<PAGE> 1
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, 1999
------------------------------------------------
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: 37,985,600 shares of common
stock, $.01 par value, were outstanding at November 5, 1999 after deducting
764,400 shares held as treasury shares.
<PAGE> 2
MIDWAY GAMES INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three months ended September 30, 1999 and 1998................ 2
Condensed Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999.......................... 3-4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1999 and 1998................ 5
Notes to Condensed Consolidated Financial Statements.......... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7-8
PART II. OTHER INFORMATION:
ITEM 5. Other Information............................................. 9
ITEM 6. Exhibits and Reports on Form 8-K.............................. 10
SIGNATURE .............................................................. 11
</TABLE>
<PAGE> 3
MIDWAY GAMES INC.
-----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
----------------------
1999 1998
--------- --------
<S> <C> <C>
REVENUES
Home video .......................................... $ 75,839 $ 69,690
Coin-operated video ................................. 30,763 19,649
--------- --------
Total revenues ........................................ 106,602 89,339
Cost of sales ......................................... 51,114 40,112
--------- --------
Gross profit .......................................... 55,488 49,227
Research and development expense ...................... 19,226 15,748
Selling expense ....................................... 12,817 13,459
Administrative expense ................................ 5,685 4,517
--------- --------
Operating income ...................................... 17,760 15,503
Interest and other income ............................. 434 373
--------- --------
Income before tax provision ........................... 18,194 15,876
Provision for income taxes ............................ (6,847) (6,069)
--------- --------
$ 11,347 $ 9,807
========= ========
Earnings per share of common stock:
Basic ................................................. $ 0.30 $ 0.26
========= ========
Diluted ............................................... $ 0.29 $ 0.26
========= ========
Shares used in calculations:
Basic ................................................. 37,944 37,648
========= ========
Diluted ............................................... 38,776 37,648
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
MIDWAY GAMES INC.
-----------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 36,240 $ 51,546
Receivables, less allowances of $7,545 and $4,954 .................... 86,154 46,244
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress ................................. 14,936 9,437
Finished goods ..................................................... 22,456 22,841
--------- ---------
37,392 32,278
Prepaid income taxes ................................................. - 7,272
Deferred income taxes ................................................ 9,132 9,132
Other current assets ................................................. 12,956 10,757
--------- ---------
Total current assets ............................................... 181,874 157,229
Property and equipment ................................................. 27,659 26,637
Less: accumulated depreciation ......................................... (16,655) (16,409)
--------- ---------
11,004 10,228
Excess of purchase cost over amount assigned to net assets acquired,
net of accumulated amortization of $13,673 and $12,693 ............... 40,327 41,307
Other assets ........................................................... 9,865 10,495
--------- ---------
$ 243,070 $ 219,259
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
MIDWAY GAMES INC.
---------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 15,876 $ 13,457
Accrued compensation and related benefits ................................... 9,089 5,601
Accrued litigation settlement ............................................... - 8,500
Income taxes payable ........................................................ 4,826 -
Accrued royalties ........................................................... 10,206 2,210
Other accrued liabilities ................................................... 10,270 7,422
-------- --------
Total current liabilities ................................................ 50,267 37,190
Deferred income taxes ......................................................... 4,493 4,493
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued ... - -
Common stock, $.01 par value, 100,000,000 shares authorized, 38,750,000
shares issued ............................................................ 388 388
Additional paid-in capital .................................................. 96,407 96,407
Retained earnings ........................................................... 101,511 90,164
Treasury stock, at cost (764,400 and 713,000 shares) ........................ (9,996) (9,383)
-------- --------
Total stockholders' equity ............................................... 188,310 177,576
-------- --------
$243,070 $219,259
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
MIDWAY GAMES INC.
---------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income ..................................................................... $ 11,347 $ 9,807
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization ............................................. 2,120 2,754
Receivables provision ..................................................... 5,036 4,264
Deferred income taxes ..................................................... - (818)
Decrease resulting from changes in operating assets and liabilities ....... (31,828) (2,908)
-------- --------
Net cash provided (used) by operating activities ............................... (13,325) 13,099
INVESTING ACTIVITIES:
Purchase of property and equipment ............................................. (1,368) (1,936)
Net change in short-term investments ........................................... - 12,000
-------- --------
Net cash provided (used) by investing activities ............................... (1,368) 10,064
FINANCING ACTIVITIES:
Purchase of treasury stock ..................................................... (613) (10,255)
-------- --------
Net cash used by financing activities .......................................... (613) (10,255)
-------- --------
Increase (decrease) in cash and cash equivalents ............................... (15,306) 12,908
Cash and cash equivalents at beginning of period ............................... 51,546 26,136
-------- --------
Cash and cash equivalents at end of period ..................................... $ 36,240 $ 39,044
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 7
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, 1999 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 2000. 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, 1999.
2. EARNINGS PER SHARE
Diluted earnings per share is different from basic earnings per share for
the three months ended September 30, 1999 due to the inclusion in the
diluted calculation of 832,000 potential incremental shares of common stock
from the assumed exercise of employee stock options for 3,380,064 shares of
common stock where the average market price for the three months exceeded
the exercise price.
6
<PAGE> 8
MIDWAY GAMES INC.
----------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report on Form 10-Q contains certain forward looking statements
concerning future business conditions and the outlook for the Company based on
currently available information 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 and uncertainties,
including, without limitation, the financial strength of the amusement games
industry, dependence on new product introductions and the ability to maintain
the scheduling of such introductions, technological changes, dependence on
dedicated platform manufacturers and other risks more fully described under
"Business - Risk Factors" in the Company's Annual Report on Form 10-K.
FINANCIAL CONDITION
During the three months ended September 30, 1999 cash used by operating,
investing and financing activities was $15,306,000 compared with cash provided
of $12,908,000 in the three months ended September 30, 1998.
Cash provided by operating activities before changes in operating assets and
liabilities was $18,503,000 in the three months ended September 30, 1999
compared to $16,007,000 in the three months ended September 30, 1998.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows on page 5, resulted in a cash outflow of $31,828,000 in
the three months ended September 30, 1999, compared with a cash outflow of
$2,908,000 in the three months ended September 30, 1998, which outflows were
primarily due to the seasonal increase in receivables and inventories in both
periods from their comparable balances at the respective June 30 year ends.
Cash used for the purchase of property and equipment during the three months
ended September 30, 1999 was $1,368,000 compared with $1,936,000 for the three
months ended September 30, 1998.
During the three months ended September 30, 1999 and 1998, $613,000 and
$10,255,000 of cash was used to acquire 51,400 and 725,000 shares of the
Company's common stock held in the treasury, respectively. The Board of
Directors authorized the purchase of up to two million shares of which 1,514,400
had been purchased as of September 30, 1999.
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, 2000 and contains usual bank line of credit terms. There
were no borrowings under the credit line at September 30, 1999 and $23,224,361
of letters of credit were outstanding. Management believes that cash and cash
equivalents, cash flow from operations and amounts available under the line of
credit will be adequate to fund the anticipated levels of inventories and
accounts receivable required in the operation of the business and the Company's
other presently anticipated needs including any purchase of shares of the
Company's common stock.
7
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues increased $17,263,000 from $89,339,000 in the quarter ended September
30, 1998 to $106,602,000 in the quarter ended September 30, 1999.
Home video game revenues increased to $75,839,000 in the September 30, 1999
quarter from $69,690,000 in the prior year period. Revenues for the September
30, 1999 first quarter included $34,107,000 from the sale of video games for the
Sega Dreamcast platform introduced in the United States by Sega in September
1999. The increase in home video game revenues is due to the sale of Sega
Dreamcast video games, partly offset by lower sales of Nintendo 64 and Sony
Playstation home video games when compared to sales in the September 1998
quarter.
During the September 30, 1999 quarter, the Company released seven new home video
game products on three platforms compared to two new home video games in the
prior year quarter. New products shipped included two for Nintendo 64, one for
Sony PlayStation, and four for Sega Dreamcast. Midway's best selling video games
during the quarter were NFL Blitz 2000, Ready 2 Rumble Boxing, HydroThunder,
Gauntlet Legends and Mortal Kombat Gold.
Coin-operated video game revenues in the September 30, 1999 quarter increased to
$30,763,000 compared to $19,649,000 in the prior year first quarter due to an
increase in the number of sit-down driving type games sold that have a higher
sales price than other coin-operated video games. The current year first quarter
included initial sales of NFL Blitz 2000 Gold and San Francisco Rush 2049 and
continuing sales of HydroThunder, Road Burners and Touchmaster.
Gross profit increased to $55,488,000 (52.1% of revenues) in the quarter ended
September 30, 1999 from $49,227,000 (55.1% of revenues) in the quarter ended
September 30, 1998. The increase in gross profit was primarily from increased
revenues. Home video game gross profit increased to 58.8% of revenues in the
quarter ended September 30, 1999 compared to 54.8% in the prior year first
quarter due to an increase in sales of disc-based units which carry a higher
gross profit percentage. Gross profit for the prior year first quarter included
a $4,225,000 cost reduction due to a net recovery relating to previous years
purchased parts overcharges from certain coin-operated game suppliers.
Research and development expenses increased $3,478,000 from $15,748,000 (17.6%
of revenues) in the quarter ended September 30, 1998 to $19,226,000 (18.0% of
revenues) in the quarter ended September 30, 1999.
Selling expense decreased $642,000 from $13,459,000 (15.1% of revenues) in the
quarter ended September 30, 1998 to $12,817,000 (12.0% of revenues) in the
quarter ended September 30, 1999.
Administrative expense increased $1,168,000 from $4,517,000 (5.1% of revenues)
in the quarter ended September 30, 1998 to $5,685,000 (5.3% of revenues) in the
quarter ended September 30, 1999.
Operating income in the quarter ended September 30, 1999 increased $2,257,000
from $15,503,000 (17.4% of revenues) in the quarter ended September 30, 1998 to
$17,760,000 (16.7% of revenues) in the quarter ended September 30,1999. The
increase results primarily from higher revenues. Operating income for the
September 30, 1998 quarter was increased by $4,225,000 (4.7% of revenues) from
the coin-operated games net recovery described above.
Net income was $11,347,000, $0.29 per diluted share, compared with net income of
$9,807,000, $0.26 per diluted share, in the prior year period. Net income for
the September 30, 1998 quarter includes a benefit of $2,620,000, $0.07 per
diluted share, on an after tax basis, from the recovery explained above.
8
<PAGE> 10
YEAR 2000 UPDATE (YEAR 2000 READINESS DISCLOSURE)
Since 1996, we have worked to make our systems Y2K compliant together with WMS
Industries Inc. (WMS), our Chicago information services provider. All are
systems have been made Y2K compliant.
We believe that there are no Y2K issues with respect to the functionality of any
of our products sold in the past or to be sold in the future. We also believe
that there are no Y2K issues with respect to the functionality of the hardware
platforms for which we sell home video games.
WMS provides contract manufacturing services to us. WMS has assured us in
writing that the systems used in their contract manufacturing are Y2K compliant.
WMS also has notified us that the assembly of the coin-operated video games
should not be affected by malfunctioning tools or equipment using embedded
microprocessors, as the assembly process is not heavily reliant on such tools or
equipment.
We may be exposed to potential Y2K problems because we rely on distributors,
large customers and coin-operated video game component suppliers. We have
contacted certain suppliers and customers to assess the potential problems, if
any. A determination as to our customers' or suppliers' levels of readiness
cannot be made. However based on the significant level of responses received
from suppliers and customers, it appears that they are either Y2K ready or
working towards becoming Y2K ready. The Company will continue to follow up with
those customers and suppliers who have not responded or indicated their Y2K work
is in process. If needed, to avoid potential Y2K problems detected by our
suppliers, we will adjust the coin-operated title release dates and at worst we
would expect a short-term delay in shipments of our products. If such a delay
should occur, we do not expect to experience a material and adverse effect on
operating results for any reportable period.
Midway does not have a contingency plan for undetected Y2K problems. Those
problems, if they occur, will be dealt with immediately upon occurrence. The
effect on Midway of such occurrence cannot be determined at this time.
This discussion of Y2K risks and readiness contains certain forward-looking
statements concerning future conditions and our business outlook based on
currently available information that involve risks and uncertainties. The actual
state of our Y2K readiness and exposure could differ materially from that
anticipated in the forward-looking statements as a result of certain risks and
uncertainties, including, without limitation, the ability to obtain supplies and
energy, make deliveries, communicate with business partners, the Y2K readiness
of customers and other business partners and the other risks described above.
9
<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
10
<PAGE> 12
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.
(Registrant)
Dated: November 10, 1999 By: /S/ Harold H. Bach, Jr.
-----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
11
<PAGE> 13
EXHIBIT INDEX
No. Description
--- -----------
27 Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 36,240
<SECURITIES> 0
<RECEIVABLES> 93,699
<ALLOWANCES> (7,545)
<INVENTORY> 37,392
<CURRENT-ASSETS> 181,874
<PP&E> 27,659
<DEPRECIATION> (16,655)
<TOTAL-ASSETS> 243,070
<CURRENT-LIABILITIES> 50,267
<BONDS> 0
0
0
<COMMON> 388
<OTHER-SE> 187,922
<TOTAL-LIABILITY-AND-EQUITY> 243,070
<SALES> 106,602
<TOTAL-REVENUES> 106,602
<CGS> 51,114
<TOTAL-COSTS> 51,114
<OTHER-EXPENSES> 19,226
<LOSS-PROVISION> 755
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,194
<INCOME-TAX> 6,847
<INCOME-CONTINUING> 11,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,347
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.29
</TABLE>
