<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 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 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 January 30, 1998.
<PAGE>
MIDWAY GAMES INC.
____________
INDEX
<TABLE>
<CAPTION>
PAGE NO
-------
Part I. Financial Information:
- -------
<S> <C> <C>
Item 1. Financial Statements:
-------
Condensed Consolidated Statements of Income --
Three and six months ended December 31, 1997 and 1996.. 2
Condensed Consolidated Balance Sheets --
December 31, 1997 and June 30, 1997.................... 3-4
Condensed Consolidated Statements of Cash Flows --
Six months ended December 31, 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.................... 9-12
Part II. Other Information:
- --------
Item 6.(a) Exhibits............................................. 13
----------
Signature.......................................................... 14
</TABLE>
<PAGE>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
--------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Home video............................................... $ 76,997 $ 93,577 $117,056 $141,131
Coin-operated video...................................... 48,060 31,942 81,741 49,943
-------- -------- -------- --------
Total revenues............................................ 125,057 125,519 198,797 191,074
Cost of sales............................................. 61,357 70,316 99,986 101,491
-------- -------- -------- --------
Gross profit.............................................. 63,700 55,203 98,811 89,583
Research and development expense.......................... 17,952 14,780 32,075 26,783
Selling expense........................................... 11,693 12,162 17,841 19,770
Administrative expense.................................... 4,963 4,762 9,001 8,756
-------- -------- -------- --------
Operating income.......................................... 29,092 23,499 39,894 34,274
Interest and other income................................. 557 1,723 1,424 1,880
Interest expense.......................................... - (856) - (1,986)
-------- -------- -------- --------
Income before tax provision............................... 29,649 24,366 41,318 34,168
Provision for income taxes................................ (11,267) (9,259) (15,701) (12,984)
-------- -------- -------- --------
Net income................................................ $ 18,382 $ 15,107 $ 25,617 $ 21,184
======== ======== ======== =======
Net income per share of common stock - basic and diluted. $ 0.48 $ 0.41 $ 0.67 $ 0.60
======== ======== ======== ========
Weighted average shares outstanding....................... 38,500 36,800 38,500 35,100
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents................................................ $ 37,755 $ 51,862
Short-term investments................................................... 9,000 10,000
-------- --------
46,755 61,862
Receivables, less allowances of $7,606 and $4,940........................ 95,756 54,477
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress...................................... 7,625 14,433
Finished goods.......................................................... 11,342 13,525
-------- --------
18,967 27,958
Deferred income taxes.................................................... 6,777 5,779
Other current assets..................................................... 11,354 4,329
-------- --------
Total current assets.................................................... 179,609 154,405
Property and equipment.................................................... 19,398 16,891
Less: accumulated depreciation........................................... (9,521) (7,393)
-------- --------
9,877 9,498
Excess of purchase cost over amount assigned to net assets acquired, net
of accumulated amortization of $6,810 and $4,850..................... 47,190 49,150
Other assets.............................................................. 1,244 1,265
-------- --------
$237,920 $214,318
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
December 31, June 30,
1997 1997
LIABILITIES AND STOCKHOLDERS' EQUITY ------------ ---------
- ------------------------------------
Current liabilities:
<S> <C> <C>
Accounts payable............................................................. $ 10,878 $ 18,889
Payable to WMS Industries Inc................................................ 2,265 2,029
Accrued compensation and related benefits.................................... 8,666 11,331
Income taxes payable......................................................... 6,328 3,866
Accrued payment on 1994 purchase of Tradewest................................ 14,400 14,400
Accrued royalties............................................................ 6,808 6,728
Other accrued liabilities.................................................... 16,762 10,852
---------- ----------
Total current liabilities................................................... 66,107 68,095
Deferred income taxes......................................................... 2,998 3,037
Other noncurrent liabilities.................................................. 2,430 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............................................................ 67,512 41,895
---------- ----------
Total stockholders' equity.................................................. 166,385 140,768
---------- ----------
$ 237,920 $ 214,318
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
MIDWAY GAMES INC.
_____________
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
Six months ended
December 31,
------------------------------------
1997 1996
------------------------------------
<S> <C> <C>
Operating activities:
Net income................................................................. $ 25,617 $ 21,184
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation and amortization........................................... 4,088 2,067
Receivables provision................................................... 6,636 7,249
Deferred income taxes................................................... (1,037) (5,015)
Decrease resulting from changes in operating assets and liabilities..... (47,904) (20,345)
----------- ----------
Net cash (used) provided by operating activities........................... (12,600) 5,140
Investing activities:
Purchase of property and equipment......................................... (2,507) (1,492)
Net change in short-term investments....................................... 1,000 --
----------- ----------
Net cash used by investing activities...................................... (1,507) (1,492)
Financing activities:
Net proceeds from public offering.......................................... -- 93,385
Dividend notes paid to WMS Industries Inc.................................. -- (50,000)
----------- ----------
Net cash provided by financing activities.................................. -- 43,385
----------- ----------
(Decrease) increase in cash and cash equivalents........................... (14,107) 47,033
Cash and cash equivalents at beginning of period........................... 51,862 9,199
----------- ----------
Cash and cash equivalents at end of period................................. $ 37,755 $ 56,232
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<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 six
months ended December 31, 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" 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 three and six months ended December 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 $395,000
and $1,253,000 for the three and six months ended December 31, 1996,
respectively, which included $272,000 and $1,036,000 accrued at 6% on the
$50 million of dividend notes payable then outstanding for the three and
six months ended December 31, 1996, respectively.
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 $24,348,000 and $21,763,000 in the three
months ended December 31, 1997 and December 31, 1996, respectively, and
$41,525,000 and $31,125,000 in the six months ended December 31, 1997 and
December 31, 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
three and six months ended December 31, 1997 and December 31, 1996 were:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
(in thousands) (in thousands)
-------------- --------------
<S> <C> <C> <C> <C>
Manufacturing overhead $2,036 $2,133 $3,375 $3,511
Research and development expense 148 187 319 370
Selling expense 466 606 916 1,104
Administrative expense 567 1,171 1,092 2,205
</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.
5. Earnings Per Share
------------------
For the quarter ended December 31, 1997, 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.
7
<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 six months ended December 31, 1997 cash used for operating and
investing was $14,107,000. In the six months ended December 31, 1996 cash
provided by operating activities less cash used for investing activities was
$3,648,000. 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 $35,304,000 in the six months ended December 31, 1997 compared
to $25,485,000 in the six months ended December 31, 1996. The increase in the
current six months was the result of the higher net income, depreciation and
amortization and the smaller decrease in the deferred tax liability.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows, resulted in a cash outflow of $47,904,000 in the six
months ended December 31, 1997, compared with a cash outflow of $20,345,000 in
the six months ended December 31, 1996, which outflows were primarily due to
increased receivables and other current assets offset in part by a reduction in
inventories all from the comparable balances at the respective June 30 year
ends. The cash outflow in the six months ended December 31, 1996 was also
reduced by an increase in accounts payable and accruals.
Cash used for investing activities was $1,507,000 for the six months ended
December 31, 1997 compared with cash used of $1,492,000 for the six months ended
December 31, 1996. Cash used for the purchase of property and equipment during
the six months ended December 31, 1997 was $2,507,000 compared with $1,492,000
for the six months ended December 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 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.
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 December 31, 1997 and $860,000 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
<PAGE>
Results of Operations
- ---------------------
Three months Ended December 31, 1997 Compared With
Three months Ended December 31, 1996
Revenues decreased $462,000 or 0.4% from $125,519,000 in the fiscal 1997 second
quarter ended December 31, 1996 to $125,057,000 in the fiscal 1998 second
quarter ended December 31, 1997.
Home video game revenues decreased to $76,997,000 in the quarter ended December
31, 1997 from $93,577,000 in the prior year quarter. The decrease was caused by
the anticipated decline of 16-bit and other home video game revenues to
$2,031,000 in the quarter ended December 31, 1997 from $23,021,000 in the prior
year quarter. Revenues from the sale of next generation home video games
increased to $74,966,000 in the quarter ended December 31, 1997 from $70,556,000
in the prior year quarter notwithstanding the lower home video game selling
prices on next generation titles due to new pricing structures initiated by the
platform manufacturers. Shipments of next generation home video game units
increased 18.7% in the fiscal 1998 second quarter compared to the prior year
quarter but next generation home video game revenues increased only 6.3% because
of a unit sales price decrease of $11.00 for Nintendo 64 and $5.00 for Sony
Playstation. The unit cost of sales of the video games for Nintendo 64 decreased
by a similar amount resulting in no change in gross profit on this product
whereas Sony Playstation unit gross profit decreased by the reduction in sales
price. During the December 31, 1997 quarter, the Company released ten new home
video game products on three platforms. New products shipped included three for
Nintendo 64, six for Sony Playstation and one for Sega Saturn. Midway's best
selling home video games during the quarter were MK Mythologies: Subzero, San
Francisco Rush, Rampage World Tour, Top Gear Rally and NHL & NHLPA Present Wayne
Gretzky 3D Hockey '98.
Coin-operated video revenues increased 50.5% to $48,060,000 in the December 31,
1997 quarter from $31,942,000 in the quarter ended December 31, 1996. The
increased coin-operated video game revenues were primarily from an increased
number of titles being sold in the quarter ended December 31, 1997 compared to
the prior year quarter. Shipments in the December 31, 1997 quarter included
initial sales of Blitz and San Francisco Rush - The Rock and continuing sales of
Mortal Kombat 4, Off Road Challenge, Maximum Force and Touchmaster.
Gross profit increased to $63,700,000 (50.9% of revenues) in the quarter ended
December 31, 1997 from $55,203,000 (44.0% of revenues) in the quarter ended
December 31, 1996. The increase in gross profit was primarily from increased
coin-operated video game revenues and an increase in the overall gross profit
margin. The gross profit margin increased in part due to the higher gross margin
realized on Nintendo 64 home video game sales from the change in the pricing
structure 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.
Research and development expenses increased $3,172,000 or 21.5% from $14,780,000
(11.8% of revenues) in the quarter ended December 31, 1996 to $17,952,000 (14.4%
of revenues) in the quarter ended December 31, 1997. The increase is due in part
to an increased number of game development teams.
Selling expense decreased $469,000 from $12,162,000 (9.7% of revenues) in the
quarter ended December 31, 1996 to $11,693,000 (9.4% of revenues) in the quarter
ended December 31, 1997. The decrease was primarily due to the change in the
revenue mix to an increased level of coin-operated video games which have lower
selling costs as a percent of sales.
Administrative expense increased $201,000 from $4,762,000 (3.8% of revenues) in
the quarter ended December 31, 1996 to $4,963,000 (4.0% of revenues) in the
quarter ended December 31, 1997. Notwithstanding the elimination of the non-
recurring expense related to the installation of a new computer system in the
December 31, 1996 quarter, administration expense did not decrease primarily
because of increased goodwill amortization and depreciation and public company
expenses in the December 31, 1997 quarter.
Operating income in the quarter ended December 31, 1997 increased $5,593,000
from $23,499,000 (18.7% of revenues) in the quarter ended December 31, 1996 to
$29,092,000 (23.3% of revenues) in the quarter ended December 31, 1997.
9
<PAGE>
Interest and other income decreased from $1,723,000 in the December 31, 1996
quarter to $557,000 in the December 31, 1997 quarter. The decrease is primarily
because other income from litigation settlement was included in the fiscal 1997
second quarter.
Interest expense of $856,000 in the quarter ended December 31, 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.
Net income increased $3,275,000 or 21.7% from $15,107,000, $.41 per share, in
the quarter ended December 31, 1996 to $18,382,000, $.48 per share, in the
quarter ended December 31, 1997. The number of shares used in calculating per
share earnings increased by 4.6% to 38,500,000 in the December 31, 1997 quarter
from 36,800,000 in the December 31, 1996 quarter because of 5,100,000 shares of
common stock sold in the October 29, 1996 public offering.
Results of Operations
- ---------------------
Six months Ended December 31, 1997 Compared With
Six months Ended December 31, 1996
Revenues increased $7,723,000 or 4.0% from $191,074,000 in the six months ended
December 31, 1996 to $198,797,000 in the six months ended December 31, 1997.
Home video game revenues decreased to $117,056,000 in the six months ended
December 31, 1997 from $141,131,000 in the prior year six months. The decrease
was caused by the anticipated decline of 16-bit and other home video game
revenues to $9,495,000 in the six months ended December 31, 1997 from
$64,834,000 in the prior year six months. Revenues from the sale of next
generation home video games increased to $107,561,000 in the six months ended
December 31, 1997 from $76,297,000 in the prior year six months notwithstanding
the lower home video game selling prices on next generation titles due to new
pricing structures initiated by the platform manufacturers. Shipments of next
generation home video game units increased 60.2% in the six months ended
December 31, 1997 compared to the prior year six months but next generation home
video game revenues increased only 41.0% because of a unit sales price decrease
of $11.00 for Nintendo 64 and $5.00 for Sony Playstation. The unit cost of sales
of the video games for Nintendo 64 decreased by a similar amount resulting in no
change in gross profit on this product whereas Sony Playstation unit gross
profit decreased by the reduction in sales price. During the six months ended
December 31, 1997, the Company released 17 new home video game products on four
platforms. New products shipped included five for Nintendo 64, eight for Sony
Playstation, three for Sega Saturn and one for Super Nintendo. Midway's best
selling home video games during the six months were MK Mythologies: Subzero, San
Francisco Rush, Rampage World Tour, Top Gear Rally, NHL & NHLPA Present Wayne
Gretzky 3D Hockey '98 and Mace: The Dark Age.
Coin-operated video revenues increased 63.7% to $81,741,000 in the six months
ended December 31, 1997 from $49,943,000 in the six months ended December 31,
1996. The increased coin-operated video game revenues were primarily from an
increased number of titles being sold in the six months ended December 31, 1997
compared to the prior year six months. Shipments in the six months ended
December 31, 1997 included initial sales of Blitz, San Francisco Rush - The
Rock, 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 $98,811,000 (49.7% of revenues) in the six months
ended December 31, 1997 from $89,583,000 (46.9% of revenues) in the six months
ended December 31, 1996. The increase in gross profit was primarily from
increased revenues and an increase in the gross profit margin. The gross profit
margin increased primarily due to the higher gross margin realized on Nintendo
64 home video game sales from the change in the pricing structure 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.
10
<PAGE>
Research and development expenses increased $5,292,000 or 19.8% from $26,783,000
(14.0% of revenues) in the six months ended December 31, 1996 to $32,075,000
(16.1% of revenues) in the six months ended December 31, 1997. The increase is
due in part to an increased number of game development teams.
Selling expense decreased $1,929,000 from $19,770,000 (10.3% of revenues) in the
six months ended December 31, 1996 to $17,841,000 (9.0% of revenues) in the six
months ended December 31, 1997. The decrease was primarily due to the change in
the revenue mix to an increased level of coin-operated video games which have
lower selling costs as a percent of sales.
Administrative expense increased $245,000 from $8,756,000 (4.6% of revenues) in
the six months ended December 31, 1996 to $9,001,000 (4.5% of revenues) in the
six months ended December 31, 1997. Notwithstanding the elimination of the non-
recurring expense related to the installation of a new computer system in the
six months ended December 31, 1996, administration expense did not decrease
primarily because of increased goodwill amortization and depreciation and public
company expenses incurred in the six months ended December 31, 1997.
Operating income in the six months ended December 31, 1997 increased $5,620,000
from $34,274,000 (17.9% of revenues) in the six months ended December 31, 1996
to $39,894,000 (20.1% of revenues) in the six months ended December 31, 1997.
Interest and other income decreased from $1,880,000 in the December 31, 1996 six
months to $1,424,000 in the December 31, 1997 six months. The decrease is
primarily because other income from litigation settlement was included in the
six months ended December 31, 1996.
Interest expense of $1,986,000 in the six months ended December 31, 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.
Net income increased $4,433,000 or 20.9% from $21,184,000, $.60 per share, in
the six months ended December 31, 1996 to $25,617,000, $.67 per share, in the
six months ended December 31, 1997. The number of shares used in calculating per
share earnings increased by 9.7% to 38,500,000 in the six months ended December
31, 1997 from 35,100,000 in the six months ended December 31, 1996 because of
5,100,000 shares of common stock sold in the October 29, 1996 public offering.
11
<PAGE>
PART II
OTHER INFORMATION
Item 6.(a) Exhibits
- -------------------
Exhibit 27 - Financial Data Schedule
12
<PAGE>
MIDWAY GAMES INC.
-----------------
Signature
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
MIDWAY GAMES INC.
-----------------
(Registrant)
Dated: February 10, 1998 By: /S/ Harold H. Bach, Jr.
----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
13
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