<Page>
As filed with the Securities and Exchange Commission on November 27, 2001
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------------
MIDWAY GAMES INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 22-2906244
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2704 WEST ROSCOE STREET, CHICAGO, ILLINOIS 60618 (773) 961-2222
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
</Table>
------------------------------
<Table>
Deborah K. Fulton, Esq.
Vice President, Secretary and General Counsel
Midway Games Inc.
2704 West Roscoe Street, Chicago, Illinois 60618 (773) 961-2222
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Jeffrey N. Siegel, Esq. Richard R. Plumridge, Esq.
Shack Siegel Katz Flaherty & Goodman P.C. Brobeck, Phleger & Harrison LLP
530 Fifth Avenue 370 Interlocken Boulevard, Suite 500
New York, New York 10036 Broomfield, Colorado 80021
(212) 782-0700 (303) 410-2000
</Table>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<Table>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
Common stock, par value
$.01(1) 5,175,000 shares(2) $14.49(3) $74,985,750(3) $18,747
</Table>
(1) Also relates to stock purchase rights that are attached to all shares of
common stock of the registrant in accordance with the Amended and Restated
Rights Agreement between the Registrant and The Bank of New York, dated
May 21, 2001. These rights are not exercisable until the occurrence of
events specified in the Rights Agreement, are evidenced by the certificates
for the common stock and are transferred along with and only with the common
stock. The value attributable to these rights, if any, is reflected in the
value of the common stock.
(2) Includes up to 675,000 shares of common stock subject to the underwriters'
over-allotment option.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based on the
average of the high and low prices of the registrant's common stock on the
New York Stock Exchange on November 21, 2001.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<Page>
PRELIMINARY PROSPECTUS November 27, 2001
(Subject to Completion)
- --------------------------------------------------------------------------------
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<Page>
4,500,000 Shares
[MIDWAY GAMES INC. LOGO]
Common Stock
----------------------------------------------------------------------
Our common stock is listed on the New York Stock Exchange under the symbol
"MWY." On November 26, 2001, the last sale price of our common stock reported on
the NYSE was $14.99 per share.
Investing in our common stock involves risks. Before buying any shares you
should read the discussion of material risks of investing in our common stock in
"Risk factors" beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<Table>
<Caption>
Per Share Total
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to Midway $ $
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</Table>
The underwriters may also purchase up to an additional 675,000 shares from us at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
The underwriters are offering the shares of our common stock as described in
"Underwriting." Delivery of the shares will be made on or about ,
2001.
UBS Warburg Gerard Klauer Mattison
<Page>
INSIDE FRONT COVER PAGE
Color images of videogame titles from some of our most popular games, including
Defender, Rampage World Tour, Paperboy, Joust, Hydro Thunder, San Francisco Rush
2049, Legion The Legend of Excalibur, Mortal Kombat, SpyHunter, Gauntlet Dark
Legacy, Arctic Thunder, Area 51 and 720 DEG..
Color images of videogame characters and features from some of our most popular
games, including Mortal Kombat character, Gauntlet character, Rampage character,
Ready 2 Rumble Boxing character Afro Thunder, sports characters and SpyHunter
car.
Color image of Midway Games Inc. logo in center of videogame titles, characters
and features. Titles, characters and features will be positioned in an oval
format surrounding the Midway logo.
<Page>
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In determining whether to invest in our common stock, you should rely only on
the information contained or incorporated by reference in this prospectus and
any supplement to this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. You
should assume that the information appearing in this prospectus is accurate only
as of the date on the front cover of this prospectus.
As used in this prospectus, the terms "we," "us," "our" and "Midway" mean Midway
Games Inc., a Delaware corporation, and its subsidiaries, and the term "common
stock" means our common stock, $.01 par value, unless the context indicates a
different meaning. References to "fiscal year" in this prospectus are to the
fiscal years ending June 30 of each year prior to or ending on June 30, 2001.
After fiscal 2001, we are changing our fiscal year end to December 31 of each
year. We will report a transition period from July 1, 2001 to December 31, 2001.
MIDWAY is our registered trademark. Our product names mentioned in this
prospectus are also our trademarks, except where we license them. Other product
names mentioned in this prospectus are the trademarks of their respective
owners.
The information in this prospectus assumes that there is no exercise of the
underwriters' over-allotment option unless otherwise indicated.
TABLE OF CONTENTS
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<Table>
<Caption>
Prospectus summary.................... 1
Risk factors.......................... 5
Forward-looking statements............ 15
Use of proceeds....................... 15
Common stock market price data........ 16
Dividend policy....................... 16
Capitalization........................ 17
Selected financial data............... 18
Management's discussion and analysis
of financial condition and results
of operations....................... 20
Business.............................. 30
</Table>
<Table>
Management............................ 41
<Caption>
Certain relationships and related
transactions........................ 48
Security ownership of certain
beneficial owners and management.... 51
Underwriting.......................... 54
Legal matters......................... 56
Experts............................... 56
Where you can find more information... 57
Documents incorporated by reference... 57
Index to financial statements......... F-1
</Table>
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i
<Page>
Prospectus summary
This summary highlights selected information contained in this prospectus. You
should read the entire prospectus carefully for details about Midway and the
offering, including the information under the heading "Risk factors." In
addition, some of the information about us that you should consider before you
invest in our common stock is incorporated by reference in this prospectus. We
encourage you to obtain the information about us identified under the heading
"Documents incorporated by reference" later in this prospectus.
OUR BUSINESS
We are a leading developer and publisher of interactive entertainment software.
Midway and our predecessors have been in the business of creating videogames for
more than 20 years and have published over 400 titles in that time. We have
published videogames for every major platform, including Sony's PLAYSTATION, the
NINTENDO 64, SNES, GAME BOY, GAME BOY COLOR, Sega's DREAMCAST, SATURN and
GENESIS, and coin-operated arcade games. We currently develop and publish games
for play on all major next generation home videogame consoles and handheld game
platforms, including Sony's PLAYSTATION 2, Microsoft's XBOX and Nintendo's
GAMECUBE and GAME BOY ADVANCE. Our titles include many of the most popular game
genres such as action, adventure, driving, extreme sports, fighting,
role-playing, sports and strategy.
Over the years, we have released many successful videogames, including MORTAL
KOMBAT, a line of games that has sold over 19 million copies, SPYHUNTER, NHL
HITZ 20-02, READY 2 RUMBLE BOXING, HYDRO THUNDER, SAN FRANCISCO RUSH EXTREME
RACING, NFL BLITZ, AREA 51, CRUIS'N USA, NBA JAM, RAMPAGE, GAUNTLET, JOUST,
DEFENDER, CENTIPEDE, ASTEROIDS and PONG. Although coin-operated games were a
traditional strength of ours, in June 2001 we decided to exit the coin-operated
arcade games business because of the contraction of the arcade game market. We
now focus entirely on developing and publishing new titles for the next
generation videogame platforms because we believe that these platforms will
create the strongest demand for videogames in the future.
OUR INDUSTRY
The interactive entertainment industry is currently completing a transition from
32- and 64-bit home videogame consoles to the next generation 128-bit consoles,
with the release of Sony's PLAYSTATION 2 in October 2000 and the release of the
Nintendo GAMECUBE and Microsoft XBOX in November 2001. Similarly, the 8-bit GAME
BOY COLOR handheld platform, introduced in 1998, is now being replaced by the
32-bit GAME BOY ADVANCE, introduced in June 2001. As sales of these next
generation platforms grow, we expect that the demand for game software for these
platforms will continue to increase. Forrester, an independent market research
firm, projects that, in the U.S. alone, console manufacturers and software
publishers will generate $29.4 billion in revenues in 2005. Forrester also
projects that $12.8 billion of those revenues will be generated by videogame
software publishers.
OUR STRATEGY
We seek to enhance our operating performance by increasing the number of high
quality videogames we make available for the next generation platforms.
Highlights of our business strategy include:
DEVELOP GAMES FOR MULTIPLE NEXT GENERATION GAME PLATFORMS. We are focusing on
developing games for play on all the next generation platforms. The processing
power of the next generation platforms allows for faster, more complex graphics
and superior game design capabilities compared to the prior generation
platforms. We have shifted our development teams from creating games for prior
generation platforms to concentrate on developing superior quality games for
these next generation videogame platforms. We expect increasing sales of our
games as sales of the next generation platforms grow.
1
<Page>
LEVERAGE OUR PROVEN FRANCHISES AND LIBRARY VALUE. Many of our games were
best-sellers and the most-frequently played games in their time. We continue to
hold these properties as valuable assets that may be leveraged in the future.
The popularity of many of our games has enabled us to successfully market
sequels.
CONTINUE TO EXPAND OUR SPORTS CATEGORY. We have enjoyed strong sales from our
line of sports games. Our titles in this popular category, such as NHL HITZ, NFL
BLITZ, NBA HOOPZ, and READY 2 RUMBLE BOXING, are characterized by extreme game
play and the superhuman abilities of the characters in these games, which we
refer to as "over-the-top" sports entertainment. We believe our "over the top"
style makes these games popular among sports videogame fans. We are developing
similar "over-the-top" games for other sports, including baseball and soccer,
for anticipated release in 2002.
STRATEGIC MANAGEMENT OF OUR IN-HOUSE DEVELOPMENT GROUP. We seek to enhance and
retain our large in-house development staff, employing approximately 440
individuals who work in teams to create our games. Our creative teams have a
long history of developing successful titles. We believe that employing in-house
developers provides us with advantages over competitors that rely more heavily
on third-party developers.
EXPAND INTERNATIONAL SALES. We believe that we can further expand our presence
in foreign markets. In fiscal 2000, we opened an office in the United Kingdom to
conduct sales of our products in Europe and Australia. In addition, we signed an
agreement giving Koei Net Co., Ltd. the exclusive right to distribute selected
home videogames in Japan and several other east Asian countries. To further
expand our international presence, we plan to develop titles that are customized
for these foreign markets.
COMPANY INFORMATION
Midway is a Delaware corporation formed in July 1988. Our principal executive
office is located at 2704 West Roscoe Street, Chicago, Illinois 60618, telephone
no. (773) 961-2222. We have an Internet web site featuring our products and
upcoming product releases, located at www.midway.com. The contents of our web
site are not a part of this prospectus.
2
<Page>
The offering
<Table>
Common stock offered by us................ 4,500,000 shares
Common stock outstanding after this 42,858,428 shares
offering................................
Use of proceeds........................... We intend to use the proceeds of the offering for
product development, working capital and other general
corporate purposes. See "Use of proceeds."
Risk factors.............................. See "Risk factors" and other information contained and
incorporated by reference in this prospectus for a
discussion of factors that you should consider before
you decide to invest in our common stock.
NYSE symbol............................... MWY
</Table>
The number of shares outstanding after this offering is based on 38,358,428
shares outstanding on November 23, 2001. This figure excludes:
- - 675,000 shares subject to the over-allotment option;
- - 7,468,798 shares issuable upon the conversion and exercise of Series B
convertible preferred stock and warrants issued on May 22, 2001 and
August 21, 2001;
- - 1,178,500 shares held as treasury shares; and
- - 6,937,403 shares reserved for issuance under our stock option plans, of which
5,876,722 are issuable upon the exercise of outstanding stock options.
3
<Page>
Summary financial data
You should read this data in conjunction with "Management's discussion and
analysis of financial condition and results of operations" and our financial
statements and the notes to these financial statements appearing elsewhere in
this prospectus.
<Table>
<Caption>
Three Months Ended
September 30, Fiscal Year Ended June 30,
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2001 2000 2001 2000 1999 1998 1997
Selected statement of operations data(1) (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues
Home video........................ $ 27,338 $ 30,746 $117,328 $229,691 $217,890 $229,732 $219,912
Coin-operated video............... 997 16,529 50,880 104,174 133,905 161,498 168,314
-------- -------- -------- -------- -------- -------- --------
Total revenues...................... 28,335 47,275 168,208 333,865 351,795 391,230 388,226
Gross profit........................ 13,558 13,374 46,405 126,539 136,227 169,847 154,031
Operating income (loss)............. (6,311) (16,360) (78,363) (20,881) 8,328(5) 65,075 60,533
Income (loss) before tax and
extraordinary credit.............. (5,542) (15,921) (76,256)(2) (19,580)(4) 9,914 68,022 62,663
Credit (provision) for income
taxes............................. -- 5,970 7,777(3) 7,539 (3,767) (25,900) (23,812)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
credit............................ (5,542) (9,951) (68,479) (12,041) 6,147 42,122 38,851
Net income (loss)................... (5,542) (9,951) (68,479)(2)(3) (12,041)(4) 6,147(5) 42,122 41,895(6)
Preferred stock dividend
Cash.............................. 481 -- 184 -- -- -- --
Imputed........................... 1,657 -- 672 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) applicable to common
stock............................. $ (7,680) $ (9,951) $(69,335)(2)(3) $(12,041)(4) $ 6,147(5) $ 42,122 $ 41,895(6)
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings (loss)
per share of common stock......... $ (0.20) $ (0.26) $ (1.84)(2)(3) $ (0.32)(4) $ 0.16(5) $ 1.10 $ 1.14(6)
======== ======== ======== ======== ======== ======== ========
Average number of shares
outstanding....................... 37,858 37,711 37,719 37,869 37,597 38,481 36,800
======== ======== ======== ======== ======== ======== ========
</Table>
<Table>
<Caption>
September 30, June 30,
--------------------- ------------------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
Selected balance sheet data(1) (In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents......... $ 26,029 $ 29,169 $ 40,330 $ 34,093 $ 51,546 $ 26,136 $ 51,862
Working capital................... 74,972 83,453 72,506 100,543 120,039 118,286 86,310
Total assets...................... 169,815 181,572 156,219 186,575 219,259 227,423 214,318
Long-term debt.................... -- -- -- -- -- -- --
Redeemable convertible preferred
stock........................... 34,089 -- 20,667 -- -- -- --
Stockholders' equity.............. 105,915 150,375 111,828 160,355 177,576 176,649 140,768
</Table>
- ------------
(1) Certain prior period balances have been reclassified to conform to current
period presentation.
(2) Fiscal 2001 loss before tax credit and net loss includes restructuring
expense of $12.6 million, $.33 per share, relating to our exiting the
coin-operated videogame business. No income tax benefit was recorded for the
restructuring expense. See note 12 to our financial statements included
elsewhere in this prospectus.
(3) Fiscal 2001 credit for income taxes does not include a credit of
$15.7 million, $.42 per share, on the operating loss, excluding
restructuring expense, after December 31, 2000. See note 6 to our financial
statements included elsewhere in this prospectus.
(4) Fiscal 2000 loss before tax provision includes fourth quarter charges
related to market conditions and asset realization of $26.0 million or
$16.2 million, $.43 per share, on an after-tax basis which created the net
loss for the year. See note 15 to our financial statements included
elsewhere in this prospectus.
(5) Fiscal 1999 operating income includes charges for settlement of litigation,
restructuring and other unusual items of $13.0 million which reduced net
income on an after-tax basis by $8.1 million, $.21 per share.
(6) Fiscal 1997 net income includes an extraordinary gain, net of tax, on early
extinguishment of debt of $3.0 million, $.08 per share.
4
<Page>
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Risk factors
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS, IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, AND THE INFORMATION INCORPORATED BY REFERENCE IN
THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK. IN THE EVENT ANY
OF THE RISKS SET FORTH BELOW ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS MAY BE MATERIALLY ADVERSLY AFFECTED. AS A RESULT, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
We have experienced recent operating and net losses, and we anticipate future
losses.
Midway has not reported a net or operating profit since the second quarter of
fiscal 2000. We reported an operating loss in fiscal 2001 of $78.4 million and
an operating loss in fiscal 2000 of $20.9 million. Midway also reported an
operating loss for the quarter ended September 30, 2001 of $6.3 million. We
anticipate an operating loss for the six-month transition period ending
December 31, 2001. We believe that our losses have been primarily attributable
to:
- - a weakness in the home videogame industry during the transition to next
generation home videogame platforms that have recently been introduced;
- - our transition strategy to discontinue games under development for older
platforms and concentrate instead on the development of games for these new
platforms; and
- - a decline in the market for coin-operated videogames.
We do not know when or whether we will become profitable again.
We depend on market acceptance of new products.
Our success depends on generating revenue from new products. Videogame products
typically have market life spans of only three to 12 months. Our new products
may not achieve and sustain market acceptance during the short life cycle
sufficient to generate revenue to recover our investment in developing the
products and to cover our other costs. The cost of developing games for next
generation platforms is between $2 million and $5 million. If our new products
fail to gain market acceptance, our operating results and financial condition
would be adversely affected.
We may experience delays in introducing new products.
From time to time, we have experienced delays in product introductions. The
timing of a creative process is difficult to predict. Unanticipated delays could
cause us to miss an important selling season. A delay in introducing products
could also affect our development schedule for other products. In either case,
we may not achieve anticipated revenues.
Our market is subject to rapid technological changes.
Technology changes rapidly in the interactive entertainment industry. We must
continually anticipate and adapt our products to emerging technologies,
including new hardware platforms, operating systems, online game play and media
formats. When we choose to incorporate a new technology into our products or to
publish or develop a product for a new platform, we may make a substantial
development investment one to two years in advance of initial shipment of these
products. We may not be able to identify accurately which emerging technologies
will gain widespread acceptance. If we invest in the development of a videogame
incorporating a new technology or for a new platform that does not achieve
significant commercial success, our revenues from that product will be adversely
affected. If, on the other hand, we do not choose to pursue the development of
products incorporating
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5
<Page>
Risk factors
- --------------------------------------------------------------------------------
new technologies or for new platforms that achieve significant commercial
success, our revenues may also be adversely affected.
We may not be able to obtain licenses to use new technologies. We also may not
be able to develop or acquire the expertise necessary to enable us to develop or
market products for emerging technologies. If either of these occurs, we will be
unable to develop videogames for new platforms.
In addition, consumers may defer purchasing home videogames for use on existing
platforms following the announcement of an introduction date for hardware
platforms incorporating new technologies. Once new platform introduction dates
have been announced, retail videogame prices may decrease as the market makes
the transition to the next generation of hardware and software, resulting in
lower revenues for us during that transition period. Accordingly, these
announcements could adversely affect sales of our existing videogames.
Our operating results may fluctuate from quarter to quarter.
We have experienced and expect to continue to experience significant quarterly
fluctuations in net sales and other operating results due to a variety of
factors, including:
- - variations in the level of market acceptance of our products;
- - delays and timing of product introductions;
- - fluctuations in our mix of products with varying profit margins;
- - introduction and market penetration of game platforms;
- - development and promotional expenses relating to the introduction of our
products;
- - peak demand during the year-end holiday season;
- - changes in our pricing policies and those of our competitors;
- - the accuracy of the forecasts of consumer demand made by retailers and by us;
and
- - the timing of orders from major customers, order cancellations and delays in
shipment.
Our purchasing and marketing levels are based, in part, on our expectations
regarding future sales. As a result, operating results in any particular quarter
may be adversely affected by a decrease in sales or a failure to meet our sales
expectations in such quarter.
Our market is highly competitive.
The interactive entertainment software business is highly competitive. Our
ability to compete successfully in this market is based, in large part, on our
ability to:
- - select and develop popular titles;
- - identify and obtain rights to commercially marketable intellectual
properties; and
- - adapt our products for use with new technologies.
Successful competition in our industry is also based on:
- - price;
- - access to retail shelf space;
- - product enhancements;
- - brand recognition;
- --------------------------------------------------------------------------------
6
<Page>
Risk factors
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- - marketing support; and
- - access to distribution channels.
Our competitors vary in size from very small companies with limited resources to
large corporations with greater financial, marketing and product development
resources than ours. We compete with the platform manufacturers, including
Nintendo, Sony and Microsoft. We also compete with companies that we depend upon
for foreign distribution or other services. These companies have an incentive to
promote their own products in preference to ours. In addition, due to their
dominant position in the industry, the manufacturers of platform hardware have a
competitive advantage with respect to retail pricing, acquiring intellectual
property licenses and securing shelf space.
We believe that large diversified entertainment, cable and telecommunications
companies, in addition to large software companies, are increasing their focus
on the interactive entertainment software market, which will result in greater
competition for us. Many of our competitors are developing on-line interactive
games and interactive networks. We may not be able to compete successfully
against current or future competitors.
For the fiscal year ended June 30, 2001, 50.0% of our home videogame revenues
were attributable to our five largest customers. We could be adversely affected
if any of them decrease or terminate their purchases from us.
Sales to our five largest customers collectively accounted for approximately
50.0% of our home videogame revenues for the fiscal year ended June 30, 2001.
Our two largest customers were Wal-Mart and Toys "R" Us. During fiscal 2001,
Wal-Mart accounted for 15.9% of our home videogame revenues and Toys "R" Us
accounted for 14.6% of our home videogame revenues.
We have no agreements with any of our customers that guarantee future purchases.
As a result, purchases by any of our customers could be reduced or terminated at
any time. A substantial reduction or a termination of purchases by one or more
of our largest customers may have a material adverse effect on us.
A business failure by any of our major customers could have a material adverse
effect on our business.
We typically make sales on credit, with terms that vary depending upon the
customer and other factors. Normally we do not hold any collateral to secure
payment by our customers. Additionally, we do not factor any of our receivables.
While we attempt to carefully monitor the creditworthiness of our customers, we
bear the risk of their inability to pay us as well as any delay in payment. A
business failure by any of our major customers could have a material adverse
effect on us.
We depend on third parties to develop some of our game titles.
Some of our games are developed by third parties. The number of titles developed
for us by third parties varies from quarter to quarter. We have less control of
a game being developed by a third party because we cannot control the
developer's personnel, schedule or resources. This may lead to a game not being
completed on time or not at all if the third party's business fails or it
experiences delays. If this happens with a game under development, we could lose
potential revenues and our investment in the game.
We depend on our key personnel.
Our success depends on the performance of senior management and on our ability
to continue to attract, motivate and retain highly qualified software
developers. The loss of the services of a number of senior management personnel
or highly qualified software developers could have a material adverse
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7
<Page>
Risk factors
- --------------------------------------------------------------------------------
effect on us. Competition for highly skilled employees is intense in our
industry, and we may not be successful in attracting and retaining these
personnel. Specifically, we may experience increased costs in order to attract
and retain skilled employees.
Product returns and price adjustments could exceed our reserves.
We accept product returns for defective products and sometimes provide
replacements, markdowns or other credits to customers that hold slow-moving
inventory of our games. At the time of product shipment, we establish reserves,
including reserves under our policies for price protection and returns of
defective products. These reserves are established according to estimates of the
potential for future returns of products based on historical return rates,
seasonality of sales, retailer inventories of our products and other factors. If
product returns, markdowns and credits exceed our reserves, our operating
results and financial condition could be adversely affected.
We depend on game platform manufacturers.
Substantially all of our products are for use on proprietary game platforms
manufactured by other companies. We depend upon these companies for the
following reasons:
- - we may only publish our games for play on their game platforms if we receive
a platform license from them, which is renewable at their discretion;
- - platform manufacturers set the prices for their platform licenses, which may
be economically prohibitive;
- - we must obtain their prior review and approval to publish games on their
platforms;
- - if the popularity of a game platform declines, or the manufacturer stops
manufacturing, does not meet the demand for a platform, or delays the
introduction of a platform in a region important to us, the games that we
have published and that we are developing for that platform would likely
produce lower sales than we anticipate;
- - these manufacturers control the manufacture of, or approval to manufacture,
our game discs and cartridges; and
- - these companies have the exclusive right to protect the intellectual property
rights to their respective hardware platforms and technology and to
discourage others from producing unauthorized software for their platforms
that compete with our games.
Because these manufacturers compete against us in the videogame publishing
markets, they are motivated to give preference to their own products over ours
in product approval and manufacturing, in promotion and in granting licenses to
us for products that might compete with their products.
We depend on third parties to manufacture our products.
We depend on third parties, including the platform manufacturers, to manufacture
our products. Manufacturing delays or interruptions could cause delays or
interruptions in product delivery. If any significant delays occur, we may not
achieve anticipated revenues. This is particularly true if any of our products
miss an important selling season. Unanticipated price increases from these
manufacturers also could adversely affect us.
We may not be able to maintain or acquire licenses for intellectual property.
Some of our games are based on properties or trademarks owned by third parties,
such as the National Basketball Association, National Hockey League and National
Football League or various players' associations. Our future success may depend
upon our ability to maintain existing licenses and
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8
<Page>
Risk factors
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to acquire additional licenses for popular intellectual properties. There is
competition for these licenses, and we may not be successful in maintaining or
acquiring intellectual property rights with significant commercial value.
Our intellectual property licenses generally require that we submit new products
developed under licenses to the licensor for approval prior to release. This
approval is generally discretionary. Rejection or delay in approval of a product
by a licensor could prevent us from selling the product. As a result, we might
not recover our investment in the product. The owners of intellectual property
licensed by us generally reserve the right to protect the intellectual property
against infringement. If any of these owners fails to protect, or infringes
someone else's, intellectual property, it could have a material adverse effect
on us.
Increased foreign sales subject us to different business and economic risks.
Foreign sales are subject to many risks, including:
- - different consumer preferences;
- - higher distribution and operating expenses;
- - unexpected changes in regulatory requirements;
- - tariffs and other barriers;
- - difficulties in staffing and managing foreign operations; and
- - potential difficulties collecting accounts receivable.
These factors or others could have an adverse effect on our future foreign sales
or the profits generated from these sales.
Sales generated by our London office will generally be denominated in British
Pounds, Euros or U.S. dollars. Sales generated by our Japanese operations are
generally made in Yen. To the extent our foreign sales are not denominated in
U.S. dollars, our sales and profits could be materially and adversely affected
by foreign currency fluctuations.
If we fail to adequately protect our intellectual property, we could lose
revenues. Any related intellectual property litigation could be time consuming
and expensive.
Unauthorized production frequently occurs in the computer software industry. We
could be materially and adversely affected if a significant amount of
unauthorized production of our DVD-ROM or CD-ROM products occurs.
We hold copyrights on the products, manuals, advertising and other materials
owned by us. We also maintain trademark rights in the Midway name, names of
certain products and their respective logos owned by us. We regard our videogame
titles, including the underlying software, as proprietary. We rely on a
combination of patent, trademark, copyright and trade secret laws in the United
States and under international law, employee and third-party nondisclosure
agreements and confidentiality agreements, among other methods to protect our
proprietary rights. Third parties may infringe our rights. It is possible that
third parties may also assert infringement claims against us. We receive
communications regarding such claims from time to time and we investigate each
claim individually. Prosecuting or defending valid claims could be difficult and
costly and could result in a diversion of our resources. Further, adverse
determinations in any claim or litigation could also have a material adverse
effect on our business, operating results and financial condition.
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9
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Risk factors
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Negative developments with respect to current litigations to which we are a
party could harm us.
We are currently a defendant in a class action lawsuit and a wrongful death
suit. See "Business--Legal proceedings" for a description of these lawsuits in
which we are currently involved. We are also involved in other litigations from
time to time. The results of any complex legal proceedings are difficult to
predict. The payment of a large amount to resolve either of these lawsuits, or
other negative developments with respect to these actions, could have a negative
effect on our stock price.
A significant downturn in general economic conditions which results in a
reduction in discretionary spending may reduce demand for our products and
reduce our revenues.
Our product sales are affected by a retail customer's ability and desire to
spend disposable income on the purchase of our videogames. A significant
downturn in general economic conditions which generally results in a reduction
in discretionary spending could result in a reduction in demand for our products
and could reduce our revenues. Such economic downturns may diminish demand for
videogames.
Our business and future operating results are subject to a broad range of
uncertainties arising out of the recent terrorist attacks on the United States.
Our business and operating results are subject to uncertainties arising out of
the recent terrorist attacks in New York City and Washington, D.C. These
uncertainties include the potential worsening or extension of the current global
economic slowdown and the economic consequences of military action or additional
terrorist activities. While the recent terrorist attacks have not had a material
impact on our financial position or results of operations to date, we cannot
determine if the attacks or any future events arising as a result of the attacks
will have a material impact on our business in the future.
RISKS RELATED TO THIS OFFERING
Sumner Redstone controls 29.6% of our common stock and may dispose of it at any
time.
Based on his most recent public report filed on November 9, 2001, Sumner
Redstone owns, individually and through his affiliate, a total of 11,354,436
shares, or 29.6%, of our currently outstanding common stock. Mr. Redstone could
sell some or all of these shares at any time on the open market or otherwise.
The sale by Mr. Redstone of a large number of shares would likely have an
adverse effect on the market price of our common stock. Although Mr. Redstone
has stated that he has no plans to acquire control of Midway, he could change
his position or could sell his stock to a person who wishes to acquire control
of Midway. Such a person may not agree with our business strategies and goals.
Mr. Redstone's substantial interest in Midway could discourage a third party
from making an acquisition of Midway favorable to our other stockholders.
Shares available for sale in the future could have an adverse effect on the
market price of our common stock.
We have 100,000,000 authorized shares of common stock, of which
38,358,428 million shares were issued and outstanding as of November 23, 2001.
As of that date, another 6,937,403 million shares were reserved for issuance
under our stock option plans and 12,852,010 million shares were reserved for
issuance under convertible preferred stock and warrants. We are issuing
4,500,000 shares in this offering. Our Board of Directors has broad discretion
with respect to the issuance of the remaining 37,352,159 million authorized but
unissued shares, including discretion to issue shares in compensatory and
acquisition transactions. In addition, if we seek further financing through the
sale of our securities, our then current stockholders may suffer dilution in
their percentage ownership of
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10
<Page>
Risk factors
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common stock. The future issuance, or even the potential issuance, of shares at
a price below the then current market price may depress the future market price
of our common stock.
Conversion of our preferred stock and exercise of warrants will dilute our
common stock, and the sale of the underlying shares may depress the market price
of our common stock.
We have issued 5,512.5 shares of Series B convertible preferred stock in a
private placement. The shares of preferred stock are convertible into common
stock until November 21, 2003, subject to limited redemption rights. 4,200 of
the preferred shares are convertible at an initial conversion price of $9.33 per
common share into a total of 4,501,608 shares, subject to adjustment. 1,312.5 of
the preferred shares are convertible at a conversion price of $10.60 per share
into a total of 1,238,208 shares, subject to anti-dilution adjustments. We also
issued three-year warrants to purchase 1,050,000 shares of common stock and
five-year warrants to purchase 555,161 shares of common stock, exercisable at
$9.33 per share, subject to anti-dilution adjustments. Finally, we issued
five-year warrants to purchase 123,821 shares of common stock, exercisable at
$10.60 per share, subject to anti-dilution adjustments.
The issuance of our common stock upon the conversion of the preferred stock or
the exercise of the warrants described above will likely occur at a time when
the conversion or exercise price is below the market price of our common stock.
Therefore, the conversion or exercise of these securities will likely have a
dilutive effect on the price of our common stock. The conversion or exercise of
these securities will also result in our having more shares of our common stock
outstanding, which would have a dilutive effect on our earnings per share. If
the holders of the preferred stock and warrants were to sell a large number of
their shares over a short period of time, those sales would likely have an
adverse effect on the market price of our common stock. Even the potential sale
of a large number of shares may depress the future market price of our common
stock.
Adjustments to the conversion price of the initial shares of our preferred stock
could result in further dilution of our common stock and may depress the market
price of our common stock.
On May 21, 2002, unless they are converted earlier, the conversion price of the
initial 4,200 shares of preferred stock described above will be adjusted. The
new conversion price will be the average of the closing bid prices of our common
stock for the period from May 22, 2001 to May 21, 2002, subject to a contractual
minimum conversion price of $4.24 and maximum conversion price of $11.45. Based
upon the actual closing bid prices of our common stock for the period from
May 22, 2001 to November 26, 2001, even if the closing bid price of our common
stock is $0 on each trading day between November 27, 2001 and May 21, 2002, the
effective minimum conversion price could not be less than $7.41. If the actual
average closing bid price of our common stock for the period from May 22, 2001
to May 21, 2002 were to be below $9.33 per share, the maximum number of shares
of common stock that could be issued upon conversion of these 4,200 shares of
preferred stock would increase, subject to other adjustments. Other adjustments
will be made to our preferred stock if events specified in the certificate of
designations for the preferred stock occur before the conversion of the
preferred stock. These events include stock splits, stock dividends and sales of
common stock or securities convertible into common stock at prices lower than
the conversion price of the preferred stock. If these adjustments occur, we
would have to issue more shares of our common stock upon conversion of our
preferred stock, which would likely further dilute our common stock and depress
its market price.
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Risk factors
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If we fail to fulfill covenants made to the holders of our preferred stock, we
may experience adverse financial effects.
If we breach our agreements with the holders of the preferred stock, or upon a
change of control of Midway, the holders of the preferred stock may require us
to repurchase the preferred stock at a premium. If we were required to
repurchase the preferred stock at a premium, we might suffer serious adverse
financial consequences. The premium is 25% above the stated value in the case of
a change of control. The premium is 20% above the stated value upon the
occurrence of default events including:
- - our failure to maintain an effective registration statement for the
underlying common stock beyond permitted grace periods;
- - suspension from trading or failure of our common stock to be listed on the
NYSE or the Nasdaq National Market for five consecutive trading days or for
more than ten trading days in any 365-day period;
- - our statement of an intention not to comply with the conversion requirements
of the preferred stock or our failure to deliver common stock upon conversion
within the allowable time periods; and
- - our failure to obtain any required stockholder approval of the issuance of
common stock in connection with the conversion and exercise of the preferred
stock and warrants.
The premium is 10% above the stated value upon our breach of any other agreement
with, or representation or warranty made to, the holders, except if the breach
would not have a material adverse effect on our business.
The exercise of outstanding stock options may dilute our common stock and
depress its market price.
As of November 23, 2001, we had outstanding options to purchase an aggregate of
5.9 million shares of common stock. Our stock options are generally exercisable
for a period of nine years, beginning one year after the date of grant. Stock
options are exercised, and the underlying common stock is generally sold, at a
time when the exercise price of the options is below the market price of the
common stock. Therefore, the exercise of these options generally has a dilutive
effect on our common stock outstanding at the time of sale. Such exercises may
have an adverse effect on the market price of our common stock. Even the
potential for the exercise of a large number of options with an exercise price
significantly below the market price may depress the future market price of our
common stock.
Our stock price may be volatile.
The trading price of our common stock may be subject to wide fluctuations in
response to certain factors, including:
- - quarter to quarter variations in our results of operations;
- - our announcements of new videogames;
- - our product development and product release schedules;
- - timing of the introduction of new platforms and delays in the actual release
of new platforms;
- - changes in earnings estimates or recommendations of financial analysts who
cover our common stock;
- - investor perceptions and expectations regarding our videogames, business
plans and strategies and those of our competitors and customers; and
- - general conditions in our industry.
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Risk factors
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In addition, from time to time the public stock markets experience extreme price
and trading volume volatility, particularly in high technology sectors of the
market. The market prices of securities of many technology companies have been
significantly affected by such volatility for reasons often unrelated to the
operating performance of the specific companies. Any broad market fluctuation
may adversely affect the market price of our common stock.
Effects of anti-takeover provisions could inhibit the acquisition of Midway.
Our Board of Directors or management could use several charter or statutory
provisions and agreements as anti-takeover devices to discourage, delay or
prevent a change in control of Midway. The use of these provisions and
agreements could adversely affect the market price of our common stock:
BLANK CHECK PREFERRED STOCK. Our certificate of incorporation authorizes the
issuance of 5,000,000 shares of preferred stock with designations, rights and
preferences that may be determined from time to time by the Board of Directors.
Accordingly, our Board has broad power, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
our common stock. Other than the 5,512.5 shares of our Series B convertible
preferred stock owned by the preferred stockholders, our Board has no current
plans, agreements or commitments to issue any shares of preferred stock.
RIGHTS PLAN. Under a rights agreement with The Bank of New York, each share of
our common stock has an accompanying right to purchase, if a person acquires
beneficial ownership of 15% or more of our common stock without the prior
approval of our Board, convertible preferred stock that permits each holder,
other than the acquiror, to purchase a number of shares of common stock at half
the market price. The effect of our rights plan is to discourage a hostile
takeover by diluting the acquiror's percentage interest in our common stock. We
can redeem the rights at $0.01 per right, subject to limited conditions, at any
time. The rights expire in 2007.
CLASSIFIED BOARD. Our certificate of incorporation provides for a classified
Board of Directors. Upon the expiration of staggered terms, one third of
Midway's directors are elected at each annual meeting to succeed those directors
whose terms expire. This means that a person would not obtain control of our
Board until the second annual stockholders' meeting after acquiring a majority
of our voting stock.
OTHER CHARTER PROVISIONS. Our certificate of incorporation and bylaws also
provide that:
- - directors may be removed by a vote of the stockholders, only for cause;
- - any vacancy on the Board may be filled only by a vote of a majority of the
remaining directors then in office;
- - there may be no stockholder action by written consent;
- - only the President, the Chairman of the Board or the entire Board may call
special meetings of stockholders, and the only business permitted to be
conducted at stockholder meetings is business brought before the meeting by
or at the direction of the Board;
- - stockholders must follow an advance notice procedure for the submission of
director nominations and other business to be considered at an annual meeting
of stockholders;
- - either a majority vote of the Board or an affirmative vote of at least 80% of
outstanding common stock is needed in order to adopt, amend or repeal our
bylaws; and
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Risk factors
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- - an affirmative vote of 80% of outstanding common stock is needed in order to
amend or repeal any of the above provisions.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. In general, this statute
prohibits a publicly-held Delaware corporation from engaging in a business
combination with anyone who owns at least 15% of its common stock. This
prohibition lasts for a period of three years after that person has acquired the
15% ownership. The corporation may, however, engage in a business combination
with such person if it is approved by the Board before the person acquires the
15% ownership or later by the Board and two-thirds of the stockholders of the
public corporation.
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Forward-looking statements
This prospectus contains "forward-looking statements" within the meaning of the
federal securities laws. These statements may be found throughout this
prospectus, particularly under the headings "Prospectus summary," "Risk
factors," "Use of proceeds," "Dividend policy," "Management's discussion and
analysis of financial condition and results of operations," and "Business,"
among others, as well as in the information incorporated by reference in this
prospectus. These statements describe our plans, strategies and goals and our
beliefs concerning future business conditions and our business outlook based on
currently available information. Forward-looking statements typically are
identified by the use of terms such as "may," "will," "should," "expect,"
"anticipate," "believe," "estimate," "intend" and similar words, although some
forward-looking statements are expressed differently. You should consider
carefully the statements under the heading "Risk factors" above and in the other
sections of this prospectus, as well as in the information incorporated by
reference, which describe additional factors that could cause our actual results
to differ from the expectations expressed in the forward-looking statements.
Use of proceeds
We estimate that the net proceeds from the sale of the 4,500,000 shares of
common stock that we are offering will be $ million, assuming that the
public offering price is $ per share. If the underwriters' over-allotment
option is exercised in full, we estimate that the aggregate net proceeds will be
$ assuming the same offering price. "Net proceeds" is what we expect to
receive after the underwriting discount and the other fees and expenses of this
offering.
We intend to use the net proceeds of the offering for product development,
working capital and other general corporate purposes. Until we use the net
proceeds of the offering, we will invest them in money market securities or
other appropriate short-term investments.
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15
<Page>
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Common stock market price data
Our common stock trades publicly on the NYSE under the symbol "MWY." The
following table shows the high and low closing sale prices of our common stock
for the periods indicated as reported on the NYSE:
<Table>
<Caption>
High Low
- ---------------------------------------------------------------------------------
Year Ending December 31, 2001
First Quarter............................................. $ 8.00 $ 6.77
Second Quarter............................................ 18.50 6.55
Third Quarter............................................. 18.50 10.80
Fourth Quarter (through November 26, 2001)................ 17.00 12.02
Year Ended December 31, 2000
First Quarter............................................. $23.69 $12.69
Second Quarter............................................ 14.38 6.06
Third Quarter............................................. 10.50 6.25
Fourth Quarter............................................ 9.00 6.13
Year Ended December 31, 1999
First Quarter............................................. $11.31 $ 7.62
Second Quarter............................................ 12.31 8.06
Third Quarter............................................. 16.50 10.44
Fourth Quarter............................................ 24.88 15.56
</Table>
On November 26, 2001, the last reported sale price of our common stock on the
NYSE was $14.99 per share. On that date, there were approximately 1,100 holders
of record of our common stock.
Dividend policy
We have never paid cash dividends on our common stock. We currently have
agreements with our bank and our convertible preferred stock investors that
prohibit us from paying dividends on our common stock. We plan to retain any
earnings to fund the operation of our business and do not plan to pay cash
dividends for the foreseeable future.
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Capitalization
The following table shows our capitalization as of September 30, 2001. The table
also shows our capitalization as adjusted to reflect the completion of this
offering at $14.99 per share and the application of the proceeds, net of the
estimated underwriting discounts, fees, and our estimated offering expenses.
<Table>
<Caption>
September 30, 2001
-----------------------
Actual As Adjusted
(In thousands)
- -------------------------------------------------------------------------------------
Cash and cash equivalents................................... $ 26,029 $ 88,987
======== ========
Long-term debt.............................................. -- --
Redeemable convertible preferred stock, 5,512.5 authorized,
issued and redeemable at $55,125.......................... 34,089 34,089
Stockholders' equity:
Preferred stock (4,994,487.5 shares authorized and
undesignated)........................................... --
Common stock (100,000,000 shares authorized;
39,147,121 shares issued, actual and 43,647,121 shares
issued, as adjusted).................................... 391 436
Additional paid-in capital................................ 120,671 183,584
Retained earnings......................................... 1,108 1,108
Treasury stock, at cost (1,178,500 shares)................ (16,103) (16,103)
Translation adjustment.................................... (152) (152)
-------- --------
Total stockholders' equity.............................. 105,915 168,873
-------- --------
Total capitalization.................................. $140,004 $202,962
======== ========
</Table>
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Selected financial data
Our selected consolidated financial data presented below as of June 30,
2001, 2000, 1999, 1998 and 1997, and for the fiscal years then ended, have been
derived from our audited consolidated financial statements and related notes.
The selected condensed consolidated financial data as of and for the three
months ended September 30, 2001 and 2000 have been derived from our unaudited
condensed consolidated financial statements included in this prospectus. These
quarterly financial statements include all adjustments, consisting only of
normal recurring adjustments, which are, in our opinion, necessary for a fair
presentation of our financial position at such dates and results of operations
for such periods. The results of operations for the three months ended
September 30, 2001 are not necessarily indicative of future results. The
information set forth below should be read in conjunction with our financial
statements included elsewhere in this prospectus and "Management's discussion
and analysis of financial condition and results of operations."
<Table>
<Caption>
Three Months Ended
September 30, Fiscal Year Ended June 30,
--------------------- ---------------------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
Selected statement of (In thousands, except per share amounts)
operations data(1)
- -------------------------------------------------------------------------------------------------------------------------------
Revenues
Home video................. $ 27,338 $ 30,746 $117,328 $229,691 $217,890 $229,732 $ 219,912
Coin-operated video........ 997 16,529 50,880 104,174 133,905 161,498 168,314
-------- -------- -------- -------- -------- -------- -----------
Total revenues............... 28,335 47,275 168,208 333,865 351,795 391,230 388,226
Gross profit................. 13,558 13,374 46,405 126,539 136,227 169,847 154,031
Operating income (loss)...... (6,311) (16,360) (78,363) (20,881) 8,328(5) 65,075 60,533
Income (loss) before tax and
extraordinary
credit..................... (5,542) (15,921) (76,256)(2) (19,580)(4) 9,914 68,022 62,663
Credit (provision) for income
taxes...................... -- 5,970 7,777(3) 7,539 (3,767) (25,900) (23,812)
-------- -------- -------- -------- -------- -------- -----------
Income (loss) before
extraordinary credit....... (5,542) (9,951) (68,479) (12,041) 6,147 42,122 38,851
Net income (loss)............ (5,542) (9,951) (68,479)(2)(3) (12,041)(4) 6,147(5) 42,122 41,895(6)
Preferred stock dividend
Cash....................... 481 -- 184 -- -- -- --
Imputed.................... 1,657 -- 672 -- -- -- --
-------- -------- -------- -------- -------- -------- -----------
Earnings (loss) applicable to
common stock............... $ (7,680) $ (9,951) $(69,335)(2)(3) $(12,041)(4) $ 6,147(5) $ 42,122 $ 41,895(6)
======== ======== ======== ======== ======== ======== ===========
Basic and diluted earnings
(loss) per share of common
stock...................... $ (0.20) $ (0.26) $ (1.84)(2)(3) $ (0.32)(4) $ 0.16(5) $ 1.10 $ 1.14(6)
======== ======== ======== ======== ======== ======== ===========
Average number of shares
outstanding................ 37,858 37,711 37,719 37,869 37,597 38,481 36,800
======== ======== ======== ======== ======== ======== ===========
</Table>
<Table>
<Caption>
September 30, June 30,
--------------------- -------------------------------------------------------------------
2001 2000 2001 2000 1999 1998 1997
Selected balance sheet data(1) (In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents....... $ 26,029 $ 29,169 $ 40,330 $ 34,093 $ 51,546 $ 26,136 $ 51,862
Working capital................. 74,972 83,453 72,506 100,543 120,039 118,286 86,310
Total assets.................... 169,815 181,572 156,219 186,575 219,259 227,423 214,318
Redeemable convertible preferred
stock......................... 34,089 -- 20,667 -- -- -- --
Stockholders' equity............ 105,915 150,375 111,828 160,355 177,576 176,649 140,768
</Table>
- ------------
(1) Certain prior period balances have been reclassified to conform to current
period presentation.
(2) Fiscal 2001 loss before tax credit and net loss includes restructuring
expense of $12.6 million, $.33 per share, relating to our exiting the
coin-operated videogame business. No income tax
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benefit was recorded for the restructuring expense. See note 12 to our
financial statements included elsewhere in this prospectus.
(3) Fiscal 2001 credit for income taxes does not include a credit of
$15.7 million, $.42 per share, on the operating loss, excluding
restructuring expense, after December 31, 2000. See note 6 to our financial
statements included elsewhere in this prospectus.
(4) Fiscal 2000 loss before tax provision includes fourth quarter charges
related to market conditions and asset realization of $26.0 million or
$16.2 million, $.43 per share, on an after-tax basis which created the net
loss for the year. See note 15 to our financial statements included
elsewhere in this prospectus.
(5) Fiscal 1999 operating income includes charges for settlement of litigation,
restructuring and other unusual items of $13.0 million which reduced net
income on an after-tax basis by $8.1 million, $.21 per share.
(6) Fiscal 1997 net income includes an extraordinary gain, net of tax, on early
extinguishment of debt of $3.0 million, $.08 per share.
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Management's discussion and analysis of financial condition and results of
operations
The following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Risk factors" and elsewhere in this prospectus.
The following discussion is qualified in its entirety by, and should be read in
conjunction with, our consolidated financial statements and the notes thereto,
which begin on page F-1.
Midway has changed its fiscal year from a fiscal year ending on June 30 to a
fiscal year ending on December 31. A transition report on Form 10-K will be
filed for the six-month fiscal period ending December 31, 2001.
OVERVIEW
We are a leading developer and publisher of interactive entertainment videogame
software for home videogame systems, including Sony's PLAYSTATION 2, Nintendo's
GAMECUBE and GAME BOY ADVANCE and Microsoft's XBOX. Midway has products in
development for the action, adventure, driving, extreme sports, fighting,
role-playing, sports and strategy genres. In addition to the corporate
headquarters in Chicago, Midway has offices in Corsicana, Texas and Milpitas and
San Diego, California. Midway has international operations in London and Japan.
Midway has publishing agreements with each of the three major platform
manufacturers: Sony, Nintendo and Microsoft. In accordance with these
agreements, Midway's products are manufactured at facilities designated by the
console manufacturers. Midway sells its products primarily direct to the major
videogame retailers in North America and uses a combination of direct sales and
distributors in Europe and Asia.
Midway controls intellectual property rights to hundreds of classic videogame
titles, including titles originally released under the Midway, Williams and
Atari brands. A number of these classic titles have been licensed for play on
websites, interactive television, cellular telephones and other handheld
wireless devices.
Since its incorporation in 1988 through the date of its initial public offering,
Midway was a wholly owned subsidiary of WMS Industries Inc. On October 29, 1996,
Midway completed its initial public offering of 5,100,000 previously unissued
shares of common stock.
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.
Effective April 6, 1998, in connection with the spin-off of Midway by WMS, we
entered into several agreements with WMS under which WMS, among other things,
performed contract manufacturing of coin-operated videogames which was
terminated in fiscal 2001 and provides information technology services to
certain parts of Midway. In addition, under a separate agreement, we provided
selling and marketing services for the WMS pinball products which were
terminated in fiscal 2000. These agreements provide for products or services on
an arm's length basis. The overall cost structure of Midway has not been
materially different in fiscal 2001, 2000 or 1999 from that experienced by
Midway in prior years under previous arrangements with WMS.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in or
derived from our statements of operations expressed as a percentage of revenues.
The indicated percentages reflect the fact that certain prior period balances
have been reclassified to conform to current period presentation.
<Table>
<Caption>
Three Months
Ended
September 30,
-------------------
2001 2000
- ---------------------------------------------------------------------------------
Revenues
Home video................................................ 96.5% 65.0%
Coin-operated video....................................... 3.5 35.0
----- -----
Total revenues.............................................. 100.0 100.0
Cost of sales............................................... 52.2 71.7
----- -----
Gross profit................................................ 47.8 28.3
Research and development expense............................ 20.8 34.9
Selling and marketing expense............................... 31.7 17.3
Administrative expense...................................... 17.7 10.7
----- -----
Operating loss.............................................. (22.3) (34.6)
Interest and other income................................... 2.7 1.0
----- -----
Loss before credit for income taxes......................... (19.6) (33.6)
Credit for income taxes..................................... -- 12.6
----- -----
Net loss.................................................... (19.6)% (21.0)%
===== =====
</Table>
Three months ended September 30, 2001 compared with three months ended
September 30, 2000
The quarter ended September 30, 2001 is the first quarter since Midway exited
the coin-operated business. Accordingly, revenues and cost of sales of the
coin-operated business were negligible and the only expenses currently being
incurred by the coin-operated business relate to the sale of assets and
exploring licensing opportunities for intellectual properties. Such expenses
relating to the coin-operated business were not significant to any of the
reported line items for the quarter ended September 30, 2001. Accordingly,
discussion concerning the coin-operated business for the quarter ended
September 30, 2001 will be limited to providing insight in certain line item
changes from the prior year's first quarter.
REVENUES
Home videogame revenues decreased 11% to $27,338,000 in the September 30, 2001
quarter compared to $30,746,000 in the prior year quarter. During the three
months ended September 30, 2001 approximately 78% of home videogame revenues
were from three titles for the Sony PLAYSTATION 2. During the three months ended
September 30, 2001 one title was released for the Nintendo GAME BOY ADVANCE
handheld platform. Midway along with the entire software entertainment industry
is coming out of a platform transition period. The overall negative impact of
the platform transition on Midway's profitability has been compounded by
Midway's transition strategy, implemented in fiscal 2000, which shifted product
development resources from older platforms to the development of products for
next generation platforms. Several titles in development that could have
softened the impact of the transition in the quarter ended September 30, 2001
were cancelled in order to have more high quality products available for the
next generation consoles. Because it takes on average 18 to
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Management's discussion and analysis of financial condition and results of
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24 months to develop a next generation title, Midway will not experience the
full benefits of this strategy until calendar year 2002.
During the quarter ended September 30, 2001, Midway released three new home
videogame titles, SPYHUNTER, NHL HITZ 20-02 and ARTIC THUNDER for the
PLAYSTATION 2. Also, Midway released NFL BLITZ 20-02 for the GAME BOY ADVANCE.
In the quarter ending December 31, 2001, Midway expects to release home
videogame products on all of the next generation platforms. Midway expects to
ship a total of eight new home videogame products in the quarter ending
December 31, 2001.
GROSS PROFIT
Home videogame gross profit increased $2,886,000 from $10,464,000, 34.0% of
related revenues, in the quarter ended September 30, 2000 to $13,350,000, 48.8%
of related revenues, in the quarter ended September 30, 2001. The increase in
gross profit in the quarter ended September 30, 2001 as compared with the prior
year's comparable quarter was due to the change in product mix. The revenues in
the quarter ended September 30, 2001 were almost entirely comprised of
videogames for the new platforms. The revenues in the quarter ended
September 30, 2000 were entirely from legacy platform home videogames, which
required significant discounting of sales price. This discounting of previously
released titles in the prior year's quarter was due to pricing pressures from
the platform transition previously mentioned.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense decreased $10,613,000 from $16,501,000 in the
quarter ended September 30, 2000 to $5,888,000 in the quarter ended
September 30, 2001. The decrease is primarily due to the increased amount of
product development costs capitalized and our exiting from the coin-operated
business. Capitalized product development costs were $11,128,000 in the three
months ended September 30, 2001 and $3,430,000 in the three months ended
September 30, 2000. The increase in capitalized software development costs is
due to more software development projects having reached the point of
technological feasibility of which all related development costs subsequent to
the establishment of technological feasibility are capitalized. For additional
information, see note 6 to the condensed consolidated financial statements for
the three months ended September 30, 2001 included elsewhere in this prospectus.
The three months ended September 30, 2000 included approximately $1,700,000 of
costs that related solely to the coin-operated business and had no carryover
value to the home videogame business; these costs do not exist in the quarter
ended September 30, 2001. In addition, approximately $3,474,000 of the research
and development expense incurred in the three months ended September 30, 2000
was on projects that were dedicated to coin-operated development which are now
dedicated to the direct development of home videogame software projects. Costs
incurred on the direct development of home videogames were approximately
$17,000,000 in the quarter ended September 30, 2001 compared with approximately
$14,757,000 that related to the development of home videogames in the quarter
ended September 30, 2000.
SELLING AND MARKETING EXPENSE
Selling and marketing expense increased $806,000 from $8,166,000 in the quarter
ended September 30, 2000 to $8,972,000 in the quarter ended September 30, 2001.
The quarter ended September 30, 2000 includes approximately $1,000,000 of
coin-operated expense. The increase in selling and marketing expense was
primarily due to a higher level of advertising to support the launch of new home
videogame titles on new platforms released in the quarter ended September 30,
2001.
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ADMINISTRATIVE EXPENSE
Administrative expense decreased $58,000 from $5,067,000 in the quarter ended
September 30, 2000 to $5,009,000 in the quarter ended September 30, 2001. The
quarter ended September 30, 2001 includes $1,050,000 of expense for executive
retirement benefits. The quarter ended September 30, 2000 included $981,000 of
goodwill amortization of which none was recorded in the quarter ended
September 30, 2001 pursuant to the adoption of Financial Accounting Standard
Board Statement No. 142.
OPERATING LOSS
Operating loss in the quarter ended September 30, 2001 decreased from
$16,360,000 in the quarter ended September 30, 2000 to an operating loss of
$6,311,000 in the quarter ended September 30, 2001. The decrease in operating
loss primarily relates to the increased level of software development cost
capitalized and increased home videogame gross profit.
INCOME TAXES
Midway provided no credit for income taxes related to the loss for the quarter
ended September 30, 2001. Midway's operating loss for the quarter resulted in
increasing net operating loss carryforwards, which can be used to offset future
taxable income. An additional allowance of $2,078,000 was provided against the
deferred tax asset related to the potential future benefit for net operating
losses generated during the quarter. The effective tax rate excluding the effect
of that allowance is approximately 37.5%.
NET LOSS
Loss applicable to common stock was $7,680,000, $.20 per share, in the quarter
ended September 30, 2001, compared with $9,951,000, $.26 per share, in the
quarter ended September 30, 2000. Loss applicable to common stock for the
quarter ended September 30, 2001 was increased by a $481,000 cash dividend and a
$1,657,000 imputed dividend on our Series B preferred stock or $(.05) per share
combined.
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The following table sets forth, for the periods indicated, certain items in or
derived from our statements of income expressed as a percentage of revenues. The
indicated percentages reflect the fact that certain prior period balances have
been reclassified to conform to current period presentation.
<Table>
<Caption>
Fiscal Year Ended
June 30,
------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------
Revenues
Home video................................................ 69.8% 68.8% 61.9%
Coin-operated video....................................... 30.2 31.2 38.1
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
Cost of sales............................................... 72.4 62.1 61.3
----- ----- -----
Gross profit................................................ 27.6 37.9 38.7
Research and development expense............................ 36.6 20.3 14.9
Selling and marketing expense............................... 19.3 17.0 12.3
Administrative expense...................................... 14.2 6.6 5.2
Restructuring expense....................................... 4.1 0.3 0.8
Litigation and settlement expense........................... -- -- 3.1
----- ----- -----
Operating loss.............................................. (46.6) (6.3) 2.4
Interest income and other expense, net...................... 1.3 0.4 0.4
----- ----- -----
Income (loss) before tax.................................... (45.3) (5.9) 2.8
Credit (provision) for income taxes......................... 4.6 2.3 (1.1)
----- ----- -----
Net (loss) income........................................... (40.7)% (3.6)% 1.7%
===== ===== =====
</Table>
Fiscal 2001 compared with fiscal 2000
Revenues decreased $165,657,000 from $333,865,000 in fiscal 2000 to $168,208,000
in fiscal 2001. Coin-operated video revenues decreased from $104,174,000 to
$50,880,000. In June of fiscal 2001 Midway exited the coin-operated videogame
business. Accordingly, coin-operated revenues and related cost of sales will not
continue in future periods. The exit from the coin-operated business is expected
to potentially result in annual savings in research and development expense of
$7,500,000 and selling and marketing and administrative expense of $6,000,000.
The actual expense in each of these activities may not decrease as we continue
to increase the number of home videogame software development projects and as a
result of anticipated increased home videogames software unit sales precipitated
by the next generation of home videogame platforms.
REVENUES
Home videogame revenues decreased to $117,328,000 in fiscal 2001 from
$229,691,000 in fiscal 2000. The decrease is primarily due to our strategy for
the platform transition currently underway from 32- and 64-bit home videogames
consoles such as Sony PLAYSTATION and NINTENDO 64 to the next generation 128-bit
consoles including Sony's PLAYSTATION 2, Nintendo's GAMECUBE and Microsoft's
XBOX. The impact of the platform transition on our profitability has been
compounded by our transition strategy to shift product development resources
from older platforms to the development of products for the next generation
platforms. Several titles in development that could have softened the impact of
the transition on fiscal 2001 were cancelled in order to have more high quality
products available for the next generation consoles. Because it takes on average
18 to 24 months to develop a next generation title, Midway is not expected to
experience the full benefit of this strategy until calendar year 2002.
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GROSS PROFIT
Home videogame gross profit decreased $56,630,000 from $95,369,000, 41.5% of
related revenues, in fiscal 2000 to $38,739,000, 33.0% of related revenues, in
fiscal 2001 when approximately 76% of revenues were from games for the older
generation platforms that were either previously released or substantially in
development at the time Midway changed its strategy to only develop for the next
generation platforms. Many of these sales were made at lower than historical
selling prices due to the effects of the platform transition. The gross profit
percentage for fiscal 2001 is not believed to be indicative of gross profit
percentages from next generation videogames. It is expected that future gross
profit percentages will return to normal.
Coin-operated videogame gross profit was $7,666,000, 15.1% of related revenues,
in fiscal 2001 compared with $31,170,000, 30.0% of related revenues, in fiscal
2000. Midway has exited the coin-operated videogame business. It is expected
that the videogame development resources which were focused on the coin-operated
business that have been deployed to the home videogame business will generate
revenues with a higher gross profit margin than coin-operated videogames
previously contributed.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses decreased by $6,087,000 from $67,694,000 in
fiscal 2000 to $61,607,000 in fiscal 2001. The decrease was in part due to the
elimination of certain coin-operated functions that were not transferable to the
home videogame business. The development activity and expense for home
videogames has increased. This increased development activity represents
investments for future revenue to be generated from videogames for the next
generation platforms.
SELLING AND MARKETING EXPENSE
Selling and marketing expense decreased $24,238,000 from $56,725,000, 17.0% of
revenues, in fiscal 2000 to $32,487,000, 19.3% of revenues, in fiscal 2001.
Neither the fiscal 2001 nor the fiscal 2000 selling and marketing cost as a
percentage of revenues is representative of expected selling and marketing
expense as a percentage of revenue in the future. The low level of revenues in
fiscal 2001 resulted in a higher selling and marketing cost as a percentage of
sales as certain nonvariable components comprised a larger portion of total
cost. The fiscal 2000 selling and marketing cost as a percentage of revenues was
adversely affected by the decline in home videogames sales. The level of
advertising activity conducted by Midway in fiscal 2000 was based on a higher
expected level of sales that did not occur. Fiscal 2000 was also adversely
impacted by $2,853,000 for the write-down of certain unamortized personal
computer distribution rights acquired in 1998.
ADMINISTRATIVE EXPENSE
Administrative expense increased $1,824,000 or $859,000 when excluding the
additional $965,000 bad debt expense provided for as a result of the exit from
the coin-operated videogame business. Administrative expense excluding the
additional bad debt expense was $22,863,000, 13.6% of revenues, in fiscal 2001
compared with $22,004,000, 6.6% of revenues in fiscal 2000. The increase as a
percentage of revenues was due to lower revenues.
RESTRUCTURING EXPENSE
Restructuring expense in fiscal 2001 was $6,846,000 and related to the
downsizing and the subsequent exiting from the coin-operated business. The
restructuring expense for fiscal 2001 includes $2,049,000 for severance for 109
people, $3,070,000 for the disposal of fixed assets, $1,037,000 for lease and
other commitments and $690,000 for administrative clean-up activities and other
expense.
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OPERATING LOSS
Operating loss in fiscal 2001 was $78,363,000 compared with an operating loss of
$20,881,000 in fiscal 2000. Operating loss for fiscal 2001 increased due to the
low level of home videogame revenues with a reduced gross profit as a result of
the platform transition and continuing product development expenses from
developing games for the next generation of platforms. Fiscal 2001 also includes
restructuring charges, additional bad debt and inventory write-downs totaling
$12,547,000 relating to Midway's exiting from the coin-operated business. The
fiscal 2000 operating loss was also due to weaker than anticipated revenues that
manifested itself in the second half of the year in an abrupt fashion, which
required unusual charges of $25,979,000. For further discussion on restructuring
and unusual charges see notes 12 and 15 to the financial statements for the
fiscal year ended June 30, 2001 included elsewhere in this prospectus.
INCOME TAXES
The income tax credit was established at an effective rate of 10.2% for fiscal
2001. Midway was required under certain accounting interpretations to provide a
valuation allowance against the deferred tax asset resulting in the reduced
effective tax credit. Such valuation allowance on the deferred tax asset
generated from operating losses will be reversed into income in future periods
in which Midway returns to profitability. The credit for income taxes in fiscal
2000 was established at an effective rate of 38.5%.
NET LOSS
Loss applicable to common stock was $69,335,000 or ($1.84) per share for fiscal
2001 compared with a loss of $12,041,000 for fiscal 2000. The fiscal 2001 loss
includes a charge of approximately $15,695,000 to provide an allowance for
recorded potential future tax benefits resulting from tax operating losses,
excluding the restructuring charge. Fiscal 2001 also includes charges of
$12,527,000 before taxes for the downsizing and subsequent exiting from the
coin-operated videogame business. Excluding these charges the fiscal 2001 loss
would have been approximately $41,113,000 or ($1.09) per share. The fiscal 2000
loss includes after tax charges of $16,151,000 or $.43 per share for unusual
items that related primarily to the abrupt softening of the home videogame
business in fiscal 2000. See notes 12 and 15 to the financial statements
included elsewhere in this prospectus for further discussion of unusual charges
for fiscal 2001 and fiscal 2000.
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 VIDEOGAME REVENUES
Home videogame 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 videogame
revenues was primarily due to sales by Midway 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
videogames for all platforms in the second half of fiscal 2000. Home videogame
revenues in fiscal 2000 include a reduction to revenues of $7,175,000 for a
provision for abnormal retail price support.
HOME VIDEOGAME GROSS PROFIT
Home videogame gross profit increased $3,519,000 from $91,850,000, 42.2% of
related revenues, in fiscal 1999 to $95,369,000, 41.5% of related revenues, in
fiscal 2000. Home videogame cost of sales in fiscal 2000 includes a charge of
$7,028,000 for inventory write-downs and $4,004,000 for write-off
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of software development costs. Home videogame gross profit percentage decreased
because of the reduction to revenues and the inventory write-down mentioned
above.
COIN-OPERATED VIDEOGAME REVENUES
Coin-operated videogame 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 videogame 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 condition
is primarily due to reduced player interest in coin-operated games because of
the increase in entertainment alternatives available to potential videogame
players.
COIN-OPERATED VIDEOGAME GROSS PROFIT
Coin-operated videogame 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 videogame 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 EXPENSE
Research and development expenses increased $15,267,000 or 29.1% from
$52,427,000, 14.9% of revenues, in fiscal 1999 to $67,694,000, 20.3% of
revenues, in fiscal 2000. The increased research and development expense is
primarily due to the development of additional home videogames for the new
platforms being introduced in the future by the platform manufacturers. During
the fourth quarter of fiscal 2000, $1,594,000 was expensed due to the
discontinuance of certain home videogames in development.
SELLING EXPENSE
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 certain unamortized personal computer
distribution rights acquired in 1998.
ADMINISTRATIVE EXPENSE
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
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
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 15 to the
financial statements included elsewhere in this prospectus 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.
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INCOME TAXES
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
Net loss was $12,041,000 or $(.32) per share in fiscal 2000. Net income was
$6,147,000 or $.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. For unusual items see note 15 to the financial
statements included elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended September 30, 2001, cash used by operating,
investing and financing activities was $14,301,000 compared with cash used of
$4,924,000 in the three months ended September 30, 2000.
Cash used by operating activities before changes in operating assets and
liabilities was $1,968,000 in the three months ended September 30, 2001 compared
to cash used of $11,408,000 in the three months ended September 30, 2000. Such
cash usage for the three months ended September 30, 2001 was lower than the
prior year's period because of a smaller net loss. Part of the prior year's net
loss was reduced by a deferred income tax credit.
The changes in the operating assets and liabilities, as shown in our condensed
statements of cash flows included elsewhere in this prospectus, resulted in a
cash outflow of $16,888,000 in the three months ended September 30, 2001 and a
cash inflow of $9,876,000 for the three months ended September 30, 2000. The
cash outflow for the three months ended September 30, 2001 was primarily due to
the funding of increased net receivables and increased capitalized software
development costs, offset in part by increased payables and accruals. The cash
inflow for the three months ended September 30, 2000 was primarily due to a
refund of income tax coupled with lower inventories and increased current
liabilities offset in part by increased account receivables from their June 30,
2000 balances.
Cash used by operating activities before changes in operating assets and
liabilities was $51,917,000 in fiscal 2001 compared to cash provided of
$24,157,000 in fiscal 2000. The fiscal 2001 cash used by operating activities
before changes in operating assets and liabilities was primarily due to the net
loss. Although fiscal 2000 had a net loss of $12,041,000, cash was provided by
operating activities before changes in operating assets and liabilities because
of the addback of the large non-cash items.
The changes in the operating assets and liabilities, as shown in our
consolidated statements of cash flows included elsewhere in this prospectus,
resulted in a cash inflow of $49,306,000 in fiscal 2001 and an outflow of
$24,814,000 in fiscal 2000. The fiscal 2001 inflow from changes in operating
assets and liabilities was primarily due to reduction in inventories and income
tax receivable. The fiscal 2000 outflow was primarily due to reduced accounts
payable and accruals balances and increased prepaid income taxes.
Cash used for the purchase of property and equipment during the three months
ended September 30, 2001 was $1,891,000 compared with $3,375,000 for the three
months ended September 30, 2000.
Cash used for investing activities in fiscal 2001 included $10,444,000 for the
purchase of property and equipment and $21,000,000 for the net change of
short-term investments. Cash used for investing activities in fiscal 2000 was
for the purchase of property and equipment of $11,273,000.
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The net change in short-term investments reduced cash by $7,000,000 in the three
months ended September 30, 2001. The change is due to temporarily investing cash
in certain investments that provide a high degree of liquidity but are not
considered cash equivalents.
Cash provided by financing activities in fiscal 2001 was $40,302,000 compared
with cash used by financing activities of $5,595,000 in fiscal 2000. In fiscal
2001, Midway sold Series B redeemable convertible preferred stock and warrants
for $39,400,000, net of cash issuance cost. Cash received in fiscal 2001 from
the exercise of common stock options was $1,086,000. Cash received in fiscal
2000 from the exercise of common stock options was $1,125,000. In fiscal 2000,
$6,720,000 of cash was used in the purchase of treasury shares.
Midway received proceeds of $1,000,000 and $23,000 for the issuance of 124,983
and 2,922 shares of Midway's common stock from the exercise of common stock
options during the three months ended September 30, 2001 and September 30, 2000,
respectively.
During the three months ended September 30, 2001, Midway received net proceeds
of $12,425,000 for the issuance of 1,312.5 shares of additional Series B
preferred stock. For additional information, see note 7 to the condensed
consolidated financial statements for the three months ended September 30, 2001
included elsewhere in this prospectus.
The home videogame 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, one platform manufacturer that
manufactures home videogames for Midway requires letters of credit for the full
purchase price at the time a purchase order is accepted.
Midway has established a line of credit that provides for borrowings and letters
of credit with a $15,000,000 availability until July 1, 2002, $40,000,000
thereafter until January 31, 2003 and then $15,000,000 until the March 2003
maturity. The agreement requires, among other things, that Midway maintains a
minimum level of stockholders' equity and a specified ratio of accounts
receivable to amounts outstanding under the line of credit and prohibits the
payment of dividends on common stock. Substantially all the assets of Midway are
pledged as collateral under the credit agreement. There were no borrowings under
the credit line, and $672,000 of letters of credit were outstanding, at
September 30, 2001.
Management believes that cash and cash equivalents, short-term investments, cash
flow from operations and amounts available under the line of credit will be
adequate to fund the anticipated levels of inventories, accounts receivable and
commitments required in the operation of the business and Midway's other
presently anticipated needs for the next twelve months.
IMPACT OF INFLATION
During the past three years, the level of inflation affecting Midway has been
relatively low. Our ability 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 our products in the market place.
SEASONALITY
The home videogame business is highly seasonal and historically has resulted in
higher revenues and operating profit in the first and second quarters of the
June 30 fiscal year due to customer purchases preceding the year-end retail
holiday selling season.
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Business
We are a leading developer and publisher of interactive entertainment software.
Midway and our predecessors have been in the business of creating videogames for
more than 20 years and have published over 400 titles in that time. We have
published videogames for every major platform, including Sony's PLAYSTATION, the
NINTENDO 64, SNES, GAME BOY, GAME BOY COLOR, Sega's DREAMCAST, SATURN and
GENESIS, and coin-operated arcade games. We currently develop and publish games
for play on all major next generation home videogame consoles and handheld game
platforms, including Sony's PLAYSTATION 2, Microsoft's XBOX and Nintendo's
GAMECUBE and GAME BOY ADVANCE. Our titles include many of the most popular game
genres such as action, adventure, driving, extreme sports, fighting,
role-playing, sports and strategy.
Over the years, we have released many successful videogames, including MORTAL
KOMBAT, a line of games that has sold over 19 million copies, SPYHUNTER, NHL
HITZ 20-02, READY 2 RUMBLE BOXING, HYDRO THUNDER, SAN FRANCISCO RUSH EXTREME
RACING, NFL BLITZ, AREA 51, CRUIS'N USA, NBA JAM, RAMPAGE, GAUNTLET, JOUST,
DEFENDER, CENTIPEDE, ASTEROIDS and PONG. Although coin-operated games were a
traditional strength of ours, in June 2001 we decided to exit the coin-operated
arcade games business because of the contraction of the arcade game market. We
now focus entirely on developing and publishing new titles for the next
generation videogame platforms because we believe that these platforms will
create the strongest demand for videogames in the future.
INDUSTRY OVERVIEW
The interactive entertainment industry is comprised of game hardware
manufacturers and videogame software publishers. Game hardware platforms include
home game consoles, self-contained handheld platforms and personal computers.
Historically, a new generation of more technologically advanced game consoles
has reached the market every four to five years. Each new generation, or cycle,
of hardware has resulted in larger numbers of consoles being purchased, referred
to in the industry as a larger "installed base." At the beginning of each cycle,
during the period of rapid growth in the installed base of the new generation of
consoles, the interactive entertainment software industry has experienced rapid
periods of expansion, as buyers purchase videogames for their new consoles.
The following table illustrates the evolution of the principal platforms of both
console and handheld devices since 1989.
<Table>
<Caption>
Manufacturer Product Name Year of U.S. Introduction Technology
- ----------------------------------------------------------------------------------------------
HOME CONSOLES:
Sega Genesis 1989 16-bit
Nintendo SNES 1991 16-bit
Sega Saturn 1995 32-bit
Sony PlayStation 1995 32-bit
Nintendo Nintendo 64 1996 64-bit
Sega Dreamcast 1999 128-bit
Sony PlayStation 2 2000 128-bit
Microsoft Xbox 2001 128-bit
Nintendo GameCube 2001 128-bit
HANDHELD PLATFORMS:
Nintendo Game Boy 1989 8-bit
Nintendo Game Boy Color 1998 8-bit
Nintendo Game Boy Advance 2001 32-bit
</Table>
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The industry is currently completing a transition from 32- and 64-bit home game
consoles to the next generation 128-bit consoles, with the release of Sony's
PLAYSTATION 2 in October 2000 and the release of the Nintendo GAMECUBE and
Microsoft XBOX in November 2001. Similarly, the 8-bit GAME BOY COLOR handheld
platform, introduced in 1998, is now being replaced by the 32-bit GAME BOY
ADVANCE, introduced in June 2001.
The demand for these new platforms has been significant. For example, Sony has
shipped approximately 20 million PLAYSTATION 2 units as of September 30, 2001.
We believe that the popularity of the new platforms is due to their ability to
offer one or more of the following features:
- - more realistic graphics and game play through 128-bit and 32-bit technology
processing speeds, more memory and better graphical resolution;
- - backwards compatibility, or the ability to play the respective platforms'
previous generation of games;
- - broad entertainment capabilities, including Internet access; and
- - the ability to watch DVD movies.
As the installed base of next generation platforms grows, we expect that the
demand for game software for these platforms will continue to increase.
Forrester, an independent market research firm, projects that, in the U.S.
alone, console manufacturers and software publishers will generate
$29.4 billion in revenues in 2005. Forrester also projects that $12.8 billion of
those revenues will be generated by videogame software publishers.
Interactive entertainment software has increasingly become a mainstream
entertainment choice for a maturing, more technologically sophisticated
audience. Consumer demographics for interactive entertainment software have
expanded in recent years to include segments of the market not previously
interested in videogames. According to Interactive Digital Software Association,
57% of all Americans who play videogames most frequently are over the age of 18.
International Data Corporation, or IDC, estimates that the household penetration
rate for videogame consoles in the U.S. is approximately 42%.
Many of the 128-bit hardware platforms, such as Sony's PLAYSTATION 2 and
Microsoft's XBOX, utilize a DVD software format and have the potential to serve
as home entertainment centers by doubling as a player for DVD movies and compact
discs. The ability of the next generation game consoles to serve as
multi-purpose entertainment devices with DVD and Internet capabilities should
have crossover appeal to a segment of the market that might not otherwise be
inclined to purchase game consoles.
OUR BUSINESS STRATEGY
We seek to enhance our operating performance by increasing the number of high
quality videogames we make available for the next generation platforms.
Highlights of our business strategy include:
DEVELOP GAMES FOR MULTIPLE NEXT GENERATION GAME PLATFORMS. We are focusing on
developing games for play on all the next generation platforms. The processing
power of the next generation platforms allows for faster, more complex graphics
and superior game design capabilities compared to the prior generation
platforms. We have shifted our development teams from creating games for prior
generation platforms to concentrate on developing superior quality games for
these next generation videogame platforms. As the installed base of the next
generation platforms grows, we expect increasing sales of our games.
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The following table lists our new games scheduled for release through
December 31, 2002 for next generation platforms:
<Table>
<Caption>
Title Category Next Generation Platform(s) Release Quarter Ending
- ----------------------------------------------------------------------------------------------------
MIDWAY'S GREATEST ARCADE HITS Classic Game Boy Advance December 2001
ARCTIC THUNDER Driving Xbox December 2001
SHADOW HEARTS Role-playing PlayStation 2 December 2001
NHL HITZ 20-02 Sports Xbox; GameCube December 2001
RAMPAGE PUZZLE ATTACK Puzzle Game Boy Advance December 2001
CRUIS'N VELOCITY Driving Game Boy Advance December 2001
ULTIMATE MORTAL KOMBAT Fighting Game Boy Advance December 2001
NFL BLITZ 20-02 Sports PlayStation 2; Xbox; GameCube March 2002
MLB SLUGFEST Sports PlayStation 2 March 2002
SPYHUNTER Action Xbox; GameCube March 2002
GRAVITY GAMES BMX Extreme PlayStation 2; Xbox; GameCube June 2002
sports
RED CARD SOCCER Sports PlayStation 2; Xbox; GameCube June 2002
FIREBLADE Action PlayStation 2 June 2002
LEGION: LEGEND OF EXCALIBUR Strategy PlayStation 2 June 2002
MLB SLUGFEST Sports Xbox; GameCube June 2002
GAUNTLET DARK LEGACY Action GameCube June 2002
MORTAL KOMBAT 5 Fighting PlayStation 2; Xbox; September 2002
GameCube; Game Boy Advance
NFL BLITZ 20-03 Sports PlayStation 2; Xbox; September 2002
GameCube; Game Boy Advance
NHL HITZ 20-03 Sports PlayStation 2; Xbox; GameCube September 2002
LEGION: LEGEND OF EXCALIBUR Strategy Xbox September 2002
NBA BASKETBALL Sports PlayStation 2; Xbox; GameCube December 2002
DEFENDER Action PlayStation 2; Xbox; GameCube December 2002
FREAKY FLIERS Adventure PlayStation 2; Xbox; GameCube December 2002
DR. MUTO Adventure PlayStation 2; GameCube December 2002
</Table>
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LEVERAGE OUR PROVEN FRANCHISES AND LIBRARY VALUE. Many of our games were
best-sellers and the most-frequently played games in their time. We continue to
hold these properties as valuable assets that may be leveraged in the future.
The popularity of many of our games has enabled us to successfully market
sequels, including the following:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
Title of Classic Original Release Date Sequel Title(s)
- -----------------------------------------------------------------------------------------------
SPY HUNTER 1983 - SPYHUNTER
- -----------------------------------------------------------------------------------------------
GAUNTLET 1985 - GAUNTLET LEGENDS
- GAUNTLET DARK LEGACY
- -----------------------------------------------------------------------------------------------
RAMPAGE 1986 - RAMPAGE WORLD TOUR
- RAMPAGE 2 UNIVERSAL TOUR
- RAMPAGE THROUGH TIME
- RAMPAGE PUZZLE ATTACK
- -----------------------------------------------------------------------------------------------
MORTAL KOMBAT 1992 - MORTAL KOMBAT II
- MORTAL KOMBAT 3
- ULTIMATE MORTAL KOMBAT 3
- MORTAL KOMBAT 4
- MORTAL KOMBAT TRILOGY
- MORTAL KOMBAT MYTHOLOGIES: SUB-ZERO
- MORTAL KOMBAT GOLD
- MORTAL KOMBAT SPECIAL FORCES
- -----------------------------------------------------------------------------------------------
NBA JAM 1993 - NBA HANGTIME
- NBA SHOWTIME: NBA ON NBC
- NBA HOOPZ
- -----------------------------------------------------------------------------------------------
CRUIS'N USA 1994 - CRUIS'N WORLD
- CRUIS'N EXOTICA
- CRUIS'N VELOCITY
- -----------------------------------------------------------------------------------------------
SAN FRANCISCO RUSH 1996 - RUSH 2: EXTREME RACING USA
EXTREME RACING - SAN FRANCISCO RUSH 2049
- -----------------------------------------------------------------------------------------------
NFL BLITZ 1997 - NFL BLITZ 2000
- NFL BLITZ 2001
- NFL BLITZ 20-02
- -----------------------------------------------------------------------------------------------
READY 2 RUMBLE BOXING 1999 - READY 2 RUMBLE BOXING: ROUND 2
- -----------------------------------------------------------------------------------------------
</Table>
Our most successful and profitable home videogame franchise has been MORTAL
KOMBAT with over 19 million units sold. We have also licensed two television and
two film adaptations of MORTAL KOMBAT and granted merchandising licenses for
toys, clothing, comic books, strategy guides and other product lines.
Additionally, we plan to release a new sequel in the MORTAL KOMBAT series,
MORTAL KOMBAT 5, in the third quarter of 2002. We have also leveraged our large
library of "hit" titles for home play by releasing "arcade classics" collections
and entering into syndication agreements. We have released 12 collections of
arcade classic games for home consoles and nine arcade classic products for
handheld platforms. We have entered into several syndication agreements to
license classic videogames for play on a variety of gaming mediums, including
websites, handheld personal digital assistants, cell phones and interactive
television. We believe that we can continue to leverage our large library of
games to produce additional successful titles in the future.
CONTINUE TO EXPAND OUR SPORTS CATEGORY. We have enjoyed strong sales from our
line of sports games. Our titles in this popular category, such as NHL HITZ, NFL
BLITZ, NBA HOOPZ, and READY 2 RUMBLE BOXING, are characterized by extreme game
play and the superhuman abilities of the characters in these games, which we
refer to as "over-the-top" sports entertainment. We believe our "over the top"
style
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makes these games popular among sports videogame fans. We are developing similar
"over-the-top" games for other sports, including baseball and soccer, for
anticipated release in 2002.
STRATEGIC MANAGEMENT OF OUR IN-HOUSE DEVELOPMENT GROUP. We seek to enhance and
retain our large in-house development staff, employing approximately 440
individuals who work in teams to create our games. Our creative teams have a
long history of developing successful titles. We believe that employing in-house
developers provides us with the following advantages over competitors that rely
more heavily on third-party developers:
- - we have more control over product quality, scheduling and costs, enhancing
our ability to release titles on time;
- - our in-house development teams are more likely to collaborate with each
other, sharing development techniques and useful experience to form a strong
collective and creative environment;
- - we can focus their efforts quickly to meet the needs of key projects;
- - we can use the same producer for both an original game and its sequels; and
- - we are not subject to the competing needs of other publishers, which is a
particular benefit prior to the crucial year-end holiday selling season.
EXPAND INTERNATIONAL SALES. We believe that we can further expand our presence
in foreign markets. In fiscal 2000, we opened an office in the United Kingdom to
conduct sales of our products in Europe and Australia. In addition, we signed an
agreement giving Koei Net Co., Ltd. the exclusive right to distribute selected
home videogames in Japan and several other east Asian countries. We expect that
Koei will shortly begin to distribute READY 2 RUMBLE BOXING: ROUND 2 for the
PLAYSTATION 2 and GAME BOY ADVANCE and GAUNTLET DARK LEGACY and SPYHUNTER for
the PLAYSTATION 2. To further expand our international presence, we are
developing titles that are customized for these foreign markets.
PRODUCTS
We currently sell games for all major videogame platforms, including the next
generation PLAYSTATION 2, XBOX, GAMECUBE and GAME BOY ADVANCE platforms, as well
as the DREAMCAST, PLAYSTATION, NINTENDO 64 and GAME BOY COLOR.
During the quarter ended September 30, 2001, we released the following home
videogames:
<Table>
<Caption>
Game Title Category Platform
- --------------------------------------------------------------------------------------------
SPYHUNTER Action PlayStation 2
NHL HITZ 20-02 Sports PlayStation 2
ARCTIC THUNDER Driving PlayStation 2
NFL BLITZ 20-02 Sports Game Boy Advance
</Table>
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During fiscal 2001, we released the following home videogames:
<Table>
<Caption>
Game Title Category Platform(s)
- --------------------------------------------------------------------------------------------
ARMY MEN SARGE'S HEROES Action Dreamcast
CART FURY Driving PlayStation 2
CRUIS'N EXOTICA Driving Nintendo 64; Game Boy Color
DESTRUCTION DERBY RAW Driving PlayStation
FORMULA ONE 2000 Driving PlayStation
GAUNTLET DARK LEGACY Action PlayStation 2
GREATEST ARCADE HITS VOL. 1 Classic Nintendo 64
MUPPET MONSTER ADVENTURE Action PlayStation
MUPPET RACE MANIA Driving PlayStation
NBA HOOPZ Sports PlayStation 2; Dreamcast; PlayStation;
Game Boy Color
NFL BLITZ 2001 Sports Dreamcast; Nintendo 64; PlayStation;
Game Boy Color
READY 2 RUMBLE BOXING: ROUND 2 Sports PlayStation 2; Dreamcast; Nintendo 64;
PlayStation; Game Boy Advance
ROLLCAGE STAGE 2 Driving PlayStation
SAN FRANCISCO RUSH 2049 Driving Dreamcast; Nintendo 64; Game Boy Color
STUNT RACER 3000 Driving Nintendo 64
TEAM BUDDIES Strategy PlayStation
</Table>
During fiscal 2000, we released the following home videogames:
<Table>
<Caption>
Game Title Category Platform(s)
- --------------------------------------------------------------------------------------------
ARCADE PARTY PAK Classic PlayStation
BILLY BOB'S HUNTIN' N FISHIN' Action Game Boy Color
COLONY WARS III: RED SUN Action PlayStation
4 WHEEL THUNDER Driving Dreamcast
GAUNTLET LEGENDS Action Dreamcast; Nintendo 64; PlayStation
HYDRO THUNDER Driving Dreamcast; Nintendo 64; PlayStation
JACKIE CHAN STUNTMASTER Action PlayStation
KURT WARNER'S ARENA FOOTBALL UNLEASHED Sports PlayStation
MARBLE MADNESS Classic Game Boy Color
MIDWAY'S GREATEST ARCADE HITS--VOL. 1 Classic Dreamcast
MORTAL KOMBAT GOLD Fighting Dreamcast
MORTAL KOMBAT SPECIAL FORCES Action PlayStation
NBA SHOWTIME: NBA ON NBC Sports Dreamcast; Nintendo 64; PlayStation;
Game Boy Color
NFL BLITZ 2000 Sports Dreamcast; Nintendo 64; PlayStation;
Game Boy Color
PAPERBOY Action Nintendo 64
RAMPAGE 2: UNIVERSAL TOUR Action Game Boy Color
RAMPAGE THROUGH TIME Action PlayStation
RAMPART Classic Game Boy Color
READY 2 RUMBLE BOXING Sports Dreamcast; Nintendo 64; PlayStation;
Game Boy Color
TOOBIN' Classic Game Boy Color
</Table>
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PRODUCT DEVELOPMENT
We seek to develop videogames that are action-packed and exciting, and which
provide sufficient challenge at various levels of proficiency to encourage
repeated play. Our game development personnel are organized in teams. The
producers manage the work of the other team members and are responsible for the
overall design of the game. Each concept is reviewed initially for technical
feasibility and evaluated relative to several factors, including whether the
proposed product fits within our general strategy and profitability objectives.
Our management team meets regularly to formally review and evaluate the progress
and quality of each title in development.
The game design teams operate in a studio environment that encourages
creativity, productivity and cooperation among design teams. We believe that
this environment, together with a compensation structure that rewards design
teams for the success of their games, enables us to attract and retain game
designers that are among the best in the industry.
The designers are supported by state-of-the-art design technology that allows
for the creation of cutting-edge, three-dimensional graphics and advanced audio
effects. We have developed and maintain a substantial library of proprietary
software and development tools. Use of these tools streamlines the development
process, allowing members of the development teams to focus their efforts on the
play and simulation aspects of the product under development. We have also
developed software tools to expedite conversion of software from one hardware
format to another and to provide sound and special visual effects. We
continually create new software and development tools and refine and upgrade our
existing tools.
Development of a next generation videogame generally takes 18 to 24 months or
longer and typically costs at least $2.0 million and, depending on the specific
software requirements, may cost up to $5.0 million. Because of the increasingly
complex technology and software involved, both the time and cost to develop
games have increased during the past few years. We believe that we can generate
significant incremental revenue from our games by introducing them on additional
platforms at a much lower cost than the development cost for introducing the
game on the first platform. Converting an existing next generation game from one
platform to another is expected to take three to 12 months, which may overlap
with the development period of the original version of the game, and to cost at
least $500,000. We use both our own personnel and independent third parties to
develop and convert videogames.
We are generally obligated to submit games to the platform manufacturers for
approval prior to publishing a game for their platforms. Additionally, prior to
release, each product undergoes careful quality assurance testing which involves
technical review of each component of the final product and testing on the
applicable platforms.
We incurred research and development expenses of $61.6 million in fiscal 2001
compared to $67.7 million in fiscal 2000 and $52.4 million in fiscal 1999.
During the three months ended September 30, 2001, we charged to expense $5.9
million of research and development.
From time to time, we have purchased distribution rights to some games under
development by third parties for various home videogame platforms. Some of these
games are sequels to games which have previously been successfully released.
From time to time we may also purchase the right to adapt and market games owned
by third parties from one platform to another, where we believe that success on
the original platform suggests a probability of success on the other platform.
We endeavor to comply with the rules established by a domestic ratings board
voluntarily established by the videogame industry and some foreign countries'
ratings boards, and we label our products with
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these ratings. We believe that ratings labels as to the violence contained in
videogames will not have an adverse effect upon us so long as ratings are
consistently applied throughout the industry.
MARKETING AND DISTRIBUTION
We market videogames for play on home and handheld platforms under the Midway
trademark. We market through our internal sales staff and through independent
sales representatives to approximately 14,000 stores, including:
- - mass merchandisers;
- - foreign, national and regional retailers;
- - discount store chains;
- - video rental retailers; and
- - entertainment software distributors and re-sellers.
It is customary for the sales representatives and distributors of our home games
who are assigned specific customers to also distribute games produced by other
manufacturers. Distribution channels are dominated by a select group of
companies, and a publisher's access to retail shelf space is a significant
competitive factor. Our principal customers for home videogames are mass
merchandisers such as Toys "R" Us, Wal-Mart and Target. Sales to our largest
customer, Wal-Mart, represented 15.9% of our home videogame revenues and 11.1%
of our total revenues in fiscal 2001. Sales to our second-largest customer, Toys
"R" Us, represented 14.6% of our home videogame revenues and 10.2% of our total
revenues in fiscal 2001. The percentage of our total revenues represented by
these customers is expected to increase because we have discontinued our
coin-operated videogame products. Consequently, substantially all of our
revenues will be from sales of videogames for home and handheld platforms. We
warrant our home videogames for a period of 90 days.
Our distribution efforts are supported by marketing programs, which emphasize
product awareness, brand recognition, dealer merchandising opportunities and
celebrity endorsements. Our marketing activities include television and print
advertising, retail store promotions, direct mailings, user support programs and
our web site. We also utilize a store-oriented marketing approach, which
includes point-of-purchase promotions, use of display cards and other forms of
merchandise displays. We provide technical support for our home products through
our customer support department, which is staffed by personnel trained to
respond to customer inquiries.
Our office in the United Kingdom sells both through distributors and directly to
retailers in Europe and Australia. In addition, pursuant to our distribution
agreement with Koei Net Co., Ltd., Koei has the exclusive right to distribute
selected console games in Japan and several other east Asian countries. We
expect that Koei will shortly begin to distribute READY 2 RUMBLE BOXING:
ROUND 2 for the PLAYSTATION 2 and GAME BOY ADVANCE and GAUNTLET DARK LEGACY and
SPYHUNTER for the PLAYSTATION 2.
MANUFACTURING
The manufacturers of the home and handheld game platforms generally manufacture
our home videogames for us, either themselves or through their designees, as
required by the applicable platform license. Platform manufacturers typically
retain the right to approve the games to be released under manufacturing and
licensing arrangements. The platform manufacturers charge us a fixed amount for
each software disc or cartridge that they manufacture or a royalty if third
parties perform the
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manufacturing. This charge generally includes a manufacturing, printing and
packaging fee, as well as a royalty for the use of the manufacturer's name and
proprietary information and technology. The platform manufacturer may change its
fee amount without our consent. We are responsible in most cases for resolving,
at our expense, any applicable warranty or repair claim. To date, we have not
experienced any material costs from warranty or repair claims.
Production is based upon estimated demand for each specific title. The level of
the inventory of finished goods depends upon market demand during the life of a
specific game title. At the time a product is approved for manufacturing, we
must generally provide the platform manufacturer with a purchase order for that
product and, for one platform manufacturer, an irrevocable letter of credit for
100% of the purchase price. Most of our products are manufactured for us on an
"as is" and "where is" basis, and delivery is at our expense and risk. Initial
orders generally require 15 to 45 days to manufacture depending on the platform.
Reorders of disc-based products generally require only seven to 14 days to
manufacture, while reorders of cartridge-based products require approximately 30
to 40 days to manufacture. Shipping of orders requires an additional three to
ten days, depending on the mode of transport and location of the manufacturer.
Only the NINTENDO 64, GAME BOY COLOR and GAME BOY ADVANCE use cartridges. The
next generation home consoles are all disc-based.
We lease a warehouse facility in Dallas, Texas, from which we distribute home
videogames to North and South America. Some products are imported into the
United States, inspected by customs agents and transferred to our warehouse
facility, where they are unpacked and shipped to our customers. At times, some
components of these products are assembled into finished products for us by
third parties prior to their transfer to our warehouse facility. We participate
in the electronic data interchange program maintained by most of our large
customers for home games. We generally fill re-orders from inventory within two
days. As a result, home videogames traditionally have no backlog of orders.
We accept product returns for defective products. In addition, sometimes we
provide replacements, markdowns or other credits on varying terms to customers
holding slow-moving inventory of our home videogames. At the time of product
shipment, we establish reserves, including reserves under our policies for price
protection and returns of defective products, which estimate the potential for
future returns of products based on historical return rates, seasonality of
sales, retailer inventories of our products and other factors.
LICENSES AND INTELLECTUAL PROPERTY
PLATFORM LICENSES. The major platform manufacturers require that publishers
obtain a license from them to publish games for play on their platforms. We have
non-exclusive licenses from Nintendo, Sony, Microsoft and Sega under which we
develop and market software products for their current platforms. Each platform
manufacturer requires that the software and a prototype of each title, together
with all related artwork and documentation, be submitted for its pre-publication
approval. This approval is generally discretionary.
Upon expiration of a platform license, we usually have a limited period to sell
off our inventory subject to that license, after which time any remaining
inventory is generally required to be destroyed. Nintendo, Microsoft, Sony and
Sega are the largest publishers of software for use on their respective systems,
and they compete directly with us.
INTELLECTUAL PROPERTY LICENSES. While we develop original proprietary games,
some of our games are licensed from third party developers or based on
trademarks and other rights and properties owned by third parties, such as the
National Basketball Association, National Hockey League and the National
Football League or their respective players' associations. Typically, we are
obligated to make minimum
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guaranteed royalty payments over the term of these licenses and to advance
payment against these guarantees. License agreements generally extend for a term
of two to three years, are terminable in the event of a material breach by us,
including failure to pay any amounts owing to the licensor in a timely manner,
and other events. Some licenses are limited to specific territories or
platforms. Each license typically provides that the licensor retains the right
to leverage the licensed property for all other purposes, including the right to
license the property for use with other products and, in some cases, software
for other interactive hardware platforms.
PATENT, TRADEMARK AND COPYRIGHT PROTECTION. Each software title may embody a
number of separately protected intellectual property rights, including:
- - trademarks associated with elements of the game, such as team logos;
- - trademarks under which the game is marketed;
- - the copyrights for the game software, including the game's audiovisual
elements; and
- - the patents for inventions in the game software.
We have over 1,000 trademark registrations worldwide for our games, and we apply
for trademark protection for all of our game titles, other than those licensed
from third parties. Notwithstanding our patent, copyright and trademark
protection, preventing and/or bringing infringement actions against unauthorized
duplication of software products is difficult and costly.
Each home game also includes patents, copyrights and trademarks licensed from
the platform manufacturer. Elements of some of our titles are owned by third
parties and licensed to us. We rely on these third parties for protection of our
licensed intellectual property rights. Their failure to adequately protect these
rights could have a material adverse effect on us.
The platform manufacturers incorporate security devices in the games that they
manufacture for us, and also in their platforms, which seek to prevent
unlicensed software products from being played on their platforms. We rely upon
each platform manufacturer for protection of this intellectual property from
infringement. We bear the risk of claims of infringement brought by third
parties arising from the sale of software with respect to intellectual property
produced by us or supplied by third party developers and embodied in our
software products. Our agreements with these outside developers generally
require the developers to indemnify us for costs and damages incurred in
connection with these claims. These software developers, however, may not have
sufficient resources to indemnify us for any claims that may arise.
COMPETITION
The interactive entertainment software business is highly competitive. It is
characterized by the continuous introduction of new titles and the development
of new technologies. Our competitors vary in size from very small companies with
limited resources to very large corporations with greater financial, marketing
and product development resources than ours.
We compete with Nintendo, Microsoft and Sony, who publish software for their
respective systems. Although Sega announced that it will no longer manufacture
videogame platforms, it will continue to be a major videogame software
publisher. We also compete with numerous other companies licensed by the
platform manufacturers to develop software products for use with their
respective systems. These competitors include Acclaim, Activision, Capcom,
Eidos, Electronic Arts, Infogrames, Konami, Lucas Arts, Namco, Take-Two
Interactive, THQ, 3DO, and Ubi Soft, among others. We face
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additional competition from the entry of new companies, including large
diversified entertainment companies, into our market.
EMPLOYEES
As of November 23, 2001, we had approximately 570 employees, approximately 440
of whom are members of our development staff. We believe that our relations with
our employees are satisfactory.
FACILITIES
In addition to our principal offices located at 2704 West Roscoe Street,
Chicago, Illinois, we have:
- - design and development offices in Milpitas and San Diego, California;
- - warehouse and distribution facilities in Dallas, Texas; and
- - sales and marketing offices in Corsicana, Texas, Milpitas, California and
London, England.
LEGAL PROCEEDINGS
On April 12, 1999, a wrongful death action was commenced against us and other
companies by the administrators for three children who were murdered in 1997 by
Michael Carneal at the Heath High School in McCracken County, Kentucky. The
action, entitled JAMES, ET AL. V. MEOW MEDIA, ET AL. was brought in the U.S.
District Court for the Western District of Kentucky, Paducah Division, Civil
Action No. 5:99CV96-J against 25 defendants. The defendants included 18
companies in the videogame business, among others. The complaint alleged, with
respect to Midway and other videogame companies, that Carneal, then 14 years
old, was influenced by the allegedly violent content of unspecified videogames
and that the videogame manufacturers and suppliers were liable for Carneal's
conduct. The complaint sought $10 million in compensatory damages with respect
to each of the three children and $100 million in punitive damages.
The action was dismissed against all defendants by order entered April 6, 2000.
The plaintiffs have appealed this order to the United States Court of Appeals
for the Sixth Circuit. Briefs have been submitted by all parties on the appeal.
A hearing has been scheduled before the Sixth Circuit on November 28, 2001. We
intend to defend this action vigorously.
On April 19, 2001, a class action was commenced against us and other companies
by individuals representing the victims (parents, teachers, students living,
injured and deceased) of the shootings by Eric Harris and Dyland Klebold on
April 20, 1999 at Columbine High School in Jefferson County, Colorado. The
action, entitled SANDERS, ET AL. V. MEOW MEDIA, ET AL., was brought in the U.S.
District Court for the District of Colorado, Civil Action No. 01--0728 against
25 defendants. The defendants include 18 companies in the videogame business,
among others. The complaint alleges, with respect to Midway and other videogame
companies, that Harris and Klebold, then 17 years old, were influenced by the
allegedly violent content of unspecified videogames and that the videogame
manufacturers and suppliers are liable for Harris' and Klebold's conduct. The
complaint seeks up to $10 million in compensatory damages for each of the
members of the plaintiff class and $5 billion in punitive damages and relief
"necessary to correct the abuses of the violent videogame industry & its
marketing of these wares to children." The court has stayed all discovery
pending the briefing of motions to dismiss the complaint. Plaintiffs have timely
responded to the motions to dismiss. Reply briefs are being filed by the
defendants. Our reply brief was timely filed. The court has not scheduled a
hearing on the various motions filed by the defendants. We intend to defend this
action vigorously.
We currently and from time to time are involved in other litigation incidental
to the conduct of our business, none of which, in our opinion, is likely to have
a material adverse effect on us.
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40
<Page>
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Management
Below is information about our officers and directors. Neil D. Nicastro is the
son of Louis J. Nicastro; otherwise, there is no family relationship between any
of our directors or executive officers. Directors are elected for staggered
three year terms to succeed those directors whose terms expire.
<Table>
<Caption>
Name Age Position(s) with Midway
- ------------------------------------------------------------------------------------------------------------
Neil D. Nicastro.................... 45 Chairman of the Board, President, Chief Executive Officer
and Chief Operating Officer
Kenneth J. Fedesna.................. 52 Executive Vice President--Product Development and Director
Thomas E. Powell.................... 40 Executive Vice President, Chief Financial Officer and
Treasurer
Deborah K. Fulton................... 38 Vice President, Secretary and General Counsel
Harold H. Bach, Jr.................. 69 Director
William C. Bartholomay.............. 73 Director
William E. McKenna.................. 82 Director
Norman J. Menell.................... 70 Director
Louis J. Nicastro................... 73 Director
Harvey Reich........................ 72 Director
Ira S. Sheinfeld.................... 63 Director
Gerald O. Sweeney, Jr............... 49 Director
Richard D. White.................... 47 Director
</Table>
NEIL D. NICASTRO joined our Board in 1988 and has been our President and Chief
Operating Officer since 1991. In 1996, Mr. Nicastro became Chairman of the Board
and Chief Executive Officer, having served as Co-Chief Executive Officer since
1994. Mr. Nicastro also served in other executive positions for us in the past.
Mr. Nicastro has served as a director of WMS Industries Inc., our former parent
company, since 1986 and as consultant to WMS since April 1998. Mr. Nicastro
became sole Chief Executive Officer of WMS in 1996, Co-Chief Executive Officer
in 1994, President in 1991 and Chief Operating Officer in 1991. Mr. Nicastro
resigned his officerships with WMS in April 1998.
KENNETH J. FEDESNA joined our Board in 1996. He has been our Executive Vice
President--Product Development since May 2000 and was our Executive Vice
President--Coin-Op Video from 1996 until May 2000. Mr. Fedesna served as our
Vice President and General Manager from 1988 to 1996. He also served as Vice
President and General Manager of Williams Electronics Games, Inc., a subsidiary
of WMS, for over five years until August 1999.
THOMAS E. POWELL joined us as Executive Vice President--Finance and Treasurer in
April 2001. On September 28, 2001, he became our Executive Vice
President--Finance, Treasurer and Chief Financial Officer. From June 1997 to
February 2001, Mr. Powell was employed by Dade Behring, Inc., a manufacturer of
medical equipment, serving most recently as Vice President of Corporate Business
Development, Strategic Planning. From 1991 to May 1997, he was employed by
Frito-Lay, a division of PepsiCo, Inc., ultimately serving as Director of
Finance.
DEBORAH K. FULTON has served as our Vice President, Secretary and General
Counsel since May 2000. She was employed by us as Senior Counsel from
March 1998 until May 2000 and by WMS as Senior Counsel from 1994 to March 1998.
Formerly, she was employed by the law firm of Gardner Carton & Douglas from 1988
until 1994.
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41
<Page>
Management
- --------------------------------------------------------------------------------
HAROLD H. BACH, JR. joined our Board in 1996. Mr. Bach served as our Executive
Vice President--Chief Financial Officer from April 2001 to September 28, 2001,
when he retired. He served us as Executive Vice President--Finance and Chief
Financial Officer from 1996 to April 2001. Mr. Bach served as our Senior Vice
President--Finance and Chief Financial Officer from 1990 to 1996, and he served
as Treasurer from 1994 to April 2001. Mr. Bach also served as Vice
President--Finance, Chief Financial and Chief Accounting Officer of WMS for over
five years until September 1999. Mr. Bach was a partner in the accounting firms
of Ernst & Young (1989-1990) and Arthur Young & Company (1967-1989).
WILLIAM C. BARTHOLOMAY joined our Board in 1996. He has been President of Near
North National Group, insurance brokers in Chicago, Illinois for more than five
years. He has served as Vice Chairman of Turner Broadcasting System, Inc., a
division of AOL-Time Warner, Inc. since 1994, having also held that office
during the period 1976-1992. He is Chairman of the Board of the Atlanta Braves
baseball team. Mr. Bartholomay is a director of WMS.
WILLIAM E. MCKENNA joined our Board in 1996. He has served as a General Partner
of MCK Investment Company, Beverly Hills, California for over five years. He
also is a director of Drexler Technology Corporation and WMS.
NORMAN J. MENELL joined our Board in 1996. He has been Vice Chairman of the
Board of WMS since 1990 and is a director of WMS. He previously held various
executive offices at WMS from 1981 to 1990, including President.
LOUIS J. NICASTRO joined our Board in 1988. He was the Chief Executive Officer
of WMS from April 1998 until June 2001 and was also its President from
April 1998 to April 2000. He has served as Chairman of the Board of WMS since
its incorporation in 1974. Mr. Nicastro also served WMS as Chief Executive
Officer or Co-Chief Executive Officer from 1974 to 1996 and as President
(1985-1988, 1990-1991), among other executive positions. Mr. Nicastro also
served as Chairman of the Board and Chief Executive Officer of WHG Resorts &
Casinos Inc. and its predecessors from 1983 until January 1998. He also served
as our Chairman of the Board and Chief Executive Officer or Co-Chief Executive
Officer from 1988 to 1996 and our President from 1988 to 1991.
HARVEY REICH joined our Board in 1996. He was a member of the law firm of
Robinson Brog Leinwand Greene Genovese & Gluck, P.C., New York, New York and its
predecessor firms for over five years until his retirement from that firm in
July 1998. He is a director of WMS.
IRA S. SHEINFELD joined our Board in 1996. He has been a member of the law firm
of Squadron, Ellenoff, Plesent & Sheinfeld LLP, New York, New York for over five
years. He is a director of WMS.
GERALD O. SWEENEY, JR. joined our Board in 1996. He has been a member of the law
firm Lord, Bissell & Brook, Chicago, Illinois for over five years.
RICHARD D. WHITE joined our Board in 1996. He has been a Managing Director of
CIBC Capital Partners, New York, New York, an affiliate of CIBC World Markets
Corp. and its predecessor, for over five years. Mr. White is a director of
Vestcom International, Inc.
EXECUTIVE COMPENSATION
The summary compensation table below sets forth the compensation earned during
the fiscal years ended June 30, 2001, 2000 and 1999 by our Chief Executive
Officer and our four next most highly compensated executive officers whose
fiscal 2001 salary and bonus exceeded $100,000. During fiscal 2000 and 1999,
Messrs. Bach and Fedesna provided services to both WMS Industries Inc. and us.
The table below reflects their compensation in those years for service in all
capacities to both WMS and
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42
<Page>
Management
- --------------------------------------------------------------------------------
Midway. Compensation paid to these persons in these years was paid by either WMS
or Midway and was reimbursed by, or to, us in amounts equal to our allocated
cost under an agreement between WMS and us.
Summary compensation table
<Table>
<Caption>
Long Term Compensation
Awards
-------------------------------
Annual Compensation Securities
---------------------------------------------- Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Other($) Options(#)(1) Compensation($)
- ---------------------------------------------------------------------------------------------------------------------
Neil D. Nicastro ................ 2001 --(2) -- 2,091(4) -- 167,868(5)
Chairman of the Board and Chief 2000 600,000 --(3) 1,811(4) 450,000(2) 134,500(5)
Executive Officer, President 1999 600,000 202,700 1,679(4) 911,850 131,842(5)
and Chief Operating Officer
Harold H. Bach, Jr .............. 2001 315,000 -- -- -- --
Executive Vice President-Chief 2000 315,000 -- -- 50,000 --
Financial Officer(6) 1999 315,000 -- -- 43,842 --
Byron C. Cook ................... 2001 325,000 -- 3,450(8) -- --
Vice-Chairman of the Board(7) 2000 325,000 -- 3,950(8) 50,000 --
1999 325,000 -- 3,423(8) 284,955 --
Kenneth J. Fedesna .............. 2001 325,000 -- 2,500(4) -- --
Executive Vice 2000 325,000 -- 2,500(4) 50,000 --
President-Product Development 1999 325,000 -- 2,500(4) 29,229 --
Deborah K. Fulton ............... 2001 180,000 -- -- -- --
Vice President, Secretary and 2000 154,846 20,000 -- 50,000 --
General Counsel 1999 141,000 16,000 -- 1,461 --
</Table>
(1) Grants of Midway stock options in fiscal 1999 were from the 1998 Stock
Incentive Plan, which required certain purchases of our common stock by
these officers.
(2) On May 4, 2000, our board granted to Mr. Nicastro an option to purchase
300,000 shares of our common stock in lieu of his salary for fiscal 2001,
which he has waived. The option is exercisable on or after June 30, 2001 and
expires on June 30, 2005. The exercise price is $7.00 per share.
(3) Mr. Nicastro's employment agreement with us permits him to receive advances
against estimated bonus payments. Advances were made in the first six months
of fiscal 2000 for bonuses accrued that were reversed in the second six
months of fiscal 2000 totaling $984,000. Mr. Nicastro will repay these
advances out of future compensation that Mr. Nicastro becomes entitled to
receive. See "Certain relationships and related transactions--Other related
party transactions."
(4) Represents life insurance premiums.
(5) Represents accruals for contractual retirement benefits. See "Employment
agreements" below.
(6) Resigned as Executive Vice President--Chief Financial Officer effective at
the close of business on September 28, 2001.
(7) Resigned from all offices and as a director effective September 30, 2001.
(8) Represents matching contributions to Mr. Cook's 401(k) account.
- --------------------------------------------------------------------------------
43
<Page>
Management
- --------------------------------------------------------------------------------
STOCK OPTIONS
During fiscal 2001, we did not grant any options to purchase common stock under
our stock option plans to the persons named in the Summary compensation table.
The following table sets forth information with respect to the number and
assumed values of options to purchase common stock owned by the persons named in
the Summary compensation table.
Aggregated option exercises in last fiscal year and fiscal year-end option
values
<Table>
<Caption>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Acquired Value 6/30/01(#) 6/30/01($)(1)
Name on Exercise(#) Realized($) Exercisable / Unexercisable Exercisable / Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------
Neil D. Nicastro.......... -- -- 1,891,850 / 120,000 13,564,425 / 510,000
Harold H. Bach, Jr........ -- -- 203,842 / 40,000 640,341 / 170,000
Byron C. Cook............. -- -- 444,955 / 40,000 3,172,028 / 170,000
Kenneth J. Fedesna........ -- -- 189,229 / 40,000 486,905 / 170,000
Deborah K. Fulton......... -- -- 27,461 / 39,000 89,841 / 370,500
</Table>
(1) Based on the closing price of our common stock on the NYSE on June 30, 2001,
which was $18.50 per share.
We have adopted a 2000 Non-Qualified Stock Option Plan, a 1999 Stock Option
Plan, a 1998 Stock Incentive Plan, a 1998 Non-Qualified Stock Option Plan and a
1996 Stock Option Plan. The plans provide for the granting of stock options to
our directors, officers, employees, consultants and advisors. The 1998 Stock
Incentive Plan required that participants purchase shares of our common stock at
the market price in order to be eligible to receive options. The plans are
intended to encourage stock ownership by our directors, officers, employees,
consultants and advisors and thereby enhance their proprietary interest in
Midway. Subject to the provisions of the plans, the Stock Option Committee
determines which of the eligible directors, officers, employees, consultants and
advisors receive stock options, the terms, including applicable vesting periods,
of the options, and the number of shares for which options are granted.
The option price per share with respect to each option is determined by the
Stock Option Committee and generally is not less than 100% of the fair market
value of our common stock on the date the option is granted. The plans each have
a term of ten years, unless terminated earlier.
As of November 23, 2001:
- - under the 1996 Stock Option Plan, 1,685,251 options were outstanding, and
294,807 further options were available for grant;
- - under the 1998 Non-Qualified Stock Option Plan, 666,404 options were
outstanding, and 63,196 further options were available for grant;
- - under the 1998 Stock Incentive Plan, 1,299,658 options were outstanding, and
239,678 further options were available for grant;
- - under the 1999 Stock Option Plan, 1,441,400 options were outstanding, and
286,500 further options were available for grant; and
- - under the 2000 Non-Qualified Stock Option Plan, 784,009 options were
outstanding, and 176,500 further options were available for grant.
- --------------------------------------------------------------------------------
44
<Page>
Management
- --------------------------------------------------------------------------------
The average exercise price of outstanding options, at November 23, 2001, was
approximately $12.55 per share. Of the 5,876,722 options outstanding, 3,161,382
were held by officers and directors of Midway, including 2,011,850 held by
Neil D. Nicastro.
EMPLOYMENT AGREEMENTS
We employ Neil D. Nicastro under the terms of an Employment Agreement dated as
of July 1, 1996. The agreement was amended on March 5, 1998, November 5, 1999,
May 4, 2000 and October 30, 2000. Mr. Nicastro's base salary is $600,000. The
agreement provides for bonus compensation in an amount equal to two percent of
our pre-tax income. The employment agreement expires October 30, 2004, subject
to automatic extensions in order that the term of Mr. Nicastro's employment
shall at no time be less than three years. In the October 30, 2000 amendment,
Mr. Nicastro converted the form of his retirement and death benefits from cash
to Midway common stock. As amended, the employment agreement provides that upon
Mr. Nicastro's retirement or death, Midway is required to deliver to
Mr. Nicastro or his designee, or if no designation is made, to his estate, on
the first day of each month, for a period of ten years, 5,065 shares of our
common stock, subject to adjustment pursuant to the terms of the employment
agreement. This benefit is payable notwithstanding Mr. Nicastro's termination of
employment for any reason.
The employment agreement provides that Mr. Nicastro shall devote such time to
our business and affairs as is reasonably necessary to perform the duties of his
position. Mr. Nicastro may continue to serve as a director of and consultant to
WMS as he deems appropriate.
The employment agreement also provides that Mr. Nicastro may participate and
receive the benefits of all pension and retirement plans, bonus plans, health,
life, hospital, medical and dental insurance, including reimbursement for all
medical and dental expenses incurred by him, his spouse and his children under
the age of twenty-one, to the extent that these expenses are not otherwise
reimbursed by insurance provided by us, and all other employee benefits and
perquisites generally made available to our employees. Additionally, we
currently provide Mr. Nicastro with $2,000,000 of life insurance coverage in
addition to the standard amount provided to our employees.
Mr. Nicastro's employment agreement further provides for full compensation
during periods of illness or incapacity. We may, however, give 30 days' notice
of termination if illness or incapacity disables Mr. Nicastro from performing
his duties for a period of more than six months. The termination notice becomes
effective if full performance is not resumed within 30 days after the notice is
given and maintained for a period of two months thereafter. The employment
agreement may be terminated at the election of Mr. Nicastro upon the occurrence
without his consent or acquiescence of any one or more of the following events:
- - the placement of Mr. Nicastro in a position of lesser stature or the
assignment to Mr. Nicastro of duties, performance requirements or working
conditions significantly different from or at variance with those presently
in effect;
- - the treatment of Mr. Nicastro in a manner which is in derogation of his
status as a senior executive;
- - the cessation of service of Mr. Nicastro as a member of our board of
directors;
- - the discontinuance or reduction of amounts payable or personal benefits
available to Mr. Nicastro under the agreement; or
- - the requirement that Mr. Nicastro work outside his agreed upon metropolitan
area.
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45
<Page>
Management
- --------------------------------------------------------------------------------
In any such event, and in the event that we are deemed to have wrongfully
terminated Mr. Nicastro's employment agreement under the terms thereof, we are
obligated to make a lump sum payment to Mr. Nicastro equal in amount to the sum
of:
- - the aggregate base salary during the remaining term of his employment
agreement, but in no event less than three times the highest base salary
payable to him during the one-year period prior to such event;
- - the aggregate bonus, assuming that Midway pre-tax income during the remainder
of the term of the employment agreement is earned at the highest level
achieved in any of the last five full fiscal years prior to such termination;
and
- - the retirement benefit, assuming the date of termination is his retirement
date, otherwise payable under the terms of the employment agreement.
Additionally, we would be obligated to purchase, at the election of
Mr. Nicastro, all stock options held by him with respect to our common stock at
a price equal to the spread between the option price and the fair market price
of the stock as defined in the agreement. The employment agreement may also be
terminated at the election of Mr. Nicastro if individuals who presently
constitute the board of directors, or successors approved by board members,
cease for any reason to constitute at least a majority of the board. Upon such
an event, we may be required to purchase the stock options held by Mr. Nicastro
and make payments similar to those described above.
If any portion of the amount paid to Mr. Nicastro is subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code, then we must pay
additional compensation to Mr. Nicastro to the extent necessary to eliminate the
economic effect on him of the resulting excise tax.
Harold H. Bach, Jr. was employed by us under the terms of an employment
agreement dated as of May 24, 1999. This agreement provided for salaried
compensation at the base rate of $315,000 per year. It also provided for, among
other things, full participation in all benefit plans and perquisites generally
available to executive employees. We agreed with Mr. Bach to terminate the
agreement effective at the close of business on September 28, 2001, with
separation payments to be made through December 31, 2004 at the same rate as
Mr. Bach's base salary. Mr. Bach's stock options and health and life insurance
benefits will remain in force.
Kenneth J. Fedesna is employed by us under the terms of an employment agreement
dated as of June 1, 1999. This agreement provides for salaried compensation at
the rate of $325,000 per year, or a greater amount as may be determined by the
board of directors. It also provides for, among other things, full participation
in all benefit plans and perquisites generally available to executive employees.
The agreement requires that we provide Mr. Fedesna with $400,000 in additional
life insurance coverage. The agreement expires on June 30, 2002, subject to
automatic extensions so that the term of Mr. Fedesna's employment shall at no
time be less than three years. Either party may terminate the agreement
effective upon expiration of the term upon written notice from the terminating
party to the other party dated and received at least three years prior to the
respective termination date. We may terminate the agreement upon 30 days'
written notice for cause. Mr. Fedesna may terminate the agreement if:
- - he is placed in a position of lesser stature;
- - he is assigned duties significantly different from or incompatible with his
position;
- - his performance requirements or working conditions change; or
- --------------------------------------------------------------------------------
46
<Page>
Management
- --------------------------------------------------------------------------------
- - the business facility at which he is required to work is relocated more than
50 miles from our present business location.
Mr. Fedesna may also terminate the agreement if the individuals who presently
constitute the board of directors, or successors approved by these board
members, cease for any reason to constitute at least a majority of the board. If
this happens, and Mr. Fedesna gives us notice of termination within 60 days,
then in lieu of any other rights under the agreement, all of Mr. Fedesna's
unvested stock options will immediately vest, and we will be required to pay him
a lump sum of three times his base salary. If any portion of the amount paid to
Mr. Fedesna is subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code, then we must pay additional compensation to Mr. Fedesna to the
extent necessary to eliminate the economic effect on him of the resulting excise
tax.
Deborah K. Fulton is employed by us under the terms of an employment agreement
dated as of May 8, 2000. This agreement provides for salaried compensation at
the rate of $180,000 per year, or a greater amount as may be determined by the
board of directors. It also provides for, among other things, full participation
in all benefit plans and perquisites generally available to executive employees.
The agreement requires that we provide Ms. Fulton with $400,000 in additional
life insurance coverage. The agreement expires on May 7, 2002, subject to
automatic extensions so that the term of Ms. Fulton's employment shall at no
time be less than two years. Either party may terminate the agreement effective
upon expiration of the term by written notice dated and received at least two
years prior to the termination date. We may also terminate the agreement upon
30 days' written notice for cause. Ms. Fulton may also terminate the agreement
if the individuals who presently constitute the board of directors, or
successors approved by these board members, cease for any reason to constitute
at least a majority of the board. If this happens, and Ms. Fulton gives us
notice of termination within 60 days, then in lieu of any other rights under the
agreement, all of Ms. Fulton's unvested stock options will immediately vest, and
we will be required to pay her a lump sum of two times her base salary. If any
portion of the amount paid to Ms. Fulton is subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code, then we must pay additional
compensation to Ms. Fulton to the extent necessary to eliminate the economic
effect on her of the resulting excise tax.
DIRECTOR COMPENSATION
We pay a fee of $32,500 per year to each director who is not also our employee.
Each director who serves as the chairman of any committee of the Board receives
a further fee of $2,500 per year for his services in that capacity and each
member of our Audit Committee receives an additional fee of $2,500 per year.
None of our directors received stock options in fiscal 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our Compensation Committee or Stock Option Committee is an employee
or officer of Midway, and no officer, director or other person had any
relationship required to be disclosed here, except that Mr. Bartholomay, one of
the members of our Compensation Committee, is President of Near North National
Group, insurance brokers, which we retain to provide insurance services.
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47
<Page>
- --------------------------------------------------------------------------------
Certain relationships and related transactions
RELATIONSHIP WITH WMS
Until October 29, 1996, we were a wholly-owned subsidiary of WMS
Industries Inc. On that date, we sold common stock in an initial public
offering, but WMS continued to own 86.8% of our common stock. On April 6, 1998,
WMS distributed all of its shares of our common stock to its stockholders. Seven
of our directors are also directors of WMS, including our Chairman and Chief
Executive Officer, Neil D. Nicastro, and his father, Louis J. Nicastro. Louis J.
Nicastro is the Chairman of the Board of WMS. Neil D. Nicastro is also a
consultant to WMS.
In August 2001, we entered into a lease of WMS's building at 2704 Roscoe Street
in Chicago Illinois, into which we have moved our executive offices. The lease
term is five years, and we may renew the lease for two successive terms of three
years each. Under the lease, we pay $7.25 per square foot per year, based on the
number of square feet that we occupy. We currently occupy approximately 9,743
square feet in the building, but the parties expect that we will occupy the
entire building, 28,500 square feet, beginning in the spring of 2002.
In connection with our spinoff from WMS, we entered into a number of agreements
with WMS, each dated as of April 6, 1998. Under a Settlement and Temporary
Services Agreement, dated as of August 31, 2001, we have amended some of these
agreements. The remaining material agreements between WMS and us dated as of
April 6, 1998, as so amended, are described below:
INFORMATION SYSTEMS SERVICE AGREEMENT. WMS provides us with access to its
AS-400 computer system and related services and computer systems for some of our
computing needs, including order entry, financial and manufacturing modules,
marketing and sales and engineering, including engineering documentation and
blueprint systems, as well as support for these computer systems. We pay WMS at
a fixed rate for monthly services. The term of the agreement expires
December 31, 2001, with an option for a three-month extension.
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT. Under this agreement, WMS or we
may designate business information as confidential, and the other party must use
its best efforts to keep this information confidential. The agreement also
includes a five-year non-competition clause, which expires in April 2003.
RIGHT OF FIRST REFUSAL AGREEMENT. WMS granted us the right of first refusal
with respect to any offer to WMS to purchase a WMS parking lot behind the
building located at 3325 North California Avenue, Chicago, Illinois, so long as
the offer is not made in connection with the sale of substantially all of WMS's
stock or assets and business as a going concern. The term of the agreement
expires April 5, 2008.
THIRD PARTIES AGREEMENT. This agreement governs the treatment of the various
arrangements with third parties with respect to game development, licensing and
other matters. Under the agreement, WMS and we allocate the rights and
obligations under third party arrangements so that the party receiving the
benefit will bear the burden of those agreements. The agreement shall remain in
effect so long as any prior third party arrangements remain outstanding.
TAX SEPARATION AGREEMENT. Until April 1998, we were a member of the
consolidated group of corporations of which WMS was the common parent for
federal income tax purposes. Therefore, we are jointly and severally liable for
any federal tax liability of the WMS group for the period that we were part of
the WMS group. The agreement sets forth the parties' respective liabilities for
federal,
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48
<Page>
Certain relationships and related transactions
- --------------------------------------------------------------------------------
state and local taxes as well as other agreements regarding the separation of
Midway and its subsidiaries from WMS. The agreement governs, among other things:
- - the filing of tax returns with federal, state and local authorities;
- - the carryover of any tax benefits of Midway;
- - the treatment of the deduction attributable to the exercise of stock options
to purchase WMS common stock which are held by employees or former employees
of Midway and any other similar compensation related tax deductions;
- - the treatment of specified net operating loss carrybacks;
- - the treatment of audit adjustments; and
- - procedures with respect to any proposed audit adjustment or other claim made
by any taxing authority with respect to a tax liability of Midway or any of
its subsidiaries.
TAX INDEMNIFICATION AGREEMENT. This agreement provides for indemnification if
our April 1998 spin-off from WMS failed to qualify under Section 355 of the
Internal Revenue Code. Each of the parties agreed, among other things, that for
a period of two years after the spin-off, each would continue active conduct of
its historic trade or business. We will indemnify WMS if our action causes the
spin-off to fail to qualify under Section 355 of the Code, against any federal,
state and local taxes, interest, penalties and additions to tax imposed upon or
incurred by the WMS group or any member. WMS will indemnify us against federal,
state and local taxes, interest, penalties and additions to tax resulting from
the spin-off, other than liabilities for which we are required to indemnify WMS.
We also have the following agreements with WMS:
TAX SHARING AGREEMENT. This agreement is dated July 1, 1996 and remains in
effect, except to the extent described in the Tax Separation Agreement referred
to above. Under this agreement, WMS and we have agreed upon a method for:
- - determining the amount that we must pay to WMS in respect of federal income
taxes;
- - compensating any member of the WMS group for use of its net operating losses,
tax credits and other tax benefits in arriving at the WMS group tax liability
as determined under the federal consolidated return regulations; and
- - providing for the receipt of any refund arising from a carryback of net
operating losses or tax credits from subsequent taxable years and for
payments upon subsequent adjustments.
PATENT LICENSE AGREEMENT. This agreement is dated July 1, 1996. WMS and we each
license to the other, on a perpetual, royalty-free basis, some patents used in
the development and manufacture of both coin-operated videogames and video
lottery terminals and other gaming machines.
OTHER RELATED PARTY TRANSACTIONS
Under his employment agreement with us, Neil D. Nicastro received $984,000 of
advances for a bonus accrued in the first six months of fiscal 2000 and later
reversed. This amount will be repaid, without interest, out of future
compensation to which Mr. Nicastro becomes entitled.
Mr. Ira S. Sheinfeld, a member of our Board of Directors, is a member of the law
firm of Squadron, Ellenoff, Plesent & Sheinfeld LLP, which we retain to provide
tax services.
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49
<Page>
Certain relationships and related transactions
- --------------------------------------------------------------------------------
Mr. Richard D. White, a member of our Board of Directors, is a Managing Director
of CIBC Capital Partners, an affiliate of CIBC World Markets Corp., which
renders financial advisory services to us from time to time, and which was an
underwriter of our 1999 public offering and 1996 initial public offering.
Mr. Gerald O. Sweeney, Jr., a member of our Board of Directors, is a member of
the law firm of Lord, Bissell & Brook, which performs legal services for Midway
from time to time.
William C. Bartholomay, a member of our Board of Directors, is President of Near
North National Group, insurance brokers, which we retain to provide insurance
services.
- --------------------------------------------------------------------------------
50
<Page>
- --------------------------------------------------------------------------------
Security ownership of certain beneficial owners and management
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of November 23, 2001, except as
otherwise footnoted, about persons which, to our knowledge, beneficially own
more than 5% of the outstanding shares of our common stock:
<Table>
<Caption>
Number of Shares Percentage of
of Common Stock Outstanding
Name and Address of Beneficial Owner Beneficially Owned(1) Common Stock(1)
- -----------------------------------------------------------------------------------------------------------
Sumner M. Redstone and
National Amusements, Inc. ................................ 11,354,436(2) 29.6%
200 Elm Street
Dedham, MA 02026
Smithfield Fiduciary LLC, et al ............................ 4,541,557(3) (3)
c/o Highbridge Capital Management
9 West 57th Street, 27th Floor
New York, NY 10019
Mellon Financial Corporation, et al. ....................... 3,935,226(4) 10.3%
One Mellon Center
Pittsburgh, PA 15258
Neil D. Nicastro ........................................... 2,990,082(5) 7.2%
c/o Midway Games Inc.
2704 West Roscoe Street
Chicago, IL 60618
Peconic Fund, Ltd., et al .................................. 2,424,934(6) 6.3%
c/o Ramius Capital Group, L.L.C.
666 Third Avenue, 26th Floor
New York, NY 10017
</Table>
(1) Under Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, shares
underlying options and other derivative securities are deemed to be
beneficially owned if the holder of the security has the right to acquire
beneficial ownership of the underlying shares within 60 days. Percentage
calculations are based on 38,358,428 shares of our common stock outstanding
on November 23, 2001.
(2) Based upon a Form 4 filed with the SEC by Sumner M. Redstone on November 9,
2001. Mr. Redstone and National Amusements, Inc., a Maryland corporation,
reported direct and indirect beneficial ownership of 7,231,665 and 4,122,771
shares, respectively, of our common stock. As a result of his stock
ownership in National Amusements, Inc., Mr. Redstone is deemed the
beneficial owner of the shares of common stock owned by National
Amusements, Inc.
(3) Represents 3,416,557 shares of common stock underlying convertible preferred
stock and 1,125,000 shares of common stock underlying warrants. Highbridge
Capital Management, LLC is the trading manager of Smithfield Fiduciary LLC
and consequently has voting control and investment discretion over
securities held by Smithfield. Glenn Dubin and Henry Swieca control
Highbridge. Highbridge, Glenn Dubin and Henry Swieca disclaim beneficial
ownership of the shares held by Smithfield. Under the certificate of
designations for the preferred stock and under
- --------------------------------------------------------------------------------
51
<Page>
Security ownership of certain beneficial owners and management
- --------------------------------------------------------------------------------
the terms of the warrants, no holder of preferred stock or warrants may
convert preferred stock or exercise their warrants to the extent that the
holder, together with its affiliates, would beneficially own more than 9.99%
of the outstanding shares of our then outstanding common stock following
such conversion or exercise. The number of shares shown does not reflect
this limitation.
(4) Based upon Schedule 13G filed with the SEC on January 18, 2001 by Mellon
Financial Corporation, as the parent company of The Boston Company, Inc. and
The Boston Company, Asset Management, LLC in their various fiduciary
capacities. The filer reported beneficial ownership of 3,935,226 shares,
sole voting power over 3,407,826 shares, shared voting power over 264,700
shares, sole dispositive power over 3,933,611 shares and shared dispositive
power over 1,475 shares.
(5) Represents 273,324 shares of common stock underlying convertible preferred
stock, 50,000 shares of common stock underlying warrants, 1,891,850 shares
of common stock underlying stock options and 774,908 shares of common stock
owned outright. Does not include an aggregate of 607,846 shares of our
common stock issuable to Mr. Nicastro in monthly installments over the
10 years following his retirement or death, pursuant to the terms of his
Employment Agreement.
(6) Represents 2,049,934 shares of common stock underlying convertible preferred
stock and 375,000 shares of common stock underlying warrants. Ramius Capital
Group, LLC is the investment adviser of Peconic Fund, Ltd. and consequently
has voting control and investment discretion over securities held by
Peconic. Ramius Capital disclaims beneficial ownership of the shares held by
Peconic. Peter A. Cohen, Morgan B. Stark and Thomas W. Strauss are the sole
managing members of C4S& Co., LLC, the sole managing member of Ramius
Capital. As a result, Messrs. Cohen, Stark and Strauss may be considered
beneficial owners of any shares deemed to be beneficially owned by Ramius
Capital.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of November 23, 2001, information about the
beneficial ownership of our common stock by each of our directors and named
executive officers and by all of our directors and executive officers as a
group:
<Table>
<Caption>
Number of Shares Percentage of
of Common Stock Outstanding
Name of Beneficial Owner Beneficially Owned(1) Common Stock(1)
- -----------------------------------------------------------------------------------------------------
Harold H. Bach, Jr.......................................... 250,130(2) *
William C. Bartholomay...................................... 90,370(3) *
Byron C. Cook............................................... 312,298(4) *
Kenneth J. Fedesna.......................................... 241,435(5) *
Deborah K. Fulton........................................... 28,631(6) *
William E. McKenna.......................................... 45,711(3) *
Norman J. Menell............................................ 62,506(3) *
Louis J. Nicastro........................................... 60,547(3) *
Neil D. Nicastro............................................ 2,990,082(7) 7.2%
Thomas E. Powell............................................ 500 *
Harvey Reich................................................ 61,277(3) *
Ira S. Sheinfeld............................................ 66,801(3) *
Gerald O. Sweeney, Jr....................................... 45,000(3) *
Richard D. White............................................ 45,000(3) *
Directors and Executive Officers as a group (14 persons).... 4,300,288(8) 10.4%
</Table>
- --------------------------------------------------------------------------------
52
<Page>
Security ownership of certain beneficial owners and management
- --------------------------------------------------------------------------------
* Less than 1%
(1) Under Rule 13d-3(d)(1) of the Securities Exchange Act of 1934, shares
underlying options and other derivative securities are deemed to be
beneficially owned if the holder of the security has the right to acquire
beneficial ownership of the underlying shares within 60 days. Percentage
calculations are based on 38,358,428 shares of our common stock outstanding
on November 23, 2001.
(2) Includes 203,842 shares of common stock underlying stock options.
(3) Includes 45,000 shares of common stock underlying stock options.
(4) Includes 140,000 shares of common stock underlying stock options. Mr. Cook
resigned on September 30, 2001.
(5) Includes 189,229 shares of common stock underlying stock options.
(6) Includes 27,461 shares of common stock underlying stock options.
(7) Represents 273,324 shares of common stock underlying convertible preferred
stock, 50,000 shares of common stock underlying warrants, 1,891,850 shares
of common stock underlying stock options and 774,908 shares of common stock
owned outright. Does not include an aggregate of 607,846 shares of our
common stock issuable to Mr. Nicastro in monthly installments over the
10 years following his retirement or death, pursuant to the terms of his
Employment Agreement.
(8) Includes an aggregate of 2,812,382 shares of common stock underlying stock
options, 273,324 shares of common stock underlying convertible preferred
stock, and 50,000 shares of common stock underlying warrants.
- --------------------------------------------------------------------------------
53
<Page>
- --------------------------------------------------------------------------------
Underwriting
The underwriters for this offering named below have entered into an underwriting
agreement concerning the shares being offered. Subject to conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table. UBS Warburg LLC and Gerard Klauer Mattison & Co., Inc. are
the representatives of the underwriters.
<Table>
<Caption>
Underwriter Number of Shares
- ------------------------------------------------------------------------------
UBS Warburg LLC.............................................
Gerard Klauer Mattison & Co., Inc...........................
-----------
Total................................................... 4,500,000
===========
</Table>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy up to 675,000 shares
from Midway, at the public offering price less the underwriting discounts and
commissions, to cover these sales. If any shares are purchased under this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us:
<Table>
<Caption>
Paid by us
---------------------------------------------
No exercise of Full exercise of
over-allotment option over-allotment option
- ---------------------------------------------------------------------------------------------------------
Per share................................................. $ $
Total................................................... $ $
</Table>
We estimate that the total expenses of this offering payable by us, excluding
underwriting discounts and commissions, will be approximately $ .
Shares sold by the underwriters to the public will initially be offered at the
public offering price set forth on the cover of this prospectus. Any shares sold
by the underwriters to securities dealers may be sold at a discount of up to
$ per share from the public offering price. Any of these securities dealers
may resell any shares purchased from the underwriters to other brokers or
dealers at a discount of up to $ per share from the public offering price.
If all the shares are not sold at the public offering price, the representatives
may change the offering price and the other selling terms.
We have agreed with the underwriters not to offer, sell, contract to sell, hedge
or otherwise dispose of, directly or indirectly, any of our common stock or
securities convertible into or exchangeable for the shares of common stock
during the period from the date of this prospectus continuing through the date
90 days after the date of this prospectus, without the prior written consent of
UBS Warburg LLC. Our executive officers and directors have also agreed to these
restrictions.
In connection with this offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include
stabilizing transactions, short sales and purchases to cover positions created
by short sales. Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market price of our
common stock while this offering is in progress. Short sales involve the sale by
the underwriters of a greater number of shares than they are required to
purchase in this offering. Short sales may be either "covered short sales" or
"naked short sales." Covered short sales are sales made in an amount not greater
than the underwriters' over-allotment option to purchase additional shares in
this offering. The underwriters
- --------------------------------------------------------------------------------
54
<Page>
Underwriting
- --------------------------------------------------------------------------------
may close out any covered short position by either exercising their
over-allotment option or purchasing shares in the open market. In determining
the source of shares to close out the covered short position, the underwriters
will consider, among other things, the price of shares available for purchase in
the open market as compared to the price at which they may purchase shares
through the over-allotment option. Naked short sales are sales in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned there may be a downward pressure
on the price of shares in the open market after pricing that could adversely
affect investors who purchase in this offering.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of that underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise affect
the market price of our common stock. As a result, the price of our common stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the NYSE or otherwise.
We have agreed to indemnify the several underwriters against some liabilities,
including liabilities under the Securities Act, and to contribute to payments
that the underwriters may be required to make in respect thereof.
Gerard Klauer Mattison & Co., Inc. acted as placement agent for the private
placement of our Series B convertible preferred stock which closed on May 22,
2001 and August 21, 2001. In connection therewith, Gerard Klauer Mattison & Co.,
Inc. received five-year warrants to purchase 555,161 shares of our common stock
at an exercise price of $9.33 per share, 123,821 shares of our common stock at
an exercise price of $10.60 per share and $2,756,250 in cash.
- --------------------------------------------------------------------------------
55
<Page>
- --------------------------------------------------------------------------------
Legal matters
The validity of the issuance of the shares offered by this prospectus will be
passed upon by our counsel, Shack Siegel Katz Flaherty & Goodman P.C., New York,
New York. As of November 23, 2001, shareholders of Shack Siegel Katz Flaherty &
Goodman P.C. hold a total of 3,070 shares of common stock and options to
purchase 45,000 shares of our common stock. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, Broomfield, Colorado.
Experts
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements and schedule at June 30, 2001 and 2000, and for each of the three
years in the period ended June 30, 2001 as set forth in their report. We have
included our financial statements and schedule in the prospectus and the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
- --------------------------------------------------------------------------------
56
<Page>
- --------------------------------------------------------------------------------
Where you can find more information
We have filed a registration statement on Form S-3 with SEC in connection with
this offering (File No. 333- ). In addition, we file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy the registration statement and any other documents we
have filed at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, DC 20549. You may call the SEC at 1-800-SEC-0330 for information on
the operation of the Public Reference Room. Our SEC filings are also available
to the public at the SEC's Internet site found at "http://www.sec.gov" and can
be inspected at the offices of the NYSE, 20 Broad Street, New York, NY 10005.
The SEC's Internet site contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC.
This prospectus is part of the registration statement and does not contain all
of the information included in the registration statement. Whenever a reference
is made in this prospectus to any contract or other document of Midway, the
reference may not be complete, and you should refer to the exhibits that are a
part of the registration statement for a copy of the contract or document.
Documents incorporated by reference
The SEC allows us to "incorporate by reference" into this prospectus the
information we file with the SEC. This means that we are disclosing important
information to you without restating that information in this document. Instead,
we are referring you to the documents listed below, and you should consider
those documents to be part of this prospectus. Information that we file with the
SEC after the date of this prospectus will update and supersede the information
in this prospectus and the documents listed below.
We incorporate by reference into this prospectus the documents listed below and
all documents that we file in the future with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, including exhibits,
until this offering is terminated:
- - our annual report on Form 10-K for the year ended June 30, 2001;
- - our quarterly report on Form 10-Q for the quarter ended September 30, 2001;
- - our current reports on Form 8-K filed on August 22, October 25, and
November 15, 2001; and
- - the description of our common stock and accompanying rights contained in our
registration statement on Form 8-A/A (File No. 1-12367) filed on June 4,
2001.
We will provide to each person, including any beneficial owner, to whom a copy
of this prospectus is delivered, a copy of any or all of the information that we
have incorporated by reference in this prospectus. You may request copies of
this information in writing or orally, and we will provide it at no cost. You
may contact us at:
Midway Games Inc.
2704 West Roscoe Street
Chicago, Illinois 60618
Attention: Deborah K. Fulton, General Counsel
Telephone: (773) 961-2222
- --------------------------------------------------------------------------------
57
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<Table>
Condensed Consolidated Balance Sheets at September 30, 2001
(unaudited) and June 30, 2001............................... F-2
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2001 and 2000
(unaudited)................................................. F-3
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2001 and 2000
(unaudited)................................................. F-4
Notes to Condensed Consolidated Financial Statements........ F-5
Report of Independent Auditors.............................. F-9
Consolidated Balance Sheets at June 30, 2001 and June 30,
2000........................................................ F-10
Consolidated Statements of Income for the years ended
June 30, 2001, 2000 and 1999................................ F-11
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 2001, 2000 and 1999............ F-12
Consolidated Statements of Cash Flows for the years ended
June 30, 2001, 2000 and 1999................................ F-13
Notes to Consolidated Financial Statements.................. F-14
</Table>
- --------------------------------------------------------------------------------
F-1
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
<Table>
<Caption>
September 30, June 30,
2001 2001
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 26,029 $ 40,330
Short-term investments.................................... 28,000 21,000
Receivables, less allowances of $7,220 and $8,354......... 25,977 14,321
Income tax receivable..................................... 860 860
Inventories, at lower of cost (FIFO) or market:
Raw materials........................................... 249 372
Finished goods.......................................... 2,202 1,616
-------- --------
2,451 1,988
Capitalized product development costs..................... 9,262 5,342
Deferred income taxes..................................... 945 2,655
Other current assets...................................... 4,292 2,437
-------- --------
Total current assets.................................... 97,816 88,933
Capitalized product development costs....................... 4,107 1,100
Property and equipment...................................... 43,140 41,240
Less: accumulated depreciation.............................. (23,003) (21,562)
-------- --------
20,137 19,678
Deferred income taxes....................................... 10,398 8,688
Excess of purchase cost over amount assigned to net assets
acquired, net............................................. 33,464 33,464
Other assets................................................ 3,893 4,356
-------- --------
$169,815 $156,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,026 $ 5,497
Accrued compensation and related benefits................. 5,146 5,110
Accrued royalties......................................... 1,264 1,205
Other accrued liabilities................................. 8,408 5,715
-------- --------
Total current liabilities............................... 22,844 17,527
Other noncurrent liabilities................................ 6,967 6,197
Redeemable convertible preferred stock, Series B, $.01 par
value, 5,512.5 shares authorized and designated, 5,512.5
shares issued at September 30, 2001 redeemable at $55,125
and 4,200 shares issued at June 30, 2001, redeemable at
$42,000................................................... 34,089 20,667
Stockholders' equity:
Preferred stock, $.01 par value, 4,994,487.5 shares
authorized and undesignated............................. -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 39,147,121 shares issued at September 30,
2001 and 39,022,138 at June 30, 2001.................... 391 390
Additional paid-in capital................................ 120,671 118,886
Retained earnings......................................... 1,108 8,788
Translation adjustment.................................... (152) (133)
Treasury stock, at cost, 1,178,500 shares................. (16,103) (16,103)
-------- --------
Total stockholders' equity.............................. 105,915 111,828
-------- --------
$169,815 $156,219
======== ========
</Table>
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F-2
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands, except per share amounts)
(Unaudited)
<Table>
<Caption>
Three months ended
September 30,
-------------------
2001 2000
-------- --------
Revenues:
Home video................................................ $27,338 $30,746
Coin-operated video....................................... 997 16,529
------- -------
Total revenues.............................................. 28,335 47,275
Cost of sales
Home video--product costs and distribution.............. 8,813 14,174
Home video--royalties and product development........... 5,175 6,108
------- -------
Home video--total cost of sales........................... 13,988 20,282
Coin-operated video....................................... 789 13,619
------- -------
Total cost of sales......................................... 14,777 33,901
------- -------
Gross profit................................................ 13,558 13,374
Research and development expense............................ 5,888 16,501
Selling and marketing expense............................... 8,972 8,166
Administrative expense...................................... 5,009 5,067
------- -------
Operating loss.............................................. (6,311) (16,360)
Interest and other income................................... 769 439
------- -------
Loss before credit for income taxes......................... (5,542) (15,921)
Credit for income taxes..................................... -- 5,970
------- -------
Net loss.................................................... (5,542) (9,951)
Preferred stock dividend:
Cash...................................................... 481 --
Imputed................................................... 1,657 --
------- -------
Loss applicable to common stock............................. $(7,680) $(9,951)
======= =======
Basic and diluted loss per share of common stock............ $ (0.20) $ (0.26)
======= =======
Average number of shares outstanding........................ 37,858 37,711
======= =======
</Table>
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F-3
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
<Table>
<Caption>
Three months ended
September 30,
-------------------
2001 2000
-------- --------
Operating activities:
Net loss.................................................... $ (5,542) $(9,951)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization............................. 1,444 2,077
Receivables provision..................................... 2,004 2,436
Deferred income taxes..................................... -- (5,970)
Stock option expense...................................... 126 --
Increase (decrease) resulting from changes in operating
assets and liabilities.................................... (16,888) 9,876
-------- -------
Net cash used by operating activities....................... (18,856) (1,532)
Investing activities:
Purchase of property and equipment.......................... (1,891) (3,375)
Net change in short-term investments........................ (7,000) --
-------- -------
Net cash used by investing activities....................... (8,891) (3,375)
Financing activities:
Cash received on exercise of common stock options........... 1,000 23
Net proceeds from sale of Series B preferred stock.......... 12,425 --
-------- -------
Net cash provided by financing activities................... 13,425 23
Effect of exchange rate changes on cash..................... 21 (40)
-------- -------
Decrease in cash and cash equivalents....................... (14,301) (4,924)
Cash and cash equivalents at beginning of period............ 40,330 34,093
-------- -------
Cash and cash equivalents at end of period.................. $ 26,029 $29,169
======== =======
</Table>
See notes to condensed consolidated financial statements.
- --------------------------------------------------------------------------------
F-4
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Financial Statements
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Due to the seasonality of Midway's business, operating results
for the quarter ended September 30, 2001 are not necessarily indicative of the
results that may be expected for the six-month fiscal period ending
December 31, 2001. See footnote on change of fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Midway Annual Report on Form 10-K for the year ended
June 30, 2001.
2. Earnings Per Share
Stock options were outstanding for 6,203,698 and 6,256,952 shares of common
stock at September 30, 2001 and September 30, 2000, respectively. Warrants were
outstanding to purchase 1,728,982 shares of common stock at September 30, 2001.
Preferred stock convertible into 5,739,816 shares of common stock was
outstanding at September 30, 2001. The calculation of loss per share for the
three months ended September 30, 2001 did not include the effect of either the
stock options, warrants or convertible preferred stock because to do so would
have been antidilutive. The calculation of loss per share for the three months
ended September 30, 2000 did not include the effect of stock options because to
do so would have been antidilutive. Accordingly, the weighted average common
shares outstanding for the three months ended September 30, 2001 and 2000 were
used in their respective calculations of earnings per share.
3. Change of Fiscal Year
Midway has changed its fiscal year end from June 30 to December 31 effective
December 31, 2001. The three months ended September 30, 2001 represents the
first quarter of a six-month fiscal period ending December 31, 2001. A
transition report on Form 10-K will be filed for the six-month fiscal period
ending December 31, 2001.
4. Reclassification of prior year balances
Certain prior period balances have been reclassified to conform to current
period presentation.
5. Goodwill
Beginning on July 1, 2001 Midway adopted Financial Accounting Standard Board
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Accordingly, the three
months ended September 30, 2001 does not include amortization of goodwill. The
three months ended September 30, 2000 includes amortization of goodwill of
$981,000. Midway has performed the required transition impairment test on
goodwill and has determined that the recorded goodwill as of July 1, 2001 is not
impaired.
- --------------------------------------------------------------------------------
F-5
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Capitalized product development costs
Midway's capitalized product development costs principally consist of software
development costs for videogames that will be sold to consumers through
retailers. Midway's videogames are played on home consoles and handheld devices
marketed by unrelated third parties. Prior to July 1, 2001 a significant portion
of Midway's product development resources were focused on developing videogames
for the coin-operated market that were charged to operations as incurred. During
fiscal 2001 Midway began redirecting much of its product development resources
from coin-operated to home videogame products. As of June 30, 2001 Midway
completely exited the coin-operated videogame market and redirected all
remaining product development resources to home videogame software products.
Midway accounts for software development in accordance with Statement of
Financial Accounting Standards No. 86 ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. Software development costs
incurred prior to the establishment of technological feasibility are expensed by
Midway when incurred and are included in research and development expense. Once
a software product has reached technological feasibility, then all subsequent
software development costs for that product are capitalized. Technological
feasibility is evaluated on a product-by-product basis and can occur early in
the development cycle or later depending on required technology to complete the
product and the availability of such technology to Midway.
The videogames that Midway is currently developing are for the new generation of
platforms and generally have a significant level of costs being incurred after
technological feasibility has been established. This is due to establishment of
technological feasibility earlier in the development cycle and the longer
development time needed for the new generation of videogames. The establishment
of technological feasibility earlier in the development cycle is, in part, due
to the direct focus of software development resources on home videogames
compared with the prior software development focus of developing for
coin-operated videogames first.
Midway evaluates the recoverability of capitalized software development costs on
a title-by-title basis. Capitalized software is amortized based on the ratio of
revenue recorded in the period to projected total revenues. This typically
results in an amortization period of less than one year. The amortization of
capitalized software costs is recorded in the royalties and product development
line item. Midway capitalized $11,128,000 and $3,430,000 of software development
costs for the three months ended September 30, 2001 and September 30, 2000,
respectively. Amortization of software development costs was $4,201,000 and
$2,584,000 for the quarters ended September 30, 2001 and September 30, 2000,
respectively.
7. Redeemable Convertible Preferred Stock and Warrants
During the three months ended September 30, 2001 all the holders of the 4,200
shares of Series B preferred stock exercised the options they received in
connection with their May 22, 2001 purchase of Series B preferred stock.
Pursuant to the exercise of those options Midway issued 1,312.5 additional
shares of Series B preferred stock at the stated value of $10,000 per share.
Midway received proceeds of $12,425,000, net of cash issuance cost. Five-year
warrants to purchase 123,821 shares of Midway's common stock were issued to the
private placement agent at an exercise price of $10.60 per common share. The
additional Series B preferred stock have a mandatory redemption date of
November 22, 2003 at the stated value of $13,125,000 plus any accrued and unpaid
dividends. The additional Series B preferred stock has similar provisions as the
initial Series B preferred stock, including a 4% quarterly dividend, except the
additional Series B preferred stock has a conversion price of $10.60 per common
share which is not subject to adjustment. The determination of the amount
included in the
- --------------------------------------------------------------------------------
F-6
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
balance sheet at September 30, 2001 from the issuance of the additional
Series B preferred stock and the change in balance of the Series B preferred
stock from June 30, 2001 was calculated as follows (In thousands):
<Table>
<Caption>
Additional Series B preferred stock
Proceeds from sale........................................ $13,125
Cash issuance costs..................................... (700)
Warrants issued to private placement agent.............. (660)
-------
Net amount allocated to preferred stock................... 11,765
Imputed dividend charged to retained earnings............. 65
-------
Amount included in the consolidated balance sheet at
September 30, 2001...................................... 11,830
-------
Initial Series B preferred stock
Amount included in the consolidated balance sheet at
June 30, 2001........................................... 20,667
Imputed dividend charged to retained earnings............. 1,592
-------
Amount included in the consolidated balance sheet at
September 30, 2001...................................... 22,259
-------
Balance sheet amount for all Series B preferred stock at
September 30, 2001 $34,089
=======
</Table>
The difference between the redemption amount and the carrying amount will be
recorded as an imputed dividend on the Series B preferred stock each quarter
until the November 22, 2003 redemption date and charged to retained earnings. In
the event of conversion of Series B preferred stock to Midway's common stock the
remaining difference between the redemption amount and the carrying amount
relating to the converted Series B preferred stock at time of conversion will be
recorded as an imputed preferred stock dividend and charged to retained earnings
at that time.
8. Income Taxes
Midway is required under certain accounting interpretations to provide a
valuation allowance for deferred tax assets resulting primarily from tax loss
carryforwards incurred after December 31, 2000. This valuation allowance
increased the net loss in the three months ended September 30, 2001 by
$2,078,000 or $.06 per share. Midway will be able to recognize the credit from
loss carryforwards in future profitable periods. The effective income tax rate
in the three months ended September 30, 2000 was 37.5%.
9. Comprehensive Income
Statement of Financial Accounting Standard Board Statement No. 130, REPORTING
COMPREHENSIVE INCOME requires the company to report foreign currency translation
adjustments as a component of other comprehensive income or loss. Comprehensive
loss for the three months ended September 30, 2001 and 2000 amounted to
$5,561,000 and $10,003,000, respectively.
10. Restructuring
During Fiscal 2001 severance of $2,049,000 was provided for 109 people relating
to the downsizing and subsequent exit from the coin-operated videogame business.
At June 30, 2001 a severance accrual of $1,845,000 was included in the
consolidated balance sheet in the caption accrued compensation and related
benefits. During the three months ended September 30, 2001 $726,000 was paid and
charged to accrued severance. At September 30, 2001 $1,119,000 of severance
accrual remains and is included
- --------------------------------------------------------------------------------
F-7
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in the consolidated balance sheet in the caption accrued compensation and
related benefits. At September 30, 2001, 95 of the 109 employees were
terminated.
11. Receivable from Officer
At September 30, 2001, Midway has a receivable of $834,000 from its chief
executive officer. Pursuant to his employment contract, $984,000 of advances
were made to him for 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 from deductions from future
salary and bonus payments. By September 30, 2001, the chief executive officer
had repaid $150,000 of the advances through deductions from his salary.
- --------------------------------------------------------------------------------
F-8
<Page>
- --------------------------------------------------------------------------------
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, 2001 and 2000, 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, 2001. Our audits
also included the financial statement schedule listed in the Index on page F-1.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 and
related schedule 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, 2001 and 2000, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
June 30, 2001, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Chicago, Illinois
August 21, 2001
- --------------------------------------------------------------------------------
F-9
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<Table>
<Caption>
June 30,
---------------------
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents................................... $ 40,330 $ 34,093
Short-term investments...................................... 21,000 --
Receivables, less allowances of $8,354 in 2001 and $5,855 in
2000...................................................... 14,321 25,398
Income taxes receivable..................................... 860 21,255
Inventories
Raw materials and work in progress........................ 372 7,907
Finished goods............................................ 1,616 19,621
-------- --------
1,988 27,528
Deferred income taxes....................................... 2,655 5,250
Other current assets........................................ 8,879 11,519
-------- --------
Total current assets........................................ 90,033 125,043
Property and equipment, net................................. 19,678 18,031
Excess of purchase cost over amount assigned to net assets
acquired, net............................................. 33,464 37,385
Deferred income taxes....................................... 8,688 --
Other assets................................................ 4,356 6,116
-------- --------
Total assets................................................ $156,219 $186,575
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................ $ 5,497 $ 8,959
Accrued compensation and related benefits................... 5,110 5,519
Accrued royalties........................................... 1,205 5,080
Other accrued liabilities................................... 5,715 4,942
-------- --------
Total current liabilities................................... 17,527 24,500
Deferred income taxes....................................... -- 1,720
Other noncurrent liabilities................................ 6,197 --
Redeemable convertible preferred stock, Series B, $.01 par
value, 5,512.5 shares authorized and designated, 4,200
shares issued, redeemable at $42,000...................... 20,667 --
Stockholders' equity:
Preferred stock, $.01 par value, shares authorized and
undesignated 4,994,487.5 in 2001 and 5,000,000 in 2000.... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
shares issued--39,022,138 in 2001 and 38,886,303 in
2000...................................................... 390 389
Additional paid-in capital.................................. 118,886 98,061
Retained earnings........................................... 8,788 78,123
Translation adjustment...................................... (133) (115)
Treasury stock, at cost--1,178,500 shares................... (16,103) (16,103)
-------- --------
Total stockholders' equity.................................. 111,828 160,355
-------- --------
Total liabilities and stockholders' equity.................. $156,219 $186,575
======== ========
</Table>
See notes to financial statements.
- --------------------------------------------------------------------------------
F-10
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<Table>
<Caption>
Years Ended June 30,
---------------------------------
2001 2000 1999
--------- --------- ---------
Revenues
Home video............................................... $117,328 $229,691 $217,890
Coin-operated video...................................... 50,880 104,174 133,905
-------- -------- --------
Total revenues............................................. 168,208 333,865 351,795
Cost of sales
Home video............................................... 64,791 112,628 102,458
Coin-operated video...................................... 43,214 73,004 89,528
-------- -------- --------
Total cost of sales........................................ 108,005 185,632 191,986
-------- -------- --------
Gross profit............................................... 60,203 148,233 159,809
Research and development expense........................... 75,405 89,388 76,009
Selling and marketing expense.............................. 32,487 56,725 43,264
Administrative expense..................................... 23,828 22,004 18,441
Restructuring expense...................................... 6,846 997 2,742
Litigation and settlement expense.......................... -- -- 11,025
-------- -------- --------
Operating income (loss).................................... (78,363) (20,881) 8,328
Interest income and other expense, net..................... 2,107 1,301 1,586
-------- -------- --------
Income (loss) before tax................................... (76,256) (19,580) 9,914
(Provision) credit for income taxes........................ 7,777 7,539 (3,767)
-------- -------- --------
Net income (loss).......................................... (68,479) (12,041) 6,147
Preferred stock dividend
Cash..................................................... 184 -- --
Imputed.................................................. 672 -- --
-------- -------- --------
Earnings (loss) applicable to common stock................. $(69,335) $(12,041) $ 6,147
======== ======== ========
Basic and diluted earnings (loss) per share of common
stock.................................................... $ (1.84) $ (.32) $ .16
======== ======== ========
Average number of shares outstanding....................... 37,719 37,869 37,597
======== ======== ========
</Table>
See notes to financial statements.
- --------------------------------------------------------------------------------
F-11
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<Table>
<Caption>
Common Stock
-------------------- Additional Cumulative Treasury Total
Number Par Paid-In Retained Translation Stock Stockholders'
of Shares Value Capital Earnings Adjustment At Cost Equity
--------- -------- ---------- -------- ----------- -------- -------------
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 (115) (16,103) 160,355
Net loss........................ (68,479) (68,479)
Translation adjustment.......... (18) (18)
--------
Comprehensive loss.............. (68,497)
Exercise of common stock
options....................... 136 1 1,085 1,086
Stock option expense............ 335 335
Dividend on series B preferred
stock
Cash.......................... (184) (184)
Imputed....................... (672) (672)
Proceeds from sale of Series B
preferred stock allocated to
warrants, purchase option and
beneficial conversion......... 19,405 19,405
------ ---- -------- -------- ----- -------- --------
Balance at June 30, 2001........ 39,022 $390 $118,886 $ 8,788 $(133) $(16,103) $111,828
====== ==== ======== ======== ===== ======== ========
</Table>
See notes to financial statements.
- --------------------------------------------------------------------------------
F-12
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
Years Ended June 30,
------------------------------
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss)........................................... $(68,479) $(12,041) $ 6,147
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization............................. 9,730 9,705 10,840
Receivables provision..................................... 11,387 24,854 12,668
Deferred income taxes..................................... (7,777) 1,109 (4,107)
Stock option expense...................................... 335 156 --
Loss on disposal of fixed assets.......................... 2,887 -- --
Tax benefit from exercise of common stock options......... -- 374 --
Increase (decrease) resulting from changes in operating
assets and liabilities:
Receivables............................................. (308) (4,182) 27,286
Inventories............................................. 25,515 4,445 (8,999)
Other current assets.................................... 2,472 (497) (1,150)
Accounts payable and accruals........................... (6,881) (12,852) (4,130)
Income taxes............................................ 20,339 (13,788) (9,852)
Other assets and liabilities not reflected elsewhere...... 8,169 2,060 (4,861)
-------- -------- --------
Net cash (used) provided by operating activities............ (2,611) (657) 23,842
INVESTING ACTIVITIES
Purchase of property and equipment.......................... (10,444) (11,273) (5,212)
Net change in short-term investments........................ (21,000) -- 12,000
-------- -------- --------
Net cash (used) provided by investing activities............ (31,444) (11,273) 6,788
FINANCING ACTIVITIES
Cash received on exercise of common stock options........... 1,086 1,125 --
Net proceeds from sale of common stock...................... -- -- 7,810
Net proceeds from sale of Series B preferred stock and
warrants.................................................. 39,400 -- --
Cash dividend on preferred stock............................ (184) -- --
Purchase of treasury stock.................................. -- (6,720) (13,030)
-------- -------- --------
Net cash provided (used) by financing activities............ 40,302 (5,595) (5,220)
-------- -------- --------
Effect of exchange rate changes on cash..................... (10) 72 --
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 6,237 (17,453) 25,410
Cash and cash equivalents at beginning of year.............. 34,093 51,546 26,136
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 40,330 $ 34,093 $ 51,546
======== ======== ========
</Table>
See notes to financial statements.
- --------------------------------------------------------------------------------
F-13
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS
Midway Games Inc. ("Midway") and its subsidiaries (the "Company") operate in one
operating segment, the design and distribution of coin-operated videogames and
publishing, licensing and distribution of home videogames (the "Videogame
Business"). The operations of the coin-operated videogame portion of the
business were discontinued in June 2001, see Note 12. Coin-operated videogames
were sold to distributors worldwide who sell them to operators and arcades. Home
videogames are sold to mass merchants, video rental retailers, and entertainment
software distributors. Prior to July 1, 1999, the Company participated in home
videogame markets outside North America through licensing and distribution
agreements with third parties, but in fiscal 2000 it began selling its home
videogames on a worldwide basis. Consumers buy or rent the home videogames to
use on game systems (Nintendo, Sony and Sega).
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $33,464,000 and $37,385,000 at June 30, 2001 and 2000, respectively
(net of accumulated amortization of $20,536,000 and $16,615,000 at June 30, 2001
and 2000, respectively) arising from prior year acquisitions is being amortized
by the straight-line method over 15 to 20 years. See Note 3 for prospective
change in amortization.
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 videogame
activities for fiscal 2001, 2000 and 1999 was $427,000, $2,569,000 and
$4,116,000, 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.
- --------------------------------------------------------------------------------
F-14
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Home and Coin-operated Videogame Revenues
Home and coin-operated videogame revenues are recorded when products are
delivered to customers. An allowance for home videogame returns, discounts, and
price adjustments is also recorded based upon management's evaluation of
historical experience as well as current industry trends.
Advertising Expense and Distribution Costs
The cost of advertising is charged to earnings as incurred and for fiscal 2001,
2000 and 1999 was $15,755,000, $33,420,000 and $23,743,000, respectively.
Distribution costs, including shipping and handling costs, are included in cost
of sales.
Sales to Customers Located Outside the United States and Sales to Major
Customers
Sales to customers located outside the United States were $25,530,000,
$45,365,000 and $35,582,000 for fiscal 2001, 2000 and 1999, respectively. Sales
of home videogames to two mass merchants during fiscal 2001 were $20,376,000 and
$17,410,000, and fiscal 2000 were $40,912,000 and $35,014,000 and fiscal 1999
were $41,539,000 and $38,183,000.
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.
NOTE 3: CHANGE OF FISCAL YEAR AND CHANGE IN GOODWILL ACCOUNTING
The Company announced in May 2001 that it was changing its fiscal year end from
June 30 to December 31. To accomplish the change, the Company will issue audited
financial statements for the six-month period ending December 31, 2001.
In June 2001, The Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. However early adoption is permitted, accordingly Midway will
adopt the new rules beginning July 1, 2001. Under the new rules, goodwill will
no longer be amortized but will be subject to annual impairment tests in
accordance with the Statements.
Application of the non-amortization provisions of the Statements is expected to
result in a decrease in amortization expense of $1,961,000 for the six-month
period ending December 31, 2001 and $3,922,000 for the fiscal year December 31,
2002. During the six-month period ending December 31, 2001, the Company will
perform the first of the required impairment tests of goodwill as of July 1,
2001 and management expects these tests will have no effect on the earnings and
financial position of the Company.
NOTE 4: RECEIVABLE FROM OFFICER
At June 30, 2001, Midway has a receivable of $984,000 from its chief executive
officer. Pursuant to his employment contract, $984,000 of advances were made to
him 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 from reductions in future salary and
bonus payments.
- --------------------------------------------------------------------------------
F-15
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5: PROPERTY AND EQUIPMENT
At June 30 net property and equipment were:
<Table>
<Caption>
2001 2000
(in thousands)
- ---------------------------------------------------------------------------------
Land........................................................ $ 1,401 $ 1,401
Leasehold improvements...................................... 5,058 4,601
Furniture, fixtures and engineering equipment............... 34,781 31,218
-------- --------
41,240 37,220
Less accumulated depreciation............................... (21,562) (19,189)
-------- --------
Net property and equipment.................................. $ 19,678 $ 18,031
======== ========
</Table>
NOTE 6: INCOME TAXES
During fiscal 2001, Midway was required under certain accounting interpretations
to provide a valuation allowance for realization of deferred tax assets
resulting primarily from tax loss carryforwards incurred subsequent to
December 31, 2000. The valuation allowance increased net loss per share by $.53.
Midway will be required to provide a valuation allowance in future periods when
a loss occurs. The valuation allowance is expected to be reversed into income in
future periods in which Midway returns to profitability.
Significant components of the provision (credit) for income tax for the years
ended June 30 were:
<Table>
<Caption>
2001 2000 1999
(in thousands)
- --------------------------------------------------------------------------------------------
Current:
Federal................................................... $ -- $(8,510) $ 6,903
State..................................................... -- (707) 971
Foreign................................................... -- 195 --
-------- ------- -------
Total current............................................. -- (9,022) 7,874
Deferred:
Federal................................................... (26,354) 1,168 (3,383)
State..................................................... (1,156) (59) (724)
Foreign................................................... (538) -- --
-------- ------- -------
Total deferred............................................ (28,048) 1,109 (4,107)
Valuation allowance......................................... 20,271 -- --
Provision for tax benefits resulting from stock options..... -- 374 --
-------- ------- -------
Provision (credit) for income taxes......................... $ (7,777) $(7,539) $ 3,767
======== ======= =======
</Table>
Consolidated pre-tax loss includes $1,759,000 pre-tax loss and $628,000 pre-tax
income from foreign operations in fiscal 2001 and 2000, respectively.
- --------------------------------------------------------------------------------
F-16
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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>
2001 2000 1999
- --------------------------------------------------------------------------------------------------
Statutory federal income tax rate........................... (35.0)% (35.0)% 35.0%
State income taxes, net of federal benefit.................. (1.0) (2.4) 1.6
Valuation allowance......................................... 26.6 -- --
Other, net.................................................. (.8) (1.1) 1.4
----- ----- ----
(10.2)% (38.5)% 38.0%
===== ===== ====
</Table>
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:
<Table>
<Caption>
2001 2000
(in thousands)
- ---------------------------------------------------------------------------------
Deferred tax assets resulting from:
Tax loss carryforward..................................... $ 28,503 $3,355
Inventory valuation....................................... 2,788 1,474
Accrued items not currently deductible.................... 1,689 1,355
Receivable allowance...................................... 3,322 1,884
-------- ------
Gross deferred tax assets................................... 36,302 8,068
-------- ------
Deferred tax liabilities resulting from
Tax over book depreciation................................ 1,491 1,189
Book over tax basis of domestic subsidiary................ 2,397 2,560
Other..................................................... 800 789
-------- ------
Gross deferred tax liabilities.............................. 4,688 4,538
-------- ------
Valuation allowance......................................... (20,271) --
-------- ------
Net deferred tax assets..................................... $ 11,343 $3,530
======== ======
</Table>
During fiscal 2001 no income taxes were paid. During fiscal 2000 and 1999 income
taxes paid were $4,654,000 and $17,726,000, respectively. At June 30, 2001 and
2000 Midway has a net operating loss carryforward of $78,600,000 and $7,976,000,
respectively, for federal income tax purposes. The net operating loss carry
forward at June 30, 2001 includes $1,025,000 relating to employee stock options
which will result in a credit to additional paid in capital when utilized.
NOTE 7: LINE OF CREDIT
During fiscal 2001 the Company maintained a line of credit for up to
$55,000,000, which provided for borrowings and letters of credit. In
August 2001, the Company modified the existing line of credit. The revolving
credit agreement extends to March 2003 and provides availability of $15,000,000
to July 1, 2002, $40,000,000 thereafter to January 31, 2003 and then $15,000,000
to maturity. The agreement requires, among other things, that the Company
maintain a minimum level of stockholders' equity and a specified ratio of
accounts receivable to outstanding borrowings under the line of credit and
prohibits the payment of dividends on common stock. Substantially all the assets
of the Company are pledged as collateral under the credit agreement.
- --------------------------------------------------------------------------------
F-17
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8: REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
On May 22, 2001, the Company sold Series B redeemable convertible preferred
stock and warrants to purchase common stock for $42,000,000 in a private
placement resulting in proceeds of $39,400,000, net of cash issuance cost.
Midway's chief executive officer purchased $2,000,000 of the Series B preferred
stock and warrants on the same terms as the other investors. The terms of the
Series B redeemable convertible preferred stock include an option to acquire
additional Series B redeemable convertible preferred stock. In addition,
warrants were issued to the private placement agent as partial compensation.
The 4,200 shares of Series B preferred stock has a stated value of $10,000 per
share and provides for a dividend of 4%, payable quarterly in cash or additional
Series B preferred stock at Midway's option. This Series B preferred stock has a
mandatory redemption date of November 22, 2003 at the stated value of
$42,000,000 plus any accrued and unpaid dividends. The initial Series B
preferred stock is convertible into the Company's common stock at $9.33 per
common share. The conversion price of $9.33 may be adjusted on May 21, 2002 if
conversion has not previously occurred. The new conversion price will be the
average of the closing bid price of the Company's common stock for the period
May 22, 2001 to May 20, 2002 subject to a floor of $4.24 and a cap of $11.45.
The option to purchase additional Series B preferred stock extended for one year
for an additional 1,312.5 Series B preferred shares at $10,000 per share. In
August 2001, the option was exercised by all the investors and Midway issued the
additional Series B preferred stock and received proceeds of approximately
$12,425,000, net of cash issuance cost. The additional Series B preferred shares
have similar provisions, including those relating to conversion and redemption,
as the initial Series B preferred shares except that the conversion price is
$10.60 and is not subject to adjustment.
Three-year warrants to purchase 1,050,000 shares of Midway's common stock at an
exercise price of $9.33 per share were issued in the May 2001 sale. Five-year
warrants to purchase 555,161 shares of Midway's common stock at an exercise
price of $9.33 per share were issued to the private placement agent.
During the six-month period from May 22, 2003 to the November 22, 2003
redemption date, the Company may have the right to require the holders of all
the Series B preferred shares to convert into the Company's common stock. Such
right will be triggered if the weighted average price of the Company's common
stock for thirty consecutive trading days during the six-month period is at or
above $15.16 for the initial Series B preferred shares and above $17.23 for the
additional Series B preferred shares.
Midway may elect to redeem all or part of the Series B preferred shares by the
issuance of its common stock valued at the average of the weighted average price
of the common stock for the 120 trading days preceding the redemption date. The
election to use common stock must be made 125 trading days prior to the
November 22, 2003 redemption date. A minimum common share price is established
equal to 50% of the closing bid price of the common stock on the 126th trading
day before the redemption date. Over the 120 trading days preceding the
redemption date, a decrease in average closing bid price below the established
minimum common share price would require the Company for each day the condition
exists to use cash to redeem 1/120 of the Series B preferred shares that the
Company had elected to redeem using common stock.
The holders of Series B preferred stock have the right to put to the Company the
Series B preferred stock at 125% of stated value in the event of a change in
control or up to 120% in the event of default. The terms of the Series B
preferred stock prohibit the payment of dividends on the Company's common stock.
- --------------------------------------------------------------------------------
F-18
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The determination of the amount included in the June 30, 2001 consolidated
balance sheet for redeemable convertible preferred stock is as follows (in
thousands):
<Table>
<Caption>
Proceeds from sale.......................................... $ 42,000
Cash issuance cost.......................................... (2,600)
--------
39,400
Amounts allocated to (included in additional paid-in
capital):
Warrants issued to private placement agent................ (3,162)
Warrants issued to investors.............................. (4,294)
Option to purchase additional preferred shares............ (2,496)
Beneficial conversion rate................................ (9,453)
--------
(19,405)
--------
Amount allocated to Series B redeemable preferred stock..... 19,995
Imputed dividend charged to retained earnings............... 672
--------
Amount in June 30, 2001 consolidated balance sheet.......... $ 20,667
========
</Table>
The $21,333,000 difference between the $42,000,000 redemption value and the
June 30, 2001 amount will be recorded as an imputed dividend on the Series B
preferred stock each quarter until the redemption date and charged to retained
earnings.
NOTE 9: EARNINGS (LOSS) PER SHARE OF COMMON STOCK
The calculation of loss per share for fiscal 2001 did not include the effect of
the Company's convertible preferred stock, warrants, or stock options because to
do so would have been antidilutive. The calculation of loss per share for fiscal
2000 did not include the effect of the Company's stock options, because to do so
would be antidilutive. The calculation of earnings per share for fiscal 1999 did
not include the effect of stock options because average market price of the
common stock was lower than the exercise prices. Additional information on the
potential dilutive securities can be found in Notes 8 and 10.
NOTE 10: PREFERRED STOCK AND COMMON STOCK OPTION PLANS
The authorized and undesignated 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. Rights
were issued to the Series B preferred stockholders equal to the number of Rights
associated with the shares of the Company's common stock to which the Series B
preferred stockholders would be entitled to if conversion had taken place. 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 Stock Option Committee of the Board of Directors has
- --------------------------------------------------------------------------------
F-19
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the authority to fix the terms and conditions upon which each option is granted,
but in no event shall the term exceed ten years. At June 30, 2001, 7,477,862
shares of common stock were reserved for possible issuance for stock option
plans and 10,870,877 shares of common stock were reserved for the possible
conversion of Series B preferred stock and possible exercise of warrants.
A summary of the status of the Company's stock option plans for the three years
ended June 30, 2001 was as follows:
<Table>
<Caption>
Weighted
Shares Average
(000) Exercise Price
- ---------------------------------------------------------------------------------------
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
Granted..................................................... 1,174 6.79
Exercised................................................... (136) 8.00
Forfeited................................................... (900) 11.54
-----
Outstanding at June 30, 2001................................ 6,439 12.17
</Table>
The following summarizes information about stock options outstanding at
June 30, 2001:
<Table>
<Caption>
Weighted Average
Number Remaining Weighted
Outstanding Contractual Life Average
Range of Exercise Prices (000) in Years Exercise Price
- --------------------------------------------------------------------------
$6.50 - $8.625 3,057 7.8 $ 7.45
10.625 - 15.5625 1,411 8.2 12.68
16.50 - 23.125 1,971 5.8 19.12
-----
6.50 - 23.125 6,439 7.3 12.17
</Table>
At June 30, 2001 options for 4,428,000 shares were exercisable at a weighted
average exercise price of $13.20 with a range of $6.50 to $23.125. At June 30,
2000 and 1999 options for 4,075,000 and 1,334,000 shares, respectively, were
exercisable at an average exercise price of $13.12 and $19.39 per share,
respectively. At June 30, 2001, 1,039,000 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 2001 and 2000 an expense
of $335,000 and $156,000, respectively, 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 earnings (loss) applicable to common stock for fiscal 2001, 2000 and
1999 adjusted for the expense provision of SFAS No. 123 was $(75,308,000),
$(21,183,000), and $564,000, respectively, or $(2.00), $(.56), and $.02,
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 2001, 2000 and 1999, respectively:
dividend yield of 0%, 0% and 0%; expected volatility of .70, .70
- --------------------------------------------------------------------------------
F-20
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and .70; risk free interest rate of 5.65%, 6.15%, and 5.95% and expected life of
the option of 6 years, 6 years and 6 years.
During fiscal 2001, 2000 and 1999 options granted with an exercise price equal
to the market price of the stock had a weighted average pro forma fair market
value using the Black-Scholes assumptions noted above of $5.70, $7.93, and $5.68
per share, respectively. During fiscal 2001 options granted with an exercise
price lower than the then market price of the stock had a weighted average
exercise price of $6.50 and a weighted average fair market value using the
Black-Scholes assumptions of $5.66. During fiscal 2001 options granted in which
the exercise price equaled the then market value of the stock had a weighted
average exercise price of $7.96.
NOTE 11: 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, short-term
investments and trade accounts receivable from the sale of games. By policy, the
Company places its cash equivalents and short-term investments only in high
credit quality securities and limits the amounts invested in any one security.
At June 30, 2001, 32% of trade accounts receivable are from sales of
coin-operated videogames 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. Sales outside the United
States of home videogames are in several currencies and foreign currency
transaction loss was $117,000 and $598,000 for fiscal 2001 and 2000,
respectively. At times during the fiscal year accounts receivable from certain
major home videogame customers represent a significant amount of the accounts
receivable then outstanding.
Cash equivalents of $13,132,000 and $26,011,000 at June 30, 2001 and 2000,
respectively, and short-term investments of $21,000,000 at June 30, 2001, 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 12: RESTRUCTURING EXPENSE AND EXIT FROM COIN-OPERATED VIDEOGAME BUSINESS
During fiscal 2001, the Company incurred restructuring charges of $12,527,000
($.33 per share with no tax credit) relating to the downsizing and the
subsequent exiting from the coin-operated videogame business. The charge
included severance of $2,049,000 for 109 people, inventory write-downs of
$4,189,000, account receivable provision of $965,000, equipment and capitalized
software disposal of $3,070,000, lease and long term commitment of $1,037,000
and administrative clean-up activities and other of $1,217,000. The
restructuring charges were included in the consolidated statement of income as
follows: coin-operated video cost of sales--$4,716,000, administrative
expense--$965,000 and restructuring expense--$6,846,000. The severance accrual
is included in the consolidated balance sheet at June 30, 2001 in the caption
accrued compensation and related benefits in the amount of $1,845,000. At
June 30, 2001, 70 of the 109 employees were terminated.
As a result of the June 2001 exiting from the coin-operated videogame business,
the revenues and cost of sales shown in consolidated statement of income will
not continue and the potential restructuring savings are expected to be:
research and development expense approximately $7,500,000 and administrative and
selling and marketing expense approximately $6,000,000. Since March 2001
substantially all the videogame design employees that developed coin-operated
videogames have been redirected to the development of home videogames.
Accordingly, research and development expense, administration and sales and
marketing expense may not decrease, to the extent of the estimated
- --------------------------------------------------------------------------------
F-21
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
potential restructuring savings, in future periods as the next generation home
videogame business expands.
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 videogames sales and administration and in product development.
There were no adjustments to the fiscal 2000 accrual.
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 13: 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, 2001 as follows:
<Table>
<Caption>
(in thousands)
2002........................................................ $3,176
2003........................................................ 2,392
2004........................................................ 2,046
2005........................................................ 1,463
2006........................................................ 65
------
9,142
Less sublease income........................................ 2,779
------
$6,363
======
</Table>
Rent expense for fiscal 2001, 2000 and 1999 was $3,676,000, $2,686,000, and
$2,281,000, respectively, and was offset by sublease income of $725,000,
$703,000 and $702,000 for fiscal 2001, 2000 and 1999, respectively. Aggregate
future gross lease commitments of approximately $5,972,000 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 videogames 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 2002, 2003, 2004 and
thereafter were $1,761,000, $1,896,000, $875,000 and $125,000, respectively. The
payments are expected to be recovered from the sale of videogames using the
license each year.
NOTE 14: 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 videogames directly into international
markets beginning in fiscal 2000.
- --------------------------------------------------------------------------------
F-22
<Page>
MIDWAY GAMES INC.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal 2001 and 2000 are as
follows:
<Table>
<Caption>
Sept. 30, Dec. 31, Mar. 31, June 30,
2000 2000 2001(1)(3) 2001(2)(3)
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------
FISCAL 2001 QUARTERS
Revenues............................................ $47,275 $76,995 $ 23,723 $ 20,215
Gross profit........................................ 16,993 33,750 1,523 7,937
Research and development expense.................... 20,120 20,759 16,447 18,079
(Loss) applicable to common stock................... (9,951) (3,011) (25,852) (30,521)
Basic and diluted (loss) per share.................. $ (.26) $ (.08) $ (.69) $ (.81)
Shares used in calculations......................... 37,711 37,711 37,719 37,734
</Table>
(1) The March 31, 2001 quarter includes a restructuring charge of $3,639,000 or
$.10 per share with no tax credit for the further downsizing of the
coin-operated videogame business.
(2) The June 30, 2001 quarter includes a restructuring charge for exiting the
coin-operated videogame business of $8,888,000 or $.23 per share.
(3) No income tax credit was recorded after December 31, 2000. See Note 6. The
loss would have decreased by $7,860,000 or $0.21 per share in the March 31,
2001 quarter and $7,835,000 or $0.21 per share in the June 30, 2001 quarter
if the tax credit was recorded for the operating loss after excluding
restructuring charges.
<Table>
<Caption>
Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000(1)
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------
FISCAL 2000 QUARTERS
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
videogames 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.
- --------------------------------------------------------------------------------
F-23
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[MIDWAY GAMES INC. LOGO]
4,500,000 Shares
Common Stock
----------------
PROSPECTUS
------------------------
UBS Warburg
Gerard Klauer Mattison
, 2001
You should rely only on the information incorporated by reference or contained
in this prospectus. We have not authorized any dealer, salesperson or other
person to give you different information. This prospectus is not an offer to
sell nor is it seeking an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted. The information contained in this
prospectus is correct only as of the date of this prospectus, regardless of the
time of the delivery of this prospectus or any sale of these securities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses related to the registration and
issuance of the securities being registered hereunder, excluding underwriting
discounts and commissions. All these expenses will be paid by the Registrant.
All amounts shown are estimates except for the SEC registration fee, NASD
registration fee and NYSE listing fee.
<Table>
SEC Registration Fee........................................ $ 18,747
NASD Filing Fee............................................. $ 7,999
Accounting Fees and Expenses................................ $ 25,000
Legal Fees and Expenses..................................... $200,000
NYSE Listing Fees........................................... $ 1,500
Printing and Engraving Expenses............................. $175,000
Miscellaneous............................................... $ 21,754
--------
Total................................................... $450,000
========
</Table>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's authority to indemnify its officers and directors is
governed by the provisions of Section 145 of the General Corporation Law of the
State of Delaware (the "DGCL"), by the Amended and Restated Bylaws of the
Registrant, as amended (the "Bylaws"), by the Restated Certificate of
Incorporation, as amended, of the Registrant (the "Certificate of
Incorporation") and by indemnification agreements entered into with each of its
directors (the "Indemnity Agreements").
Under Section 145 of the DGCL, directors and officers as well as other
employees and individuals may be indemnified against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation (a "derivative action")) if they acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of the
Registrant, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with defense or settlement of such an action and the DGCL requires
court approval before there can be any indemnification where the person seeking
indemnification has been found liable to the Registrant.
The Certificate of Incorporation and Bylaws provide that the Registrant
shall, to the fullest extent permitted by Section 145 of the DGCL,
(i) indemnify any and all persons whom it shall have power to indemnify under
said section from and against any and all of the expenses, liabilities or other
matters referred to in or covered by said section, and (ii) advance expenses
related thereto to any and all said persons. The indemnification and advancement
of expenses provided for therein shall not be deemed to be exclusive of any
other rights to which those indemnified may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in their official capacities and as to action in another capacity
while holding such offices, and shall continue as to persons who have ceased to
be directors, officers, employees or agents and shall inure to the benefit of
the heirs, executors and administrators of such person. In addition, the
Certificate of Incorporation provides for the elimination of personal liability
of directors of the Registrant to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director, to the fullest
extent permitted by the DGCL, as amended and supplemented.
II-1
<Page>
The Indemnity Agreements provide for the indemnification of officers and
directors to the fullest extent permitted by the laws of the State of Delaware,
and obligate the Registrant to provide the maximum protection allowed under
Delaware law. In addition, the Indemnity Agreements supplement and increase such
protection in certain respects.
The Underwriting Agreement among UBS Warburg LLC, Gerard Klauer Mattison &
Co., Inc. and the Registrant filed as Exhibit 1.1 hereto provides for the
indemnification of officers and directors by the underwriters under certain
circumstances.
The Registrant has purchased an insurance policy that provides coverage for
losses of up to an aggregate amount of $20 million arising from claims made
against the directors or officers for any actual or alleged wrongful act in
their capacities as directors or officers of the Registrant. The coverage only
applies, however, if indemnity is not available pursuant to the foregoing
provisions described in this Item 15. The policy also covers losses of the
Registrant for securities claims made against the Registrant and for the amount
of any indemnification paid to directors and officers, in each case up to the
aggregate $20 million limit.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS.
The following exhibits are being furnished herewith or incorporated by
reference herein:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1* Form of Underwriting Agreement.
4.1 Specimen Certificate of Common Stock, incorporated by
reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, as amended, effective October 29,
1996 (File No. 333-11919).
4.2 Amended and Restated Rights Agreement, dated as of May 21,
2001, between the Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 22, 2001.
5 Opinion of Shack Siegel Katz Flaherty & Goodman P.C.,
counsel for Registrant.
23.1 Consent of Shack Siegel Katz Flaherty & Goodman P.C.
(contained in the Opinion filed as Exhibit 5 hereto).
23.2 Consent of Ernst & Young LLP.
24 Power of Attorney (contained on the signature page hereof).
</Table>
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-2
<Page>
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-3
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois on this 27th day of
November, 2001.
<Table>
MIDWAY GAMES INC.
By: /s/ NEIL D. NICASTRO
-----------------------------------------
Neil D. Nicastro,
CHIEF EXECUTIVE OFFICER
</Table>
POWER OF ATTORNEY
Each person whose signature to this Registration Statement appears below
hereby appoints Neil D. Nicastro, Thomas E. Powell and Deborah K. Fulton, and
each of them acting singly, as his attorney-in-fact, to sign on his behalf
individually and in the capacity stated below and to file all amendments and
post-effective amendments to this Registration Statement, which amendment or
amendments may make such changes and additions to this Registration Statement as
such attorney-in-fact may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE DATE TITLE
- --------- ---- -----
Chairman of the Board of
/s/ NEIL D. NICASTRO Directors, President, Chief
- ---------------------------------------- November 27, 2001 Executive Officer (Principal
Neil D. Nicastro Executive Officer) and Chief
Operating Officer
Executive Vice President, Chief
/s/ THOMAS E. POWELL Financial Officer (Principal
- ---------------------------------------- November 27, 2001 Financial and Principal
Thomas E. Powell Accounting Officer) and
Treasurer
/s/ KENNETH J. FEDESNA
- ---------------------------------------- November 27, 2001 Executive Vice President--Product
Kenneth J. Fedesna Development and Director
/s/ HAROLD H. BACH
- ---------------------------------------- November 27, 2001 Director
Harold H. Bach
/s/ WILLIAM C. BARTHOLOMAY
- ---------------------------------------- November 27, 2001 Director
William C. Bartholomay
</Table>
II-4
<Page>
<Table>
<Caption>
SIGNATURE DATE TITLE
- --------- ---- -----
/s/ WILLIAM E. MCKENNA
- ---------------------------------------- November 27, 2001 Director
William E. McKenna
/s/ NORMAN J. MENELL
- ---------------------------------------- November 27, 2001 Director
Norman J. Menell
/s/ LOUIS J. NICASTRO
- ---------------------------------------- November 27, 2001 Director
Louis J. Nicastro
/s/ HARVEY REICH
- ---------------------------------------- November 27, 2001 Director
Harvey Reich
/s/ IRA S. SHEINFELD
- ---------------------------------------- November 27, 2001 Director
Ira S. Sheinfeld
/s/ GERALD O. SWEENEY, JR.
- ---------------------------------------- November 27, 2001 Director
Gerald O. Sweeney, Jr.
/s/ RICHARD D. WHITE
- ---------------------------------------- November 27, 2001 Director
Richard D. White
</Table>
II-5
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1* Form of Underwriting Agreement.
4.1 Specimen Certificate of Common Stock, incorporated by
reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, as amended, effective October 29,
1996 (File No. 333-11919).
4.2 Amended and Restated Rights Agreement, dated as of May 21,
2001, between the Registrant and The Bank of New York, as
Rights Agent, incorporated by reference to the Registrant's
Current Report on Form 8-K filed on May 22, 2001.
5 Opinion of Shack Siegel Katz Flaherty & Goodman P.C.,
counsel for Registrant.
23.1 Consent of Shack Siegel Katz Flaherty & Goodman P.C.
(contained in the Opinion filed as Exhibit 5 hereto).
23.2 Consent of Ernst & Young LLP.
24 Power of Attorney (contained on the signature page hereof).
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* To be filed by amendment.