<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, 1998
--------------------------------------------------
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 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 April 30, 1998.
<PAGE>
MIDWAY GAMES INC.
____________
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three and nine months ended March 31, 1998 and 1997.................. 2
Condensed Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997..................................... 3-4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 1998 and 1997............................ 5
Notes to Condensed Consolidated Financial Statements................. 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9-12
Part II. Other Information:
Item 2. Changes in Securities and Use of Proceeds............................ 13
Item 4. Submission of Matters to a Vote of Security-Holders.................. 13-14
Item 6. Exhibits and Reports on Form 8-K..................................... 15
Signature ..................................................................... 16
</TABLE>
<PAGE>
MIDWAY GAMES INC.
___________
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
-------------------------- ------------------------
1998 1997 1998 1997
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Home video............................................... $52,916 $45,472 $169,972 $186,603
Coin-operated video...................................... 41,431 53,588 123,172 103,531
------- -------- -------- --------
Total revenues.............................................. 94,347 99,060 293,144 290,134
Cost of sales............................................... 50,978 63,403 150,964 164,894
------- -------- -------- --------
Gross profit................................................ 43,369 35,657 142,180 125,240
Research and development expense............................ 17,334 13,208 49,409 39,991
Selling expense............................................. 10,006 7,054 27,847 26,824
Administrative expense...................................... 5,629 5,672 14,630 14,428
------- -------- -------- --------
Operating income............................................ 10,400 9,723 50,294 43,997
Interest and other income................................... 902 981 2,326 2,861
Interest expense............................................ - (358) - (2,344)
------- -------- -------- --------
Income before tax provision................................. 11,302 10,346 52,620 44,514
Provision for income taxes.................................. (4,295) (3,931) (19,996) (16,915)
------- -------- -------- --------
Net income.................................................. $ 7,007 $ 6,415 $ 32,624 $ 27,599
======= ======= ======== ========
Net income per share of common stock - basic and diluted.... $ 0.18 $ 0.17 $ 0.85 $ 0.76
======= ======= ======== ========
Weighted average shares outstanding......................... 38,500 38,500 38,500 36,233
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
MIDWAY GAMES INC.
___________
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
-------- --------
ASSETS
- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 33,845 $ 51,862
Short-term investments............................................................ 23,800 10,000
-------- --------
57,645 61,862
Receivables, less allowances of $6,255 and $4,940................................. 81,349 54,477
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress.............................................. 9,453 14,433
Finished goods.................................................................. 9,833 13,525
-------- --------
19,286 27,958
Deferred income taxes............................................................. 6,777 5,779
Other current assets.............................................................. 11,066 4,329
-------- --------
Total current assets............................................................ 176,123 154,405
Property and equipment.............................................................. 20,999 16,891
Less: accumulated depreciation..................................................... (10,975) (7,393)
-------- --------
10,024 9,498
Excess of purchase cost over amount assigned to net assets acquired, net of
accumulated amortization of $7,792 and $4,850..................................... 46,208 49,150
Other assets........................................................................ 10,854 1,265
-------- --------
$243,209 $214,318
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
MIDWAY GAMES INC.
------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable................................................................ $ 16,028 $ 18,889
Payable to WMS Industries Inc................................................... 4,125 2,029
Accrued compensation and related benefits...................................... 9,896 11,331
Income taxes payable............................................................ - 3,866
Accrued payment on 1994 purchase of Tradewest................................... 14,400 14,400
Accrued royalties............................................................... 6,800 6,728
Other accrued liabilities....................................................... 12,902 10,852
----------- -----------
Total current liabilities................................................... 64,151 68,095
Deferred income taxes............................................................... 2,998 3,037
Other noncurrent liabilities........................................................ 2,668 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............................................................... 74,519 41,895
----------- -----------
Total stockholders' equity................................................... 173,392 140,768
----------- -----------
$ 243,209 $ 214,318
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
MIDWAY GAMES INC.
___________
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
-------------------------------
1998 1997
------------- ------------
Operating activities:
<S> <C> <C>
Net income......................................................................... $ 32,624 $ 27,599
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation and amortization............................................... 6,115 3,635
Receivables provision....................................................... 9,698 10,719
Deferred income taxes....................................................... (1,037) (8,653)
Decrease resulting from changes in operating assets and liabilities......... (47,918) (15,623)
------------- ------------
Net cash (used) provided by operating activities................................... (518) 17,677
Investing activities:
Purchase of property and equipment................................................. (3,699) (1,474)
Net change in short-term investments............................................... (13,800) -
------------- ------------
Net cash used by investing activities.............................................. (17,499) (1,474)
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 cash provided by financing activities.......................................... - 38,186
------------- ------------
(Decrease) increase in cash and cash equivalents................................... (18,017) 54,389
Cash and cash equivalents at beginning of period................................... 51,862 9,199
------------- ------------
Cash and cash equivalents at end of period......................................... $ 33,845 $ 63,588
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
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 nine
months ended March 31, 1998 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. Spin-off
--------
As previously announced, the Board of Directors of WMS Industries Inc.
("WMS") declared the spin-off distribution of Midway Games Inc. ("Midway")
common stock to holders of WMS common stock, with the close of business on
March 31, 1998 being the record date. This declaration resulted in the
distribution by WMS on April 6, 1998 of its remaining ownership interest of
33,400,000 shares of Midway common stock by means of a tax free spin-off.
WMS stockholders of record on March 31, 1998 were issued 1.19773 shares of
Midway common stock for each share of WMS common stock owned.
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. From July 1, 1996 through March 31, 1998, 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" 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
<PAGE>
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, during the four months
ended October 31, 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 Game Business have been conducted
by the Company.
During the four months ended October 31, 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 $1,253,000
for the four months ended October 31, 1996 which included $1,036,000 on the
$50 million dividend notes accrued at 6% through October 31, 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 $20,891,000 and $31,854,000 in the three
months ended March 31, 1998 and March 31, 1997, respectively, and
$62,416,000 and $59,577,000 in the nine months ended March 31, 1998 and
March 31, 1997, 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
three and nine months ended March 31, 1998 and March 31, 1997 were:
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C>
Manufacturing overhead $1,991 $1,382 $5,366 $4,254
Research and development expense 150 189 469 559
Selling expense 561 913 1,477 2,017
Administrative expense 521 1,434 1,613 3,397
</TABLE>
The Company entered into a Manufacturing and Services Agreement with WMS in
1996 under which WMS and its subsidiaries agreed 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 was
expected to purchase materials and WMS subsidiaries manufactured the coin-
operated video games charging actual labor with labor fringes and
manufacturing overhead allocated. The labor fringes, manufacturing overhead
and other services provided were allocated based on the various factors
noted in Note 3.
Effective April 6, 1998, in connection with the spin-off described in Note
2, the Company terminated the 1996 agreement and entered into several
agreements with WMS under which WMS will perform contract manufacturing and
provide information technology services to certain parts of the Company. In
addition, under a separate agreement, the Company will provide selling and
marketing services for the WMS pinball products. These agreements provide
for prices for products or services on an arms length basis. It is expected
that the overall cost structure of the Company, at current or expanded
levels of coin-operated video game operations, will not be materially
different from that experienced by the Company under the prior
Manufacturing and Services Agreement with WMS.
7
<PAGE>
5. Earnings Per Share
------------------
For the quarter and nine months ended March 31, 1998, the Company adopted
SFAS No. 128, "Earnings per Share," which was effective December 15, 1997.
The inclusion of dilutive securities under SFAS No. 128 had no impact on
current or prior period earnings per share.
8
<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 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 nine months ended March 31, 1998 cash used for operating and
investing activities was $18,017,000. In the nine months ended March 31, 1997
cash provided by operating activities less cash used for investing activities
was $16,203,000. 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.
Cash provided by operating activities before changes in operating assets and
liabilities was $47,400,000 in the nine months ended March 31, 1998 compared to
$33,300,000 in the nine months ended March 31, 1997. The increase in the current
nine months was the result of the higher net income, depreciation and
amortization and a smaller increase in deferred taxes.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows, resulted in a cash outflow of $47,918,000 in the nine
months ended March 31, 1998, which outflow was primarily due to increased
receivables and other current and long-term assets offset in part by a reduction
in inventories all from the comparable balances at June 30, 1997. The changes in
operating assets and liabilities in the prior year nine months ended March 31,
1997 resulted in a cash outflow of $15,623,000, which outflow was primarily due
to increased receivables and inventories offset in part by higher accounts
payable and accruals all from the comparable balances at June 30, 1996.
Cash used for investing activities was $17,499,000 for the nine months ended
March 31, 1998 compared with cash used of $1,474,000 for the nine months ended
March 31, 1997. Cash used for the purchase of property and equipment during the
nine months ended March 31, 1998 was $3,699,000 compared with $1,474,000 for the
nine months ended March 31, 1997. During the nine months ended March 31, 1998
cash of $13,800,000 was utilized for the purchase of short-term investments.
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 in November 1996 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 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.
9
<PAGE>
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 March 31, 1998 and $4,310,000 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.
Results of Operations
- ---------------------
Three months Ended March 31, 1998 Compared With
Three months Ended March 31, 1997
Revenues decreased $4,713,000 or 4.8% from $99,060,000 in the fiscal 1997 third
quarter ended March 31, 1997 to $94,347,000 in the fiscal 1998 third quarter
ended March 31, 1998.
Home video game revenues increased to $52,916,000 in the quarter ended March 31,
1998 from $45,472,000 in the prior year quarter. Revenues from the sale of next
generation home video games increased to $50,128,000 in the quarter ended March
31, 1998 from $43,894,000 in the prior year quarter. Shipments of next
generation home video game units increased 81% in the fiscal 1998 third quarter
compared to the prior year quarter with all the increase from Sony Playstation
units. However, home video game revenues increased only 16% primarily because of
the change in sales mix to lower priced Sony Playstation units and a unit sales
price decrease initiated in part by the video game platform manufacturers. Home
video game gross profit increased to 51.1% of revenues in the quarter ended
March 31, 1998 compared to 34.1% in the March 31, 1997 quarter due to the change
in sales mix to Sony Playstation which has a higher gross profit percentage and
because the unit cost of Nintendo 64 cartridges was reduced in the current
fiscal year. During the March 31, 1998 quarter, the Company released six new
home video game products, three for Nintendo 64 and three for Sony Playstation.
Midway's best selling home video games during the quarter were MK Mythologies:
Subzero, San Francisco Rush, Rampage World Tour, Quake, Gex2 and MK Trilogy.
Coin-operated video game revenues decreased 22.7% to $41,431,000 in the March
31, 1998 quarter from $53,588,000 in the quarter ended March 31, 1997. The
decreased coin-operated video game revenues were primarily from a shift in the
product mix from dedicated video games to lower priced video kits. Shipments in
the March 31, 1998 quarter included initial sales of California Speed, Surf
Planet Universe and Maximum Force-Area 51 and continuing sales of Blitz, San
Francisco Rush - The Rock, Off Road Challenge and Touchmaster.
Gross profit increased to $43,369,000 (46.0% of revenues) in the quarter ended
March 31, 1998 from $35,657,000 (36.0% of revenues) in the quarter ended March
31, 1997. The increase in gross profit was primarily from an increased
percentage of home video game revenues in total revenues and an increase in the
home video game gross profit margin noted above.
Research and development expenses increased $4,126,000 or 31.2% from $13,208,000
(13.3% of revenues) in the quarter ended March 31, 1997 to $17,334,000 (18.4% of
revenues) in the quarter ended March 31, 1998. The increase is due in part to an
increased number of game development teams.
Selling expense increased $2,952,000 from $7,054,000 (7.1% of revenues) in the
quarter ended March 31, 1997 to $10,006,000 (10.6% of revenues) in the quarter
ended March 31, 1998. The increase was primarily due to the change in the
revenue mix to an increased level of home video games which have higher selling
costs as a percent of sales.
Administrative expense decreased $43,000 from $5,672,000 (5.7% of revenues) in
the quarter ended March 31, 1997 to $5,629,000 (6.0% of revenues) in the quarter
ended March 31, 1998, notwithstanding increased goodwill amortization and
depreciation and public company expenses in the March 31, 1998 quarter.
10
<PAGE>
Operating income in the quarter ended March 31, 1998 increased $677,000 from
$9,723,000 (9.8% of revenues) in the quarter ended March 31, 1997 to $10,400,000
(11.0% of revenues) in the quarter ended March 31, 1998.
Interest and other income decreased from $981,000 in the March 31, 1997 quarter
to $902,000 in the March 31, 1998 quarter.
Interest expense of $358,000 in the quarter ended March 31, 1997 was due to
interest on the Atari Games purchase notes which are no longer outstanding.
Net income increased $592,000 or 9.2% from $6,415,000, $.17 per share, in the
quarter ended March 31, 1997 to $7,007,000, $.18 per share, in the quarter ended
March 31, 1998. The number of shares used in calculating per share earnings was
38,500,000 for both quarters.
Nine months Ended March 31, 1998 Compared With
Nine months Ended March 31, 1997
Revenues increased $3,010,000 or 1.0% from $290,134,000 in the nine months ended
March 31, 1997 to $293,144,000 in the nine months ended March 31, 1998.
Home video game revenues decreased to $169,972,000 in the nine months ended
March 31, 1998 from $186,603,000 in the prior year nine months. The decrease was
caused by the anticipated decline of 16-bit and other home video game revenues
to $12,283,000 in the nine months ended March 31, 1998 from $66,412,000 in the
prior year nine months. Revenues from the sale of next generation home video
games increased to $157,689,000 in the nine months ended March 31, 1998 from
$120,191,000 in the prior year nine months notwithstanding the lower home video
game selling prices on next generation titles due to new pricing structures
initiated in part by the platform manufacturers. Shipments of next generation
home video game units increased 66.9% in the nine months ended March 31, 1998
compared to the prior year nine months but next generation home video game
revenues increased only 31.2% because of a unit sales price decreases. The unit
cost of sales and selling price of the video games for Nintendo 64 decreased
resulting in a small decrease in gross profit on this product whereas Sony
Playstation unit gross profit generally decreased by the reduction in sales
price. During the nine months ended March 31, 1998, the Company released 23 new
home video game products on four platforms. New products shipped included eight
for Nintendo 64, eleven for Sony Playstation, three for Sega Saturn and one for
Super Nintendo. Midway's best selling home video games during the nine months
were MK Mythologies: Subzero, San Francisco Rush, Rampage World Tour, Top Gear
Rally, NHL & NHLPA Present Wayne Gretzky 3D Hockey '98, Quake, Gex 2 and Mace:
The Dark Age.
Coin-operated video revenues increased 19.0% to $123,172,000 in the nine months
ended March 31, 1998 from $103,531,000 in the nine months ended March 31, 1997.
The increased coin-operated video game revenues were primarily from an increased
number of titles being sold in the nine months ended March 31, 1998 compared to
the prior year nine months. Shipments in the nine months ended March 31, 1998
included initial sales of Blitz, San Francisco Rush - The Rock, California
Speed, Mortal Kombat 4, Off Road Challenge, Surf Planet Universe and Maximum
Force-Area 51 and continuing sales of San Francisco Rush, Maximum Force, Cruis'n
the World and Touchmaster.
Gross profit increased to $142,180,000 (48.5% of revenues) in the nine months
ended March 31, 1998 from $125,240,000 (43.2% of revenues) in the nine months
ended March 31, 1997. The increase in gross profit was primarily from an
increase in the overall gross profit margin. Home video game gross profit margin
increased due to a shift in revenue mix of next generation products to Sony
Playstation which has a higher gross profit percentage and because of increased
gross profit percentage from Nintendo 64 home video game sales due to the change
in the pricing structure primarily initiated by Nintendo described above. Gross
profit margin also increased due to a higher gross margin on coin-operated video
games due to lower parts costs and spreading fixed production costs over a
larger sales volume.
11
<PAGE>
Research and development expenses increased $9,418,000 or 23.6% from $39,991,000
(13.8% of revenues) in the nine months ended March 31, 1997 to $49,409,000
(16.9% of revenues) in the nine months ended March 31, 1998. The increase is
due in part to an increased number of game development teams.
Selling expense increased $1,023,000 from $26,824,000 (9.2% of revenues) in the
nine months ended March 31, 1997 to $27,847,000 (9.5% of revenues) in the nine
months ended March 31, 1998. The increase was primarily due to higher coin-
operated video game advertising expense due to the increase in number of titles
released in the current nine month period offset in part by lower selling
expense for home video games because of a decrease in home video game revenues.
Administrative expense increased $202,000 from $14,428,000 (5.0% of revenues) in
the nine months ended March 31, 1997 to $14,630,000 (5.0% of revenues) in the
nine months ended March 31, 1998. Notwithstanding the elimination of the non-
recurring expense related to the installation of a new computer system in the
nine months ended March 31, 1997, administration expense did not decrease
primarily because of increased goodwill amortization and depreciation and public
company expenses incurred in the nine months ended March 31, 1998.
Operating income in the nine months ended March 31, 1998 increased $6,297,000
from $43,997,000 (15.2% of revenues) in the nine months ended March 31, 1997 to
$50,294,000 (17.2% of revenues) in the nine months ended March 31, 1998.
Interest and other income decreased from $2,861,000 in the March 31, 1997 nine
months to $2,326,000 in the March 31, 1998 nine months. The decrease is
primarily because other income from litigation settlement was included in the
nine months ended March 31, 1997.
Interest expense of $2,344,000 in the nine months ended March 31, 1997 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.
Net income increased $5,025,000 or 18.2% from $27,599,000, $.76 per share, in
the nine months ended March 31, 1997 to $32,624,000, $.85 per share, in the nine
months ended March 31, 1998. The number of shares used in calculating per share
earnings increased by 6.3% to 38,500,000 in the nine months ended March 31, 1998
from 36,233,000 in the nine months ended March 31, 1997 because of 5,100,000
shares of common stock sold in the October 29, 1996 public offering.
12
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
- ---------------------------------------------------
See Item 4 below
Item 4. Submission of Matters to a Vote of Security-Holders.
- -------------------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on January 27, 1998.
The matters submitted to a vote of the Company's stockholders were (1) the
election of twelve members to the Board of Directors; (2) the amendment to the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and to the Company's Restated Bylaws (the "Bylaws") to provide
for the classification of the Board of Directors; (3) the amendment to the
Certificate of Incorporation and the Bylaws to provide that any vacancy on the
Board may be filled for the unexpired term by a vote of the majority of the
remaining Directors; (4) the amendment to the Certificate of Incorporation and
the Bylaws to eliminate stockholder action by written consent; (5) the amendment
to the Certificate of Incorporation and the Bylaws to permit only the President,
Chairman of the Board or Board of Directors to call special meetings and to
limit the business permitted to be conducted at such meetings; (6) the amendment
to the Certificate of Incorporation and the Bylaws to implement advance notice
procedures for the submissions of director nominations and other business to be
considered at annual meetings; (7) the amendment to the Certificate of
Incorporation and the Bylaws to require a majority vote of the board or
affirmative vote of 80% of the outstanding common stock in order to amend the
By-Laws or Certificate of Incorporation; and (8) the ratification of the
appointment of Ernst & Young LLP as independent auditors for the 1998 fiscal
year.
The voting results of the Company's stockholders were as follows:
(1) The Company's stockholders re-elected the entire Board of Directors, as
follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------------------------ ---------- --------
<S> <C> <C>
Harold H. Bach, Jr. 38,289,301 4,547
William C. Bartholomay 38,289,301 4,547
Byron C. Cook 38,289,301 4,547
Kenneth J. Fedesna 38,289,301 4,547
William E. McKenna 38,289,301 4,547
Norman J. Menell 38,289,301 4,547
Louis J. Nicastro 38,289,201 4,647
Neil D. Nicastro 38,289,301 4,547
Harvey Reich 38,289,301 4,547
Ira S. Sheinfeld 38,289,301 4,547
Richard D. White 38,289,301 4,547
Gerald O. Sweeney, Jr. 38,289,301 4,547
</TABLE>
(2) Stockholders voted 34,103,779 shares (89.06% of the shares represented at
the meeting) in favor of the provision to provide for the classification of
the Board of Directors; 3,892,159 shares (10.16% of the shares represented
at the meeting) voted against approval; 825 (less than 0.01% of the shares
represented at the meeting) abstained from voting; and proxies representing
297,085 (0.78% of the shares represented at the meeting) were unmarked and
not voted.
(3) Stockholders voted 34,276,404 shares (89.51% of the shares represented at
the meeting) in favor of the provision that any vacancy on the Board may be
filled for the unexpired term by a vote of the majority of the remaining
Directors; 3,719,759 shares (9.71% of the shares represented at the
meeting) voted against approval; 600 (less than 0.01% of the shares
represented at the meeting) abstained from voting; and proxies representing
297,085 (0.78% of the shares represented at the meeting) were unmarked and
not voted.
13
<PAGE>
(4) Stockholders voted 34,150,716 shares (89.18% of the shares represented at
the meeting) in favor of the provision to eliminate stockholder action by
written consent; 3,845,185 shares (10.04% of the shares represented at the
meeting) voted against approval; 862 (less than 0.01% of the shares
represented at the meeting) abstained from voting; and proxies representing
297,085 (0.78% of the shares represented at the meeting) were unmarked and
not voted.
(5) Stockholders voted 34,060,628 shares (88.95% of the shares represented at
the meeting) in favor of the provision to permit only the President,
Chairman of the Board or Board of Directors to call special meetings and to
limit the business permitted to be conducted at such meetings; 3,935,473
shares (10.27% of the shares represented at the meeting) voted against
approval; 662 (less than 0.01% of the shares represented at the meeting)
abstained from voting; and proxies representing 297,085 (0.78% of the
shares represented at the meeting) were unmarked and not voted.
(6) Stockholders voted 34,101,609 shares (89.05% of the shares represented at
the meeting) in favor of the provision to implement advance notice
procedures for the submissions of director nominations and other business
to be considered at annual meetings; 3,894,454 shares (10.17% of the shares
represented at the meeting) voted against approval; 700 (less than 0.01% of
the shares represented at the meeting) abstained from voting; and proxies
representing 297,085 (0.78% of the shares represented at the meeting) were
unmarked and not voted.
(7) Stockholders voted 34,065,115 shares (88.96% of the shares represented at
the meeting) in favor of the provision to require a majority vote of the
board or affirmative vote of 80% of the outstanding common stock in order
to amend the By-Laws or Certificate of Incorporation; 3,930,948 shares
(10.26% of the shares represented at the meeting) voted against approval;
700 (less than 0.01% of the shares represented at the meeting) abstained
from voting; and proxies representing 297,085 (0.78% of the shares
represented at the meeting) were unmarked and not voted.
(8) Stockholders voted 38,290,223 shares (99.99% of the shares represented at
the meeting) in favor of the ratification of the appointment of Ernst &
Young LLP as independent auditors for the 1998 fiscal year; 3,200 shares (
0.01% of the shares represented at the meeting) voted against approval; 425
(less than 0.01% of the shares represented at the meeting) abstained from
voting.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) List of Exhibits:
Exhibit 3.1 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Registrant (incorporated
herein by reference to the Form 8-K (File No. 1-12367) filed
with the Securities and Exchange Commission on April 17,
1998).
Exhibit 3.2 Amended and Restated By-laws of the Registrant (incorporated
herein by reference to the Form 8-K (File No. 1-12367) filed
with the Securities and Exchange Commission on April 17,
1998).
Exhibit 4.1 First Amendment to Rights Agreement, dated as of November 6,
1997, between the Registrant and The Bank of New York, as
Rights Agent (incorporated herein by reference to the Form 8-K
(File No. 1-12367) filed with the Securities and Exchange
Commission on April 17, 1998).
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Securities and Exchange Commission
on March 17, 1998 reporting an Item 5 ("Other Events") event and an Item 7
("Financial Statements, Proforma Financial Statements and Exhibits")
exhibit.
15
<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 thereunto duly authorized.
MIDWAY GAMES INC.
Dated: May 12, 1998 By: /S/ Harold H. Bach, Jr.
----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
16
<PAGE>
INDEX TO EXHIBITS
Exhibit. Description.
-------- ------------
Exhibit 27 Financial Data Schedule
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 33,845
<SECURITIES> 23,800
<RECEIVABLES> 87,604
<ALLOWANCES> (6,255)
<INVENTORY> 19,286
<CURRENT-ASSETS> 176,123
<PP&E> 20,999
<DEPRECIATION> (10,975)
<TOTAL-ASSETS> 243,209
<CURRENT-LIABILITIES> 64,151
<BONDS> 0
0
0
<COMMON> 385
<OTHER-SE> 173,392
<TOTAL-LIABILITY-AND-EQUITY> 243,209
<SALES> 293,144
<TOTAL-REVENUES> 293,144
<CGS> 150,964
<TOTAL-COSTS> 150,964
<OTHER-EXPENSES> 49,409
<LOSS-PROVISION> 9,698
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 52,620
<INCOME-TAX> 19,996
<INCOME-CONTINUING> 32,624
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,624
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
