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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 September 30, 1997
-------------------------------------------------
Commission file number 001-12367
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MIDWAY GAMES INC.
-------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2906244
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
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 October 31, 1997.
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MIDWAY GAMES INC.
____________
INDEX
<TABLE>
<CAPTION>
PAGE NO
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Part I. Financial Information:
- -------
<S> <C> <C>
Item 1. Financial Statements:
------ Condensed Consolidated Statements of Income -
Three months ended September 30, 1997 and 1996...................... 2
Condensed Consolidated Balance Sheets -
September 30, 1997 and June 30, 1997................................ 3-4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1997 and 1996...................... 5
Notes to Condensed Consolidated Financial Statements................ 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
------- and Results of Operations........................................... 9-10
Part II. Other Information:
- --------
Item 6.(a) Exhibits............................................................ 11
----------
Signature .................................................................... 12
</TABLE>
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<TABLE>
<CAPTION>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
Three months ended
September 30,
------------------
1997 1996
------------------
<S> <C> <C>
Revenues
Home video............................................. $ 40,059 $ 47,554
Coin-operated video.................................... 33,681 18,001
-------- --------
Total revenues.......................................... 73,740 65,555
Cost of sales........................................... 38,629 31,175
-------- --------
Gross profit............................................ 35,111 34,380
Research and development expense........................ 14,123 12,003
Selling expense......................................... 6,148 7,608
Administrative expense.................................. 4,038 3,994
-------- --------
Operating income........................................ 10,802 10,775
Interest and other income............................... 867 157
Interest expense........................................ - (1,130)
-------- --------
Income before tax provision............................. 11,669 9,802
Provision for income taxes.............................. (4,434) (3,725)
-------- --------
Net income.............................................. $ 7,235 $ 6,077
======= =======
Net income per share of common stock.................... $ 0.19 $ 0.18
======= =======
Shares used in calculating per share amounts............ 38,500 33,400
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
2
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[CAPTION]
<TABLE>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
September 30, June 30,
1997 1997
------------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 54,132 $ 51,862
Short-term investments.................................................. 10,000 10,000
---------- ----------
64,132 61,862
Receivables, less allowances of $6,802 and $4,940....................... 61,789 54,477
Receivable from WMS Industries Inc...................................... 672 -
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress..................................... 12,124 14,433
Finished goods......................................................... 11,253 13,525
---------- ----------
23,377 27,958
Deferred income taxes................................................... 6,511 5,779
Other current assets.................................................... 8,081 4,329
---------- ----------
Total current assets................................................... 164,562 154,405
Property and equipment................................................... 18,043 16,891
Less: accumulated depreciation.......................................... (8,466) (7,393)
---------- ----------
9,577 9,498
Excess of purchase cost over amount assigned to net assets acquired, net
of accumulated amortization of $5,830 and $4,850.................... 48,170 49,150
Other assets............................................................. 1,246 1,265
---------- ----------
$ 223,555 $ 214,318
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
September 30, June 30,
1997 1997
------------ ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable............................................................ $ 27,434 $ 18,889
Payable to WMS Industries Inc............................................... - 2,029
Accrued compensation and related benefits................................... 9,139 11,331
Income taxes payable........................................................ - 3,866
Accrued payment on 1994 purchase of Tradewest............................... 14,400 14,400
Accrued royalties ......................................................... 5,407 6,728
Other accrued liabilities................................................... 13,752 10,852
--------- ---------
Total current liabilities.................................................. 70,132 68,095
Deferred income taxes........................................................ 2,998 3,037
Other noncurrent liabilities................................................. 2,422 2,418
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued... - -
Common stock, $.01 par value, 100,000,000 shares authorized, 38,500,000
shares issued and outstanding.............................................. 385 385
Additional paid-in capital.................................................. 98,488 98,488
Retained earnings........................................................... 49,130 41,895
--------- ---------
Total stockholders' equity................................................. 148,003 140,768
--------- ---------
$ 223,555 $ 214,318
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------------
1997 1996
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<S> <C> <C>
Operating activities:
Net income.............................................................................. $ 7,235 $ 6,077
Adjustments to reconcile net income to net cash provided (used) by operatin
activities:
Depreciation and amortization......................................................... 2,053 1,005
Receivables provision................................................................. 2,299 1,569
Deferred income taxes................................................................. (771) (307)
Decrease resulting from changes in operating assets and liabilities................... (7,394) (21,953)
---------- ----------
Net cash provided (used) by operating activities........................................ 3,422 (13,609)
Investing activities:
Purchase of property and equipment...................................................... (1,152) (982)
---------- ----------
Net cash used by investing activities................................................... (1,152) (982)
Financing activities:
Net transactions with WMS Industries Inc................................................ - 17,250
---------- ----------
Net cash provided by financing activities............................................... - 17,250
Increase in cash and cash equivalents................................................... 2,270 2,659
Cash and cash equivalents at beginning of period........................................ 51,862 9,199
---------- ----------
Cash and cash equivalents at end of period.............................................. $ 54,132 $ 11,858
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
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MIDWAY GAMES INC.
_____________
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
--------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Due to the
seasonality of the Company's businesses, operating results for the quarter
ended September 30, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year
ended June 30, 1997.
2. Planned Distribution
--------------------
On August 11, 1997, WMS Industries Inc. ("WMS") announced its intention to
distribute pro rata to the stockholders of WMS its remaining ownership
interest of 33,400,000 shares of Midway Games Inc. ("Midway") by means of a
tax free spin-off. The distribution is conditioned upon several
requirements, including the receipt of a ruling from the Internal Revenue
Service that the transaction will be tax free to WMS and its stockholders.
WMS management anticipates that the spin-off will be completed by early
1998.
3. Basis of Presentation and Relationship with WMS Industries Inc.
---------------------------------------------------------------
Since its incorporation in 1988 through July 1, 1996 the Company was the
primary subsidiary in which WMS conducted the coin-operated video games
business. Subsequent to July 1, 1996, Midway has been 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. and Midway Interactive Inc. to Midway. The
aforementioned transfers resulted in WMS concentrating its "Video Game
Business" into Midway and its wholly-owned subsidiaries.
The condensed consolidated 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
6
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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.
4. Transactions with WMS
---------------------
The Company, except for its Atari Games subsidiary, for the quarter ended
September 30, 1996 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 initial public offering on October 29, 1996 the
treasury activities of the Video Games Business have been conducted by the
Company.
During the quarter ended September 30, 1996 one subsidiary that has
seasonal cash needs was charged interest at prime on the balance of the
intercompany payable to WMS. Interest expense payable to WMS was $858,000
for the quarter ended September 30, 1996 which included $764,000 accrued at
6% on the $50 million of dividend notes payable then outstanding.
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 $17,177,000 and $9,362,000 in the quarters
ended September 30, 1997 and September 30, 1996, respectively. In addition,
certain other costs have been allocated to the Company based on various
factors noted in Note 3. Charges to the Company from WMS and WMS
subsidiaries for the allocations in the quarters ended September 30, 1997
and September 30, 1996 were:
<TABLE>
<CAPTION>
Three months ended
September 30,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Manufacturing overhead $1,339 $1,378
Research and development expense 171 183
Selling expense 945 498
Administrative expense 868 1,034
</TABLE>
The Company 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 3 that are used in the condensed consolidated financial statements.
7
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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 as a result
of certain risks including those described in the Company's 1997 Annual Report
on Form 10-K and other documents filed with the Securities and Exchange
Commission.
Financial Condition
- -------------------
Prior to the October 29, 1996 initial public offering, the Company, except for
its Atari Games subsidiary, 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 no longer relies on WMS for its seasonal cash needs.
During the quarter ended September 30, 1997 cash provided by operating
activities less cash used for investing activities was $2,270,000. In the
quarter ended September 30, 1996 cash used for operating and investing
activities was $14,591,000 and cash of $17,250,000 was provided by WMS.
Cash provided by operating activities before changes in operating assets and
liabilities was $10,816,000 in the quarter ended September 30, 1997 compared to
$8,344,000 in the quarter ended September 30, 1996. The increase in the current
quarter was the result of the higher net income, depreciation and amortization
and the receivables provision.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows, resulted in a cash outflow of $7,394,000 in the
quarter ended September 30, 1997, compared with a cash outflow of $21,953,000 in
the quarter ended September 30, 1996, which outflows were primarily due to
increased receivables, in part offset by higher accounts payable and accruals
and a reduction in inventories from their comparable balances at the respective
June 30 year ends.
Cash used for the purchase of property and equipment during the quarter ended
September 30, 1997 was $1,152,000 compared with $982,000 for the quarter ended
September 30, 1996.
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 platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a 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
extends to October 31, 1998 and contains usual bank line of credit terms. There
were no borrowings under the credit line at September 30, 1997 and $10,641,000
of letters of credit were outstanding. Management believes that cash and cash
equivalents, short-term investments, 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
amounts due under the Tradewest acquisition agreement.
8
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Results of Operations
- ---------------------
Three months Ended September 30, 1997 Compared With
Three months Ended September 30, 1996
Revenues increased $8,185,000 or 12.5% from $65,555,000 in the quarter ended
September 30, 1996 to $73,740,000 in the quarter ended September 30, 1997.
Home video game revenues decreased to $40,059,000 in the quarter ended September
30, 1997 from $47,554,000 in the prior year quarter. Revenues from the sale of
next generation home video games increased to $32,595,000 in the quarter ended
September 30, 1997 from $5,741,000 in the prior year quarter, offset by the
anticipated decline of 16-bit and other home video game revenues to $7,464,000
in the quarter ended September 30, 1997 from $41,813,000 in the prior year
quarter. Home video game revenues decreased as a result of the lower home video
game selling prices on next generation titles due to new pricing structures
initiated by the platform manufacturers. During the September 30, 1997 quarter,
the Company released seven new home video game products on four platforms. New
products shipped included two for Nintendo 64, two for Sony Playstation, two for
Sega Saturn and one for Super Nintendo. Midway's best selling video games during
the quarter were Top Gear Rally, Mace the Dark Age and MK Mythologies: Subzero.
Coin-operated video revenues increased 87.1% to $33,681,000 in the September 30,
1997 quarter from $18,001,000 in the quarter ended September 30, 1996. The
increased coin-operated video game revenues were primarily from an increased
number of titles being sold in the quarter ended September 30, 1997 compared to
the prior year quarter. Shipments in the September 30, 1997 quarter included
initial sales of Mortal Kombat 4 and Off Road Challenge and continuing sales of
San Francisco Rush, Maximum Force, Cruis'n the World and Touchmaster.
Gross profit increased to $35,111,000 (47.6% of revenues) in the quarter ended
September 30, 1997 from $34,380,000 (52.4% of revenues) in the quarter ended
September 30, 1996. The increase in gross profit was primarily from increased
revenues offset, in part, by a decrease in the gross profit margin. The gross
profit margin decreased primarily due to the change in the revenue mix to a
higher level of coin-operated video games.
Research and development expenses increased $2,120,000 or 17.7% from $12,003,000
(18.3% of revenues) in the quarter ended September 30, 1996 to $14,123,000
(19.2% of revenues) in the quarter ended September 30, 1997. The increase is due
in part to an increased number of game development teams.
Selling expense decreased $1,460,000 from $7,608,000 (11.6% of revenues) in the
quarter ended September 30, 1996 to $6,148,000 (8.3% of revenues) in the quarter
ended September 30, 1997. The decrease was primarily due to lower home video
game selling expense needed to support lower home video game revenues.
Administrative expense increased $44,000 from $3,994,000 (6.1% of revenues) in
the quarter ended September 30, 1996 to $4,038,000 (5.5% of revenues) in the
quarter ended September 30, 1997. Notwithstanding the elimination of the non-
recurring expense related to the installation of a new computer system in the
September 30, 1996 quarter, administrative expense did not decrease primarily
because of increased goodwill amortization and depreciation and public company
expenses in the September 30, 1997 quarter.
Operating income in the quarter ended September 30, 1997 increased $27,000 from
$10,775,000 (16.4% of revenues) in the quarter ended September 30, 1996 to
$10,802,000 (14.6% of revenues) in the quarter ended September 30, 1997.
Interest and other income increased from $157,000 in the September 30, 1996
quarter to $867,000 in the September 30, 1997 quarter. The increase is primarily
from interest income on a higher level of cash and cash equivalents and short-
term investments.
Interest expense of $1,130,000 in the quarter ended September 30, 1996 was due
to interest on the Atari Games purchase notes and interest on the $50 million
dividend notes due to WMS both of which are no longer outstanding.
9
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Net income increased $1,158,000 or 19.1% from $6,077,000, $.18 per share, in the
quarter ended September 30, 1996 to $7,235,000, $.19 per share, in the quarter
ended September 30, 1997. The number of shares used in calculating per share
earnings increased by 15% to 38,500,000 in the September 30, 1997 quarter from
33,400,000 in the September 30, 1996 quarter because of 5,100,000 shares of
common stock sold in the October 29, 1996 public offering.
10
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PART II
OTHER INFORMATION
Item 6.(a) Exhibits
- -------------------
Exhibit 27 - Financial Data Schedule
11
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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: November 12, 1997 By: /S/ Harold H. Bach, Jr.
----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 54,132
<SECURITIES> 10,000
<RECEIVABLES> 68,591
<ALLOWANCES> (6,802)
<INVENTORY> 23,377
<CURRENT-ASSETS> 164,562
<PP&E> 18,043
<DEPRECIATION> (8,466)
<TOTAL-ASSETS> 223,555
<CURRENT-LIABILITIES> 70,132
<BONDS> 0
0
0
<COMMON> 385
<OTHER-SE> 147,618
<TOTAL-LIABILITY-AND-EQUITY> 223,555
<SALES> 73,740
<TOTAL-REVENUES> 73,740
<CGS> 38,629
<TOTAL-COSTS> 38,629
<OTHER-EXPENSES> 14,123
<LOSS-PROVISION> 2,299
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,669
<INCOME-TAX> 4,434
<INCOME-CONTINUING> 7,235
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,235
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0
</TABLE>
