<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
--------------------------------------------------
Commission file number 001-12367
---------
MIDWAY GAMES INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2906244
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3401 North California Ave., Chicago, IL 60618
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (773) 961-2222
----------------------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by X whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES NO X
------ -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 38,500,000 shares of common
stock, $.01 par value, were outstanding at February 10, 1997.
<PAGE>
MIDWAY GAMES INC.
____________
INDEX
<TABLE>
<CAPTION>
PAGE NO
-------
PART I. FINANCIAL INFORMATION:
- -------
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS:
------ Condensed Statements of Income -
Three and six months ended December 31, 1996 and 1995.......... 2
Condensed Balance Sheets -
December 31, 1996 and June 30, 1996............................ 3-4
Condensed Statements of Cash Flows -
Six months ended December 31, 1996 and 1995.................... 5
Notes to Condensed Financial Statements........................ 6-9
ITEM 2. Management's Discussion and Analysis of Financial Condition
------ and Results of Operations...................................... 10-12
PART II. OTHER INFORMATION:
- --------
ITEM 6.(A) EXHIBITS...................................................... 13
----------
SIGNATURE ............................................................. 14
</TABLE>
<PAGE>
MIDWAY GAMES INC.
_____________
CONDENSED STATEMENTS OF INCOME
(Thousands of dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------------------ -------------------------
1996 1995 1996 1995
---- ---- ---- ----
Consolidated Combined Consolidated Combined
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Revenues
Home video................................... $ 93,577 $ 72,173 $141,131 $118,890
Coin-operated video.......................... 31,942 16,989 49,943 38,210
-------- -------- -------- --------
Total revenues................................. 125,519 89,162 191,074 157,100
Cost of sales.................................. 70,316 48,547 101,491 89,169
-------- -------- -------- --------
Gross profit................................... 55,203 40,615 89,583 67,931
Research and development expense............... 14,780 9,541 26,783 15,392
Selling expense................................ 12,162 9,723 19,770 17,285
Administrative expense......................... 4,762 2,243 8,756 4,515
-------- -------- -------- --------
Operating income............................... 23,499 19,108 34,274 30,739
Interest and other income...................... 1,723 - 1,880 -
Interest expense............................... (856) (372) (1,986) (419)
-------- -------- -------- --------
Income before tax provision.................... 24,366 18,736 34,168 30,320
Provision for income taxes..................... (9,259) (7,138) (12,984) (11,552)
-------- -------- -------- --------
Net income..................................... $ 15,107 $ 11,598 $ 21,184 $ 18,768
======== ======== ======== ========
Net income per share of common stock........... $ 0.41 $ 0.35 $ 0.60 $ 0.56
======== ======== ======== ========
Shares used in calculating per share amounts... 36,800 33,400 35,100 33,400
======== ======== ======== ========
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
MIDWAY GAMES INC.
----------------------
CONDENSED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30
1996 1996
---- ----
Consolidated Combined
------------ --------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents ...................................... $ 56,232 $ 9,199
Receivables, less allowances of $7,894 and $995 ................ 107,981 48,951
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress ......................... 16,113 16,835
Finished goods ............................................. 5,964 8,187
-------- --------
22,077 25,022
Deferred income taxes .......................................... 1,980 -
Other current assets ........................................... 6,114 5,407
-------- --------
Total current assets ....................................... 194,384 88,579
Property and equipment ............................................. 13,337 9,491
Less: accumulated depreciation .................................... (4,744) (3,564)
-------- --------
8,593 5,927
Excess of purchase cost over amount assigned to net assets
acquired, net of accumulated amortization of $2,922 and $2,035 ... 48,558 22,765
Other assets ....................................................... 1,277 991
-------- --------
$252,812 $118,262
======== ========
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
MIDWAY GAMES INC.
----------------------
CONDENSED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ --------
Consolidated Combined
------------ --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable ............................................... $ 23,430 $ 17,686
Accrued compensation and related benefits ...................... 10,162 4,849
Income taxes payable ........................................... 10,447 -
Deferred income taxes .......................................... - 1,400
Accrued payment on 1994 purchase of Tradewest .................. 7,200 -
Accrued payment on 1996 purchase of Atari Games Corporation .... 11,632 3,286
Dividend notes ................................................. - 50,000
Accrued royalties .............................................. 11,796 6,088
Payable to WMS Industries Inc. ................................. 10,354 -
Other accrued liabilities ...................................... 23,816 16,888
-------- --------
Total current liabilities .................................. 108,837 100,197
Long term debt ..................................................... 7,863 7,863
Deferred income taxes .............................................. - 2,794
Accrued payment on 1994 purchase of Tradewest ...................... 14,400 -
Other noncurrent liabilities ....................................... 1,655 1,920
Stockholders' equity:
Stockholder's net investment ................................... - 5,488
Preferred stock, $.01 par value, 5,000,000 shares authorized ... - -
Common stock, $.01 par value, 100,000,000 shares authorized,
38,500,000 shares outstanding ................................ 385 -
Additional paid-in capital...................................... 98,488 -
Retained earnings............................................... 21,184 -
-------- --------
Total stockholders' equity................................. 120,057 5,488
-------- --------
$252,812 $118,262
======== ========
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
MIDWAY GAMES INC.
--------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
------------------------
1996 1995
------------ --------
Consolidated Combined
------------ --------
<S> <C> <C>
Operating activities:
Net income ........................................................................ $ 21,184 $ 18,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 2,067 1,303
Receivables provision ......................................................... 7,249 4,282
Deferred income taxes ......................................................... (5,015) (4,196)
Decrease resulting from changes in operating assets and liabilities ........... (20,345) (17,189)
-------- --------
Net cash provided by operating activities ......................................... 5,140 2,968
Investing activities:
Purchase of property and equipment ................................................ (1,492) (1,640)
-------- --------
Net cash used by investing activities ............................................. (1,492) (1,640)
Financing activities:
Net proceeds from public offering ................................................. 93,385 -
Dividend notes paid to WMS Industries Inc. ........................................ (50,000) -
Net transactions with WMS Industries Inc. ......................................... - 1,073
-------- --------
Net cash provided by financing activities ......................................... 43,385 1,073
-------- --------
Increase in cash and cash equivalents ............................................. 47,033 2,401
Cash and cash equivalents at beginning of period .................................. 9,199 -
-------- --------
Cash and cash equivalents at end of period ........................................ $ 56,232 $ 2,401
======== ========
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
MIDWAY GAMES INC.
-------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
--------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Due to the seasonality of the
Company's businesses, operating results for the six month period ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1997. For further
information, refer to the combined financial statements and footnotes
thereto for the year ended June 30, 1996 included in the Company's
Registration Statement on Form S-1.
2. BASIS OF PRESENTATION AND RELATIONSHIP WITH WMS INDUSTRIES INC.
---------------------------------------------------------------
Since its inception in 1988, Midway Games Inc. ("Midway") has been a
wholly-owned subsidiary of WMS Industries Inc. ("WMS") and was the primary
subsidiary in which WMS conducts the coin-operated video games business.
Subsequent to July 1, 1996, Midway is the only WMS subsidiary in the coin-
operated video game business.
On July 1, 1996 (the "Transfer Date") WMS transferred out of Midway all of
the operating assets and liabilities relating to the "Bally(R)" pinball
business previously conducted by Midway. On the Transfer Date WMS
transferred the coin-operated video game operating assets and liabilities
not previously part of Midway from other WMS subsidiaries to Midway. Also
on the Transfer Date WMS transferred 100% of the stock of Midway Home
Entertainment Inc. (formerly Williams Entertainment Inc.) and Midway
Interactive Inc. (formerly Williams Interactive Inc.) to Midway. The
aforementioned transfers resulted in WMS concentrating its Video Game
Business into Midway and its wholly-owned subsidiaries. WMS's net
investment has been reflected as Stockholder's Net Investment in the
combined financial statements at June 30, 1996. The aforementioned
transfers have been reflected in the financial statements for June 30, 1996
and prior periods, and the revenues and expenses of the Bally pinball
business have been excluded from the financial statements.
The combined financial statements at June 30, 1996 and for the periods
ending June 30, 1996 or prior reflect the historical combined financial
position and results of operations of the Video Game Business as if the
Company operated the Video Games Business under the structure implemented
on the Transfer Date. The results of the Video Game Business include the
results of Midway Home Entertainment Inc., and the results of Midway
Interactive Inc., subsequent to its purchase of Atari Games Corporation
("Atari Games") on March 29, 1996. The Company believes that this is the
most meaningful presentation in that it presents on an historical basis the
results of operations and financial condition of all of the components of
the Video Games Business that the Company owns after giving effect to the
structure implemented on the Transfer Date. The financial statements
subsequent to July 1, 1996 are presented on a consolidated basis.
6
<PAGE>
The financial statements include transfers and allocations of costs and
expenses from WMS or other WMS subsidiaries primarily for activities
relating to the Midway coin-operated video games business. Cost of sales
includes material, labor and labor fringes transferred from the other WMS
subsidiaries at cost based on the standard cost of material adjusted to
estimated actual using engineered bills of material and actual labor with
standard labor fringes applied. Cost of sales also includes allocations of
manufacturing overhead cost incurred in the production of coin-operated
video games for Midway. Research and development expenses includes
allocations for certain shared facilities and personnel. Selling and
administrative expenses include certain allocations relating to general
management, treasury, accounting, human resources, insurance and selling
and marketing. These allocations were determined by using various factors
such as dollar amount of sales, number of personnel, square feet of
building space, estimates of time spent to provide services and other
appropriate costing measures. In the opinion of management these transfers
of cost of sales and allocations are made on a reasonable basis to properly
reflect the share of costs incurred by WMS on behalf of the Company.
The financial statements may not necessarily be representative of results
that would have been attained if the Company operated as a separate
independent entity.
3. ACQUISITION
-----------
On March 29, 1996, a Midway Games subsidiary acquired all the capital stock
of Atari Games Corporation ("Atari Games") from Warner Communications Inc.
("Warner"), a subsidiary of Time Warner Inc.
The Company is in the process of assimilating parts of the Atari Games
business into the Company's similar activities and exiting certain
activities. A $4,500,000 liability for exit activities was established on
March 29, 1996, the only major component of which was $2,500,000 of
employee severance costs. The liability also includes provisions for
severance and relocation costs for employees of Atari Games, contractual
liabilities, direct exit costs and estimated losses of the two foreign
subsidiaries until disposition.
As of December 31, 1996 costs of $3,485,000 for assimilation and exit
activities related to the acquisition of Atari Games have been incurred.
Additional costs will continue to be incurred until the sale of the
subsidiary in Japan has been completed. The timing and outcome of this
event will determine the adjustment required, if any, to the liability for
exit activities. Any change in the exit liability would result in an
adjustment to goodwill.
Under the terms of the purchase agreement, Warner is required and agreed on
January 7, 1997 to make an additional cash payment of $1,403,000 to Atari
Games in order to increase net current assets to the required amount based
upon the Atari Games' final March 29, 1996 balance sheet. A receivable for
this amount is included in the condensed balance sheet.
As of December 31, 1996, $11,632,000 was recorded as accrued additional
purchase price under the four year non-recourse promissory note to Warner
resulting in recording $5,080,000 of goodwill.
The April 1994 acquisition of Tradewest provides for additional purchase
price payments contingent on the level of subsequent earnings. As a result
of the level of home video earnings through December 31, 1996, the maximum
additional payment of $7,200,000 due in June 1997 and $14,400,000 due in
June 1998 were recorded as of December 31, 1996.
7
<PAGE>
4. TRANSACTIONS WITH WMS
---------------------
The Company, except for Atari Games, for the periods included in the
financial statements participated in the WMS central cash management
system, pursuant to which all cash receipts were transferred to WMS and all
cash disbursements were made by WMS. Seasonal cash needs were provided by
WMS. After the completion of the public offering (see Note 6) the treasury
activities of the Video Games Business are being conducted by the Company.
During the three and six months ended December 31, 1996 and December 31,
1995 one subsidiary that has seasonal cash needs was charged interest at
prime and was paid interest at short-term treasury bill rates on the
balance of the intercompany amount with WMS. Due to the seasonal cash
flows of this subsidiary, the intercompany account with WMS alternated
between intercompany accounts payable and receivable. Interest income
accrued from WMS and interest expense accrued to WMS was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
(in thousands) (in thousands)
-------------- --------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest income $ 0 $ 0 $ 0 $ 6
Interest expense $ 123 $ 365 $ 217 $ 442
</TABLE>
Interest expense for the three and six months ended December 31, 1996 also
included $272,000 and $1,036,000 on the $50 million dividend notes accrued
at 6%.
The Company has been charged for the specific production costs, excluding
manufacturing overhead, of the coin-operated video games produced by a
subsidiary of WMS that totaled $21,763,000 and $10,831,000 in the three
months ended December 31, 1996 and December 31, 1995, respectively, and
$31,125,000 and $23,771,000 in the six months ended December 31, 1996 and
December 31, 1995, respectively. In addition, certain other costs have
been allocated to the Company based on various factors noted in Note 2.
Charges to the Company from WMS and WMS subsidiaries for the allocations in
the three and six months ended December 31, 1996 and December 31, 1995
were:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1996 1995 1996 1995
----- ----- ----- -----
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C>
Manufacturing overhead $2,133 $ 818 $3,511 $1,793
Research and development expense $ 187 $ 373 $ 370 $ 739
Selling expense $ 606 $ 372 $1,104 $ 866
Administrative expense $1,171 $ 712 $2,205 $1,592
</TABLE>
The Company has entered into a Manufacturing and Services Agreement with
WMS under which WMS and its subsidiaries agree to continue performing
contract manufacturing for coin-operated video games for Midway and Atari
Games as well as providing general management, financial reporting, and
treasury services to the Company and general management, accounting, human
resources and selling and marketing services to Midway. The Company
intends to purchase materials and WMS subsidiaries will manufacture the
coin-operated video games charging actual labor with labor fringes and
manufacturing overhead allocated. The labor fringes, manufacturing
overhead and other services provided will be allocated based on the various
factors noted in Note 2 that are used in the financial statements.
8
<PAGE>
5. AUTHORIZED SHARES
-----------------
In October 1996 the Company recapitalized and authorized 5,000,000 shares
of preferred stock and 100,000,000 shares of common stock. In addition,
the Company declared in October 1996 a 33,400 for one stock split,
reflected retroactively in the determination of net income per share.
6. PUBLIC OFFERING
---------------
On October 30, 1996, the Company successfully completed an initial public
offering of 5,100,000 of its common shares at a price of $20.00 per share
resulting in net proceeds to the Company of approximately $93,385,000. WMS
Industries owns 33,400,000 common shares of the Company representing 86.8%
of its outstanding common stock. The dividend notes payable to WMS of $50
million and all advances from WMS then outstanding were paid with the
proceeds of the offering.
9
<PAGE>
MIDWAY GAMES INC.
-----------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in the forward looking statements.
FINANCIAL CONDITION
- -------------------
On November 4, 1996 the Company received net proceeds of $93,385,000 (after
deducting all cost of issuing the stock) from the initial public offering of
5,100,000 shares of common stock.
Prior to the initial public offering, the Company, except for its Atari Games
subsidiary, has participated in the WMS central cash management system, pursuant
to which all cash receipts were transferred to WMS and all cash disbursements
were made by WMS. Seasonal cash needs were provided by WMS. Shortly after the
initial public offering the Company established its own cash management system
and will no longer rely on WMS for its seasonal cash needs.
During the six months ended December 31, 1996 and 1995, cash provided by
operating, investing and financing activities was $47,033,000 and $2,401,000,
respectively.
Cash provided by operating activities before changes in operating assets and
liabilities, was $25,485,000 in the six months ended December 31, 1996 and
$20,157,000 in the six months ended December 31, 1995.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows, resulted in $20,345,000 of cash outflow in the six
months ended December 31, 1996, compared with $17,189,000 of cash outflow in the
six months ended December 31, 1995, which outflows were primarily due to
increased receivables balances, in part offset by higher accounts payable and
accruals from their comparable balances at the respective June 30 year ends.
Cash used for the purchase of property and equipment during the six months ended
December 31, 1996 was $1,492,000 compared with $1,640,000 for the six months
ended December 31, 1995.
During fiscal 1996 the Board of Directors of the Company declared a dividend and
the Company issued $50,000,000 of Dividend Notes payable to WMS which bear
interest at 6%. The dividend notes and accrued interest were paid from the
proceeds of the initial public offering.
The home video game business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain home video game
manufacturers that supply the Company require letters of credit for the full
purchase price at the time the purchase order is accepted.
The Company has established a line of credit for $50,000,000 and an additional
letter of credit line of up to $30,000,000. The revolving credit agreement is
for a one-year term and contains usual bank line of credit terms. There were no
borrowings under the revolving credit line at December 31, 1996. At December
31, 1996, $9,751,000 of the Company's letters of credit are issued pursuant to
the letter of credit line. Management believes that cash and cash equivalents,
cash flow from operations, and amounts available under the line of credit will
be adequate to fund the anticipated levels of inventories and accounts
receivable required in the operation of the business and the Company's other
presently anticipated needs, as well as pay any amounts due under the Tradewest
and Atari Games acquisition agreements.
10
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1995
Revenues increased $36,357,000 or 40.8% from $89,162,000 in the quarter ended
December 31, 1995 to $125,519,000 in the quarter ended December 31, 1996. Home
video revenues increased 29.7% to $93,577,000 in the quarter ended December 31,
1996. Coin-operated video revenues increased $14,953,000 or 88% in the quarter
ended December 31, 1996 to $31,942,000. The increase in home video revenues are
due to a higher number of units shipped primarily due to an increase in the
number of titles sold and an expanded consumer base due to the growth in the
installed base of next generation platforms. In the three months ended December
31, 1996, approximately 75% of the Company's home video game sales were for the
next generation platforms. The increased coin-operated revenues were primarily
from increased unit shipments of the newest games Cruisin' World and San
Francisco Rush.
Gross profit increased $14,588,000 or 35.9% to $55,203,000 (44.0% of revenues)
in the quarter ended December 31, 1996 from $40,615,000 (45.6% of revenues) in
the quarter ended December 31, 1995. The increase in gross profit was
primarily from increased revenues as discussed above and the decrease in gross
profit margin percentage resulted from an increase in the percentage of coin-
operated video revenues in total revenues.
Research and development expenses increased $5,239,000 or 54.9% from $9,541,000
(10.7% of revenues) in the quarter ended December 31, 1995 to $14,780,000 (11.8%
of revenues) in the quarter ended December 31, 1996. The increase is primarily
due to including the product development expenses from the Company's subsidiary
Atari Games acquired in March 1996.
Selling expense increased $2,439,000 or 25.1% from $9,723,000 (10.9% of
revenues) in the quarter ended December 31, 1995 to $12,162,000 (9.7% of
revenues) in the quarter ended December 31, 1996. The increase was primarily
due to increased advertising and promotion costs to support the increased home
video game sales.
Administrative expense increased $2,519,000 from $2,243,000 (2.5% of revenues)
in the quarter ended December 31, 1995 to $4,762,000 (3.8% of revenues) in the
quarter ended December 31, 1996. The increase in administrative expense is
primarily due to cost relating to the installation of a new computer system,
increased goodwill amortization and administrative expenses of the newly
acquired Atari Games.
Operating income in the quarter ended December 31, 1996, after absorbing a
$5,239,000 increase in research and development expense which is expected to
benefit future periods, increased $4,391,000 or 23% from $19,108,000 (21.4% of
revenues) in the quarter ended December 31, 1995 to $23,499,000 (18.7% of
revenues) in the quarter ended December 31, 1996. The increase in operating
income results primarily from increased revenues noted above.
Interest and other income was $1,723,000 in the quarter ended December 31, 1996
compared to none in the quarter ended December 31, 1995. The current year
amount includes approximately $900,000 in a litigation settlement and the
balance is primarily from interest income on cash equivalents.
Interest expense increased primarily due to interest accrued on the 6% dividend
notes and on the Atari Games purchase notes.
Net income increased $3,509,000 or 30.3%, from $11,598,000 in the quarter ended
December 31, 1995 to $15,107,000 in the quarter ended December 31, 1996. The
increase in net income was due primarily to higher operating income in the
quarter ended December 31, 1996 as discussed above.
11
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH
SIX MONTHS ENDED DECEMBER 31, 1995
Revenues increased $33,974,000 or 21.6% from $157,100,000 in the six months
ended December 31, 1995 to $191,074,000 in the six months ended December 31,
1996. Home video revenues increased $22,241,000 or 18.7% in the six months
ended December 31, 1996 to $141,131,000. Coin-operated video revenues increased
$11,733,000 or 30.7% in the six months ended December 31, 1996 to $49,943,000.
The increase in the home video game revenues results from the significant
increase in the sale of next generation video game units in the quarter ended
December 31, 1996 and the increase in coin-operated video revenue results from
the successful introduction of two new coin-operated video games in the quarter
ended December 31, 1996.
Gross profit increased $21,652,000 or 31.9% to $89,583,000 (46.9% of revenues)
in the six months ended December 31, 1996 from $67,931,000 (43.2% of revenues)
in the six months ended December 31, 1995. The increase in gross profit was
primarily from increased revenues and lower unit cost of home video games due to
contract manufacturing of 16-bit cartridges for the first time and the increase
in the gross profit margin percentage was primarily due to the lower unit cost
of 16-bit cartridges.
Research and development expenses increased $11,391,000 or 74.0% from
$15,392,000 (9.8% of revenues) in the six months ended December 31, 1995 to
$26,783,000 (14% of revenues) in the six months ended December 31, 1996. The
increase is primarily due to including the product development expenses from the
Company's subsidiary Atari Games acquired in March 1996.
Selling expense as a percentage of revenues decreased to 10.3% in the six months
ended December 31, 1996 from 11% in the six months ended December 31, 1995
notwithstanding the $2,485,000 increase in advertising and promotion of home
video games.
Administrative expense increased $4,241,000 from $4,515,000 (2.9% of revenues)
in the six months ended December 31, 1995 to $8,756,000 (4.6% of revenues) in
the six months ended December 31, 1996. The increase in administrative expense
is primarily due to cost relating to the installation of a new computer system,
increased goodwill amortization and administrative expenses of the newly
acquired Atari Games.
Operating income in the six months ended December 31, 1996, after absorbing an
$11,391,000 increase in research and development expense which is expected to
benefit future periods, increased $3,535,000 or 11.5% from $30,739,000 (19.6% of
revenues) in the six months ended December 31, 1995 to $34,274,000 (17.9% of
revenues) in the six months ended December 31, 1996. The increase in operating
income results primarily from increased revenues noted above.
Interest and other income was $1,880,000 in the six months ended December 31,
1996 compared to none in the six months ended December 31, 1995. The current
year amount includes approximately $900,000 in a litigation settlement and the
balance is primarily from interest income on cash equivalents.
Interest expense increased primarily due to interest accrued on the 6% dividend
notes and on the Atari Games purchase notes.
Net income increased $2,416,000 or 12.9% from $18,768,000 in the six months
ended December 31, 1995 to $21,184,000 in the six months ended December 31,
1996. The increase in net income was due primarily to higher operating income
in the six months ended December 31, 1996 as discussed above.
12
<PAGE>
PART II
OTHER INFORMATION
ITEM 6.(A) EXHIBITS
- -------------------
Exhibit 27 - Financial Data Schedule
13
<PAGE>
MIDWAY GAMES INC.
-----------------
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
MIDWAY GAMES INC.
-----------------
(Registrant)
Dated: February 14, 1997 By: /S/ Harold H. Bach, Jr.
----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
14
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