<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 March 31, 1997
------------------------------------------------
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
Incorporation or Organization) Identification No.)
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 X NO
--- ---
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 May 8, 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 nine months ended March 31, 1997 and 1996.............. 2
Condensed Balance Sheets -
March 31, 1997 and June 30, 1996................................. 3-4
Condensed Statements of Cash Flows -
Nine months ended March 31, 1997 and 1996........................ 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, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------------------------- -------------------------------
1997 1996 1997 1996
Consolidated Combined Consolidated Combined
------------ -------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Home video.................................. $45,472 $22,092 $ 186,603 $ 140,982
Coin-operated video......................... 53,588 20,983 103,531 59,193
------- ------- --------- ---------
Total revenues................................ 99,060 43,075 290,134 200,175
Cost of sales................................. 63,403 23,516 164,894 112,685
------- ------- --------- ---------
Gross profit.................................. 35,657 19,559 125,240 87,490
Research and development expense.............. 13,208 5,459 39,991 20,851
Selling expense............................... 7,054 2,115 26,824 19,400
Administrative expense........................ 5,672 2,176 14,428 6,691
------- ------- --------- ---------
Operating income.............................. 9,723 9,809 43,997 40,548
Interest and other income..................... 981 286 2,861 39
Interest expense.............................. (358) - (2,344) (172)
------- ------- --------- ---------
Income before tax provision................... 10,346 10,095 44,514 40,415
Provision for income taxes.................... (3,931) (3,846) (16,915) (15,398)
------- ------- --------- ---------
Net income.................................... $ 6,415 $ 6,249 $ 27,599 $ 25,017
======= ======= ========= =========
Net income per share of common stock.......... $ 0.17 $ 0.19 $ 0.76 $ 0.75
======= ======= ========= =========
Shares used in calculating per share amounts.. 38,500 33,400 36,233 33,400
======= ======= ========= =========
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
MIDWAY GAMES INC.
_____________
CONDENSED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ --------
Consolidated Combined
------------ --------
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 63,588 $ 9,199
Receivables, less allowances of $9,340 and $995........ 63,643 48,951
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress................... 22,734 16,835
Finished goods....................................... 10,878 8,187
-------- --------
33,612 25,022
Deferred income taxes.................................. 5,618 -
Receivable from WMS Industries Inc..................... 2,294 -
Other current assets................................... 5,287 5,407
-------- --------
Total current assets................................. 174,042 88,579
Property and equipment................................... 13,319 9,491
Less: accumulated depreciation........................... (5,365) (3,564)
-------- --------
7,954 5,927
Excess of purchase cost over amount assigned to net
assets acquired, net of accumulated amortization of
$3,869 and $2,035....................................... 50,131 22,765
Other assets............................................. 1,070 991
-------- --------
$233,197 $118,262
======== ========
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
MIDWAY GAMES INC.
_____________
CONDENSED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ --------
Consolidated Combined
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 30,930 $ 17,686
Accrued compensation and related benefits............... 11,758 4,849
Income taxes payable.................................... 3,287 -
Deferred income taxes................................... - 1,400
Accrued payment on 1994 purchase of Tradewest........... 7,200 -
Note payable on 1996 purchase of Atari Games Corporation 8,953 3,286
Dividend notes.......................................... - 50,000
Accrued royalties....................................... 9,738 6,088
Other accrued liabilities............................... 10,941 16,888
Long-term debt due within one year...................... 7,863 -
-------- --------
Total current liabilities............................ 90,670 100,197
Long-term debt............................................ 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....................................... 27,599 -
-------- --------
Total stockholders' equity........................... 126,472 5,488
-------- --------
$233,197 $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>
Nine months ended
March 31,
---------------------------
1997 1996
------------ ----------
Consolidated Combined
------------ ----------
Operating activities:
<S> <C> <C>
Net income.......................................................................... $ 27,599 $ 25,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 3,635 2,037
Receivables provision............................................................ 10,719 3,318
Deferred income taxes............................................................ (8,653) (3,016)
Decrease resulting from changes in operating assets and liabilities.............. (15,623) (1,895)
----------- ----------
Net cash provided by operating activities........................................... 17,677 25,461
Investing activities:
Purchase of property and equipment.................................................. (1,474) (2,217)
Cash acquired in acquisition of Atari Games Corporation, net of cash used........... - 7,996
----------- ----------
Net cash provided (used) by investing activities.................................... (1,474) 5,779
Financing activities:
Net proceeds from public offering................................................... 93,385 -
Dividend notes paid to WMS Industries Inc........................................... (50,000) -
Payment on note payable from the purchase of Atari Games Corporation ............... (5,199) -
Net transactions with WMS Industries Inc............................................ - (20,422)
----------- ----------
Net cash provided (used) by financing activities.................................... 38,186 (20,422)
----------- ----------
Increase in cash and cash equivalents............................................... 54,389 10,818
Cash and cash equivalents at beginning of period.................................... 9,199 -
----------- ----------
Cash and cash equivalents at end of period.......................................... $ 63,588 $ 10,818
=========== ==========
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
MIDWAY GAMES INC.
--------
NOTES 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 nine month period ended
March 31, 1997 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 conducted the coin-operated video games business.
Subsequent to July 1, 1996, Midway is the only WMS subsidiary in the coin-
operated video games 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 on
March 29, 1996. The Company believes that this is the most meaningful
presentation in that it presents on a 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 has been assimilating parts of the Atari Games business into
the Company's similar activities and exiting certain activities. A
$4,500,000 liability for assimilation and 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 March 31, 1997 costs of $4,229,000
for assimilation and exit activities related to the acquisition of Atari
Games have been incurred. Substantially all exit activities have taken
place as of March 31, 1997 and no adjustment of the liability for exit
activities is required.
As of March 31, 1997, the entire amount of $14,152,000 being accrued based
on a percentage of Atari Games gross profit was recorded under the four
year non-recourse promissory note to Warner resulting in recording
$7,600,000 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 recent level of home video earnings, 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 four months ended October 31, 1996 and the three and nine months
ended March 31, 1996 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 Nine months ended
March 31, March 31,
(in thousands) (in thousands)
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income - $264 $ 0 $270
Interest expense - 0 217 442
</TABLE>
Interest expense for the nine months ended March 31, 1997 also included
$1,036,000 on the $50 million dividend notes accrued at 6% through October
30, 1996.
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 $31,854,000 and $12,832,000 in the three
months ended March 31, 1997 and March 31, 1996, respectively, and
$59,577,000 and $36,603,000 in the nine months ended March 31, 1997 and
March 31, 1996, 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 nine months ended March 31, 1997 and March 31, 1996 were:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
(in thousands) (in thousands)
------------ ------------
<S> <C> <C> <C> <C>
Manufacturing overhead $1,382 $1,062 $4,254 $2,855
Research and development
expense 189 376 559 1,115
Selling expense 913 464 2,017 1,330
Administrative expense 1,434 587 3,397 2,179
</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.
7. Subsequent Event
----------------
On April 15, 1997 the Company entered into an agreement with Warner and
prepaid, at a discount, the $16,816,000 unpaid balance of promissory notes
due to Warner that were issued in the purchase of Atari Games. The discount
resulted in an after tax extraordinary gain from early extinguishment of
debt of $3,044,000, $.08 per share, to be recorded in the fourth quarter of
fiscal 1997.
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 nine months ended March 31, 1997 and 1996, cash provided by
operating, investing and financing activities was $54,389,000 and $10,818,000,
respectively.
Cash provided by operating activities before changes in operating assets and
liabilities, was $33,300,000 in the nine months ended March 31, 1997 and
$27,356,000 in the nine months ended March 31, 1996.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows, resulted in $15,623,000 of cash outflow in the nine
months ended March 31, 1997, compared with $1,895,000 of cash outflow in the
nine months ended March 31, 1996, which outflows were primarily due to increased
receivables and inventory, 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 nine months
ended March 31, 1997 was $1,474,000 compared with $2,217,000 for the nine months
ended March 31, 1996.
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 with 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 March 31, 1997. At March 31, 1997,
$18,649,000 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 March 31, 1997 Compared With
Three Months Ended March 31, 1996
Revenues increased $55,985,000 or 130.0% from $43,075,000 in the quarter ended
March 31, 1996 to $99,060,000 in the quarter ended March 31, 1997. Home video
revenues increased 105.8% to $45,472,000 in the quarter ended March 31, 1997.
Coin-operated video game revenues increased $32,605,000 or 155.4% in the quarter
ended March 31, 1997 to $53,588,000. The home video revenues for the March 31,
1996 quarter included $10,000,000 in licensing revenues. 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 March 31, 1997, approximately 90% of the Company's home video game sales
were for the next generation platforms. The increased coin-operated video game
revenues were primarily from shipments of the newest games Cruis'n World and San
Francisco Rush.
Gross profit increased $16,098,000, or 82.3% to $35,657,000 (36.0% of revenues)
in the quarter ended March 31, 1997 from $19,559,000 (45.4% of revenues) in the
quarter ended March 31, 1996. The increase in gross profit was primarily from
increased revenues as discussed above. The gross profit margin percentage in the
quarter ended March 31, 1996 excluding the $7,698,000 gross profit relating to
the $10,000,000 of licensing revenues was 35.9% of adjusted revenues.
Research and development expenses increased $7,749,000 or 141.9% from $5,459,000
(12.7% of revenues) in the quarter ended March 31, 1996 to $13,208,000 (13.3% of
revenues) in the quarter ended March 31, 1997. 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 $4,939,000 from $2,115,000 (4.9% of revenues) in the
quarter ended March 31, 1996 to $7,054,000 (7.1% of revenues) in the quarter
ended March 31, 1997. The increase was primarily due to increased advertising
and promotion costs to support the increased coin-operated and home video game
sales.
Administrative expense increased $3,496,000 from $2,176,000 (5.1% of revenues)
in the quarter ended March 31, 1996 to $5,672,000 (5.7% of revenues) in the
quarter ended March 31, 1997. The increase in administrative expense is
primarily due to increased goodwill amortization and depreciation, public
company expenses and the administrative expenses of Atari Games acquired in
March 1996.
Operating income in the quarter ended March 31, 1997, after absorbing a
$7,749,000 increase in research and development expense which is expected to
benefit future periods, decreased $86,000 or .9% from $9,809,000 (22.8% of
revenues) in the quarter ended March 31, 1996 to $9,723,000 (9.8% of revenues)
in the quarter ended March 31, 1997. Excluding the $7,135,000 effect on the
March 31, 1996 quarter operating income from the $10,000,000 in licensing
revenues, operating income increased $7,049,000.
Interest and other income was $981,000 in the quarter ended March 31, 1997
compared to $286,000 in the quarter ended March 31, 1996. The increase is
primarily from interest income on a higher level of cash and cash equivalents.
Interest expense was primarily due to interest accrued on the Atari Games
purchase notes.
Net income increased $166,000 or 2.7% from $6,249,000, $.19 per share, in the
quarter ended March 31, 1996 to $6,415,000, $.17 per share, in the quarter ended
March 31, 1997. Net income for the three months ended March 31, 1996 included
$4,318,000, $.13 per share, from the $10,000,000 of licensing revenues as
discussed above. After excluding the net income from the licensing revenue, net
income increased from $.06 per share to $.17 per share notwithstanding that the
number of shares used in calculating per share earnings increased by 15% to
38,500,000 in the March 31, 1997 quarter from 33,400,000 in the March 31, 1996
quarter because of 5,100,000 shares of common stock sold in the October 30, 1996
public offering.
11
<PAGE>
Results of Operations
- ---------------------
Nine Months Ended March 31, 1997 Compared With
Nine Months Ended March 31, 1996
Revenues increased $89,959,000 or 44.9% from $200,175,000 in the nine months
ended March 31, 1996 to $290,134,000 in the nine months ended March 31, 1997.
Home video revenues increased $45,621,000 or 32.4% in the nine months ended
March 31, 1997 to $186,603,000. Coin-operated video revenues increased
$44,338,000 or 74.9% in the nine months ended March 31, 1997 to $103,531,000.
The increase in the home video game revenues results from the significant
increase in sales of next generation video game units. The increased coin-
operated video game revenues were primarily from shipments of the newest games
Cruis'n World, San Francisco Rush and Touchmaster.
Gross profit increased $37,750,000 or 43.1% to $125,240,000 (43.2% of revenues)
in the nine months ended March 31, 1997 from $87,490,000 (43.7% of revenues) in
the nine months ended March 31, 1996. The increase in gross profit was primarily
from increased revenues. Gross profit margin percentage decreased slightly as
compared to the nine months ended March 31, 1996 primarily due to $7,698,000 of
gross profit on the $10,000,000 in licensing revenues in the March 1996 period
increased the prior quarter margin percentage by 1.7%.
Research and development expenses increased $19,140,000 or 91.8% from
$20,851,000 (10.4% of revenues) in the nine months ended March 31, 1996 to
$39,991,000 (13.8% of revenues) in the nine months ended March 31, 1997. 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 9.2% in the nine months
ended March 31, 1997 from 9.7% in the nine months ended March 31, 1996.
Administrative expense increased $7,737,000 from $6,691,000 (3.3% of revenues)
in the nine months ended March 31, 1996 to $14,428,000 (5.0% of revenues) in the
nine months ended March 31, 1997. The increase in administrative expense is
primarily due to costs relating to the installation of a new computer system,
increased goodwill amortization and depreciation, public company expenses and
the administrative expenses of Atari Games acquired in March 1996.
Operating income in the nine months ended March 31, 1997, after absorbing a
$19,140,000 increase in research and development expense which is expected to
benefit future periods, increased $3,449,000 or 8.5% from $40,548,000 (20.3% of
revenues) in the nine months ended March 31, 1996 to $43,997,000 (15.2% of
revenues) in the nine months ended March 31, 1997. The increase in operating
income results primarily from increased revenues noted above. Excluding the
$7,135,000 effect on the March 1996 period operating income from the $10,000,000
in licensing revenues, operating margin percentage would have been 17.6%.
Interest and other income was $2,861,000 in the nine months ended March 31, 1997
compared to $39,000 in the nine months ended March 31, 1996. The current year
amount includes approximately $900,000 in a litigation settlement and the
balance is primarily from increased interest income on cash and cash
equivalents.
Interest expense increased primarily due to interest paid to WMS on the 6%
dividend notes and to Warner on the Atari Games purchase notes.
Net income increased $2,582,000 or 10.3% from $25,017,000, $.75 per share, in
the nine months ended March 31, 1996 to $27,599,000, $.76 per share, in the nine
months ended March 31, 1997. The increase in net income was due primarily to
higher operating income in the nine months ended March 31, 1997 as discussed
above. Net income for the nine months ended March 31, 1996 included $4,318,000,
$.13 per share, from the $10,000,000 of licensing revenues discussed above.
After excluding the net income from the licensing revenues net income increased
from $.62 per share to $.76 per share notwithstanding that the number of shares
used in calculating per share earnings increased by 8.5% to 36,233,000 in the
nine months ended March 31, 1997 from 33,400,000 in the nine months ended March
31, 1996 because of 5,100,000 shares of common stock sold in the October 30,
1996 public offering.
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: May 9, 1997 By: /S/ Harold H. Bach, Jr.
----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 63,588 0
<SECURITIES> 0 0
<RECEIVABLES> 72,983 0
<ALLOWANCES> (9,340) 0
<INVENTORY> 33,612 0
<CURRENT-ASSETS> 171,748 0
<PP&E> 13,319 0
<DEPRECIATION> (5,365) 0
<TOTAL-ASSETS> 230,903 0
<CURRENT-LIABILITIES> 88,376 0
<BONDS> 0 0
0 0
0 0
<COMMON> 385 0
<OTHER-SE> 126,087 0
<TOTAL-LIABILITY-AND-EQUITY> 230,903 0
<SALES> 290,134 200,175
<TOTAL-REVENUES> 290,134 200,175
<CGS> 164,894 112,685
<TOTAL-COSTS> 164,894 112,685
<OTHER-EXPENSES> 39,991 20,851
<LOSS-PROVISION> 10,719 3,318
<INTEREST-EXPENSE> (2,344) (172)
<INCOME-PRETAX> 44,514 40,415
<INCOME-TAX> 16,915 15,398
<INCOME-CONTINUING> 27,599 25,017
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 27,599 25,017
<EPS-PRIMARY> .76 .75
<EPS-DILUTED> .76 .75
</TABLE>
