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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           -------------------------
 
                                   FORM 10-K
 
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1998
 
                         COMMISSION FILE NUMBER 1-8300
 
                              WMS INDUSTRIES INC.
             (Exact name of registrant as specified in its charter)
 
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                  DELAWARE                                      36-2814522
       (State or other jurisdiction of            (I.R.S. Employer Identification Number)
       incorporation or organization)
 
3401 NORTH CALIFORNIA AVE., CHICAGO, ILLINOIS                      60618
  (Address of principal executive offices)                      (Zip Code)
</TABLE>
 
Registrant's telephone number, including area code: (773) 961-1111
 
Securities registered pursuant to Section 12(b) of the Act:
 
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                                                                 NAME OF EACH EXCHANGE
                 TITLE OF EACH CLASS                              ON WHICH REGISTERED
                 -------------------                             ---------------------
<S>                                                       <C>
Common Stock, $.50 par value                                    New York Stock Exchange

Stock Purchase Rights pursuant to Rights Agreement              New York Stock Exchange
</TABLE>
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None.
 
     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
 
Yes  X                No 
   -----                ----- 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
     The aggregate market value of the 27,849,495 shares of Common Stock held by
non-affiliates of the registrant on September 15, 1998 was $193,206,000. Solely
for purposes of this calculation, all shares held by directors and executive
officers of the registrant have been excluded. Such exclusion should not be
deemed an admission that such individuals are affiliates of the registrant. On
such date, the number of shares of Common Stock outstanding (excluding 52,312
shares held as treasury shares) was 27,986,750 shares.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
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                                                                PART
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Annual Report to Stockholders of Registrant for the fiscal
  year ended June 30, 1998..................................  I, II, IV
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                                     PART I
 
     This Annual Report on Form 10-K contains forward looking information and
describes the beliefs of WMS Industries Inc. (the "Company" or "WMS") concerning
future business conditions and the outlook for the Company based on currently
available information. Wherever possible, the Company has identified these
forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements. These risks and uncertainties include the following: the Company's
loss from continuing operations, the financial strength of the gaming and
amusement games industries, the expansion of legalized gaming into new markets,
the ability of the Company to qualify for and maintain licenses and approvals
from the governing bodies having jurisdiction over the Company's gaming machine
business, the ability of the Company to develop new technologies on a timely
basis and to design, introduce and market successful new game titles, the
success of planned advertising, marketing and promotional campaigns and the
outcome of certain legal proceedings to which the Company is a party, as well as
the items set forth under "Item 1. Business -- Factors Affecting Future
Performance." The Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise. Discussions containing such forward looking statements may be found
in the materials set forth under "Item 1. Business -- The Company," "--
Operations" and "-- Factors Affecting Future Performance" and "Item 3. Legal
Proceedings" contained herein and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's 1998
Annual Report to Stockholders (the "1998 Annual Report").
 
ITEM 1. BUSINESS.
 
                                  THE COMPANY
 
     WMS was incorporated in Delaware on November 20, 1974 under the name
Williams Electronics, Inc. The Company's principal executive offices are located
at 3401 North California Avenue, Chicago, Illinois 60618, telephone number (773)
961-1111. During fiscal year 1998 the Company, through its subsidiaries and
affiliates, was engaged in the design, manufacture and sale of slot/video gaming
machines and video lottery terminals ("Gaming"), coin-operated pinball and
novelty games and wooden cabinets for coin-operated games ("Pinball, Novelty and
Cabinets") and the contract manufacture of video games ("Contract
Manufacturing").
 
     Until April 6, 1998, the Company also engaged in the design, distribution
and sale of interactive entertainment software played in both the coin-operated
and home markets through its subsidiary, Midway Games Inc. ("Midway"). On such
date, the Company distributed to its stockholders through a dividend (the
"Distribution") all of the shares of common stock of Midway owned by the
Company, which shares constituted 86.8% of the outstanding stock of Midway. On
October 29, 1996, Midway completed an initial public offering of 5,100,000
shares of Midway common stock (the "Offering"), which comprised the remaining
13.2% of Midway shares. The Distribution provided the Company's stockholders
with 1.19773 shares of Midway common stock for each owned share of the Company's
common stock, par value $.50 ("Common Stock"). Fractional shares were sold and
the net proceeds thereof paid in cash. The distribution ratio reflected
27,886,021 shares of Common Stock outstanding on the record date for the
Distribution. On the date of the Distribution, the Company's rights plan became
effective. See "The Distribution" below.
 
                 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
 
     The Distribution, which was proposed during 1997, split the Company and
Midway into two independent public corporations. Accordingly, the financial
position, results of operations and cash flows of the Company's video games
business segment are reported as discontinued operations in the 1998 Annual
Report. The Company's businesses are reported in the following three industry
segments: (i) Gaming; (ii) Pinball, Novelty and Cabinets; and (iii) Contract
Manufacturing. Financial information for the years ended June 30, 1998,
 
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1997 and 1996 with respect to these segments appears at Note 16 of the Notes to
Consolidated Financial Statements in the 1998 Annual Report, which information
is incorporated herein by reference.
 
                                   OPERATIONS
 
GENERAL
 
     During the fiscal year ended June 30, 1998, the Company was a designer,
manufacturer and marketer of gaming equipment, pinball and novelty games and
wooden cabinets for coin-operated games and a contract manufacturer of
coin-operated video games. The Gaming business segment is conducted through the
Company's subsidiary, WMS Gaming Inc. ("WGI") which markets its products under
the Williams(TM) and WMS Gaming(TM) trademarks. The Pinball, Novelty and
Cabinets business segment is conducted through its subsidiaries Williams
Electronics Games, Inc. ("Williams" or "WEG") and Fun House Games Inc. ("Fun
House Games") which market products under the Bally(R), FunHouse(R) and
Williams(R) trademarks and the Company's subsidiary, Lenc-Smith Inc.
("Lenc-Smith"). The Contract Manufacturing business segment is conducted through
WEG.
 
GAMING
 
     Slot/Video Gaming Machines: The Company has designed, developed and
manufactured a series of gaming machines for casinos located in established
gaming jurisdictions, including jurisdictions permitting land based casinos and
casino gaming on riverboats and in casinos owned by Native American nations, as
well as in government sponsored gaming jurisdictions such as Canada. The
Company's newest generation of slot machines integrates video or dotmatrix
animation with traditional games to create a "game within a game" for longer,
more exciting play. As they play the primary slot game and achieve certain
milestones, players move on to play a secondary game for additional bonus
credits. The secondary game gives players a sense of "investment" in the game
which contributes to player interest and extended play. The Company's newest
reel machines include Jackpot Party, X-Factor, Top Cat, Pharaoh's Fortune, Big
Bang Piggy Bankin' and Winning Streak. Each of these games features engaging and
entertaining themes. With the special Dotmation dotmatrix animation features, a
player's game experience is enhanced with animated sequences of mermaids diving
into the ocean or genies emerging from magic lamps to present the top awards.
Like all Williams games, these reel slots feature high-end sound, utilizing the
Company's proprietary Digital Compression System ("DCS"), and exciting glass
designs and visuals. At the September 1998 World Gaming Congress Exposition, the
Company expects to introduce at least eight new reel spinning games and six new
video gaming devices -- all with new themes and graphics.
 
     The Company's innovations in video technology have given rise to some of
the industry's leading video gaming device concepts which utilize second-screen
bonusing features, including Reel 'Em In, Filthy Rich, Boom!, Jackpot Party and
Life of Luxury. These games are designed to attract players with greater visual
excitement through state-of-the art graphics and bigger monitors, high-end DCS
sound and engaging game themes. With the Company's multi-game Multi-Pay Plus,
the Company premiered an innovative cabinet design that accommodates a bigger,
high-resolution monitor in the same footprint of games with smaller, low
resolution monitors. Both the upright 17" and slant-top 19" versions of the game
incorporate this new cabinet design. Multi-Pay Plus offers the player a varied
menu of games on a single machine, including video poker, keno, blackjack and
video reel games. The Williams video gaming devices feature enhanced viewing
through high-resolution 19" or 17" monitors which vividly display digitized
images in up to 256 colors simultaneously as well as compact-disc quality
digitally produced sound effects and music. These devices accept both coins and
bills in varying denominations via an electronic coin validator or high-security
bill validator to ensure a high-level of fraud protection. Reel 'Em In, Filthy
Rich, Boom!, Jackpot Party and Life of Luxury also utilize the same superior
cabinet design with a clever recreational fishing theme, farming theme, Fourth
of July picnic theme, festive party theme and material extravagance theme,
respectively.
 
     The Company is authorized to sell its gaming machines in Arizona, Colorado,
Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan,
Missouri, Minnesota, Mississippi, Montana, Nevada,
 
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New Jersey, New Mexico, North Dakota, Oregon, Rhode Island, South Dakota, West
Virginia and Wisconsin. The Company is also authorized to sell its gaming
machines directly or through distributors in certain foreign jurisdictions and
to several Native American nations.
 
     See "Item 3. Legal Proceedings" with respect to certain patent litigation
between the Company and International Game Technology involving reel-type slot
machines.
 
     Video Lottery Terminals: WGI markets video lottery terminals ("VLT" or
"VLTs") under the Williams(TM) and WMS Gaming(TM) trademarks. VLTs, purchased,
leased or operated on a revenue sharing basis by state lottery agencies to
increase lottery revenues, offer a wide selection of exciting, menu-driven
games, including poker, keno, blackjack and video slot games. The Williams VLTs
feature enhanced viewing through high-resolution 19" or 17" monitors which
vividly display digitized images in up to 256 colors simultaneously as well as
compact-disc quality digitally produced sound effects and music. Game selection
and play are initiated by lightly touching a touch screen attached to the
monitor. VLTs accept both coins and bills in varying denominations via an
electronic coin validator or high-security bill validator to ensure a high-level
of fraud protection. All money handling and storage compartments, as well as the
long-life, programmable printer, are secured with heavy duty, multiple barrel
locks which are accessed separately. A heavy gauge steel cabinet and innovative
drip system protect internal components. Williams VLTs are equipped with
built-in, self diagnostic software to identify problem areas and to record
electronically all aspects of machine operation, including game play,
wagering/payout data and physical breaches such as opening doors, removing
currency, accessing the central processor and disconnecting the power source.
Extensive information storage capacity allows for periodic telephone polling by
the central computer or on-line, real time monitoring. Williams VLTs communicate
with mainframe central site computers and retail validation terminals through
internal modems, master/slave configurations and fiber optic connections.
 
     The Williams Multi-Magic VLT, successor to the popular Midas Touch VLT, is
available in three different model configurations -- one of which provides
unique player comfort through a combination of a slant-top playing surface and
built-in seating. VLTs represent a source of revenue for jurisdictions in
addition to taxes and may be operated as stand-alone units or may interface with
central monitoring computers operated by governmental agencies. WGI is currently
approved as a manufacturer of VLTs in Delaware, Oregon, Rhode Island and West
Virginia, and the Canadian Provinces of Alberta, New Brunswick, New Foundland
and Nova Scotia.
 
PINBALL, NOVELTY AND CABINETS
 
     Pinball Games: Based on industry awards with respect to the Company's
coin-operated pinball games and the number of such games sold in comparison to
its competitors, the Company believes it is the world's leading manufacturer of
pinball games, producing pinball games under both the Williams and Bally trade
names. Coin-operated pinball games utilize electromechanical devices such as
flippers to propel steel balls on an intricately designed playing field. These
games are generally designed by members of the Company's internal design staff
but may be designed by outside consultants. During fiscal 1998, the Company
introduced four new pinball game models -- two for the Williams product line and
two for the Bally product line. In fiscal 1998, four of the Company's pinball
games received American Amusement Machine Association ("AAMA") Silver and Gold
Sales Achievement Awards. In addition, the Amusement and Music Operators
Association ("AMOA") named the Company's The Adams Family Most Played Pinball
Game at its Fall 1997 trade show. Williams and Bally pinball games have received
three nominations for Most Played Pinball Game to be decided at the Fall 1998
trade show.
 
     Shuffle-Alley and Novelty Games: Shuffle-alley games offer a simulation of
bowling with varied scoring options. During fiscal 1996, the Company introduced
League Champs, its most recent version of shuffle alley. Coin-operated novelty
redemption games dispense tickets when a certain level of skill is achieved.
Such games comprise a large proportion of games located in family entertainment
centers. Tickets won may be redeemed by the player for merchandise of nominal
value. The Company did not introduce any new novelty games in fiscal 1998. In
fiscal 1997, the Company introduced Aaahh!! Real Monsters based on the popular
children's
 
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cartoon. During fiscal 1996, the Company established Fun House Games to develop
and market novelty games. Additional novelty games introduced in fiscal 1996
were Safecracker and Ticket-Tac-Toe.
 
     Cabinets: Lenc-Smith sells wooden pinball cabinets to WEG and wooden
cabinets and other wooden products to Midway, pursuant to a Cabinet Supply
Agreement, and to other companies from time to time, primarily for coin-operated
video games. See "Item 13. Certain Relationships and Related Transactions --
Relationship with Midway -- Cabinet Supply Agreement."
 
     Due to an industry wide decline in demand for pinball games in recent
years, the Company determined to downsize its Pinball, Novelty and Cabinets
segment operations in fiscal 1996. See Note 4 to the Notes to Consolidated
Financial Statements contained in the 1998 Annual Report.
 
CONTRACT MANUFACTURING
 
     The Company manufactures coin-operated video games and kits for Midway
pursuant to the Manufacturing Agreement described under the heading "Item 13.
Certain Relationships and Related Transactions -- Relationship with
Midway -- Manufacturing Agreement." From time to time, the Company may also
perform contract manufacturing for other parties.
 
                               BUSINESS STRATEGY
 
GENERAL
 
     The Company's overall business strategy is to increase both market share
and profitability by offering an expanding library of high-earning games for
each key segment of the market. The Company intends to accomplish this by
building on the Company's track record of creating the most innovative,
entertaining games available and by increasing sales penetration in major
markets. The Company utilizes the creative talents of 89 experienced game
designers organized in teams comprised of programmers, artists and mechanical
and electrical engineers.
 
GAMING
 
     The Williams slot machine and video gaming device lines offer casinos a
variety of game themes, all with original soundtracks, art and varying
paytables. The Company's Gaming machines emphasize innovation, reliability,
price and player appeal all of which are expected to translate into substantial
earnings for casino owners. The Company's new gaming machines have more advanced
technological features than its existing machines which are expected to elevate
excitement for end-users.
 
PINBALL, NOVELTY AND CABINETS
 
     During fiscal 1997, the Company completed a downsizing of its pinball
design and manufacturing operations as a result of the industry-wide decline in
demand for pinball games. Notwithstanding this market contraction, the Company
believes it will be able to maintain its share of the worldwide pinball games
market as a result of its leadership in design and engineering which is
evidenced by the continued annual achievement awards bestowed by the AMOA and
AAMA. Such leadership enables the Company to offer its distributors a variety of
innovative pinball games which result in greater operator profit through
increased player interest, mechanical reliability and serviceability. The
Company's design and engineering staff has been the industry leader in
innovations such as music and other sound effects, multi-level playing fields,
multi-ball releases and in reliability improvements such as solid state
technology and sophisticated diagnostic testing to quickly locate any
malfunction. In the past, the Company has generally introduced eight new pinball
machines per year in order to sustain player interest while spreading research,
development and manufacturing expenses to maintain competitive pricing. However,
as a result of the Company's decision to downsize the Pinball, Novelty and
Cabinets segment, the Company introduced four models during fiscal 1997, four
models in fiscal 1998 and expects to introduce four games in fiscal 1999.
 
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CONTRACT MANUFACTURING
 
     Contract manufacturing for Midway is conducted pursuant to the
Manufacturing Agreement. The Company does not currently plan to seek additional
manufacturing contracts. From time to time, however, the Company may perform
contract manufacturing for other parties.
 
                           MARKETING AND DISTRIBUTION
 
     Slot/Video Gaming Machines. The slot/video machine market is composed of
casinos located in hotels and other establishments, riverboats, in Native
American nations and on cruise ships. Casinos feature gaming as their primary
attraction. Gaming machines designed for the casino market are normally sold
directly to the casino and on occasion they may be sold to or through casino
management companies or through specialized gaming machine distributors. Sales
may be made in return for full payment or financed through machine revenue as
well as provided on a revenue-sharing basis. The Company employs 12 sales
personnel in offices in several United States locations and retains two
sales/service consultants for the Canadian market.
 
     Video Lottery Terminals. The VLT market is different from both the casino
market and the traditional lottery market. Most VLTs are located in places where
gaming is not the principal attraction. In certain jurisdictions, VLTs are
privately owned either by the owners of the establishments in which the
terminals are placed or by route operators or distributors who contract with
establishment owners to install, service and maintain the terminals. In other
jurisdictions, VLTs may be owned by or leased to the government or its appointed
agent or may be provided by the Company to the governmental agency on a
revenue-sharing basis.
 
     Pinball and Novelty Games. Coin-operated pinball and novelty games are sold
under the Williams, Bally and Fun House trademarks. Pinball and novelty games
are marketed through approximately 53 independent distributors worldwide.
Distributors sell these products to operators who own and operate the machines
and place them in amusement arcades, restaurants, taverns, convenience stores
and movie theaters. Distributors are primarily responsible for the sale and
distribution of these products in designated territories and are generally
expected to provide replacement parts and service and to arrange for installment
financing. It is customary for distributors of the Company's novelty games also
to distribute games produced by other manufacturers. However, the appointment of
distributors of the Company's pinball games are generally made on an exclusive
basis. Pinball and novelty games are marketed through trade shows, promotional
videotapes and advertising in trade publications.
 
     Export Sales. Export sales of the Company's products, primarily of pinball
games to Western Europe, were approximately $24.4 million (25.0% of total
revenues) for the fiscal year ended June 30, 1998 compared with $33.7 million
(44.0% of total revenues) for the fiscal year ended June 30, 1997 and $41.4
million (44.0% of total revenues) for the fiscal year ended June 30, 1996.
Substantially all foreign sales are made in United States dollars and,
therefore, the Company is not generally subject to the risk of fluctuation of
the value of foreign currencies in relation to the dollar.
 
     Customers/Distributors. In the fiscal year ended June 30, 1998, no one
customer accounted for greater than 10% of revenues of the Company. However,
Nova Games Import-Export GmbH & Co. KG and affiliates accounted for
approximately 16.0% ($12.1 million) of the Company's total revenues for fiscal
1997 and 15.0% ($14.0 million) of the Company's total revenues for fiscal 1996.
In the opinion of the Company, while the loss of a single distributor could
temporarily affect the distribution of a particular model, it would not have a
material adverse effect on the business of the Company. In any such event, the
Company believes it could make arrangements with alternate distributors for the
distribution of the Company's products.
 
                                 MANUFACTURING
 
     The Company's products are manufactured in its factories in Illinois.
Effective as of July 1, 1996 and in connection with the Offering, Midway and the
Company entered into a Manufacturing and Services Agreement dated as of July 1,
1996 (the "Manufacturing and Services Agreement") pursuant to which,
 
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among other things, the Company continued to manufacture Midway's coin-operated
video games. Effective as of April 6, 1998, in connection with the Distribution,
Midway and the Company and/or certain of its subsidiaries entered into various
agreements, including, among others, the Manufacturing Agreement and a Cabinet
Supply Agreement dated as of April 6, 1998 (the "Cabinet Supply Agreement")
pursuant to which the Company continues to manufacture Midway's coin-operated
video games and cabinets therefor. Effective April 6, 1998, the Manufacturing
Agreement superseded the Manufacturing and Services Agreement. For a description
of the Manufacturing and Services Agreement, the Manufacturing Agreement and the
Cabinet Supply Agreement, see "Item 13. Certain Relationships and Related
Transactions". The Company believes its facilities are adequate for its current
and planned production needs. Production is generally based on advance purchase
orders from Midway with respect to Contract Manufacturing, from governmental
agencies with respect to VLT's and from distributors or Midway with respect to
Pinball, Novelty and Cabinets.
 
     As a result of the patent litigation, the Company was enjoined from
manufacturing or selling certain older models of its reel-type slot machines.
Consequently, the Company has a significant inventory of potentially excess and
unusable slot machines of such particular models that are written down to the
cost of salvageable parts therein. See "Item 3. Litigation" and "Note 13:
Litigation" contained in the Company's Consolidated Financial Statements in the
1998 Annual Report.
 
     The Company believes that it is not meaningful to compare backlog orders at
the end of fiscal years since the amount of backlog orders varies from the
beginning to the end of a normal two- to three-month production process of a
coin-operated game and during the on-going production process for certain models
of gaming equipment which can extend over a period of years.
 
     Slot machines are warranted for a period of 90 days; VLTs are warranted for
a period of up to one year; and most pinball and novelty games are warranted for
a period of 60 to 90 days. No substantial costs have been incurred by the
Company in connection with such warranties.
 
     The raw materials used in manufacturing the Company's products include
various metals, plastics, wood and glass obtained from numerous sources of
supply. In addition, numerous component parts, including electronic
subassemblies and video monitors, are purchased from suppliers. Wood cabinets
for amusement games are manufactured by the Company's subsidiary, Lenc-Smith, as
well as by outside suppliers. The Company believes that the sources of supply of
component parts and raw materials are adequate and that substitute sources of
materials are available.
 
     The Company has a long cycle from purchase of inventory to collection of
cash on the sale of its gaming machines which is typical in the industry.
Component parts are purchased and assembled into finished goods which are
inventoried in order to be able to quickly fulfill customer orders. Finished
gaming machines are often installed in casinos on a "trial" basis and, only
after a successful trial period, the machines are sold to the casinos. The sale
may have extended payment terms if competitive forces so require.
 
INTELLECTUAL PROPERTY LICENSES
 
     While the Company primarily seeks to develop original proprietary games,
certain of the Company's games and gaming devices are based on properties
licensed from third parties, such as Hasbro, Inc. and the National Basketball
Association. Typically, the Company is obligated to make certain minimum
guaranteed royalty payments over the term of the license and to advance payment
against such guarantees. License agreements generally extend for a term of two
to three years, are terminable in the event of material breach (including
failure to pay any amounts owing to the licensor in a timely manner) by the
Company and certain other events, and, in some cases, are renewable upon payment
of certain minimum guarantees or the attainment of specified sales levels during
the term of the license. Certain licenses are limited to specific territories.
Each license typically provides that the licensor retains the right to exploit
the licensed property for all other purposes, including the right to license the
property for use with other products.
 
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PATENT, TRADEMARK, COPYRIGHT AND PRODUCT PROTECTION
 
     Each slot/video gaming machine and pinball and novelty game title may
embody a number of separately-protected intellectual property rights, including
trademarks, copyrights and patents. See "Item 3. Legal Proceedings" with respect
to certain patent litigation between the Company and International Game
Technology involving certain older models of reel-type slot machines.
 
                             GOVERNMENT REGULATION
 
GENERAL
 
     The manufacture and distribution of gaming equipment is subject to
extensive Federal, state, local and foreign regulation. Although the laws and
regulations of the various jurisdictions in which the Company operates vary in
their technical requirements and are subject to amendment from time to time,
virtually all of these jurisdictions require licenses, permits, documentation of
qualification, including evidence of financial stability, and other forms of
approval for companies engaged in the manufacture and distribution of gaming
devices as well as for the officers, directors, major stockholders and key
personnel of such companies.
 
     WGI has obtained the required regulatory licenses to manufacture and sell
its products to land based casinos, riverboats, racetracks, lotteries and Native
American casinos in the following domestic gaming jurisdictions: Arizona,
Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana,
Minnesota, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North
Dakota, Oregon, Rhode Island, South Dakota, West Virginia, Wisconsin, Bad River
Band of Chippewa, Bay Mills Indian Community, Chitimacha Tribe of Louisiana,
Coushatta Tribe of Louisiana, Fond du Lac Band of Lake Superior Chippewa, Fort
McDowell Mohave-Apache Indian Community, Grand Portage Band of Chippewa, Grand
Traverse Band of Ottawa & Chippewa Indians, Hannahville Indian Community,
Ho-Chunk Nation, Lac du Flambeau Band of Lake Superior Chippewa Indians, Lac
Vieux Desert Band of Lake Superior Chippewa Indians, Leech Lake Band of
Chippewa, Lower Sioux Indian Community, Mashantucket Pequot Tribe, Menominee
Indian Tribe of Wisconsin, Mille Lacs Band of Ojibwe Indians, Mississippi Band
of Choctaw Indians, Mohegan Tribe of Indians, Omaha Tribe of Nebraska, Oneida
Tribe of Indians of Wisconsin, Prairie Band of Potawatomi Nation, Prairie Island
Indian Community, Pueblo of Isleta, Pueblo of Santa Ana, Pueblo of Tesuque, Red
Cliff Band of Lake Superior Chippewa, Red Lake Band of Chippewa Indians, Sac &
Fox Tribe of Mississippi in Iowa, Sault Ste. Marie Tribe of Chippewa Indians,
Shakopee Mdewakanton Sioux (Dakota) Community, Sisseton Wahpeton Sioux Tribe,
Spirit Lake Sioux Tribe, St. Croix Chippewa Indians of Wisconsin, Standing Rock
Sioux Tribe, Tunica-Biloxi Tribe of Louisiana, Upper Sioux Community, Ute
Mountain Ute Tribe, White Earth Nation, White Mountain Apache Tribe,
Yavapai-Apache Nation.
 
     WGI is also licensed in the Canadian provinces of Alberta, British
Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Quebec
and Saskatchewan, and in the Bahamas, Greece and Puerto Rico.
 
NEVADA REGULATIONS
 
     The manufacture, sale and distribution of gaming devices for use or play in
Nevada or for distribution outside of Nevada are subject to the Nevada Gaming
Control Act and the regulations promulgated thereunder (collectively, the
"Nevada Act"). The Company's manufacturing and distribution of gaming devices
are subject to licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission") and the Nevada State Gaming Control Board (the "Nevada
Board"). The Nevada Commission and the Nevada Board are collectively referred to
as the "Nevada Gaming Authorities."
 
     The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of
 
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minimum procedures for internal fiscal affairs, and the safeguarding of assets
and revenues, providing reliable record keeping and requiring the filing of
periodic reports with the Nevada Gaming Authorities; (iv) the prevention of
cheating and fraudulent practices; and (v) providing a source of state and local
revenues through taxation and licensing fees. A change in such laws, regulations
and procedures could have an adverse effect on the Company's future Nevada
operations.
 
     Certain of the Company's subsidiaries (each a "Gaming Subsidiary" and
collectively the "Gaming Subsidiaries"), which manufacture and distribute gaming
devices or which hold stock of a Company subsidiary which does so, are required
to be licensed or registered by the Nevada Gaming Authorities. The licenses
require periodic payments of fees and taxes and are not transferable. No person
may become a stockholder of, or receive any percentage of profits from, the
Gaming Subsidiaries without first obtaining licenses and approvals from the
Nevada Gaming Authorities. The Company is registered by the Nevada Commission as
a publicly traded corporation ("Registered Corporation") and as such, it is
required periodically to submit detailed financial and operating reports to the
Nevada Commission and to furnish any other information which the Nevada
Commission may require. On August 21, 1997, the Nevada Commission approved the
Company's application for an amendment to its Order of Registration by removing
the limitation which, if not removed, would have caused the Order of
Registration to expire in August 1997. Also on that date, the Gaming
Subsidiaries and Mr. Louis J. Nicastro, Mr. Neil D. Nicastro and Mr. Harold H.
Bach, Jr. were registered, licensed or found suitable by the Nevada Commission,
as applicable, as a Registered Corporation, as registered holding companies, for
licensure as a manufacturer and distributor of gaming devices, as an operator of
a slot machine route and as directors, officers and stockholders of such
entities. There can be no assurance that such registrations, findings of
suitability and licenses will not be revoked, suspended, limited or conditioned
or that such persons will continue to be found suitable as licensees.
 
     All gaming devices that are manufactured, sold or distributed for use or
play in Nevada, or for distribution outside of Nevada, must be manufactured by
licensed manufacturers and distributed or sold by licensed distributors. All
gaming devices manufactured for use or play in Nevada must be approved by the
Nevada Commission before distribution or exposure for play. The approval process
for gaming devices includes rigorous testing by the Nevada Board, a field trial
and a determination as to whether the gaming device meets strict technical
standards that are set forth in the regulations of the Nevada Commission.
Associated equipment must be administratively approved by the Chairman of the
Nevada Board before it is distributed for use in Nevada.
 
     The Nevada Commission may investigate any individual who has a material
relationship to, or material involvement with, the Company or the Gaming
Subsidiaries in order to determine whether such individual is suitable or should
be licensed as a business associate of a licensee. Officers, directors and
certain key employees of the Gaming Subsidiaries must file license applications
with the Nevada Gaming Authorities. Officers, directors and key employees of the
Company who are actively and directly involved in activities of the Gaming
Subsidiaries may be required to be licensed or found suitable by the Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all the costs of the
investigation. Changes in licensed positions must be reported to the Nevada
Gaming Authorities and, in addition to their authority to deny an application
for a finding of suitability or license, the Nevada Commission has jurisdiction
to disapprove a change in a corporate position.
 
     If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or the Gaming Subsidiaries, the companies involved
would have to sever all relationships with such person. In addition, the Nevada
Commission may require the Company or any of the Gaming Subsidiaries to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
 
     The Company and the Gaming Subsidiaries are required to submit detailed
financial and operating reports to the Nevada Commission. Substantially all
material loans, leases, sales of securities and similar
 
                                        8
<PAGE>   10
 
financing transactions by the Gaming Subsidiaries must be reported to, and
approved by, the Nevada Commission.
 
     If it were determined that the Nevada Act was violated by the Gaming
Subsidiaries, the licenses they hold could be limited, conditioned, suspended or
revoked, subject to compliance with certain statutory and regulatory procedures.
In addition, the Gaming Subsidiaries, the Company and the persons involved could
be subject to substantial fines for each separate violation of the Nevada Act at
the discretion of the Nevada Commission. The limitation, conditioning or
suspension of any gaming license or the appointment of a supervisor could and
the revocation of any license would materially adversely affect the Company's
future operations in Nevada.
 
     Any beneficial holder of the voting securities of the Company, regardless
of the number of shares owned, may be required to file applications, be
investigated and have his, her or its suitability as a beneficial holder of the
Company's voting securities determined if the Nevada Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
 
     The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of the Company's voting securities to report the acquisition to the
Nevada Commission. The Nevada Act requires that beneficial owners of more than
10% of the Company's voting securities apply to the Nevada Commission for a
finding of suitability within 30 days after the Chairman of the Nevada Board
mails the written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
10% but not more than 15% of the Company's voting securities may apply to the
Nevada Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor shall not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business as an institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the Board of Directors of the Company, any change in the Company's
corporate charter, bylaws, management, policies or operations, or those of any
of its gaming affiliates, or any other action which the Nevada Commission finds
to be inconsistent with holding the Company's voting securities for investment
purposes only. Activities which are not deemed to be inconsistent with holding
voting securities for investment purposes only include: (i) voting on all
matters voted on by stockholders; (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management policies or operations; and
(iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the beneficial holder of voting
securities who must be found suitable is a corporation, partnership or trust, it
must submit detailed business and financial information including a list of
beneficial owners. The applicant is required to pay all costs of investigation.
 
     Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request by the Nevada
Commission or the Chairman of the Nevada Board, fails to identify the beneficial
owner. Any stockholder found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the common stock of a Registered Corporation beyond
such period of time as may be prescribed by the Nevada Commission may be guilty
of a criminal offense. The Company is subject to disciplinary action if, after
it receives notice that a person is unsuitable to be a stockholder or to have
any other relationship with the Company or the Gaming Subsidiaries, the Company:
(i) pays that unsuitable person any dividend or interest upon voting securities
of the Company; (ii) allows that person to exercise, directly or indirectly, any
voting rights conferred through securities held by that person; (iii) pays
remuneration in any form to that person for services rendered or otherwise; or
(iv) fails to pursue all lawful efforts to require the unsuitable person to
relinquish voting securities including, if necessary, the immediate repurchase
of such voting securities for cash at fair market value.
 
                                        9
<PAGE>   11
 
     The Nevada Commission may in its discretion, require holders of any debt
security of a Registered Corporation to file applications, be investigated and
be found suitable to own the debt security of a Registered Corporation if the
Nevada Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the State of Nevada. If the Nevada
Commission determines that a person is unsuitable to own such security, then
pursuant to the Nevada Act, the Registered Corporation can be sanctioned,
including with the loss of its approvals, if, without the prior approval of the
Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest
or any distribution whatsoever; (ii) recognizes any voting right by such
unsuitable person in connection with such securities; (iii) pays the unsuitable
person remuneration in any form; or (iv) makes any payment to the unsuitable
person by way of principal, redemption, conversion, exchange, liquidation or
similar transaction.
 
     The Company is required to maintain a current stock ledger in the State of
Nevada which may be examined by the Nevada Gaming Authorities at any time. If
any securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. The Company is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require that the Company's stock certificates bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Nevada Commission has not imposed such a requirement on the Company.
 
     The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or the proceeds
therefrom are intended to be used to construct, acquire or finance gaming
facilities in Nevada, or to retire or extend obligations incurred for such
purposes. Such approval, if given, does not constitute a finding, recommendation
or approval by the Nevada Commission or the Nevada Board as to the accuracy or
adequacy of the prospectus or the investment merits of the securities. Any
representation to the contrary is unlawful.
 
     Changes in control of the Company through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or any act or conduct
by a person whereby he or she obtains control, may not occur without the prior
approval of the Nevada Commission. Entities seeking to acquire control of a
Registered Corporation must satisfy the Nevada Board and the Nevada Commission
in a variety of stringent standards prior to assuming control of such Registered
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
 
     The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada gaming licenses and Registered Corporations that are
affiliated with those operations may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate licensees and their affiliates; (ii) preserve
the beneficial aspects of conducting business in the corporate form; and (iii)
promote a neutral environment for the orderly governance of corporate affairs.
Approvals are, in certain circumstances, required from the Nevada Commission
before the Company can make exceptional repurchases of voting securities above
the current market price thereof and before a corporate acquisition opposed by
management can be consummated. The Nevada Act also requires prior approval of a
plan of recapitalization proposed by the Company's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purpose of acquiring control of the Registered Corporation.
 
     License fees and taxes computed in various ways depending on the type of
gaming or activity involved are payable to the State of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either quarterly or annually. Annual fees are also payable to
the State of Nevada for renewal of licenses as a manufacturer and distributor.
 
                                       10
<PAGE>   12
 
     Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming operations. The
revolving fund is subject to increase or decrease in the discretion of the
Nevada Commission. Thereafter, Licensees are required to comply with certain
reporting requirements imposed by the Nevada Act. The Nevada Board may require a
Licensee to file an application for a finding of suitability to be made by the
Nevada Commission concerning an actual or intended activity or association of
the Licensee in a foreign gaming operation. A Licensee is also subject to
disciplinary action by the Nevada Commission if any such licensee knowingly
violates any laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations, engages
in activities that are harmful to the State of Nevada or its ability to collect
gaming taxes and fees, or employs a person in the foreign operation who has been
denied a license or finding of suitability in Nevada on the ground of personal
unsuitability.
 
NEW JERSEY REGULATION
 
     The manufacture, distribution, and operation of gaming machines in New
Jersey are regulated by the New Jersey Casino Control Commission (the "New
Jersey Commission") pursuant to the New Jersey Casino Control Act and the
regulations of the New Jersey Commission promulgated thereunder (collectively,
the "New Jersey Act"). Under the New Jersey Act, a company must be licensed as a
gaming related casino service industry ("CSI"), or fulfill other requirements,
in order to manufacture or distribute gaming machines. In order for a CSI
license to be issued or maintained, certain directors, officers, key employees
and owners of a company must be found by the New Jersey Commission to possess by
clear and convincing evidence good character, honesty, integrity and financial
stability.
 
     WGI has been issued a CSI license by the New Jersey Commission. This
license was issued for a two-year period and, upon proper application and
satisfaction of the same requirements for the initial issuance of a license, may
be renewed for four-year periods. However, the New Jersey Commission has the
discretion to suspend, revoke, or refuse to renew a license if a licensee fails
to continue to satisfy the requirements for licensure or violates the New Jersey
Act.
 
     In addition, all gaming machines used in New Jersey casinos must be
approved by the New Jersey Commission. In determining whether to approve gaming
machines, the New Jersey Commission will consider various factors, including
design, integrity, fairness, and honesty and may require a field test of the
machine.
 
MISSISSIPPI
 
     The manufacture, sale and distribution of gaming devises for use or play in
Mississippi are subject to the Mississippi Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Mississippi Act"). Such
activities are subject to the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi
State Tax Commission (collectively referred to as the "Mississippi Gaming
Authorities"). Although not identical, the Mississippi Act is similar to the
Nevada Act.
 
     The Company and the Gaming Subsidiaries have received the various
registrations, approvals, permits and licenses in order to engage in
manufacturing and distribution of gaming equipment in Mississippi. The license
to manufacture and distribute gaming equipment in Mississippi is not
transferable, is issued for a two-year period and must be renewed every two
years thereafter.
 
     Similar to Nevada, the Mississippi Commission may investigate and find
suitable any individual who has a material relationship to, or material
involvement with, the Company or the Gaming Subsidiaries, including, but not
limited to, record or beneficial holders of any of the voting securities of the
Company or the Gaming Subsidiaries and any other person whom the Mississippi
Commission determines exercises a significant influence upon the management or
affairs of the Company. The Company and the Gaming Subsidiaries are
                                       11
<PAGE>   13
 
required to maintain a current stock ledger in Mississippi which may be examined
by the Mississippi Commission at any time. The Company believes that all
required findings of suitability currently required have been applied for or
obtained. Any applicant for a finding of suitability must pay all investigative
fees and costs of the Mississippi Commission in connection with such an
investigation.
 
     The Mississippi Act requires any person who acquires beneficial ownership
of more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Mississippi Commission and such person may be required to be
found suitable. The Mississippi Act requires that beneficial owners of more than
10% of a Registered Corporation's voting securities apply to the Mississippi
Commission for a finding of suitability. The Mississippi Commission exercises
its discretion to require a finding of suitability of any beneficial owner of
more than 5% of a Registered Corporation's common stock. Under certain
circumstances, an "institutional investor," which acquires more than 5%, but not
more than 10%, of the Registered Corporation's voting securities may apply to
the Mississippi Commission for a waiver of such finding of suitability if such
institutional investor holds the voting securities for investment purposes only
and otherwise meets the regulatory requirements of the institutional investor
waiver provisions.
 
     The Company may not make a public offering of its securities without the
approval of the Mississippi Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Mississippi, or to retire or extend obligations incurred for such purposes. All
loans by the Company must be reported to the Mississippi Commission and certain
loans and other stock transactions must be approved in advance.
 
     If it were determined that the Mississippi Act was violated by the Company
or the Gaming Subsidiaries, the licenses they hold could be limited,
conditioned, suspended or revoked, subject to compliance with certain statutory
and regulatory procedures, which action, if taken, could materially adversely
affect the Company's manufacturing and distribution of gaming devices.
 
FEDERAL REGISTRATION
 
     Any subsidiaries of the Company that are involved in gaming activities are
required to register annually with the United States Department of Justice,
Criminal Division, in connection with the sale, distribution or operation of
Gaming. The Federal Gambling Devices Act of 1962 (the "Federal Act") makes it
unlawful, in general, for a person to manufacture, deliver or receive gaming
machines, gaming machine type devices and components across state lines or to
operate gaming machines unless that person has first registered with the
Attorney General of the United States. The Company is required to register and
renew its registration annually. The Company has complied with such registration
requirements. In addition, various record keeping and equipment identification
requirements are imposed by the Federal Act. Violation of the Federal Act may
result in seizure and forfeiture of the equipment, as well as other penalties.
 
REGULATION IN FOREIGN JURISDICTIONS
 
     Certain foreign countries permit the importation, sale and/or operation of
gaming equipment. Where importation is permitted, some countries prohibit or
restrict the payout feature of the traditional slot machine or limit the
operation of slot machines to a controlled number of casinos or casino-like
locations. Certain jurisdictions in which the Company operates require the
licensing of gaming devices, gaming device operators and manufacturers. The
Company and its gaming machines have been properly licensed and approved or have
applied for licensure and approval in all jurisdictions where the Company's
operations require such licensure and approval.
 
NATIVE AMERICAN GAMING REGULATION
 
     Numerous Native American tribes have become engaged in or have licensed
gaming activities on Indian lands as a means of generating tribal governmental
revenue. The Company manufactures and supplies gaming equipment for Native
American tribes. Gaming on Native American lands, including the terms and
conditions under which gaming equipment can be sold or leased to Native American
tribes, is or may be subject to regulation under the laws of the tribes, the
laws of the host state, the Indian Gaming Regulatory Act of 1988
                                       12
<PAGE>   14
 
("IGRA"), which is administered by the National Indian Gaming Commission (the
"NIGC") and the Secretary of the U.S. Department of the Interior (the
"Secretary"), and also may be subject to the provisions of certain statutes
relating to contracts with Native American tribes, which are administered by the
Secretary. As a precondition to gaming involving gaming machines, IGRA requires
that the tribe and the state enter into a written agreement (a "tribal-state
compact") that specifically authorizes such gaming, and that has been approved
by the Secretary, with notice of such approval published in the Federal
Register. Tribal-state compacts vary from state to state. Many require that
equipment suppliers meet ongoing registration and licensing requirements of the
state and/or the tribe and some impose background check requirements on the
officers, directors and shareholders of gaming equipment suppliers. Under IGRA,
tribes are required to regulate all commercial gaming under ordinances approved
by the NIGC. Such ordinances may impose standards and technical requirements on
main hardware and software and may impose registration, licensing and background
check requirements on gaming equipment suppliers and their officers, directors
and shareholders.
 
REGULATORY CHANGES AND LICENSE STATUS
 
     The laws and regulations of the numerous jurisdictions, foreign and
domestic, in which the Company and its Gaming Subsidiaries do business are
subject to change from time to time. In addition, the license status of the
Company and its Gaming Subsidiaries with respect to these jurisdictions is
subject to change. The information set forth in this Annual Report on Form 10-K
represents the most current available at the time of filing. Thus far the
Company has never been denied any such necessary governmental licenses, permits
or approvals. No assurances, however, can be given that such required licenses,
permits or approvals will be given or renewed in the future.
 
                                  COMPETITION
 
     The Gaming and Pinball, Novelty and Cabinets businesses are intensely
competitive and are characterized by the continuous introduction of new titles
and the development of new technologies. The ability of the Company to compete
successfully in these markets is based, in large part, upon its ability to
select and develop new products, to identify and obtain rights to commercially
marketable intellectual properties and to adapt its products for use with new
technologies. In addition, successful competition is also based upon price,
product enhancements, new product introductions, marketing support and
distribution systems. The Company's competitors vary in size from very small
companies with limited resources to very large corporations with greater
financial, marketing and product development than those of the Company.
 
     The Company believes that it is a leading manufacturer of slot/video gaming
machines and VLTs and the world's leading manufacturer of coin-operated pinball
games. In the slot/video gaming machine market, the Company competes with
International Game Technology, Alliance Gaming Corp., Sigma Game, Inc., Casino
Data Systems, Inc., Video Lottery Consultants, Inc., Silicon Gaming, Inc.,
Atronics, Inc. and Aristocrat, Inc. In the VLT market, the Company competes
primarily with International Game Technology, G-Tech and Video Lottery
Consultants, Inc., each based in the United States, and Spielo, based in Canada.
See "Item 3. Legal Proceedings" with respect to certain patent litigation
between the Company and International Game Technology involving certain older
models of reel-type slot machines. In the coin-operated pinball game market, the
Company competes with Sega Pinball. See "Factors Affecting Future
Performance -- Competition" below.
 
     During the term of the Manufacturing Agreement, WMS will not experience
competition for the manufacture of Midway's coin-operated video games; however,
the Manufacturing Agreement may be terminated on six months' notice. Midway may,
at any time, seek and accept superior competing third-party bids for cabinets
under the Cabinet Supply Agreement. No assurance can be given that Midway will
continue to employ the Company's services and keep these agreements in effect.
 
                                       13
<PAGE>   15
 
                    DESIGN, RESEARCH AND PRODUCT DEVELOPMENT
 
     The gaming equipment and pinball and novelty games which are sold by the
Company may be designed by members of its internal design staff or by
independent designers under contract to the Company. Cabinets are made to
customer specifications, and manufacturing under the Manufacturing Agreement is
based on Midway's designs and specifications. The Company also evaluates
coin-operated games designed by others with a view toward obtaining licenses
authorizing it to manufacture and sell such games as well as for purposes of
performing the contract manufacture of such games for sale under the trademarks
of others. The Company currently employs approximately 89 persons in its
research and product development departments. During the fiscal years ended June
30, 1998, 1997, and 1996, approximately $12,908,000, $12,882,000 and
$13,436,000, respectively, were expended on research and development with
respect to the Company's Gaming and Pinball, Novelty and Cabinets businesses.
 
                                  SEASONALITY
 
     None of the Company's business segments has historically been seasonal, but
quarterly revenues and net income usually increase when a coin-operated gaming
machine, pinball game or novelty game that achieves significant player appeal is
introduced.
 
                                   EMPLOYEES
 
     At June 30, 1998, the Company employed approximately 1,100 persons.
Approximately 550 of such employees were represented by the International
Brotherhood of Electrical Workers (the "IBEW") and approximately 145 of such
employees were represented by the United Furniture Workers union (the "UFW").
Collective bargaining agreements with the IBEW relating to the Chicago and
Waukegan, Illinois manufacturing facilities both expire June 30, 2000. The
collective bargaining agreement with the UFW relating to the Cicero, Illinois
manufacturing facility owned by Lenc-Smith expired June 30, 1998, and the
Company is currently in negotiations with the UFW to renew such agreement.
Non-salaried Lenc-Smith employees are currently on strike, but the Company does
not believe that the strike will have an adverse effect on the Company's
business, as the Company has been purchasing cabinets from alternative
suppliers. The Company believes that its relations with its other employees are
satisfactory.
 
                                THE DISTRIBUTION
 
     In addition to the Company's businesses, the Company previously, through
Midway and Midway's subsidiaries and affiliates, designed, published and
marketed interactive entertainment software played in both the coin-operated and
home markets. On April 6, 1998, the Company distributed to its stockholders
through a dividend all of the Midway common stock which it owned, which stock
represented 86.8% of the outstanding common stock of Midway. The Distribution
provided the Company's stockholders with 1.19773 shares of Midway common stock
for each share of Common Stock held by such stockholders on the Distribution
record date of March 31, 1998. Fractional shares were sold and the net proceeds
thereof paid in cash. The distribution ratio reflected 27,886,021 shares of
Common Stock outstanding on March 31, 1998. The Company first announced its
intentions to complete the Distribution on August 11, 1997. On the date of the
Distribution, pursuant to the Company's Stock Option Plans, the stock options
held by directors, officers and other employees of the Company were adjusted,
and adjustment payments were made to holders of such options. See "Item 11.
Executive Compensation."
 
     The financial position, results of operations and cash flows of Midway are
reported as discontinued operations in the 1998 Annual Report.
 
     In November 1997, the Board of Directors adopted a rights plan pursuant to
the Rights Agreement dated as of March 5, 1998 between the Company and The Bank
of New York, as Rights Agent, which became effective on the date of the
Distribution. The Rights Agreement provides that one preferred stock purchase
right (a "Right") will attach to each share of the Common Stock issued. The
Rights will expire at the close of
 
                                       14
<PAGE>   16
 
business on April 6, 2007 unless previously redeemed by the Company for nominal
consideration prior to exercisability. The Rights will not be exercisable,
transferable separately or trade separately from the shares of Common Stock,
until (a) the tenth business day after the date of a public announcement that a
person or group is an "Acquiring Person" or (b) the tenth business day (or such
later day as the Board, with the concurrence of a majority of Continuing
Directors (as defined), determines) after a person or group announces a tender
or exchange offer, which, if consummated, would result in such person or group
beneficially owning 15% or more of the Common Stock. In general, any person or
group of affiliated persons who, after the date of adoption of the Rights
Agreement, acquires beneficial ownership of 15% or more of the Common Stock will
be considered an "Acquiring Person." If a person or group of affiliated persons
becomes an Acquiring Person, then each Right (other than Rights owned by such
Acquiring Person and its affiliates and associates) will entitle the holder
thereof to purchase, for the exercise price, a number of shares of the Common
Stock having a then current market value of twice the exercise price.
Accordingly, at the original exercise price, each Right would entitle its
registered holder to purchase $200.00 worth of Common Stock for $100.00. A more
complete summary of the terms of the Rights Agreement is hereby incorporated
herein by reference to Exhibit 1 to the Company's Registration Statement on Form
8-A (File No. 1-8300) filed March 25, 1998.
 
     The Distribution was also accompanied by certain director and executive
officer changes. Prior to the Distribution, in June 1996, Mr. Louis J. Nicastro
had resigned from his position with WMS and certain amusement game subsidiaries
of the Company in order to assume, at the request of the Board of Directors of
the Company, the position of Chief Executive Officer of WHG Resorts & Casinos
Inc. ("WHG") in contemplation of the distribution by the Company of all the
common stock of WHG to the Company's stockholders. In early January 1998, WHG
was merged with a large resort and casino company. The Board of Directors, in
view of Mr. Nicastro's experience with the Company and in the industry, invited
him to return as Chief Executive Officer and President, effective on the date of
the Distribution, when the former Chief Executive Officer and President, Mr.
Neil D. Nicastro, was scheduled to resign from the Company in order to devote
substantially all of his business time to Midway. See "Item 11. Executive
Compensation -- Employment Contracts." In addition, Mr. Kenneth J. Fedesna
resigned as a director of the Company, David M. Satz, Jr. joined the Board of
Directors and Kevin L. Verner became Vice President and Chief Operating Officer
shortly after the Distribution.
 
                                       15
<PAGE>   17
 
                      FACTORS AFFECTING FUTURE PERFORMANCE
 
     Some of the risks and uncertainties that may cause the Company's operating
results to vary from anticipated results or that may that adversely affect its
operating results are as follows:
 
LOSSES FROM CONTINUING OPERATIONS
 
     The Company, apart from its discontinued operations, has not generated net
income during its last three fiscal years and may not generate net income for
the current fiscal year.
 
GAMING
 
     Patent Litigation. WGI is party to certain patent litigation between WGI
and International Game Technology with respect to certain older model reel-type
slot machines. In the event that it is ultimately determined in these actions
that the Company's older model slot machines infringe on International Game
Technology's patent and if the Company is unable to develop or acquire
non-infringing alternative devices or obtain licenses to use the patent, the
development of the Company's reel-type slot machine business may be adversely
affected. For a description of the patent litigation, see "Item 3. Legal
Proceedings."
 
     Ability to Maintain Regulatory Approvals. The manufacture and distribution
of gaming equipment is subject to extensive Federal, state, local and foreign
regulation. Although the laws and regulations of the various jurisdictions in
which the Company operates vary in their technical requirements and are subject
to amendment from time to time, virtually all of these jurisdictions require
licenses, permits, documentation of qualification, including evidence of
financial stability, and other forms of approval for companies engaged in the
manufacture and distribution of gaming devices as well as for the officers,
directors, major stockholders and key personnel of such companies. The Company
is authorized to sell its gaming machines in Arizona, Colorado, Connecticut,
Delaware, Illinois, Indiana, Iowa, Kansas, Louisiana, Michigan, Missouri,
Minnesota, Mississippi, Nevada, New Jersey, New Mexico, North Dakota, Oregon,
Rhode Island, South Dakota, West Virginia and Wisconsin, as well as to cruise
ships operating in international waters. The Company is also authorized to sell
its gaming machines directly or through distributors in several international
jurisdictions and to many Native American nations. Thus far, the Company has
never been denied any such necessary governmental licenses, permits or
approvals. No assurances, however, can be given that such required licenses,
permits or approvals will be given or renewed in the future.
 
     Application of Future or Additional Regulatory Requirements. In the future
the Company intends to seek the necessary registrations, licenses, approvals and
findings of suitability for the Company, its products and its personnel in other
U.S. and foreign jurisdictions in which the Company identifies significant sales
potential for its products. However, there can be no assurance that such
registrations, licenses, approvals or findings of suitability will be obtained
and will not be revoked, suspended or conditioned or that the Company will be
able to obtain the necessary approvals for its future products as they are
developed in a timely manner, or at all. If a registration, license, approval or
finding of suitability is required by a regulatory authority and the Company
fails to seek or does not receive the necessary registration, license, approval
or finding of suitability, the Company may be prohibited from selling its
products for use in the respective jurisdiction or may be required to sell its
products through other licensed entities at a reduced profit to the Company.
 
PINBALL, NOVELTY AND CABINETS
 
     During fiscal 1997, the Company completed a downsizing of its pinball
design and manufacturing operations as a result of the industry-wide decline in
demand for pinball games. Notwithstanding this market contraction, the Company
believes it will be able to maintain its share of the worldwide pinball games
market, and it expects to introduce a new generation of pinball games in late
1998, tentatively entitled "Pinball 2000." However, no assurance can be given as
to the likelihood of success and consumer acceptance of Pinball 2000 nor whether
the decline in demand for pinball games generally will abate.
 
                                       16
<PAGE>   18
 
CONTRACT MANUFACTURING
 
     The Manufacturing Agreement may be terminated on six months' notice. No
assurance can be given that Midway will continue to employ the Company's
services and keep this agreement in effect. In the event that Midway terminates
the Manufacturing Agreement, the Company's business and financial condition
could be adversely affected.
 
GENERAL
 
     Conflicts of Interest With Midway. Certain of WMS' officers and directors
are also officers, directors and stockholders of Midway, and may be subject to
various conflicts of interest including, among others, the performance by the
two companies under their existing agreements with each other as well as the
negotiation of any agreements required to be entered into in the future between
these two parties. Additionally, WMS may be subject to various conflicts of
interest arising from the relationship among it and Midway and their respective
affiliates.
 
     Mr. Louis J. Nicastro, the President, Chief Executive Officer and Chairman
of the Board of WMS is also a Director of Midway. Mr. Neil D. Nicastro, the son
of Louis J. Nicastro and a Director of and a consultant to WMS, is also the
Chairman of the Board, President, Chief Executive Officer and Chief Operating
Officer of Midway. Mr. Harold H. Bach, Jr., Mr. Kenneth J. Fedesna and Mr. Orrin
J. Edidin, officers and employees of WMS and/or various of its affiliates, are
also officers of Midway. Mr. Bach and Mr. Fedesna are also Directors of Midway.
Each of these key employees will devote such time to the business and affairs of
the Company as the Board of Directors deems appropriate. However, each such
person has other duties and responsibilities with Midway that may conflict with
time which might otherwise be devoted to his duties with WMS. The Company
anticipates that Messrs. Bach, Fedesna and Edidin will resign their positions
with the Company by the end of fiscal 1999.
 
     Competition. The Gaming and Pinball, Novelty and Cabinets businesses are
intensely competitive and are characterized by the continuous introduction of
new titles and the development of new technologies. The ability of the Company
to compete successfully in these markets is based, in large part, upon its
ability to select and develop new products, to identify and obtain rights to
commercially marketable intellectual properties and to adapt its products for
use with new technologies. In addition, successful competition is also based
upon price, product enhancements, new product introductions, marketing support
and distribution systems. The Company's competitors vary in size from very small
companies with limited resources to very large corporations with greater
financial, marketing and product development than those of the Company. See
"Operations -- Competition" above. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures faced by the Company will not adversely affect its
business and financial condition.
 
                                       17
<PAGE>   19
 
ITEM 2. PROPERTIES.
 
     The following table sets forth the Company's principal properties,
principal use, approximate floor space and the annual rental and lease
expiration date, where leased by the Company, at June 30, 1998.
 
<TABLE>
<CAPTION>
                                                                                         LEASE
                                   PRINCIPAL         APPROXIMATE       ANNUAL          EXPIRATION
         LOCATION                     USE            SQUARE FEET       RENT($)          DATE(1)
         --------                  ---------         -----------       -------         ----------
<S>                         <C>                      <C>           <C>               <C>
3401 N. California          Principal Office           129,400       100% Owned            --
  Ave. ...................
Chicago, IL                 & Gaming Mfg.                            by Williams
313 1/2 Worth Ave.,         Administrative Office          665         16,625           03/31/00
  #B-1....................
Palm Beach, FL
13820 West Business.......  Gaming Warehouse and        54,107         221,838          07/31/00
Center Drive                Distribution Center
Green Oaks, IL
2704 W. Roscoe St. .......  Gaming Office/R&D           28,500       100% Owned            --
Chicago, IL                                                          by Williams
4170 W. Harmon Ave........  Gaming Office/Warehouse     26,809         135,120          01/31/99
Las Vegas, NV
350 Commerce Dr. .........  Gaming Office/Warehouse     16,500         82,500           09/30/99
Pleasantville, NJ
3950 N.E. 33rd Terrace....  Gaming Office/Warehouse      6,600         38,280           04/31/01
Suites 10 and 11
Kansas City, MO
12450 Short Cut Rd. ......  Gaming Office/Warehouse      5,750         24,000           07/31/02
Biloxi, MS
6590 S. Bermuda Rd. ......  Gaming Warehouse            15,000         30,000        month-to-month
Las Vegas, NV
4750 Longley Ln. .........  Gaming Office/Warehouse      4,960         34,784           07/31/99
Reno, NV
420 Corporate Cir.........  Gaming Office/Warehouse      1,500         18,105           01/15/02
Suite C
Golden, CO
800 S. North Point Rd. ...  Pinball, Novelty and       236,000       100% Owned            --
Waukegan, IL                Video Games Mfg.                         by Williams
4616 W. 19th St. .........  Cabinet Mfg.               105,000      100% Owned by          --
Cicero, IL                                                         Lenc-Smith Inc.
2033 Swanson Ct...........  Warehouse                   15,000         14,000           09/30/98
Gurnee, IL
</TABLE>
 
-------------------------
(1)  Under leases that contain renewal options, additional amounts may be 
     payable for taxes, insurance, utilities and maintenance.
 
     Management believes that all of the facilities listed in the foregoing
table are in good repair and are adequate for their respective purposes. The
manufacturing facilities used by the Company are suitable and adequate for the
design and production of the Company's products and for its contract
manufacturing. Except during the July vacation shutdown, the manufacturing
facilities are generally operated on a one-shift basis; however, during periods
of increased production, certain portions of the facilities are operated on
multiple shifts. The production levels can be increased or decreased on a
periodic basis to match the level of incoming customer orders.
 
                                       18
<PAGE>   20
 
     The Company owns substantially all of the machinery, equipment, tools and
dies, furnishings and fixtures used in its businesses, all of which are well
maintained and satisfactory for the purposes intended.
 
ITEM 3. LEGAL PROCEEDINGS.
 
     In May 1994, WGI instituted a declaratory judgment action (the "Model 400
Action") against International Game Technology ("IGT"), in the United States
District Court for the Northern District of Illinois. The action sought a
declaration that a certain patent issued in 1984 and owned by IGT (the "Telnaes
Patent") was invalid, and that certain reel-type slot machines then made by WGI
did not infringe the Telnaes Patent. IGT counterclaimed alleging that the
Telnaes Patent was infringed by WGI's reel-type slot machines. The Telnaes
Patent relates to a particular method of assigning the probability of selecting
particular reel stop positions in a computer-controlled reel-type gaming
machine, which increases or decreases the probabilities of winning by means of
the computer's software, not the mechanical reels themselves.
 
     On September 19, 1996, the trial court rendered a decision in favor of IGT,
finding the Telnaes Patent valid, finding WGI's Model 400 slot machine to
infringe the Telnaes Patent, and enjoining WGI from further infringement of the
Telnaes Patent. On February 28, 1997, after a hearing on IGT's alleged damages,
the Court awarded judgment in favor of IGT and against WGI in the amount of
$32,845,189. Subsequently, the Court granted WGI's motion for a stay of
proceedings to enforce the money judgment pending disposition of WGI's motion
for a new trial and a similar stay pending appeal. On March 14, 1997, WGI filed
a motion seeking a new trial based on newly discovered evidence. A hearing on
the motion and the newly discovered evidence was concluded on September 18, 1997
and the Court disposed of this post-judgment motion on October 1, 1997 by
denying WGI's request for a new trial. WGI filed a notice of appeal on October
20, 1997. A bond having been previously filed by WGI, enforcement of the money
judgment has been stayed pending the disposition of the appeal. The appeal is
now pending before the United States Court of Appeals for the Federal Circuit.
 
     On November 26, 1996, IGT commenced an action against WGI in the United
States District Court for the Northern District of Illinois (the "Model 401
Action"). In this action, IGT seeks a judgment declaring that WGI's Model 401
slot machine also infringes the Telnaes Patent. The complaint seeks a
preliminary and permanent injunction and treble damages. On December 18, 1996,
the Court granted IGT's motion for a preliminary injunction and enjoined WGI
from the manufacture, use and sale of the Model 401 slot machine. On April 10,
1997, WGI filed a motion to vacate the previously entered preliminary injunction
based upon the newly discovered evidence. On May 5, 1998, the Court denied the
motion to vacate the preliminary injunction. WGI filed a notice of appeal on May
7, 1998. The appeal of the preliminary injunction order is now pending before
the United States Court of Appeals for the Federal Circuit.
 
     In the event that it is ultimately determined in the Model 400 Action and
in the Model 401 Action that such slot machines infringe upon the Telnaes Patent
and if WGI is unable to develop or acquire non-infringing alternative devices or
obtain a license to use the Telnaes Patent, the development of WGI's reel-type
slot machines business may be adversely affected. The Telnaes Patent relates
only to reel spinning slot machines and does not relate to VLTs, video poker
machines and other video gaming devices.
 
     Other than set forth above, the Company currently and from time to time is
involved in litigation incidental to the conduct of its business, none of which,
in the opinion of the Company, is likely to have a material adverse effect on
the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     Not applicable.
 
                                       19
<PAGE>   21
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
     Reference is made to "Market for the Company's Common Stock and Related
Security-Holder Matters" set forth in the 1998 Annual Report, which information
is incorporated by reference herein.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
     Reference is made to "Selected Five-Year Financial Data" set forth in the
1998 Annual Report, which information is incorporated by reference herein.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
 
     Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the 1998 Annual Report, which
information is incorporated by reference herein.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
 
     Not applicable.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     Reference is made to the Consolidated Financial Statements and Notes
thereto and Report of Independent Auditors set forth in the 1998 Annual Report,
which information is incorporated by reference herein.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
     Not applicable.
 
                                       20
<PAGE>   22
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
     (a) Identification of Directors. Except as set forth below, the directors
listed in the following table were elected at the January 1998 Annual Meeting of
Stockholders to serve until the 1999 Annual Meeting of Stockholders and until
their respective successors are duly elected and qualify. All are present
directors of the Company. Mr. Kenneth J. Fedesna, who was also elected as a
director of the Company at the January 1998 Annual Meeting of Stockholders,
resigned as a director on April 6, 1998. On April 6, 1998, Mr. David M. Satz,
Jr. was elected as a director of the Company to serve until the 1999 Annual
Meeting of Stockholders and until his successor has been duly elected and
qualifies. Mr. Satz was elected to fill the vacancy resulting from the
resignation of Mr. Fedesna. Mr. Neil D. Nicastro is the son of Mr. Louis J.
Nicastro; otherwise, there is no family relationship between any of the
directors or executive officers of the Company.
 
<TABLE>
<CAPTION>
                                                                                     SHARES OF
                                                                                    COMMON STOCK   PERCENTAGE
                                                                    DIRECTOR OR     DEEMED TO BE       OF
                                            POSITION WITH            EXECUTIVE      BENEFICIALLY   OUTSTANDING
                                        COMPANY AND PRINCIPAL      OFFICER OF THE     OWNED AT       COMMON
          DIRECTOR (AGE)              OCCUPATION AS OF 09/15/98    COMPANY SINCE    09/15/98(1)     STOCK(2)
          --------------              -------------------------    --------------   ------------   -----------
<S>                                 <C>                            <C>              <C>            <C>
Louis J. Nicastro (70)............  Chairman of the Board of
                                    Directors, President and
                                    Chief Executive Officer of
                                    the Company                         1974        7,659,832(3)      26.9%
Neil D. Nicastro (41).............  Director of the Company,
                                    former President, Chief
                                    Executive Officer and Chief
                                    Operating Officer of the
                                    Company and Chairman of the
                                    Board of Directors,
                                    President, Chief Executive
                                    Officer and Chief Operating
                                    Officer of Midway                   1986        8,437,500(4)      28.9%
Norman J. Menell (66).............  Vice Chairman of the Board of
                                    Directors of the Company            1980           75,902(5)         * 
William C. Bartholomay (70).......  Director of the Company and                                            
                                    President of Near North                                                
                                    National Group                      1981           92,486(5)         * 
William E. McKenna (79)...........  Director of the Company and                                            
                                    General Partner, MCK                                                   
                                    Investment Company                  1981           76,280(5)         * 
Harvey Reich (69).................  Director of the Company and                                            
                                    Attorney                            1983           74,876(5)         * 
Ira S. Sheinfeld (60).............  Director of the Company and                                            
                                    Attorney, Squadron, Ellenoff,                                          
                                    Plesent & Sheinfeld LLP             1993          118,930(6)         * 
David M. Satz, Jr. (72)...........  Director of the Company and                                            
                                    Attorney, Saiber Schlesinger                                           
                                    Satz & Goldstein                    1998           51,000(7)         * 
</TABLE>
 
-------------------------
* Less than 1% of the number of outstanding shares of Common Stock on September
  15, 1998.
 
(1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
    amended, shares underlying options are deemed to be beneficially owned if
    the holder of the option has the right to acquire beneficial ownership of
    such shares within 60 days.
 
(2) For purposes of calculating the percentage of outstanding Common Stock owned
    by each director, shares issuable upon the exercise of options exercisable
    within 60 days have been deemed to be outstanding.
 
                                       21
<PAGE>   23
 
(3) The number of shares reported as beneficially owned includes 7,155,200
    shares owned by Sumner M. Redstone and National Amusements, Inc. for which
    the reporting person has shared voting power but no dispositive power.
    Additionally, the number of shares reported as beneficially owned includes
    504,632 shares for which the reporting person has sole voting and sole
    dispositive power, 500,000 of which may be acquired upon the exercise of
    options. For a discussion concerning the shared voting power with respect to
    the 7,155,200 shares of Common Stock referred to above, see "Item 12.
    Security Ownership of Certain Beneficial Owners and Management -- Voting
    Proxy Agreement."
 
(4) The number of shares reported as beneficially owned includes 7,155,200
    shares owned by Sumner M. Redstone and National Amusements, Inc. for which
    the reporting person has shared voting power but no dispositive power.
    Additionally, the number of shares reported as beneficially owned includes
    1,282,300 shares for which the reporting person has sole voting and sole
    dispositive power, 1,257,286 of which may be acquired pursuant to stock
    options. For a discussion concerning the shared voting power with respect to
    the 7,155,200 shares of Common Stock referred to above, see "Item 12.
    Security Ownership of Certain Beneficial Owners and Management -- Voting
    Proxy Agreement."
 
(5) Includes 62,955 shares of Common Stock which such person has the right to
    acquire upon the exercise of stock options.
 
(6) Includes 100,728 shares of Common Stock which Mr. Sheinfeld has the right to
    acquire upon the exercise of stock options.
 
(7) Includes 50,000 shares of Common Stock which Mr. Satz has the right to
    acquire upon the exercise of stock options.
 
     LOUIS J. NICASTRO has been the President and Chief Executive Officer of the
Company since April 6, 1998 and was Chief Operating Officer of the Company from
April 6, 1998 to May 14, 1998. He has served as Chairman of the Board of
Directors of the Company since its incorporation in 1974. Mr. Nicastro also
served as Co-Chief Executive Officer of the Company (1994-1996), Chief Executive
Officer (1974-1994), President (1985-1988 and 1990-1991) and Chief Operating
Officer (1985-1986 and 1998). Mr. Nicastro is also a Director of Midway, and he
held various executive positions for Midway from 1988 until 1996.
 
     NEIL D. NICASTRO is a Director of and a consultant to the Company and he
was the President, Chief Executive Officer and Chief Operating Officer of the
Company until his resignation from such positions on April 6, 1998. Mr. Nicastro
became a Director of the Company in 1986 and was elected President of the
Company June 18, 1991, sole Chief Executive Officer June 26, 1996, Co-Chief
Executive Officer August 29, 1994 and Chief Operating Officer September 30,
1990. He served as Treasurer (1986-1994), Executive Vice President (1988-1991),
Senior Vice President (1987-1988), Vice President (1986-1987) and Director of
Stockholder Relations (1981-1986). Mr. Nicastro is Chairman of the Board,
President, Chief Executive Officer and Chief Operating Officer of Midway. Mr.
Nicastro has held various other executive positions for Midway since 1988.
 
     NORMAN J. MENELL has been Vice Chairman of the Board of Directors since
1990 and a Director of the Company since 1980. He also served as President
(1988-1990), Chief Operating Officer (1986-1990) and Executive Vice President
(1981-1988) of the Company. Mr. Menell is also a Director of Midway.
 
     WILLIAM C. BARTHOLOMAY is President of Near North National Group, Chicago,
Illinois (insurance brokers) and Chairman of the Board of the Atlanta Braves
(National League Baseball). He has served as Vice Chairman of Turner
Broadcasting System, Inc., a division of Time Warner Inc., since April 1994
having also held that office during the period 1976-1992 and having served as a
Director (1976-1994). He also served as Vice Chairman of the Board of Directors
of Frank B. Hall & Co. Inc. (1974-1990). Mr. Bartholomay was elected a Director
of the Company in 1981. Mr. Bartholomay is also a Director of Midway.
 
     WILLIAM E. MCKENNA has served as a General Partner of MCK Investment
Company, Beverly Hills, California for in excess of five years. He also is a
Director of Midway, California Amplifier, Inc., Drexler Technology Corporation
and Safeguard Health Enterprises, Inc. Mr. McKenna has served as a Director of
the Company since 1981.
 
                                       22
<PAGE>   24
 
     HARVEY REICH was a member of the law firm of Robinson Brog Leinwand Greene
Genovese & Gluck, P.C., New York, New York and its predecessor firms for in
excess of five years until his retirement in July 1998. Mr. Reich was elected a
Director of the Company in 1983. Mr. Reich is also a Director of Midway.
 
     IRA S. SHEINFELD became a director of the Company in 1993. He has been a
member of the law firm of Squadron, Ellenoff, Plesent & Sheinfeld LLP, New York,
New York, for in excess of five years. Mr. Sheinfeld is also a Director of
Midway.
 
     DAVID M. SATZ JR. became a Director of the Company on April 6, 1998. Mr.
Satz has been a member of the law firm Saiber Schlesinger Satz & Goldstein,
Newark, New Jersey, for in excess of five years. Mr. Satz is also a Director of
the Atlantic City Racing Association.
 
     (b) Identification of Executive Officers. The following officers will serve
until the 1999 Annual Meeting of the Board of Directors and until their
respective successors are duly elected and qualify.
 
<TABLE>
<CAPTION>
                NAME                     AGE                            POSITION
                ----                     ---                            --------
<S>                                      <C>    <C>
Louis J. Nicastro....................    70     Chairman of the Board, President and Chief Executive
                                                Officer
Kevin L. Verner......................    39     Vice President and Chief Operating Officer
Harold H. Bach, Jr. .................    66     Vice President -- Finance, Treasurer, Chief Financial
                                                and Chief Accounting Officer
Orrin J. Edidin......................    37     Vice President, Secretary and General Counsel
</TABLE>
 
     The principal occupation or employment of Mr. Louis J. Nicastro during the
last five years is set forth in Item 10(a) above. See also "Item 11. Executive
Compensation -- Employment Contracts" with respect to Mr. Louis J. Nicastro's
employment arrangements with the Company.
 
     Mr. Verner has served as Vice President and Chief Operating Officer of the
Company since May 14, 1998, and as Executive Vice President and General Manager
of WGI since February 18, 1997. Previously, Mr. Verner served as Vice President
and Director of New Business Development of R.J. Reynolds Tobacco Company from
February 1993 until February 1997.
 
     Mr. Bach assumed the positions of Treasurer effective September 13, 1994
and Vice President-Finance, Chief Financial and Chief Accounting Officer
effective September 30, 1990. He also served as Secretary of the Company from
July 5, 1990 to June 15, 1992. Additionally, Mr. Bach has served as Executive
Vice President -- Finance, Chief Financial Officer and a Director of Midway
since August 30, 1996. Previously, he served as Senior Vice President -- Finance
and Chief Financial Officer of Midway from September 17, 1990 to August 30,
1996, and he has served as Treasurer of Midway continuously since December 1,
1994. Prior to joining the Company, Mr. Bach was a partner in the accounting
firms of Ernst & Young (1989-1990) and Arthur Young & Company (1967-1989).
 
     Mr. Edidin has served as Vice President, Secretary and General Counsel of
the Company since May 30, 1997. Mr. Edidin served as Associate General Counsel
of Fruit of the Loom, Inc. from August 1992 until May 1997. Mr. Edidin has also
served as Vice President, Secretary and General Counsel of Midway since June 30,
1997.
 
                                       23
<PAGE>   25
 
ITEM 11. EXECUTIVE COMPENSATION.
 
     The Summary Compensation Table below sets forth the compensation paid by
the Company and Midway for service in all capacities during the fiscal years
ended June 30, 1998, 1997 and 1996 to each of the Company's executive officers
who served during such periods and whose compensation exceeded $100,000.
Pursuant to the Manufacturing and Services Agreement, after the Offering and
until the Distribution the compensation paid by the Company to the executive
officers of the Company (other than Mr. Neil D. Nicastro) was allocated to
Midway based upon estimates by management of the Company and by management of
Midway of the percentage of time devoted to Midway. After the Distribution,
compensation paid by WMS to the executive officers of the Company is reimbursed
by Midway in amounts equal to the Company's allocated cost pursuant to the
Temporary Support Services Agreement dated as of April 6, 1998 between the
Company and Midway (the "Temporary Support Services Agreement"). Management of
the Company believes that such executive officers devoted 40% to 70% of their
time to Midway during fiscal 1998. See "Item 13. Certain Relationships and
Related Transactions" for a description of the Manufacturing and Services
Agreement and the Temporary Support Services Agreement.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                LONG TERM
                                                                              COMPENSATION
                                                                                 AWARDS
                                          ANNUAL COMPENSATION                 -------------
                             ----------------------------------------------    SECURITIES
                                                             OTHER ANNUAL      UNDERLYING        ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR   SALARY($)     BONUS     COMPENSATION($)   OPTIONS(#)(1)   COMPENSATION($)
---------------------------  ----   ---------     -----     ---------------   -------------   ---------------
<S>                          <C>    <C>         <C>         <C>               <C>             <C>             
Louis J. Nicastro........    1998    107,308           --           --            500,000        4,956,640(2)
  Chairman of the Board,     1997         --           --           --            629,554(3)     9,261,503(4)
  President and Chief        1996    832,500           --        6,127(6)              --          629,971(7)
  Executive Officer(5)
Neil D. Nicastro.........    1998    575,000    1,387,820           --            250,000        2,547,074(8)(9)(10)
  Former President, Chief    1997    600,000      969,160           --          1,007,286(4)        54,632(10)
  Executive Officer and      1996    532,500      267,600           --                 --           35,791(10)
  Chief Operating
  Officer(11)
Kevin L. Verner..........    1998    250,000      100,000           --                 --           50,100(8)(12)
  Vice President and Chief
  Operating Officer(13)
Harold H. Bach, Jr. .....    1998    300,000      220,000           --                 --               --(8)
  Vice President --          1997    300,000      175,000           --             94,433(4)            --
  Finance, Treasurer,        1996    262,000       67,800           --                 --               --
  Chief Financial Officer
  and Chief Accounting
  Officer
Orrin J. Edidin..........    1998    180,000       75,000           --             25,000               --(8)
  Vice President, Secretary
  and General Counsel(14)
</TABLE>
 
-------------------------
 (1) Does not include Midway stock options, all of which were granted at an
     exercise price equal to market value on the date of grant. In fiscal 1998,
     Mr. Louis J. Nicastro received options to purchase 10,000 shares of Midway
     common stock, Mr. Neil D. Nicastro received options to purchase 150,000
     shares of Midway common stock, Mr. Bach received options to purchase 50,000
     shares of Midway common stock and Mr. Edidin received options to purchase
     35,000 shares of Midway common stock. In fiscal 1997, Mr. Neil D. Nicastro
     received options to purchase 500,000 shares of Midway common stock, Mr.
     Louis J. Nicastro received an option to purchase 25,000 shares of Midway
     common stock and Mr. Bach received options to purchase 100,000 shares of
     Midway common stock.
 
                                       24
<PAGE>   26
 
 (2) Represents a payment made to Mr. Louis J. Nicastro to compensate him in
     lieu of adjusting his WMS stock options in connection with the
     Distribution. See "Adjustment to Options Resulting from the Distribution"
     below.
 
 (3) Reflects the adjusted amount (total number) of stock options previously
     granted by the Company, which number of options and the exercise price
     thereof were adjusted pursuant to the distribution of the WHG common stock.
 
 (4) Represents a termination payment received in fiscal 1997. See "Item 1.
     Business -- The Distribution" and Note 3 to the Notes to Consolidated
     Financial Statements.
 
 (5) Mr. Louis J. Nicastro was elected President, Chief Executive Officer and
     Chief Operating Officer of the Company on April 6, 1998 and resigned from
     the position of Chief Operating Officer on May 14, 1998. Mr. Louis J.
     Nicastro has been Chairman of the Board of Directors since 1974. He also
     served as Co-Chief Executive Officer in fiscal 1996 until June 26, 1996.
     See "Item 1. Business -- The Distribution."
 
 (6) Represents tax gross-up payments.
 
 (7) Represents the accrual for contractual retirement benefits for Mr. Louis J.
     Nicastro.
 
 (8) Excludes the value of adjustments to stock options of these holders
     pursuant to the Distribution. These amounts are found under "Adjustment to
     Options Resulting from the Distribution" below.
 
 (9) Includes Mr. Nicastro's termination payment in the amount of $2,500,000. He
     also received an option to purchase 250,000 shares of Common Stock and a
     WMS consulting agreement. See "Employment Contracts" below.
 
(10) Includes life insurance premiums of $1,571, $1,467 and $691 for fiscal
     1998, 1997 and 1996, respectively, and accrual for contractual retirement
     benefits of $45,503, $53,165 and $35,100 for fiscal 1998, 1997 and 1996,
     respectively.
 
(11) Mr. Nicastro served as President, Chief Executive Officer and Chief
     Operating Officer of the Company during fiscal 1998 until his resignation
     from such positions on April 6, 1998.
 
(12) Includes $50,100 paid to Mr. Verner in consideration of his forfeiture of
     performance units granted by his previous employer.
 
(13) Mr. Verner was elected Vice President and Chief Operating Officer of the
     Company on May 14, 1998.
 
(14) Mr. Edidin joined the Company as Vice President, Secretary and General
     Counsel on May 30, 1997.
 
     The following table sets forth certain information with respect to options
to purchase Common Stock granted in fiscal 1998 under the Company's stock option
plans to persons named in the Summary Compensation Table.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                  INDIVIDUAL GRANTS                                                  POTENTIAL REALIZABLE
                       ---------------------------------------                                         VALUE AT ASSUMED
                                              PERCENT OF TOTAL                                       ANNUAL RATES OF STOCK
                                                  OPTIONS                                           PRICE APPRECIATION FOR
                       NUMBER OF SECURITIES       GRANTED                                               OPTION TERM(1)
                        UNDERLYING OPTIONS    TO EMPLOYEES IN    EXERCISE PRICE                     -----------------------
        NAME               GRANTED (#)        FISCAL YEAR (%)      ($/SHARE)      EXPIRATION DATE     5%($)        10%($)
        ----           --------------------   ----------------   --------------   ---------------     -----        ------
<S>                    <C>                    <C>                <C>              <C>               <C>          <C>
Louis J. Nicastro....        500,000               47.68             5.4375          04/06/08       1,711,250    4,331,250
Neil D. Nicastro.....        250,000               23.84             5.4375          04/06/08         855,625    2,165,625
Kevin L. Verner......             --                  --                 --                --              --           --
Harold H. Bach, Jr. .             --                  --                 --                --              --           --
Orrin J. Edidin(2)...         25,000                2.38             4.4375          05/28/08          69,813      176,813
</TABLE>
 
-------------------------
(1) The assumed appreciation rates are set pursuant to the rules and regulations
    promulgated under the Securities Exchange Act of 1934, as amended, and are
    not derived from the historical or projected prices of the Company's Common
    Stock. Total potential stock price appreciation from April 6, 1998 to April
    6, 2008 for all stockholders, based on the price of $5.4375 per share of
    Common Stock on April 6, 1998 and
 
                                       25
<PAGE>   27
 
    a total of 27,886,021 shares of Common Stock outstanding, would be
    $95,359,000 and $241,660,000 at assumed rates of stock appreciation of 5%
    and 10%, respectively.
 
(2) This option become exercisable for up to 10%, 30%, 60% and 100% of the
    option grant upon the first, second, third and fourth anniversaries,
    respectively, of the date of the grant.
 
     The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock and the number and value of
outstanding options owned by persons named in the Summary Compensation Table.
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL-YEAR-END OPTION VALUES
 
<TABLE>
<CAPTION>
                                                                           NUMBER OF                VALUE OF
                                                                     SECURITIES UNDERLYING        UNEXERCISED
                                                                      UNEXERCISED OPTIONS     IN-THE-MONEY OPTIONS
                                         SHARES                          AT 6/30/98(#)          AT 6/30/98($)(1)
                                       ACQUIRED ON       VALUE          EXERCISABLE(E)           EXERCISABLE(E)
               NAME                    EXERCISE(#)    REALIZED($)      UNEXERCISABLE(U)         UNEXERCISABLE(U)
               ----                    -----------    -----------    ---------------------    --------------------
<S>                                    <C>            <C>            <C>                      <C>
Louis J. Nicastro..................      629,554       5,449,419(2)          500,000(E)                   --(E)
Neil D. Nicastro...................           --              --           1,257,286(E)            1,111,162(E)
Kevin L. Verner....................           --              --              12,591(E)               13,768(E)
                                                                             113,320(U)              123,915(U)
Harold H. Bach, Jr.................           --              --              94,433(E)               63,128(E)
Orrin J. Edidin....................           --              --              47,500(U)               19,091(U)
                                                                               2,500(E)                2,121(E)
</TABLE>
 
-------------------------
(1) Based on the closing price of Common Stock on the New York Stock Exchange on
    June 30, 1998, which was $4.1875.
 
(2) Excludes a $4,956,640 payment to compensate Mr. Louis J. Nicastro for the
    full amount to which he would otherwise have been entitled under the
    Adjustment Plan described below under the heading "Adjustment to Options
    Resulting from the Distribution."
 
ADJUSTMENT TO OPTIONS RESULTING FROM THE DISTRIBUTION
 
     As of the date of the Distribution, Midway had 38,500,000 shares
outstanding of which the Company owned 33,400,000 shares, representing
approximately 86.8% of the outstanding shares of Midway common stock.
 
     In August 1997, the Company announced that its Board of Directors had
approved the Distribution in principle. The Distribution was conditioned upon
several requirements, including the receipt of a ruling from the Internal
Revenue Service that the transaction be tax free to the Company and its
stockholders. The Company completed the Distribution on April 6, 1998.
 
     Each of the Company's four Stock Option Plans in effect prior to the
Distribution provided that in the event of a dividend or other distribution,
such as the Distribution, outstanding options were to be adjusted so as to
prevent dilution of the benefits or potential benefits intended to be made
available by the options in such manner as the Board of Directors deems
equitable. Several adjustment method alternatives were considered by the Board.
Some companies that have implemented a spin-off of a subsidiary have followed a
strategy where existing option holders were given replacement options in both
the parent and the subsidiary. However, since Midway was already a public
company with 13.2% of its stock held by stockholders other than the Company, the
Board concluded that it would not be appropriate for the Company to cause Midway
to issue options to satisfy the Company's obligations to its option holders.
 
     The Board also considered adjusting the number and exercise price of the
options so that their intrinsic value after the Distribution would equal the
intrinsic value of the options before the Distribution. Such an adjustment would
be accompanied by both reducing the exercise price of the options and increasing
the
 
                                       26
<PAGE>   28
 
number of shares issuable upon exercise of the options. However, in light of the
significant value of Midway to the Company as a whole, such an approach would
have resulted in the issuance of options to acquire more than twice the number
the shares of Common Stock outstanding, which the Board believed would not be in
the best interests of stockholders.
 
     Instead, the Board adopted an approach that would give option holders the
same number of options to acquire shares of Common Stock after the Distribution
(at the exercise price described below) as such holders held at the time of the
Distribution and to compensate option holders for the lost opportunity value
represented by the shares of common stock of Midway being distributed in the
Distribution to stockholders of the Company which option holders would not
participate in. In order to preserve the Company's cash resources, the Board
also provided that such compensation be paid through a combination of cash and
shares of Common Stock and would be capped.
 
     The Board also believed it was desirable to advise the Company's
stockholders at the earliest time of the minimum number of Midway shares they
would receive as a result of the Distribution. Such number would have varied by
reason of the exercise of any options prior to the completion of the
Distribution. The Board believed that it was therefore in the interest of
stockholders to obtain an undertaking from each option holder not to exercise
his or her options prior to the completion of the Distribution.
 
     After considering all of the foregoing and in consultation with its
financial advisors, the Board approved and proposed to option holders the plan
described below (the "Adjustment Plan"). The Adjustment Plan was accepted by
holders of all outstanding options under the Company's four Stock Option Plans
then in effect, including each of the persons listed in the Summary Compensation
Table. The implementation of the Distribution was subject to the receipt of an
opinion from the Company's financial advisors, CIBC Oppenheimer Corp., that the
Distribution, including the adjustments to stock options resulting from the
Distribution, was fair to the Company and its stockholders.
 
     Pursuant to the Adjustment Plan, each option holder agreed not to exercise
his or her outstanding options until the earliest of (i) the record date of the
Distribution which was March 31, 1998, (ii) the date the Company publicly
announces that is has abandoned its plan to complete the Distribution, (iii) the
termination of employment of such holder by the Company for any reason, or (iv)
June 30, 1998. In consideration for such agreement, each option holder was
afforded one of two choices, at their election, which election was made shortly
before the Distribution, in the event the Distribution was completed:
 
          (1) Each option holder became entitled to receive a guaranteed minimum
     payment for all of his or her options in an amount equal to the spread
     between the trading price of shares of Common Stock on September 22, 1997
     ($30.00), the date the Adjustment Plan was approved by the Board, and the
     exercise price of the option, plus a premium which represented the value of
     the option holder's commitment not to exercise the options, determined
     using the Black-Scholes method of determining option values; or
 
          (2) At the time of the Distribution, the option holder could elect to
     receive: (a) an ongoing option (the "Surviving Option") to purchase the
     same number of shares of Common Stock as they then held at an exercise
     price determined by multiplying the exercise price of the applicable
     options by a fraction, the numerator of which was the projected value of
     shares of Common Stock after the date on which shares of Common Stock
     traded ex-dividend (i.e. without entitlement to the Midway shares being
     spun off), as determined by the Board upon advice of its financial
     advisors, and the denominator of which was the average closing price of
     shares of Common Stock on the New York Stock Exchange for a period of time
     prior to the Distribution determined by the Board and (b) payment for the
     lost opportunity value of options to purchase the number of shares of
     common stock of Midway that such optionee would have received prior to the
     Distribution (the "Phantom Midway Options"). The number of shares subject
     to the Phantom Midway Options was determined by multiplying the number of
     options by the ratio of shares of Common Stock (the "Distribution Ratio").
     The exercise price of the Phantom Midway Options was determined by
     subtracting the exercise price of the applicable Surviving Option from the
     exercise price of the applicable option and dividing the result by the
     Distribution Ratio. The Phantom
 
                                       27
<PAGE>   29
 
     Midway Options were then valued using the Black-Scholes methodology,
     utilizing such assumptions approved by the Board and its financial
     advisors, and were purchased by the Company.
 
     Payments by the Company for either the minimum guarantee or the Phantom
Midway Options was initially approved by the Board to be paid in cash up to
maximum of $30.0 million and in shares of Common Stock up to a maximum of
2,000,000 shares. Shortly before the Distribution, the Board became concerned
that, after payment of taxes, optionees would have little cash remaining and
might be inclined, for investment concentration or other reasons, to sell shares
of Midway common stock received in the Distribution, which sales might have a
depressive effect on the market price of such stock. The Board believed that
this concern would be alleviated if $5.0 million of additional cash were
available to pay to optionees so that optionees would receive at least 70% of
their adjustment payments in cash.
 
     In order to raise the additional $5.0 million in cash as well as additional
cash of approximately $8.5 million used to pay expenses of the Distribution and
for additional working capital, the Company requested that Mr. Louis J.
Nicastro, Chairman of the Board of the Company, forego his entitlement under the
Adjustment Plan, to receive payments valued at $10,406,059 and an adjustment of
the exercise price of his stock options to $3.519 per share. Instead, at the
request of the Board, shortly before the Distribution, Mr. Nicastro exercised
his options to purchase 629,554 shares of Common Stock, sold such shares in the
public market and received from the Company a payment of $4,956,640 representing
the difference between $10,406,059 and the net amount he received from the
exercise and sale. When Mr. Nicastro exercised his options, the Company received
an aggregate exercise price of $13,437,200. The Company used $5.0 million of the
proceeds from the aforementioned exercise, together with $30.0 million, to pay
the 1998 cash portion of the adjustment to the other option holders. In
consideration of the Company making increased cash available to holders, each of
Messrs. Neil D. Nicastro, Harold H. Bach, Jr., Kenneth J. Fedesna, officers
and/or directors of the Company and/or Midway, agreed to refrain from selling or
disposing of shares of Midway common stock received by them in the Distribution
for a period of six months after the Distribution.
 
     The consideration paid under the Adjustment Plan in fiscal 1998 to the
persons named in the Summary Compensation Table is in addition to the amounts
set forth therein and is as follows: Mr. Neil D. Nicastro received $12,428,476
in cash and Common Stock valued at $6,079,497. Mr. Kevin L. Verner received
$175,615 in cash and Common Stock valued at $85,904. Mr. Verner will receive
additional cash adjustment payments, up to a total of $2,256,605 if he is still
serving the Company through the end of the vesting period, on the dates that his
options would have vested. Mr. Harold H. Bach, Jr. received $1,093,193 in cash
and Common Stock valued at $534,722. Mr. Orrin J. Edidin received $49,442 in
cash. He will receive additional cash adjustment payments, up to a total of
$441,335 if he is still serving the Company or Midway through the end of the
vesting period, on the dates that his options would have vested. The Common
Stock was valued at the average of the high and low sale prices on the New York
Stock Exchange on April 3, 1998, the last day of trading prior to the
Distribution.
 
COMPENSATION OF DIRECTORS
 
     The Company pays a fee of $40,000 per annum to each director who is not
also an employee of the Company or its subsidiaries. Each such director who
serves as the chairman of any committee of the Board of Directors receives a
further fee of $5,000 per annum for his services in such capacity and each
member of the Company's Audit and Ethics Committee receives an additional fee of
$5,000 per annum.
 
     Each Director of the Company who was not also an employee of the Company or
its subsidiaries prior to the Distribution (which at that time included Mr.
Louis J. Nicastro) was also a non-employee Director of Midway. All such persons
continue to serve on the Midway Board of Directors. During the 1998 fiscal year,
Midway paid a fee of $22,500 per annum to each such Midway Director. Each such
Director who serves as the chairman of any committee of the Midway Board of
Directors receives a further fee of $2,500 per annum for his services in such
capacity and each other member of Midway's Audit Committee receives an
additional fee of $2,500 per annum. Each such director was also eligible to
receive, and has received, options to purchase Midway common stock.
 
                                       28
<PAGE>   30
 
     The Company's 1991 and 1993 Stock Option Plans and 1998 Non-Qualified Stock
Option Plan (each, a "Plan") provide for the issuance of shares of Common Stock
of the Company pursuant to non-qualified stock options which may be granted to
non-employee directors of the Company, generally at not less than 100% of the
fair market value of such shares on the date of grant. Under the 1991 Plan, Mr.
Sheinfeld holds options to purchase 37,773 shares (as adjusted) of Common Stock
at an average exercise price of $3.26 (as adjusted). Under the 1993 Plan, the
following non-employee directors each hold options to purchase 62,955 shares (as
adjusted) of Common Stock at an exercise price of $3.519 per share (as
adjusted): Messrs. Bartholomay, McKenna, Menell, Reich and Sheinfeld. Under the
1998 Plan, Mr. Satz holds options to purchase 50,000 shares of Common Stock at
an exercise price of $4.4375 per share.
 
     Directors also are entitled to participate at the Company's expense in a
medical reimbursement plan which is supplementary to the primary medical
insurance maintained by such individual and in certain stock option plans of the
Company. See "Stock Option Plans" below.
 
     Pursuant to the Adjustment Plan described above, Mr. Sheinfeld received
18,202 shares of Common Stock valued at $604,648 and cash in the amount of
$1,236,277, and Messrs. Reich, Menell, McKenna and Bartholomay each received
10,731 shares of Common Stock valued at $356,470 and cash in the amount of
$728,799.
 
STOCK OPTION PLANS
 
     The Company currently has the following five stock option plans in effect:
the 1982 Employee Stock Option Plan; the 1991 Stock Option Plan; the 1993 Stock
Option Plan; the 1994 Stock Option Plan; and the 1998 Non-Qualified Stock Option
Plan (collectively, the "Stock Option Plans" or "Plans"). The Plans provide for
the issuance of shares of Common Stock pursuant to options which may be granted
thereunder. Options granted under the Plans may be in the form of options
meeting the requirements of Section 422 of the Internal Revenue Code, as amended
("incentive stock option", except in the case of the 1998 Plan), or options not
meeting the requirements of such section ("non-qualified stock options").
 
     The purpose of each of the Plans is to encourage employees of the Company
and its subsidiaries and, under certain of the Plans, non-employee directors,
consultants and advisers of the Company to acquire a proprietary interest in the
Company and to enable such individuals to realize benefits from an increase in
the value of the Common Stock, to provide such individuals with greater
incentive and to encourage their continued provision of services to the Company
and, generally, to promote the interests of the Company and all of its
stockholders.
 
     Under the 1982 Plan, there are 220,270 options outstanding, and no further
options are available for grant. Under the 1991 Plan, there are 963,217 options
outstanding and 88,445 options available for grant through September 6, 2001.
Under the 1993 Plan, there are 1,474,905 outstanding options, and no further
options are available for grant. Under the 1994 Plan, there are 1,450,326
options outstanding and 191,296 options available for grant through June 20,
2004. Under the 1998 Plan, there are 291,000 options outstanding and 709,000
options available for grant through May 13, 2008. The average exercise price of
the outstanding exercisable options at September 15, 1998, was approximately
$3.66. Of the 4,399,718 options outstanding, 2,430,178 were held by officers and
directors of the Company (including 500,000 held by Mr. Louis J. Nicastro and
1,257,286 held by Mr. Neil D. Nicastro).
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     No member of the Company's Compensation Committee or Stock Option Committee
is an employee or officer of the Company, and no officer, director or other
person had any relationship required to be disclosed here.
 
EMPLOYMENT CONTRACTS
 
     Mr. Louis J. Nicastro is employed by the Company under the terms of an
Employment Agreement dated as of April 6, 1998. The employment agreement
provides for salaried compensation at the rate of $450,000 per
 
                                       29
<PAGE>   31
 
annum, or such greater amount as may be determined by the Board of Directors.
The agreement expires June 30, 2000, subject to automatic extensions in order
that the term of Mr. Nicastro's employment shall at no time be less than two
years; provided that either party may terminate the agreement effective upon
expiration of the original term or the extended term upon written notice from
the terminating party to the other party dated and received at least two years
prior to the respective termination date.
 
     The employment agreement of Mr. Louis J. Nicastro provides for, among other
things, full participation in all benefit plans and perquisites generally
available to senior executives and for reimbursement of all medical and dental
expenses incurred by him or his spouse during their lives to the extent such
expenses are not otherwise reimbursed by insurance provided by the Company.
Additionally, Mr. Nicastro is entitled to receive such special bonuses as may be
determined from time to time by the Board of Directors. The employment agreement
may be terminated at the election of Mr. Nicastro upon the occurrence without
his prior written consent of any one or more of the following events: (i) the
placement of Mr. Nicastro in a position of lesser status, the assignment to Mr.
Nicastro of duties inconsistent with his positions with the Company or duties
which, if performed, would result in a significant change in the nature or scope
of powers, authority, functions or duties inherent in such positions presently
in effect, the assignment to Mr. Nicastro of performance requirements or working
conditions which are at variance with the performance requirements or working
conditions presently in effect, or the treatment of Mr. Nicastro in a manner
which is in deregation of his status as a senior executive; (ii) the cessation
of service of Mr. Nicastro as a member of the Board of Directors of the Company;
(iii) the discontinuance or reduction (from the highest level in effect during
the term of the employment agreement) of amounts payable for base salary payable
to Mr. Nicastro pursuant to the agreement; and (iv) the discontinuance or
reduction (from the level in effect on the date of the employment agreement) of
the perquisites or fringe benefits inherent in Mr. Nicastro's position on the
date of the employment agreement. In such event, and in the event the Company is
deemed to have wrongfully terminated Mr. Nicastro's employment agreement under
the terms thereof, the Company is obligated (a) to pay Mr. Nicastro a lump sum
payment equal in amount to three times Mr. Nicastro's base salary at the highest
annual rate in effect during the one-year period immediately preceding
termination and (b) to purchase at the election of Mr. Nicastro all stock
options held by him with respect to the Company's Common Stock and options to
purchase the securities of any other company at least 20% of the voting
securities of which are owned by the Company at a price equal to the spread
between the option price and the fair market price of such stock as defined in
the employment agreement. The employment agreement may also be terminated at the
election of Mr. Nicastro if individuals who presently constitute the Board of
Directors, or successors approved by such Board members, cease for any reason to
constitute at least a majority of the Board. Upon such an event, the Company
will be required to make payments and purchase the stock options held by Mr.
Nicastro as set forth above.
 
     If payments made to Mr. Nicastro pursuant to the employment agreement after
a change of control are considered "excess parachute payments" under Section
280G of the Internal Revenue Code of 1986, as amended, additional compensation
is required to be paid to Mr. Nicastro to the extent necessary to eliminate the
economic effect on him of the resulting excise tax. Pursuant to Section 280G, in
addition to income taxes, the recipient is subject to a 20% nondeductible excise
tax on excess parachute payments. An excess parachute payment is a payment in
the nature of compensation which is contingent on a change of ownership or
effective control and which exceeds the portion of the base amount (i.e., the
average compensation for the five-year period prior to the change of control)
allocable to the payment. These rules apply only if the present value of all
payments of compensation (including non-taxable fringe benefits) at the time of
a change of control is at least equal to three times the base amount. Excess
parachute payments are not deductible by the Company.
 
     In contemplation of the Offering of common stock of Midway, the Company and
Midway each entered into separate employment agreements (the "1996 Agreements")
with Mr. Neil D. Nicastro effective as of July 1, 1996. On March 5, 1998 in
connection with the Distribution and at the request of the Board of Directors of
the Company, the Company and Mr. Nicastro entered into an agreement (the
"Termination Agreement") pursuant to which Mr. Nicastro's employment with the
Company terminated effective at the time of the Distribution. Pursuant to the
Termination Agreement, at the time of the Distribution,
 
                                       30
<PAGE>   32
 
Mr. Nicastro resigned as President, Chief Executive Officer and Chief Operating
Officer of the Company to devote his full time to Midway.
 
     Each of the 1996 Agreements provided that Mr. Nicastro would receive
salaried compensation at the rate of $300,000 per annum, or such greater amount
as may have been determined by the Board of Directors of the Company or Midway,
as applicable. Mr. Nicastro's 1996 Agreement with Midway provided for bonus
compensation in an amount equal to two percent of the pre-tax income of Midway
multiplied by the percentage of Midway common stock outstanding which was not
owned by the Company (which was 13.2%). Mr. Nicastro's 1996 Agreement with the
Company also provided for bonus compensation in an amount equal to two percent
of the pre-tax income of the Company. The portion of Mr. Nicastro's bonus from
the Company that was attributable to the pre-tax income of Midway was charged to
Midway pursuant to the Manufacturing and Services Agreement between the Company
and Midway. The 1996 Agreement with the Company provided for, among other
things, full participation in all benefit plans available to senior executives
and for reimbursement of all medical and dental expenses incurred by Mr.
Nicastro or his spouse and incurred by his children under the age of twenty-one.
Additionally, the Company and Midway each provided Mr. Nicastro with $1,000,000
of life insurance coverage in addition to the standard amount provided to
Company employees. Each of the 1996 Agreements provided that Mr. Nicastro could
divide his attention between the business of the Company and the business of
Midway as he would consider appropriate. The 1996 Agreements further provided
for certain benefits upon the termination of Mr. Nicastro's employment.
 
     Pursuant to the Termination Agreement, as full consideration for payments
that would otherwise have been made to Mr. Nicastro under the 1996 Agreement
with the Company with respect to base salary, bonus, retirement and death
benefits, Mr. Nicastro was paid a lump sum of $2,500,000, and he was granted a
10-year option to purchase 250,000 shares of Common Stock at an exercise price
of $5.4375. Additionally, the $1,000,000 of life insurance coverage provided by
the Company under such 1996 Agreement was transferred to Midway at the time of
the Distribution.
 
     In connection with the Distribution, the Company also entered into a
consulting agreement (the "Consulting Agreement") with Mr. Nicastro pursuant to
which Mr. Nicastro agreed to make himself reasonably available at the Company's
request, to render such services concerning the Company as the Board of
Directors or the Chairman of the Board and Chief Executive Officer of the
Company may reasonably request. The term of the Consulting Agreement is for five
years from the date of the Distribution, and is automatically renewable for
successive one year terms unless either party shall give notice of termination
not less than six months prior to the end of the term then in effect. The
Company pays Mr. Nicastro $1,000 per month for his services under the Consulting
Agreement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
VOTING PROXY AGREEMENT
 
     In order for the Company to be permitted to manufacture and sell slot
machines in Nevada, the Company and its Gaming Subsidiaries and Mr. Louis J.
Nicastro and Mr. Neil D. Nicastro were required to be registered, licensed or
found suitable and have been registered, licensed or found suitable by the
Nevada Board and the Nevada Commission, as applicable, as a Registered
Corporation, as registered holding companies, for licensure as a manufacturer
and distributor of gaming devices and as directors, officers and stockholders of
such entities, as applicable. Under applicable Nevada law and administrative
procedure, as a greater than 10% stockholder of the Company, Mr. Sumner M.
Redstone ("SMR") was required to apply and has an application pending with the
Nevada Gaming Authorities for a finding of suitability as a stockholder of the
Company. Pending completion of the processing of SMR's application, SMR and
National Amusements, Inc. ("NAI") have voluntarily granted to Mr. Louis J.
Nicastro and, if he is unable to perform his duties under the Proxy Agreement
(as defined below), Mr. Neil D. Nicastro, individually, a voting proxy for all
of the shares of Common Stock which they own beneficially or of record.
 
     On September 21, 1995, Mr. Louis J. Nicastro and Mr. Neil D. Nicastro
entered into a Voting Proxy Agreement (the "Proxy Agreement") with the Company,
SMR and NAI, pursuant to which Mr. Louis J. Nicastro and, if he is unable to
perform his duties under the Proxy Agreement, Mr. Neil D. Nicastro have

                                       31
<PAGE>   33
 
been appointed, individually, as proxy holder with full power of substitution
during and for the term of the voting proxy, to vote all shares of the Company's
Common Stock as the proxy of SMR and NAI at any annual, special or adjourned
meeting of the stockholders of the Company, including the right to execute
consents, certificates or other documents relating to the Company that the law
of the State of Delaware may permit or require on any and all matters which may
be presented to the stockholders of the Company. The term of the Proxy Agreement
is for 10 years commencing August 25, 1995, unless sooner terminated upon 30
days' written notice. The Proxy Agreement will be deemed terminated as to any
subject matter that will be presented for approval, consent or ratification to
the stockholders of the Company if the Company fails to give SMR and NAI 45
days' notice of such subject matter. The Proxy Agreement will also terminate if
SMR and NAI are found suitable as stockholders of the Company by the Nevada
Gaming Authorities or are no longer subject to the provisions of Nevada gaming
laws applicable to holders of more than 10% of the Company's Common Stock. The
Proxy Agreement is not applicable to any shares of the Company's Common Stock
sold or otherwise disposed of by SMR or NAI to any person who is not an
affiliate of SMR or NAI. SMR and NAI have agreed to give notice of any sale or
disposition to the Chairman of the Nevada Board within 10 days after such sale
or disposition. The Proxy Agreement was entered into to assure that the passive
investment position of SMR and NAI relative to the Company will not change
without prior notification to the Nevada Gaming Authorities.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information as of September 15, 1998
(except as otherwise footnoted) with respect to persons known to be the
beneficial owner of more than five percent of the Company's Common Stock, each
Executive Officer of the Company who is not also a Director of the Company, and
Directors and Executive Officers of the Company as a group. Security ownership
of the individual Directors of the Company is set forth under the heading
"Identification of Directors" in Item 10(a) above.
 
<TABLE>
<CAPTION>
                                                                    NUMBER OF
                                                                 SHARES OF COMMON      PERCENTAGE OF
                                                                STOCK BENEFICIALLY      OUTSTANDING
            NAME AND ADDRESS OF BENEFICIAL OWNER                     OWNED(1)         COMMON STOCK(2)
            ------------------------------------                ------------------    ---------------
<S>                                                             <C>                   <C>
Sumner M. Redstone and National Amusements, Inc. ...........        7,155,200(3)           25.5%
  200 Elm Street
  Dedham, MA 02026
Boston Partners Asset Management, L.P. .....................        1,633,700(4)            5.8%
  One Financial Center, 43rd Floor
  Boston, MA 02111
FMR Corp. ..................................................        2,095,000(5)            7.5%
  82 Devonshire St.
  Boston, MA 02109
Neil D. Nicastro............................................        8,437,500(6)           28.8%
  Midway Games Inc.
  3401 North California Avenue
  Chicago, IL 60618
Louis J. Nicastro...........................................        7,659,832(7)           26.8%
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Harold H. Bach, Jr. ........................................          112,530(8)               *
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
</TABLE>
 
                                       32
<PAGE>   34
 
<TABLE>
<CAPTION>
                                                                    NUMBER OF
                                                                 SHARES OF COMMON      PERCENTAGE OF
                                                                STOCK BENEFICIALLY      OUTSTANDING
            NAME AND ADDRESS OF BENEFICIAL OWNER                     OWNED(1)         COMMON STOCK(2)
            ------------------------------------                ------------------    ---------------
<S>                                                             <C>                   <C>
Kevin L. Verner.............................................           15,177(9)               *
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Orrin J. Edidin.............................................            2,500(10)              *
  WMS Industries Inc.
  3401 North California Avenue
  Chicago, IL 60618
Directors and executive officers as a group (eleven
  persons)..................................................        9,561,813(11)          31.6%(12)
</TABLE>
 
-------------------------
  * Less than 1% of the number of outstanding shares of Common Stock on
    September 15, 1998.
 
 (1) Pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, as
     amended, shares underlying options are deemed to be beneficially owned if
     the holder of the option has the right to acquire beneficial ownership of
     such shares within 60 days.
 
 (2) For purposes of calculating the percentage of outstanding Common Stock,
     shares issuable upon the exercise of options within 60 days have been
     deemed to be outstanding.
 
 (3) The number of shares reported is based upon information contained in
     Amendment No. 20, dated January 7, 1997, to the Schedule 13D filed by Mr.
     Sumner M. Redstone with the Securities and Exchange Commission and a Form
     4, dated July 9, 1998, filed by Mr. Redstone with the Securities and
     Exchange Commission. Pursuant to such filings, Mr. Redstone and National
     Amusements, Inc., a Maryland corporation, reported beneficial ownership of
     and sole investment power with respect to 3,671,300 and 3,483,900 shares,
     respectively, of the Common Stock and shared voting power with respect to
     such shares pursuant to a Proxy Agreement entered into with the Company,
     and Messrs. Louis J. and Neil D. Nicastro (see "Voting Proxy Agreement"
     above). As a result of his stock ownership in National Amusements, Inc. Mr.
     Redstone is deemed the beneficial owner of the shares of Common Stock owned
     by National Amusement, Inc.
 
 (4) The number of shares reported is based upon information contained in
     Schedule 13G, dated February 9, 1998, filed by Boston Partners Asset
     Management, L.P. ("BPAM"), Boston Partners, Inc. ("Boston Partners") and
     Desmond John Heathwood ("Heathwood", and collectively with BPAM and Boston
     Partners, the "Reporting Persons"). Each of the Reporting Persons may be
     deemed to own beneficially 1,633,700 shares of Common Stock. As sole
     general partner of BPAM, Boston Partners may be deemed to own beneficially
     all of the shares of Common Stock that BPAM may be deemed to own. As
     principal stockholder of Boston Partners, Heathwood may be deemed to own
     beneficially all of the Common Stock that Boston Partners may be deemed to
     own beneficially. BPAM holds all the above 1,633,700 shares under
     management for its clients, who have the right to direct the receipt of
     dividends, to receive dividends from such shares and to receive the
     proceeds from the sale of such shares. Boston Partners and Heathwood
     expressly disclaimed beneficial ownership of any shares of Common Stock in
     the Schedule 13G.
 
 (5) The number of shares reported is based upon a written certification
     delivered by Fidelity Management & Research Company, a wholly-owned
     subsidiary of FMR Corp., stating that it is the beneficial owner of the
     shares as a result of acting as investment adviser to various investment
     companies registered under Section 8 of the Investment Company Act of 1940
     and that Fidelity Advisor Strategic Opportunities Fund, one of such
     investment companies, is the beneficial owner of 1,825,100 shares or 6.5%
     of the Common Stock. FMR Corp. reported that it has sole power to dispose
     of or direct the disposition of all such shares.
 
 (6) The number of shares reported as beneficially owned includes 7,155,200
     shares of Common Stock owned by Sumner M. Redstone and National Amusements,
     Inc. for which the reporting person has
 
                                       33
<PAGE>   35
 
     shared voting power but no dispositive power. Additionally, the number of
     shares reported as beneficially owned includes 1,282,300 shares for which
     the reporting person has sole voting and sole dispositive power, 1,257,286
     of which may be acquired upon the exercise of stock options. For a
     discussion concerning the shared voting power with respect to the 7,155,200
     shares of Common Stock referred to above, see "Voting Proxy Agreement"
     above.
 
 (7) The number of shares reported as beneficially owned includes 7,155,200
     shares owned by Sumner M. Redstone and National Amusements, Inc. for which
     the reporting person has shared voting power but no dispositive power.
     Additionally, the number of shares reported as beneficially owned includes
     504,632 shares for which the reporting person has sole voting and sole
     dispositive power, 500,000 of which may be acquired upon the exercise of
     stock options. For a discussion concerning the shared voting power with
     respect to the 7,155,200 shares of Common Stock referred to above, see
     "Voting Proxy Agreement" above.
 
 (8) Includes 94,433 shares of Common Stock which Mr. Harold H. Bach, Jr. has
     the right to acquire upon the exercise of stock options.
 
 (9) Includes 12,591 shares of Common Stock which Mr. Kevin L. Verner has the
     right to acquire upon the exercise of stock options.
 
(10) Includes 2,500 shares of Common Stock which Mr. Orrin J. Edidin has the
     right to acquire upon the exercise of stock options.
 
(11) Includes 2,269,358 shares of Common Stock which directors and executive
     officers have the right to acquire upon the exercise of stock options.
     Additionally, includes 7,155,200 shares of Common Stock owned by Sumner M.
     Redstone and National Amusements, Inc. with respect to which Mr. Louis J.
     Nicastro and Mr. Neil D. Nicastro both have shared voting power but no
     dispositive power. For a discussion concerning the shared voting power with
     respect to the 7,155,200 shares of Common Stock referred to above, see
     "Voting Proxy Agreement" above.
 
(12) For purposes of this calculation, the 7,155,200 shares of Common Stock
     owned by Sumner M. Redstone and National Amusements, Inc. with respect to
     which Mr. Louis J. Nicastro and Mr. Neil D. Nicastro have shared voting
     power but no dispositive power have only been counted once. For a
     discussion concerning the shared voting power with respect to the 7,155,200
     shares of Common Stock referred to above, see "Voting Proxy Agreement"
     above.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
RELATIONSHIP WITH MIDWAY
 
     Prior to the Offering, Midway was a wholly-owned subsidiary of WMS. As a
result of the Offering, WMS' beneficial ownership of Midway common stock was
reduced from 100.0% to 86.8%. As a result of the Distribution, WMS does not own
any Midway common stock. A majority of Midway's directors are also directors
and/or officers of WMS. Additionally, several of the executive officers of
Midway are officers and/or directors of WMS. See "Item 10 -- Directors and
Executive Officers of the Registrant."
 
     In connection with the Distribution, WMS and Midway entered into the
following agreements:
 
     Manufacturing Agreement. WEG and Midway entered into the Manufacturing
Agreement with respect to the manufacture of coin-operated video games and kits.
The Manufacturing Agreement became effective as of April 6, 1998 and will
continue in effect for a period of three years and for successive renewal
periods of six months each unless terminated (a) by either party for any reason
upon six months' notice or (b) in the event of a material default under the
Manufacturing Agreement or under the Confidentiality provisions of the
Confidentiality and Non-Competition Agreement discussed below, immediately at
the election of the non-defaulting party. Pursuant to this Agreement, all of
Midway's coin-operated video games are manufactured by WEG at its facility in
Waukegan, Illinois.
 
     WEG is required to allocate 65% of its combined production and storeroom
square footage at the Waukegan plant to perform its obligations under the
Manufacturing Agreement. Midway conducts its own design and engineering of
coin-operated video games, including programming, graphic design, electrical

                                       34
<PAGE>   36
 
engineering, sound engineering and model shop engineering. Certain production
engineering activities, such as the design process for the assembly of each
game, creating work station profiles and quality control of incoming parts and
the assembly process are provided to Midway by WEG. Materials used in the
manufacture of coin-operated video games which are unique to such games are
purchased by Midway from third party vendors. Materials used in the manufacture
of coin-operated video games which are common with materials used in the
production of pinball and novelty games sold by WEG are purchased by WEG
(estimated to be 5% of materials costs) and charged to Midway at actual cost
plus 9.0%. All labor costs, including fringe benefits, directly associated with
the manufacturing of coin-operated video games are charged to Midway at WEG's
actual cost plus 9.0%. The Waukegan plant's operating costs are either
identified as Midway costs and charged to Midway or allocated as agreed between
the parties. Such identified or allocated costs include, without limitation,
manufacturing costs, materials management costs, quality assurance costs and
administration costs. Plant operating costs of WEG paid by Midway under the
Manufacturing Agreement are increased by 9.0%. The obligations of WEG under the
Manufacturing Agreement are guaranteed by WMS.
 
     Cabinet Supply Agreement. Lenc-Smith and Midway entered into the Cabinet
Supply Agreement with respect to the supply of cabinets for coin-operated video
games. The Cabinet Supply Agreement became effective as of April 6, 1998 and
will continue in effect for a period of three years and for successive renewal
periods of six months each unless terminated (a) by either party for any reason
upon six months' notice or (b) in the event of a material default, immediately
at the election of the non-defaulting party.
 
     The Cabinet Supply Agreement provides that to initiate the purchase of
video game cabinets, Midway shall issue a pricing inquiry to Lenc-Smith
specifying the number of cabinets to be ordered and the cabinet specifications.
Lenc-Smith then provides a formal quote on the pricing inquiry, and, upon
agreement on a final price, a purchase order will be issued. Lenc-Smith ships
all cabinets to WEG's Waukegan, Illinois plant for use in the manufacture of
coin-operated video games. Midway may purchase cabinets from manufacturers other
than Lenc-Smith if Lenc-Smith does not meet competitive bona-fide quotes.
 
     Spare Parts Sales and Service Agreement. WEG entered into the Spare Parts
and Sales Service Agreement with Midway and Atari Games Corporation, a
wholly-owned subsidiary of Midway ("Atari Games"), pursuant to which WEG sells
spare parts for coin-operated video games produced on behalf of Midway and Atari
Games. The agreement became effective as of April 6, 1998 and has the same term
and is terminable in the same manner as the Cabinet Supply Agreement. Pursuant
to the agreement, WEG must purchase and maintain an adequate inventory of spare
parts needed by end-users of coin-operated video games of Midway and Atari
Games. To the extent any parts are proprietary to Midway, Midway will sell or
arrange for the sale of such parts to WEG. WEG will purchase all non-proprietary
parts through its usual vendor sources or through Midway at negotiated prices.
Midway and Atari Games are required to refer their customers to WEG for spare
parts purchases during the term of the agreement. The agreement does not include
warranty services, which services Midway is required to provide to its
customers.
 
     Sales Agreement. WEG entered into the Sales Agreement with Midway effective
April 6, 1998. The term of the agreement is the same as the term of the Cabinet
Supply Agreement. During the term of the agreement, Midway will supply WEG with
certain sales services, including sales testing for all new products developed
by WEG, coordinating and negotiating print advertising and video presentations
with third-party advertising and media firms, and negotiating distribution and
sales agency agreements with third-party distributors. In consideration for such
services, WEG will pay Midway $500,000 per annum plus a commission of 1.5% on
the first $25.0 million of annual net sales of WEG products made by Midway and
1.0% on annual net sales of WEG products made by Midway in excess of $25.0
million. The commission for the period April 6, 1998 through June 30, 1998 was
1.5% of the first $6,250,000 of net sales made by Midway and 1.0% thereafter. An
annual budget for marketing and testing will be developed and agreed upon in
advance between the parties annually and modified quarterly upon mutual
agreement. To extent additional services are provided which were not included in
the budget, certain additional charges will be applicable for payroll, overhead
and expense at Midway's cost plus 8.0%.
 
     Information Systems Service Agreement. WEG and Midway entered into an
Information Systems Service Agreement effective as of April 6, 1998 for a term
of three years with successive renewal periods of
 
                                       35
<PAGE>   37
 
18 months. The agreement is terminable by either party (a) upon 18 months'
notice or (b) upon a material default, immediately by the non-defaulting party.
Pursuant to the agreement, WEG provides Midway with access to its computer
systems for business applications, including, without limitation, order entry,
financial and manufacturing modules, marketing and sales and engineering
(including electronic engineering documentation and blueprint systems) as well
as support for the computer system. The agreement also provides that WEG will
coordinate the provision and maintenance of cabling, wiring, switching
components, routers and gateway and the purchasing, maintaining and upgrading of
network services for Midway. These services include purchasing of desktop
computers and related hardware as well as providing certain telecommunications
service to Midway. Midway may also request WEG to provide services to develop
the communications networking, operating and computer system of Midway and other
related services. Midway pays WEG an amount equal to the cost to WEG for all
services provided plus 6.6% of such cost.
 
     Confidentiality and Non-Competition Agreement. WMS entered into the
Confidentiality and Non-Competition Agreement with Midway effective as of April
6, 1998. Pursuant to the agreement, either party may designate information
regarding its business as confidential, which each party will use its best
efforts to keep confidential. For a period of five years from the date of the
agreement, neither party shall engage, directly or indirectly, in the business
currently conducted by the other party (except that Midway may engage in any
business related to coin-operated video game manufacturing, cabinet supply,
spare parts sales and video-simulated non-mechanical pinball games).
Additionally, for the greater of (i) the period from the date of the agreement
until April 5, 2000 or (ii) a period ending one year after the date that any
particular employee of Midway or WMS no longer is providing services to the
other party pursuant to any of the agreements entered into in connection with
the Distribution, such other party shall not, directly or indirectly, hire or
solicit the employment of such employee or encourage such employee to leave his
or her employment or induce any such employee to seek, accept or obtain
employment by any person other than such employer.
 
     Right of First Refusal Agreement. WMS and Midway entered into the Right of
First Refusal Agreement as of April 6, 1998 pursuant to which Midway was granted
the right of first refusal with respect to any offer to WMS to purchase the
Waukegan plant, or any material part thereof, which offer is not made in
connection with the sale of substantially all of WMS' assets and business as a
going concern or a sale of substantially all of the capital stock of WMS, and
which WMS intends to accept. The term of the agreement is for 10 years expiring
April 5, 2008.
 
     Third Parties Agreement. WMS entered into the Third Parties Agreement with
Midway on April 6, 1998. The agreement governs the treatment of the numerous
arrangements with third parties that WMS and Midway are party to with respect to
game development, the obtaining or grant of licenses and other matters, which
provide for, among other matters, the receipt of payments, the obligation or
guaranty of an obligation to make payments to third parties, recoupment of prior
advances, rights of first refusal and reporting and monitoring of intellectual
property rights. The parties will allocate all other rights and obligations
under third party arrangements so that the party receiving the benefit will bear
the burden of such agreements. The agreement shall remain in effect so long as
any third party arrangements remain outstanding.
 
     Temporary Support Services Agreement. WMS and Midway entered into a
Temporary Support Services Agreement which provides, among other things, that
WMS will supply all or a portion of Midway's administrative, legal and
accounting, information services, and janitorial and other agreed upon services,
including the use of space by Midway in any WMS facility, as requested from time
to time by Midway. In consideration for the services provided by WMS, Midway
will pay WMS an amount equal to its direct or allocated cost (including, without
limitation, wages, salaries, fringe benefits and materials), as indicated on
monthly invoices supplied by WMS. The agreement was effective as of April 6,
1998 and will continue for a period of 18 months and for successive renewal
periods of three months each; provided, however, that the agreement may be
terminated by either party upon six months' notice, and each party may, upon 60
days' notice, terminate any one or more of the services provided, except the use
of space by Midway in any WMS facility.
 
     Tax Separation Agreement. Midway has been a member of the consolidated
group of corporations of which WMS was the common parent for federal income tax
purposes (the "WMS Group") since 1988.
 
                                       36
<PAGE>   38
 
Therefore, Midway is jointly and severally liable for any federal tax liability
incurred by the WMS Group. Midway and WMS entered into the Tax Separation
Agreement as of April 6, 1998. The agreement sets forth the parties respective
liabilities for federal, state and local taxes as well as their agreements as a
result of Midway and its subsidiaries ceasing to be members of the WMS Group.
The Tax Separation Agreement governs, among other things, (i) the filing of tax
returns with federal, state and local authorities, (ii) the carryover of any tax
benefits of Midway, (iii) the treatment of the deduction attributable to the
exercise of stock options to purchase Common Stock which are held by employees
or former employees of Midway and any other similar compensation related tax
deductions, (iv) the treatment of certain net operating loss carrybacks, (v) the
treatment of audit adjustments, (vi) procedures with respect to any proposed
audit adjustment or other claim made by any taxing authority with respect to a
tax liability of Midway or any of its subsidiaries. Certain other tax matters
are addressed in the Tax Sharing Agreement which was entered into in connection
with the Offering and which remains in full force and effect. See "Tax Sharing
Agreement" below.
 
     Tax Indemnification Agreement. WMS entered into the Tax Indemnification
Agreement with Midway effective as of April 6, 1998 providing for
indemnifications in the event the Distribution fails to qualify under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"). Each of the
parties agreed that for a period of two years after the Distribution, each would
continue active conduct of its historic trade or business as conducted by it
during the five-year period prior to the Distribution. Midway also agreed that,
to fund an acquisition, within one year after the Distribution, it would either
(i) raise cash through an offering of shares of its common stock or debentures
with detachable warrants to purchase shares of its common stock or (ii) use
shares of its common stock as acquisition consideration. Additionally, each
party agreed not to: (i) merge or consolidate with another entity; (ii)
liquidate or partially liquidate; (iii) sell or transfer all or substantially
all its assets in a single transaction or a series of transactions; (iv) redeem
or otherwise repurchase any of its capital stock in a manner contrary to certain
Internal Revenue Service ("IRS") revenue procedures; (v) enter into any
transaction or make any change in its equity structure which may cause the
Distribution to be treated as a plan pursuant to which one or more persons
acquire directly or indirectly its common stock representing a "50 percent or
greater interest" within the meaning of Section 355(d)(4) of the Code; or (vi)
in the case of Midway except in connection with stock issued pursuant to an
employee benefit or compensation plan and except as described in the private
letter ruling issued in connection with the Distribution issue additional shares
of its capital stock, unless such party first obtains the consent of the other
party and, if applicable, the person or persons acquiring a "50 percent or
greater interest" in such party have agreed to become jointly or severally
liable for payments required to be made by such party pursuant to the Tax
Indemnification Agreement.
 
     Midway will indemnify WMS with respect to any action referred to above
which it takes or if it fails to issue Midway common stock as set forth above
which causes the Distribution to fail to qualify under Section 355 of the Code,
against any federal, state and local taxes, interest, penalties and additions to
tax imposed upon or incurred by the WMS Group or any member thereof. WMS will
indemnify Midway and its subsidiaries against any and all federal, state and
local taxes, interest, penalties and additions to tax resulting from the
Distribution, other than any such liabilities for which Midway is required to
indemnify WMS. The agreement also governs the procedures for indemnification,
calculation of the amount of indemnified liability for income taxes and
reduction of indemnity by income tax benefits from indemnified liabilities.
 
     In connection with the Offering, WMS and Midway entered into the following
agreements:
 
     Manufacturing and Services Agreement. WMS and Midway entered into the
Manufacturing and Services Agreement with respect to various aspects of their
relationship after the Offering. As of the Distribution, the Manufacturing
Agreement referred to above superseded and replaced the Manufacturing and
Services Agreement. The Manufacturing and Services Agreement became effective as
of July 1, 1996. The Manufacturing and Services Agreement provided, among other
things, for WMS to provide Midway with management, legal and administrative
services and certain services for its coin-operated video games including,
without limitation: (i) manufacturing; (ii) engineering support; (iii) sales and
marketing; (iv) warranty and field services; and (v) creative services.
 
                                       37
<PAGE>   39
 
     Materials used in the manufacture of coin-operated video games were
purchased by Midway at its expense. Certain other manufacturing costs were
allocated based upon units produced for Midway and the other amusement games
businesses of WMS. All labor costs associated with the manufacturing of coin-
operated video games were charged to Midway at actual cost to WMS. Certain
management, legal and administrative expenses and sales and marketing expenses
were allocated based upon the revenues of and/or units produced for Midway and
the other amusement games businesses of WMS or other methods appropriate for the
allocation of the particular expense.
 
     Tax Sharing Agreement. WMS and Midway entered into a Tax Sharing Agreement
(the "Tax Sharing Agreement") (which remains in effect, except as provided in
the Tax Separation Agreement referred to above) whereby WMS and Midway have
agreed upon a method for: (i) determining the amount which Midway must pay to
WMS in respect of federal income taxes; (ii) compensating any member of the WMS
Group for use of its net operating losses, tax credits and other tax benefits in
arriving at the WMS Group tax liability as determined under the federal
consolidated return regulations; and (iii) providing for the receipt of any
refund arising from a carryback of net operating losses or tax credits from
subsequent taxable years and for payments upon subsequent adjustments. The
amount Midway is required to pay to WMS in respect of federal income taxes is
determined as if Midway was filing a separate tax return. If any two or more
members of the WMS Group are required to elect, or WMS elects to cause two or
more members of the WMS Group to file combined or consolidated income tax
returns under state or local income tax law, the financial consequences of such
filings among such members shall be determined in a manner as similar as
practicable to those provided for under the Tax Sharing Agreement for federal
taxes. The Tax Sharing Agreement is not binding on the IRS or upon state, local
or foreign taxing authorities. The effectiveness of the Tax Sharing Agreement is
therefore dependent on each member of the WMS Group having the ability to pay
its relative share of taxes. Because the IRS or other taxing authorities can be
expected to seek payment from WMS prior to seeking payment from the individual
group members, it is likely that Midway would seek to enforce any rights it may
have against WMS for sharing at a time when WMS was unable to pay its
proportionate share of taxes.
 
     Patent License Agreement. WMS and Midway entered into a patent license
agreement which remains in effect, pursuant to which WMS and Midway each
licensed to the other, on a perpetual, royalty-free basis, certain patents used
in the development and manufacture of both coin-operated video games and video
lottery terminals and other gaming machines.
 
OTHER RELATED PARTY TRANSACTIONS
 
     Mr. Ira S. Sheinfeld, a Director of the Company, is a member of the law
firm of Squadron, Ellenoff, Plesent & Sheinfeld LLP which the Company has
retained to provide tax services during the last fiscal year and proposes to
retain for such services during the current fiscal year.
 
     The Company pays Mr. Neil D. Nicastro $1,000 per month for his services
under the Consulting Agreement. See "Item 11. Executive Compensation --
Employment Contracts."
 
     Pursuant to the Termination Agreement, as full consideration for payments
that would otherwise have been made to Mr. Neil D. Nicastro under the 1996
Agreement with the Company with respect to base salary, bonus, retirement and
death benefits, Mr. Nicastro was paid a lump sum of $2,500,000, and he was
granted a 10-year option to purchase 250,000 shares of Common Stock at an
exercise price of $5.4375. See "Item 11. Executive Compensation -- Employment
Contracts."
 
                                       38
<PAGE>   40
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
     (a)(1) Financial Statements of the Company. See "Index to Financial
Information" on page F-1.
 
     (2) Financial Statement Schedule of the Company. See "Index to Financial
Information" on page F-1.
 
     (3) Exhibits.
 
<TABLE>
<C>   <S>     <C>
      2(a)    Plan of Reorganization and Distribution Agreement dated as
              of March 20, 1997 among the Company, Williams Hotel
              Corporation and WHG, incorporated by reference to Exhibit
              2.1 to the Company's Report on Form 8-K filed May 5, 1997
              (the "1997 Form 8-K").
      3(a)    Amended and Restated Certificate of Incorporation of the
              Company dated February 17, 1987; Certificate of Amendment
              dated January 28, 1993; and Certificate of Correction dated
              May 4, 1994, incorporated by reference to Exhibit 3(a) to
              the Company's Annual Report on Form 10-K for the year ended
              June 30, 1994 (the "1994 10-K").
      3(b)    Certificate of Amendment to the Amended and Restated
              Certificate of Incorporation of the Company, as filed with
              the Secretary of State of the State of Delaware on February
              25, 1998, incorporated by reference to Exhibit 3.1 to the
              Company's Quarterly Report on Form 10-Q for the fiscal
              quarter ended March 31, 1998.
      3(c)    Form of Certificate of Designations of Series A Preferred
              Stock (included as Exhibit A to the Rights Agreement
              referred to in Exhibit 4(b) hereto).
      3(d)    By-Laws of the Company, as amended and restated through June
              26, 1996, incorporated by reference to Exhibit 3(b) to the
              Company's Annual Report on Form 10-K for the year ended June
              30, 1996.
      4(a)    Specimen of Common Stock certificate, incorporated by
              reference to Exhibit 4(a) to the 1994 10-K.
      4(b)    Rights Agreement dated as of March 5, 1998 between the
              Company and The Bank of New York, as Rights Agent,
              incorporated by reference to Exhibit 1 to the Company's
              Registration Statement on Form 8-A (File No. 1-8300) filed
              March 25, 1998.
      4(c)    Form of Rights Certificate (included as Exhibit B to the
              Rights Agreement referred to in Exhibit 4(b) hereto).
      10(a)   Third Amended and Restated Employment Agreement dated as of
              July 1, 1996 between the Company and Neil D. Nicastro,
              incorporated by reference to Exhibit 10(a) to the Company's
              Annual Report on Form 10-K for the fiscal year ended June
              30, 1997.
      10(b)   Second Amendment and Restatement of the Company's Pension
              Plan for Salaried Employees adopted June 24, 1986 and
              Amendment Nos. 1 to 5 thereof, incorporated by reference to
              Exhibit 10(c) to the 1994 10-K.
      10(c)   Second Amended and Restated Williams Electronics Games, Inc.
              Group Annuity Plan for Hourly Employees (effective as of
              January 1, 1987), incorporated by reference to Exhibit 10(f)
              to Company's Quarterly Report on Form 10-Q for the quarter
              ended March 31, 1988.
      10(d)   1982 Employee Stock Option Plan, as amended, incorporated by
              reference to Exhibit 10(e) to the 1994 10-K.
      10(e)   1991 Stock Option Plan, as amended, incorporated by
              reference to Exhibit 10(f) to the 1994 10-K.
      10(f)   1993 Stock Option Plan, incorporated by reference to Exhibit
              10(g) to the 1994 10-K.
      10(g)   1994 Stock Option Plan, incorporated by reference to
              Appendix A to the Company's Definitive Proxy Statement dated
              December 12, 1994.
</TABLE>
 
                                       39
<PAGE>   41
<TABLE>
<C>   <S>     <C>
      10(h)   Form of Indemnity Agreement authorized to be entered into
              between the Company and each officer and director approved
              by the Board of Directors, incorporated by reference to
              Exhibit 10(k) to the 1994 10-K.
      10(i)   WMS Industries Inc. 401(k) Retirement Savings Plan for
              Non-Union Employees adopted January 1, 1992, incorporated by
              reference to Exhibit 10(cc) to the Form 10-K for the fiscal
              year ended June 30, 1992 (the "1992 10-K").
      10(j)   Williams Innovative Technologies, Inc. 401(k) Retirement
              Savings Plan (Union Employees) adopted January 1, 1992,
              incorporated by reference to Exhibit 10(dd) to the 1992
              10-K.
      10(k)   WMS Industries Inc. Treasury Share Bonus Plan adopted April
              19, 1993, incorporated by reference to Exhibit 10(ee) to the
              Annual Report on Form 10-K for the fiscal year ended June
              30, 1993.
      10(l)   Voting Proxy Agreement dated September 21, 1995 among Louis
              J. Nicastro, Neil D. Nicastro, the Company, Sumner M.
              Redstone and National Amusements, Inc., incorporated by
              reference to Exhibit 10(u) to Company's Annual Report on
              Form 10-K for the fiscal year ended June 30, 1995.
      10(m)   Manufacturing and Services Agreement dated as of July 1,
              1996 between the Company and Midway, incorporated by
              reference to Exhibit 10.1 to the Midway Registration
              Statement on Form S-1, File No. 333-11919, filed on
              September 13, 1996 (the "Midway S-1").
      10(n)   Tax Sharing Agreement dated as of July 1, 1996 among the
              Company, Midway, Midway Home Entertainment Inc., Midway
              Interactive Inc., Atari Games and Tengen, Inc., incorporated
              by reference to Exhibit 10.2 to the Midway S-1.
      10(o)   Patent License Agreement dated as of July 1, 1996 between
              Williams and Midway, incorporated by reference to Exhibit
              10.4 to the Midway S-1.
      10(p)   Tax Sharing Agreement, dated as of March 20, 1997, between
              the Company, Williams Hotel Corporation, WHG, ESJ Hotel
              Corporation, WMS Property Inc. and WHG El Con Corp., as
              amended April 15, 1997, incorporated by reference to Exhibit
              10.1 to the 1997 Form 8-K.
      10(q)   Amendment to Article III, Section 3 (Option Adjustments) of
              1982 Employee Stock Option Plan, incorporated by reference
              to Proposal No. 2 to the Company's Definitive Proxy
              Statement on Schedule 14A as filed with the Commission on
              December 11, 1996.
      10(r)   Amendment to Article III, Section 3 (Option Adjustments) of
              1991 Stock Option Plan, incorporated by reference to
              Proposal No. 2 to the Company's Definitive Proxy Statement
              on Schedule 14A as filed with the Commission on December 11,
              1996.
      10(s)   Amendment to Article III, Section 3 (Option Adjustments) of
              1993 Stock Option Plan, incorporated by reference to
              Proposal No. 2 to the Company's Definitive Proxy Statement
              on Schedule 14A as filed with the Commission on December 11,
              1996.
      10(t)   Amendment to Article III, Section 3 (Option Adjustments) of
              1994 Stock Option Plan, incorporated by reference to
              Proposal No. 2 to the Company's Definitive Proxy Statement
              on Schedule 14A as filed with the Commission on December 11,
              1996.
      10(u)   1998 Non-Qualified Stock Option Plan, incorporated by
              reference to Exhibit 4.6(a) to the Company's Registration
              Statement No. 333-57585 on Form S-8 filed with the
              Commission on June 24, 1998 (the "1998 S-8").
</TABLE>
 
                                       40
<PAGE>   42
<TABLE>
<C>   <S>     <C>
      10(v)   Severance Agreement dated March 5, 1998 between the Company
              and Neil D. Nicastro, incorporated by reference to Exhibit 2
              to the Report on Form 8-K filed April 17, 1998 (the "April
              1998 8-K").
      10(w)   Consulting Agreement dated as of April 6, 1998 between the
              Company and Neil D. Nicastro, incorporated by reference to
              Exhibit 3 to the April 1998 8-K.
      10(x)   Employment Agreement dated as of April 6, 1998 between the
              Company and Louis J. Nicastro, incorporated by reference to
              Exhibit 1 to the April 1998 8-K.
      10(y)   Manufacturing Agreement dated as of April 6, 1998 between
              Williams Electronics Games, Inc. and Midway and the Guaranty
              of the obligations of Williams Electronics Games, Inc.
              thereunder by the Company, incorporated by reference to
              Exhibit 10.23 to the Midway Annual Report on Form 10-K for
              the fiscal year ended June 30, 1998 (the "Midway 1998
              10-K").
      10(z)   Cabinet Supply Agreement dated as of April 6, 1998 between
              Lenc-Smith Inc. and Midway, incorporated by reference to
              Exhibit 10.24 to the Midway 1998 10-K.
      10(aa)  Spare Parts Sales and Service Agreement dated as of April 6,
              1998 among Williams Electronics Games, Inc., Midway and
              Atari Games Corporation, incorporated by reference to
              Exhibit 10.25 to the Midway 1998 10-K.
      10(bb)  Sales Agreement dated as of April 6, 1998 between Williams
              Electronics Games, Inc. and Midway, incorporated by
              reference to Exhibit 10.26 to the Midway 1998 10-K.
      10(cc)  Information Systems Service Agreement dated as of April 6,
              1998 between Williams Electronics Games, Inc. and Midway,
              incorporated by reference to Exhibit 10.27 to the Midway
              1998 10-K.
      10(dd)  Confidentiality and Non-Competition Agreement dated as of
              April 6, 1998 between the Company and Midway, incorporated
              by reference to Exhibit 10.28 to the Midway 1998 10-K.
      10(ee)  Right of First Refusal Agreement dated as of April 6, 1998
              between the Company and Midway, incorporated by reference to
              Exhibit 10.29 to the Midway 1998 10-K.
      10(ff)  Third Parties Agreement dated as of April 6, 1998 between
              the Company and Midway, incorporated by reference to Exhibit
              10.30 to the Midway 1998 10-K.
      10(gg)  Temporary Support Services Agreement dated as of April 6,
              1998 between the Company and Midway, incorporated by
              reference to Exhibit 10.31 to the Midway 1998 10-K.
      10(hh)  Tax Separation Agreement dated as of April 6, 1998 between
              the Company and Midway, incorporated by reference to Exhibit
              10.32 to the Midway 1998 10-K.
      10(ii)  Tax Indemnification Agreement dated as of April 6, 1998
              between the Company and Midway, incorporated by reference to
              Exhibit 10.33 to the Midway 1998 10-K.
      13      Portions of 1998 Annual Report to Stockholders.
      21      Subsidiaries of the Company.
      23      Consent of Ernst & Young LLP.
      27      Financial Data Schedule.
 (b)  Reports on Form 8-K.
</TABLE>
 
     A Report on Form 8-K was filed by the Company on April 17, 1998, reporting
completion of the Distribution and certain related matters under Items 2 and 7.
 
                                       41
<PAGE>   43
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on the
24th day of September, 1998.
 
                                          WMS INDUSTRIES INC.
 
                                          By:     /s/ LOUIS J. NICASTRO
                                            ------------------------------------
                                            Louis J. Nicastro
                                              Chairman of the Board, President
                                              and Chief Executive Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been duly signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
               SIGNATURE                                  TITLE                            DATE
               ---------                                  -----                            ----
<C>                                      <S>                                        <C>
 
         /s/ LOUIS J. NICASTRO           Chairman of the Board, President, Chief    September 24, 1998
---------------------------------------  Executive Officer and Director
           Louis J. Nicastro             (Principal Executive Officer)
 
        /s/ HAROLD H. BACH, JR.          Vice President -- Finance, Chief           September 24, 1998
---------------------------------------  Financial Officer and Treasurer
          Harold H. Bach, Jr.            (Principal Financial and Principal
                                         Accounting Officer)
 
         /s/ NORMAN J. MENELL            Vice Chairman of the Board of Directors    September 24, 1998
---------------------------------------
           Norman J. Menell
 
      /s/ WILLIAM C. BARTHOLOMAY         Director                                   September 24, 1998
---------------------------------------
        William C. Bartholomay
 
        /s/ WILLIAM E. MCKENNA           Director                                   September 24, 1998
---------------------------------------
          William E. McKenna
 
         /s/ NEIL D. NICASTRO            Director                                   September 24, 1998
---------------------------------------
           Neil D. Nicastro
 
           /s/ HARVEY REICH              Director                                   September 24, 1998
---------------------------------------
             Harvey Reich
 
        /s/ DAVID M. SATZ, JR.           Director                                   September 24, 1998
---------------------------------------
          David M. Satz, Jr.
 
         /s/ IRA S. SHEINFELD            Director                                   September 24, 1998
---------------------------------------
           Ira S. Sheinfeld
</TABLE>
 
                                       42
<PAGE>   44
 
                              WMS INDUSTRIES INC.
 
                         INDEX TO FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                PAGE
                                                                NO.
                                                                ----
<S>                                                             <C>
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of independent auditors..............................    F-2
Consolidated balance sheets at June 30, 1998 and June 30,
  1997......................................................      *
Consolidated statements of income for the years ended June
  30, 1998, 1997 and 1996...................................      *
Consolidated statements of changes in stockholders' equity
  for the years ended June 30, 1998, 1997 and 1996..........      *
Consolidated statements of cash flows for the years ended
  June 30, 1998, 1997 and 1996..............................      *
Notes to consolidated financial statements..................      *
Financial statements schedule II -- Valuation and Qualifying
  Accounts for the years ended June 30, 1998, 1997 and
  1996......................................................    F-3
</TABLE>
 -------------------------
* Incorporated by reference to the portions of the Company's 1998 Annual Report
  filed as Exhibit 13 to this Form 10-K.
 
     All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the consolidated financial statements
and notes thereto.
 
                                       F-1
<PAGE>   45
 
                         REPORT OF INDEPENDENT AUDITORS
 
To the Stockholders and Board of Directors
  WMS Industries Inc.
 
     We have audited the consolidated financial statements of WMS Industries
Inc. and subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K
of WMS Industries Inc. for the year ended June 30, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
The financial statements and related schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and related schedule based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and related schedule
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WMS Industries Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
 
                                          /s/ ERNST & YOUNG LLP
 
Chicago, Illinois
August 17, 1998
 
                                       F-2
<PAGE>   46
 
                                                                     SCHEDULE II
 
                              WMS INDUSTRIES INC.
 
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                    YEARS ENDED JUNE 30, 1998, 1997 AND 1996
 
<TABLE>
<CAPTION>
                                                          COLUMN C
           COLUMN A                COLUMN B              ADDITIONS               COLUMN D       COLUMN E
           --------               -----------    --------------------------      --------       --------
                                  BALANCE AT      CHARGED        CHARGED         BALANCE
                                   BEGINNING         TO             TO         DEDUCTIONS--        AT
                                      OF         COSTS AND        OTHER          AMOUNTS         END OF
         DESCRIPTION                PERIOD        EXPENSES       ACCOUNTS      WRITTEN OFF       PERIOD
         -----------              ----------     ---------       --------      ------------      ------
<S>                               <C>            <C>           <C>             <C>             <C>
Allowance for receivables:
  1998........................    $ 5,439,000    $  581,000    $         --     $3,623,000     $ 2,397,000
  1997........................    $   831,000    $5,285,000    $         --     $  677,000     $ 5,439,000
  1996........................    $   437,000    $  432,000    $         --     $   38,000     $   831,000
Unrealized holding loss on
  noncurrent marketable equity
  securities:
  1998........................    $12,758,000    $       --    $(12,758,000)    $       --     $        --
  1997........................    $ 8,321,000    $       --    $  4,437,000     $       --     $12,758,000(1)
  1996........................    $ 4,571,000    $       --    $  3,750,000     $       --     $ 8,321,000(1)
</TABLE>
 
-------------------------
(1) Included as a direct reduction of stockholders' equity.
 
                                       F-3
<PAGE>   47
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
 2(a)      Plan of Reorganization and Distribution Agreement dated as
           of March 20, 1997 among the Company, Williams Hotel
           Corporation and WHG, incorporated by reference to Exhibit
           2.1 to the Company's Report on Form 8-K filed May 5, 1997
           (the "1997 Form 8-K").
 3(a)      Amended and Restated Certificate of Incorporation of the
           Company dated February 17, 1987; Certificate of Amendment
           dated January 28, 1993; and Certificate of Correction dated
           May 4, 1994, incorporated by reference to Exhibit 3(a) to
           the Company's Annual Report on Form 10-K for the year ended
           June 30, 1994 (the "1994 10-K").
 3(b)      Certificate of Amendment to the Amended and Restated
           Certificate of Incorporation of the Company, as filed with
           the Secretary of State of the State of Delaware on February
           25, 1998, incorporated by reference to Exhibit 3.1 to the
           Company's Quarterly Report on Form 10-Q for the fiscal
           quarter ended March 31, 1998.
 3(c)      Form of Certificate of Designations of Series A Preferred
           Stock (included as Exhibit A to the Rights Agreement
           referred to in Exhibit 4(b) hereto).
 3(d)      By-Laws of the Company, as amended and restated through June
           26, 1996, incorporated by reference to Exhibit 3(b) to the
           Company's Annual Report on Form 10-K for the year ended June
           30, 1996.
 4(a)      Specimen of Common Stock certificate, incorporated by
           reference to Exhibit 4(a) to the 1994 10-K.
 4(b)      Rights Agreement dated as of March 5, 1998 between the
           Company and The Bank of New York, as Rights Agent,
           incorporated by reference to Exhibit 1 to the Company's
           Registration Statement on Form 8-A (File No. 1-8300) filed
           March 25, 1998.
 4(c)      Form of Rights Certificate (included as Exhibit B to the
           Rights Agreement referred to in Exhibit 4(b) hereto).
10(a)      Third Amended and Restated Employment Agreement dated as of
           July 1, 1996 between the Company and Neil D. Nicastro,
           incorporated by reference to Exhibit 10(a) to the Company's
           Annual Report on Form 10-K for the fiscal year ended June
           30, 1997.
10(b)      Second Amendment and Restatement of the Company's Pension
           Plan for Salaried Employees adopted June 24, 1986 and
           Amendment Nos. 1 to 5 thereof, incorporated by reference to
           Exhibit 10(c) to the 1994 10-K.
10(c)      Second Amended and Restated Williams Electronics Games, Inc.
           Group Annuity Plan for Hourly Employees (effective as of
           January 1, 1987), incorporated by reference to Exhibit 10(f)
           to Company's Quarterly Report on Form 10-Q for the quarter
           ended March 31, 1988.
10(d)      1982 Employee Stock Option Plan, as amended, incorporated by
           reference to Exhibit 10(e) to the 1994 10-K.
10(e)      1991 Stock Option Plan, as amended, incorporated by
           reference to Exhibit 10(f) to the 1994 10-K.
10(f)      1993 Stock Option Plan, incorporated by reference to Exhibit
           10(g) to the 1994 10-K.
10(g)      1994 Stock Option Plan, incorporated by reference to
           Appendix A to the Company's Definitive Proxy Statement dated
           December 12, 1994.
10(h)      Form of Indemnity Agreement authorized to be entered into
           between the Company and each officer and director approved
           by the Board of Directors, incorporated by reference to
           Exhibit 10(k) to the 1994 10-K.
10(i)      WMS Industries Inc. 401(k) Retirement Savings Plan for
           Non-Union Employees adopted January 1, 1992, incorporated by
           reference to Exhibit 10(cc) to the Form 10-K for the fiscal
           year ended June 30, 1992 (the "1992 10-K").
</TABLE>
<PAGE>   48
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
10(j)      Williams Innovative Technologies, Inc. 401(k) Retirement
           Savings Plan (Union Employees) adopted January 1, 1992,
           incorporated by reference to Exhibit 10(dd) to the 1992
           10-K.
10(k)      WMS Industries Inc. Treasury Share Bonus Plan adopted April
           19, 1993, incorporated by reference to Exhibit 10(ee) to the
           Annual Report on Form 10-K for the fiscal year ended June
           30, 1993.
10(l)      Voting Proxy Agreement dated September 21, 1995 among Louis
           J. Nicastro, Neil D. Nicastro, the Company, Sumner M.
           Redstone and National Amusements, Inc., incorporated by
           reference to Exhibit 10(u) to Company's Annual Report on
           Form 10-K for the fiscal year ended June 30, 1995.
10(m)      Manufacturing and Services Agreement dated as of July 1,
           1996 between the Company and Midway, incorporated by
           reference to Exhibit 10.1 to the Midway Registration
           Statement on Form S-1, File No. 333-11919, filed on
           September 13, 1996 (the "Midway S-1").
10(n)      Tax Sharing Agreement dated as of July 1, 1996 among the
           Company, Midway, Midway Home Entertainment Inc., Midway
           Interactive Inc., Atari Games and Tengen, Inc., incorporated
           by reference to Exhibit 10.2 to the Midway S-1.
10(o)      Patent License Agreement dated as of July 1, 1996 between
           Williams and Midway, incorporated by reference to Exhibit
           10.4 to the Midway S-1.
10(p)      Tax Sharing Agreement, dated as of March 20, 1997, between
           the Company, Williams Hotel Corporation, WHG, ESJ Hotel
           Corporation, WMS Property Inc. and WHG El Con Corp., as
           amended April 15, 1997, incorporated by reference to Exhibit
           10.1 to the 1997 Form 8-K.
10(q)      Amendment to Article III, Section 3 (Option Adjustments) of
           1982 Employee Stock Option Plan, incorporated by reference
           to Proposal No. 2 to the Company's Definitive Proxy
           Statement on Schedule 14A as filed with the Commission on
           December 11, 1996.
10(r)      Amendment to Article III, Section 3 (Option Adjustments) of
           1991 Stock Option Plan, incorporated by reference to
           Proposal No. 2 to the Company's Definitive Proxy Statement
           on Schedule 14A as filed with the Commission on December 11,
           1996.
10(s)      Amendment to Article III, Section 3 (Option Adjustments) of
           1993 Stock Option Plan, incorporated by reference to
           Proposal No. 2 to the Company's Definitive Proxy Statement
           on Schedule 14A as filed with the Commission on December 11,
           1996.
10(t)      Amendment to Article III, Section 3 (Option Adjustments) of
           1994 Stock Option Plan, incorporated by reference to
           Proposal No. 2 to the Company's Definitive Proxy Statement
           on Schedule 14A as filed with the Commission on December 11,
           1996.
10(u)      1998 Non-Qualified Stock Option Plan, incorporated by
           reference to Exhibit 4.6(a) to the Company's Registration
           Statement No. 333-57585 on Form S-8 filed with the
           Commission on June 24, 1998 (the "1998 S-8").
10(v)      Severance Agreement dated March 5, 1998 between the Company
           and Neil D. Nicastro, incorporated by reference to Exhibit 2
           to the Report on Form 8-K filed April 17, 1998 (the "April
           1998 8-K").
10(w)      Consulting Agreement dated as of April 6, 1998 between the
           Company and Neil D. Nicastro, incorporated by reference to
           Exhibit 3 to the April 1998 8-K.
10(x)      Employment Agreement dated as of April 6, 1998 between the
           Company and Louis J. Nicastro, incorporated by reference to
           Exhibit 1 to the April 1998 8-K.
10(y)      Manufacturing Agreement dated as of April 6, 1998 between
           Williams Electronics Games, Inc. and Midway and the Guaranty
           of the obligations of Williams Electronics Games, Inc.
           thereunder by the Company, incorporated by reference to
           Exhibit 10.23 to the Midway Annual Report on Form 10-K for
           the fiscal year ended June 30, 1998 (the "Midway 1998
           10-K").
</TABLE>
<PAGE>   49
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                              DESCRIPTION
-------                            -----------
<S>        <C>
10(z)      Cabinet Supply Agreement dated as of April 6, 1998 between
           Lenc-Smith Inc. and Midway, incorporated by reference to
           Exhibit 10.24 to the Midway 1998 10-K.
10(aa)     Spare Parts Sales and Service Agreement dated as of April 6,
           1998 among Williams Electronics Games, Inc., Midway and
           Atari Games Corporation, incorporated by reference to
           Exhibit 10.25 to the Midway 1998 10-K.
10(bb)     Sales Agreement dated as of April 6, 1998 between Williams
           Electronics Games, Inc. and Midway, incorporated by
           reference to Exhibit 10.26 to the Midway 1998 10-K.
10(cc)     Information Systems Service Agreement dated as of April 6,
           1998 between Williams Electronics Games, Inc. and Midway,
           incorporated by reference to Exhibit 10.27 to the Midway
           1998 10-K.
10(dd)     Confidentiality and Non-Competition Agreement dated as of
           April 6, 1998 between the Company and Midway, incorporated
           by reference to Exhibit 10.28 to the Midway 1998 10-K.
10(ee)     Right of First Refusal Agreement dated as of April 6, 1998
           between the Company and Midway, incorporated by reference to
           Exhibit 10.29 to the Midway 1998 10-K.
10(ff)     Third Parties Agreement dated as of April 6, 1998 between
           the Company and Midway, incorporated by reference to Exhibit
           10.30 to the Midway 1998 10-K.
10(gg)     Temporary Support Services Agreement dated as of April 6,
           1998 between the Company and Midway, incorporated by
           reference to Exhibit 10.31 to the Midway 1998 10-K.
10(hh)     Tax Separation Agreement dated as of April 6, 1998 between
           the Company and Midway, incorporated by reference to Exhibit
           10.32 to the Midway 1998 10-K.
10(ii)     Tax Indemnification Agreement dated as of April 6, 1998
           between the Company and Midway, incorporated by reference to
           Exhibit 10.33 to the Midway 1998 10-K.
13         Portions of 1998 Annual Report to Stockholders.
21         Subsidiaries of the Company.
23         Consent of Ernst & Young LLP.
27         Financial Data Schedule.
</TABLE>