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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, 2000
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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 (I.R.S. Employer
Incorporation 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 X NO
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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: 37,710,725 shares of common
stock, $.01 par value, were outstanding at October 31, 2000 after deducting
1,178,500 shares held as treasury shares.
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MIDWAY GAMES INC.
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements:
Condensed Consolidated Statements of Income -
Three months ended September 30, 2000 and 1999....................... 2
Condensed Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000................................. 3-4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999....................... 5
Notes to Condensed Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 7-8
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................... 9
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings.................................................... 9
ITEM 6. Exhibits and Reports on Form 8-K..................................... 9
SIGNATURE ..................................................................... 10
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PART I
FINANCIAL INFORMATION:
MIDWAY GAMES INC
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended
September 30,
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2000 1999
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REVENUES
Home video ................................ $ 30,746 $ 75,839
Coin-operated video ....................... 16,529 30,763
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Total revenues ................................ 47,275 106,602
COST OF SALES
Home video ................................ 16,663 31,266
Coin-operated video ....................... 13,619 19,848
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Total cost of sales ........................... 30,282 51,114
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Gross profit .................................. 16,993 55,488
Research and development expense .............. 20,120 19,226
Selling expense ............................... 8,166 12,817
Administrative expense ........................ 5,067 5,685
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Operating (loss) income ....................... (16,360) 17,760
Interest income and other expense, net ........ 439 434
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(Loss) income before tax ...................... (15,921) 18,194
Credit (provision) for income taxes ........... 5,970 (6,847)
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Net (loss) income ............................. $ (9,951) $ 11,347
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Earnings (loss) per share of common stock:
Basic ......................................... $ (0.26) $ 0.30
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Diluted ....................................... $ (0.26) $ 0.29
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Shares used in calculations:
Basic ......................................... 37,711 37,944
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Diluted ....................................... 37,711 38,776
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See notes to condensed consolidated financial statements
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MIDWAY GAMES INC
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CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
September 30, June 30,
2000 2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 29,169 $ 34,093
Receivables, less allowances of $7,729 and $5,855 ......................... 38,804 25,398
Income taxes receivable ................................................... 10,020 21,255
Inventories, at lower of cost (FIFO) or market:
Raw materials and work in progress ..................................... 6,679 7,907
Finished goods ......................................................... 12,692 19,621
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19,371 27,528
Deferred income taxes ..................................................... 5,623 5,250
Other current assets ...................................................... 11,663 11,519
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Total current assets ................................................... 114,650 125,043
Property and equipment ......................................................... 40,566 37,220
Less: accumulated depreciation ................................................ (20,259) (19,189)
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20,307 18,031
Deferred income taxes .......................................................... 3,877 --
Excess of purchase cost over amount assigned to net assets acquired, net of
accumulated amortization of $17,596 and $16,615 ........................... 36,404 37,385
Other assets ................................................................... 6,334 6,116
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$ 181,572 $ 186,575
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See notes to condensed consolidated financial statements.
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MIDWAY GAMES INC
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CONDENSED CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
September 30, June 30,
2000 2000
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................. $ 10,299 $ 8,959
Accrued compensation and related benefits .................................... 4,574 4,015
Accrued royalties ............................................................ 7,537 5,080
Other accrued liabilities .................................................... 8,787 6,446
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Total current liabilities ................................................. 31,197 24,500
Deferred income taxes ............................................................. -- 1,720
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued..... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
38,889,225 shares issued at September 30, 2000
and 38,886,303 at June 30, 2000 ........................................... 389 389
Additional paid-in capital ................................................... 98,084 98,061
Retained earnings............................................................. 68,172 78,123
Translation adjustment ....................................................... (167) (115)
Treasury stock, at cost (1,178,500 shares) ................................... (16,103) (16,103)
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Total stockholders' equity ................................................ 150,375 160,355
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$ 181,572 $ 186,575
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See notes to condensed consolidated financial statements.
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MIDWAY GAMES INC
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three months ended
September 30,
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2000 1999
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OPERATING ACTIVITIES:
Net (loss) income ........................................................................ $ (9,951) $ 11,347
Adjustments to reconcile net (loss) income to net cash (used) by operating
activities:
Depreciation and amortization ..................................................... 2,077 2,120
Receivables provision ............................................................. 2,436 5,036
Deferred income taxes ............................................................. (5,970) --
Increase (decrease) resulting from changes in operating assets and liabilities .... 9,876 (31,828)
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Net cash (used) by operating activities .................................................. (1,532) (13,325)
INVESTING ACTIVITIES:
Purchase of property and equipment ....................................................... (3,375) (1,368)
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Net cash (used) by investing activities .................................................. (3,375) (1,368)
FINANCING ACTIVITIES:
Cash received on exercise of common stock options ........................................ 23 --
Purchase of treasury stock ............................................................... -- (613)
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Net cash provided (used) by financing activities ......................................... 23 (613)
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Effect of exchange rate changes on cash .................................................. (40) --
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Decrease in cash and cash equivalents .................................................... (4,924) (15,306)
Cash and cash equivalents at beginning of period ......................................... 34,093 51,546
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Cash and cash equivalents at end of period ............................................... $ 29,169 $ 36,240
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See notes to condensed consolidated financial statements.
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MIDWAY GAMES INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Due to the
seasonality of the Company's business, operating results for the three
months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2000.
2. EARNINGS PER SHARE
At September 30, 2000, options were outstanding for 6,256,952 shares of
common stock. The incremental share effect of those options were not
utilized in the calculation of net loss per share for the three months
ended September 30, 2000. The diluted net income per share calculation for
the three months ended September 30, 1999 is different from basic earnings
per share due to the inclusion in the diluted calculation of 832,000
potential incremental shares of common stock from the assumed exercise of
employee stock options.
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MIDWAY GAMES INC.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains certain forward looking statements
concerning future business conditions and the outlook for the Company based on
currently available information that involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in the
forward looking statements as a result of certain risks and uncertainties,
including, without limitation, the financial strength of the amusement games
industry, dependence on new product introductions and the ability to maintain
the scheduling of such introductions, technological changes, dependence on
dedicated platform manufacturers and other risks more fully described under
"Business - Risk Factors" in the Company's Annual Report on Form 10-K.
FINANCIAL CONDITION
During the three months ended September 30, 2000 cash used by operating,
investing and financing activities and the effect of exchange rate changes was
$4,924,000 compared with cash used of $15,306,000 in the three months ended
September 30, 1999.
Cash used by operating activities before changes in operating assets and
liabilities was $11,408,000 in the three months ended September 30, 2000
compared to cash provided of $18,503,000 in the three months ended September 30,
1999.
The changes in the operating assets and liabilities, as shown in the condensed
statements of cash flows on page 5, resulted in a cash inflow of $9,876,000 in
the three months ended September 30, 2000, compared with a cash outflow of
$31,828,000 in the three months ended September 30, 1999. The inflows during the
three months ended September 30, 2000 were primarily due to the refund of income
taxes coupled with lower inventories and increased current liabilities, offset
in part, by increased accounts receivables from their June 30, 2000 balances.
The outflows in the September 30, 1999 three-month period were primarily due to
the increase in receivables and inventories from their comparable balances at
the June 30, 1999.
Cash used for the purchase of property and equipment during the three months
ended September 30, 2000 was $3,375,000 compared with $1,368,000 for the three
months ended September 30, 1999.
During the three months ended September 30, 1999, $613,000 of cash was used to
acquire 51,400 shares of the Company's common stock held in the treasury. The
Board of Directors authorized the purchase of up to two million shares of which
1,928,500 had been purchased as of September 30, 2000.
The home video game business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable during
certain months of the fiscal year. In addition, certain platform manufacturers
that manufacture home video games for the Company require letters of credit for
the full purchase price at the time a purchase order is accepted.
The Company has established a line of credit for $55,000,000 that provides for
borrowings and letters of credit. The revolving credit agreement extends to
September 19, 2001 and provides for a reduction in availability to $15,000,000
at March 31, 2001 with an increase in availability to $35,000,000 at June 30,
2001. The agreement requires, among other things, that the Company maintain a
minimum level of stockholders' equity and a specified ratio of accounts
receivable to amounts outstanding under the line of credit. Under certain
conditions the bank may require the Company to secure the line of credit by a
pledge of its' assets. There were no borrowings under the credit line at
September 30, 2000 and $9,812,592 of letters of credit were outstanding.
Management believes that cash and cash equivalents, cash flow from operations
and amounts available under the line of credit will be adequate to fund the
anticipated levels of inventories, accounts receivable and commitments required
in the operation of the business and the Company's other presently anticipated
needs for the next twelve months.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues decreased $59,327,000 from $106,602,000 in the quarter ended September
30, 1999 to $47,275,000 in the quarter ended September 30, 2000.
Home video game revenues decreased 59% to $30,746,000 in the September 30, 2000
quarter compared to $75,839,000 in the prior year period. Unit sales that were
sold at full price decreased by 60%. The Company believes that these decreases
are primarily due to the platform transition currently underway from 32 and
64-bit home video game consoles such as the Sony PlayStation and Nintendo 64 to
the next generation 128-bit consoles, including Sony's PlayStation 2, Nintendo's
Gamecube and Microsofts's Xbox. Midway's revenues relating to the Sega Dreamcast
platform decreased 87% to $4,583,000 in the fiscal 2001 first quarter from
$34,107,000 in the prior year period when the Sega Dreamcast platform was
launched in the United States.
During the fiscal 2001 first quarter the Company released four new home video
games on four platforms. New products shipped included three for Sony
PlayStation, two for Nintendo 64, two for Sega Dreamcast and two for Game Boy
Color. Midway's best selling video games during the quarter were NFL Blitz 2001
and San Francisco Rush 2049.
Home video game gross profit decreased $30,490,000 from $44,573,000 (58.8% of
related revenues) in the first quarter of fiscal 2000 to $14,083,000 (45.8% of
related revenues). The first quarter of fiscal 2001 includes an increased number
of game units sold at significant discounts. This discounting of previously
released titles was due to a continuation of the pricing pressures from the
platform transition previously mentioned.
Coin-operated video game revenues decreased 46% to $16,529,000 in the September
30, 2000 quarter compared to $30,763,000 in the prior year period. The Company
believes that the decrease in coin-op revenue was the result of weak industry
market conditions and the market acceptance of Midway's products offered in the
fiscal 2001 first quarter compared with the prior year's offerings. The current
year first quarter included sales of The Grid, C.A.R.T. Fury and Touchmaster
Infinity.
Coin-operated video game gross profit decreased to $2,910,000 (17.6% of related
revenues) in the quarter ended September 30, 2000 from $10,915,000 (35.5% of
related revenues) in the quarter ended September 30, 1999. The decrease in gross
profit was primarily due to the decrease in coin-operated revenues from the sale
of fewer units and certain coin-op games at discount prices and having certain
fixed period costs being absorbed by lower unit sales.
Research and development expenses increased $894,000 from $19,226,000 (18.0% of
revenues) in the quarter ended September 30, 1999 to $20,120,000 (42.6% of
revenues) in the quarter ended September 30, 2000. The increased research and
development expense is primarily due to the development of home video games for
all the new platforms being introduced in the future by the platform
manufacturers and the increase in expense per game required by the new
platforms.
Selling expense decreased $4,651,000 from $12,817,000 (12.0% of revenues) in the
quarter ended September 30, 1999 to $8,166,000 (17.3% of revenues) in the
quarter ended September 30, 2000.
Administrative expense decreased $618,000 from $5,685,000 (5.3% of revenues) in
the quarter ended September 30, 1999 to $5,067,000 (10.7% of revenues) in the
quarter ended September 30, 2000.
Operating (loss) income in the quarter ended September 30, 2000 decreased from
income of $17,760,000 in the quarter ended September 30, 1999 to an operating
loss of $16,360,000 in the quarter ended September 30, 2000. The decrease
results primarily from lower revenues coupled with a lower gross profit
percentage and increased research and development expense.
Net loss was $9,951,000, $0.26 per share, in the quarter ended September 30,
2000, compared with net income of $11,347,000, $0.29 per share on a fully
diluted basis, in the prior year period.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information concerning the wrongful death action brought against us and
other companies entitled James, et al. v. Meow Media, et al. as set forth in
"Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the year ended
June 30, 2000 is herein incorporated by this reference. Midway and all of the
other defendants timely filed their respective appellate response briefs which
were due October 19, 2000. Plaintiffs' reply brief, which was due on November 2,
2000, was also timely filed. Final appellate briefs are due November 30, 2000.
As of November 10th, no oral argument has been scheduled.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter Agreement dated as of October 30, 2000 between the Registrant
and Neil D. Nicastro further amending Mr. Nicastro's Employment
Agreement with the Registrant.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDWAY GAMES INC.
(Registrant)
Dated: November 13, 2000 By: /s/ Harold H. Bach, Jr.
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Harold H. Bach, Jr.
Executive Vice President-Finance
Principal Financial and
Chief Accounting Officer
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EXHIBIT INDEX
No. Description
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10.1 Letter Agreement dated as of October 30, 2000 between the Registrant and
Neil D. Nicastro further amending Mr. Nicastro's Employment Agreement
with the Registrant.
27 Financial Data Schedule