gaming machine sales
represented $101.9 million, and participation and lease revenues represented
$24.1 million, or 80.9% and 19.1% of gaming revenues, respectively, in fiscal
1999. The increase in revenues resulted primarily from the sale of 13,582 video
and reel type gaming machines in fiscal 1999 compared to 7,207 gaming machines
in fiscal 1998, because of the market acceptance of our new models introduced
over the last twelve months. Participation and lease revenues tripled to $24.1
million in fiscal 1999 compared with $8.0 million in fiscal 1998. The increase
was from Monopoly-themed gaming machines introduced in fiscal 1999 under
participation or lease arrangements. At June 30, 1999, we had approximately
2,715 Monopoly-themed gaming machines installed nationwide. Gaming had an
operating profit of $16.8 million for fiscal 1999, compared to an operating loss
of $9.6 million for fiscal 1998 because of the increased revenues and the higher
gross margin primarily generated by participation and lease arrangements,
compared with the gross margin on gaming machine sales.
Pinball and cabinets. Pinball and cabinets revenues increased $7.8 million, or
20.4%, to $46.1 million in fiscal 1999 from $38.3 million in fiscal 1998,
primarily due to sales of our next-generation pinball games, Pinball 2000,
introduced in March 1999. Pinball and cabinets operating loss decreased by
$773,000 to $7.0 million because of higher revenues, partially offset by
continued research and development costs for Pinball 2000. This segment had
operating income in the fourth quarter of fiscal 1999.
Contract manufacturing. Contract manufacturing revenues in fiscal 1999 were
$15.2 million and included the contract manufacturing business segment activity
for the entire year, generating operating income of $1.3 million. In fiscal
1998, this segment was included for only approximately three months and had
revenues of $4.0 million and operating income of $347,000. Prior to the Midway
spin-off, we recorded these operations as a cost allocation between a parent and
a consolidated subsidiary.
FISCAL 1998 COMPARED WITH FISCAL 1997
Consolidated revenues increased $22.4 million, or 29.2% to $99.0 million in
fiscal 1998 from $76.6 million in fiscal 1997. Consolidated gross profit
increased to $22.0 million in fiscal 1998 from $16.5 million in fiscal 1997 due
primarily to increased gaming machine revenues which generated increased gross
profit and an increase in the gaming segment gross profit margin due to
spreading certain fixed costs over greater production.
In fiscal 1998 we recorded a pre-tax charge of $59.9 million for the adjustment
to our outstanding stock options to compensate the holders for the lost
opportunity value represented by the shares of Midway stock distributed in the
spin-off, in which distribution option holders did not participate. In fiscal
1997 we recorded a pre-tax provision of $61.9 million relating to patent
litigation. See Note 12 to the Consolidated Financial Statements.
Loss from continuing operations was $48.8, or $1.85 per share, in fiscal 1998
compared with $46.8 million, or $1.92 per share, in fiscal 1997. Loss from
continuing operations in fiscal 1998 included an after-tax charge of $39.9
million, or $1.51 per share, from the adjustment to our stock options. Loss from
continuing operations in fiscal 1997 included after-tax provisions relating to
our patent litigation of $37.4 million, or $1.54 per share. After excluding
these after tax items, loss from continuing operations was $8.9 million, or
$0.34 per share, in fiscal 1998 and $9.4 million, or $0.39 per share, in fiscal
1997. The decreased loss was primarily from the increased gaming segment gross
profit, after absorbing the increased selling and administrative expenses.
Gaming. Gaming revenues increased $23.2 million, or 68.9%, to $56.8 million in
fiscal 1998 from $33.6 million in fiscal 1997, primarily from the increase in
the number of gaming machines sold during the year to 7,207 from 3,754 in fiscal
1997. Gaming revenues in fiscal 1998 included newly-released reel spinning and
video gaming machines including slot machines and video lottery terminals.
Fiscal 1997 revenues included primarily old model reel spinning slot machines
and video lottery terminals.
16
<PAGE> 20
Pinball and cabinets. Pinball and cabinets revenues decreased $4.7 million, or
11.0%, to $38.3 million in fiscal 1998 from $43.0 million in fiscal 1997. The
decrease was primarily due to the continuing industry-wide decline in demand for
pinball games. The pinball and cabinets operating loss increased to $7.8 million
in fiscal 1998 from $3.0 million in fiscal 1997. The increase resulted primarily
from lower gross profit due to reduced unit sales prices and continued
development expense for the next generation of pinball games.
Contract manufacturing. In fiscal 1998, contract manufacturing revenues of $4.0
million and operating income of $347,000 included operations for the period
April 6, 1998 to June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
We believe that cash and cash equivalents of $58.7 million at June 30, 1999,
along with our $25.0 million bank revolving line of credit that extends to
August 1, 2000 will be adequate to fund our anticipated level of inventories and
receivables required in the operation of our business, to fund other presently
anticipated needs and to fund any payment required in the event that we are
unsuccessful in our further appeal of our patent litigation. See Note 12 to the
Consolidated Financial Statements, regarding patent litigation.
Cash flows from operating, investing and financing activities during fiscal 1999
resulted in a net cash increase of $21.7 million, as compared with a net cash
increase of $39.4 million during fiscal 1998. The cash increase in fiscal 1999
was primarily from the sale of short-term investments. The increase in fiscal
1998 was primarily from the sale of short-term investments and other marketable
equity securities.
Cash provided by operating activities before changes in operating assets and
liabilities was $21.3 million for fiscal 1999, as compared with cash used of
$23.4 million for fiscal 1998.
The changes in operating assets and liabilities, as shown in the Consolidated
Statements of Cash Flows, resulted in a cash outflow of $2.8 million during
fiscal 1999, compared with a cash outflow of $17.5 million during fiscal 1998.
The cash outflow in fiscal 1999 was primarily due to an increase in receivables,
offset, in part, by a reduction in income tax receivables and an increase in
accounts payable from the comparable balances at June 30, 1998. The cash outflow
for fiscal 1998 was primarily due to increased inventories and income tax
receivables from the comparable balances at June 30, 1997.
Cash used by investing activities was $4.6 million for fiscal 1999 compared with
cash provided of $66.1 million for fiscal 1998. Cash used for the purchase of
property, plant and equipment during fiscal 1999 was $10.4 million compared with
$6.2 million for fiscal 1998. Cash used for additions to gaming machines on
participation or lease was $20.2 million in fiscal 1999 compared with $305,000
in fiscal 1998. Net cash of $26.0 million was provided from the sale of
short-term investments during fiscal 1999 compared with $72.6 million from the
sale of short-term investments and marketable equity securities in fiscal 1998.
Cash provided by financing activities, which was primarily from common stock
option proceeds, for fiscal 1999 was $7.9 million compared with $14.2 million
for fiscal 1998.
YEAR 2000 UPDATE
The term Year 2000 is used to refer to a worldwide computer-related problem
where some software programs and embedded programs in electronic systems will
not work properly when processing a date after 1999.
We began addressing this problem in 1996. We believe that most of the systems
utilized for our internal operations have been made Year 2000 ready, at an
estimated cost of $1.3 million. The remaining Year 2000-related work is
primarily to upgrade our network servers. This work is expected to be completed
by September 30, 1999, at a cost estimated to be less than $200,000. We believe
that there are no Year 2000 issues with respect to the functionality of our
products sold in the past or to be sold in the future. We also believe that our
assembly of products will not be affected by malfunctioning tools or equipment
using embedded microprocessors, because the assembly process is not heavily
reliant on such tools or equipment.
17
<PAGE> 21
We rely on suppliers of components for our gaming machines and pinball games. In
the event that they experience a Year 2000-related failure, they may expose us
to Year 2000 problems. We have contacted certain suppliers and customers to
assess their potential Year 2000 problems. We cannot determine with certainty
our customers' or suppliers' levels of Year 2000 readiness. Based on the
significant level of responses, however, our suppliers and customers appear to
be either Year 2000-ready or working toward becoming Year 2000-ready. We will
continue to follow up with those customers and suppliers who have not responded
or indicated that their Year 2000 work is in process. If needed, to avoid
potential Year 2000 problems detected by our suppliers or customers, we will
adjust the shipping dates for products accordingly. At worst, we would expect a
short-term delay in shipments. If a delay should occur, we do not expect it to
have a material effect on our operating results for any reportable period.
We do not have a contingency plan for undetected Year 2000 problems. We intend
to respond to those problems if and when they occur. We cannot determine the
effect on our business, if any, of any undetected Year 2000 problems.
This discussion of Year 2000 risks and readiness contains certain
forward-looking statements concerning future conditions and our business outlook
based on currently available information that involve risks and uncertainties.
The actual state of our Year 2000 readiness and exposure could differ materially
from that anticipated in the forward-looking statements as a result of certain
risks and uncertainties, including, without limitation, the ability to obtain
supplies and energy, to make deliveries, to communicate with business partners
and the Year 2000 readiness of suppliers, customers and other business partners.
18
<PAGE> 22
BUSINESS
COMPANY OVERVIEW
We are a leading designer, manufacturer and marketer of innovative video and
reel spinning gaming machines, video lottery terminals and pinball games. Our
primary focus is the growth of our gaming machine business. We seek to develop
gaming machines that offer greater entertainment value than traditional slot
machines and generate greater revenues for casinos and other gaming machine
operators. Our gaming machines incorporate secondary bonus rounds, advanced
graphics, digital sound and engaging game themes, some of which include popular
songs and recognized trademarks. Our gaming machines are installed in all of the
major gaming jurisdictions in North America and in several foreign
jurisdictions. Our gaming machine revenues increased 121.8% from $56.8 million
in fiscal 1998, to $126.0 million in fiscal 1999.
In June 1997, we introduced Reel 'Em In, our first single-themed multi-coin,
multi-line video gaming machine that incorporates a secondary bonus game. Our
multi-coin, multi-line gaming machines accept up to 90 coins at a time and have
up to nine distinct pay lines, giving the players more ways to win. In addition,
secondary bonusing creates a "game-within-a-game" that rewards players by
offering them a chance to advance from the primary game to a secondary game. The
secondary game also gives the players additional payoff opportunities and allows
them to interact with the game by choosing from various entertaining options in
the bonus round. The success of Reel 'Em In led to our introduction of a series
of video gaming machines based on this new-generation design. This series
includes Winning Bid, Top Banana, Filthy Rich, Jackpot Party, Life of Luxury,
Boom! and Instant Winner, each featuring a unique and entertaining theme. The
multi-coin, multi-line and secondary bonus features and our highly-entertaining
themes are designed to attract new players, encourage repeat play and increase
the average wager per play.
In the fall of 1998, we introduced a series of four Monopoly-themed gaming
machines that were named the "Most Innovative Gaming Product for 1999" at the
American Gaming, Lodging and Leisure Summit. We are the exclusive worldwide
licensee of the widely-recognized Monopoly trademark for use on gaming machines.
Since their introduction, these machines have typically generated average daily
revenue significantly in excess of the average daily revenue of the casinos'
other gaming machines. For example, in Nevada during the first six months of
1999, these machines generated average daily revenue of more than twice the
casinos' average daily revenue per machine. As a result of their superior
earnings, we have been able to offer our Monopoly-themed gaming machines to
casino operators on a revenue participation or daily lease basis. This allows us
to share in the superior earnings of these gaming machines and to generate
recurring revenues. As of August 31, 1999, we had installed over 3,000
Monopoly-themed gaming machines.
We are also the world's leading pinball game designer and manufacturer. We
recently developed Pinball 2000, which is a new-generation platform for pinball
games that integrates a fully-interactive video monitor with the traditional
playfield. We introduced our first Pinball 2000 game, Revenge From Mars, in
March 1999, and we introduced our second Pinball 2000 game, Star Wars: Episode
I, in July 1999. We also manufacture coin-operated video amusement games for
Midway Games Inc., our former subsidiary.
INDUSTRY OVERVIEW
Gaming Machine Industry
In the 1990's, the proliferation of gaming into new jurisdictions, particularly
gulf coast and midwestern states and Native American nations, and the expansion
of traditional gaming markets substantially increased the number of gaming
machines in North America. We estimate that, as of the end of 1998, the
installed base of gaming machines in North America was more than 525,000 units.
We expect that the installed base of gaming machines in North America will
continue to grow with the opening of new mega-resort casinos in Las Vegas and
Atlantic City, the expansion of riverboat and Native American gaming markets and
the opening of the Detroit market to casino gaming. The demand for gaming
machines is
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increasingly driven, however, by the replacement cycle for the existing base of
gaming machines. While the physical useful life of a gaming machine can be up to
a decade or more, casino operators tend to replace machines on a shorter cycle
in response to changing player preferences and new technology.
With fewer opportunities available to develop new casinos, we believe that
casino operators are focusing on increasing revenue growth at their existing
casinos. In North America, gaming machines produce approximately two-thirds of
the typical casino's gaming revenue, with table games representing most of the
balance. Additionally, slot operations are significantly less labor intensive
than table games, and as a result have higher operating margins. The importance
of slot revenue to casino operators' profitability has created significant
demand for gaming machines that have the ability to generate higher earnings per
machine. As a result, the pace of innovation in gaming machine design has
accelerated, and gaming equipment manufacturers have increasingly focused on
enhancing the overall entertainment value of gaming machines.
Historically, the gaming machine market was dominated by reel spinning slot
machines, which still constitute the majority of machines on casino floors.
Video poker gaming machines were introduced in the 1980s. These machines offer
the player an interactive gaming experience not offered by traditional reel-
spinning slots, because the player makes choices during play that affect the
game. We believe that the two most significant recent developments in gaming
machine design have been the extension of the video gaming platform beyond video
poker and the introduction of gaming machines with secondary bonus rounds:
- The introduction of video gaming machines that simulate a reel spinning
slot machine on a video screen expanded the video platform beyond video
poker. These new-generation video gaming machines are predominantly
multi-coin, multi-line gaming machines that offer multiple distinct
paylines and allow up to 90 coins to be wagered on a single play. This
tends to increase the average wager per play. We believe that
multi-coin, multi-line gaming machines are currently the fastest growing
segment on the casino floor.
- Secondary bonusing, or the game-within-a-game concept, allows a player
to advance beyond the primary round into a bonus round if the player
obtains a certain result in the primary round. The bonus round is
designed to create significant player appeal by giving the player
various unique interactive options and a sense of investment in the
game. This encourages the player to continue to play the machine in an
effort to achieve the bonus round. In addition, the bonus round gives
designers an opportunity to incorporate additional entertaining content
into gaming machines.
Over the next few years, we expect significant demand for multi-coin, multi-line
video gaming machines and other gaming machines that offer the player secondary
bonus rounds and other enhanced entertainment features, which we believe will
result in higher revenue per machine for casinos.
Some of the new-generation gaming machines with secondary bonusing features and
entertaining themes earn significantly more than the older gaming machines on
the casino floors. As a result, the manufacturers have been able to lease some
of these machines to casino operators for a revenue participation percentage or,
in jurisdictions where this is not permitted, for a fixed daily lease fee. This
allows manufacturers to share in the superior earnings of these games and to
generate a recurring revenue stream for themselves. We estimate that at least
21,000 gaming machines are currently placed under recurring revenue arrangements
throughout North America.
Video lottery terminals ("VLTs") include both video and reel spinning gaming
machines. VLTs are purchased, leased or operated on a revenue-participation
basis to raise revenue for the jurisdictions where they are placed. Most VLTs
are linked to a central computer for accounting and security purposes and are
monitored by the state lotteries or other government authorities. Unlike gaming
machines designed for the casino market, most VLTs are located in places where
casino-type gaming is not the principal attraction, such as racetracks, bars and
restaurants.
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Pinball Industry
Pinball games are found in amusement arcades, family entertainment centers,
restaurants, bars, bowling alleys, convenience stores and movie theaters,
primarily in Europe and North America. We believe that there are at least
several hundred thousand coin-operated pinball games installed throughout the
world, although no reliable figures are available. The worldwide pinball market
has declined from, we believe, a high of approximately 100,000 units sold in
1993 to a low in 1998 of only about 15,000 units sold. We believe that this
decline was caused by increased competition from other forms of entertainment,
including coin-operated video games and home entertainment systems, as well as
by a lack of design innovation. In our experience, however, the pinball market
has been cyclical, recovering when a new generation of pinball technology is
introduced. The only manufacturers of pinball games today are WMS, with about a
two-thirds market share, and Sega Pinball.
BUSINESS STRATEGY
Gaming
Our business strategy is primarily focused on the growth of our gaming machine
business. We intend to increase our market penetration in the major North
American gaming jurisdictions. We also plan to expand distribution to new gaming
jurisdictions and international markets. We seek to increase our market share
and profitability by offering an expanding portfolio of entertaining gaming
machines with higher earning potential. This strategy includes the following
elements:
- Leverage our strength in developing gaming machines with enhanced
entertainment value: For 53 years we have been designing successful
arcade-style amusement games with creative and compelling content and
the latest technology. We believe that this experience allows us to
create gaming machines that offer significantly greater entertainment
value than traditional gaming machines. Our gaming machine development
teams combine the talents of 95 engineers, designers, artists and
musicians. We believe that we are well-positioned to develop gaming
machines that have superior entertainment value and generate higher
revenue for our customers. We are currently developing numerous
innovative and entertaining gaming machines, some of which we expect to
offer only on a recurring revenue basis.
- Maximize the potential of our exclusive license for use of the Monopoly
theme on gaming machines: As the exclusive licensee of the Monopoly name
for use with gaming machines, we have converted a popular trademark into
a successful line of four superior-earning gaming machines. The success
of these Monopoly-themed gaming machines has allowed us to lease them to
casino operators, generating recurring revenues for us. We are currently
developing two new gaming machines based on the Monopoly theme, and we
anticipate introducing additional gaming machines based on this theme.
- Focus on the multi-coin, multi-line video gaming machine market: We
believe that the fastest growing product on the casino floor is the
multi-coin, multi-line video gaming machine. We believe that the growth
of this type of gaming machine will continue because it offers more
interactive entertainment value and because casino managers wish to
increase the diversity of the gaming machines on their slot floors. Our
portfolio of multi-coin, multi-line video gaming machines has
established us as a leading supplier of this type of video gaming
machine. We are developing a number of additional multi-coin, multi-line
video gaming machines and expect to increase the rate at which we
introduce these machines in the future.
Pinball
We are the world's leading designer and manufacturer of pinball games. The
pinball market has declined significantly in recent years due to the growth of
competition from video and other amusement games. Historically, however, the
pinball market has been cyclical, recovering when a new generation of pinball
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technology is introduced. Therefore, we have invested in the new technologies
behind Pinball 2000. Pinball 2000 games integrate a fully-interactive video
monitor with traditional playfield action.
Our strategy is to introduce at least two to three new Pinball 2000 games each
year in order to offer our distributors and players a continuing variety of new
games with engaging game themes. We introduced our first Pinball 2000 game,
Revenge From Mars, in March 1999. We have sold approximately 7,000 Revenge From
Mars pinball games, which is the largest number of units of any pinball game
sold since 1994. We introduced our second Pinball 2000 product, Star Wars:
Episode I, in July 1999, and we are developing a third Pinball 2000 game that we
intend to introduce in the second half of fiscal 2000. We intend to continue to
evaluate the market potential of Pinball 2000 to determine whether this new
platform has succeeded in stimulating a recovery in the pinball market.
PRODUCTS
Gaming
We have established a fast-growing line of video and reel spinning gaming
machines and VLTs incorporating highly-entertaining themes and innovative gaming
features. Our gaming machines' technological features include dotmatrix
animation ("Dotmation") displays for reel spinning slot machines, touch-screen
video displays for video gaming machines, advanced graphics and our digital
compression DCS Sound System ("DCS") music, voice-overs and sound effects.
Engaging and humorous themes and a high degree of player interactivity are
incorporated into each of our games, particularly in the secondary bonus round.
We believe that by designing gaming machines that are fun and interesting to
play and incorporate the latest gaming technologies, we supply gaming machines
with superior player appeal.
Our gaming machines integrate a secondary bonus round with the traditional
gaming machine to create a game-within-a-game for more exciting and interactive
play. As players achieve various milestones in the primary round, they move on
to play a secondary round for additional bonuses. The secondary round gives the
player a sense of investment in the game and encouragement to continue wagering
in the hope of entering the bonus round. The player can win in both the primary
round and the secondary round. In our secondary rounds, the player has various
choices to make regarding the bonus features. For example, in some games the
player can select from a variety of tokens or characters that will be used to
obtain or reveal the bonus. Amusing or familiar graphical and musical themes add
to the player appeal of our gaming machines.
Monopoly-themed gaming machines. In the fall of 1998, we introduced our first
four Monopoly-themed gaming machines in Las Vegas under an exclusive worldwide
license from Hasbro. These gaming machines have been well-received by both
casinos and players. For example, in Nevada during the first six months of 1999,
these machines generated average daily revenue of more than twice the casinos'
average daily revenue per machine. Our Monopoly-themed gaming machines were
named the "Most Innovative Gaming Product for 1999" at the American Gaming,
Lodging and Leisure Summit in January of 1999. Our game designers used the
actual elements of the Monopoly game to create the four highly interactive and
entertaining machines. These elements include Mr. Monopoly, Chance, Community
Chest and the distinctive game board and tokens, with a big band theme song. To
attract additional player attention, the machines are approximately nine feet
tall. These gaming machines have now been approved for play in every major
gaming jurisdiction in the United States. As of August 31, 1999, we had
installed over 3,000 of these new gaming machines. The Monopoly-themed gaming
machines incorporate secondary bonus rounds and the entertaining themes
described below:
- Once Around -- a multi-coin, multi-line video gaming machine where the
player can build houses and hotels on various Monopoly properties to
increase those properties' bonus round payouts. The player then chooses
a token that travels around the board landing on various properties to
collect bonuses.
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- Reel Estate -- a multi-coin, multi-line video gaming machine where the
player picks a token that travels around the Monopoly board. Collecting
all the properties in a color group provides a free spin.
- Advance to Boardwalk -- a reel spinning slot machine that features up to
six trips around a Monopoly board for bonuses and multipliers.
- Roll & Win -- a reel spinning slot machine that provides bonus
multipliers by rolling oversized mechanical dice. The player accumulates
bonuses by moving around a mini-Monopoly board.
Multi-coin, multi-line video gaming machines. Our new line of multi-coin,
multi-line gaming machines combines advanced graphics, DCS sound effects and
music, secondary bonus rounds and a unique entertaining theme for each game. In
the primary round, the video screen of these gaming machines simulates
traditional reel-spinning slot machines. Depending on the machine, the player
can wager up to either 45 or 90 coins per play. This new line of multi-coin,
multi-line gaming machines includes the following:
- Winning Bid -- Live auction theme. Features necklaces, vases and antique
lamp symbols. Three or more gavel symbols begin the bonus round, which
simulates a live estate auction. The player selects an auction item and
a humorous character to start the bidding. As the characters raise the
bids, the bonuses increase. Introduced in June 1999.
- Top Banana -- Caribbean party theme. Features beach party symbols of
bananas, starfish and tropical fruit. Three or more gorilla, hippo or
turtle symbols start the bonus round. In the bonus round, the player has
the option to stack a number of different silly monkeys. The player
decides when to jump for bananas held by a gorilla in a palm tree. If
the monkeys get the bananas, the player wins additional bonuses. There
is also a random multiplier bonus possibility. Introduced in April 1999.
- Instant Winner -- Instant lottery ticket theme. Features 3-D lottery
balls and cash symbols. Three "Scratch & Win" symbols begin the bonus
round. The player selects from six WMS-themed scratch-off tickets and
scratches off areas of the tickets to reveal the bonus award. There is
also a bonus "sweepstakes" check if the player obtains three or more
sweepstakes symbols. Introduced in February 1999.
- Jackpot Party -- 70's party theme. Features music from KC & the Sunshine
Band and The Village People. Three or more party horn symbols start the
bonus round and the disco music. The player chooses party gifts for
hidden bonuses until hitting a party gift with one of the "party pooper"
characters, which ends the bonus round. Introduced in October 1998.
- Life of Luxury -- Material extravagance theme with numerous betting
options. Features images of sports cars, diamonds and yachts as symbols.
Obtain three or more gold coin symbols to receive ten free bonus spins
while jazz music plays. Introduced in September 1998.
- Boom! -- Fourth of July backyard barbecue theme. Features hotdogs,
hamburgers and fireworks. Three or more identical barbecue food symbols
start the bonus round. In the bonus round, the player selects a rocket
that launches into the sky and explodes to reveal a bonus. Introduced in
April 1998.
- Filthy Rich -- Barnyard theme. Features cows, chickens and pig symbols.
Three or more identical barnyard symbols begin the bonus round. The
player then sees a pigpen on the screen and may choose which mud-caked
pig to wash off, revealing the amusing bonus pig. Introduced in November
1997.
- Reel 'Em In -- Family fishing theme. Features symbols of lures and fish.
Three or more fishing lure symbols begin the bonus round. The player
then "goes fishing" by choosing a humorous character to hook the bonus
fish. Introduced in July 1997. In May 1998, Chance magazine called Reel
'Em In "perhaps the hottest slot machine in the country."
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Other video games. We also offer a selection of other video gaming machines,
including Multi-Pay Plus, which premiered our new-generation graphics and sound
design. Multi-Pay Plus offers the player a varied menu of engaging themed games
on a single machine, including video poker, keno, blackjack and video slot
games.
Reel spinning slot machines. Our new line of reel spinning slot machines
includes Perfect Match, Jackpot Limbo, Jackpot Party, X-Factor, Jackpot Stampede
Deluxe, Pharaoh's Fortune, Big Bang Piggy Bankin' and Winning Streak. Each of
these gaming machines features engaging and entertaining themes. With secondary
bonusing through the use of our Dotmation feature, a player's game experience is
enhanced with animated sequences of mermaids diving into the ocean or genies
emerging from magic lamps to present the top awards. These reel spinning slot
machines also feature DCS sound and exciting glass designs and visuals.
Video Lottery Terminals. Our VLTs include both video and reel spinning gaming
machines. They feature advanced graphics and DCS sound effects and music and
incorporate many of the same features as our other gaming machines. We offer a
variety of multi-game and single-themed VLTs. Our VLTs may be operated as
stand-alone units or may interface with central monitoring computers operated by
governmental agencies. Our VLTs are located in places where casino-type gaming
is not the principal attraction, such as racetracks, bars and restaurants.
Pinball and cabinets
Pinball. We are the world's leading designer and manufacturer of pinball games.
For over 50 years, WMS and our predecessors have been making innovative and
highly-entertaining pinball games, which are presently sold under the Williams
and Bally trademarks. We believe that we obtained our leading market share as a
result of the action and humor that we design into our games, as well as our
innovations in design and engineering. These innovations include CD-quality
music and sound effects, multi-level playing fields, multi-ball releases and a
high level of mechanical reliability.
Pinball 2000, our new generation of pinball games, integrates a
fully-interactive video monitor with traditional playfield action. Virtual
images are projected onto the playfield, allowing the ball to interact with
video targets as well as traditional 3-D targets. For example, the ball appears
to destroy Martians or space ships, and the video display illustrates the
destruction in dramatic fashion. Images on the video screen move and are
transformed during the play depending on the movement of the balls. The new
stereo sound system places speakers closer to the player for maximum enjoyment
at any volume level. There may be multiple balls in play at one time, and the
ball may move onto more than one level on the playfield for added excitement.
We believe that Pinball 2000 products are the most advanced and entertaining
pinball games designed to date. We also believe that our modular Pinball 2000
machines offer the best mechanical reliability and serviceability in the
industry for the following reasons:
- This new platform is modular, allowing the games to be changed by
replacing the software, artwork and removable playfield. Conversion kits
are expected generally to be installable in less than half an hour on
site and are expected to be less expensive than a new game. Therefore,
the machine owners will be able to upgrade to a new game easily and cost
effectively.
- The location owner can service the machine without calling the operator.
For example, the owner can clean the playfield and clear ball jams. This
is because, for the first time, the playfield is accessible by the
location owner. This feature significantly decreases down time and
service costs.
- The advanced design of this platform uses fewer moving parts, and
therefore these machines require less frequent service than older
models.
We introduced our first Pinball 2000 game, Revenge From Mars, in March 1999. We
have sold approximately 7,000 of these games. We began selling our second
Pinball 2000 product, Star Wars: Episode I, in July 1999.
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Cabinets. In addition to manufacturing our own wooden pinball cabinets, we also
make and sell wooden cabinets and other wooden products to Midway, under a
Cabinet Supply Agreement, and to other third parties from time to time,
primarily for coin-operated video games. See "Certain Relationships and Related
Transactions."
Contract manufacturing
We manufacture coin-operated video games for Midway under a manufacturing
agreement. See "Certain Relationships and Related Transactions."
DESIGN, RESEARCH AND PRODUCT DEVELOPMENT
In designing our gaming machines and pinball games, our designers, engineers and
artists build upon the more than 50 years of experience that WMS and our
predecessors have in designing and developing fun, humorous and exciting games.
We are continually developing new games in order to broaden our product line,
introduce new technologies and enhance player appeal. Our gaming machines are
usually designed by our internal gaming design teams or in some cases by
independent designers under contract to us. Gaming machines must be approved and
sometimes tested by certain regulatory authorities before being marketed in a
particular gaming jurisdiction. Our pinball games are designed exclusively by
our internal design teams. The game design teams operate in a studio environment
that encourages creativity, productivity and cooperation among design teams. As
of September 1, 1999, 142 persons were employed in our design, research and
development teams, of whom 95 were dedicated to gaming. During the fiscal years
ended June 30, 1999, 1998, and 1997, we spent approximately $14.1 million, $12.9
million and $12.9 million, respectively, on design, research and product
development, of which $8.8 million, $7.9 million and $7.4 million was spent for
gaming, in those respective years.
While we primarily seek to develop original proprietary games, certain of our
gaming machines and pinball games are based on popular intellectual properties
licensed from third parties, such as Hasbro and Lucasfilm. Typically, WMS is
obligated to make certain minimum guaranteed royalty payments over the term of
the license and to advance payment against those guarantees.
SALES AND MARKETING
Gaming
We are authorized to sell our gaming machines directly to casinos in over 90
North American jurisdictions and in several other gaming jurisdictions.
Generally, we sell our gaming machines directly in order to maximize customer
service and to enhance profitability. Our gaming machines are often installed on
a trial basis, and only after a successful trial period are the machines
purchased by the customers. In addition, we have begun to place our gaming
machines under revenue-participation or daily rental leases.
We sell and lease our gaming machines through 15 salespeople in offices in
several United States locations and a sales/service consultant in Canada. These
salespeople earn a salary and commissions based on sales volume. Our gaming
machines are marketed through trade shows, promotional videotapes, our website
and advertising in trade journals.
Pinball
Pinball games are marketed through approximately 50 independent distributors
worldwide, coordinated by Midway's coin-operated machine sales team, under our
sales agreement with Midway. See "Certain Relationships and Related
Transactions." Distributors sell these products to operators of amusement
arcades, family entertainment centers, restaurants, bars, bowling alleys,
convenience stores and movie theaters. Distributors generally are assigned
designated exclusive territories and are generally expected to provide
replacement parts and service and to arrange for installment financing. Pinball
games are marketed through trade shows, promotional videotapes, our website and
advertising in trade publications. In addition,
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we operate an Internet locator on our website through which players can find the
locations of our pinball games throughout the world.
Distributors/Customers
No one customer accounts for greater than 10% of our revenues. However, our
largest pinball distributor, and its affiliates accounted for approximately 28%
of our pinball and cabinets revenue in fiscal 1999. In our opinion, the loss of
a single distributor or customer would not have a material adverse effect on our
business. If we were to lose a distributor, we believe that we could make
arrangements with alternate distributors for the distribution of our products.
Export Sales
Export sales of our products, primarily of pinball games to Western Europe, were
approximately $34.6 million, or 18.5% of total revenues, for fiscal 1999,
compared with $24.4 million, or 24.6% of total revenues, for fiscal 1998 and
$33.7 million, or 44.0% of total revenues, for fiscal 1997. Substantially all
foreign sales are made in United States dollars under letters of credit.
COMPETITION
Gaming
The gaming machine market is intensely competitive and is characterized by the
continuous introduction of new titles and the development of new technologies.
Our ability to compete successfully in this market is based, in large part, upon
our ability to:
- continually develop new products with player appeal;
- offer machines that consistently out-perform other gaming machines;
- identify and obtain rights to commercially marketable intellectual
properties; and
- adapt our products for use with new technologies.
In addition, successful competition in this market is also based upon:
- price or lease terms;
- mechanical reliability;
- brand recognition; and
- marketing support.
Our competitors vary in size from very small companies with limited resources to
large corporations with greater financial, marketing and product development
resources than ours. In the video and reel spinning gaming machine market, we
compete with market leader International Game Technology ("IGT"), as well as
Alliance Gaming, Sigma Game, Casino Data Systems, Silicon Gaming, Atronic Casino
Technology, Anchor Gaming and Aristocrat Leisure Systems. In the VLT market, we
compete primarily with IGT, G-Tech Holdings, Anchor Gaming and Spielo Gaming
International.
Pinball and cabinets
We are the leading manufacturer of pinball games. Our only competitor in this
market is Sega Pinball. We also compete with coin-operated video games and other
amusement games for space in bars, arcades and other traditional pinball
locations and with home entertainment systems. Competition is based on player
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appeal, including the use of popular intellectual properties, engaging themes
and technological innovation. In addition, successful competition in our pinball
market is also based upon:
- price;
- mechanical reliability;
- brand recognition; and
- access to distribution channels.
We also currently supply Midway with cabinets for their coin-operated video
games. Midway is not required to purchase cabinets under the agreement and may
seek competing third-party bids at any time.
MANUFACTURING
Gaming
We manufacture our gaming machines in our facility in Chicago, Illinois. We
believe that this facility is adequate for our current and planned gaming
production needs. Manufacturing is generally based on purchase orders from
customers. Gaming machines are generally warranted for a period of 90 days. The
raw materials used in manufacturing our gaming machines include various metals,
plastics, wood and glass obtained from numerous sources. In addition, numerous
component parts, including electronic subassemblies and video monitors, are
purchased from suppliers. We believe that our sources of supply of component
parts and raw materials are adequate and that alternative sources of materials
are available.
Pinball and cabinets
We manufacture pinball games in our facility in Waukegan, Illinois. We believe
that this facility is adequate for our current and planned pinball production
needs. Production of pinball games is generally based on advance purchase orders
from distributors. Most pinball games are warranted for a period of 60 to 90
days. We manufacture cabinets for our pinball games and Midway's coin-operated
video games in our facility in Cicero, Illinois based, in the case of Midway's
cabinets, on purchase orders, subject to our acceptance, according to Midway
designs and specifications. We believe that this facility is adequate for our
current and planned cabinet production needs.
Contract manufacturing
We manufacture Midway's coin-operated video games in our facility in Waukegan,
Illinois. We believe that this facility is adequate for our current and planned
contract manufacturing needs. Manufacturing for Midway is based on purchase
orders and uses Midway designs and specifications.
EMPLOYEES
At September 1, 1999, we employed approximately 1,475 persons. Approximately 715
of those employees were represented by the International Brotherhood of
Electrical Workers (the "IBEW"), and approximately 165 were represented by the
International Union of Electronic, Electrical, Salaried Machine and Furniture
Workers (the "IUE"). The collective bargaining agreements with the IBEW relate
to our Chicago and Waukegan, Illinois manufacturing facilities, respectively,
and expire on June 30, 2000. The collective bargaining agreement with the IUE
relates to our Cicero, Illinois manufacturing facility and expires June 30,
2002. We believe that our relations with our employees are satisfactory.
LEGAL PROCEEDINGS
In May 1994, we instituted a declaratory judgment action against IGT in the
United States District Court for the Northern District of Illinois. The action
sought a declaration that a patent issued in 1984 and owned by IGT (the "Telnaes
Patent") was invalid, and that certain reel spinning slot machines that we were
then manufacturing did not infringe the Telnaes Patent. IGT counterclaimed,
alleging that the
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Telnaes Patent was infringed by our reel spinning slot machines. The Telnaes
Patent relates to a particular method of assigning the probability of selecting
particular reel stop positions in a computer-controlled reel spinning slot
machine, which increases or decreases the probabilities of winning by means of
the computer's software, not the mechanical reels themselves.
On September 19, 1996, the trial court rendered a decision in favor of IGT,
finding that the Telnaes Patent is valid, finding that our Model 400 slot
machine infringes the Telnaes Patent, and enjoining us from further infringement
of the Telnaes Patent. On February 28, 1997, after a hearing on IGT's alleged
damages, the court awarded a treble-damage judgment in favor of IGT and against
us in the amount of $32.8 million, plus post-judgment interest. Subsequently,
the court granted our motion for a stay of proceedings to enforce the money
judgment pending disposition of our motion for a new trial and a similar stay
pending appeal. On October 1, 1997, the court denied our motion for a new trial.
We filed a notice of appeal on October 20, 1997 with the United States Court of
Appeals for the Federal Circuit. On July 20, 1999, the appellate court reversed
the trial court's holding of literal infringement, affirmed its holding of
infringement under the doctrine of equivalents, vacated its holding of willful
infringement, affirmed its holding that the Telnaes Patent is not invalid and
affirmed the award of actual damages of $10.8 million, plus interest. The
appellate court vacated the award, however, to the extent that it was based on
trebling for willful infringement and remanded the case to the trial court for
further proceedings to reconsider the issue of willful infringement in light of
the appellate court's finding of no literal infringement. On August 3, 1999, we
filed a petition for rehearing with the United States Court of Appeals for the
Federal Circuit with respect to the appellate court's affirmance of the trial
court's finding of infringement under the doctrine of equivalents. Since we had
previously filed a bond, enforcement of the money judgment has been stayed
pending the disposition of the appeal.
On November 26, 1996, IGT commenced a second action against us in the same
court. In this action, IGT seeks a judgment declaring that our Model 401 slot
machine also infringes the Telnaes Patent. The complaint also seeks a
preliminary and permanent injunction and treble damages. On December 18, 1996,
the court granted IGT's motion for a preliminary injunction and enjoined us from
the manufacture, use and sale of the Model 401 slot machine. On May 5, 1998, the
court denied our motion to vacate the preliminary injunction. We filed a notice
of appeal on May 7, 1998. In decisions rendered on July 22, 1999 and September
3, 1999, the United States Court of Appeals for the Federal Circuit vacated the
preliminary injunction and the amount of the security bond set by the trial
court and remanded the case to the trial court for further proceedings.
In the event that the court ultimately determines that the Model 400 or Model
401 slot machines infringe upon the Telnaes Patent, and if we are unable to
obtain a license to use the Telnaes Patent, we will be unable to develop certain
types of reel spinning slot machines, and we may be required to pay additional
damages. The Telnaes Patent relates only to reel spinning slot machines that we
no longer manufacture and does not relate to our video gaming machines or to our
currently marketed reel spinning slot machines.
We are not currently involved in any legal proceeding that we believe could have
a material adverse effect on us other than those described above.
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GOVERNMENT REGULATION
GENERAL
The manufacture and distribution of gaming equipment is subject to extensive
federal, state, tribal, local and foreign regulation. Although the laws and
regulations of the various jurisdictions in which we operate vary in their
technical requirements and are subject to amendment from time to time, virtually
all of these jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
machines as well as for the officers, directors, major stockholders and key
personnel of those companies.
We have obtained the required licenses to manufacture and sell our products to
customers in the following domestic gaming jurisdictions: Arizona, Colorado,
Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North
Dakota, Oregon, Puerto Rico, Rhode Island, South Dakota, West Virginia,
Wisconsin, Ak-Chin Indian Community, Bad River Band of Lake Superior Tribe of
Chippewa Indians, Bay Mills Indian Community, Boise Forte Band of Minnesota
Chippewa (Nett Lake), Chitimacha Tribe of Louisiana, Coushatta Tribe of
Louisiana, Flandreau Santee Sioux Tribe, Fond du Lac Band of Minnesota Chippewa,
Fort McDowell Mohave-Apache Indian Community, Grand Portage Band of Minnesota
Chippewa, Grand Traverse Band of Ottawa & Chippewa Indians, Hannahville Indian
Community, Ho-Chunk Nation, Iowa Tribe of Kansas & Nebraska, Keweenaw Bay Indian
Community, Kickapoo Tribe of Indians in Kansas, Lac du Flambeau Band of Lake
Superior Chippewa, Lac Vieux Desert Band of Lake Superior Chippewa Indians,
Leech Lake Band of Minnesota Chippewa, Lower Sioux Indian Community,
Mashantucket Pequot Tribe, Menominee Indian Tribe of Wisconsin, Mille Lacs Band
of Minnesota Chippewa, Mississippi Band of Choctaw Indians, Mohegan Indian
Tribe, Omaha Tribe of Nebraska, Oneida Tribe of Indians of Wisconsin, Pascua
Yaqui Tribe, Prairie Band of Potawatomi Indians of Kansas, Prairie Island
Community of the Minnesota Mdewakanton Sioux, Pueblo of Acoma, Pueblo of Isleta,
Pueblo of Sandia, Pueblo of San Juan, Pueblo of Santa Ana, Pueblo of Tesuque,
Red Cliff Band of Lake Superior Chippewa, Red Lake Band of Chippewa Indians, Sac
& Fox Nation of Missouri in Kansas and Nebraska, Sac & Fox Tribe of Mississippi
in Iowa, Saginaw Chippewa Indian Tribe, Sault Ste. Marie Tribe of Chippewa,
Shakopee Mdewakanton Sioux Community, Sisseton-Wahpeton Sioux Tribe, Southern
Ute Indian Tribe, Spirit Lake Sioux Tribe, St. Croix Chippewa Indians of
Wisconsin, Standing Rock Sioux Tribe, Tunica-Biloxi Tribe of Louisiana, Turtle
Mountain Band of Chippewa Indians, Upper Sioux Indian Community, Ute Mountain
Ute Tribe, White Earth Band of Minnesota Chippewa, White Mountain Apache Tribe,
Winnebago Tribe of Nebraska, Yankton Sioux Tribe of South Dakota, Yavapai-Apache
Indian Community. We have also obtained the required licenses to manufacture and
sell our products in the following additional gaming jurisdictions: the Canadian
provinces of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland,
Nova Scotia, Ontario, Quebec and Saskatchewan; Victoria and New South Wales in
Australia; the Bahamas; and Greece.
To date, we have never been denied any necessary governmental registrations,
licenses, permits, findings of suitability or approvals. In addition, we believe
that all registrations, licenses, permits, findings of suitability or approvals
currently required have been applied for or obtained. We cannot assure you that
the required licenses, permits, approvals or findings of suitability will be
given or renewed in the future.
NEVADA REGULATIONS
The manufacture, sale and distribution of gaming machines for use or play in
Nevada or for distribution outside of Nevada and the operation of slot machine
routes are subject to the Nevada Gaming Control Act and the regulations
promulgated under that act (collectively, the "Nevada Act"). The license as an
operator of a slot machine route permits a licensee to place slot machines and
gaming devices on the premises of other licensees on a participation basis. Our
manufacturing, distributing and slot route operations are subject to licensing
and regulatory control of the Nevada Gaming Commission (the
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<PAGE> 33
"Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board")
and, with respect to the operation of slot machine routes, various other county
and city regulatory authorities (all of these authorities are collectively
referred to as the "Nevada Gaming Authorities").
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (1) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (2) the establishment and maintenance of responsible accounting
practices and procedures; (3) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs, and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (4) the prevention of cheating and
fraudulent practices; (5) providing a source of state and local revenues through
taxation and licensing fees; and (6) the strict regulation of all persons,
locations, practices, associations and activities related to the operation of
licensed gaming establishments and the manufacture and distribution of gaming
devices and associated equipment. A change in these laws, regulations and
procedures could have an adverse effect on our future Nevada operations.
Certain of our subsidiaries that manufacture and distribute gaming devices or
operate a slot machine route, or which hold stock of a subsidiary which does so
(a "Gaming Subsidiary"), are required to be licensed or registered by the Nevada
Gaming Authorities. The licenses require periodic payments of fees and taxes and
are not transferable. We are registered by the Nevada Commission as a publicly
traded corporation ("Registered Corporation"), and so we are required
periodically to submit detailed financial and operating reports to the Nevada
Commission and to furnish any other information which the Nevada Commission may
require. We have obtained from the Nevada Gaming Authorities the various
registrations, findings of suitability, approvals, permits and licenses
(collectively, "Licenses") required to engage in slot route operations, and the
manufacture, sale and distribution of gaming devices for use or play in Nevada
or for distribution outside of Nevada. We cannot assure you that these Licenses
will not be revoked, suspended, limited or conditioned.
All gaming devices that are manufactured, sold or distributed for use or play in
Nevada, or for distribution outside of Nevada, must be manufactured by licensed
manufacturers and distributed or sold by licensed distributors. All gaming
devices manufactured for use or play in Nevada must be approved by the Nevada
Commission before sales distribution or exposure for play. The approval process
for gaming devices includes rigorous testing by the Nevada Board, a field trial
and a determination as to whether the gaming machine meets strict technical
standards that are set forth in the regulations of the Nevada Commission.
Associated equipment (as defined in the Nevada Act) must be administratively
approved by the Chairman of the Nevada Board before it is distributed for use in
Nevada.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, us in order to determine whether
that individual is suitable or should be licensed as a business associate of a
licensee. Officers, directors and certain key employees of our Gaming
Subsidiaries must file license applications with the Nevada Gaming Authorities.
Our officers, directors and key employees who are actively and directly involved
in activities of our Gaming Subsidiaries may be required to be licensed or found
suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may
deny an application for licensing for any cause which they deem reasonable. A
finding of suitability is comparable to licensing, and both require submission
of detailed personal financial information followed by a thorough investigation.
The applicant for licensing or a finding of suitability must pay all the costs
of the investigation. Changes in licensed positions must be reported to the
Nevada Gaming Authorities and, in addition to their authority to deny an
application for a finding of suitability or license, the Nevada Gaming
Authorities have jurisdiction to disapprove a change in a corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with us, the companies involved would have to sever all
relationships with that person. In addition, the Nevada Gaming Authorities may
require us to terminate
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the employment of any person who refuses to file appropriate applications.
Determinations of suitability or of questions pertaining to licensing are not
subject to judicial review in Nevada.
We are required to submit detailed financial and operating reports to the Nevada
Commission. Substantially all material loans, leases, sales of securities and
similar financing transactions by our Gaming Subsidiaries must be reported to,
and approved by, the Nevada Commission.
If the Nevada Gaming Authorities determine that we violated the Nevada Act, our
Licenses could be limited, conditioned, suspended or revoked, subject to
compliance with certain statutory and regulatory procedures. In addition, we and
the persons involved could be subject to substantial fines for each separate
violation of the Nevada Act at the discretion of the Nevada Gaming Authorities.
The limitation, conditioning or suspension of any License or the appointment of
a supervisor could, and the revocation of any License would, materially
adversely affect our future operations in Nevada.
Any beneficial holder of our voting securities, regardless of the number of
shares owned, may be required to file applications, be investigated and have
his, her or its suitability as a beneficial holder of our voting securities
determined if the Nevada Commission has reason to believe that ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada Gaming
Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires beneficial ownership of more
than 5% of our voting securities to report the acquisition to the Nevada
Commission. The Nevada Act requires that beneficial owners of more than 10% of
our voting securities apply to the Nevada Commission for a finding of
suitability within 30 days after the mailing of the written notice by the
Chairman of the Nevada Board requiring that filing. Under certain circumstances,
an "institutional investor," as defined in the Nevada Act, which acquires more
than 10% but not more than 15% of our voting securities may apply to the Nevada
Commission for a waiver of that finding of suitability if the institutional
investor holds the voting securities for investment purposes only. An
institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of our board of directors, any change in our corporate charter, bylaws,
management, policies or operations, or those of any of our gaming affiliates, or
any other action which the Nevada Commission finds to be inconsistent with
holding our voting securities for investment purposes only. Activities which are
not deemed to be inconsistent with holding voting securities for investment
purposes only include: (1) voting on all matters voted on by stockholders; (2)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in our
management policies or operations; and (3) other activities that the Nevada
Commission may determine to be consistent with investment intent. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the voting securities of a Registered
Corporation beyond that period of time as may be prescribed by the Nevada
Commission may be guilty of a criminal offense. We are subject to disciplinary
action if, after we receive notice that a person is unsuitable to be a
stockholder or to have any other relationship with us, we: (1) pay that
unsuitable person any dividend or interest upon our voting securities; (2) allow
that person to exercise, directly or indirectly, any voting rights conferred
through securities held by that person; (3) pay remuneration in any form to that
person for services rendered or otherwise; or (4) fail to pursue all lawful
efforts to require the unsuitable person to relinquish voting securities
including, if necessary, the immediate repurchase of the voting securities for
cash at fair market value.
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The Nevada Commission may in its discretion, require holders of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that ownership of theses securities
would otherwise be inconsistent with the declared policies of the State of
Nevada. If the Nevada Commission determines that a person is unsuitable to own
that security, then under the Nevada Act, the Registered Corporation can be
sanctioned, including with the loss of its approvals, if, without the prior
approval of the Nevada Commission, it: (1) pays to the unsuitable person any
dividend, interest or any distribution whatsoever; (2) recognizes any voting
right by the unsuitable person in connection with that security; (3) pays the
unsuitable person remuneration in any form; or (4) makes any payment to the
unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction.
We are required to maintain a current stock ledger in the State of Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make this disclosure may be grounds for finding the
record holder unsuitable. We are also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require that our stock certificates bear a legend indicating that the
securities are subject to the Nevada Act. However, to date, the Nevada
Commission has not imposed this requirement on us.
We may not make a public offering of our securities without the prior approval
of the Nevada Commission if the securities or the proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for these purposes. We have
received approval for this offering. This approval does not constitute a
finding, recommendation or approval by the Nevada Commission or the Nevada Board
as to the accuracy or adequacy of the prospectus or the investment merits of the
securities. Any representation to the contrary is unlawful.
Changes in control of WMS through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Commission and the Nevada Board
in a variety of stringent standards prior to assuming control of the Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licenses and Registered Corporations that are affiliated
with those operations may be injurious to stable and productive corporate
gaming. The Nevada Commission has established a regulatory scheme to ameliorate
the potentially adverse effects of these business practices upon Nevada's gaming
industry and to further Nevada's policy to: (1) assure the financial stability
of corporate licensees and their affiliates; (2) preserve the beneficial aspects
of conducting business in the corporate form; and (3) promote a neutral
environment for the orderly governance of corporate affairs. Approvals are, in
certain circumstances, required from the Nevada Commission before we can make
exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by our board of directors in response to a tender
offer made directly to the Registered Corporation's stockholders for the purpose
of acquiring control of the Registered Corporation.
License fees and taxes computed in various ways depending on the type of gaming
or activity involved are payable to the State of Nevada and to the counties and
cities in which the Nevada licensee's respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either quarterly or annually. Annual fees are also payable to the State
of Nevada for renewal of licenses as a manufacturer, distributor and operator of
a slot machine route.
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Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with any such person, and who proposes to
become involved in a gaming venture outside of Nevada, is required to deposit
with the Nevada Board, and thereafter maintain, a revolving fund in the amount
of $10,000 to pay the expenses of investigation by the Nevada Board of their
participation in foreign gaming operations. The revolving fund is subject to
increase or decrease in the discretion of the Nevada Commission. Thereafter,
licensees are required to comply with certain reporting requirements imposed by
the Nevada Act. The Nevada Board may require a licensee to file an application
for a finding of suitability concerning an actual or intended activity or
association of the licensee in a foreign gaming operation. A licensee is also
subject to disciplinary action by the Nevada Commission if the licensee
knowingly violates any laws of the foreign jurisdiction pertaining to the
foreign gaming operation, fails to conduct the foreign gaming operation in
accordance with the standards of honesty and integrity required of Nevada gaming
operations, engages in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employs a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the ground of personal unsuitability.
RECENT NEVADA LEGISLATION
On May 21, 1999 legislation became effective in the State of Nevada imposing
additional requirements on persons who provide gaming machines to casino
customers on a revenue participation basis. Among other things, the new law
requires these persons to pay their "full proportionate share" of license fees
and taxes imposed on gaming revenues generated by these participation gaming
machines. Although the new law imposes some additional costs upon us, we do not
believe that these costs will be material to our business.
NEW JERSEY REGULATION
The manufacture, distribution, and operation of gaming machines in New Jersey
are regulated by the New Jersey Casino Control Commission (the "New Jersey
Commission") under the New Jersey Casino Control Act and the regulations of the
New Jersey Commission promulgated thereunder (collectively, the "New Jersey
Act"). Under the New Jersey Act, a company must be licensed as a gaming related
casino service industry ("CSI"), or fulfill other requirements, in order to
manufacture or distribute gaming machines. In order for a CSI license to be
issued or maintained, certain directors, officers, key employees and owners of a
company must be found by the New Jersey Commission to possess by clear and
convincing evidence good character, honesty, integrity and financial stability.
We have been issued a CSI license by the New Jersey Commission. This license was
issued for a two-year period and, upon proper application and satisfaction of
the same requirements for the initial issuance of a license, may be renewed for
four-year periods. However, the New Jersey Commission has the discretion to
suspend, revoke, or refuse to renew a license if a licensee fails to continue to
satisfy the requirements for licensure or violates the New Jersey Act.
In addition, all gaming machines used in New Jersey casinos must be approved by
the New Jersey Commission. In determining whether to approve gaming machines,
the New Jersey Commission will consider various factors, including design,
integrity, fairness, and honesty and may require a field test of the machine.
MISSISSIPPI
The manufacture, sale and distribution of gaming devises for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). These
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission. Although not identical, the Mississippi Act is similar to
the Nevada Act.
Our license to manufacture and distribute gaming equipment in Mississippi is not
transferable, is issued for a two-year period and must be renewed every two
years. As in Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement
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with, us, including, but not limited to, record or beneficial holders of any of
our voting securities and any other person whom the Mississippi Commission
determines exercises a significant influence upon our management or affairs. We
are required to maintain a current stock ledger in Mississippi which may be
examined by the Mississippi Commission at any time. Any applicant for a finding
of suitability must pay all investigative fees and costs of the Mississippi
Commission in connection with the investigation.
The Mississippi Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission, and that person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Mississippi
Commission for a finding of suitability. The Mississippi Commission exercises
its discretion to require a finding of suitability of any beneficial owner of
more than 5% of a Registered Corporation's common stock. Under certain
circumstances, an "institutional investor," which acquires more than 5%, but not
more than 10%, of the Registered Corporation's voting securities may apply to
the Mississippi Commission for a waiver of the finding of suitability if the
institutional investor holds the voting securities for investment purposes only
and otherwise meets the regulatory requirements of the institutional investor
waiver provisions.
We may not make a public offering of our securities without the prior approval
of the Mississippi Commission if the securities or proceeds therefrom are
intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for these purposes. The
Mississippi Commission has the authority to grant a continuous approval of
securities offerings and has granted this approval to us, which approval covers
this offering, subject to an annual renewal of this approval. All loans by us
must be reported to the Mississippi Commission and certain loans and other stock
transactions must be approved in advance.
If it were determined that we violated the Mississippi Act, the licenses that we
hold could be limited, conditioned, suspended or revoked, subject to compliance
with statutory and regulatory procedures, which action, if taken, could
materially adversely affect our manufacturing and distribution of gaming
machines.
FEDERAL REGISTRATION
Any of our subsidiaries that are involved in gaming activities are required to
register annually with the United States Department of Justice, Criminal
Division, in connection with the sale, distribution or operation of Gaming. The
Federal Gambling Devices Act of 1962 makes it unlawful, in general, for a person
to manufacture, deliver or receive gaming machines and components across state
lines or to operate gaming machines unless that person has first registered with
the Attorney General of the United States. We are required to register and renew
our registration annually. We have complied with these registration
requirements. In addition, various record keeping and equipment identification
requirements are imposed by this act. Violation of the Federal Act may result in
seizure and forfeiture of the equipment, as well as other penalties.
REGULATION IN FOREIGN JURISDICTIONS
Certain foreign countries permit the importation, sale and/or operation of
gaming equipment. Where importation is permitted, some countries prohibit or
restrict the payout feature of the traditional slot machine or limit the
operation of slot machines to a controlled number of casinos or casino-like
locations. Certain jurisdictions in which we operate require the licensing of
gaming machines, gaming machine operators and manufacturers. We and our gaming
machines have been properly licensed and approved or have applied for licensure
and approval in all jurisdictions where our operations require licensure and
approval.
NATIVE AMERICAN GAMING REGULATION
Numerous Native American tribes have become engaged in or have licensed gaming
activities on Indian lands as a means of generating tribal governmental revenue.
We manufacture and supply gaming equipment for Native American tribes. Gaming on
Native American lands, including the terms and
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conditions under which gaming equipment can be sold or leased to Native American
tribes, is or may be subject to regulation under the laws of the tribes, the
laws of the host state, the Indian Gaming Regulatory Act of 1988 ("IGRA"), which
is administered by the National Indian Gaming Commission (the "NIGC") and the
Secretary of the U.S. Department of the Interior (the "Secretary"), and also may
be subject to the provisions of certain statutes relating to contracts with
Native American tribes, which are administered by the Secretary. As a
precondition to gaming involving gaming machines, IGRA requires that the tribe
and the state enter into a written agreement (a "tribal-state compact") that
specifically authorizes such gaming, and that has been approved by the
Secretary, with the notice of approval published in the Federal Register.
Tribal-state compacts vary from state to state. Many require that equipment
suppliers meet ongoing registration and licensing requirements of the state
and/or the tribe and some impose background check requirements on the officers,
directors and shareholders of gaming equipment suppliers. Under IGRA, tribes are
required to regulate all commercial gaming under ordinances approved by the
NIGC. These ordinances may impose standards and technical requirements on main
hardware and software and may impose registration, licensing and background
check requirements on gaming equipment suppliers and their officers, directors
and shareholders.
REGULATORY CHANGES AND LICENSE STATUS
The laws and regulations of the numerous jurisdictions, foreign and domestic, in
which WMS and our gaming subsidiaries do business are subject to change from
time to time. In addition, the license status of WMS and our gaming subsidiaries
with respect to these jurisdictions is subject to change. The information set
forth in this prospectus represents the most current available at the time of
filing.
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MANAGEMENT
Our officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH WMS
- ---- --- --------------------------------------------------------
<S> <C> <C>
Louis J. Nicastro.................... 71 Chairman of the Board, President and Chief Executive
Officer
Norman J. Menell..................... 67 Vice Chairman of the Board
Kevin L. Verner...................... 40 Vice President and Chief Operating Officer
Harold H. Bach, Jr. ................. 67 Vice President -- Finance, Treasurer, Chief Financial
and Chief Accounting Officer(1)
Jeffrey M. Schroeder................. 42 Vice President -- Finance, Treasurer, Chief Financial
and Chief Accounting Officer(1)
Orrin J. Edidin...................... 38 Vice President, Secretary and General Counsel
Terence M. Dunleavy.................. 42 Vice President, Assistant General Counsel and Chief
Compliance Officer
William C. Bartholomay............... 71 Director(2)(3)(5)
William E. McKenna................... 80 Director(3)(4)(5)
Neil D. Nicastro..................... 42 Director(2)
Harvey Reich......................... 70 Director(4)
David M. Satz, Jr. .................. 73 Director(6)
Ira S. Sheinfeld..................... 61 Director(3)
</TABLE>
- ---------------------------
(1) Upon the completion of this offering, Mr. Bach is expected to resign
from his positions with WMS in order to devote substantially all of his
business time to Midway. Mr. Bach is expected to remain as a consultant
to WMS. Upon Mr. Bach's resignation, Mr. Schroeder is expected to assume
the positions currently held by Mr. Bach.
(2) Nominating Committee member. Mr. Nicastro is chairman of this committee.
(3) Audit and Ethics Committee member. Mr. McKenna is chairman of this
committee.
(4) Stock Option Committee member. Mr. Reich is chairman of this committee.
(5) Compensation Committee member. Mr. Bartholomay is chairman of this
committee.
(6) Chairman of the Negotiating Committee and the Regulatory Compliance
Committee.
BIOGRAPHICAL INFORMATION
Louis J. Nicastro has been our President and Chief Executive Officer since April
6, 1998 and was also Chief Operating Officer from April 6, 1998 to May 14, 1998.
He served as Chairman of the Board of WMS since our incorporation in 1974. From
1983 to January 1998, Mr. Nicastro was also the Chairman of the Board and Chief
Executive Officer of WHG Resorts & Casinos. Mr. Nicastro also served as our
Co-Chief Executive Officer (1994-1996), Chief Executive Officer (1974-1994),
President (1985-1988 and 1990-1991) and Chief Operating Officer (1985-1986). Mr.
Nicastro is a director of Midway, and he held various executive positions for
Midway from 1988 until 1996. Mr. Nicastro is Neil D. Nicastro's father.
Norman J. Menell has been Vice Chairman of the Board since 1990 and a director
since 1980. He has also served as our President (1988-1990), Chief Operating
Officer (1986-1990) and Executive Vice President (1981-1988). Mr. Menell is also
a director of Midway.
Kevin L. Verner has served as our Vice President and Chief Operating Officer
since May 14, 1998, and as Executive Vice President and General Manager of WMS
Gaming since February 1997. Previously, Mr. Verner served as Vice President and
Director of New Business Development of R.J. Reynolds Tobacco Company from 1993
until February 1997.
Harold H. Bach, Jr. has held the positions of Treasurer since 1994 and Vice
President -- Finance, Chief Financial and Chief Accounting Officer since 1990.
Additionally, Mr. Bach has served as Executive Vice President -- Finance, Chief
Financial Officer and a director of Midway since August 1996. He served as
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Senior Vice President -- Finance and Chief Financial Officer of Midway from 1990
to August 1996, and 'he has served as Treasurer of Midway since December 1994.
Prior to joining WMS, Mr. Bach was a partner in the accounting firms of Ernst &
Young (1989-1990) and Arthur Young & Company (1967-1989).
Jeffrey M. Schroeder joined us in June 1999. We anticipate that he will assume
the positions of Vice President -- Finance, Treasurer, Chief Financial and Chief
Accounting Officer upon the completion of this offering. Mr. Schroeder is a
certified public accountant and was, until July 1998, the chief financial
officer of Farley Industries, Inc., a management services company. He joined
that company in 1985.
Orrin J. Edidin has served as our Vice President, Secretary and General Counsel
since May 1997. Mr. Edidin served as Associate General Counsel of Fruit of the
Loom, Inc. from 1992 until May 1997. Mr. Edidin has also served as Vice
President, Secretary and General Counsel of Midway since June 1997. We
anticipate that, in fiscal 2000, Mr. Edidin will begin to devote substantially
all of his business time to Midway and that he will remain as a consultant to
WMS. We are in the process of searching for a new general counsel.
Terence M. Dunleavy joined us in May 1997 and was appointed as Vice President,
Assistant General Counsel and Chief Compliance Officer in June 1999. Mr.
Dunleavy was Assistant General Counsel/ Director of Compliance of Mikohn Gaming
Nevada, Inc. a gaming systems manufacturer, from April 1996 to November 1996,
Senior Regulatory Attorney with Madison Gas & Electric Company, from December
1994 to January 1996 and Commissioner of the Wisconsin Gaming Commission from
September 1992 to December 1994.
William C. Bartholomay is President of Near North National Group, insurance
brokers in Chicago, Illinois and Chairman of the Board of the Atlanta Braves. He
has served as Vice Chairman of Turner Broadcasting System, Inc., a division of
Time Warner Inc., for more than five years. Mr. Bartholomay was elected a
director of WMS 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 more than 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 WMS since 1981.
Neil D. Nicastro has been Midway's President and Chief Operating Officer for
more than five years, Co-Chief Executive Officer since December 1994, Chairman
of the Board and Chief Executive Officer since July 1996 and has held various
other executive positions for Midway since 1988. Mr. Nicastro was also our
President, Chief Executive Officer and Chief Operating Officer for more than
five years before his resignation from those positions in April 1998. Mr.
Nicastro became a director of WMS in 1986, and he remains a director and a
consultant to us. Mr. Nicastro is Louis J. Nicastro's son.
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 more
than five years until his retirement in July 1998. Mr. Reich was elected a
director of WMS in 1983. Mr. Reich is also a director of Midway.
David M. Satz, Jr. became a director of WMS in April 1998. Mr. Satz has been a
member of the law firm Saiber Schlesinger Satz & Goldstein, Newark, New Jersey,
for more than five years. Mr. Satz is also a director of the Atlantic City
Racing Association.
Ira S. Sheinfeld became a director of WMS in 1993. He has been a member of the
law firm of Squadron, Ellenoff, Plesent & Sheinfeld LLP, New York, New York, for
more than five years. Mr. Sheinfeld is also a director of Midway.
37
<PAGE> 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to Midway's 1996 initial public offering, Midway was a wholly-owned
subsidiary of WMS. As a result of Midway's offering and our 1998 distribution of
the remainder of our Midway stock to our stockholders, we do not own any Midway
common stock. A majority of our directors, however, are directors of Midway.
Additionally, several of our executive officers are officers or directors of
Midway. See "Management" and "Risk Factors -- We may have conflicts of interest
with Midway."
INTERCOMPANY AGREEMENTS
WMS and Midway continue to provide certain services and products to each other
under a number of agreements, which are discussed in Item 13 of our 1999 Annual
Report on Form 10-K, which is incorporated by reference in this prospectus. See
"Where You Can Find More Information." Three of these agreements, the
manufacturing agreement, cabinet supply agreement and pinball sales agreement,
each effective as of April 6, 1998, are described briefly below.
Manufacturing Agreement. We manufacture coin-operated video games and kits for
Midway. The agreement requires us to allocate 65.0% of our combined production
and storeroom square footage at our Waukegan plant to perform our obligations
under this agreement. Midway provides the designs and purchases most of the
materials used in the manufacture of the coin-operated video games. All labor
costs, including fringe benefits, directly associated with the manufacturing of
coin-operated video games are charged to Midway at our 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, plus 9.0%. The
identified or allocated costs include, without limitation, manufacturing costs,
materials management costs, quality assurance costs and administration costs.
The agreement may be terminated by either party for any reason upon six months'
notice.
Cabinet Supply Agreement. We supply coin-operated video game cabinets to
Midway. The agreement provides that to initiate the purchase of video game
cabinets, Midway issues a pricing inquiry to us, specifying the number of
cabinets to be ordered and the cabinet specifications. We then provide a formal
quote on the pricing inquiry, and, upon agreement on a final price, a purchase
order is issued. We build the cabinets in our Cicero, Illinois facility and ship
them to our Waukegan, Illinois plant for use in the manufacture of coin-operated
video games. Midway is not required to purchase cabinets from us and may
purchase cabinets from other manufacturers if we do not meet competitive
bona-fide quotes.
Pinball Sales Agreement. Our pinball products are marketed and sold under a
sales agreement with Midway, which was amended as of June 15, 1999. Midway
markets and field tests all of our pinball games. From May 1, 1999 through
December 31, 1999, we have agreed to pay Midway a fixed amount at the rate of
approximately $135,000 per month. In addition, we pay Midway a commission of
1.5% on the first $25.0 million of annual net sales by Midway of our products
and 1.0% on annual net sales by Midway of our products in excess of $25.0
million. This agreement may be terminated by either party for any reason upon
six months' notice.
VOTING PROXY AGREEMENT
In order for us to manufacture and sell gaming machines in Nevada, our officers
are required to be, and have been, registered, licensed or found suitable by the
Nevada Gaming Authorities. In addition, under applicable Nevada law and
administrative procedure, as a greater than 10% stockholder of WMS, Sumner M.
Redstone was required to apply, and has an application pending with the Nevada
Gaming Authorities, for a finding of suitability as a stockholder of WMS. Mr.
Redstone and National Amusements, Inc. ("NAI"), a company that he controls,
collectively own 7,180,200 shares of our common stock. Pending completion of the
processing of this application, Mr. Redstone and NAI, on September 21, 1995,
voluntarily granted a voting proxy under a voting agreement to Louis J. Nicastro
and, if he is unable to perform his duties under the voting agreement, Neil D.
Nicastro, individually, to vote all of Mr. Redstone's and NAI's shares of our
common stock. The voting agreement is intended to assure that
38
<PAGE> 42
the passive investment position of Mr. Redstone and NAI relative to WMS will not
change without prior notification to the Nevada Gaming Authorities.
Under the voting agreement, Mr. Nicastro votes each share of our common stock
owned by Mr. Redstone and NAI at his discretion at meetings of our stockholders
or acts as proxy in connection with any written consent of our stockholders. The
term of the voting agreement ends August 24, 2004 unless Mr. Redstone terminates
it upon 30 days' written notice. It may also be terminated upon a finding by the
Nevada Gaming Authorities that Mr. Redstone and NAI are suitable as stockholders
of WMS or are no longer subject to the applicable provisions of Nevada gaming
laws.
39
<PAGE> 43
UNDERWRITING
We will enter into an underwriting agreement with the underwriters named below.
CIBC World Markets Corp. and Prudential Securities Incorporated are acting as
representatives of the underwriters. The underwriting agreement will provide for
the purchase of a specific number of shares of our common stock by each of the
underwriters. The underwriters' obligations will be several, which means that
each underwriter is required to purchase a specified number of shares but is not
responsible for the commitment of any other underwriter to purchase shares.
Subject to the terms and conditions of the underwriting agreement, each
underwriter will severally agree to purchase the number of shares of our common
stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
CIBC World Markets Corp.....................................
Prudential Securities Incorporated..........................
----------
Total.................................................. 3,500,000
==========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters will
agree to purchase all of the shares offered by this prospectus, other than those
covered by the over-allotment option, if any are purchased. Under the
underwriting agreement, if an underwriter defaults in its commitment to purchase
shares, the commitments of non-defaulting underwriters may be increased or the
underwriting agreement may be terminated, depending on the circumstances.
The representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to securities dealers at the same price less a concession of
$ per share. The underwriters may also allow, and those dealers may reallow,
a concession not in excess of $0.10 per share to certain other dealers. After
the shares are released for sale to the public, the representatives may change
the offering price and other selling terms at various times.
We have granted to the underwriters an over-allotment option. This option, which
is exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 525,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the initial public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to public will be
$ and the total proceeds to us will be $ . The underwriters
have severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares proportionate
to the underwriter's initial amount reflected in the table above.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by WMS:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH FULL
EXERCISE OF EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- ----------------
<S> <C> <C> <C>
WMS.......................................... $ $ $
</TABLE>
We estimate that our total expenses of the offering, excluding the underwriting
discount, will be approximately $500,000. We have also agreed to indemnify the
underwriters against some liabilities, including liabilities under the
Securities Act.
WMS and each of our officers and directors have agreed to a "lock-up" with
respect to an aggregate of 1,177,782 shares of our common stock and other
securities of ours that they beneficially own, including securities that are
convertible into shares of our common stock and securities that are exchangeable
or exercisable for shares of our common stock. Each of the lock-ups is for a
term of 90 days, except that the lock-up with respect to Mr. Bach's
beneficially-owned shares is for a term of 30 days. This means that, for these
periods following the date of this prospectus, WMS and such persons may not
issue, sell, register or otherwise dispose of these securities, except for the
issuance of securities in connection
40
<PAGE> 44
with our stock option plans or an acquisition, without the prior written consent
of CIBC World Markets Corp.
Any shares offered by this prospectus will be listed on the New York Stock
Exchange, subject to official notice of issuance.
Each share is sold together with certain stock purchase rights. These rights are
described in a registration statement on Form 8-A that we filed with the SEC on
March 25, 1998. See "Where You Can Find More Information."
CIBC World Markets Corp., one of the representatives, has provided investment
banking and financial advisory services to us. We have paid CIBC World Markets
Corp. customary fees for these services.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- Stabilizing transactions -- The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price of
the shares, so long as stabilizing bids do not exceed a specified
maximum.
- Over-allotments and syndicate covering transactions -- The underwriters
may create a short position in our common stock by selling more shares
than are set forth on the cover page of this prospectus. If a short
position is created in connection with the offering, the representatives
may engage in syndicate covering transactions by purchasing our common
stock in the open market. The representatives may also elect to reduce
any short position by exercising all or part of the over-allotment
option.
- Penalty bids -- If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering transaction,
they may reclaim a selling concession from the selling group members who
sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of our
common stock to be higher than it would be in the absence of these transactions.
The imposition of a penalty bid might also have an effect on the price of our
common stock if it discourages resales of the shares.
Neither we nor the underwriters makes any representation or prediction as to the
effect that the transactions described above may have on the price of our common
stock. These transactions may occur on the NYSE or otherwise. If these
transactions are commenced, they may be discontinued without notice at any time.
LEGAL MATTERS
The validity of the shares offered by this prospectus has been passed upon by
our counsel, Shack & Siegel, P.C., New York, New York. As of September 8, 1999,
shareholders of Shack & Siegel, P.C. hold a total of 7,585 shares of our common
stock and options to purchase 30,000 shares of our common stock. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Morgan, Lewis & Bockius LLP, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements and schedule included in our Annual Report on Form 10-K for the year
ended June 30, 1999, as set forth in their report, which is incorporated in this
prospectus by reference. We have incorporated our consolidated financial
statements by reference in this prospectus in reliance on their report, given on
their authority as experts in accounting and auditing.
41
<PAGE> 45
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the Securities and
Exchange Commission in connection with this offering (File No. 333-83021). In
addition, we file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy the registration statement
and any other documents we have filed at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, DC 20549. You may also call the SEC at
1-800-SEC-0330 for further information about the Public Reference Room. Our SEC
filings are also available to the public at the SEC's Internet site found at
"www.sec.gov" and can be inspected at the offices of the NYSE, 20 Broad Street,
New York, NY 10005.
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of WMS, the
reference may not be complete, and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
In addition, the SEC allows us to "incorporate by reference" into this
prospectus the information we file with it, which means that we can disclose
important information to you by referring you to those documents. Information
incorporated by reference is part of this prospectus. Later information filed
with the SEC will update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until this offering is terminated:
- Our annual report on Form 10-K for the year ended June 30, 1999,
including exhibits.
- The description of our common stock and accompanying rights contained in
our registration statements on Form 8-A filed on January 21, 1982 and
March 25, 1998.
We will provide to each person, including any beneficial owner, to whom a copy
of this prospectus is delivered, a copy of any or all of the information that we
have incorporated by reference in this prospectus. You may request copies of
this information, and we will provide it at no cost, by writing or telephoning
us at:
WMS Industries Inc.
3401 North California Avenue
Chicago, IL 60618
Attention: Vice President -- Finance.
Telephone: (773) 961-1111
42
<PAGE> 46
WMS INDUSTRIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998.... F-3
Consolidated Statements of Income for the years ended June
30, 1999, 1998 and 1997................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997.......... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
WMS Industries Inc.
We have audited the accompanying consolidated balance sheets of WMS Industries
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of WMS
Industries Inc. and subsidiaries at June 30, 1999 and 1998, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 12, 1999
F-2
<PAGE> 48
WMS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 58,669 $ 36,943
Short-term investments.................................... -- 26,000
-------- --------
58,669 62,943
Receivables, net of allowances of $3,807 in 1999 and
$2,397 in 1998......................................... 48,135 30,432
Income tax receivable..................................... 3,257 10,114
Inventories
Raw materials and work in progress..................... 20,094 17,523
Finished goods......................................... 25,421 22,097
-------- --------
45,515 39,620
Deferred income taxes..................................... 17,595 18,155
Other current assets...................................... 976 769
-------- --------
Total current assets.............................. 174,147 162,033
Gaming machines on participation or lease, net.............. 19,731 3,725
Property, plant and equipment, net.......................... 38,157 32,607
Other assets................................................ 6,044 9,157
-------- --------
Total assets...................................... $238,079 $207,522
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 14,868 $ 7,818
Accrued compensation and related benefits................. 4,988 3,020
Accrued liability related to WMS Gaming Inc. patent
litigation............................................. 38,543 35,372
Other accrued liabilities................................. 5,708 3,757
-------- --------
Total current liabilities......................... 64,107 49,967
Deferred income taxes....................................... 625 869
Other noncurrent............................................ 1,268 1,395
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none
issued)................................................ -- --
Common stock (issued 30,428,621 shares in 1999 and
28,032,766 shares in 1998)............................. 15,214 14,016
Additional paid-in capital................................ 180,989 170,418
Accumulated deficit....................................... (23,742) (28,995)
-------- --------
172,461 155,439
Treasury stock, at cost (77,312 shares in 1999 and 52,312
shares in 1998)........................................ (382) (148)
-------- --------
Total stockholders' equity........................ 172,079 155,291
-------- --------
Total liabilities and stockholders' equity........ $238,079 $207,522
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 49
WMS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Gaming:
Machine sales............................................. $101,895 $ 48,820 $ 25,334
Participation and lease................................... 24,061 7,968 8,279
-------- -------- --------
125,956 56,788 33,613
Pinball and other......................................... 61,334 42,202 42,983
-------- -------- --------
Total revenues.................................... 187,290 98,990 76,596
-------- -------- --------
COST AND EXPENSES
Cost of sales............................................... 130,612 76,971 60,146
Research and development.................................... 14,143 12,908 12,882
Selling and administrative.................................. 34,551 27,885 20,959
Adjustment to common stock options.......................... 3,037 59,890 --
Provisions related to WMS Gaming Inc. patent litigation..... -- -- 61,925
-------- -------- --------
Total costs and expenses.................................... 182,343 177,654 155,912
-------- -------- --------
Operating income (loss)..................................... 4,947 (78,664) (79,316)
Interest and other income................................... 3,525 4,410 5,661
Interest expense............................................ -- -- (3,443)
-------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... 8,472 (74,254) (77,098)
Provision (credit) for income taxes......................... 3,219 (25,430) (30,301)
-------- -------- --------
Income (loss) from continuing operations.................... 5,253 (48,824) (46,797)
Discontinued operations, net of applicable income taxes:
Video games segment
Income from discontinued operations.................... -- 28,302 34,813
Extraordinary gain on early extinguishment of debt..... -- -- 2,641
Costs related to discontinuance, net................... -- (1,556) (1,650)
Gain on initial public offering of subsidiary.......... -- -- 47,771
Hotel and casino segments
Income from discontinued operations.................... -- -- 4,742
Costs related to discontinuance........................ -- -- (825)
-------- -------- --------
Net income (loss)........................................... $ 5,253 $(22,078) $ 40,695
======== ======== ========
Basic and diluted per share of common stock:
Income (loss) from continuing operations.................. $ .18 $ (1.85) $ (1.92)
-------- -------- --------
Net income (loss)......................................... $ .18 $ (.84) $ 1.67
-------- -------- --------
Average number of shares outstanding...................... 29,308 26,446 24,334
-------- -------- --------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 50
WMS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TREASURY UNREALIZED TOTAL
COMMON PAID-IN EARNINGS STOCK, HOLDING STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) AT COST LOSS EQUITY
------- ---------- --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JUNE 30, 1996........ $12,100 $ 82,496 $123,906 $(148) $ (8,321) $ 210,033
Net income for the year ended June
30, 1997......................... -- -- 40,695 -- -- 40,695
Increase in unrealized holding loss
on noncurrent investment in
marketable equity securities..... -- -- -- -- (4,437) (4,437)
---------
Comprehensive income............... 36,258
Issuance of 70,104 shares of common
stock through exercise of
options.......................... 35 1,325 -- -- -- 1,360
Tax benefit from common stock
options.......................... -- 147 -- -- -- 147
Adjustment to common stock options
for distribution of subsidiary... -- 705 -- -- -- 705
Distribution of subsidiary as a
tax-free dividend................ -- -- (52,503) -- -- (52,503)
------- -------- -------- ----- -------- ---------
BALANCE AS OF JUNE 30, 1997........ 12,135 84,673 112,098 (148) (12,758) 196,000
Net loss for the year ended June
30, 1998......................... -- -- (22,078) -- -- (22,078)
Decrease in unrealized loss on
noncurrent investment in
marketable equity securities..... -- -- -- -- 12,758 12,758
---------
Comprehensive loss................. (9,320)
Issuance of 758,385 shares of
common stock through exercise of
stock options.................... 379 13,954 -- -- -- 14,333
Issuance of 2,488,855 shares of
common stock in conversion of
subordinated debentures.......... 1,244 55,090 -- -- -- 56,334
Issuance of 515,360 shares of
common stock relating to
adjustment of common stock
options.......................... 258 14,717 -- -- -- 14,975
Tax benefit from common stock
options.......................... -- 1,984 -- -- -- 1,984
Distribution of subsidiary as a
tax-free dividend................ -- -- (119,015) -- -- (119,015)
------- -------- -------- ----- -------- ---------
BALANCE AS OF JUNE 30, 1998........ 14,016 170,418 (28,995) (148) -- 155,291
Net income for the year ended June
30, 1999......................... -- -- 5,253 -- -- 5,253
Issuance of 2,395,855 shares of
common stock through exercise of
stock options.................... 1,198 6,893 -- -- -- 8,091
Tax benefit from common stock
options.......................... -- 3,678 -- -- -- 3,678
Received 25,000 treasury shares in
lieu of cash from exercise of
stock options.................... -- -- -- (234) -- (234)
------- -------- -------- ----- -------- ---------
BALANCE AS OF JUNE 30, 1999........ $15,214 $180,989 $(23,742) $(382) $ -- $ 172,079
======= ======== ======== ===== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 51
WMS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 5,253 $(22,078) $ 40,695
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Income from discontinued operations -- video games
segment................................................ -- (28,302) (37,454)
Income from discontinued operations -- gain on initial
public offering of subsidiary -- video games segment... -- -- (47,771)
Income from discontinued operations -- hotel and casino
segments............................................... -- -- (4,742)
Costs related to discontinuance........................... -- 1,556 2,475
Gain on sale of marketable equity securities.............. -- (859) --
Depreciation and amortization............................. 8,752 5,642 6,279
Receivables provision..................................... 3,271 581 335
WMS common stock issued in common stock option
adjustment............................................. -- 14,975 --
Provisions related to Gaming patent litigation............ -- -- 60,875
Deferred income taxes..................................... 316 3,098 (21,247)
Stock option compensation expense......................... -- -- 705
Tax benefit from exercise of common stock options......... 3,678 1,984 147
Increase (decrease) resulting from changes in operating
assets and liabilities
Receivables............................................ (20,974) (3,738) (4,505)
Income tax receivable.................................. 6,857 (10,114) --
Inventories............................................ (2,296) (6,031) (12,207)
Other current assets................................... (207) 490 3,972
Accounts payable and accruals.......................... 10,969 2,369 (2,608)
Other assets and liabilities not reflected elsewhere... 2,845 (458) 1,657
-------- -------- --------
Net cash provided (used) by operating activities............ 18,464 (40,885) (13,394)
INVESTING ACTIVITIES
Purchase of property, plant and equipment................... (10,394) (6,192) (3,471)
Additions to gaming machines on participation or lease...... (20,201) (305) (2,184)
Net change in short-term investments........................ 26,000 44,000 (42,891)
Proceeds from sale of marketable equity securities.......... -- 28,617 --
-------- -------- --------
Net cash provided (used) by investing activities............ (4,595) 66,120 (48,546)
FINANCING ACTIVITIES
Cash received on exercise of stock options.................. 7,857 14,333 1,360
Redemption of long-term debt................................ -- (178) --
-------- -------- --------
Net cash provided by financing activities................... 7,857 14,155 1,360
DISCONTINUED OPERATIONS
Net transfer from discontinued operations and payment of
transaction costs in 1998 -- video games segment.......... -- (4,300) 50,000
Net transfer to discontinued operations and payment of
transaction costs -- hotel and casino segments............ -- -- (11,918)
-------- -------- --------
Net cash (used) provided by discontinued operations......... -- (4,300) 38,082
Increase (decrease) in cash and cash equivalents............ 21,726 35,090 (22,498)
Cash and cash equivalents at beginning of year.............. 36,943 1,853 24,351
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 58,669 $ 36,943 $ 1,853
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 52
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS OVERVIEW
WMS Industries Inc. ("WMS") operates in three business segments: the gaming
segment which is engaged in the design, manufacture and sale of slot machines
(video and reel type), video lottery terminals and other gaming devices; the
pinball and cabinets segment which is engaged in the design, manufacture and
sale of coin-operated pinball games and the manufacture of cabinets; and the
contract manufacturing segment which continues to manufacture under a contract
the coin-operated video games designed and sold by Midway Games Inc. ("Midway").
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Such preparation requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
On April 6, 1998, WMS completed a spin-off of its 86.8% ownership interest in
Midway consisting of 33,400,000 shares of Midway common stock, to the WMS
stockholders. The activities of Midway prior to its spin-off, which was the
video game segment of WMS, are shown as discontinued operations.
On April 22, 1997, WMS completed the spin-off of 100% of WMS' Puerto Rico based
hotel, casino and hotel management business, WHG Resorts & Casinos Inc. ("WHG
Resorts & Casinos"), to the WMS stockholders. Its activities prior to its
spin-off are shown as discontinued operations.
NOTE 2: PRINCIPAL ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of WMS and its
majority-owned subsidiaries (the "Company"). All significant intercompany
accounts and transactions have been eliminated. Certain prior year balances have
been reclassified to conform with the current year presentation.
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
Property, Plant and Equipment and Gaming Machines
Property, plant and equipment and gaming machines are stated at cost and
depreciated by the straight-line method over their estimated useful lives.
Advertising Expense
The cost of advertising is charged to earnings as incurred and for fiscal 1999,
1998 and 1997 was $1,263,000, $633,000 and $590,000, respectively.
Accounting Pronouncements
As of July 1, 1998, the Company adopted Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on net income or stockholders' equity.
Prior year financial statements have been reclassified to conform to these
requirements.
F-7
<PAGE> 53
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3: DISCONTINUED OPERATIONS
As discussed in Note 1, on April 6, 1998, the Company completed a spin-off of
its 86.8% interest in Midway. Accordingly, the results of operations and cash
flows of Midway have been reported as discontinued operations in the
consolidated financial statements. Net assets of the video games segment of
$119,015,000 at the time of spin-off were included as a reduction of retained
earnings from the tax-free dividend.
In conjunction with the Midway spin-off, at the request of the Board of
Directors, on April 6, 1998 Neil D. Nicastro resigned as President, Chief
Executive Officer and Chief Operating Officer of WMS to devote his full time to
Midway as Chairman of the Board, President, Chief Executive Officer and Chief
Operating Officer. Neil D. Nicastro agreed to the early termination and full
settlement of his employment agreement with WMS pursuant to which, in lieu of
all future payments of base salary, bonus, retirement and death benefits, he
received a payment of $2,500,000 and a 10 year option to purchase 250,000 shares
of the Company's common stock. The payment less income tax benefit of $861,000
and amounts previously accrued under his employment agreement are included in
discontinuance costs in fiscal 1998. Other discontinuance costs of $150,000 were
accrued in connection with the Midway spin-off in addition to the $1,650,000
accrued at June 30, 1997.
The condensed income statement for Midway for the nine months ended March 31,
1998 and for the fiscal year ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................... $293,144 $388,266
Cost and expenses........................................... 242,850 327,693
-------- --------
Operating income............................................ 50,294 60,533
Interest and other income, net.............................. 2,326 2,130
-------- --------
Income before tax provision and extraordinary credit........ 52,620 62,663
Provision for income taxes.................................. (19,996) (23,812)
-------- --------
Income before extraordinary credit.......................... 32,624 38,851
Extraordinary gain, net..................................... -- 3,044
-------- --------
Net income.................................................. $ 32,624 $ 41,895
======== ========
</TABLE>
The income from discontinued operations of the video games segment for the nine
months ended March 31, 1998 and fiscal 1997 shown in the WMS consolidated
statements of income is equal to income before extraordinary credit of Midway
reduced by minority interest in income of $4,322,000 and $4,038,000,
respectively. The extraordinary gain is reduced by minority interest of
$403,000. WMS recognized an after tax gain of $47,771,000 on the Midway initial
public offering completed on October 29, 1996.
On April 22, 1997 the Company completed a spin-off of WHG Resorts & Casinos.
Accordingly, the results of operations and cash flows of these business segments
have been reported as discontinued operations in the consolidated financial
statements for fiscal 1997. Net assets of the hotel and casino segments of
$52,503,000 at the time of spin-off were included as a reduction of retained
earnings from the tax-free dividend.
F-8
<PAGE> 54
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income from discontinued operations includes the results of WHG Resorts &
Casinos for the nine months ended March 31, 1997 as follows:
<TABLE>
<CAPTION>
1997
----
(IN THOUSANDS)
<S> <C>
Revenues.................................................... $41,206
Costs and expenses.......................................... 30,384
-------
Operating income............................................ 10,822
Interest expense, net....................................... (846)
-------
Income before income taxes and minority interests........... 9,976
Provision for income taxes.................................. (2,302)
Minority interests.......................................... (2,932)
-------
Income from discontinued operations......................... $ 4,742
=======
</TABLE>
NOTE 4: INVESTMENTS IN SECURITIES
All investments are designated as available-for-sale and are recorded at market
value with the holding gain or loss reflected in stockholders' equity.
Short-term investments consist principally of money market preferred stocks that
generally have no fixed maturity dates but have dividend reset dates every 49
days or less. There were no securities held at June 30,1999. At June 30, 1998
securities with costs equal to market were securities included as part of cash
equivalents of $9,407,000 and short-term investments of $26,000,000.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND GAMING MACHINES
At June 30 net property, plant and equipment were:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 3,481 $ 3,481
Buildings and improvements.................................. 27,629 25,113
Machinery and equipment..................................... 33,690 26,626
Furniture and fixtures...................................... 2,214 2,107
-------- --------
67,014 57,327
Less accumulated depreciation............................... (28,857) (24,720)
-------- --------
Net property, plant and equipment........................... $ 38,157 $ 32,607
======== ========
</TABLE>
Accumulated depreciation of gaming machines on participation or lease at June
30, 1999 and 1998 was $7,135,000 and $2,940,000, respectively.
F-9
<PAGE> 55
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6: INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes. Significant components of the Company's
deferred tax assets and liabilities at June 30 were:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets resulting from
Inventory valuation....................................... $ 2,556 $ 2,335
Receivables valuation..................................... 1,221 472
Accrued items not currently deductible.................... 507 517
Accruals relating to Gaming litigation.................... 15,500 18,275
------- -------
Total deferred tax assets......................... 19,784 21,599
------- -------
Deferred tax liabilities resulting from
Tax over book depreciation................................ 650 924
Federal tax on deferred state tax......................... 897 1,682
Other..................................................... 1,267 1,707
------- -------
Total deferred tax liabilities.................... 2,814 4,313
------- -------
Net deferred tax assets..................................... $16,970 $17,286
======= =======
</TABLE>
Significant components of the provision (credit) for income taxes for the years
ended June 30, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal.............................................. $ (671) $(26,753) $ (7,754)
State................................................ (104) (3,759) (1,447)
------ -------- --------
Total current................................ (775) (30,512) (9,201)
Deferred
Federal.............................................. (200) 2,679 (17,297)
State................................................ (21) 419 (3,950)
Change in state allocations.......................... 537 -- --
------ -------- --------
Total deferred............................... 316 3,098 (21,247)
Provision for tax benefits resulting from stock
options.............................................. 3,678 1,984 147
------ -------- --------
Provision (credit) for income taxes on continuing
operations........................................... 3,219 (25,430) (30,301)
Provision for income taxes on discontinued operations
extraordinary gain................................... -- -- 2,001
Provision for income taxes on discontinued
operations........................................... -- 19,135 57,522
------ -------- --------
Income tax (credit) provision, net..................... $3,219 $ (6,295) $ 29,222
====== ======== ========
</TABLE>
F-10
<PAGE> 56
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision or credit for income taxes on continuing operations differs from
the amount computed using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal effect................... 8.7 2.7 4.6
Dividend received deduction on investment income............ (5.1) -- --
Option adjustment cost not deductible....................... -- (3.5) --
Other, net.................................................. (0.6) -- (0.3)
---- ---- ----
38.0% 34.2% 39.3%
</TABLE>
NOTE 7: LINE OF CREDIT AND LONG-TERM DEBT
The Company has a line of credit for $25,000,000 under a revolving credit
agreement for a one-year term to August 1, 2000 which contains usual bank line
of credit terms.
During fiscal 1998, as a result of a call for redemption on September 22, 1997
of 33% of the $57,500,000 in outstanding debentures and a call for redemption on
October 29, 1997 of the remaining outstanding debentures, debentures with an
aggregate principal amount of $57,322,000 were converted into 2,488,855 shares
of WMS common stock and $178,000 of such debentures were redeemed.
The amount of interest paid during fiscal 1997 was $3,443,000.
NOTE 8: STOCKHOLDERS' EQUITY
Authorized common stock of the Company consists of 100,000,000 shares of $.50
par value. At June 30, 1999, 2,998,910 shares of common stock were reserved for
possible issuance for stock option plans. Additionally, there are 5,000,000
shares of $.50 par value preferred stock authorized. The preferred stock is
issuable in series, and the relative rights and preferences and the number of
shares in each series are to be established by the Board of Directors.
At the date of the Midway spin-off the WMS Rights Agreement became effective.
Under the Rights Agreement, each share of WMS common stock has an accompanying
Right to purchase, under certain conditions, one one-hundredth of a share of the
Company's Series A Preferred Stock at an exercise price of $100, permitting each
holder to receive $200 worth of the Company's common stock valued at the then
current market price. The Rights are redeemable by the Company at $.01 per
Right, subject to certain conditions, at any time and expire in 2007. The Rights
are intended to assure fair shareholder treatment in any attempted takeover of
the Company and to guard against abusive takeover tactics.
NOTE 9: COMMON STOCK PLANS
Under the stock option plans the Company may grant both incentive stock options
and nonqualified options on shares of common stock through the year 2008.
Options may be granted to employees and under certain conditions to non-employee
directors and consultants. The stock option committee has the authority to fix
the terms and conditions upon which each employee option is granted, but in no
event shall the term exceed ten years or generally be granted at less than 100%
of the fair market value of the stock at the date of grant.
On September 30, 1997, the Company entered into an agreement with each of the
holders of all of the common stock options then outstanding, which were
exercisable into 4,089,011 shares of WMS common stock, regarding option
adjustment in connection with the Midway spin-off. Each option holder agreed not
to exercise their stock option through the date of the Midway spin-off (see Note
1).
F-11
<PAGE> 57
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On the spin-off record date of March 31, 1998, the Company recorded a pre-tax
charge of $59,890,000 for the adjustment to stock options, pursuant to the
anti-dilution provision of the Company's stock option plans, to compensate the
holders for the lost opportunity value represented by the shares of Midway
distributed in the spin-off which option holders did not participate in. Of that
amount, cash payments on April 6, 1998 totaled $35,001,000, and 515,360 pre
spin-off shares of WMS common stock were issued valued at $14,974,000. An
additional $4,179,000 was paid in the fourth quarter of fiscal 1998 and $779,000
was accrued for the Company's portion of payroll tax. Expense related to the
adjustment of stock options that were not vested as of June 30, 1998 are being
recorded and paid consistent with the options' vesting schedule. During fiscal
1999 $3,037,000 of such expense was recorded. At June 30, 1999, the maximum
additional future pre-tax expense related to non-vested stock options is
$2,911,000 plus interest.
At the request of the Board of Directors, in lieu of receiving from the Company
the adjustment to stock option payment, Louis J. Nicastro, Chairman of the
Board, exercised all of his 629,554 WMS common stock options and sold the shares
of common stock on March 19, 1998. The cash received by the Company of
$13,437,000 from exercise of these options was then available for the stock
option adjustment payments. Louis J. Nicastro received $4,957,000 from the
Company as compensation for the difference between what the Company would have
paid him for his stock option adjustment and the net he received from exercise
and sale.
The Company accounts for stock options for purposes of determining net income in
accordance with APB No. 25. During fiscal 1997, $705,000 was recognized as stock
option compensation in connection with the modification by the Board of
Directors of the outstanding stock option terms because of the spin-off of the
Company's hotel and casino segments.
F-12
<PAGE> 58
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans for the three years
ended June 30, 1999 was as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding at June 30, 1996................................ 3,156 $24.50
Granted..................................................... 215 23.62
Exercise.................................................... (53) 20.48
Forfeited................................................... (50) 21.63
------
Outstanding at modification date (4/22/97).................. 3,268 24.54
------
Activity after 4/22/97 modification:
Outstanding as modified..................................... 4,114 19.49
Granted..................................................... 25 20.25
Exercised................................................... (17) 16.07
------
Outstanding at June 30, 1997................................ 4,122 19.51
Exercised................................................... (663) 21.22
------
Outstanding at modification date (4/6/98)................... 3,459 19.18
------
Activity after 4/6/98 modification:
Outstanding as modified..................................... 3,459 3.16
Granted..................................................... 1,041 5.16
Exercised................................................... (94) 2.57
------
Outstanding at June 30, 1998................................ 4,406 3.65
Granted..................................................... 456 9.93
Exercised................................................... (2,396) 3.38
Forfeited................................................... (137) 3.67
------
Outstanding at June 30, 1999................................ 2,329 5.16
======
</TABLE>
The following tables summarize information about stock options outstanding at
June 30, 1999:
Options outstanding
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL LIFE AVERAGE
EXERCISE PRICES (000) IN YEARS EXERCISE PRICE
- --------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$ 2.51 - $ 4.44.............................. 1,413 5.6 $ 3.48
5.25 - 7.88.............................. 565 8.9 5.63
10.63 - 15.00.............................. 351 9.8 11.17
-----
2.51 - 15.00.............................. 2,329 7.1 5.16
</TABLE>
Options exercisable
<TABLE>
<CAPTION>
NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE
EXERCISE PRICES (000) EXERCISE PRICE
- --------------- ----------- --------------
<S> <C> <C>
$2.51 - $4.44............................................... 1,066 $3.37
5.25 - 7.88............................................... 500 5.44
-----
2.51 - 7.88............................................... 1,566 4.03
</TABLE>
F-13
<PAGE> 59
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1999, 670,000 shares were available for future grants under the
plans. At June 30, 1998, 3,799,000 options with a weighted average exercise
price of $3.66 per share were exercisable. At June 30, 1997, 3,506,000 options
with a weighted average exercise price of $19.70 per share were exercisable.
On April 6, 1998, the Board of Directors reduced the exercise price of each
option by approximately 83.5% to reflect the initial post Midway spin-off
trading price of WMS common stock. This modification did not result in any
additional pro forma compensation expense.
On April 22, 1997, the Board of Directors increased the number of outstanding
stock options by approximately 26% for each option holder and reduced the
exercise price of each option by approximately 20% to reflect the dilution to
the outstanding stock options for the distribution of WHG Resorts & Casinos Inc.
to the shareholders of WMS.
The Company has a Treasury Share Bonus Plan for key employees covering all the
shares of common stock held in the treasury. The vesting and other terms of the
awards are flexible. No awards of treasury stock were outstanding at June 30,
1999 and 1998.
SFAS No. 123 regarding stock option plans permits the use of APB 25 but requires
the inclusion of certain pro forma disclosures in the footnotes. Pro forma net
income (loss) and net income (loss) per share adjusted for the pro forma expense
provisions of SFAS 123 were:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ -----------
<S> <C> <C> <C>
Pro forma net income (loss)................... $4,784,000 $(25,850,000) $28,367,000
Pro forma basic and diluted net income (loss)
per share................................... $ .16 $ (.98) $ 1.17
</TABLE>
The fiscal 1997 pro forma net income includes an after tax charge of $7,985,000
relating to the modification of options because of the spin-off of the hotel and
casino segments. The fiscal 1998 and 1997 pro forma net income (loss) includes
an after tax charge of $1,747,000 and $4,343,000, respectively, for the granting
of Midway options.
The pro forma fair value of each option grant and the 1997 modification is
estimated on the date of grant or modification using the Black-Scholes option
pricing model with the following weighted average assumptions used for
modifications and grants in fiscal 1999, 1998 and 1997: dividend yield 0% for
all three years; expected volatility of .80 in fiscal 1999 and .37 for fiscal
1998 and 1997; risk free interest rates of 5.95% in 1999, 5.65% in 1998 and 6.1%
in 1997; and expected life of the options of six years for 1999 and 1998 and
three years for 1997. The weighted average pro forma fair value, using the
Black-Scholes assumptions noted above, of the options granted during fiscal
1999, 1998 and 1997 was $7.22, $2.36 and $5.33, respectively.
NOTE 10: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit and market risk consist primarily of cash equivalents and trade notes and
accounts receivable. By policy, the Company places its cash equivalents and
short-term investments only in high credit quality securities and limits the
amounts invested in any one security. At June 30, 1999, 25% of trade accounts
receivable are from sale of games to the Company's distributors located
primarily throughout the United States and Western Europe and because of the
number and geographic distribution, concentration is limited. Foreign sales are
typically made in U.S. dollars and typically on the basis of a letter of credit.
The accounts and notes receivable from the sale of gaming devices are generally
from a large number of customers with no significant concentration other than in
Nevada.
The amount reported for cash equivalents are considered to be a reasonable
estimate of their fair value.
F-14
<PAGE> 60
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: LEASE COMMITMENTS
The Company leases certain of its office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 1999 as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000.................................................... $ 823
2001.................................................... 306
2002.................................................... 35
2003.................................................... 2
------
$1,166
======
</TABLE>
Rent expense for fiscal 1999, 1998 and 1997 was $1,837,000, $1,699,000 and
$1,414,000, respectively.
NOTE 12: PATENT LITIGATION
The Company's subsidiary, WMS Gaming Inc. ("WGI"), is currently involved in
patent infringement litigation with its competitor International Game Technology
("IGT") regarding a certain slot machine component patent. During fiscal 1997,
the U.S. District Court for the Northern District of Illinois ruled that WMS
Gaming's Model 400 reel spinning slot machine infringed IGT's patent and issued
a permanent injunction prohibiting the sale of Model 400 and entered a judgment
in favor of IGT and against WGI in the amount of $32,845,000 in the Model 400
slot machine action. The same District Court issued a preliminary injunction
prohibiting the sale of WMS Gaming's reel spinning slot machine Model 401. The
Model 400 and Model 401 operate differently and each machine is based on
separate and distinct methods of operation, each corresponding to separate
patents granted by the U.S. Patent and Trademark Office to WGI. WGI appealed the
decisions of the District Court to the U.S. Court of Appeals for the Federal
Circuit. In July 1999 the U.S. Court of Appeals for the Federal Circuit rendered
its decision in the Model 400 and Model 401 litigation. In the Model 400
litigation, the appellate court reversed the district court's holding of literal
infringement, affirmed the district court's holding of infringement under the
doctrine of equivalents, vacated the district court's holding of willful
infringement, affirmed the district court's holding that IGT's patent is not
invalid, and affirmed the amount of actual damages of $10,753,550 but vacated
the damages award to the extent it was based on trebling for willful
infringement. The appellate court remanded the case to the district court to
reconsider the issue of willful infringement in light of the appellate court's
finding of no literal infringement. In the Model 401 litigation, the appellate
court vacated the preliminary injunction and remanded the case to the district
court for further proceedings consistent with its ruling. The Company has filed
petitions with the Court of Appeals for rehearing of certain aspects of its
decisions.
Due to the fact that obtaining a complete reversal before the Federal Circuit
occurs in only a minority of the patent cases it reviews, as of December 31,
1996, management accrued $61,925,000 to provide for the judgment and other costs
and losses. The $61,925,000 loss provision, as adjusted, provides for the
judgment award of $32,845,000 and, among other things, realization of inventory,
receivables and legal fees. The major components of the balance of the provision
were $6,950,000 for sales returns and uncollectible receivables and $16,300,000
for excess and unusable reel spinning slot machine inventory. Through June 30,
1999, $18,803,000 has been charged to the provisions primarily for uncollectible
receivables, inventory and legal fees.
The slot machines component which is the subject of the litigation is only used
in reel spinning slot machines and not in video lottery terminals and other
video gaming machines. If the Company is unable to obtain a complete reversal of
the District Court judgment on further appeal, and is unable to further
F-15
<PAGE> 61
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
develop or acquire non-infringing alternate devices or obtain a license to use
the patent, further development of the Company's reel spinning slot machine
business may be adversely affected.
NOTE 13: PENSION PLANS
During fiscal 1992 and 1998, the Company suspended the salary and hourly defined
benefit plans and substituted defined contribution employee retirement savings
plans. The components of net periodic pension cost of the defined benefit plans
were:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service costs............................................... $ -- $ 107 $ 185
Interest cost............................................... 289 372 395
Expected return on plan assets.............................. (112) (155) (185)
Net amortization of transition and other.................... 2 (43) (13)
----- ----- -----
Benefit cost................................................ $ 179 $ 281 $ 382
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 4,683 $ 4,724
Service cost................................................ -- 77
Interest cost............................................... 288 369
Actuarial (gains) loss...................................... (296) 580
Benefit paid................................................ (1,011) (1,067)
------- -------
Benefit obligation at end of year........................... 3,664 4,683
------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 2,790 3,184
Actual return on plan assets................................ 120 190
Company contributions....................................... 141 518
Benefits paid and expenses.................................. (1,031) (1,102)
------- -------
Fair value of plan assets at end of year.................... 2,020 2,790
------- -------
Funded status of the plan (underfunded)..................... (1,644) (1,893)
Unrecognized amounts........................................ 903 1,273
------- -------
Accrued benefit cost........................................ $ (741) $ (620)
======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF JUNE 30
Discount rate............................................... 7.5% 7.5%
Expected return on plan assets.............................. 9.0 9.0
AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSISTS
OF:
Accrued benefit liability................................... $(1,644) $(1,893)
Intangible asset............................................ 903 1,273
------- -------
Net amount recognized....................................... $ (741) $ (620)
======= =======
</TABLE>
The Company has two defined contribution employee retirement savings plans.
These defined contribution plans cover certain hourly and salaried employees of
the amusement game and gaming businesses and corporate headquarters. The
Company's contributions to these plans are based on employee participation with
certain limitations. The Company may change any of the factors which determine
the Company's contribution to such plans. A subsidiary is required to make
contributions on behalf of unionized
F-16
<PAGE> 62
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employees to defray part of the costs of the multi-employer pension plan
established by its labor union. Such contributions are computed using a fixed
charge per employee. Contributions to the defined contribution and
multi-employer plans for fiscal 1999, 1998 and 1997 were $303,000, $207,000 and
$181,000, respectively.
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1998 1998 1999 1999
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL 1999 QUARTERS
Revenues....................................... $26,799 $38,991 $48,954 $72,546
Gross profit................................... 6,214 9,166 14,539 26,759
Net income (loss).............................. (1,644) (1,235) 1,837 6,295
Per share of common stock:
Basic :
Net income (loss)............................ $ (.06) $ (.04) $ .06 $ .21
------- ------- ------- -------
Shares used.................................. 27,988 29,039 30,055 30,196
------- ------- ------- -------
Diluted:
Net income (loss)............................ $ (.06) $ (.04) $ .06 $ .20
------- ------- ------- -------
Shares used.................................. 27,988 29,039 30,055 31,168
------- ------- ------- -------
</TABLE>
The December 31, 1998, March 31, 1999 and June 30, 1999 quarters include an
after-tax charge of $375,000, $.01 per share, $330,000, $.01 per share and
$1,178,000, $.04 per share, respectively, for the spin-off related adjustment to
WMS outstanding common stock options vesting during each quarter.
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1997 1997 1998 1998
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL 1998 QUARTERS
Revenues...................................... $20,035 $23,397 $ 20,511 $35,047
Gross profit.................................. 5,350 5,767 4,308 6,594
Loss from continuing operations............... (2,989) (1,502) (43,350) (983)
Discontinued operations
Video games segment......................... 6,277 15,947 4,522 --
------- ------- -------- -------
Net income (loss)............................. $ 3,288 $14,445 $(38,828) $ (983)
======= ======= ======== =======
Basic and diluted per share of common stock:
Loss from continuing operations............. $ (.12) $ (.06) $ (1.62) $ (.04)
------- ------- -------- -------
Net income (loss)........................... $ .13 $ .54 $ (1.45) $ (.04)
------- ------- -------- -------
Average number of shares outstanding........ 24,549 26,471 26,843 27,944
------- ------- -------- -------
</TABLE>
The March 31, 1998 quarter includes an after-tax charge of $39,917,000, $1.49
per share, for the spin-off related adjustment to WMS outstanding common stock
options. The June 30, 1998 quarter includes an after-tax gain of $530,000, $.02
per share, on the sale of non current marketable securities.
F-17
<PAGE> 63
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: OPERATING SEGMENTS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES (ALL EXTERNAL)
Gaming............................................... $125,956 $ 56,788 $ 33,613
Pinball and cabinets................................. 46,109 38,251 42,983
Contract manufacturing............................... 15,225 3,951 --
-------- -------- --------
Total revenues....................................... $187,290 $ 98,990 $ 76,596
======== ======== ========
GROSS PROFIT
Gaming............................................... $ 50,380 $ 17,338 $ 6,898
Pinball and cabinets................................. 4,408 4,068 9,552
Contract manufacturing............................... 1,890 613 --
-------- -------- --------
Total gross profit................................... $ 56,678 $ 22,019 $ 16,450
======== ======== ========
OPERATING INCOME (LOSS)
Gaming............................................... $ 16,786 $ (9,590) $(12,510)
Pinball and cabinets................................. (6,988) (7,761) (2,997)
Contract manufacturing............................... 1,257 347 --
All other:
Provisions related to patent litigation (Note
12)............................................. -- -- (61,925)
Adjustment to common stock options (Note 9)........ (3,037) (59,890) --
Unallocated general corporate expenses............. (3,071) (1,770) (1,884)
-------- -------- --------
Total operating income (loss)........................ 4,947 (78,664) (79,316)
Unallocated amounts:
Interest and other income.......................... 3,525 4,410 5,661
Interest expense................................... -- -- (3,443)
-------- -------- --------
Income (loss) from continuing operations before
income taxes....................................... $ 8,472 $(74,254) $(77,098)
======== ======== ========
TOTAL ASSETS
Gaming............................................... $106,092 $ 70,517 $ 53,225
Pinball and cabinets................................. 34,931 30,855 51,930
Contract manufacturing............................... 14,841 14,940 --
All other:
Corporate.......................................... 82,215 91,210 111,047
Net assets of discontinued operations.............. -- -- 90,713
-------- -------- --------
Total assets......................................... $238,079 $207,522 $306,915
======== ======== ========
DEPRECIATION
Gaming............................................... $ 5,941 $ 2,321 $ 2,529
Pinball and cabinets................................. 1,502 2,967 3,448
Contract manufacturing............................... 1,300 203 --
All other:
Corporate.......................................... 9 151 302
-------- -------- --------
Total depreciation................................... $ 8,752 $ 5,642 $ 6,279
======== ======== ========
</TABLE>
F-18
<PAGE> 64
WMS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Gaming............................................... $ 24,408 $ 2,152 $ 3,683
Pinball, novelty and cabinets........................ 2,054 4,315 1,953
Contract manufacturing............................... 2,155 -- --
All other:
Corporate.......................................... 1,978 30 19
-------- -------- --------
Total capital expenditures........................... $ 30,595 $ 6,497 $ 5,655
======== ======== ========
Sales to major customers (Pinball and cabinets
segment)........................................... $ 12,811 $ 7,960 $ 12,099
-------- -------- --------
Export sales......................................... $ 34,594 $ 24,364 $ 33,731
-------- -------- --------
</TABLE>
F-19
<PAGE> 65
- --------------------------------------------------------------------------------
[WMS LOGO]
WMS INDUSTRIES INC.
3,500,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
September , 1999
CIBC WORLD MARKETS
PRUDENTIAL SECURITIES
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses payable by the registrant in
connection with the registration and issuance of the securities being registered
hereunder, excluding underwriting discounts and commission. As indicated below,
all amounts shown are estimates except for the Commission and NASD registration
fee.
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission...... $ 17,724.17
NASD Filing Fee............................................. 6,875.60
Accounting Fees and Expenses................................ [40,000.00]
Legal Fees and Expenses..................................... [200,000.00]
NYSE Listing Fees........................................... [15,000.00]
Gaming Regulatory Investigation Fees........................ [25,000.00]
Blue Sky Fees and Expenses.................................. [5,000.00]
Printing Expenses........................................... [150,000.00]
Miscellaneous............................................... [40,400.23]
------------
Total................................................ $[500,000.00]
============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's authority to indemnify its officers and directors is governed
by the provisions of Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL"), by its Certificate of Incorporation and bylaws and by
indemnification agreements entered into with each of its directors.
Under Section 145 of the DGCL, directors and officers as well as other employees
and individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation (a
"derivative action")) if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
registrant, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with defense or settlement of a derivative action, and the DGCL
requires court approval before there can be any indemnification where the person
seeking indemnification has been found liable to the registrant.
The Certificate of Incorporation and bylaws of the registrant provide that it
shall, to the fullest extent permitted by Section 145 of the DGCL, (i) indemnify
any and all persons whom it shall have power to indemnify under said section
from and against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and (ii) advance expenses related
thereto to any and all said persons. The indemnification and advancement of
expenses provided for is not considered to be exclusive of any other rights to
which those indemnified may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in their
official capacities and as to action in another capacity while holding their
offices, and shall continue as to persons who have ceased to be directors,
officers, employees or agents and shall inure to the benefit of those person's
heirs, executors and administrators. In addition, the Certificate of
Incorporation provides for the elimination of personal liability of directors of
the registrant to the registrant or its stockholders for monetary damages for
breach of fiduciary duty as a director, to the fullest extent permitted by the
DGCL, as amended and supplemented.
The indemnification agreements provide for the indemnification of officers and
directors to the fullest extent permitted by the laws of the State of Delaware
and obligate the registrant to provide the maximum
II-1
<PAGE> 67
protection allowed under Delaware law. In addition, these agreements supplement
and increase the laws' protection in certain respects.
The Underwriting Agreement between CIBC World Markets Corp. and the registrant
filed as Exhibit 1 hereto provides for the indemnification of officers and
directors by CIBC World Markets Corp. under certain circumstances.
ITEM 16. EXHIBITS.
The following exhibits are being furnished with this filing or incorporated by
reference in this filing:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1 Form of Underwriting Agreement.
4.1 Specimen certificate of common stock, incorporated by
reference to Exhibit 4(a) to the registrant's Annual Report
on Form 10-K (file no. 1-8300) for the fiscal year ended
June 30, 1994.
4.2 Rights Agreement dated as of March 5, 1998 between the
registrant and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to the registrant's
Registration Statement on Form 8-A (file no. 1-8300), as
filed with the Commission on March 25, 1998.
5* Opinion of Shack & Siegel, P.C., counsel for registrant.
23.1* Consent of Shack & Siegel, P.C.
23.2 Consent of Ernst & Young LLP.
24* Power of Attorney.
99.1* Worldwide Merchandising Agreement/License Agreement Summary
and License Agreement between WMS Gaming Inc., Hasbro, Inc.
and Hasbro International, Inc. dated as of the first day of
September, 1997. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment filed
separately with the Commission.
99.2* Amendment to License Agreement between WMS Gaming Inc.,
Hasbro, Inc. and Hasbro International, Inc. dated 1998.
Portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission.
99.3* Employment Agreement between Terence M. Dunleavy and the
registrant dated June 1, 1999.
99.4* Employment Agreement between Kevin L. Verner and the
registrant dated June 1, 1999.
99.5* Letter agreement dated June 15, 1999 amending Sales
Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and Midway Games Inc.
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report under Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report under Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
2. The undersigned registrant hereby undertakes that: (a) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of
II-2
<PAGE> 68
this Registration Statement as of the time it was declared effective; and (b)
for the purpose of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
3. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement (File No. 333-83021) to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Palm Beach, State of
Florida on this 8th day of September, 1999.
WMS INDUSTRIES INC.
By: /s/ LOUIS J. NICASTRO
---------------------------------------
Louis J. Nicastro,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement (File No. 333-83021) has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<C> <C> <S>
/s/ LOUIS J. NICASTRO September 8, 1999 Chairman of the Board, President and
- ------------------------------------------ Chief Executive Officer (Principal
Louis J. Nicastro Executive Officer)
/s/ HAROLD H. BACH, JR.* September 8, 1999 Vice President -- Finance, Chief
- ------------------------------------------ Financial Officer and Treasurer
Harold H. Bach, Jr. (Principal Financial and Accounting
Officer)
/s/ NORMAN J. MENELL* September 8, 1999 Vice Chairman of the Board
- ------------------------------------------
Norman J. Menell
/s/ WILLIAM C. BARTHOLOMAY* September 8, 1999 Director
- ------------------------------------------
William C. Bartholomay
/s/ WILLIAM E. MCKENNA* September 8, 1999 Director
- ------------------------------------------
William E. McKenna
/s/ NEIL D. NICASTRO* September 8, 1999 Director
- ------------------------------------------
Neil D. Nicastro
/s/ HARVEY REICH* September 8, 1999 Director
- ------------------------------------------
Harvey Reich
/s/ DAVID M. SATZ, JR.* September 8, 1999 Director
- ------------------------------------------
David M. Satz, Jr.
/s/ IRA S. SHEINFELD* September 8, 1999 Director
- ------------------------------------------
Ira S. Sheinfeld
*By: /s/ ORRIN J. EDIDIN
------------------------------------
Orrin J. Edidin
Attorney-In-Fact
</TABLE>
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXH. DESCRIPTION
NO.- -----------
<S> <C>
1 Form of Underwriting Agreement.
4.1 Specimen certificate of common stock, incorporated by
reference to Exhibit 4(a) to the registrant's Annual Report
on Form 10-K (file no. 1-8300) for the fiscal year ended
June 30, 1994.
4.2 Rights Agreement dated as of March 5, 1998 between the
registrant and The Bank of New York, as Rights Agent,
incorporated by reference to Exhibit 1 to the registrant's
Registration Statement on Form 8-A (file no. 1-8300), as
filed with the Commission on March 25, 1998.
5* Opinion of Shack & Siegel, P.C., counsel for registrant.
23.1* Consent of Shack & Siegel, P.C.
23.2 Consent of Ernst & Young LLP.
24* Power of Attorney.
99.1* Worldwide Merchandising Agreement/License Agreement Summary
and License Agreement between WMS Gaming Inc., Hasbro, Inc.
and Hasbro International, Inc. dated as of the first day of
September, 1997. Portions of this exhibit have been omitted
pursuant to a request for confidential treatment filed
separately with the Commission.
99.2* Amendment to License Agreement between WMS Gaming Inc.,
Hasbro, Inc. and Hasbro International, Inc. dated 1998.
Portions of this exhibit have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission.
99.3* Employment Agreement between Terence M. Dunleavy and the
registrant dated June 1, 1999.
99.4* Employment Agreement between Kevin L. Verner and the
registrant dated June 1, 1999.
99.5* Letter agreement dated June 15, 1999 amending Sales
Agreement dated as of April 6, 1998 between Williams
Electronics Games, Inc. and Midway Games Inc.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
3,500,000 Shares
WMS Industries Inc.
Common Stock
UNDERWRITING AGREEMENT
______________, 1999
CIBC World Markets Corp.
Prudential Securities Incorporated
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
WMS Industries Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions contained herein, to sell to you and the
other underwriters named on Schedule I to this Agreement (the "Underwriters"),
for whom you are acting as representatives (the "Representatives"), an aggregate
of 3,500,000 shares (the "Firm Shares") of the Company's common stock, par value
$0.50 per share (the "Common Stock"). The respective amounts of the Firm Shares
to be purchased by each of the several Underwriters are set forth opposite their
names on Schedule I hereto. In addition, the Company proposes to grant to the
Underwriters an option to purchase up to an additional 525,000 shares (the
"Option Shares") of Common Stock from it for the purpose of covering
over-allotments in connection with the sale of the Firm Shares. The Firm Shares
and the Option Shares are together called the "Shares."
1. Sale and Purchase of the Shares.
On the basis of the representations, warranties and agreements
contained in, and subject to the terms and conditions of, this Agreement:
<PAGE> 2
(a) The Company agrees to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at a price of $_____ per share (the
"Initial Price"), the number of Firm Shares set forth opposite the
name of such Underwriter on Schedule I to this Agreement, subject to
adjustment in accordance with Section 10 hereof.
(b) The Company grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the Option
Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted
by the Representatives to eliminate fractions) of the total number of
Option Shares to be purchased by the Underwriters as such Underwriter
is purchasing of the Firm Shares. Such option may be exercised only to
cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on
or before 12:00 noon, New York City time, on the business day before
the Firm Shares Closing Date (as defined below), and from time to time
thereafter within 30 days after the date of this Agreement, in each
case upon written or telegraphic notice, or verbal or telephonic
notice confirmed by written or telegraphic notice, by the
Representatives to the Company no later than 12:00 noon, New York City
time, on the business day before the Firm Shares Closing Date or at
least two business days before the Option Shares Closing Date (as
defined below), as the case may be, setting forth the number of Option
Shares to be purchased and the time and date (if other than the Firm
Shares Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the Firm
Shares to the Representatives for the respective accounts of the Underwriters,
and payment of the purchase price by certified or official bank check or checks
payable in New York Clearing House (same day) funds drawn to the order of the
Company, against delivery of the certificate(s) therefor to the Representatives,
shall take place at the offices of Morgan, Lewis & Bockius LLP, 101 Park Avenue,
New York, New York 10178, at 10:00 a.m., New York City time, on the third
business day following the date of this Agreement, or at such time and date, not
later than 10 business days after the date of this Agreement, as shall be agreed
upon by the Company and the Representatives (such time and date of delivery and
payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised, delivery by the Company of the Option Shares to the Representatives
for the respective accounts of the Underwriters and payment of the purchase
price by certified or official bank check or checks payable in New York Clearing
House (same day) funds to the Company shall take place at the offices of Morgan,
Lewis & Bockius LLP specified above at the time and on the date (which may be
the same date as, but in no event shall be earlier than, the Firm Shares Closing
Date) specified in the notice referred to in Section 1(b) (such time and date of
delivery and payment are called the "Option Shares Closing Date"). The Firm
Shares Closing Date and the Option Shares Closing Date are called, individually,
a "Closing Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such
names and shall be in such denominations as the Representatives shall request
at least two full business days before the
-2-
<PAGE> 3
Firm Shares Closing Date or, in the case of Option Shares, on the day of
notice of exercise of the option as described in Section 1(b) and shall be made
available to the Representatives for checking and packaging, at such place as is
designated by the Representatives, on the full business day before the Firm
Shares Closing Date (or the Option Shares Closing Date in the case of the Option
Shares).
3. Registration Statement and Prospectus; Public Offering. The
Company has prepared and filed in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a Registration Statement (as hereinafter
defined) on Form S-3 (No. 333-83021), including a preliminary prospectus
relating to the Shares, and such amendments thereto as may have been required to
the date of this Agreement. Copies of such Registration Statement (including all
amendments thereto) and of the related Preliminary Prospectus (as hereinafter
defined) have heretofore been delivered by the Company to you. The term
"Preliminary Prospectus" as used in this Agreement means any preliminary
prospectus (as described in Rule 430 of the Rules) included at any time as a
part of the Registration Statement or filed with the Commission by the Company
with the consent of the Representatives pursuant to Rule 424(a) of the Rules.
The term "Registration Statement" as used in this Agreement means the initial
registration statement, including all exhibits, financial schedules and
information deemed to be a part of the Registration Statement through
incorporation by reference or otherwise, as amended at the time and on the date
it became effective (the "Effective Date") and as thereafter amended by
post-effective amendments. If the Company has filed an abbreviated registration
statement to register additional Shares pursuant to Rule 462(b) under the Rules
(the "462(b) Registration Statement") then any reference herein to the
Registration Statement shall be deemed to include such 462(b) Registration
Statement. The term "Prospectus" as used in this Agreement means the prospectus
in the form included in the Registration Statement at the time of effectiveness
or, if Rule 430A of the Rule is relied on, the term Prospectus shall also
include the final prospectus filed with the Commission pursuant to Rule 424(b)
of the Rules.
The Company understands that the Underwriters propose to make a
public offering of the Shares, as set forth in and pursuant to the Prospectus,
as soon after the Effective Date and the date of this Agreement as the
Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each Preliminary Prospectus, and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Representatives).
4. Representations and Warranties of the Company. The Company
hereby represents and warrants to, and agrees with, each Underwriter as follows:
(a) On the Effective Date the Registration Statement complied, and
on the date of the Prospectus, the date any post-effective amendment
to the Registration Statement becomes effective, the date any
supplement or amendment to the Prospectus is filed with the Commission
and each Closing Date, the Registration Statement and the Prospectus
(and any amendment thereof or supplement thereto) will comply, in all
material respects, with the applicable provisions of the Securities
Act and the Rules and the Securities
-3-
<PAGE> 4
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder; the Registration
Statement did not, as of the Effective Date, contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; and on the other dates referred to
above, neither the Registration Statement nor the Prospectus nor any
amendment thereof or supplement thereto will contain any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part
of the Registration Statement or any amendment thereto or pursuant to
Rule 424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material
respects with the applicable provisions of the Securities Act and the
Rules and did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading.
Notwithstanding the foregoing, none of the representations and
warranties in this paragraph 4(a) shall apply to statements in, or
omissions from, the Registration Statement or the Prospectus made in
reliance upon, and in conformity with, information herein or otherwise
furnished in writing by the Representatives on behalf of the several
Underwriters for use in the Registration Statement or the Prospectus.
With respect to the preceding sentence, the Company acknowledges that
the only information furnished in writing by the Representatives on
behalf of the several Underwriters for use in the Registration
Statement or the Prospectus is the information referred to in Section
7(b) hereof.
(b) The Registration Statement is effective under the Securities
Act and no stop order preventing or suspending the effectiveness of
the Registration Statement or preventing or suspending the use of the
Prospectus has been issued and no proceedings for that purpose have
been instituted or are threatened under the Securities Act; any
required filing of the Prospectus and any supplement thereto pursuant
to Rule 424(b) of the Rules has been or will be made in the manner and
within the time period required by such Rule 424(b).
(c) The documents incorporated by reference in the Registration
Statement and the Prospectus, at the time they were filed with the
Commission, complied in all material respects with the requirements of
the Exchange Act and, when read together and with the other
information in the Registration Statement and the Prospectus, do not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The financial statements of the Company (including all notes
and schedules thereto) included or incorporated by reference in the
Registration Statement and Prospectus present fairly the financial
position, the results of operations, the cash flows and the changes in
stockholders' equity and the other information purported to be shown
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<PAGE> 5
therein of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements
and related schedules and notes have been prepared in conformity with
generally accepted accounting principles in the United States applied
on a consistent basis throughout the periods involved, and all
adjustments necessary for a fair presentation of the results for such
periods have been made. The summary and selected financial data
included in the Prospectus present fairly the information shown
therein as at the respective dates and for the respective periods
specified and the summary and selected financial data have been
presented on a basis consistent with the consolidated financial
statements so set forth in the Prospectus and other financial
information.
(e) Ernst & Young LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are and, during the periods
covered by their reports, were independent public accountants as
required by the Securities Act and the Rules.
(f) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Each
subsidiary of the Company is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of
such subsidiary's incorporation. The Company and each of its
subsidiaries is duly qualified to do business and is in good standing
as a foreign corporation in each jurisdiction in which the nature of
the business conducted by it or location of the assets or properties
owned, leased or licensed by it requires such qualification, except
for such jurisdictions where the failure to so qualify would not have
a material adverse effect on the assets, properties, business, results
of operations or financial condition of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"). Except
for its ownership of WMS Gaming (Canada) Ltd., which has no
significant assets or operations, and spare parts used to service VLTs
in Canada, the Company does not own, lease or license any asset or
property outside the United States of America. The Company and each of
its subsidiaries has all requisite corporate power and authority, and
all necessary authorizations, approvals, consents, orders, licenses,
certificates and permits of and from all governmental or regulatory
bodies or any other person or entity (collectively, the "Permits"), to
own, lease and license its assets and properties and conduct its
businesses, all of which are valid and in full force and effect, as
described in the Registration Statement and the Prospectus except
where the failure to obtain or maintain such Permits would not have a
Material Adverse Effect; the Company and each of its subsidiaries has
fulfilled and performed in all material respects all of its material
obligations with respect to such Permits, and no event has occurred
that allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of
the rights of the Company thereunder. Except as may be required under
the Securities Act and state and foreign Blue Sky laws and gaming
laws, no other Permits are required to enter into, deliver and perform
this Agreement, and to issue and sell the Shares.
(g) All outstanding shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued and are
fully paid and nonassessable,
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<PAGE> 6
and except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of the subsidiaries are owned by
the Company either directly or through direct or indirect wholly owned
subsidiaries, free and clear of any security interests, claims, liens
or encumbrances.
(h) The Company and its subsidiaries own or possess adequate and
enforceable rights to use all trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications,
patents, licenses, know-how and other similar rights and proprietary
knowledge (collectively, "Intangibles") described in the Prospectus as
being owned by them, including registrations or licenses with respect
to the names "Williams", "WMS Gaming" and "Bally". Except as described
in the Prospectus, neither the Company nor any of its subsidiaries has
received any notice of, nor is aware of, any infringement of or
conflict with asserted rights of others with respect to any
Intangibles.
(i) The Company and its subsidiaries have good and marketable
title in fee simple to all items of real property and good and
marketable title to all personal property described in the Prospectus
as being owned by them and any real property and buildings described
in the Prospectus as being held under lease by the Company or any of
its subsidiaries are held by it under valid, existing and enforceable
leases, free and clear of all liens, encumbrances, claims, security
interests and defects, except such as are described in the
Registration Statement and the Prospectus or would not have a Material
Adverse Effect.
(j) There is no litigation or governmental or other proceeding or
investigation before any court or before or by any public body or
board pending or, to the Company's knowledge, threatened (and the
Company does not know of any basis therefor) against, or involving the
assets, properties or business of, the Company or its subsidiaries or
to which the Company or its subsidiaries is subject which might have a
Material Adverse Effect, affect the consummation of this Agreement or
be required to be disclosed in the Registration Statement and the
Prospectus that is not so disclosed.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
described therein, (i) there has not been any material adverse change
with regard to the assets or properties, business, results of
operations, or financial condition of the Company, (ii) neither the
Company nor any of its subsidiaries has sustained any loss or
interference with its assets, business or properties (whether owned or
leased) from fire, explosion, earthquake, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or any
court or legislative or other governmental action, order or decree
which would have a Material Adverse Effect; and (iii) since the date
of the latest balance sheet included in the Registration Statement and
the Prospectus, except as reflected therein, neither the Company nor
any of its subsidiaries has (a) issued any securities except for
issuances pursuant to the Company's stock option plans made in the
ordinary course and pursuant to a settlement with a former employee or
incurred any liability or obligation, direct or contingent, for
borrowed money, except such liabilities or obligations incurred in the
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<PAGE> 7
ordinary course of business, (b) entered into any transaction not
in the ordinary course of business or (c) declared or paid any
dividend or made any distribution on any shares of its stock or
redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its stock.
(l) There is no document, contract or other agreement of a
character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required by the Securities Act or
the Rules. Each description of a document, contract or other agreement
in the Registration Statement and the Prospectus accurately reflects
in all material respects the terms of the underlying document,
contract or agreement. Each agreement described in the Registration
Statement and Prospectus or listed in the Exhibits to the Registration
Statement or incorporated by reference therein is in full force and
effect and is valid and enforceable by and against the Company or any
subsidiary of the Company, as the case may be, in accordance with its
terms except (i) as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by
general equitable principles and (ii) to the extent that rights to
indemnity or contribution may be limited by Federal and state
securities laws or the public policy underlying such laws. Neither the
Company nor any subsidiary of the Company, if such subsidiary is a
party, nor to the Company's knowledge, any other party is in default
in the observance or performance of any term or obligation to be
performed by it under any such agreement, and no event has occurred
which with notice or lapse of time or both would constitute such a
default, in any such case which default or event would have a Material
Adverse Effect. No default exists, and no event has occurred which
with notice or lapse of time or both would constitute a default, in
the due performance and observance by the Company or any subsidiary of
the Company, if the subsidiary is a party thereto, of any other
agreement or instrument to which the Company or any subsidiary of the
Company is a party or by which it or its properties or business may be
bound or affected, which default or event would have a Material
Adverse Effect.
(m) None of the Company or its subsidiaries is in violation of any
term or provision of its charter or by-laws or of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation,
where the consequences of such violation would have a Material Adverse
Effect.
(n) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or require
any consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of
the Company or any of its subsidiaries pursuant to the terms of, any
indenture, mortgage, deed of trust or other
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<PAGE> 8
agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their properties or businesses is bound, or any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation applicable to the Company or any of its subsidiaries, or
violate any provision of the charter or by-laws of the Company or any
of its subsidiaries, except for such consents or waivers as have
already been obtained and are in full force and effect or the absence
of which would not have a Material Adverse Effect.
(o) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus. The
certificates evidencing the shares are in due and proper legal form
and have been duly authorized for issuance by the Company. All of the
issued and outstanding shares of Common Stock have been duly and
validly issued and are fully paid and nonassessable. There are no
statutory preemptive or other similar rights to subscribe for or to
purchase or acquire any shares of Common Stock of the Company or any
of its subsidiaries or any such rights pursuant to its Articles of
Incorporation or by-laws or any agreement or instrument to or by which
the Company or any of its subsidiaries is a party or is bound. The
Shares, when issued and sold pursuant to this Agreement, will be duly
and validly issued, fully paid and nonassessable and none of them will
be issued in violation of any preemptive or other similar right.
Except as disclosed in the Registration Statement and the Prospectus,
there is no outstanding option, warrant or other right calling for the
issuance of, and there is no commitment, plan or arrangement to issue,
any shares of stock of the Company or any security convertible into,
or exercisable or exchangeable for, such stock. The Common Stock and
the Shares conform in all material respects to all statements in
relation thereto contained in the Registration Statement and the
Prospectus.
(p) No holder of any security of the Company has the right to have
any security owned by such holder included in the Registration
Statement or to demand registration of any security owned by such
holder during the period ending 90 days after the date of this
Agreement. Each director and executive officer of the Company has
delivered to the Representatives a written lock-up agreement in the
form attached to this Agreement (a "Lock-up Agreement").
(q) All necessary corporate action has been duly and validly taken
by the Company to authorize the execution, delivery and performance of
this Agreement and the issuance and sale of the Shares by the Company.
This Agreement has been duly and validly authorized, executed and
delivered by the Company and constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in
accordance with its terms, except (i) as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles and (ii) to the extent
that rights to indemnity or contribution under this Agreement may be
limited by Federal and state securities laws or the public policy
underlying such laws.
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<PAGE> 9
(r) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the net proceeds thereof
as described in the Prospectus, will not be, an "investment company"
or a person directly or indirectly controlled by an "investment
company," as defined in the Investment Company Act of 1940, as
amended.
(s) None of the Company or any of its subsidiaries is involved in
any labor dispute and, to the knowledge of the Company, no such
dispute is threatened, which dispute would have a Material Adverse
Effect. The Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or
contractors which would have a Material Adverse Effect. The Company is
not aware of any threatened or pending litigation between the Company
or any of its subsidiaries and any of its executive officers which, if
adversely determined, could have a Material Adverse Effect and, has no
reason to believe that such officers will not remain in the employment
of the Company, except as described in the Prospectus.
(t) No transaction has occurred between or among the Company and
any of its officers, directors, holders of five percent or more of the
capital stock of the Company or any affiliate or affiliates of any
such officer, or director or holder that is required to be described
in and is not described in the Registration Statement and the
Prospectus.
(u) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Stock to facilitate the sale
or resale of any of the Shares.
(v) The books, records and accounts of the Company and its
subsidiaries accurately and fairly reflect, in reasonable detail, the
transactions in, and dispositions of, the assets of, and the results
of operations of, the Company and its subsidiaries. The Company and
each of its subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles in the United States and to
maintain asset accountability, (iii) access to assets is permitted
only in accordance with management's general or specific authorization
and (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(w) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; all policies of insurance and
fidelity or surety bonds insuring the Company or any of its
subsidiaries or the Company's or its subsidiaries' respective
businesses, assets, employees, officers and directors are in full
force and effect; the Company and each of its subsidiaries are in
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<PAGE> 10
compliance with the terms of such policies and instruments in all
material respects; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect
in each case whether or not arising from transactions in the ordinary
course of business. Neither the Company nor any of its subsidiaries
has been denied any insurance coverage which it has sought or for
which it has applied during the last two fiscal years.
(x) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated required to be obtained or performed
by the Company (except such additional steps as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") or may
be necessary to qualify the Shares for public offering by the
Underwriters under the state securities or Blue Sky laws) has been
obtained or made and is in full force and effect.
(y) There are no affiliations with the NASD among the Company's
officers, directors or, to the best of the knowledge of the Company,
any holders of five percent or more of the capital stock of the
Company, except as set forth in the Registration Statement or
otherwise disclosed in writing to the Representatives of the
Underwriters and except that the Company makes no representation as to
the NASD affiliation of FMR Corp.
(z) The Company and each of its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local rules,
laws and regulations which are applicable to its business relating to
the use, treatment, disposal of toxic substances and protection of
human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) have received and are in compliance with all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses, (iii) have
not received notice of any actual or potential liability or asserted
claim under Environmental Laws, (iv) to the Company's knowledge, no
facts currently exist that would require the Company or its
subsidiaries to make future material capital expenditures to comply
with Environmental Laws and (v) no property which is or has been
owned, leased or occupied by the Company or any of its subsidiaries
has been designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation of Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et. seq.) or otherwise designated as
a contaminated site under applicable state or local law. None of the
company or any of its subsidiaries has been named as a "potentially
responsible party" under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
(aa) The Company and each of its subsidiaries has filed all
Federal, local and foreign tax returns which are required to be filed
through the date hereof, or has received extensions thereof, and has
paid all taxes shown on such returns and all assessments received
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<PAGE> 11
by it to the extent that the same are material and have become due
and there are no tax audits or investigations pending, which if
adversely determined would have a Material Adverse Effect; nor are
there any material proposed additional tax assessments against the
Company or any of its subsidiaries.
(bb) The Shares have been duly authorized for listing on the New
York Stock Exchange ("NYSE").
(cc) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be affected
by the Year 2000 Problem (that is, any significant risk that computer
hardware or software applications used by the Company and its
subsidiaries will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000); as
a result of such review, (i) the Company has no reason to believe, and
does not believe, that (A) there are any issues related to the
Company's preparedness to address the Year 2000 Problem that are of a
character required to be described or referred to in the Registration
Statement or Prospectus which have not been accurately described in
the Registration Statement or Prospectus and (B) the Year 2000 Problem
will have a Material Adverse Effect, or result in any material loss or
interference with the business or operations of the Company and its
subsidiaries, taken as a whole; and (ii) the Company has no reason to
believe, after due inquiry, that the suppliers, vendors, customers or
other material third parties used or served by the Company and such
subsidiaries are not addressing or will not address the Year 2000
Problem in a timely manner, except to the extent that a failure to
address the Year 2000 by a supplier, vendor, customer or material
third party would not have a Material Adverse Effect.
(dd) The Company has complied with all provisions of Florida
Statutes Section 517.075.
(ee) Neither the Company nor any of its subsidiaries or any other
person associated with or acting on behalf of the Company or its
subsidiaries including, without limitation, any director, officer,
agent or employee of the Company or its subsidiaries has, directly or
indirectly, while acting on behalf of the Company or its subsidiaries
(i) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political
activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political
parties or campaigns from corporate funds; (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended; or
(iv) made any other unlawful payment.
(ff) Any certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters in
connection with the offering of the Shares shall be deemed a
representation and warranty to each Underwriter by the Company as to
matters covered thereby.
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<PAGE> 12
(gg) The Company has not distributed and, prior to the later of
(i) the Closing Dates and (ii) the completion of the distribution of
the Shares, will not distribute any offering material in connection
with the offering and sale of the Shares other than the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or other materials,
if any permitted by the Securities Act.
5. Conditions of the Underwriters' Obligations. The obligations of
the Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) Notification that the Registration Statement has become
effective shall have been received by the Representatives and the
Prospectus shall have been timely filed with the Commission in
accordance with Section 6(A)(i) of this Agreement.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and
no order suspending the effectiveness of the Registration Statement
shall be in effect and no proceedings for such purpose shall be
pending before or threatened by the Commission, and any requests for
additional information on the part of the Commission (to be included
in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of the Commission and the
Representatives. (1)
(c) The representations and warranties of the Company contained in
this Agreement and in the certificates delivered pursuant to Section
5(d) shall be true and correct when made and on and as of each Closing
Date as if made on such date, and the Company shall have performed all
covenants and agreements and satisfied all the conditions contained in
this Agreement required to be performed or satisfied by it at or
before such Closing Date.
(d) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing
Date, of the chief executive or chief operating officer and the chief
financial officer or chief accounting officer of the Company to the
effect that (i) the signers of such certificates have carefully
examined the Registration Statement, the Prospectus and this
Agreement, and that, to their knowledge, the representations and
warranties of the Company in this Agreement are true and correct on
and as of such Closing Date with the same effect as if made on such
Closing Date, (ii) to their knowledge, the Company has performed all
covenants and agreements and satisfied all conditions contained in
this Agreement required to be performed or satisfied by it at or prior
to such Closing Date and (iii) no stop order suspending the
effectiveness of the Registration Statement has been issued and, to
their knowledge, no proceedings for that purpose have been instituted
or are pending under the Securities Act.
(e) The Representatives shall have received at the time this
Agreement is executed and on each Closing Date a signed letter from
Ernst & Young LLP addressed to the Representatives and dated,
respectively, the date of this Agreement and each such Closing Date,
in form and substance reasonably satisfactory to the Representatives,
confirming that
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<PAGE> 13
they are independent accountants within the meaning of the
Securities Act and the Rules, and stating in effect that:
(i) in their opinion, the financial statements and financial
statement schedules included or incorporated by reference in the
Registration Statement and the Prospectus and reported on by them
comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Rules;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited condensed
consolidated financial statements included in the Company's quarterly
reports on Form 10-Q for the quarters ended September 30, 1997,
December 31, 1997, March 31, 1998, September 30, 1998, December 31,
1998 and March 30, 1999;
(iii) on the basis of the review referred to in clause (ii) above,
a reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:
(1) the unaudited condensed consolidated
financial statements included in the
Company's quarterly reports on Form
10-Q for the quarters ended
September 30, 1997, December 31,
1997, March 31, 1998, September 30,
1998, December 31, 1998 and March
30, 1999 do not comply as to form in
all material respects with the
applicable accounting requirements
of the Act and the related published
Rules and Regulations or any
material modifications should be
made to such unaudited financial
statements for them to be in
conformity with generally accepted
accounting principles;
(2) at a specified date not more than
three business days prior to the
date of the letter, there was any
change in the capital stock or any
increase in the short-term or
long-term indebtedness of the
Company and its consolidated
subsidiaries or, at the date of the
latest available balance sheet read
by such accountants, there was any
decrease in consolidated net current
assets or net assets, as compared
with amounts shown on the latest
balance sheet included in the
Prospectus; or
(3) for the period from the closing date
of the latest income statement
included in the Prospectus
to the closing date of the latest
available income statement read by
such accountants
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<PAGE> 14
there were any
decreases, as compared with the
corresponding period of the prior
year and the period of corresponding
length ended the date of the latest
income statement included in the
Prospectus, in consolidated net
sales or net operating income or in
the total or per share amounts of
consolidated net income;
except in all cases set forth in clauses (2) and (3) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter;
(iv) they have performed certain other procedures as a result of
which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting,
financial or statistical information derived from the general
accounting records of the Company) set forth in the Registration
Statement and the Prospectus and reasonably specified by the
Representatives agrees with the accounting records of the Company; and
(v) based upon the procedures set forth in clause (ii) above and a
reading of the amounts included in the Registration Statement under
the heading "Summary Financial Information" included in the
Registration Statement and Prospectus and a reading of the financial
statements from which certain of such data were derived, nothing has
come to their attention that gives them reason to believe that the
"Summary Financial Information" included in the Registration Statement
and Prospectus do not comply as to the form in all material respects
with the applicable accounting requirements of the Securities Act and
the Rules, or that the information set forth therein is not fairly
stated in relation to the financial statements included in the
Registration Statement or Prospectus from which certain of such data
were derived are not in conformity with generally accepted accounting
principles in the United States applied on a basis substantially
consistent with that of the audited financial statements included in
the Registration Statement and Prospectus.
References to the Registration Statement and the Prospectus in
this paragraph (e) are to such documents as amended and supplemented
at the date of the letter.
(f) The Representatives shall have received on each Closing Date
from Shack & Siegel, P.C., counsel for the Company, an opinion, addressed to the
Representatives and dated such Closing Date, and stating in effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware. The Company is duly qualified and in good standing as a
foreign corporation authorized to do business in each jurisdiction as
listed on a schedule attached to the opinion.
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<PAGE> 15
(ii) Each of the Company's subsidiaries has been duly incorporated
and is validly existing as a corporation, in good standing under the
laws of the jurisdiction of its incorporation. Each subsidiary of the
Company is duly qualified and in good standing as a foreign
corporation authorized to do business in each jurisdiction as listed
on a schedule attached to the opinion. Except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of each
subsidiary are owned by the Company either directly or through wholly
owned subsidiaries.
(iii) Each of the Company and its subsidiaries has all requisite
corporate power and authority to own, lease and license its assets and
properties and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus; and the
Company has all requisite corporate power and authority and all
necessary authorizations, approvals, consents, orders, licenses,
certificates and permits to enter into, deliver and perform this
Agreement and to issue and sell the Shares other than those required
under the Securities Act, the rules of the National Association of
Securities Dealers, Inc. ("NASD") and state and foreign Blue Sky laws.
(iv) The Company has authorized and outstanding capital stock as
set forth in the Registration Statement and the Prospectus under the
caption "Capitalization"; the certificates evidencing the Shares are
in due and proper legal form and have been duly authorized for
issuance by the Company; all of the outstanding shares of Common Stock
of the Company have been duly and validly authorized and issued and to
such counsel's knowledge, are fully paid and nonassessable, and none
of them was issued in violation of any preemptive or other similar
right. The Shares when issued and sold pursuant to this Agreement will
be duly and validly issued, outstanding, fully paid and nonassessable,
and none of them will have been issued in violation of any preemptive
or other similar right. To such counsel's knowledge, except as
disclosed in the Registration Statement and the Prospectus, there are
no preemptive rights or any restriction upon the voting or transfer of
any securities of the Company pursuant to the Company's Articles of
Incorporation or by-laws or other governing documents or any other
instrument to which the Company is a party or by which it may be
bound. To such counsel's knowledge, except as disclosed in the
Registration Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance of, and no
commitment, plan or arrangement to issue, any shares of stock of the
Company or any security convertible into, exercisable for, or
exchangeable for stock of the Company. The Common Stock and the Shares
conform in all material respects to the descriptions thereof contained
in the Registration Statement and the Prospectus. To such counsel's
knowledge, except as disclosed in the Prospectus, no holders of
securities of the Company have rights to the registration of such
securities under the Registration Statement.
(v) Each of the Lock-up Agreements executed by the Company's
directors and officers has been duly and validly delivered by such
persons and constitutes the legal, valid and binding obligation of
each such person enforceable
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<PAGE> 16
against each such person in accordance with its terms, except as
the enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and by general
equitable principles.
(vi) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and
performance of this Agreement, and the issuance and sale of the
Shares. This Agreement has been duly and validly authorized, executed
and delivered by the Company, and this Agreement constitutes the
legal, valid and binding obligation of the Company enforceable against
the Company in accordance with its terms except (A) as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general equitable
principles and (B) to the extent that rights to indemnity or
contribution under this Agreement may be limited by Federal or state
securities laws or the public policy underlying such laws.
(vii) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or any event which with notice
or lapse of time, or both, would constitute a default) under, or
require consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any material
properties or assets of the Company and its subsidiaries taken as a
whole pursuant to the terms of, any indenture, mortgage, deed trust,
note or other material agreement or instrument of which such counsel
is aware and to which the Company or any subsidiary of the Company is
a party or by which it or any of their material properties or
businesses is bound, or any material franchise, license, permit,
judgment, decree, order, statute, rule or regulation of which such
counsel is aware or violate any provision of the charter or by-laws of
the Company or any subsidiary of the Company.
(viii) To such counsel's knowledge, no event has occurred which
with notice or lapse of time, or both, would constitute a default, in
the due performance and observance of any term, covenant or condition
by the Company of any indenture, mortgage, deed of trust, note or any
other agreement or instrument to which the Company is a party or by
which it or any of its assets or properties or businesses may be bound
or affected, where the consequences of such default would have a
Material Adverse Effect.
(ix) To such counsel's knowledge, the Company and its subsidiaries
are not in violation of any term or provision of their respective
charters or by-laws or any
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<PAGE> 17
franchise, license, permit, judgment, decree, order, statute, rule
or regulation, where the consequences of such violation would have a
Material Adverse Effect.
(x) No consent, approval, authorization or order of any court or
governmental agency or regulatory body is required for the execution,
delivery or performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby or thereby,
except such as have been obtained under the Securities Act or the
rules of the NASD and such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of
the Shares by the several Underwriters.
(xi) To such counsel's knowledge, except as described in the
Prospectus, there is no litigation or governmental or other proceeding
or investigation, before any court or before or by any public body or
board pending or threatened against, or involving the assets,
properties or businesses of, the Company which would have a Material
Adverse Effect.
(xii) The Capital Stock of the Company conforms in all material
respects to the description thereof incorporated by reference in the
Prospectus.
(xiii) The statements in the Prospectus under the captions
"Management," and "Certain Relationships and Related Transactions,"
insofar as such statements constitute a summary of documents referred
to therein or matters of law, are fair summaries in all material
respects and accurately present the information called for with
respect to such documents and matters. Accurate copies of all
contracts and other documents of which such counsel is aware required
to be filed as exhibits to, or described in, the Registration
Statement have been so filed with the Commission or are fairly
described in the Registration Statement, as the case may be.
(xiv) The Registration Statement, all preliminary prospectuses and
the Prospectus and each amendment or supplement thereto (except for
the financial statements and schedules and other financial and
statistical data included therein, as to which such counsel expresses
no opinion) comply as to form in all material respects with the
applicable requirements of the Securities Act, the Rules and the
Exchange Act. The Company meets the requirements for filing the
Registration Statement on Form S-3.
(xv) The Registration Statement is effective under the Securities
Act, and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the knowledge of such counsel, are
threatened, pending or contemplated. Any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424(b) under
the Securities Act has been made in the manner and within the time
period required by such Rule 424(b).
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<PAGE> 18
(xvi) The Shares have been approved for listing on the NYSE.
(xvii) The company is not an "investment company" or an entity
controlled by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
Notwithstanding the foregoing, with respect to the first two sentences of
section 5(f)(ii) and the first sentence of section 5(f)(iii), such counsel
expresses no opinion regarding WMS Gaming (Canada) Ltd. and WMS Gaming (Nevada)
Inc. To the extent deemed advisable by such counsel, they may rely as to matters
of fact on certificates of responsible officers of the Company and public
officials and they shall not opine as to matters which are governed by gaming
laws or regulations or by laws other than the laws of the State of New York, the
General Corporation Law of the State of Delaware and the Federal laws of the
United States. Copies of such certificates shall be furnished to the
Representatives and counsel for the Underwriters.
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of the Representatives and representatives of the independent
certified public accountants of the Company, at which conferences the contents
of the Registration Statement and the Prospectus and related matters were
discussed and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as specified
in the foregoing opinion), on the basis of the foregoing, no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective (except with respect to
the financial statements and the notes and schedules thereto and other financial
data, as to which such counsel need express no belief) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus as amended or supplemented (except with respect to the
financial statements and notes schedules thereto and other financial data, as to
which such counsel need make no statement) on the date thereof contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) The Representatives shall have received on each Closing Date from
Terence M. Dunleavy, assistant general counsel to the Company, an opinion,
addressed to the Representatives and dated such Closing Date, and stating in
effect that:
(1) The statements contained in the Prospectus under the captions
"Government Regulation"and "Risk Factors - Our gaming machine business
is heavily regulated, and we depend on our ability to obtain and
maintain regulatory approvals" insofar as such statements constitute a
summary of matters of law, are fair summaries in all material
respects.
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<PAGE> 19
(ii) No consent, approval, exemption, authorization, designation,
declaration or filing by or with any governmental agency or regulatory
body having jurisdiction over the Company's business relating to
gaming laws or regulations is required for the execution, delivery or
performance of the Underwriting Agreement by the Company or the
consummation of the transactions contemplated thereby, other than
those that have been obtained or made.
(iii) The Company is currently in possession of and in compliance
in all material respects with all permits, licenses and other
approvals necessary to carry on its gaming machine business, except
where the failure to have such permits, licenses and other approvals
would not have a material adverse effect on the Company.
To the extent deemed advisable by such counsel, he may rely as to matters of
fact on certificates of responsible officers of the Company and public officials
and on the opinions of other counsel satisfactory to the Representatives;
provided that such counsel shall state that in his opinion the Underwriters and
he are justified in relying on such other opinions. Copies of such certificates
and other opinions shall be furnished to the Representatives and counsel for the
Underwriters.
(h) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives
and their counsel, and the Underwriters shall have received from
Morgan, Lewis & Bockius LLP a favorable opinion, addressed to the
Representatives and dated each Closing Date, with respect to the
Shares, the Registration Statement and the Prospectus, and such other
related matters as the Representatives may reasonably request, and the
Company shall have furnished to Morgan, Lewis & Bockius LLP such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters.
(i) If the Shares have been qualified for sale in Florida, the
Representatives shall have received on each Closing Date certificates,
addressed to the Representatives, and dated such Closing Date, of an
executive officer of the Company, to the effect that the signer of
such certificate has reviewed and understands the provisions of
Section 517.075 of the Florida Statutes, and represents that the
Company has complied, and at all times will comply, with all
provisions of Section 517.075 and further, that as of such Closing
Date, neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in
Cuba.
(j) The Representatives shall have received copies of the Lock-up
Agreements executed by each entity or person described in Section
4(p).
2. Covenants of the Company.
(A) The Company covenants and agrees as follows:
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<PAGE> 20
(i) The Company shall prepare the Prospectus in a form approved by
the Representatives and file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than the Commission's close of
business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as
may be required by Rule 430A(a)(3) under the Securities Act.
(ii) The Company shall promptly advise the Representatives in
writing (i) when any amendment to the Registration Statement shall
have become effective, (ii) of any request by the Commission for any
amendment of the Registration Statement or the Prospectus or for any
additional information, (iii) of the prevention or suspension of the
use of any preliminary prospectus or the Prospectus or of the issuance
by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the institution or threatening of any
proceeding for that purpose and (iv) of the receipt by the Company of
any notification with respect to the suspension of the qualification
of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company shall not
file any amendment of the Registration Statement or supplement to the
Prospectus unless the Company has furnished the Representatives a copy
for their review prior to filing and shall not file any such proposed
amendment or supplement to which the Representatives reasonably
object. The Company shall use its best efforts to prevent the issuance
of any such stop order and, if issued, to obtain as soon as possible
the withdrawal thereof.
(iii) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any
event occurs as a result of which the Prospectus as then amended or
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein in the light of the circumstances under which they were made
not misleading, or if it shall be necessary to amend or supplement the
Prospectus to comply with the Securities Act or the Rules, the Company
promptly shall prepare and file with the Commission, subject to the
second sentence of paragraph (ii) of this Section 6(A), an amendment
or supplement which shall correct such statement or omission or an
amendment which shall effect such compliance.
(iv) The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not
later than 45 days after the end of the 12-month period beginning at
the end of the fiscal quarter of the Company during which the
Effective Date occurs (or 90 days if such 12-month period coincides
with the Company's fiscal year), an earnings statement (which need not
be audited) of the Company, covering such 12-month period, which shall
satisfy the provisions of Section 11(a) of the Securities Act or Rule
158 of the Rules.
(v) The Company shall furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the
Registration Statement (including all exhibits thereto and amendments
thereof) and to each other Underwriter a copy
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<PAGE> 21
of the Registration Statement (without exhibits thereto) and all
amendments thereof and, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Securities Act or the
Rules, as many copies of any preliminary prospectus and the Prospectus
and any amendments thereof and supplements thereto as the
Representatives may reasonably request.
(vi) The Company shall cooperate with the Representatives and
their counsel in endeavoring to qualify the Shares for offer and sale
in connection with the offering under the laws of such jurisdictions
as the Representatives may designate and shall maintain such
qualifications in effect so long as required for the distribution of
the Shares; provided, however, that the Company shall not be required
in connection therewith, as a condition thereof, to qualify as a
foreign corporation or to execute a general consent to service of
process in any jurisdiction or subject itself to taxation as doing
business in any jurisdiction.
(vii) For a period of one year after the date of this Agreement,
the Company shall supply to the Representatives, and to each other
Underwriter who may so request in writing, copies of such financial
statements and other periodic and special reports as the Company may
from time to time distribute generally to the holders of any class of
its capital stock and shall furnish to the Representatives a copy of
each annual or other report it shall be required to file with the
Commission.
(viii) Without the prior written consent of CIBC World Markets
Corp., on behalf of the Underwriters, for a period of 90 days after
the date of this Agreement, the Company shall not issue, sell or
register with the Commission (other than on Form S-8 or on any
successor form), or otherwise dispose of, directly or indirectly, any
equity securities of the Company (or any securities convertible into
or exercisable or exchangeable for equity securities of the Company),
except for (i) the issuance of the Shares pursuant to the Registration
Statement; (ii) the issuance of options, or shares issuable upon
exercise of options, pursuant to the Company's existing stock option
plans as described in the Registration Statement and the Prospectus;
and (iii) the issuance of shares in connection with an acquisition
made by the Company and approved by the Company's Board of Directors.
(ix) On or before completion of this offering, the Company shall
make all filings required under applicable securities laws and by the
NYSE.
(x) The Company shall file timely and accurate reports in
accordance with the provisions of Florida Statutes Section 517.05, or
any successor provision, and any regulation promulgated thereunder, if
at any time after the Effective Date, the Company or any of its
affiliates commences engaging in business with the government of Cuba
or any person or affiliate located in Cuba.
(xi) The Company will apply the net proceeds from the offering of
the Shares in the manner set forth under "Use of Proceeds" in the
Prospectus.
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<PAGE> 22
(B) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses incident to
the public offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to: (i) the preparation,
printing, filing and distribution of the Registration Statement, including all
exhibits thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and the
printing, filing and distribution of this Agreement; (ii) the preparation and
delivery of certificates for the Shares to the Underwriters; (iii) the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the various jurisdictions referred to in Section
6(A)(vi), including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs of
shipping and mailing) to the Representatives and to the Underwriters of copies
of each preliminary prospectus, the Prospectus and all amendments or supplements
to the Prospectus, and of the several documents required by this Section to be
so furnished, as may be reasonably requested for use in connection with the
offering and sale of the Shares by the Underwriters or by dealers to whom Shares
may be sold; (v) the filing fees of the NASD in connection with its review of
the terms of the public offering and reasonable fees and disbursements of
counsel for the Underwriters in connection with such review; (vi) the furnishing
(including costs of shipping and mailing) to the Representatives and to the
Underwriters of copies of all reports and information required by Section
6(A)(vii); (vii) inclusion of the Shares for listing on the NYSE; and (viii) all
transfer taxes, if any, with respect to the sale and delivery of the Shares by
the Company to the Underwriters. Subject to the provisions of Section 9, the
Underwriters agree to pay, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and expenses incident
to the performance of the obligations of the Underwriters under this Agreement
not payable by the Company pursuant to the preceding sentence, including,
without limitation, the fees and disbursements of counsel for the Underwriters.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim
asserted), to which it may become subject under the Securities Act,
the Exchange Act or other Federal or state laws or regulations, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus
or any amendment thereof or supplement thereto or in any audio or
visual materials prepared by the Company or in any written information
furnished by or on behalf of the Company in any format, including,
without limitation, slides, videos, films, tape recordings used in
connection with the marketing of the Shares, including, without
limitation, statements communicated to
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<PAGE> 23
securities analysts employed by the Underwriters, or arise out of
or are based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) in whole or in part upon any
breach of the representations and warranties set forth in Section 4
hereof, or (iii) in whole or in part upon any failure of the Company
to perform any of its obligations hereunder or under law; provided,
however, that such indemnity shall not inure to the benefit of any
Underwriter (or any person controlling such Underwriter) on account of
any losses, claims, damages or liabilities arising from the sale of
the Shares to any person by such Underwriter if such untrue statement
or omission or alleged untrue statement or omission was made in such
preliminary prospectus, the Registration Statement or the Prospectus,
or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use
therein, it being understood and agreed that the only such information
furnished by any Underwriter consists of the information described as
such in Section 7(b) below. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of the
Company, and each officer of the Company who signs the Registration
Statement, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which
was made in any preliminary prospectus, the Registration Statement or
the Prospectus, or any amendment thereof or supplement thereto,
contained in (i) the number of shares to be purchased by each
Underwriter; (ii) the concession and reallowance figures and the first
sentence appearing in the 3rd paragraph under the caption
"Underwriting" and (iii) the stabilization and penalty bid information
contained in the 11th paragraph under the caption "Underwriting";
provided, however, that the obligation of each Underwriter to
indemnify the Company (including any controlling person, director or
officer thereof) shall be limited to the net proceeds received by the
Company from such Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in
respect of which a claim is to be made against an indemnifying party
or parties under this Section, notify each such indemnifying party of
the commencement of such action, suit or proceeding, enclosing a copy
of all papers served. No indemnification provided for in Section 7(a)
or 7(b) shall be available to any party who shall fail to give notice
as provided in this Section 7(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have
related and was prejudiced by the failure to give such notice but the
omission so to notify such indemnifying party of any such action, suit
or proceeding shall not relieve it from any liability that it may have
to any indemnified party for contribution or otherwise than under this
Section. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be
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<PAGE> 24
entitled to participate in, and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party
to such indemnified party of its election so to assume the defense
thereof and the approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for
any legal or other expenses, except as provided below and except for
the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any
such action, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the employment of counsel
by such indemnified party has been authorized in writing by the
indemnifying parties, (ii) the indemnified party shall have reasonably
concluded that there may be a conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the
defense of such action (in which case the indemnifying parties shall
not have the right to direct the defense of such action on behalf of
the indemnified party) or (iii) the indemnifying parties shall not
have employed counsel to assume the defense of such action within a
reasonable time after notice of the commencement thereof, in each of
which cases the fees and expenses of counsel shall be at the expense
of the indemnifying parties. An indemnifying party shall not be liable
for any settlement of any action, suit, proceeding or claim effected
without its written consent, which consent shall not be unreasonably
withheld or delayed.
8. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 7(a) or 7(b) is due in accordance with its terms but for any reason is
held to be unavailable or insufficient to hold harmless an indemnified party
under Section 7(a) or 7(b), then each indemnifying party shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled hereunder
to contribution from any person who may be liable for contribution) to which the
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 7 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the Prospectus, bear to
(y) the underwriting discounts received by the Underwriters, as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company or
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
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<PAGE> 25
The Company and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter (except as may be provided
in the Agreement Among Underwriters) be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder; and (ii) the Company shall be liable and responsible for
any amount in excess of such underwriting discount; provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each case to
clauses (i) and (ii) in the immediately preceding sentence of this Section 8.
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section, notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties from whom
contribution may be sought shall not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its written consent. The Underwriter's obligations to contribute
pursuant to this Section 8 are several in proportion to their respective
underwriting commitments and not joint.
9. Termination. This Agreement may be terminated with respect to
the Shares to be purchased on a Closing Date by the Representatives by
notifying the Company at any time
(a) in the absolute discretion of the Representatives at or before
any Closing Date: (i) if, on or prior to such date, any domestic or
international event or act or occurrence has materially disrupted, or
in the opinion of the Representatives will in the future materially
disrupt, the securities markets; (ii) if there has occurred any new
outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United
States is such as to make it, in the judgment of the Representatives,
inadvisable to proceed with the offering; (iii) if there shall be such
a material adverse change in general financial, political or economic
conditions or the effect of international conditions on the financial
markets in the United States is such as to make it, in the judgment of
the Representatives, inadvisable or impracticable to market the
Shares; (iv) if trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. or the NASDAQ National Market has
been suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities shall have been required, by said exchanges or by order of
the Commission, the National Association of Securities
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<PAGE> 26
Dealers, Inc., or any other governmental or regulatory authority;
(v) if a banking moratorium has been declared by any state or Federal
authority; or (vi) if, in the judgment of the Representatives, there
has occurred a Material Adverse Effect, or
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as
required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Company shall not be under any liability to any Underwriter, and
no Underwriter shall be under any liability to the Company, except that (y) if
this Agreement is terminated by the Representatives or the Underwriters because
of any failure, refusal or inability on the part of the Company to comply with
the terms or to fulfill any of the conditions of this Agreement, the Company
will reimburse the Underwriters for all out-of-pocket expenses (including the
reasonable fees and disbursements of their counsel) incurred by them in
connection with the proposed purchase and sale of the Shares or in contemplation
of performing their obligations hereunder and (z) no Underwriter who shall have
failed or refused to purchase the Shares agreed to be purchased by it under this
Agreement, without some reason sufficient hereunder to justify cancellation or
termination of its obligations under this Agreement, shall be relieved of
liability to the Company or to the other Underwriters for damages occasioned by
its failure or refusal.
10. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more substitute
underwriters to purchase such Shares or make such other arrangements as the
Representatives may deem advisable, or one or more of the remaining Underwriters
may agree to purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing
Date, then each of the nondefaulting Underwriters shall be obligated
to purchase such Shares on the terms herein set forth in proportion to
their respective obligations hereunder; provided that in no event
shall the maximum number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section
10 by more than one-ninth of such number of Shares without the written
consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed 10% of the Shares that
all the Underwriters are obligated to purchase on such Closing Date,
then the Company shall be entitled to one additional business day
within which it may, but is not obligated to, find one or more
substitute underwriters reasonably satisfactory to the Representatives
to purchase such Shares upon the terms set forth in this Agreement.
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<PAGE> 27
In any such case, either the Representatives or the Company
shall have the right to postpone the applicable Closing Date for a period of not
more than five business days in order that necessary changes and arrangements
(including any necessary amendments or supplements to the Registration Statement
or Prospectus) may be effected by the Representatives and the Company. If the
number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed 10% of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6(B),
7, 8 and 9. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations,
warranties, indemnities and other statements of the Company or its officers and
of the Underwriters set forth in or made pursuant to this Agreement shall remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or the Company or any of the officers, directors or
controlling persons referred to in Sections 7 and 8 hereof, and shall survive
delivery of and payment for the Shares. The provisions of Sections 6(B), 7, 8
and 9 shall survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing
and mailed or delivered or sent by telephone or facsimile if subsequently
confirmed in writing, (a) if to the Representatives, c/o CIBC World Markets
Corp., One World Financial Center, New York, New York 10281 Attention:
_______________ with a copy to Morgan, Lewis & Bockius LLP, 101 Park Avenue, New
York, New York 10178, Attention: Howard L. Shecter, Esq., and (b) if to the
Company, to its agent for service as such agent's address appears on the cover
page of the Registration Statement with a copy to Shack & Siegel, P.C., 530 5th
Avenue, 16th Floor, New York, New York, 10036, Attention: Jeffrey N. Siegel,
Esq.
This Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflict
of laws.
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<PAGE> 28
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
[signature page to follow]
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<PAGE> 29
Please confirm that the foregoing correctly sets forth the agreement among us.
Very truly yours,
WMS INDUSTRIES INC.
By
-------------------------
Name:
Title:
Confirmed:
CIBC World Markets Corp.
Prudential Securities Incorporated
Acting severally on behalf of themselves
and as representative of the several
Underwriters named in Schedule I
annexed hereto.
By CIBC World Markets Corp.
By
-----------------------------------
Name:
Title:
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<PAGE> 30
SCHEDULE I
Number of
Firm Shares to
Name Be Purchased
- ---- ---------------
CIBC World Markets Corp.
Prudential Securities Incorporated
---------------
Total 3,500,000
===============
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<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-3 (File No. 333-83021) and the related
Prospectus of WMS Industries Inc. and to the incorporation by reference therein
of our report dated August 12, 1999, with respect to the consolidated financial
statements and schedule of WMS Industries Inc. and subsidiaries included in its
Annual Report (Form 10-K) for the year ended June 30, 1999, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
--------------------------------------
Chicago, Illinois
September 3, 1999