<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 December 31, 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 (I.R.S. Employer Identification No.)
of 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 3 NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 37,989,942 shares of common
stock, $.01 par value, were outstanding at January 24, 2000 after deducting
764,400 shares held as treasury shares.
<PAGE> 2
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, 1999 and 1998................ 2
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999.................................. 3-4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 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........................................... 7-10
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K..................................... 11
SIGNATURE ..................................................................... 12
</TABLE>
<PAGE> 3
Part I
Financial Information:
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,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Home video .................... $ 118,771 $ 89,112 $ 194,610 $ 158,802
Coin-operated video ........... 28,823 36,549 59,586 56,198
--------- --------- --------- ---------
Total revenues .................... 147,594 125,661 254,196 215,000
Cost of sales .................... 68,869 65,678 119,983 105,790
--------- --------- --------- ---------
Gross profit ...................... 78,725 59,983 134,213 109,210
Research and development expense .. 24,973 22,458 44,199 38,206
Selling expense ................... 18,580 14,943 31,397 28,402
Administrative expense ............ 5,775 5,594 11,460 10,111
--------- --------- --------- ---------
Operating income .................. 29,397 16,988 47,157 32,491
Interest and other income ........ 607 317 1,041 690
--------- --------- --------- ---------
Income before tax provision ....... 30,004 17,305 48,198 33,181
Provision for income taxes ........ (11,176) (6,615) (18,023) (12,684)
--------- --------- --------- ---------
Net income ........................ $ 18,828 $ 10,690 $ 30,175 $ 20,497
========= ========= ========= =========
Earnings per share of common stock:
Basic ............................. $ 0.50 $ 0.29 $ 0.79 $ 0.55
========= ========= ========= =========
Diluted ........................... $ 0.48 $ 0.29 $ 0.78 $ 0.55
========= ========= ========= =========
Shares used in calculations:
Basic ............................. 37,987 37,145 37,991 37,397
========= ========= ========= =========
Diluted ........................... 39,487 37,145 38,574 37,397
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
MIDWAY GAMES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 50,855 $ 51,546
Receivables, less allowances of $9,926 and $4,954 .................... 105,925 46,244
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress ................................ 10,567 9,437
Finished goods .................................................... 27,105 22,841
--------- ---------
37,672 32,278
Prepaid income taxes ................................................. -- 7,272
Deferred income taxes ................................................ 6,547 9,132
Other current assets ................................................. 11,091 10,757
--------- ---------
Total current assets .............................................. 212,090 157,229
Property and equipment .................................................... 30,653 26,637
Less: accumulated depreciation ........................................... (17,177) (16,409)
--------- ---------
13,476 10,228
Excess of purchase cost over amount assigned to net assets acquired, net of
accumulated amortization of $14,654 and $12,693 ...................... 39,346 41,307
Other assets .............................................................. 9,223 10,495
--------- ---------
$ 274,135 $ 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>
December 31, June 30,
1999 1999
----------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 20,268 $ 13,457
Accrued compensation and related benefits .............................. 8,487 5,601
Accrued litigation settlement .......................................... -- 8,500
Income taxes payable ................................................... 10,495 --
Accrued royalties ...................................................... 11,267 2,210
Other accrued liabilities .............................................. 12,040 7,422
--------- ---------
Total current liabilities ........................................... 62,557 37,190
Deferred income taxes ....................................................... 4,415 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, 38,752,030
and 38,750,000 shares issued ........................................ 388 388
Additional paid-in capital ............................................. 96,432 96,407
Retained earnings ...................................................... 120,339 90,164
--------- ---------
217,159 186,959
Treasury stock, at cost (764,400 and 713,000 shares) ................... (9,996) (9,383)
--------- ---------
Total stockholders' equity .......................................... 207,163 177,576
--------- ---------
$ 274,135 $ 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>
Six months ended
December 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net income ............................................................... $ 30,175 $ 20,497
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 4,552 5,527
Receivables provision ............................................. 12,124 9,271
Deferred income taxes ............................................. 2,507 (781)
Decrease resulting from changes in operating assets and liabilities (44,731) (28,477)
-------- --------
Net cash provided by operating activities ................................ 4,627 6,037
Investing activities:
Purchase of property and equipment ....................................... (4,730) (3,000)
Net change in short-term investments ..................................... -- 12,000
-------- --------
Net cash provided (used) by investing activities ......................... (4,730) 9,000
Financing activities:
Proceeds from the sale of common stock ................................... 25 --
Purchase of treasury stock ............................................... (613) (12,848)
-------- --------
Net cash (used) by financing activities .................................. (588) (12,848)
-------- --------
(Decrease) increase in cash and cash equivalents ......................... (691) 2,189
Cash and cash equivalents at beginning of period ......................... 51,546 26,136
-------- --------
Cash and cash equivalents at end of period ............................... $ 50,855 $ 28,325
======== ========
</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 and six months ended December 31, 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 and six months ended December 31, 1999 due to the
inclusion in the diluted calculation 1,500,000 and 583,000,
respectively, of potential incremental shares of common stock from the
assumed exercise of employee stock options, respectively. At December
31,1999 options were outstanding for 5,542,825 shares of common stock
and all were included in the calculation of incremental shares for the
three and six months ended December 31, 1999.
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 six months ended December 31, 1999 cash used by operating, investing
and financing activities was $691,000 compared with cash provided of $2,189,000
in the six months ended December 31, 1998.
Cash provided by operating activities before changes in operating assets and
liabilities was $49,358,000 in the six months ended December 31, 1999 compared
to $34,514,000 in the six months ended December 31, 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 $44,731,000 in
the six months ended December 31, 1999, compared with a cash outflow of
$28,477,000 in the six months ended December 31, 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 six months ended
December 31, 1999 was $4,730,000 compared with $3,000,000 for the six months
ended December 31, 1998.
During the six months ended December 31, 1999 and 1998, $613,000 and $12,848,000
of cash was used to acquire 51,400 and 984,800 shares, respectively, of the
Company's common stock held in the treasury. The Board of Directors authorized
the purchase of up to two million shares of which 1,514,400 had been purchased
as of December 31, 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 December 31, 1999 and $2,262,254 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 DECEMBER 31, 1999 COMPARED WITH
THREE MONTHS ENDED DECEMBER 31, 1998
Revenues increased $21,933,000 from $125,661,000 in the quarter ended December
31, 1998 to $147,594,000 in the quarter ended December 31, 1999.
Home video game revenues increased to $118,771,000 in the December 31, 1999
quarter from $89,112,000 in the prior year period. Revenues for the December 31,
1999 first quarter included $25,384,000 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 and higher sales of Sony Playstation home video games,
partly offset by lower sales of Nintendo 64, when compared to sales in the
December 1998 quarter.
During the December 31, 1999 quarter, the Company released thirteen new home
video game products on four platforms. New products shipped included three for
Nintendo 64, three for Sony Playstation, six for Color Game Boy and one for Sega
Dreamcast. Midway's best selling video games during the quarter were NFL Blitz
2000, Ready 2 Rumble Boxing, NBA Showtime, Gauntlet Legends and Paperboy. In the
second quarter Midway sold five video game titles for the Sega Dreamcast. Midway
is the largest third party publisher for this exciting new platform.
Coin-operated video game revenues in the December 31, 1999 quarter decreased to
$28,823,000 compared to $36,549,000 in the prior year second quarter due to a
decrease in the number of coin-operated video games sold. The current year
second quarter included initial sales of Off Road Thunder and Touchmaster
Infinity and continuing sales of Hydro Thunder, Road Burners, San Francisco Rush
2049 and Touchmaster.
Gross profit increased to $78,725,000 (53.3% of revenues) in the quarter ended
December 31, 1999 from $59,983,000 (47.7% of revenues) in the quarter ended
December 31, 1998. The increase in gross profit was primarily due to the
increase in home video game revenues. Home video game gross profit increased to
58.8% of revenues in the quarter ended December 31, 1999 compared to 53.5% in
the prior year second quarter due to an increase in sales of disc-based units
which carry a higher gross profit percentage.
Research and development expenses increased $2,515,000 from $22,458,000 (17.9%
of revenues) in the quarter ended December 31, 1998 to $24,973,000 (16.9% of
revenues) in the quarter ended December 31, 1999.
Selling expense increased $3,637,000 from $14,943,000 (11.9% of revenues) in the
quarter ended December 31, 1998 to $18,580,000 (12.6% of revenues) in the
quarter ended December 31, 1999.
Administrative expense increased $181,000 from $5,594,000 (4.5% of revenues) in
the quarter ended December 31, 1998 to $5,775,000 (3.9% of revenues) in the
quarter ended December 31, 1999.
Operating income in the quarter ended December 31, 1999 increased $12,409,000
from $16,988,000 (13.5% of revenues) in the quarter ended December 31, 1998 to
$29,397,000 (19.9% of revenues) in the quarter ended December 31,1999. The
increase results primarily from higher revenues coupled with the increase in the
gross profit percentage.
Net income was $18,828,000, $0.48 per diluted share, in the quarter ended
December 31, 1999, compared with net income of $10,690,000, $0.29 per diluted
share, in the prior year period.
8
<PAGE> 10
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
SIX MONTHS ENDED DECEMBER 31, 1998
Revenues increased $39,196,000 from $215,000,000 in the six months ended
December 31, 1998 to $254,196,000 in the six months ended December 31, 1999.
Home video game revenues increased to $194,610,000 in the December 31, 1999
six-month period from $158,802,000 in the prior year period. Revenues for the
December 31, 1999 six-month period included $59,491,000 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 and higher sales of Sony Playstation home video
games, partly offset by lower sales of Nintendo 64, when compared to sales in
the December 1998 six-month period.
During the December 31, 1999 six-month period, the Company released twenty new
home video game products on four platforms. New products shipped included five
for Nintendo 64, four for Sony Playstation, six for Color Game Boy and five for
Sega Dreamcast. Midway's best selling video games during the six-month period
were NFL Blitz 2000, Ready 2 Rumble Boxing, Hydro Thunder, NBA Showtime,
Gauntlet Legends, Mortal Kombat Gold and Paperboy. Midway is the largest third
party publisher for Sega Dreamcast.
Coin-operated video game revenues in the December 31, 1999 six-month period
increased to $59,586,000 compared to $56,198,000 in the prior year six-month
period. The current six-month period included initial sales of NFL Blitz 2000
Gold, San Francisco Rush 2049, Off Road Thunder and Touchmaster Infinity and
continuing sales of Hydro Thunder, Road Burners and Touchmaster.
Gross profit increased to $134,213,000 (52.8% of revenues) in the six months
ended December 31, 1999 from $109,210,000 (50.8% of revenues) in the six months
ended December 31, 1998. The increase in gross profit was primarily due to the
increase in home video game revenues. Home video game gross profit increased to
58.6% of revenues in the six months ended December 31, 1999 compared to 54.1% in
the prior year six-month period due to an increase in sales of disc-based units
which carry a higher gross profit percentage. Gross profit for the December 31,
1998 six-month period 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 $5,993,000 from $38,206,000 (17.8%
of revenues) in the six months ended December 31, 1998 to $44,199,000 (17.4% of
revenues) in the six months ended December 31, 1999.
Selling expense increased $2,995,000 from $28,402,000 (13.2% of revenues) in the
six months ended December 31, 1998 to $31,397,000 (12.4% of revenues) in the six
months ended December 31, 1999.
Administrative expense increased $1,349,000 from $10,111,000 (4.7% of revenues)
in the six months ended December 31, 1998 to $11,460,000 (4.5% of revenues) in
the six months ended December 31, 1999.
Operating income in the six months ended December 31, 1999 increased $14,666,000
from $32,491,000 (15.1% of revenues) in the six months ended December 31, 1998
to $47,157,000 (18.6% of revenues) in the six months ended December 31,1999. The
increase results primarily from higher revenues. Operating income for the six
months ended December 31, 1998 was increased by $4,225,000 (2.0% of revenues)
from the coin-operated games net recovery described above.
Net income was $30,175,000, $0.78 per diluted share in the six months ended
December 31, 1999, compared with net income of $20,497,000, $0.55 per diluted
share, in the prior year period. Net income for the December 31, 1998 six-month
period includes a benefit of $2,620,000, $0.07 per diluted share, on an after
tax basis, from the net recovery described above.
9
<PAGE> 11
YEAR 2000 UPDATE (YEAR 2000 READINESS DISCLOSURE)
As of the filing of this document in early February 2000, there has been no Y2K
problems experienced by Midway either directly or indirectly as a result of
third party participants such as suppliers or customers. All our 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 Industries Inc. provides contract manufacturing services to us and has
assured us in writing that the systems and tools used in their contract
manufacturing are Y2K compliant.
We have contacted certain suppliers and customers to assess Y2K 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 combined with no reported problems to date
it appears that they are either Y2K ready or working towards becoming Y2K ready.
The Company will continue to identify potential risk and follow up with those
customers and suppliers deemed necessary 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.
10
<PAGE> 12
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
11
<PAGE> 13
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: February 4, 2000 By: /s/ Harold H. Bach, Jr.
----------------------------
Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
12
<PAGE> 14
EXHIBIT INDEX
No. Description
--- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 50,855
<SECURITIES> 0
<RECEIVABLES> 115,851
<ALLOWANCES> (9,926)
<INVENTORY> 37,672
<CURRENT-ASSETS> 212,090
<PP&E> 30,653
<DEPRECIATION> (17,177)
<TOTAL-ASSETS> 274,135
<CURRENT-LIABILITIES> 62,557
<BONDS> 0
0
0
<COMMON> 388
<OTHER-SE> 206,775
<TOTAL-LIABILITY-AND-EQUITY> 274,135
<SALES> 254,196
<TOTAL-REVENUES> 254,196
<CGS> 119,983
<TOTAL-COSTS> 119,983
<OTHER-EXPENSES> 44,199
<LOSS-PROVISION> 945
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 48,198
<INCOME-TAX> 18,023
<INCOME-CONTINUING> 30,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,175
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.78
</TABLE>
