SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996
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Commission file number 001-12367
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MIDWAY GAMES INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2906244
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
3401 North California Ave., Chicago, IL 60618
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (773) 961-2222
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N/A
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by X whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES NO X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 38,500,000 shares of common
stock, $.01 par value, were outstanding at November 8, 1996.
MIDWAY GAMES INC.
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INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION:
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ITEM 1. Financial Statements:
------- Condensed Statements of Income -
Three months ended September 30, 1996 and 1995................... 2
Condensed Balance Sheets -
September 30, 1996 and June 30, 1996............................. 3-4
Condensed Statements of Cash Flows -
Three months ended September 30, 1996 and 1995................... 5
Notes to Condensed Financial Statements.......................... 6-9
ITEM 2. Management's Discussion and Analysis of Financial Condition
------- and Results of Operations........................................ 10-11
PART II. OTHER INFORMATION:
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ITEM 6.(A) Exhibits......................................................... 12
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SIGNATURE............................................................................ 13
MIDWAY GAMES INC.
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CONDENSED STATEMENTS OF INCOME
(Thousands of dollars, except per share amounts)
(Unaudited)
Three months ended
September 30,
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1996 1995
---- ----
Consolidated Combined
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REVENUES
Home video............................................. $ 47,554 $ 46,717
Coin-operated video.................................... 18,001 21,221
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Total revenues............................................ 65,555 67,938
Cost of sales............................................. 31,175 40,622
-------- --------
Gross profit.............................................. 34,380 27,316
Research and development expense.......................... 12,003 5,851
Selling expense........................................... 7,608 7,562
Administrative expense.................................... 3,994 2,272
-------- --------
Operating income.......................................... 10,775 11,631
Interest and other income................................. 157 -
Interest expense.......................................... (1,130) (47)
-------- --------
Income before tax provision............................... 9,802 11,584
Provision for income taxes................................ (3,725) (4,414)
-------- --------
Net income................................................ $ 6,077 $ 7,170
======== ========
Net income per share of common stock...................... $ 0.18 $ 0.21
======== ========
Shares used in calculating per share amounts.............. 33,400 33,400
======== ========
See notes to condensed financial statements.
2
MIDWAY GAMES INC.
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CONDENSED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
September 30, June 30,
1996 1996
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Consolidated Combined
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ASSETS
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Current assets:
Cash and cash equivalents......................... $ 11,858 $ 9,199
Receivables, less allowances of $2,619 and $995... 77,588 48,951
Inventories, at lower of cost (Fifo) or market:
Raw materials and work in progress.............. 16,203 16,835
Finished goods.................................. 5,070 8,187
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21,273 25,022
Other current assets.............................. 8,743 5,407
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Total current assets............................ 119,462 88,579
Property and equipment.............................. 10,473 9,491
Less: accumulated depreciation...................... (4,126) (3,564)
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6,347 5,927
Excess of purchase cost over amount assigned to net
assets acquired, net of accumulated amortization of
$2,478 and $2,035................................... 22,322 22,765
Other assets......................................... 1,005 991
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$149,136 $118,262
======== ========
See notes to condensed financial statements.
3
MIDWAY GAMES INC.
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CONDENSED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
September 30, June 30,
1996 1996
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Consolidated Combined
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LIABILITIES AND STOCKHOLDER'S EQUITY
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CURRENT LIABILITIES:
Accounts payable............................... $ 11,201 $ 17,686
Accrued compensation and related benefits...... 5,987 4,849
Income taxes payable........................... 4,032 --
Deferred income taxes.......................... 1,418 1,400
Accrued payment on 1996 purchase of Atari
Games Corporation............................ 3,286 3,286
Dividend notes................................. 50,000 50,000
Accrued royalties.............................. 11,696 6,088
Advance from WMS Industries Inc................ 17,250 --
Other accrued liabilities...................... 20,449 16,888
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Total current liabilities.................... 125,319 100,197
Long term debt................................... 7,863 7,863
Deferred income taxes............................ 2,469 2,794
Other noncurrent liabilities..................... 1,920 1,920
STOCKHOLDER'S EQUITY:
Stockholder's net investment................... -- 5,488
Preferred stock, $.01 par value, 5,000,000
shares authorized............................. -- --
Common stock, $.01 par value, 100,000,000
shares authorized, 33,400,000 shares
outstanding.................................. 334 --
Additional paid-in capital..................... 5,154 --
Retained earnings.............................. 6,077 --
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Total stockholder's equity................... 11,565 5,488
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$ 149,136 $ 118,262
========= =========
See notes to condensed financial statements.
4
MIDWAY GAMES INC.
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CONDENSED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three months ended
September 30,
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1996 1995
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Consolidated Combined
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OPERATING ACTIVITIES:
Net income........................................................................... $ 6,077 $ 7,170
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization................................................... 1,005 634
Receivables provision........................................................... 1,569 1,307
Deferred income taxes........................................................... (307) (1,013)
Decrease resulting from changes in operating assets and liabilities............. (21,953) (20,642)
-------- --------
Net cash used by operating activities................................................ (13,609) (12,544)
INVESTING ACTIVITIES:
Purchase of property and equipment................................................... (982) (1,049)
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Net cash used by investing activities................................................ (982) (1,049)
FINANCING ACTIVITIES:
Net transactions with WMS Industries Inc............................................. 17,250 14,066
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Net cash provided by financing activities............................................ 17,250 14,066
Increase in cash and cash equivalents................................................ 2,659 473
Cash and cash equivalents at beginning of period..................................... 9,199 -
-------- --------
Cash and cash equivalents at end of period........................................... $ 11,858 $ 473
======== ========
See notes to condensed financial statements.
5
MIDWAY GAMES INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
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The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Due to the seasonality of the
Company's businesses, operating results for the three month period ended
September 30, 1996 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 1997. For further
information, refer to the combined financial statements and footnotes
thereto for the year ended June 30, 1996 included in the Company's
Registration Statement on Form S-1.
2. BASIS OF PRESENTATION
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Basis of Presentation and Relationship with WMS Industries Inc.
Since its inception in 1988, Midway Games Inc. ("Midway") has been a
wholly-owned subsidiary of WMS Industries Inc. ("WMS") and was the primary
subsidiary in which WMS conducts the coin-operated video games business.
Subsequent to July 1, 1996, Midway is the only WMS subsidiary in the coin-
operated video game business.
On July 1, 1996 (the "Transfer Date") WMS transferred out of Midway all of
the operating assets and liabilities relating to the "Bally(R)" pinball
business previously conducted by Midway. On the Transfer Date WMS
transferred the coin-operated video game operating assets and liabilities
not previously part of Midway from other WMS subsidiaries to Midway. Also
on the Transfer Date WMS transferred 100% of the stock of Midway Home
Entertainment Inc. (formerly Williams Entertainment Inc.) and Midway
Interactive Inc. (formerly Williams Interactive Inc.) to Midway. The
aforementioned transfers resulted in WMS concentrating its Video Game
Business into Midway and its wholly-owned subsidiaries. WMS's net
investment has been reflected as Stockholder's Net Investment in the
combined financial statements at June 30, 1996. The aforementioned
transfers have been reflected in the financial statements for June 30, 1996
and prior periods, and the revenues and expenses of the Bally pinball
business have been excluded from the financial statements.
The combined financial statements at June 30, 1996 and for the periods
ending June 30, 1996 or prior reflect the historical combined financial
position and results of operations of the Video Game Business as if the
Company operated the Video Games Business under the structure implemented
on the Transfer Date. The results of the Video Game Business include the
results of Midway Home Entertainment Inc., and the results of Midway
Interactive Inc., subsequent to its purchase of Atari Games Corporation
("Atari Games") on March 29, 1996. The Company believes that this is the
most meaningful presentation in that it presents on an historical basis the
results of operations and financial condition of all of the components of
the Video Games Business that the Company owns after giving effect to the
structure implemented on the Transfer Date. The financial statements
subsequent to July 1, 1996 are presented on a consolidated basis.
6
The financial statements include transfers and allocations of costs and
expenses from WMS or other WMS subsidiaries primarily for activities
relating to the Midway coin-operated video games business. Cost of sales
includes material, labor and labor fringes transferred from the other WMS
subsidiaries at cost based on the standard cost of material adjusted to
estimated actual using engineered bills of material and actual labor with
standard labor fringes applied. Cost of sales also includes allocations of
manufacturing overhead cost incurred in the production of coin-operated
video games for Midway. Research and development expenses includes
allocations for certain shared facilities and personnel. Selling and
administrative expenses include certain allocations relating to general
management, treasury, accounting, human resources, insurance and selling
and marketing. These allocations were determined by using various factors
such as dollar amount of sales, number of personnel, square feet of
building space, estimates of time spent to provide services and other
appropriate costing measures. In the opinion of management these transfers
of cost of sales and allocations are made on a reasonable basis to properly
reflect the share of costs incurred by WMS on behalf of the Company.
The financial statements may not necessarily be representative of results
that would have been attained if the Company operated as a separate
independent entity.
3. ACQUISITION
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On March 29, 1996, a Midway Games subsidiary acquired all the capital stock
of Atari Games Corporation ("Atari Games") from Warner Communications Inc.
("Warner"), a subsidiary of Time Warner Inc.
The Company is in the process of assimilating parts of the Atari Games
business into the Company's similar activities and exiting certain
activities. A $4,500,000 liability for exit activities was established on
March 29, 1996, the only major component of which was $2,500,000 of
employee severance costs. The liability also includes provisions for
severance and relocation costs for employees of Atari Games, contractual
liabilities, direct exit costs and estimated losses of the two foreign
subsidiaries until disposition.
As of September 30, 1996 costs of $2,928,000 for assimilation and exit
activities related to the acquisition of Atari Games have been incurred.
Additional costs will continue to be incurred until the sale of the
subsidiary in Japan has been completed and the building used for
manufacturing in California has been subleased. The timing and outcome of
these events will determine the adjustment required, if any, to the
liability for exit activities. Subsequent to September 30, 1996 Atari
Games completed the sale of its subsidiary in Ireland, the result of which
did not require any adjustment to the exit liability.
Under the terms of the purchase agreement, Warner is required to make an
additional cash payment of $3,247,000 to Atari Games in order to increase
net current assets to the required amount based upon the Atari Games' final
March 29, 1996 balance sheet. A receivable for this amount is included in
the condensed balance sheet. The final purchase price has not as yet been
accepted by Warner. Any significant change in the exit liability or
purchase price would result in an adjustment to negative goodwill.
7
4. TRANSACTIONS WITH WMS
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The Company, except for Atari Games, for the periods included in the
financial statements participated in the WMS central cash management
system, pursuant to which all cash receipts were transferred to WMS and all
cash disbursements were made by WMS. Seasonal cash needs were provided by
WMS. After the completion of the Offering (see Note 6) the treasury
activities of the Video Games Business will be conducted by the Company.
During the quarters ended September 30, 1996 and September 30, 1995 one
subsidiary that has seasonal cash needs was charged interest at prime and
was paid interest at short-term treasury bill rates on the balance of the
intercompany amount with WMS. Due to the seasonal cash flows of this
subsidiary, the intercompany account with WMS alternated between
intercompany accounts payable and receivable. Interest income accrued from
WMS and interest expense accrued to WMS was as follows:
September 30,
1996 1995
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(in thousands)
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Interest income $ 0 $ 6
Interest expense $94 $77
Interest expense for the September 30, 1996 quarter also included $764,000
on the $50 million dividend notes accrued at 6%.
The Company has been charged for the specific production costs, excluding
manufacturing overhead, of the coin-operated video games produced by a
subsidiary of WMS that totaled $9,362,000 and $12,940,000 in the quarters
ended September 30, 1996 and September 30, 1995, respectively. In
addition, certain other costs have been allocated to the Company based on
various factors noted in Note 2. Charges to the Company from WMS and WMS
subsidiaries for the allocations in the quarters ended September 30, 1996
and September 30, 1995 were:
September 30,
1996 1995
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(in thousands)
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Manufacturing overhead $1,378 $975
Research and development expense 183 366
Selling expense 498 494
Administrative expense 1,034 880
The Company has entered into a Manufacturing and Services Agreement with
WMS under which WMS and its subsidiaries agree to continue performing
contract manufacturing for coin-operated video games for Midway and Atari
Games as well as providing general management, financial reporting, and
treasury services to the Company and general management, accounting, human
resources and selling and marketing services to Midway. The Company
intends to purchase materials and WMS subsidiaries will manufacture the
coin-operated video games charging actual labor with labor fringes and
manufacturing overhead allocated. The labor fringes, manufacturing
overhead and other services provided will be allocated based on the various
factors noted in Note 2 that were used in the financial statements.
8
5. AUTHORIZED SHARES
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In October 1996 the Company recapitalized and authorized the shares of
preferred and common stock retroactively reflected in the September 30,
1996 consolidated balance sheet. In addition, the financial statements
reflect the October 1996 stock split of 33,400 for one.
6. PUBLIC OFFERING
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On October 30, 1996, the Company successfully completed an initial public
offering of 5,100,000 of its common shares at a price of $20.00 per share
resulting in net proceeds to the Company of approximately $93,700,000. WMS
Industries owns 33,400,000 common shares of the Company representing 86.8%
of its outstanding common stock. The dividend notes of $50 million and the
advances from WMS of $17,250,000 were paid with the proceeds of the
offering.
9
MIDWAY GAMES INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains certain forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in the forward looking statements.
FINANCIAL CONDITION
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The Company, except for its Atari Games subsidiary, has participated in the WMS
central cash management system, pursuant to which all cash receipts were
transferred to WMS and all cash disbursements were made by WMS. Seasonal cash
needs were provided by WMS. After completion of the Offering, as described in
Note 6 to the condensed financial statements, the Company will conduct its own
treasury activities.
During the quarter ended September 30, 1996 and 1995, cash used by operating and
investing activities, was $14,591,000 and $13,593,000, respectively, and
$17,250,000 and $14,066,000, respectively, was provided by WMS. The $11,858,000
of cash at September 30, 1996 and the $9,199,000 of cash at June 30, 1996 is
cash at Atari Games.
Cash provided by operating activities before changes in operating assets and
liabilities, was $8,344,000 in the quarter ended September 30, 1996 and
$8,098,000 in the quarter ended September 30, 1995.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows, resulted in $21,953,000 of cash outflow in the quarter
ended September 30, 1996, compared with $20,642,000 of cash outflow in the
quarter ended September 30, 1995, which outflows were primarily due to increased
receivables balances, in part offset by higher accounts payable and accruals
from their comparable balances at the respective June 30 year ends.
Cash used for the purchase of property and equipment during the three months
ended September 30, 1996 was $982,000 compared with $1,049,000 for the three
months ended September 30, 1995.
During fiscal 1996 the Board of Directors of the Company declared a dividend and
the Company issued $50,000,000 of Dividend Notes payable to WMS which bear
interest at 6%. The net proceeds of the Offering are approximately $93,700,000
and will be used in part to pay the previously declared $50,000,000 Dividend
Notes and all other amounts payable to WMS. The balance of the proceeds will be
used for working capital.
The home video game business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain home video game
manufacturers that supply the Company require letters of credit for the full
purchase price at the time the purchase order is accepted.
The Company has been dependent upon WMS for its cash requirements. The Company
has entered into a revolving credit agreement with a bank, subject to certain
conditions including completion of the Offering, for the establishment of a line
of credit for $50,000,000 and an additional letter of credit line of up to
$30,000,000. The revolving credit agreement is for a one-year term and contains
usual bank line of credit terms. At September 30, 1996, $12,980,000 of the
Company's letters of credit are issued pursuant to a WMS credit facility. These
letters of credit will then be transferred to the Company's letter of credit
facility. Management believes that cash and cash equivalents, cash flow from
operations, cash from the Offering added to working capital and amounts
available under the line of credit will be adequate to fund the anticipated
levels of inventories and accounts receivable required in the operation of the
business and the Company's other presently anticipated needs, as well as pay any
amounts due under the Tradewest and Atari Games acquisition agreements.
10
RESULTS OF OPERATIONS
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THREE MONTH ENDED SEPTEMBER 30, 1996 COMPARED WITH
THREE MONTH ENDED SEPTEMBER 30, 1995
Revenues decreased $2,383,000 or 3.5% from $67,938,000 in the quarter ended
September 30, 1995 to $65,555,000 in the quarter ended September 30, 1996. Home
video revenues increased 1.8% to $47,554,000 in the quarter ended September 30,
1996. Coin-operated video revenues decreased $3,220,000 or 15.2% in the quarter
ended September 30, 1996 to $18,001,000.
Gross profit increased $7,064,000 or 25.9% to $34,380,000 (52.4% of revenues) in
the quarter ended September 30, 1996 from $27,316,000 (40.2% of revenues) in the
quarter ended September 30, 1995. The increase in gross profit and gross profit
margin was primarily from lower unit cost of home video games due to contract
manufacturing of 16-bit cartridges for the first time.
Research and development expenses increased $6,152,000 or 105.1% from $5,851,000
(8.6% of revenues) in the quarter ended September 30, 1995 to $12,003,000 (18.3%
of revenues) in the quarter ended September 30, 1996. The increase is primarily
due to including the product development expenses from the Company's subsidiary
Atari Games acquired in March 1996.
Administrative expense increased $1,722,000 or 75.8% from $2,272,000 (3.3% of
revenues) in the quarter ended September 30, 1995 to $3,994,000 (6.1% of
revenues) in the quarter ended September 30, 1996. The increase in
administrative expense is primarily due to cost relating to the installation of
a new computer system, increased goodwill amortization and administrative
expenses of the newly acquired Atari Games.
Operating income in the quarter ended September 30, 1996, after absorbing a
$6,152,000 increase in research and development expense which is expected to
benefit future periods, decreased $856,000 or 7.4% from $11,631,000 (17.1% of
revenues) in the quarter ended September 30, 1995 to $10,775,000 (16.4% of
revenues) in the quarter ended September 30, 1996.
Interest expense increased primarily due to interest accrued on the 6% dividend
notes and on the Atari Games purchase notes.
Net income decreased $1,093,000 or 15.2% from $7,170,000 in the quarter ended
September 30, 1995 to $6,077,000 in the quarter ended September 30, 1996. The
decrease in net income was due primarily to lower operating income discussed
above and higher interest expense in the quarter ended September 30, 1996.
11
PART II
OTHER INFORMATION
ITEM 6.(A) EXHIBITS
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Exhibit 27 - Financial Data Schedule
12
MIDWAY GAMES INC.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
MIDWAY GAMES INC.
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(Registrant)
Dated: November 14, 1996 By: /s/ Harold H. Bach, Jr.
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Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
13