<PAGE> 1
EXHIBIT 13
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS
SELECTED FIVE-YEAR FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
SELECTED STATEMENT OF INCOME DATA June 30, 2000 1999 1998 1997 1996(3)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Home video $ 229,691 $ 217,890 $ 229,732 $ 219,912 $ 154,102
Coin-operated video 104,174 133,905 161,498 168,314 91,321
------------------------------------------------------------------------------------------------------------------------------------
Total revenues 333,865 351,795 391,230 388,226 245,423
------------------------------------------------------------------------------------------------------------------------------------
Gross profit 148,233 159,809 190,099 166,819 105,367
------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (20,881) 8,328(2) 65,075 60,533 40,494
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before tax and extraordinary credit (19,580)(1) 9,914 68,022 62,663 40,765
(Provision) credit for income taxes 7,539 (3,767) (25,900) (23,812) (15,536)
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary credit (12,041) 6,147 42,122 38,851 25,229
Extraordinary gain on early extinguishment of debt, net -- -- -- 3,044 --
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12,041)(1) $ 6,147(2) $ 42,122 $ 41,895 $ 25,229
------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted per share of common stock
Income (loss) before extraordinary credit $ (.32) $ .16 $ 1.10 $ 1.06 $ .76
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (.32)(1) $ .16(2) $ 1.10 $ 1.14 $ .76
------------------------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding 37,869 37,597 38,481 36,800 33,400
------------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data
Total assets $ 186,575 $ 219,259 $ 227,423 $ 214,318 $ 118,262
------------------------------------------------------------------------------------------------------------------------------------
Working capital 100,543 120,039 118,286 86,310 (11,618)(4)
------------------------------------------------------------------------------------------------------------------------------------
Dividend notes payable -- -- -- -- 50,000
------------------------------------------------------------------------------------------------------------------------------------
Long-term debt -- -- -- -- 7,863
------------------------------------------------------------------------------------------------------------------------------------
Stockholder's net investment -- -- -- -- 5,488
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 160,355 177,576 176,649 140,768 --
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 2000 loss before tax provision includes fourth quarter charges
related to market conditions and asset realization of $25,979,000 or on an
after-tax basis $16,151,000 ($.43 per share) which created the net loss for
the year. See Note 13 to the financial statements.
(2) Fiscal 1999 operating income includes charges for settlement of litigation,
restructuring and other unusual items of $13,023,000 which reduced net
income on an after-tax basis by $8,074,000, $ .21 per share.
(3) Includes the results of Midway Interactive Inc., subsequent to its purchase
of Atari Games Corporation on March 29, 1996.
(4) In fiscal 1996 the Company operated under its former parent company central
cash management system whereby excess cash was remitted to its former
parent.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion set forth below 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. Company
means Midway Games Inc. and its subsidiaries.
OVERVIEW
Since its incorporation in 1988 through the date of the initial public offering,
Midway Games Inc. ("Midway") was a wholly-owned subsidiary of WMS Industries
Inc. ("WMS"). Immediately prior to the initial public offering, Midway
effectuated a 33,400 for one stock split resulting in 33,400,000 shares of
common stock being issued and outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable to
WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On April 6, 1998, WMS completed the spin-off of its remaining 86.8%
ownership interest of 33,400,000 shares of Midway. The spin-off was completed by
means of a tax free pro rata distribution of the Midway shares to the WMS
stockholders.
The Company and WMS entered a Manufacturing and Services Agreement in
1996 under which WMS provided contract manufacturing of coin-operated video
games and several other services to the Company. Effective April 6, 1998, in
connection with the spin-off of the Company by WMS, the 1996 agreement was
terminated and the Company entered into several agreements with WMS under which
WMS, among other things, performs contract manufacturing of coin-operated video
games and provides information technology services to certain parts of the
Company. In addition, under a separate agreement, the Company provided selling
and marketing services for the WMS pinball products which was terminated in
fiscal 2000. These agreements provide for products or services on an arm's
length basis. See Note 3 to the financial statements regarding termination of
the three agreements. The overall cost structure of the Company, has not been
materially different in fiscal 2000 or fiscal 1999 from that experienced by the
Company under the 1996 Manufacturing and Services Agreement with WMS.
During the second half of fiscal 2000 the Company was adversely
impacted by the home video game platform transition. The industry is shifting
from 32 and 64-bit platforms to 128-bit next generation platforms. During a
platform transition, the number of video games sold declines and consumer demand
shifts toward value priced video games for the older platforms. Publishers
reduce selling prices of home video games to the retailers, which
disproportionately reduces profit margins to the publisher. At the same time
product development expense increases because it takes 18 to 24 months to create
video games that will be sold as the three next generation platform sales ramp
up in fiscal 2002. The platform transition is expected to continue through the
summer of 2001, which creates a very challenging business condition for Midway
in fiscal 2001.
<PAGE> 3
FINANCIAL CONDITION
Cash provided by operating activities before changes in operating assets and
liabilities was $24,157,000 in fiscal 2000 and $25,548,000 in fiscal 1999.
Although fiscal 2000 had a net loss of $12,041,000, cash provided by operating
activities before changes in operating assets and liabilities did not change
significantly from the previous year because of the addback of the large
non-cash items.
The changes in the operating assets and liabilities, as shown in the
consolidated statements of cash flows, resulted in a cash outflow of $24,814,000
in fiscal 2000 and $1,706,000 in fiscal 1999. The fiscal 2000 outflow was
primarily due to reduced accounts payable and accruals balances and increased
prepaid income taxes. The fiscal 1999 outflow was primarily due to outflows from
increased inventory and prepaid income taxes, partially offset by inflow from
lower receivables.
Cash used for investing activities in fiscal 2000 for the purchase of
property and equipment was $11,273,000. Cash provided by investing activities in
fiscal 1999 was $6,788,000 and was from the sale of short-term investments
offset by cash used for the purchase of property and equipment of $5,212,000.
Cash used by financing activities was $5,595,000 in fiscal 2000
compared to $5,220,000 in fiscal 1999. Cash received in fiscal 2000 from the
exercise of common stock options for 136,303 shares was $1,125,000. In fiscal
1999, $7,810,000 of cash was received from the sale of 1,000,000 shares of
common stock, net of issuance cost. In fiscal 2000, $6,720,000 of cash was used
in the purchase of treasury shares compared with $13,030,000 in fiscal 1999.
See the Consolidated Statements of Cash Flows on page 12 for further
details of cash flow items.
The home video 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.
At June 30, 2000, the Company had completed the repurchase of 1,928,500
shares of its common stock as authorized by the Board of Directors.
In September 2000, the Company replaced the existing line of credit
with a new line of credit for $55,000,000 that provides for borrowings and
letters of credit. The revolving credit agreement extends to September 2001 and
contains certain financial requirements described in Note 7. There were no
borrowings under the credit line at June 30, 2000 and $106,000 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, accounts receivable, and
commitments as described in Note 11 required in the operation of the business
and the Company's other presently anticipated needs for the 2001 fiscal year.
<PAGE> 4
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain items in or
derived from the Company's statements of income expressed as a percentage of
revenues:
--------------------------------------------------------------------------------
June 30, 2000 1999 1998
--------------------------------------------------------------------------------
Revenues
Home video 68.8% 61.9% 58.7%
Coin-operated video 31.2% 38.1% 41.3%
--------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0%
Cost of sales 55.6% 54.6% 51.4%
--------------------------------------------------------------------------------
Gross profit 44.4% 45.4% 48.6%
Research and development
expense 26.8% 21.6% 17.3%
Selling expense 17.0% 12.3% 9.8%
Administrative expense 6.6% 5.2% 4.9%
Restructuring expense 0.3% 0.8% --
Litigation and settlement expense -- 3.1% --
--------------------------------------------------------------------------------
Operating income (loss) (6.3%) 2.4% 16.6%
Interest income and other expense, net 0.4% 0.4% 0.8%
--------------------------------------------------------------------------------
Income (loss) before tax (5.9%) 2.8% 17.4%
Credit (provision) for income taxes 2.3% (1.1%) (6.6%)
================================================================================
Net income (loss) (3.6%) 1.7% 10.8%
--------------------------------------------------------------------------------
Fiscal 2000 Compared with Fiscal 1999
Revenues decreased $17,930,000 or 5.1% from $351,795,000 in fiscal 1999 to
$333,865,000 in fiscal 2000.
Home video game revenues increased $11,801,000 or 5.4% from
$217,890,000 in fiscal 1999 to $229,691,000 in fiscal 2000. The increase in home
video game revenues was primarily due to sales by the Company outside of North
America, primarily Europe, for the first time and unit sales for the next
generation Sega Dreamcast platform introduced in September 1999 offset, in part,
by lower unit sales for the Nintendo 64 platform and a weak market and lower
sales prices for video games for all platforms in the second half of fiscal
2000. Home video game revenues in fiscal 2000 include a reduction to revenues of
$7,175,000 for a provision for abnormal retail price support.
Home video game gross profit increased $1,631,000 from $115,432,000
(53.0% of related revenues) in fiscal 1999 to $117,063,000 (51.0% of related
revenues) in fiscal 2000. Home video game cost of sales in fiscal 2000 includes
a charge of $7,028,000 for inventory write-downs. Home video game gross profit
percentage decreased because of the reduction to revenues and the inventory
write-down mentioned above.
Coin-operated video game revenues decreased $29,731,000 or 22.2% from
$133,905,000 in fiscal 1999 to $104,174,000 in fiscal 2000. The decrease in
coin-operated video game revenues was primarily due to weak market conditions
for new coin-operated games and the lack of exceptionally interesting games
introduced during the fiscal year. It is believed that the weak market
conditions is primarily due to reduced player interest in coin-operated games
because of the increase in entertainment alternatives available to potential
video game players.
Coin-operated video game gross profit decreased $13,207,000 or 29.8%
from $44,377,000 (33.1% of related revenues) in fiscal 1999 to $31,170,000
(30.0% of related revenues) in fiscal 2000, primarily due to lower revenues in
fiscal 2000. Coin-operated video game gross profit was decreased by $1,907,000
in fiscal 2000 and $2,229,000 in fiscal 1999 for inventory write-downs.
Research and development expenses increased $13,379,000 or 17.6% from
$76,009,000 (21.6% of revenues) in fiscal 1999 to $89,388,000 (26.8% of
revenues) in fiscal 2000. The increased research and development expense is
primarily due to the development of additional home video games for the new
platforms being introduced in the future by the platform manufacturers. During
the fourth quarter of fiscal 2000,
<PAGE> 5
prepaid development cost of $5,598,000 was written-off due to the discontinuance
of certain home video games in development or because development costs were in
excess of current market realization.
Selling expense increased $13,461,000 or 31.1% from $43,264,000 (12.3%
of revenues) in fiscal 1999 to $56,725,000 (17.0% of revenues) in fiscal 2000.
The increase in selling expense was primarily from a higher level of advertising
expense based on an expected increase in sales volume that did not occur and an
increase in marketing staff. The fiscal 2000 selling expense was also increased
by $2,853,000 for the write-down of the unamortized PC distribution agreement
acquired in 1998.
Administrative expense increased $3,563,000 or 19.3% from $18,441,000
(5.2% of revenues) in fiscal 1999 to $22,004,000 (6.6% of revenues) in fiscal
2000 primarily due to opening a foreign sales office and computer related
development projects.
Restructuring expense in fiscal 2000 was $997,000 and represents cost
of employee severance. The restructuring primarily further reduces certain
functions through the combining of similar activities formerly conducted at
different locations.
Operating loss was $20,881,000 in fiscal 2000. Fiscal 1999 had
operating income of $8,328,000 (2.4% of revenues). The fiscal 2000 operating
loss adjusted for unusual charges mentioned above and further described in Note
13 results in operating income of $4,677,000 (1.4% of revenues). Fiscal 1999
includes unusual charges totaling $13,024,000 from litigation and settlement
costs and restructuring expenses net of a credit from a cost overcharge
recovery.
The credit (provision) for income taxes reflects federal, state and
foreign income taxes and resulted in an effective rate of 38.5% in fiscal 2000
and 38.0% in fiscal 1999.
Net loss was $12,041,000, $(.32) per share, in fiscal 2000. Net income
was $6,147,000, $ .16 per share, in fiscal 1999. Fiscal 2000 net loss includes
after tax charges of $16,151,000 or $.43 per share for unusual items. Fiscal
1999 includes after tax net charges of $8,074,000 or $.21 per share for the net
unusual items described above. See Note 13 for unusual items.
Fiscal 1999 Compared with Fiscal 1998
Revenues decreased $39,435,000 or 10.1% from $391,230,000 in fiscal 1998 to
$351,795,000 in fiscal 1999.
Home video game revenues decreased $11,842,000 or 5.2% from
$229,732,000 in fiscal 1998 to $217,890,000 in fiscal 1999. The decrease in home
video revenues was primarily due to a reliance on third party designed games
that were favorably reviewed but did not do well in the market place and a
reduced number of home games converted from coin-op games that generally have
higher sales. Home video game gross profit was $115,432,000 (53.0% of related
revenues) in fiscal 1999 compared to $124,777,000 (54.3% of related revenues) in
fiscal 1998.
Coin-operated video game revenues decreased $27,503,000 or 17.1% from
$161,498,000 in fiscal 1998 to $133,905,000 in fiscal 1999. The decrease in
coin-operated video game revenues was primarily from a reduced number of sit
down driving games in the product mix and a sharp decrease in demand, during the
latter part of fiscal 1999, for games that incorporate guns or a shooting theme.
Coin-operated video game gross profit decreased $20,945,000 or 32.1%
from $65,322,000 (40.4% of related revenues) in fiscal 1998 to $44,377,000
(33.1% of related revenues) in fiscal 1999, primarily due to lower revenues and
lower margins on coin-operated games sold during fiscal 1999 and an unusual
inventory write down of $2,229,000.
Research and development expenses increased $8,532,000 or 12.6% from
$67,477,000 (17.3% of revenues) in fiscal 1998 to $76,009,000 (21.6% of
revenues) in fiscal 1999. The increase is due in part to an increased number of
internal game development teams and in part to additional externally developed
home video games released during fiscal 1999.
Selling expense increased $4,976,000 or 13.0% from $38,288,000 (9.8% of
revenues) in fiscal 1998 to $43,264,000 (12.3% of revenues) in fiscal 1999. The
increase was primarily due to increased level of advertising for NFL Blitz home
video game.
Administrative expense decreased $818,000 or 4.2% from $19,259,000
(4.9% of revenues) in fiscal 1998 to $18,441,000 (5.2% of revenues) in fiscal
1999.
<PAGE> 6
Restructuring expense in fiscal 1999 was $2,742,000 and represents
primarily cost of employee severance. The restructuring eliminates certain
duplicative functions in our Midway and Atari coin-op business units and is
expected to reduce overhead by approximately $5,000,000 per year.
The litigation and settlement expense in fiscal 1999 of $11,025,000
includes $2,525,000 of professional and legal expense and $8,500,000 for the
settlement of litigation and disputes with GT Interactive resulting from
distribution agreements. The agreements have been terminated and the Company is
now able to sell its home video games directly to markets outside North America.
Operating income decreased $56,747,000 or 87.2% from $65,075,000 (16.6%
of revenues) in fiscal 1998 to $8,328,000 (2.4% of revenues) in fiscal 1999
primarily due to lower sales and decreased gross profit, increased research and
development and selling expenses, coupled with the litigation and settlement
costs and restructuring expenses.
IMPACT OF INFLATION
During the past three years, the level of inflation affecting the Company has
been relatively low. The ability of the Company to pass on future cost increases
in the form of higher sales prices will continue to be dependent on the
prevailing competitive environment and the acceptance of the Company's products
in the market place.
SEASONALITY
The home video game business is highly seasonal and historically has resulted in
higher revenues and net income in the first and second quarters of the June 30
fiscal year due to customer purchases preceding the year-end retail holiday
selling season. The coin-operated video game business has not historically been
seasonal but quarterly revenues and net income may increase when a coin-operated
video game that achieves significant player appeal is introduced.
<PAGE> 7
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED SECURITY-HOLDER MATTERS
Midway Games Inc. common stock, par value $.01 per share, is traded on the New
York Stock Exchange under the symbol MWY. The table sets forth for the periods
indicated the high and low sale prices per share as reported on the New York
Stock Exchange.
-----------------------------------------------------------------------
Calendar Period High Low
-----------------------------------------------------------------------
1998
Third Quarter $ 17 1/8 $ 9 3/8
Fourth Quarter 13 1/16 9
-----------------------------------------------------------------------
1999
First Quarter $ 11 5/16 $ 7 5/8
Second Quarter 12 15/16 8 1/16
Third Quarter 16 1/2 10 7/16
Fourth Quarter 24 7/8 15 9/16
-----------------------------------------------------------------------
2000
First Quarter $ 23 11/16 $ 12 11/16
Second Quarter 14 3/8 6 1/16
Third Quarter (through August 18, 2000) 10 1/2 8
-----------------------------------------------------------------------
No cash dividends with respect to the common stock were declared or paid during
fiscal 2000 or 1999. The payment of future cash dividends will depend upon,
among other things, earnings, anticipated expansion and capital requirements and
the financial condition of the Company.
At August 18, 2000, there were approximately 1,193 holders of record of
the Company's common stock.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Midway Games Inc.
We have audited the accompanying consolidated balance sheets of Midway Games
Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended June 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Midway
Games Inc. and subsidiaries at June 30, 2000 and 1999, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
August 22, 2000, except for
Note 7 as to which the date is
September 20, 2000
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
June 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 34,093 $ 51,546
Receivables, less allowances of $5,855 in 2000 and $4,954 in 1999 25,398 46,244
Income taxes receivable 21,255 7,272
Inventories
Raw materials and work in progress 7,907 9,437
Finished goods 19,621 22,841
-------------------------------------------------------------------------------------------------------------------
27,528 32,278
Deferred income taxes 5,250 9,132
Other current assets 11,519 10,757
-------------------------------------------------------------------------------------------------------------------
Total current assets 125,043 157,229
Property and equipment, net 18,031 10,228
Excess of purchase cost over amount assigned to net assets acquired, net 37,385 41,307
Other assets 6,116 10,495
-------------------------------------------------------------------------------------------------------------------
Total assets $ 186,575 $ 219,259
===================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,959 $ 13,457
Accrued compensation and related benefits 4,015 5,601
Accrued litigation settlement -- 8,500
Accrued royalties 5,080 2,210
Other accrued liabilities 6,446 7,422
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 24,500 37,190
Deferred income taxes 1,720 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, shares issued-38,886,303 in 2000 and 38,750,000 in 1999 389 388
Additional paid-in capital 98,061 96,407
Retained earnings 78,123 90,164
===================================================================================================================
176,573 186,959
Translation adjustment (115) --
Treasury stock, at cost-1,178,500 shares in 2000 and 713,000 shares in 1999 (16,103) (9,383)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 160,355 177,576
-------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 186,575 $ 219,259
===================================================================================================================
</TABLE>
See notes to financial statements
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Home video $ 229,691 $ 217,890 $ 229,732
Coin-operated video 104,174 133,905 161,498
--------------------------------------------------------------------------------------------------------------------------
Total revenues 333,865 351,795 391,230
Cost of Sales
Home video 112,628 102,458 104,955
Coin-operated video 73,004 89,528 96,176
--------------------------------------------------------------------------------------------------------------------------
Total cost of sales 185,632 191,986 201,131
--------------------------------------------------------------------------------------------------------------------------
Gross profit 148,233 159,809 190,099
Research and development expense 89,388 76,009 67,477
Selling expense 56,725 43,264 38,288
Administrative expense 22,004 18,441 19,259
Restructuring expense 997 2,742 --
Litigation and settlement expense -- 11,025 --
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (20,881) 8,328 65,075
Interest income and other expense, net 1,301 1,586 2,947
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before tax (19,580) 9,914 68,022
(Provision) credit for income taxes 7,539 (3,767) (25,900)
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (12,041) $ 6,147 $ 42,122
==========================================================================================================================
Basic and diluted net income (loss) per share of common stock $ (.32) $ .16 $ 1.10
Average number of shares outstanding 37,869 37,597 38,481
==========================================================================================================================
</TABLE>
See notes to financial statements
<PAGE> 10
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock
------------
Additional Treasury Cumulative Total
Number Par Paid-In Retained Stock, Translation Stockholders'
of Shares Value Capital Earnings At Cost Adjustment Equity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 38,500 $ 385 $ 98,488 $ 41,895 -- -- $ 140,768
Net income 42,122 42,122
Purchase of treasury stock (463,200 shares) $(6,241) (6,241)
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 38,500 385 98,488 84,017 (6,241) -- 176,649
Net income 6,147 6,147
Purchase of treasury stock (999,800 shares) (13,030) (13,030)
Sale of common stock 250 3 1,807 1,810
Treasury shares sold pursuant to employee
incentive plan (750,000 shares) (3,888) 9,888 6,000
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 38,750 388 96,407 90,164 (9,383) -- 177,576
Net loss (12,041) (12,041)
Translation adjustment $ (115) (115)
---------
Comprehensive loss (12,156)
Purchase of treasury stock (465,500 shares) (6,720) (6,720)
Exercise of common stock options 136 1 1,124 1,125
Stock option expense 156 156
Tax benefit from exercise of common stock
options 374 374
------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 38,886 $ 389 $ 98,061 $ 78,123 $(16,103) $ (115) $ 160,355
====================================================================================================================================
</TABLE>
See notes to financial statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended June 30, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (12,041) $ 6,147 $ 42,122
Adjustments to reconcile net income (loss) to net cash (used) provided by
operating activities:
Depreciation and amortization 9,705 10,840 8,913
Receivables provision 24,854 12,668 16,872
Deferred income taxes 1,109 (4,107) 2,210
Stock option expense 156 -- --
Tax benefit from exercise of common stock options 374 -- --
Increase (decrease) resulting from changes in operating assets and liabilities:
Receivables (4,182) 27,286 (48,593)
Inventories 4,445 (8,999) 4,679
Other current assets (497) (1,150) (5,278)
Accounts payable and accruals (12,852) (4,130) (8,509)
Income taxes (13,788) (9,852) (1,286)
Other assets and liabilities not reflected elsewhere 2,060 (4,861) (9,685)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (657) 23,842 1,445
INVESTING ACTIVITIES
Purchase of property and equipment (11,273) (5,212) (4,530)
Payment on prior year acquisition -- -- (14,400)
Net change in short-term investments -- 12,000 (2,000)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (11,273) 6,788 (20,930)
FINANCING ACTIVITIES
Cash received on exercise of common stock options 1,125 -- --
Net proceeds from sale of common stock -- 7,810 --
Purchase of treasury stock (6,720) (13,030) (6,241)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash (used) by financing activities (5,595) (5,220) (6,241)
-----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 72 -- --
-----------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (17,453) 25,410 (25,726)
Cash and cash equivalents at beginning of year 51,546 26,136 51,862
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 34,093 $ 51,546 $ 26,136
===================================================================================================================================
</TABLE>
See notes to financial statements.
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS
Midway Games Inc. ("Midway") and its subsidiaries (the "Company") operates in
one operating segment, the design and distribution of coin-operated video games
and publishing, licensing and distribution of home video games (the "Video Game
Business"). Coin-operated video games are sold to distributors worldwide who
sell them to operators and arcades. Home video games are sold to mass merchants,
video rental retailers, and entertainment software distributors. Prior to July
1, 1999, the Company participated in markets outside North America through
licensing and distribution agreements with third parties but in fiscal 2000 it
began selling its home video games on a worldwide basis. Consumers buy or rent
the home video games to use on game systems (Nintendo, Sony and Sega).
NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Relationship with WMS Industries Inc. ("WMS")
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 April 6, 1998, the date of the Midway spin-off from WMS,
the Company was the only WMS subsidiary in the coin-operated and home video
games business. Subsequent to April 6, 1998, Midway began operating on a
stand-alone basis and all transactions with WMS have been at arm's length.
The consolidated income statement for fiscal 1998, through April 6,
1998, includes 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 the Company. Research and development expense
includes allocations for certain shared facilities and personnel. Selling and
administrative expenses include certain allocations relating to general
management, treasury, accounting, human resources, insurance and selling and
marketing. These allocations were determined by using various factors such as
dollar amount of sales, number of personnel, square feet of building space,
estimates of time spent to provide services and other appropriate costing
measures. In the opinion of management these transfers of cost of sales and
allocations are made on a reasonable basis to properly reflect the share of
costs incurred by WMS on behalf of the Company.
The results of operations for fiscal 1998 may not necessarily be
representative of results that would have been attained if the Company operated
as a separate independent entity.
<PAGE> 13
Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost and depreciated by the straight-line
method over their estimated useful lives.
Excess of Purchase Cost Over Amount Assigned
to Net Assets Acquired (Goodwill)
Goodwill of $37,385,000 and $41,307,000 at June 30, 2000 and 1999, respectively,
(net of accumulated amortization of $16,615,000 and $12,693,000 at June 30, 2000
and 1999, respectively) arising from prior year acquisitions is being amortized
by the straight-line method over 15 to 20 years.
Long-Lived Assets
The Company performs reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount.
Intellectual Properties Licenses
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed and the Company fulfills its obligation, if any, under the
agreement. Unit royalties on sales that exceed the guarantee are recognized as
revenue as earned. License and royalty revenues primarily from home video game
activities, for fiscal 2000, 1999 and 1998 was $2,569,000, $4,116,000 and
$2,572,000, respectively.
Consolidation Policy
The consolidated financial statements include the accounts of Midway and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Home and Coin-operated Video Game Revenues
Home and coin-operated video game revenues are recorded when products are
delivered to customers. An allowance for home video game returns, discounts, and
price adjustments is also recorded based upon management's evaluation of
historical experience as well as current industry trends.
Advertising Expense
The cost of advertising is charged to earnings as incurred and for fiscal 2000,
1999 and 1998 was $37,984,000, $27,272,000 and $22,732,000, respectively.
Sales to customers located outside the United States and Sales to Major
Customers Sales to customers located outside the United States were $45,365,000,
$35,582,000 and $42,900,000 for fiscal 2000, 1999 and 1998, respectively. Sales
of home video games to two mass merchants during fiscal 2000 were $40,912,000
and $35,014,000 and in fiscal 1999 were $41,539,000 and $38,183,000, and to one
mass merchant in fiscal 1998 was $48,914,000.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE> 14
NOTE 3: TRANSACTIONS WITH WMS
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 $62,416,000 in the period to April 6, 1998. In
addition, certain other costs have been allocated to the Company based on the
various factors noted in Note 2. Charges to the Company from WMS and WMS
subsidiaries for the allocations in the period to April 6, 1998 were:
manufacturing overhead $ 5,366,000, research and development expense $469,000,
selling expense $1,477,000 and administrative expense $1,613,000.
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 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 2.
Effective April 6, 1998, in connection with the spin-off mentioned in
Note 2, the 1996 agreement was terminated and the Company entered into several
agreements with WMS under which WMS, among other things, performs contract
manufacturing and provides information technology services to certain parts of
the Company. In addition, under a separate agreement, the Company provided
selling and marketing services for the WMS pinball products. These agreements
provide for prices for products or services on an arm's length basis. The
overall cost structure of the Company has not been materially different in
fiscal 1999 and 2000 from that experienced by the Company under the prior
Manufacturing and Services Agreement with WMS.
The selling and marketing services agreement mentioned above was
terminated during fiscal 2000 when WMS discontinued the pinball products
business. The contract manufacturing agreement mentioned above is expected to be
terminated as of September 30, 2000 when the Company intends to use other
contract manufacturer vendors for the production of coin-operated video games.
The information technology services are expected to be phased out over the next
eighteen months when the Company develops its own.
See Note 6 for income tax allocations.
NOTE 4: OTHER ASSETS
At June 30, 2000 other assets include receivables from two officers
totaling $1,484,000. Pursuant to his employment contract $984,000 of advances
were made to the president of Midway for a bonus accrued during the first six
months of fiscal year 2000. The accrued bonus was reversed in the second six
months of fiscal year 2000. The receivable is expected to be extinguished by
future bonus accrual. In March 2000 a $500,000 loan was made to the executive
vice president of publishing in connection with the relocation of his residence.
The loan is due in March 2005, accumulates interest at 6%, is collateralized by
a junior mortgage on the house and certain advance payments are required from
future bonuses.
<PAGE> 15
NOTE 5: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
-------------------------------------------------------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------
Land $ 1,401 $ --
Leasehold improvements 4,601 3,473
Furniture, fixtures and engineering equipment 31,218 23,164
-------------------------------------------------------------------------------
37,220 26,637
Less accumulated depreciation (19,189) (16,409)
-------------------------------------------------------------------------------
Net property and equipment $ 18,031 $ 10,228
===============================================================================
NOTE 6: INCOME TAXES
The results of the Company up to April 6, 1998, the date of the spin-off, have
been included in the consolidated income tax returns of WMS; however, income
taxes have been recorded based on a calculation of the income taxes that would
have been incurred if the Company operated as an independent entity. WMS and the
Company entered into a tax sharing agreement effective July 1, 1996 and ending
on the spin-off date that requires a tax calculation, accrual and payment by the
Company as if the Company was filing separate tax returns.
Significant components of the provision (credit) for income tax for the
years ended June 30 were:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (8,510) $ 6,903 $ 20,613
State (707) 971 3,077
Foreign 195 -- --
---------------------------------------------------------------------------------------------------------
Total current (9,022) 7,874 23,690
Deferred:
Federal 1,168 (3,383) 1,996
State (59) (724) 214
---------------------------------------------------------------------------------------------------------
Total deferred 1,109 (4,107) 2,210
Provision for tax benefits resulting from stock options 374 -- --
---------------------------------------------------------------------------------------------------------
Provision (credit) for income taxes $ (7,539) $ 3,767 $ 25,900
=========================================================================================================
</TABLE>
Consolidated pre-tax loss includes $628,000 pretax income from foreign
operations in fiscal 2000. The income tax provision (credit) differs from the
amount computed using the statutory federal income tax rate for the years ended
June 30 as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate (35.0)% 35.0% 35.0%
State income taxes, net of federal benefit (2.4) 1.6 3.1
Foreign sales corporation benefits -- -- (.5)
Other, net (1.1) 1.4 .5
---------------------------------------------------------------------------------------------------------
(38.5)% 38.0% 38.1%
=========================================================================================================
</TABLE>
<PAGE> 16
Deferred income taxes reflect the net tax effects of a loss carryforward and
temporary differences between the amount of assets and liabilities for financial
reporting purposes and the amounts used for income taxes. Significant components
of the Company's deferred tax assets and liabilities at June 30 were:
--------------------------------------------------------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------------
Deferred tax assets resulting from:
Tax loss carryforward $3,355 $ --
Inventory valuation 1,474 3,360
Accrued items not currently deductible 1,355 3,385
Receivable allowance 1,884 2,031
--------------------------------------------------------------------------------
Total deferred tax assets 8,068 8,776
--------------------------------------------------------------------------------
Deferred tax liabilities resulting from:
Tax over book depreciation 1,189 457
Book over tax basis of domestic subsidiary 2,560 2,723
Other 789 957
--------------------------------------------------------------------------------
Total deferred tax liabilities 4,538 4,137
--------------------------------------------------------------------------------
Net deferred tax assets $3,530 $4,639
================================================================================
During fiscal 2000 and 1999 income taxes paid were $4,654,000 and
$17,726,000, respectively. During fiscal 1998 income taxes paid to WMS were
$24,976,000. At June 30, 2000 the Company has a net operating loss carryforward
of $7,976,000 for federal income tax purposes.
NOTE 7: LINE OF CREDIT
During fiscal 2000 the Company maintained a line of credit for $50,000,000 and
an additional letter of credit line of $30,000,000. In September 2000 the
Company replaced the existing line of credit with a new line of credit for
$55,000,000 that provides for borrowings and letters of credit. The revolving
credit agreement extends to September 19, 2001 and provides for a reduction in
availability to $15,000,000 at March 31, 2001 with an increase in availability
to $35,000,000 at June 30, 2001. The agreement requires, among other things,
that the Company maintain a minimum level of stockholders' equity and a
specified ratio of accounts receivable to amounts outstanding under the line of
credit. Under certain conditions, the bank may require the Company to secure the
line of credit by a pledge of its assets.
NOTE 8: PREFERRED STOCK AND COMMON STOCK OPTION PLANS
The preferred stock is issuable in series, and the elective rights and
preferences and number of shares in each series are to be established by the
Board of Directors.
The Midway Rights Agreement became effective in 1998. Under the Rights
Agreement, each share of Midway common stock has an accompanying Right to
purchase, under certain conditions, one one-hundredth of a share of the
Company's Series A Preferred Stock at an exercise price of $100, permitting each
holder to receive $200 worth of the Company's common stock valued at the then
current market price. The Rights are redeemable by the Company at $.01 per
Right, subject to certain conditions, at any time and expire in 2007. The Rights
are intended to assure fair shareholder treatment in any attempted takeover of
the Company and to guard against abusive takeover tactics.
Under the common stock option plans the Company may grant both
incentive stock options and nonqualified options on shares of common stock
through the year 2010. The plans authorized option grants on 7,750,000 shares of
common stock to employees and under certain conditions to non-employee directors
and consultants. The Compensation and Stock Option Committee of the Board of
Directors has the authority to fix the terms and conditions upon which each
option is granted, but in no event shall the term exceed ten years or be granted
at less than 100% of the fair market value of the stock at the date of grant. At
June 30, 2000, 7,614,000 shares of common stock were reserved for possible
issuance for stock option plans.
<PAGE> 17
A summary of the status of the Company's stock option plans for the
three years ended June 30, 2000 was as follows:
--------------------------------------------------------------------------------
Weighted
Shares average
(000) Exercise Price
--------------------------------------------------------------------------------
Outstanding at June 30, 1997 1,810 $20.00
Granted 475 16.50
------
Outstanding at June 30, 1998 2,285 19.27
Granted 2,513 8.43
Forfeited (40) 20.00
------
Outstanding at June 30, 1999 4,758 13.54
Granted 1,906 11.78
Exercised (136) 8.25
Forfeited (227) 17.11
------
Outstanding at June 30, 2000 6,301 12.99
--------------------------------------------------------------------------------
The following summarizes information about stock options outstanding at June 30,
2000:
Weighted Average
Number Remaining Weighted
Outstanding Contractual Life Average
Range of Exercise Prices (000) in Years Exercise Price
--------------------------------------------------------------------------------
$ 7.00 - $ 10.628 2,507 8.2 $ 7.97
11.50 - 16.5625 2,176 8.9 13.55
20.00 - 23.125 1,618 6.4 20.02
-----
7.00 - 23.125 6,301 8.0 12.99
--------------------------------------------------------------------------------
At June 30, 2000 options for 4,075,000 shares were exercisable at a weighted
average exercise price of $13.12 with a range of $8.00 to $20.00. At June 30,
1999 and 1998 options for 1,334,000 and 956,000 shares, respectively, were
exercisable at an average exercise price of $19.39 and $19.41 per share,
respectively. At June 30, 2000, 1,313,000 shares were available for future
grants under the plans.
The Company accounts for stock options for purposes of determining net
income (loss) in accordance with APB Opinion No. 25. In fiscal 2000 an expense
of $156,000 was recognized in conjunction with the stock option plans. SFAS No.
123 regarding stock option plans permits the use of APB Opinion No. 25 but
requires the inclusion of certain pro forma disclosures in the footnotes.
Pro forma net (loss) income for fiscal 2000, 1999 and 1998 adjusted for
the expense provision of SFAS No. 123 was $(21,183,000), $564,000 and
$38,586,000, respectively, or $ (.56), $.02 and $1.00, respectively, per share
of common stock.
For pro forma calculations, the fair value of each option is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for fiscal 2000, 1999 and 1998,
respectively: dividend yield of 0%, 0% and 0%; expected volatility of .70, .70
and .40; risk free interest rate of 6.15%, 5.95% and 5.65% and expected life of
the option of 6 years, 6 years and 6 years.
During fiscal 2000, 1999 and 1998 options granted had a weighted
average pro forma fair market value using the Black-Scholes assumptions noted
above of $7.93, $5.68 and $7.92 per share, respectively.
<PAGE> 18
NOTE 9: CONCENTRATION OF CREDIT AND MARKET RISK AND FAIR VALUE DISCLOSURES OF
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to concentrations of
credit and market risk consist primarily of cash equivalents, and trade accounts
receivable from the sale of games. By policy, the Company places its cash
equivalents only in high credit quality securities and limits the amounts
invested in any one security. At June 30, 2000, 53% of trade accounts receivable
are from sales of coin-operated video games to the Company's distributors
located primarily throughout the United States and Western Europe and, because
of the number and geographic distribution, concentration is limited. Foreign
sales of coin-operated video games are typically made in U.S. dollars and
typically on the basis of a letter of credit. Sales outside the United States of
home video games are in several currencies and foreign currency transaction loss
was $598,000 for fiscal 2000. At times during the fiscal year accounts
receivable from certain major home video game customers represent a significant
amount of the accounts receivable then outstanding.
Cash equivalents of $26,011,000 at June 30, 2000, which are designated
available-for-sale, are recorded at cost which is equal to market and considered
by management to be the fair value of these financial instruments.
NOTE 10: RESTRUCTURING EXPENSE
During fiscal 2000 the Company incurred $997,000 of restructuring expense
($618,000, $ .02 per share, after tax) for severance of 84 employees in
coin-operated games sales and administration and in product development.
During fiscal 1999 the Company incurred $2,742,000 of restructuring expense
($1,700,000, $.05 per share, after tax) for severance of 53 employees and other
costs. The restructuring reduced redundancies in sales, marketing, product
development and administration in the Midway and Atari coin-operated business
units. There were no adjustments to the fiscal 1999 accrual.
NOTE 11: COMMITMENTS
The Company leases certain warehouses, office facilities and equipment under
non-cancelable operating leases with net future lease commitments for minimum
rentals at June 30, 2000 as follows:
--------------------------------------------------------------------------------
(in thousands)
--------------------------------------------------------------------------------
2001 $ 2,755
2002 2,711
2003 2,083
2004 1,745
2005 1,335
Thereafter 62
--------------------------------------------------------------------------------
10,691
Less sublease income 3,495
--------------------------------------------------------------------------------
$ 7,196
================================================================================
Rent expense for fiscal 2000, 1999 and 1998 was $2,686,000, $2,281,000,
and $1,872,000, respectively, and was offset by sublease income of $703,000,
$702,000 and $633,000 for fiscal 2000, 1999 and 1998, respectively. Aggregate
future gross lease commitments of approximately $7,223,000 were guaranteed,
prior to the acquisition of Atari Games, and continue to be guaranteed by its
former parent company.
The Company enters into license agreements for the use of intellectual
property in specific video games or for a period of time. Certain of these
agreements provide for advance payments or guarantee minimum payments of
royalties. Future annual minimum payments due under the agreements for fiscal
2001, 2002, 2003
<PAGE> 19
and thereafter were $3,365,000, $950,000 , $600,000 and $575,000, respectively.
The payments are expected to be recovered from the sale of video games using the
license each year.
NOTE 12: LITIGATION SETTLEMENT
GT Interactive Software Corp. (GT Interactive), on January 25, 1999, filed suit
against the Company for various claims arising from the distribution agreements
between GT Interactive and the Company. The Company subsequently terminated GT
Interactive as a distributor and initiated several counter claims. The
settlement of all litigation and disputes required a payment of $8,500,000 to GT
Interactive which was accrued at June 30, 1999 and paid in fiscal 2000. In
addition, the Company incurred $2,525,000 of professional and legal expense
relating to this litigation. The total litigation and settlement costs in fiscal
1999 were $11,025,000 ($6,836,000 or $.18 per share, after-tax). This settlement
allowed the Company to sell its home video games directly into international
markets beginning in fiscal 2000.
<PAGE> 20
NOTE 13: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
(in thousands, except
per share amounts) Sept. 30, Dec. 31, Mar. 31, June 30,
Fiscal 2000 Quarters 1999 1999 2000 2000(1)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $106,602 $147,594 $ 54,945 $ 24,724
Gross profit (loss) 55,488 78,725 17,963 (3,943)
Research and development
expense 19,226 24,973 18,110 27,079
Net income (loss) 11,347 18,828 (11,481) (30,735)
Net income (loss) per share
Basic $ .30 $ .50 $ (.30) $ (.82)
Diluted .29 .48 -- --
Shares used in calculations
Basic 37,944 37,987 37,783 37,708
Diluted 38,776 39,487 -- --
</TABLE>
(1) The June 30, 2000 quarter includes unusual charges that total $25,979,000
($16,151,000 after tax or $.43 per share) for nonrecurring items related to
market conditions and realization of asset evaluations. Revenues were reduced by
$7,175,000 for a provision for abnormal retail price support, cost of sales
increased by $8,935,000 for finished goods inventory write downs, research and
development expense increased by $5,598,000 for home video games where
development was discontinued or in excess or realization, selling expense
includes a charge of $2,853,000 for accelerated amortization of the PC
distribution agreement, restructuring costs of $997,000 were accrued and other
expense includes $421,000 for the write down of certain investments.
<TABLE>
<CAPTION>
(in thousands, except
per share amounts) Sept. 30, Dec. 31, Mar. 31, June 30,
Fiscal 1999 Quarters 1998(2) 1998 1999 1999(1)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $89,339 $125,661 $80,330 $ 56,465
Gross profit 49,227 59,983 32,426 18,173
Research and development
expense 15,748 22,458 17,210 20,593
Net income (loss) 9,807 10,690 1,056 (15,406)
Basic and diluted net
income (loss) per share $ .26 $ .29 $ .03 $ (.40)
Average number of shares
outstanding 37,648 37,145 37,546 38,051
</TABLE>
(1) The June 30, 1999 quarter includes settlement of litigation and
restructuring charges of $13,767,000 as well as other unusual charges of
$3,481,000, primarily relating to inventory writedowns, which total
$17,248,000 and increased net loss by $10,694,000, net of tax, ($ .28 per
share).
(2) The September 30, 1998 quarter includes a credit of $4,225,000 from the
recovery of prior year overcharges from certain coin-operated game parts
suppliers. Net income increased by $2,620,000, net of tax, from that credit
($ .07 per share).
