<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number: 1-8300
WMS INDUSTRIES INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-2814522
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
3401 North California Ave., Chicago, IL 60618
(Address of Principal Executive Offices) (Zip Code)
(773) 961-1111
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 30,773,388 shares of common
stock, $.50 par value, were outstanding at May 9, 2000 after deducting 77,312
shares held as treasury shares.
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WMS INDUSTRIES INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Page
Number
<S> <C>
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and nine months ended March 31, 2000 and 1999.............. 2
Condensed Consolidated Balance Sheets -
March 31, 2000 and June 30, 1999................................. 3-4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2000 and 1999........................ 5
Notes to Condensed Consolidated Financial Statements............. 6-7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8-11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk....... 11
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings................................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 12
ITEM 6. Exhibits and Reports on Form 8-K................................. 12
SIGNATURES ................................................................. 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
----------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Machine sales $ 32,308 $ 28,110 $ 99,427 $ 67,862
Participation and leasing 16,831 $ 6,555 49,562 11,222
--------- --------- --------- ---------
Total gaming revenues 49,139 34,665 148,989 79,084
Contract manufacturing 3,470 3,794 9,649 11,230
--------- --------- --------- ---------
Total revenues 52,609 38,459 158,638 90,314
Costs and Expenses
Cost of gaming revenue 24,030 21,211 73,802 50,721
Cost of contract manufacturing 3,129 3,308 8,503 9,731
Research and development 3,177 2,520 8,385 6,408
Reversal of excess accrual due to settlement of litigation -- -- (13,160) --
Common stock option adjustments 851 539 1,763 1,140
Selling and administrative 9,842 6,822 29,798 18,769
--------- --------- --------- ---------
Total costs and expenses 41,029 34,400 109,091 86,769
--------- --------- --------- ---------
Operating income 11,580 4,059 49,547 3,545
Interest and other income and expense, net 854 946 2,414 2,785
--------- --------- --------- ---------
Income from continuing operations before income taxes 12,434 5,005 51,961 6,330
Provision for income taxes 4,725 1,916 19,745 2,419
--------- --------- --------- ---------
Income from continuing operations 7,709 3,089 32,216 3,911
Discontinued operations, net of applicable taxes
Loss from discontinued operations -- (1,252) (469) (4,953)
Costs related to discontinuance -- -- (13,200) --
--------- --------- --------- ---------
Net income (loss) $ 7,709 $ 1,837 $ 18,547 $ (1,042)
========= ========= ========= =========
Basic earnings (loss) per share of common stock:
Net income from continuing operations $ 0.25 $ 0.10 $ 1.05 $ 0.13
Loss from discontinued operations -- (0.04) (0.44) (0.17)
--------- --------- --------- ---------
Net income (loss) $ 0.25 $ 0.06 $ 0.61 $ (0.04)
========= ========= ========= =========
Diluted earnings (loss) per share of common stock:
Net income from continuing operations $ 0.25 $ 0.10 $ 1.03 $ 0.13
Loss from discontinued operations -- (0.04) (0.44) (0.17)
--------- --------- --------- ---------
Net income (loss) $ 0.25 $ 0.06 $ 0.59 $ (0.04)
========= ========= ========= =========
Shares used in per share calculations:
Basic 30,726 30,055 30,562 29,020
========= ========= ========= =========
Diluted 31,361 30,800 31,236 29,646
========= ========= ========= =========
See notes to condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 64,920 $ 58,663
Receivables, net of allowances of $3,388 and $2,883 40,172 35,516
Income tax receivable 4,646 3,258
Inventories, at lower of cost (FIFO) or market:
Raw materials and work in progress 13,776 11,452
Finished goods 26,363 24,392
--------- ---------
40,139 35,844
Deferred income taxes 10,167 17,595
Prepaid expenses 492 634
Assets of discontinued operations 10,766 31,702
--------- ---------
Total current assets 171,302 183,212
--------- ---------
Gaming machines on participation or lease 27,463 26,866
Less accumulated depreciation (10,001) (7,135)
--------- ---------
17,462 19,731
Property, plant and equipment 51,846 49,590
Less accumulated depreciation (20,498) (17,750)
--------- ---------
31,348 31,840
Other assets 2,174 3,296
--------- ---------
$ 222,286 $ 238,079
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
<TABLE>
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,022 $ 5,162
Accrued compensation and related benefits 2,471 2,919
Accrued liability related to patent litigation -- 38,543
Liabilities related to discontinued operations 12,487 13,933
Other accrued liabilities 7,350 4,818
--------- ---------
Total current liabilities 28,330 65,375
--------- ---------
Deferred income taxes 428 625
Stockholders' equity:
Preferred stock (5,000,000 shares authorized, none issued) -- --
Common stock (30,821,813 and 30,428,621 shares issued) 15,411 15,214
Additional paid in capital 183,694 180,989
Accumulated deficit (5,195) (23,742)
--------- ---------
193,910 172,461
Treasury stock, at cost (77,312 shares) (382) (382)
--------- ---------
Total stockholders' equity 193,528 172,079
--------- ---------
$ 222,286 $ 238,079
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
<TABLE>
WMS INDUSTRIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 18,547 $ (1,042)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Loss from discontinued operations 13,669 4,953
Reversal of excess accrual due to settlement of litigation (13,160) --
Litigation payment (27,000) --
Depreciation and amortization 11,526 4,376
Receivables provision 505 635
Deferred income taxes 15,331 245
Tax benefit from exercise of stock options 1,624 75
(Decrease) increase from changes in operating assets and liabilities (4,936) 2,255
-------- --------
Net cash provided by continuing operating activities 16,106 11,497
Investing activities:
Purchase of property, plant and equipment (2,487) (5,887)
Additions to gaming machines on participation or lease (6,361) (13,326)
Net change in short-term investments -- 3,100
-------- --------
Net cash used by investing activities (8,848) (16,113)
Financing activities:
Cash received on exercise of common stock options 1,278 6,919
-------- --------
Cash transfer (to) from discontinued operations (2,279) 1,985
-------- --------
Increase in cash and cash equivalents 6,257 4,288
Cash and cash equivalents at beginning of period 58,663 36,902
-------- --------
Cash and cash equivalents at end of period $ 64,920 $ 41,190
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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WMS INDUSTRIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter and nine months ended March
31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2000. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended June 30, 1999.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances, transactions and stockholdings have been
eliminated.
Certain prior year balances have been reclassified to conform to the
current year presentation and restated to reflect the pinball and
cabinets segment as discontinued operations.
3. DISCONTINUED OPERATIONS
On October 25, 1999 (the measurement date), the Company announced the
closing of its pinball and cabinets segment. Accordingly, this segment
is accounted for as a discontinued operation in the accompanying
condensed consolidated financial statements.
By January 2000, manufacturing for the pinball and cabinets segment was
completed. Management expects to sell the finished goods inventory by
June 2000. Any remaining property, including inventory and equipment,
is expected to be sold or disposed of at the earliest practical date.
The estimated loss on disposal is as follows (thousands of dollars):
<TABLE>
<CAPTION>
Pre-tax Income tax
loss benefit Net
--------- ---------- ---------
<S> <C> <C> <C>
Estimated loss on disposal $ 17,700 $ 6,700 $ 11,000
Estimated operating losses from
October 25, 1999 to anticipated disposal date 3,600 1,400 2,200
--------- --------- ---------
$ 21,300 $ 8,100 $ 13,200
========= ========= =========
</TABLE>
Revenues of the pinball and cabinets segment were $3.4 million and
$22.9 million for the quarter and nine months ended March 31, 2000, and
$10.5 million and $24.4 million for the quarter and nine months ended
March 31, 1999. At March 31, 2000, the assets of the pinball and
cabinets segment consisted of trade receivables, inventories and plant
and equipment amounting to $10.8 million after deducting an allowance
of $9.3 million for write-offs to estimated realizable value. The
liabilities related to discontinued operations were $12.5 million,
including $4.8 million of reserves established for shutdown costs and
estimated operating losses through the disposal date.
6
<PAGE> 8
4. LITIGATION
See Item 1 of Part II for the status of litigation.
5. SEGMENT INFORMATION
The following summarizes the Condensed Consolidated Statements of
Income for the periods shown in the format presented as segment
information in the notes to the year-end consolidated financial
statements reflecting the pinball and cabinets segment as discontinued
operations (thousands of dollars):
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Gaming $ 49,139 $ 34,665 $ 148,989 $ 79,084
Contract manufacturing 3,470 3,794 9,649 11,230
--------- --------- --------- ---------
Total revenues $ 52,609 $ 38,459 $ 158,638 $ 90,314
========= ========= ========= =========
Gross Profit
Gaming $ 25,109 $ 13,454 $ 75,187 $ 28,363
Contract manufacturing 341 486 1,146 1,499
--------- --------- --------- ---------
Total gross profit $ 25,450 $ 13,940 $ 76,333 $ 29,862
========= ========= ========= =========
Operating income (loss)
Gaming $ 13,341 $ 4,818 $ 41,805 $ 5,721
Contract manufacturing 262 333 735 975
Reversal of excess accrual due to settlement of litigation -- -- 13,160 --
Common stock option adjustments (851) (539) (1,763) (1,140)
Unallocated general corporate expenses (1,172) (553) (4,390) (2,011)
--------- --------- --------- ---------
Total operating income 11,580 4,059 49,547 3,545
Interest and other income and expense, net 854 946 2,414 2,785
--------- --------- --------- ---------
Income from continuing operations before
income taxes $ 12,434 $ 5,005 $ 51,961 $ 6,330
========= ========= ========= =========
</TABLE>
The basis of segmentation presented above is the same as that presented
in the last annual report.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward looking statements
concerning our future business conditions and outlook based on currently
available information that involves risks and uncertainties. Our actual results
could differ materially from those anticipated in the forward looking statements
as a result of these risks and uncertainties, including, without limitation, the
financial strength of the gaming industry, the expansion of legalized gaming
into new markets, the development, introduction and success of new games and new
technologies and the ability to maintain the scheduling of such introductions,
our ability to qualify for and maintain gaming licenses and approvals, the
outcome of certain legal proceedings to which we are a party and other risks
more fully described under "Item 1. Business - Risk Factors" in our Annual
Report on Form 10-K for the year ended June 30, 1999.
SIGNIFICANT EVENTS AND TRENDS
In October 1999, we announced that we had decided to close our pinball and
cabinets segment as part of a plan to focus on our gaming segment. In the first
quarter, we recorded a $21.3 million pre-tax loss on disposal, including cash
expenses of $10.1 million, for projected operating losses through the disposal
date, severance pay, and shut down expenses. We do not anticipate that this
discontinued operation will have a material effect on our liquidity or
operations in future periods. The loss on disposal included about $11.2 million
in non-cash losses from write-downs of receivables, inventory, plant and
equipment to net realizable value on disposal. Tax benefits related to the loss
on disposal were estimated to be $8.1 million. The exact amount of the proceeds
received and the loss ultimately recorded will depend upon several factors over
the course of the shut down period and at the date the sale of the remaining
assets is consummated. Our consolidated financial statements have been restated
to reflect the operating loss from the segment and the expected loss on disposal
as a discontinued operation.
In December 1999, we announced that we had settled our litigation with
International Game Technology regarding their Telnaes patent. We made a
tax-deductible payment of $27.0 million to them and agreed to split evenly with
them about $3.4 million held in an escrow account pending resolution of this
matter. Because we had previously established a reserve of about $38.5 million
for this litigation and previously expensed that amount, we recognized pre-tax
income of $13.2 million in the December 1999 quarter from the reversal of the
excess accrual. This resulted in an increase in income from continuing
operations, on an after-tax basis, of $8.2 million, or $0.26 per diluted share.
FINANCIAL CONDITION
Cash flows from operating, investing and financing activities during the nine
months ended March 31, 2000 resulted in a net cash increase of $6.3 million as
compared to a net cash increase of $4.3 million during the nine months ended
March 31, 1999.
Cash provided by operating activities before changes in operating assets and
liabilities was $21.0 million for the nine months ended March 31, 2000 as
compared to $9.2 million of cash provided by operations for the nine months
ended March 31, 1999. The current period's increase in cash provided from
operations before changes in operating assets and liabilities relative to the
comparable prior year's period is primarily a result of an increase in non-cash
depreciation and amortization related primarily to gaming machines on
participation or lease coupled with a higher loss from discontinued operations
and the net increase in deferred income taxes partially offset by the payment
for the litigation settlement with IGT and the reversal of the excess accrual
due to the settlement of litigation.
The changes in operating assets and liabilities for the nine months ended March
31, 2000 were primarily due to increases in receivables and inventories from the
comparable balances at June 30, 1999, partially offset by an increase in
accounts payable. The operating assets and liabilities changes for the nine
months ended March 31, 1999 were primarily due to increases in accounts payable
from the comparable balances at June 30, 1998.
Cash used by investing activities was $8.8 million for the nine months ended
March 31, 2000 compared with cash used of $16.1 million for the nine months
ended March 31, 1999. Cash used for the purchase of property, plant and
equipment during the nine months ended March 31, 2000 was $2.5 million compared
to $5.9 million for the
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nine months ended March 31, 1999. We used $6.4 million of cash for additions to
gaming machines on participation or lease in the current nine-month period, as
compared to $13.3 million in the comparable prior year period. Net cash of $3.1
million was received from the maturity of short-term investments during the nine
months ended March 31, 1999.
We have no material commitments for property or equipment investments at this
time.
Cash provided by financing activities, which was primarily from common stock
option proceeds, for the nine months ended March 31, 2000 was $1.3 million
compared to $6.9 million in the prior year's nine-month period. We have an
unused $25.0 million revolving credit agreement expiring August 1, 2000, which
contains customary bank line of credit terms.
During the current nine-month period, management decided to withdraw a proposed
offering of 3,500,000 shares of common stock due to adverse market conditions.
Costs and expenses related to the offering of $0.4 million were written off in
the September 1999 quarter. We expect no adverse changes in financial condition
or results of operations as a result of this action.
We believe that existing cash, cash equivalents, short-term investments and
available borrowing capacity together with funds generated from operations will
be adequate to fund the anticipated level of inventories and receivables
required in the operation of our business as well as to fund our other presently
anticipated needs for the next twelve months.
RESULTS OF OPERATIONS
Segment information is presented in note 5 of the condensed consolidated
financial statements in Part I, Item 1.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1999
Consolidated revenues increased to $52.6 million in the quarter ended March 31,
2000 from $38.5 million in the quarter ended March 31, 1999. This resulted from
unit price increases for video and reel-type slot machines and from growth in
the installed base of participation and leased games on the MONOPOLY(R) themed
models. We shipped 3,684 gaming machines in the current quarter, resulting in
product and parts sales of $32.3 million versus 3,688 machines and $28.1 million
of product and parts sales in the comparable prior year quarter. Revenues from
participation and leased games rose 157% to $16.8 million in the current quarter
based on 3,630 units leased at the end of the period as compared to revenues of
$6.6 million in the prior year's quarter based on 1,814 units leased at the end
of the prior year's period.
Consolidated gross profit increased 83% to $25.4 million in the quarter ended
March 31, 2000 from $13.9 million in the quarter ended March 31, 1999 due to
continued growth in participation and lease revenues, higher average unit sales
pricing, and cost and productivity gains. The gross margin percentage increased
from 36.2% to 48.4%.
Research and development expenses increased $0.7 million, or 26.1%, in the
current quarter to $3.2 million as compared to $2.5 million in the prior year's
quarter, which reflects our operating strategy of continuing to develop new
themes and designs for our gaming machines.
Selling and administrative expenses increased $3.0 million, or 44.3%, in the
current quarter to $9.8 million from $6.8 million in the prior year's quarter.
The increase reflects continuing investment in staffing and support due to the
growth in revenues, higher investment in development of new markets domestically
and internationally, and higher legal expenses for litigation and regulatory
matters.
Consolidated operating income was $11.6 million in the March 31, 2000 quarter
compared to income of $4.0 million in the prior year's quarter. This increase
results from higher revenue and gross margins, partially offset by increased
spending on research and development and selling and administrative expenses
described above.
9
<PAGE> 11
Income from continuing operations was $7.7 million, $0.25 per diluted share, for
the quarter ended March 31, 2000 compared with income from continuing operations
of $3.1 million, $0.10 per diluted share, in the March 31, 1999 quarter. These
amounts are net of our provision for current and deferred taxes of $4.7 million
and $1.9 million for the current and prior year quarter, respectively.
Net income, which includes both continuing operations and discontinued
operations, was $7.7 million, $0.25 per diluted share, for the quarter ended
March 31, 2000 compared to net income of $1.8 million, $0.06 per diluted share,
for the prior year fiscal quarter. The prior year's quarter reflected a pre-tax
loss from the discontinued pinball and cabinets segment of $1.3 million, which
represents the operating losses of that segment incurred in that quarter.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED WITH
NINE MONTHS ENDED MARCH 31, 1999
Consolidated revenues increased to $158.6 million in the nine months ended March
31, 2000 from $90.3 million in the nine months ended March 31, 1999. This
resulted from unit price increases and market share growth in video and
reel-type slot machine sales and from growth in the installed base of
participation and leased games on the MONOPOLY(R) themed models. We shipped
12,068 gaming machines for product sales of $99.4 million for the current
year-to-date period versus 9,101 machines and $67.9 million of product sales in
the comparable prior year period. Revenues from participation and leased games
rose to $49.6 million in the current nine month period based on 3,630 units
leased at the end of the period as compared to revenues of $11.2 million in the
prior year's nine-month period from 1,814 units leased at the end of the prior
year's period.
Consolidated gross profit increased to $76.3 million in the nine months ended
March 31, 2000 from $29.9 million in the nine months ended March 31, 1999 due
continued growth in participation and lease revenues, higher average unit sales
pricing, and cost and productivity gains. The gross margin percentage increased
from 33.1% to 48.1%.
Research and development expenses increased $2.0 million, or 30.9%, in the
current nine-month period to $8.4 million as compared to $6.4 million in the
prior year's nine-month period, which reflects our operating strategy of
continuing to develop new themes and designs for our gaming machines.
Selling and administrative expenses increased $11.0 million, or 58.8%, in the
current nine-month period to $29.8 million from $18.8 million in the prior
year's nine-month period. The increase reflects continuing investment in
staffing and support due to the growth in revenues, higher investment in
development of new markets domestically and internationally, and higher legal
expenses for litigation and regulatory matters.
Consolidated operating income was $49.5 million in the nine months ended March
31, 2000, compared to income of $3.5 million in the prior year's nine month
period. This reflects a $13.2 million pre-tax increase to income due to the
litigation settlement for less than the amount reserved and the results of
increased sales revenues and higher gross margins, partially offset by increased
spending on research and development, and selling and administrative expenses as
described above.
Income from continuing operations was $32.2 million, $1.03 per diluted share,
for the nine months ended March 31, 2000 compared with, income from continuing
operations of $3.9 million, $0.13 per diluted share, in the nine months ended
March 31, 1999. These amounts are net of our provision for current and deferred
taxes of $19.7 million and $2.4 million for the current and prior year
nine-month period, respectively.
Net income, which includes both continuing operations and discontinued
operations, was $18.5 million, $0.59 per diluted share, for the nine months
ended March 31, 2000 compared to a net loss of $1.0 million, $0.04 per diluted
share, for the prior year nine-month period. The current period net income
reflects a pre-tax gain of $13.2 million from the litigation settlement for less
than the amount originally reserved, less related tax benefits of $5.0 million.
This was offset by pre-tax losses from the discontinued pinball and cabinet
segment totaling $22.0 million and $8.3 million of related tax benefits in the
first quarter. The pre-tax losses on discontinued operations includes $11.2
million of non-cash write-offs of inventory, accounts receivable and property
and equipment to
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estimated net realizable value; $10.1 million in reserves for shutdown expenses
(including future operating losses of $3.6 million); and the first quarter's
operating loss of $0.7 million. The prior year's period reflected a pre-tax loss
from the discontinued pinball and cabinets segment of $8.0 million, which
represents the operating losses of that segment incurred in that period.
YEAR 2000
The term Year 2000 is used to refer to a computer-related problem where some
software programs and embedded programs in electronic systems microprocessors
may not work properly when processing a date after 1999.
About 800 of our video lottery terminals in operation for the Delaware Lottery
became temporarily inoperative in late December 1999. We repaired the problem
within a week, which involved replacing certain computer chips in the machines.
In April 2000, we paid in settlement a total of $1,012,000, of which amount
$750,000 had been reserved for in the December 1999 quarter. Because these
machines were of a specific model used by a single customer, we believe that the
malfunction discussed above represents an isolated case and does not indicate a
systemic risk to us. We are not aware of any other date-related problems, and do
not anticipate a materially adverse change in our liquidity or financial
position as a result of such problems.
MONOPOLY(R)is a registered trademark of Hasbro.(C) 1999 Hasbro, Inc. All rights
reserved. Used with permission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information concerning the patent litigation between International Game
Technology ("IGT") and us as set forth in "Part II Item 1 Legal Proceedings" in
our quarterly report on Form 10-Q for the quarter ended September 30, 1999, is
incorporated here by this reference.
On February 14, 2000, WMS filed its Answer and Counterclaim to Compliant denying
IGT's allegations of infringement of U.S. Pat. No. 5,951,397, and raising
affirmative defenses and counterclaims concerning violations by IGT of federal
antitrust laws and other state laws. On February 25, 2000, IGT filed its
Plaintiff's Motion for Leave to File Amended Compliant Against WMS.
On February 25, 2000, IGT filed its Plaintiff's Motion for Leave to File Amended
Complaint Against WMS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on January 25, 2000. The matters
submitted to a stockholder vote were:
1) the election of eight members to the Board of Directors; and
2) the ratification of the appointment of Ernst & Young LLP as independent
auditors for the 2000 fiscal year.
The voting results were as follows:
1) Our stockholders re-elected each of the eight incumbent directors, as
follows:
Nominee For Withheld
------------------------- ------------ ----------
William C. Bartholomay 29,260,620 315,902
William E. McKenna 29,257,340 318,372
Norman J. Menell 29,260,602 315,110
Louis J. Nicastro 29,257,790 317,922
Neil D. Nicastro 29,107,332 468,380
Harvey Reich 29,258,790 316,922
David M. Satz, Jr. 29,253,690 322,022
Ira S. Scheinfeld 28,958,402 617,310
2) Stockholders voted 29,487,094 shares (99.7% of the shares represented at
the meeting) in favor of the ratification of the appointment of Ernst & Young
LLP as independent auditors for the 2000 fiscal year; 64,330 shares (0.2% of the
shares represented at the meeting) voted against approval, and 24,288 shares
(less than 0.1% of the shares represented at the meeting) abstained from voting
or were unmarked and not voted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Amended and Restated Certificate of Incorporation of WMS dated February
17, 1987; Certificate of Amendment dated January 28, 1993; and
Certificate of Correction dated May 4, 1994, incorporated by reference
to Exhibit 3(a) to our Annual Report on Form 10-K for the year ended
June 30, 1994.
3(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of WMS, as filed with the Secretary of the State of
Delaware of February 25, 1998, incorporated by reference to Exhibit
3(a) to our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred Stock,
incorporated by reference to Exhibit A to the Rights Agreement dated as
of March 5, 1998 between us and The Bank of New York, as Rights Agent,
filed as Exhibit 1 to our registration Statement on Form 8-A (File No.
1-8300) filed March 25, 1998.
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3(d) By-Laws of WMS, as amended and restated through June 26, 1996,
incorporated by reference to Exhibit 3(b) to our Annual Report on Form
10-K for the year ended June 30, 1996.
10(a) Employment Agreement dated as of March 21, 2000 between WMS and Brian
R. Gamache
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WMS INDUSTRIES INC.
Dated: May 12, 2000 By: /s/ Scott D. Schweinfurth
-----------------------------------
Scott D. Schweinfurth
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
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<PAGE> 16
EXHIBIT INDEX
No. Description
- --- -----------
3(a) Amended and Restated Certificate of Incorporation of WMS dated February
17, 1987; Certificate of Amendment dated January 28, 1993; and
Certificate of Correction dated May 4, 1994, incorporated by reference
to Exhibit 3(a) to our Annual Report on Form 10-K for the year ended
June 30, 1994.
3(b) Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of WMS, as filed with the Secretary of the State of
Delaware of February 25, 1998, incorporated by reference to Exhibit
3(a) to our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998.
3(c) Form of Certificate of Designations of Series A Preferred Stock,
incorporated by reference to Exhibit A to the Rights Agreement dated as
of March 5, 1998 between us and The Bank of New York, as Rights Agent,
filed as Exhibit 1 to our registration Statement on Form 8-A (File No.
1-8300) filed March 25, 1998.
3(d) By-Laws of WMS, as amended and restated through June 26,
1996,incorporated by reference to Exhibit 3(b) to our Annual Report on
Form 10-K for the year ended June 30, 1996.
10(a) Employment Agreement dated as of March 21, 2000 between WMS and Brian
R. Gamache
27 Financial Data Schedule
15
<PAGE> 1
EXHIBIT 10(a)
EXECUTIVE EMPLOYMENT AGREEMENT
AGREEMENT made as of the 21st day of March, 2000, by and between WMS
INDUSTRIES INC., a Delaware corporation (the "Corporation"), and BRIAN GAMACHE
("Executive").
W I T N E S S E T H:
WHEREAS, the Corporation and Executive desire to enter into an
employment agreement on the terms and subject to the conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the parties hereto agree as follows:
1. EMPLOYMENT; DUTIES. The Corporation hereby employees Executive as an
executive of the Corporation to perform services as President and Chief
Operating Officer and to perform such other supervisory, managerial or executive
duties on behalf of the Corporation as the Chief Executive Officer or the Board
of Directors of the Corporation may from time to time determine.
2. ACCEPTANCE AND LOYALTY. Executive hereby accepts such employment and
agrees that throughout the period of his employment hereunder, he will devote
his full time, attention, knowledge and skills, faithfully, diligently and to
the best of his ability, in furtherance of the business of the Corporation and
will perform the duties assigned to him pursuant to Section 1 hereof. Executive
shall perform all duties and responsibilities in a professional manner
consistent with the skill, competence and efficiency expected of an executive
employee performing the duties assigned to Executive and subject to the
direction and control of the Chief Executive Officer and the Board of Directors
of the Corporation. Executive will do such traveling as may be reasonably
required of him in the performance of his obligations hereunder. Executive shall
at all times be subject to,
<PAGE> 2
observe and carry out such rules, regulations, policies, directions and
restrictions as the Corporation may from time to time establish. During his
employment hereunder, Executive shall not, without the written approval of the
Chief Executive Officer or the Board of Directors of the Corporation first had
and obtained in each instance, directly or indirectly, accept employment or
compensation from or perform services of any nature for, any business enterprise
other than the Corporation or any of its subsidiaries or affiliates.
Notwithstanding the foregoing, Executive may render without compensation
investment services to any immediate member of Executive's family, which shall
include the Executive and any trust or account which is comprised entirely of
assets held for the benefit of such Executive and/or immediate members of his
family. During Executive's employment hereunder, Executive shall not be entitled
to additional compensation for serving in any office, including as a director,
of the Corporation or any of its subsidiaries or affiliates to which he may be
elected. Executive represents and warrants that, to his best knowledge, that
there are no contractual, licensing or other impediments to the performance of
Executive's services hereunder.
3. TERM. The term of Executive's employment hereunder shall commence on
a date mutually agreeable to the Corporation and Executive not later than April
17, 2000 (the "Commencement Date") and shall terminate on June 30, 2003 (the
"Term").
4. COMPENSATION AND BENEFITS.
4.1 BASE SALARY. The Corporation shall pay to Executive a base
salary ("Base Salary") at the rate of $375,000 per annum, or such greater amount
as the Board of Directors of the Corporation shall from time to time determine.
Base salary shall be payable in equal installments in accordance with the
Corporation's normal payroll policy.
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<PAGE> 3
4.2 FIXED BONUS. The Corporation shall pay to Executive a bonus in
respect of the Corporation's fiscal year ending June 30, 2000 in an amount
determined by multiplying $200,000 times the number of days between the
Commencement Date and June 30, 2000 and dividing the result by 365, and a bonus
of $200,000 in respect of each subsequent full fiscal year during the Term,
provided that Executive remains continuously employed by the Corporation from
the Commencement Date through the end of such fiscal year. Each such bonus (a
"Fixed Bonus") shall be paid within 30 days after the end of the fiscal year in
which it is earned. Commencing with the fiscal quarter ending September 30,
2000, if requested by Executive, the Corporation shall advance to Executive, on
the last business day of each fiscal quarter, an amount equal to 12.5% of his
Fixed Bonus for the fiscal year in which such fiscal quarter ends. Such advance
shall be without interest and shall be retained by Executive and applied against
his Fixed Bonus if Executive remains employed through the end of that fiscal
year. Such advance shall bear interest at the rate of 8% per annum from the date
of the advance if Executive's employment terminates prior to the end of such
fiscal year, and shall be immediately due and payable by Executive to the
Corporation on the date of such termination. Any amounts due from Executive to
the Corporation may be offset by the Corporation against any amounts due to
Executive by the Corporation.
4.3 PERFORMANCE BONUS. In addition to the Fixed Bonus, the Corporation
will establish a discretionary performance bonus program for Executive for the
Corporation's fiscal year ending June 30, 2001, and each fiscal year thereafter
during the Term. The performance bonus program will take into account the
Corporation's revenue and profit growth and will permit
3
<PAGE> 4
Executive to earn a bonus of up to $175,000 for each fiscal year in which the
performance goals are met.
4.4 SIGNING BONUS. Simultaneously with the execution of this Agreement,
the Corporation shall pay to Executive a signing bonus of $100,000. The net
amount of this bonus, after taxes, shall be immediately payable by Executive to
the Corporation if during the Term Executive's employment is terminated by the
Corporation for "cause" or Executive terminates his employment without "good
reason."
4.5 INSURANCE, ETC. Executive shall be entitled to participate, to the
extent he is eligible under the terms and conditions thereof, in any pension,
retirement, disability, hospitalization, insurance, medical service, or other
employee benefit plan which is generally available to executive employees of the
Corporation and which may be in effect from time to time during the period of
his employment hereunder, including the Exec-U-Care insurance program. Without
limitation, upon commencement of his employment, Executive shall receive 401(k)
and Exec-U-Care Medical Plan as maintained by the Corporation in accordance with
the provisions of such plans, including a life insurance benefit provided by
Exec-U-Care of $200,000 and an additional life insurance coverage of $200,000
provided by the Corporation. The Corporation shall be under no obligation to
institute or continue the existence of any such employee benefit plan.
5. BUSINESS EXPENSES. The Corporation shall reimburse Executive for all
authorized expenses reasonably incurred by him in accordance with the
Corporation's travel and entertainment policies and procedures in effect during
the Term. Executive shall be entitled to fly first class on the Corporation's
business.
4
<PAGE> 5
6. STOCK OPTIONS. On the Commencement Date, the Corporation will grant
Executive non-qualified options to purchase 250,000 shares of the Corporation's
common stock under one or more of the Corporation's existing stock option plans.
The options shall be exercisable as to 100,000 shares one year after the
Commencement Date and as to an additional 30,000 shares each year thereafter
until fully exercisable.
7. MOVING EXPENSES. On the first business day of each of the first six
months of Executive's employment with the Corporation, the Corporation will pay
the Executive $7,500 as an advance for the purpose of covering Executive and his
family for the rental and maintenance costs of an appropriate hotel or apartment
in the greater Chicago area while Executive is relocating. Executive shall,
within thirty days following the initial six month period of employment, provide
the Corporation receipts for such costs and refund the difference, if any,
between all advances and such costs. The Corporation will also provide
reimbursement of reasonably documented moving expenses from Plano, Texas to
Chicago, up to an aggregate of $75,000, including the real estate commissions on
the sale of Executive's home in Plano, Executive's loss on his country club
membership resale and the moving of Executive's household items and two
automobiles. In addition, the Corporation will retain at its expense a
professional relocation firm to assure the purchase of Executive's home in
Plano, Texas and assist Executive in the location of a new home in the greater
Chicago area. The Corporation will reimburse Executive for the amount, if any,
by which the purchase price paid by Executive for Executive's home in Plano
exceeds the sale price obtained upon the sale of Executive's home in Plano,
Texas to prevent Executive from suffering a loss between the price he paid for
the Plano home and the sales price for the Plano home. Executive
5
<PAGE> 6
shall provide the Corporation with documentation showing the purchase price he
paid for his home in Plano. Executive will be responsible for the taxes, if any,
payable by Executive by reason of any reimbursement or payments made by the
Corporation pursuant to this Paragraph 7.
8. VACATION. Executive shall be entitled to four weeks paid vacation
per year. Any such vacations are to be taken at times mutually agreeable to
Executive and the Chief Executive Officer of the Corporation. Vacation time
shall not be accumulated from year to year, unless Executive is requested by the
Chief Executive Officer of the Corporation to forego a vacation.
9. KEY-MAN LIFE INSURANCE. The Corporation may purchase and maintain
life insurance covering the life of Executive ("Key-man Insurance") in an amount
determined by the Corporation. The Corporation shall be the sole owner and
beneficiary of the Key-man Insurance and may apply to the payment of premiums
thereunder any dividends declared and paid thereon. Executive shall submit
himself to such physical examinations as the Chief Executive Officer of the
Corporation may deem necessary or desirable in connection with the purchase and
maintenance of the Key-man Insurance.
10. NON-COMPETITION AND NON-RAIDING. In consideration of the
Corporation's entering into this Agreement:
10.1 NON-COMPETITION. Executive agrees that during a period from the
Commencement Date until one year after the termination of Executives employment
hereunder for any reason, he will not, directly or indirectly, without the prior
written consent of the Corporation, own, manage, operate, join, control,
participate in, perform any services for, invest in, or otherwise be connected
with, in any manner, whether as an officer, director, employee, consultant,
partner,
6
<PAGE> 7
investor or otherwise, any business entity which is engaged in the design,
importation, manufacture and/or sale of electronic gaming devices or
coin-operated amusement games or any business entity which is engaged in any
other business in which the Corporation or any affiliate of the Corporation is
engaged at the end of the Term or the time of termination of Executive's
employment or, to the knowledge of Executive, is planning to be engaged within
one year after such termination. Nothing herein contained shall be deemed to (i)
prohibit Executive from investing his funds in securities of a company if the
securities of such company are listed for trading on a national stock exchange
or traded in the over-the-counter market and Executive's holdings therein
represent less than five percent of the total number of shares or principal
amount of other securities of such company outstanding, or (ii) prohibit or
limit the right of Executive to return to the hotel/casino business as an
operator and/or owner.
10.2 NON-RAIDING. Executive agrees that during a period from the
Commencement Date until two years after the termination of employment hereunder
for any reason, he will not, directly or indirectly, without the prior written
consent of the Corporation, induce or influence, or seek to induce or influence,
any person who is engaged by the Corporation or any affiliate of the Corporation
as an employee, agent, independent contractor or otherwise, to terminate his
employment or engagement, nor shall Executive directly or indirectly, through
any other person, firm or corporation, employ or engage, or solicit for
employment or engagement, or advise or recommend to any other person or entity
that such person or entity employ or engage or solicit for employment or
engagement, any person or entity employed or engaged by the Corporation or any
affiliate of the Corporation.
7
<PAGE> 8
10.3 MODIFICATION. Executive acknowledges that the provisions of
this Paragraph 10 are reasonable and necessary for the protection of the
Corporation. In the event that any provision of this Paragraph 10, including any
sentence, clause or part hereof, shall be deemed contrary to law or invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions shall not be affected, but shall, subject to the discretion of such
court, remain in full force and effect and any invalid and unenforceable
provisions shall be deemed, without further action on the part of the parties
hereto, modified, amended and limited to the extent necessary to render the same
valid and enforceable.
11. CONFIDENTIALITY AGREEMENT.
11.1 As used herein, the term "Confidential Information" shall mean any
and all information of the Corporation and of its affiliates (for purposes of
this paragraph, the Corporation's affiliates shall be deemed included within the
meaning of "Corporation"), including, but not limited to, all data,
compilations, programs, devices, strategies, or methods concerning or related to
(i) the Corporation's finances, financial condition, results of operations,
employee relations, amounts of compensation paid to officers and employees and
any other data or information relating to the internal affairs of the
Corporation and its operations; (ii) the terms and conditions (including prices)
of sales and offers of sales of the Corporation's products and services; (iii)
the terms, conditions and current status of the Corporation's agreements and
relationship with any customer or supplier; (iv) the customer and supplier lists
and the identities and business preferences of the Corporation's actual and
prospective customers and suppliers or any employee or agent thereof with whom
the Corporation communicates; (v) the trade secrets, manufacturing and operating
techniques, price data,
8
<PAGE> 9
costs, methods, systems, plans, procedures, formulas, processes, hardware,
software, machines, inventions, designs, drawings, artwork, blueprints,
specifications, tools, skills, ideas, and strategic plans possessed, developed,
accumulated or acquired by the Corporation; (vi) any communications between the
Corporation, its officers, directors, stockholders, or employees, and any
attorney retained by the Corporation for any purpose, or any person retained or
employed by such attorney for the purpose of assisting such attorney in his or
her representation of the Corporation; (vii) any other information and knowledge
with respect to all products developed or in any stage of development by the
Corporation; (viii) the abilities and specialized training or experience of
others who as employees or consultants of the Corporation during the Term have
engaged in the design or development of any such products; and (ix) any other
matter or thing, whether or not recorded on any medium, (a) by which the
Corporation derives actual or potential economic value from such matter or thing
being not generally known to other persons or entities who might obtain economic
value from its disclosure or use, or (b) which gives the Corporation an
opportunity to obtain an advantage over its competitors who do not know or use
the same.
11.2 Executive acknowledges and agrees that the Corporation is engaged
in highly competitive businesses and has expended, or will expend, significant
sums of money and has invested, or will invest, a substantial amount of time to
develop and maintain the secrecy of the Confidential Information. The
Corporation has thus obtained, or will obtain, a valuable economic asset which
has enabled, or will enable, it to develop an extensive reputation and to
establish long-term business relationships with its suppliers and customers. If
such Confidential Information were disclosed to another person or entity or used
for the benefit of anyone other than the Corporation,
9
<PAGE> 10
the Corporation would suffer irreparable harm, loss and damage. Accordingly,
Executive acknowledges and agrees that, unless the Confidential Information
becomes publicly known through legitimate origins not involving an act or
omission by Executive:
(1) the Confidential Information is, and all times hereafter shall
remain, the sole property of the Corporation;
(2) Executive shall use his best efforts and the utmost diligence to
guard and protect the Confidential Information from disclosure to
any competitor, customer or supplier of the Corporation or any
other person, firm, corporation or other entity;
(3) unless the Corporation gives Executive prior express written
permission, during his employment and thereafter, Executive shall
not use for his own benefit, or divulge to any competitor or
customer or any other person, firm, corporation, or other entity,
any of the Confidential Information which Executive may obtain,
learn about, develop or be entrusted with as a result of
Executive's employment by the Corporation; and
(4) except in the ordinary course of the Corporation's business,
Executive shall not seek or accept any Confidential Information
from any former, present or future employee of the Corporation.
11.3 Executive also acknowledges and agrees that all documentary and
tangible Confidential Information including, without limitation, such
Confidential Information as Executive
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<PAGE> 11
has committed to memory, is supplied or made available by the Corporation to the
Executive solely to assist him in performing his services under this Agreement.
Executive further agrees that after his employment with the Corporation is
terminated for any reason:
(1) Executive shall not remove from the property of the Corporation
and shall immediately return to the Corporation, all documentary
or tangible Confidential Information is his possession, custody,
or control and not make or keep any copies, notes, abstracts,
summaries, tapes or other record of any type of Confidential
Information; and
(2) Executive shall immediately return to the Corporation any and all
other property of the Corporation in his possession, custody or
control, including, without limitation, any and all keys,
security cards, passes, credit cards and marketing literature.
12. INVENTION DISCLOSURE. Any invention, improvement, design,
development or discovery conceived, developed, created or made by Executive
alone or with others, during the period of his employment hereunder and
applicable to the business of the Corporation or its affiliates, whether or not
patentable or registrable, shall become the sole and exclusive property of the
Corporation. Executive hereby assigns to the Corporation, all of his rights to
any "intellectual material" created or developed by him during the course of his
employment. As used herein, "intellectual material" shall include, but shall not
be limited to, ideas, titles, themes, production ideas, methods of presentation,
artistic renderings, sketches, plots, music, lyrics, dialogue, phrases,
11
<PAGE> 12
slogans, catch words, characters, names and similar literary, dramatic and
musical material, trade names, trademarks and service marks and all
copyrightable expressions in audio visual works, computer software, electronic
circuitry and all mask works for integrated circuits. Executive shall disclose
the intellectual material promptly and completely to the Corporation and shall,
during the period of his employment hereunder and at any time and from time to
time hereafter (a) execute all documents requested by the Corporation for
vesting in the Corporation or any of its affiliates the entire, right, title and
interest in and to the same, (b) execute all documents requested by the
Corporation for filing and prosecuting such applications for patents, trademarks
and/or copyrights as the Corporation, in its sole discretion, may desire to
prosecute, and (c) give the Corporation all assistance it reasonably requires,
including the giving of testimony in any suit, action or proceeding, in order to
obtain, maintain and protect the Corporation's right therein and thereto. If any
such assistance is required following the termination of this Agreement, the
Corporation shall reimburse Executive for his time and the reasonable expenses
incurred by him in rendering such assistance. Anything contained in this
paragraph to the contrary notwithstanding, this paragraph does not apply to an
invention for which no equipment, supplies, facilities, or trade secret
information of the Corporation or its affiliates was used and which was
developed entirely on the Executive's own time, unless (d) the invention
relates: (i) to the business of the Corporation or its affiliates, or (ii) to
the Corporation's or any of its affiliates' actual or demonstrably anticipated
research or development, or (e) the invention results from any work performed by
the Executive for the Corporation or its affiliates.
12
<PAGE> 13
13. REMEDIES. Executive acknowledges and agrees that the business of
the Corporation is highly competitive and that violation of any of the covenants
provided for in Paragraphs 10, 11 and 12 of this Agreement would cause
immediate, immeasurable and irreparable harm, loss and damage to the Corporation
not adequately compensable by a monetary award. Accordingly, Executive agrees,
without limiting any of the other remedies available to the Corporation, that
any violation of said covenants, or any one of them, may be enjoined or
restrained by any court of competent jurisdiction, and that any temporary
restraining order or emergency, preliminary or final injunctions may be issued
by any court of competent jurisdiction, without notice and without bond. In the
event any proceedings are commenced by the Corporation against Executive for any
actual or threatened violation of any of said covenants and if the Corporation
prevails in such litigation, then, Executive shall be liable to the Corporation
for, and shall pay to the Corporation, all costs and expenses of any kind,
including reasonable attorneys' fees, which the Corporation may incur in
connection with such proceedings.
14. TERMINATION OF EMPLOYMENT.
14.1 DEATH. Executive's employment shall terminate automatically
upon the death of Executive.
14.2 DISABILITY. If the Corporation determines in good faith that
the disability of Executive has occurred during the term hereof (pursuant to the
definition of "disability" set forth below), it may give to Executive written
notice in accordance with Paragraph 17 of this Agreement of its intention to
terminate Executive's employment. In such event, Executive's employment with the
Corporation shall terminate effective on the 30th day after receipt of such
notice by Executive (the
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<PAGE> 14
"Disability Effective Date"), provided that, within the 30 days after such
receipt, Executive shall not have returned to full-time performance of
Executive's duties. For purposes of this Agreement, "disability" shall mean the
absence of Executive from Executive's duties with the Corporation on a full-time
basis for 60 consecutive business days as a result of incapacity due to mental
or physical illness which is determined to be total and permanent by a physician
selected by the Corporation or its insurers and acceptable to Executive or
Executive's legal representative.
14.3 CAUSE. The Corporation may terminate Executive's employment
during the term hereof for "cause." For purposes of this Agreement, "cause"
means (i) conviction of a felony or any other crime involving fraud, larceny or
dishonesty; (ii) failure and refusal to follow a reasonable direction of the
Chief Executive Officer or the Board of Directors of the Corporation after
notice in writing of such failure or refusal and a cure period of ten days
thereafter; (iii) commission of any dishonest, willful or grossly negligent act
which has or is reasonably likely to have a material adverse effect on the
Corporation or its customer or trade relationships; or (iv) failure or refusal
to provide accurate and reasonably complete information with respect to
Executive's personal history to the Corporation or to governmental agencies
regulating the business of the Corporation, failure or refusal to reasonably
cooperate with such regulators or failure to obtain necessary regulatory
licensing approvals or clearances because of inaccurate, incomplete or falsified
information provided by Executive. It is understood that poor financial
performance of the Corporation shall not in itself constitute grounds for the
termination of Executive for "cause."
14.4 GOOD REASON. Executive's employment may be terminated by
Executive for "good reason." For purposes of this Agreement, "good reason" shall
mean a material breach by the
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Corporation of any material provision of this Agreement, after the Executive has
provided the Corporation with notice thereof and a reasonable opportunity to
cure such breach.
14.5 NOTICE OF TERMINATION. Any termination by the Corporation for
"cause", or by Executive for "good reason", shall be communicated by Notice of
Termination to the other party hereto given in accordance with Paragraph 17 of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
Executive's employment under the provision so indicated and (iii) if the Date of
Termination (as defined below) is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than thirty days
after the giving of such notice). The failure by Executive or the Corporation to
set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of "good reason" or "cause" shall not waive any right
of Executive or the Corporation, respectively, hereunder or preclude Executive
or the Corporation, respectively, from asserting such fact or circumstance in
enforcing Executive's or the Corporation's rights hereunder.
14.6 DATE OF TERMINATION. "Date of Termination" means (i) if
Executive's employment is terminated by the Corporation for "cause", or by
Executive for "good reason", the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if Executive's
employment is terminated by the Corporation other than for "cause" or
"disability", the Date of Termination shall be the date on which the Corporation
notifies Executive of such termination and (iii) if Executive's employment is
terminated by reason of death or
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"disability", the Date of Termination shall be the date of death of Executive or
the Disability Effective Date, as the case may be.
14.7 PAYMENTS AS A RESULT OF TERMINATION. (1) If, during the Term,
the Corporation shall terminate Executive's employment other than for "cause",
including by reason of the Executive's death or "disability", or Executive shall
terminate employment for "good reason:"
(1) the Corporation shall pay to Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of
the amounts set forth in clauses A and B below:
1. the sum of (1) Executive's annual Base Salary through the
Date of Termination to the extent not theretofore paid, and (2) the
product of (x) the annual Fixed Bonus and (y) a fraction (the
"Proration Fraction"), the numerator of which is the number of days
in the current fiscal year through the Date of Termination, and the
denominator of which is 365, less any advances theretofore made to
Executive in respect of the annual Fixed Bonus (the sum of the
amounts described in clauses (1) and (2) shall be hereinafter
referred to as the "Accrued Obligations"); and
2. (x) if the termination is by reason of Executive's death or
"disability", the amount equal to one year's Base Salary and one
year's Fixed Bonus; or (y) if the termination is other than for
"cause", death or "disability", or Executive shall terminate for
"good reason", the amount equal to the greater of (i) one year's
Base Salary and one year's Fixed Bonus, or (ii) the product of (1)
the number of
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years (including fractions thereof) remaining from the Date of
Termination until the end of the Term and (2) the sum of one year's
Base Salary and one year's Fixed Bonus.
(2) If the Executive's employment shall be terminated for "cause"
or the Executive terminates employment without "good reason" during the Term,
this Agreement shall terminate without further obligations to Executive other
than the obligation to pay to Executive the Accrued Obligations, provided,
however, if Executive terminates employment without good reason prior to one
year from the Commencement Date, in addition to the Accrued Obligations the
Corporation shall pay to Executive the amount equal to one year's Base Salary
and Fixed Bonus payable in 12 equal monthly installments beginning one month
after the Date of Termination, which payment will be reduced by any amounts
received by Executive from other employment during such payment period.
15. CHANGE OF CONTROL.
15.1 If at any time during the Term, individuals who presently
constitute the Board of Directors of the Corporation, or who have been
recommended for election to the Board by two-thirds of the Board consisting of
individuals who are either presently on the Board or such recommended successors
cease for any reason to constitute at least a majority of such Board (such event
being hereafter referred to as a "Change of Control") and Executive gives
written notice to the Corporation within 60 days after such Change of Control of
his election to terminate his employment hereunder, the Corporation shall pay to
Executive within 15 days after Executive's delivery of such notice, as severance
pay and liquidated damages, in lieu of any other rights or remedies which might
17
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otherwise be available to him under his Agreement, and without mitigation of any
kind or amount, whether or not Executive shall seek or accept other employment,
a lump sum payment equal in amount three times the annual Base Salary and annual
Fixed Bonus payable to Executive pursuant to Sections 4.1 and 4.2 of this
Agreement. In addition, all unexpired options to purchase securities of the
Corporation granted to Executive before the Change of Control shall, if
unvested, vest fully on the date of the Change of Control, notwithstanding any
vesting provisions of such options. The payments provided for in this Section 15
shall be paid in full, without discount to present value.
15.2 If it shall be determined that any amount payable under Section
15.1 by the Corporation to or for the benefit of Executive (a "Base Payment")
would be subject to the excise tax (the "Excise Tax") imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), then Executive shall
be entitled to receive an additional payment (the "Gross-Up Payment") in an
amount such that the net amount retained by Executive, after the calculation and
deduction of any Excise Tax on the Base Payment shall be equal to the Base
Payment, less any federal, state and local income taxes. The Gross-Up Payment
shall be reduced by income or Excise Tax withholding payments made by the
Corporation to any federal, state, or local taxing authority with respect to the
Gross-Up Payment that was not deducted from compensation payable to the
Executive. All determinations required to be made under this Section 15.2,
including whether and when a Gross-Up Payment is required, the amount of such
Gross-Up Payment, and the assumptions to be utilized in arriving at such
determination, except as specified above, shall be made by the Corporation's
auditors (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Corporation and Executive within fifteen business days
after the receipt of notice from
18
<PAGE> 19
Executive that there should be a Gross-Up Payment. The determination of tax
liability made by the Accounting Firm shall be subject to review by Executive's
tax advisor, and, if Executive's tax advisor does not agree with the
determination reached by the Accounting Firm, then the Accounting Firm and
Executive's tax advisor shall jointly designate a nationally recognized public
accounting firm, which shall make the determination. All fees and expenses of
the accountants retained by the Corporation or jointly designated and retained
shall be borne by the Corporation. Any determination by a jointly designated
public accounting firm shall be binding upon the Corporation and Executive.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties hereto with respect to Executive's employment with the
Corporation and no amendment or modification hereof shall be valid or binding
unless made in writing and signed by the party against whom enforcement thereof
is sought.
17. NOTICES. Any notice required, permitted or desired to be given
pursuant to any of the provisions of this Agreement shall be deemed to have been
sufficiently given or served for all purposes if delivered in person or sent by
telephone facsimile or sent by certified mail, return receipt requested, or sent
by responsible overnight delivery service, postage and fees prepaid, to the
parties hereto at their respective addresses set forth below. Either of the
parties hereto may at any time and from time to time change the address to which
notice shall be sent hereunder by notice to the other party given under this
Section 17. The date of the giving of any notice sent by mail shall be three
business days following the date of the posting of the mail, if delivered in
person, the date delivered in person, if sent by overnight delivery service, the
next business day following delivery to an overnight delivery service or if sent
by telephone facsimile, the date sent by telephone facsimile.
19
<PAGE> 20
If to the Corporation:
3401 North California Avenue
Chicago, IL 60618
Facsimile: (312) 961-1099
Attention: Mr. Louis J. Nicastro, President
If to the Executive:
5601 Kelly Lane
Plano, TX 75093
18. WITHHOLDING TAXES. All payments made to Executive under this
Agreement shall be subject to applicable payroll taxes and withholding
requirements.
19. NO ASSIGNMENT. Neither this Agreement nor the right to receive any
payments hereunder may be assigned by Executive. This Agreement shall be binding
upon Executive, his heirs, executors and administrators and upon the
Corporation, its successors and assigns.
20. NO WAIVER. No course of dealing nor any delay on the part of the
Corporation in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
21. GOVERNING LAW. This Agreement shall be governed, interpreted and
construed in accordance with the substantive laws of the State of Illinois
applicable to agreements entered into and to be performed entirely therein.
22. SEVERABILITY. If any clause, paragraph, section or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any arbitrator or court of competent jurisdiction, such provision
shall be ineffective but shall not in any way invalidate or affect any other
20
<PAGE> 21
clause, paragraph, section or part of this Agreement. The parties intend that
all clauses, paragraphs, sections or parts of this Agreement shall be
enforceable to the fullest extent permitted by law.
23. AFFILIATE. As used in this Agreement, "affiliate" means any person
or entity controlled by or under common control with the Corporation.
24. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which counterparts, when taken together, shall constitute
but one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.
WMS INDUSTRIES INC.
By:
---------------------------------------
Louis J. Nicastro, Chairman of the
Board and Chief Executive Officer
---------------------------------------
BRIAN GAMACHE
21
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