Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Reports 43 269K
2: EX-10.18 Material Contract 5 18K
3: EX-13 1997 Annual Report 26± 113K
4: EX-21 Subsidiaries of the Registrants 1 5K
5: EX-23 Consent of Independent Auditors 1 6K
6: EX-27 Financial Data Schedule 1 6K
EXHIBIT 13
MIDWAY GAMES INC.
INDEX TO FINANCIAL INFORMATION
[Download Table]
Selected Five-Year Financial Data 17
Management's Discussion 18
Market for the Company's Common Stock
and Related Security-Holder Matters 22
Report of Independent Auditors 22
Balance Sheets 23
Statements of Income 24
Statements of Changes
in Stockholders' Equity 25
Statements of Cash Flows 20
Notes to Financial Statements 27
Quarterly Financial Information 32
Midway Games Inc.
SELECTED FIVE-YEAR FINANCIAL DATA
[Enlarge/Download Table]
(In thousands, except per share amounts)
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SELECTED STATEMENT OF INCOME DATA JUNE 30, 1997 1996(1) 1995 1994(1) 1993
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REVENUES
Home video $ 219,912 $ 154,102 $ 60,839 $ 23,959 $ 1,806
Coin-operated video 168,314 91,321 119,640 97,923 83,825
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Total revenues 388,226 245,423 180,479 121,882 85,631
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Gross profit 166,819 105,367 78,727 59,203 33,878
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Operating income 60,533 40,494 47,136 45,237 25,754
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Income before tax provision and extraordinary credit 62,663 40,765 46,993 45,458 25,754
Provision for income taxes (23,812) (15,536) (17,854) (17,435) (9,915)
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Income before extraordinary credit 38,851 25,229 29,139 28,023 15,839
Extraordinary gain on early extinguishment of debt, net 3,044 - - - -
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Net income $ 41,895 $ 25,229 $ 29,139 $ 28,023 $ 15,839
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Income per share of common stock
Income before extraordinary credit $ 1.06 $ 0.76 $ 0.87 $ 0.84 $ 0.47
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Net income $ 1.14 $ 0.76 $ 0.87 $ 0.84 $ 0.47
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Average number of shares outstanding (2) 36,800 33,400 33,400 33,400 33,400
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SELECTED BALANCE SHEET DATA
Total assets $214,318 $ 118,262 $ 81,106 $ 50,993 $ 21,010
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Working capital (3) 86,310 (11,618)(3) 27,327 24,407 15,140
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Dividend notes payable - 50,000 - - -
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Long-term debt - 7,863 - - -
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Stockholder's net investment - 5,488 49,752 37,677 15,580
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Stockholders' equity 140,768 - - - -
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(1) Includes the results of Midway Home Entertainment Inc., subsequent
to its purchase of Tradewest on April 29, 1994 and the results of Midway
Interactive Inc., subsequent to its purchase of Atari Games Corporation on
March 29, 1996. See Note 5 to the financial statements.
(2) Reflects retroactively the 33,400 for 1 stock split effectuated
October,1996.
(3) Prior to the Company's initial public offering substantially all of
the excess cash generated by the Company's operations was regularly
remitted to WMS Industries Inc. pursuant to WMS Industries Inc. centralized
cash management system.
(4) The financial statements of Midway Games Inc. for the years through
June 30, 1996 are the combined operations of Midway Games Inc. reflecting
the transfer of certain businesses to and from WMS Industries Inc. as of
July 1, 1996. See Note 3 to the financial statements.
17
Midway Games Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion set forth below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as the discussions
contained under "Item 1. Business--The Company," "--Business" and "--Factors
Affecting Future Performance" in the Company's Annual Report on Form 10-K
contain 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.
OVERVIEW
Since its incorporation in 1988 through the date of the initial public
offering, Midway Games Inc. ("Midway") was a wholly-owned subsidiary of WMS
Industries Inc. ("WMS"). Immediately prior to the initial public
offering, Midway effectuated a 33,400 for one stock split resulting in
33,400,000 shares of common stock being issued and outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable to
WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On August 11, 1997, WMS announced its intention to distribute pro rata to
the stockholders of WMS its remaining ownership interest of 33,400,000 shares
of Midway by means of a tax free spin-off. The distribution is conditioned upon
several requirements, including the receipt of a ruling from the Internal
Revenue Service ("IRS") that the transaction will be tax free to WMS and its
stockholders. WMS management anticipates that the spin-off will be completed
during fiscal 1998.
The Company and WMS have a Manufacturing and Services Agreement
("Agreement") under which WMS provides contract manufacturing of coin-operated
video games and several other services to the Company. See Notes 3 and 4 to the
financial statements. Under the Agreement the products or services are provided
at identified or allocated cost. In order to obtain a tax free ruling one of
the requirements of the IRS is that all transactions after the distribution
must be on an arm's length basis. The Company and WMS will have to enter into a
new agreement to provide for this method of transfer pricing. The Company may
discontinue its use of certain WMS services. Arm's length pricing may result in
an increase in cost of sales and certain expenses incurred by the Company. The
ability of the Company to recover the increased costs from increasing its sales
prices or through other cost reduction activities cannot be determined at this
time.
FINANCIAL CONDITION
The Company received net proceeds of $93,385,000 (after deducting the costs of
issuing the stock) from the initial public offering of 5,100,000 shares of
common stock.
Prior to the initial public offering, the Company, except for its Atari
Games subsidiary, 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.
Shortly after the initial public offering the Company established its own cash
management system and no longer relies on WMS for its seasonal cash needs.
During fiscal 1997 and 1996, cash provided by operating activities less
cash used for investing activities was $16,248,000 and $28,692,000,
respectively, of which, $19,493,000 was retained by WMS in fiscal 1996. The
$9,199,000 of cash at June 30, 1996 is cash at Atari Games. During fiscal 1997
cash provided by financing activities was $26,415,000.
Cash provided by operating activities before changes in operating assets
and liabilities, was $51,956,000 in fiscal 1997 and $29,117,000 in fiscal 1996.
The increase was primarily the result of the increase in net income,
depreciation and amortization and the receivables provision, offset, in part,
by the non-cash extraordinary gain on early extinguishment of debt which was
included in net income.
18
Midway Games Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
The changes in the operating assets and liabilities, as shown in the
statements of cash flows, resulted in a cash outflow of $13,809,000 in fiscal
1997, which outflow was primarily due to an increased receivables balance at
June 30, 1997, compared with $6,162,000 of cash inflow in fiscal 1996,
primarily due to a reduced receivables balance at June 30, 1996. The increase
in accounts receivable at June 30, 1997 from the balance at June 30, 1996
resulted primarily from increased sales in the fourth quarter of fiscal 1997 as
compared to the fourth quarter of fiscal 1996.
Cash used by investing activities was $21,899,000 in fiscal 1997 and
$6,587,000 in fiscal 1996. Cash used for the purchase of property and equipment
increased to $4,699,000 in fiscal 1997 from $3,107,000 in fiscal 1996. Cash
used for the additional purchase price of Tradewest was $7,200,000 and
$11,476,000 in fiscal 1997 and fiscal 1996, respectively. On the date of
acquisition Atari Games had cash in excess of the amount used for its
acquisition resulting in a $7,996,000 increase in cash during fiscal 1996.
Cash provided by financing activities was $26,415,000 in fiscal 1997. Net
proceeds received from the initial public offering of $93,385,000 were in part
used to pay the dividend notes due to WMS in the amount of $50,000,000. The
balance of the proceeds is being used for working capital. The Company used
cash of $16,970,000 to prepay the promissory notes from the purchase of Atari
Games.
See the Statements of Cash Flows on page 26 for further details of cash
flow items.
The home video business is highly seasonal and significant working capital
is required to finance high levels of inventories and accounts receivable
during certain months of the fiscal year. In addition, certain platform
manufacturers that manufacture home video games for the Company require letters
of credit for the full purchase price at the time a purchase order is accepted.
The Company has established a line of credit for $50,000,000 and an
additional letter of credit line of $30,000,000. The revolving credit agreement
is for a one-year term and contains usual bank line of credit terms. There were
no borrowings under the credit line at June 30, 1997 and $125,000 of letters of
credit were outstanding. 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 and accounts receivable required in the operation of the business
and the Company's other presently anticipated needs, as well as pay the amount
due under the Tradewest acquisition agreement.
RESULTS OF OPERATIONS
The following table sets forth for the years indicated certain items in or
derived from the Company's statements of income expressed as a percentage of
revenues:
[Download Table]
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June 30, 1997 1996 1995
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Revenues
Home video 56.6% 62.8% 33.7%
Coin-operated video 43.4% 37.2% 66.3%
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Total revenues 100.0% 100.0% 100.0%
Cost of sales 57.0% 57.1% 56.4%
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Gross profit 43.0% 42.9% 43.6%
Research and development
expense 14.4% 13.2% 8.1%
Selling expense 7.9% 9.3% 5.4%
Administrative expense 5.1% 3.9% 4.0%
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Operating income 15.6% 16.5% 26.1%
Interest income (expense), net 0.5% 0.1% (0.1)%
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Income before tax provision
and extraordinary credit 16.1% 16.6% 26.0%
Provision for income taxes 6.1% 6.3% 9.9%
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Income before extraordinary
credit 10.0% 10.3% 16.1%
Extraordinary gain on early
extinguishment of debt, net 0.8% 0.0% 0.0%
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Net income 10.8% 10.3% 16.1%
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FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues increased $142,803,000 or 58.2% from $245,423,000 in fiscal 1996 to
$388,226,000 in fiscal 1997. Home video game revenues increased $65,810,000 or
42.7% from $154,102,000 in fiscal 1996 to $219,912,000 in fiscal 1997. Home
video game revenues increased as a result of an increased number of units
shipped primarily due to an increase in the number of titles sold and an
expanded consumer base due to the growth in the installed base of 32-bit and
64-bit next generation platforms. In fiscal 1997, 60% of the
19
Midway Games Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Company's home video game unit sales were for the next generation platforms
and during the last six months of the 1997 fiscal year, home video game sales
for next generation platforms were 87% of the Company's total home video game
unit sales. Coin-operated video game revenues increased by 84.3% from
$91,321,000 in fiscal 1996 to $168,314,000 in fiscal 1997. Coin-operated video
game revenues increased due to an increased number of "hit" games sold during
fiscal 1997 as well as the inclusion of revenues from coin-operated video game
sales of the Company's subsidiary Atari Games acquired in March 1996.
Gross profit increased $61,452,000 or 58.3% from $105,367,000 (42.9% of
revenues) in fiscal 1996 to $166,819,000 (43.0% of revenues) in fiscal 1997.
The increase in gross profit was primarily from increased revenues.
Research and development expenses increased $23,446,000 or 72.2% from
$32,495,000 (13.2% of revenues) in fiscal 1996 to $55,941,000 (14.4% of
revenues) in fiscal 1997. The increase is primarily due to including the
product development expenses from the Company's subsidiary Atari Games acquired
in March 1996 and due to an increase in the number of game development teams.
Selling expense increased $7,628,000 or 33.4% from $22,815,000 (9.3% of
revenues) in fiscal 1996 to $30,443,000 (7.9% of revenues) in fiscal 1997. The
increase was primarily due to increased sales commissions and advertising and
promotion costs for the increased home video game sales.
Administrative expense increased $10,339,000 or 108.1% from $9,563,000
(3.9% of revenues) in fiscal 1996 to $19,902,000 (5.1% of revenues) in fiscal
1997. The increase in administrative expense is primarily due to increased
goodwill amortization and depreciation, public company expenses, a new computer
system and computer systems upgrades and the administrative expense of Atari
Games acquired in March 1996.
Operating income increased $20,039,000 or 49.5% from $40,494,000 (16.5% of
revenues) in fiscal 1996 to $60,533,000 (15.6% of revenues) in fiscal 1997.
Operating income includes $7,135,000 in fiscal 1996 from licensing revenues.
Excluding the effects of licensing revenues and, notwithstanding the
$23,446,000 increase in research and development expense, operating income
increased $27,174,000 or 81.5% from fiscal 1996 to fiscal 1997 primarily due
to the increase in revenues from fiscal 1996 to fiscal 1997.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38% in fiscal 1997 and 38.1% in fiscal 1996.
Net income increased $16,666,000 or 66.1% from $25,229,000, $.76 per
share, in fiscal 1996 to $41,895,000, $1.14 per share, in fiscal 1997. Fiscal
1997 net income includes $3,044,000, $.08 per share, from an extraordinary gain
on early extinguishment of debt while fiscal 1996 net income includes
$4,318,000, $.13 per share, relating to licensing revenues. Excluding the
effects of the extraordinary gain in fiscal 1997 and licensing revenues in
fiscal 1996, earnings increased $17,940,000 or 85.8% from $20,911,000 in fiscal
1996 to $38,851,000 in fiscal 1997 and per share earnings increased 68.3% from
$.63 per share to $1.06 per share. The number of shares used in calculating per
share earnings increased by 10% to 36,800,000 in fiscal 1997 from 33,400,000 in
fiscal 1996 because of 5,100,000 shares of common stock sold in the October 29,
1996 initial public offering. The increase in income before extraordinary
credit was primarily the result of the increase in sales of both coin-operated
and home video games, after absorbing the increases in research and
development, selling and administrative expenses.
FISCAL 1996 COMPARED WITH FISCAL 1995
Revenues increased $64,944,000 or 36.0% from $180,479,000 in fiscal 1995 to
$245,423,000 in fiscal 1996. Home video game revenues include licensing
revenues of $10,000,000 in fiscal 1996 and $27,000,000 in fiscal 1995 from
licensing the distribution of home video games for use on personal computers,
licensing certain foreign distribution of home video games and certain other
licensing revenues. Excluding licensing revenues, home video game revenues
increased $110,263,000 or 326% from $33,839,000 in fiscal 1995 to $144,102,000
in fiscal 1996. The increase in home video game revenues was due to the fact
that the Company only began to publish home video games based on its
coin-operated
20
Midway Games Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
video games in fiscal 1996. Fiscal 1995 home video game revenues principally
included revenue from those games that were in process of development by
Tradewest at the time it was acquired by the Company in April 1994.
Coin-operated video game revenues decreased by 23.7% from $119,640,000 in
fiscal 1995 to $91,321,000 in fiscal 1996. The decrease in coin-operated video
game revenues was primarily due to delays in the development of certain video
games in fiscal 1996 and higher unit sales of certain coin-operated video games
introduced in fiscal 1995 in comparison to unit sales in fiscal 1996.
Gross profit increased $26,640,000 or 33.8% from $78,727,000 (43.6% of
revenues) in fiscal 1995 to $105,367,000 (42.9% of revenues) in fiscal 1996.
Excluding the effects of licensing revenues, gross profit increased $43,131,000
or 79.1% from $54,538,000 (35.6% of related revenues) in fiscal 1995 to
$97,669,000 (41.5% of related revenues) in fiscal 1996. This increase in gross
profit margin was primarily due to a shift in the Company's product mix to home
video games.
Research and development expense increased $17,834,000 or 122% from
$14,661,000 (8.1% of revenues) in fiscal 1995 to $32,495,000 (13.2% of
revenues) in fiscal 1996. The increase is primarily due to an increased number
of games under development, including those of Atari Games in the three months
ended June 30, 1996 and in part due to royalties paid to game designers as part
of their compensation.
Selling expense increased $13,123,000 or 135% from $9,692,000 in fiscal
1995 to $22,815,000 in fiscal 1996 primarily due to the shift in the Company's
revenues from coin-operated video games to home video games.
Administrative expense increased $2,325,000 or 32.1% from $7,238,000 (4.0%
of revenues) in fiscal 1995 to $9,563,000 (3.9% of revenues) in fiscal 1996.
The increase was primarily due to increased incentive based compensation in the
home video game business resulting from increased sales of those games.
Operating income decreased $6,642,000 or 14.1% from $47,136,000 (26.1% of
revenues) in fiscal 1995 to $40,494,000 (16.5% of revenues) in fiscal 1996.
Operating income includes $7,135,000 in fiscal 1996 and $23,239,000 in fiscal
1995 from licensing revenues. Excluding the effects of licensing revenues and,
notwithstanding the $17,834,000 increase in research and development expense,
operating income increased $9,462,000 or 39.6% from fiscal 1995 to fiscal 1996,
primarily due to the increased sales of home video games.
The provision for income taxes reflects federal and state income taxes and
resulted in an effective rate of 38.1% in fiscal 1996 and 38% in fiscal 1995.
Net income decreased $3,910,000 or 13.4% from $29,139,000, $.87 per share,
in fiscal 1995 to $25,229,000, $.76 per share, in fiscal 1996. Net income
includes $4,318,000 in fiscal 1996 and $14,562,000 in fiscal 1995 relating to
licensing revenues. Excluding the effects of licensing revenues, net income
increased $6,334,000 or 43.5% from $14,577,000, $.44 per share, in fiscal 1995
to $20,911,000, $.63 per share, in fiscal 1996. This increase in net income was
primarily the result of the sizable increase in the sale of home video games
based on the coin-operated version. The Company achieved this result
notwithstanding the increase in research and development expense.
IMPACT OF INFLATION
During the past three years, the level of inflation affecting the Company has
been relatively low. The ability of the Company to pass on future cost
increases in the form of higher sales prices will continue to be dependent on
the prevailing competitive environment and the acceptance of the Company's
products in the market place.
SEASONALITY
The home video game business is highly seasonal and historically has resulted
in higher revenues and net income in the first and second quarters of the June
30 fiscal year due to customer purchases preceding the year-end retail holiday
selling season. The coin-operated video game business has not historically been
seasonal but quarterly revenues and net income usually increase when a
coin-operated video game that achieves significant player appeal is introduced.
21
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
SECURITY-HOLDER MATTERS
Midway Games Inc. common stock, par value $.01 per share, began trading on the
New York Stock Exchange on October 29, 1996 under the symbol MWY. The following
table sets forth for the periods indicated the high and low sale prices per
share as reported on the New York Stock Exchange.
[Download Table]
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Calendar Period High Low
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1996
Fourth Quarter
(beginning Oct. 29, 1996) $25 1/2 $18 3/8
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1997
First Quarter $21 $15
Second Quarter 23 1/2 15 1/8
Third Quarter
(through Sept. 18, 1997) 24 5/8 18 3/8
The Company paid $50,000,000 of dividend notes due to its parent, WMS
Industries Inc., from part of the proceeds of the October 1996 initial public
offering. The dividend notes had been previously declared on June 30, 1996. No
other cash dividends with respect to the common stock were declared or paid
during fiscal 1997. The payment of future cash dividends will depend upon,
among other things, earnings, anticipated expansion and capital requirements
and the financial condition of the Company.
At September 18, 1997, there were approximately 650 holders of record of
the Company's common stock.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Midway Games Inc.
We have audited the accompanying balance sheets of Midway Games Inc. and
subsidiaries as of June 30, 1997 and 1996, and the related statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Midway Games Inc. and
subsidiaries at June 30, 1997 and 1996, and the results of their operations and
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
August 19, 1997
22
Midway Games Inc.
BALANCE SHEETS
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(In thousands)
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June 30, 1997 1996
Consolidated Combined
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ASSETS
Current assets:
Cash and cash equivalents $ 51,862 $ 9,199
Short-term investments 10,000 -
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61,862 9,199
Receivables, less allowances of $4,940 in 1997 and $995 in 1996 54,477 48,951
Inventories
Raw materials and work in progress 14,433 16,835
Finished goods 13,525 8,187
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27,958 25,022
Deferred income taxes 5,779 -
Other current assets 4,329 5,407
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TOTAL CURRENT ASSETS 154,405 88,579
Property and equipment, net 9,498 5,927
Excess of purchase cost over amount assigned to net assets acquired, net 49,150 22,765
Other assets 1,265 991
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TOTAL ASSETS $214,318 $118,262
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,889 $ 17,686
Payable to WMS Industries Inc. 2,029 -
Accrued compensation and related benefits 11,331 4,849
Income taxes payable 3,866 -
Deferred income taxes - 1,400
Accrued payment on 1994 purchase of Tradewest 14,400 -
Accrued payment on 1996 purchase of Atari Games Corporation - 3,286
Dividend notes payable to WMS Industries Inc. - 50,000
Accrued royalties 6,728 6,088
Other accrued liabilities 10,852 16,888
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TOTAL CURRENT LIABILITIES 68,095 100,197
Long-term debt - 7,863
Deferred income taxes 3,037 2,794
Other noncurrent liabilities 2,418 1,920
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 100,000,000 shares authorized,
38,500,000 shares issued and outstanding 385 -
Additional paid-in capital 98,488 -
Retained earnings 41,895 -
Stockholder's net investment - 5,488
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TOTAL STOCKHOLDERS' EQUITY 140,768 5,488
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $214,318 $118,262
==================================================================================================
See notes to financial statements.
23
Midway Games Inc.
STATEMENTS OF INCOME
[Enlarge/Download Table]
(In thousands, except per share amounts)
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Years Ended June 30, 1997 1996 1995
Consolidated Combined Combined
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REVENUES
Home video $219,912 $154,102 $ 60,839
Coin-operated video 168,314 91,321 119,640
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Total revenues 388,226 245,423 180,479
Cost of sales 221,407 140,056 101,752
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Gross profit 166,819 105,367 78,727
Research and development expense 55,941 32,495 14,661
Selling expense 30,443 22,815 9,692
Administrative expense 19,902 9,563 7,238
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Operating income 60,533 40,494 47,136
Interest and other income 4,504 1,079 52
Interest expense (2,374) (808) (195)
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Income before tax provision and extraordinary credit 62,663 40,765 46,993
Provision for income taxes (23,812) (15,536) (17,854)
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Income before extraordinary credit 38,851 25,229 29,139
Extraordinary gain on early extinguishment
of debt, net of taxes of $2,001 3,044 - -
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Net income $ 41,895 $ 25,229 $ 29,139
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Income per share of common stock
Income before extraordinary credit $ 1.06 $ .76 $ .87
Extraordinary gain on early extinguishment of debt, net .08 - -
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Net income $ 1.14 $ .76 $ .87
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Average number of shares outstanding 36,800 33,400 33,400
================================================================================================
See notes to financial statements.
24
Midway Games Inc.
STATEMENTS OF STOCKHOLDERS' EQUITY
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(In thousands)
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Common Stock
---------------------- Additional Stockholder's Total
Number Paid-in Retained Net Stockholders'
of Shares Par Value Capital Earnings Investment Equity
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COMBINED BALANCE AT JUNE 30, 1994 - $ - $ - $ - $ 37,677 $ 37,677
Net income 29,139 29,139
Net transactions with WMS Industries Inc. (17,064) (17,064)
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COMBINED BALANCE AT JUNE 30, 1995 - - - - 49,752 49,752
Net income 25,229 25,229
Dividends declared (50,000) (50,000)
Net transactions with WMS Industries Inc. (19,493) (19,493)
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COMBINED BALANCE AT JUNE 30, 1996 - - - - 5,488 5,488
Formation transactions 33,400 334 5,154 (5,488) -
Net proceeds from initial public offering 5,100 51 93,334 93,385
Net income 41,895 41,895
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CONSOLIDATED BALANCE AT JUNE 30, 1997 38,500 $385 $98,488 $41,895 $ - $ 140,768
====================================================================================================================
See notes to financial statements.
25
Midway Games Inc.
STATEMENTS OF CASH FLOWS
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(In thousands)
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Years Ended June 30, 1997 1996 1995
Consolidated Combined Combined
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OPERATING ACTIVITIES
Net income $41,895 $25,229 $29,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,297 3,208 1,808
Receivables provision 14,586 3,358 3,218
Deferred income taxes (5,777) (2,678) 4,986
Extraordinary gain on early extinguishment of debt (5,045) - -
Increase (decrease) resulting from changes in
operating assets and liabilities:
Receivables (20,112) 8,089 (20,939)
Inventories (2,936) (1,072) (4,660)
Other current assets 1,078 (1,253) (1,625)
Accounts payable and accruals 2,289 (479) 13,052
Current taxes payable 3,354 - -
Other assets and liabilities not reflected elsewhere 2,518 877 (1,032)
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Net cash provided by operating activities 38,147 35,279 23,947
INVESTING ACTIVITIES
Purchase of property and equipment (4,699) (3,107) (3,859)
Payment for Tradewest acquisition (7,200) (11,476) (3,024)
Cash acquired in acquisition of Atari Games
Corporation, net of cash used - 7,996 -
Net change in short-term investments (10,000) - -
----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (21,899) (6,587) (6,883)
FINANCING ACTIVITIES
Net proceeds from initial public offering 93,385 - -
Dividend notes paid to WMS Industries Inc. (50,000) - -
Payment of notes payable from the purchase of Atari Games Corporation (16,970) - -
----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,415 - -
Net transactions with WMS Industries Inc. - (19,493) (17,064)
----------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 42,663 9,199 -
Cash and cash equivalents at beginning of year 9,199 - -
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $51,862 $9,199 $ -
======================================================================================================================
See notes to financial statements.
26
Midway Games Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS
Midway Games Inc. ("Midway") and its subsidiaries (the "Company") operates in
one business segment, the design and distribution of coin-operated video games
and publishing, licensing and distribution of home video games (the "Video Game
Business"). Coin-operated video games are sold to distributors worldwide who
sell them to operators and arcades. Home video games are sold to mass
merchants, video rental retailers, and entertainment software distributors in
North America. The Company exploits the other worldwide markets through
licensing and distribution agreements with third parties. Consumers buy or rent
the home video games to use on game systems (Nintendo, Sony and Sega) and on
personal computers.
NOTE 2: INITIAL PUBLIC OFFERING AND PLANNED DISTRIBUTION
Since its incorporation in 1988 through the date of the initial public
offering, Midway was a wholly-owned subsidiary of WMS Industries Inc. ("WMS").
Immediately prior to the initial public offering, Midway effectuated a 33,400
for one stock split resulting in 33,400,000 shares of common stock being issued
and outstanding.
On October 29, 1996, Midway completed its initial public offering of
5,100,000 previously unissued shares of common stock at $20.00 per share. This
transaction reduced WMS' ownership in Midway to 86.8%. Net proceeds to Midway
from the initial public offering were $93,385,000. The dividend notes payable
to WMS of $50,000,000 and all advances from WMS then outstanding were paid with
part of the proceeds of the offering.
On August 11, 1997, WMS announced its intention to distribute pro rata to
the stockholders of WMS its remaining ownership interest of 33,400,000 shares
of Midway by means of a tax free spin-off. The distribution is conditioned upon
several requirements, including the receipt of a ruling from the Internal
Revenue Service that the transaction will be tax free to WMS and its
stockholders. WMS management anticipates that the spin-off will be completed
during fiscal 1998.
NOTE 3: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND RELATIONSHIP WITH WMS INDUSTRIES INC.
Since its incorporation in 1988 through July 1, 1996 the Company was the
primary subsidiary in which WMS conducted the coin-operated video games
business. Subsequent to July 1, 1996, Midway has been the only WMS subsidiary
in the coin-operated video games 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 through 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 these financial statements.
The combined financial statements at June 30, 1996 and for 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 Game 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 Game 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.
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
27
Midway Games Inc.
NOTES TO FINANCIAL STATEMENTS continued
with standard labor fringes applied. Cost of sales also includes allocations
of manufacturing overhead cost incurred in the production of coin-operated
video games for the Company. Research and development expense includes
allocations for certain shared facilities and personnel. Selling and
administrative expenses include certain allocations relating to general
management, treasury, accounting, human resources, insurance and selling and
marketing. These allocations were determined by using various factors such as
dollar amount of sales, number of personnel, square feet of building space,
estimates of time spent to provide services and other appropriate costing
measures. In the opinion of management these transfers of cost of sales and
allocations are made on a reasonable basis to properly reflect the share of
costs incurred by WMS on behalf of the Company.
The financial statements may not necessarily be representative of results
that would have been attained if the Company operated as a separate independent
entity.
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 $49,150,000 and $22,765,000 at June 30, 1997 and 1996,
respectively, (net of accumulated amortization of $4,850,000 and $2,035,000 at
June 30, 1997 and 1996, respectively) arising from the acquisitions of
Tradewest in April 1994 and Atari Games in March 1996 is being amortized by the
straight-line method over 15 to 20 years.
INTELLECTUAL PROPERTIES LICENSES
Nonrefundable guaranteed amounts are recognized as revenue when the license
agreements are signed. Unit royalties on sales that exceed the guarantee are
recognized as revenue as earned. License and royalty revenues primarily from
home video game activities, for fiscal 1997, 1996 and 1995 was $6,537,000,
$18,985,000 and $37,555,000, respectively.
HOME VIDEO GAME REVENUES
Home video game revenues are recorded when products are shipped to customers.
An allowance for returns and discounts is also recorded based upon management's
evaluation of historical experience as well as current industry trends.
ADVERTISING EXPENSE
The cost of advertising is charged to earnings as incurred and for fiscal 1997,
1996 and 1995 was $16,524,000, $13,338,000 and $5,695,000, respectively.
EXPORT SALES AND SALES TO A MAJOR CUSTOMER
Export sales primarily to Western Europe were $70,367,000, $34,945,000 and
$40,940,000 for fiscal 1997, 1996 and 1995, respectively. Sales of home video
games to one mass merchant during fiscal 1997 and 1996 were $40,675,000 and
$30,898,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," to
replace Accounting Principals Board ("APB") Opinion No. 15, "Earnings Per
Share". SFAS No. 128 requires dual presentation of basic earnings per share
("EPS") and diluted EPS on the face of all statements of earnings issued after
December 15, 1997, for all public companies with complex capital structures.
SFAS No. 128 also requires restatement of all prior period statements of
earnings using the dual presentation of basic and diluted EPS. Basic EPS is
computed by dividing income by the weighted average number of shares
outstanding for the period. Diluted EPS reflects, on a pro forma basis,
earnings per share for the period available to common shareholders assuming the
exercise or conversion of all securities which are exercisable or convertible
into common stock and which would either dilute or not affect basic EPS. The
Company does not anticipate the effect of the provisions of this new standard
on earnings per share to be material.
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.
28
Midway Games Inc.
NOTE 4: TRANSACTIONS WITH WMS
The Company, except for Atari Games, for the years 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 initial public offering the treasury activities of the Video Game Business
are being conducted by the Company.
During the four months ended October 31, 1996 and the fiscal years
ended June 30, 1996 and 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. The maximum intercompany
amount due to WMS during this period was $25,700,000. Interest income accrued
from WMS and interest expense accrued to WMS was as follows:
[Download Table]
-------------------------------------------------
(in thousands) 1997 1996 1995
-------------------------------------------------
Interest income $ 0 $771 $ 45
Interest expense 217 442 195
Interest expense for fiscal 1997 also included $1,036,000 on the
$50,000,000 dividend notes accrued at 6% through October 31, 1996.
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 $93,563,000, $51,961,000 and $73,564,000 in the
years ended June 30, 1997, 1996 and 1995, respectively. In addition, certain
other costs have been allocated to the Company based on the various factors
noted in Note 3. Charges to the Company from WMS and WMS subsidiaries for the
allocations in the years ended June 30, 1997, 1996 and 1995 were:
[Download Table]
------------------------------------------------
(in thousands) 1997 1996 1995
------------------------------------------------
Manufacturing overhead $5,368 $3,947 $2,965
Research and development
expense 779 1,352 1,477
Selling expense 3,263 1,933 2,247
Administrative expense 3,452 3,433 3,167
The Company 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 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 are allocated based on the
various factors noted in Note 3 that were used in the financial statements.
See Note 7 for income tax allocations.
NOTE 5: ACQUISITIONS
On March 29, 1996, a wholly-owned subsidiary of the Company, Midway
Interactive Inc., acquired all the capital stock of Atari Games from Warner
Communications Inc. ("Warner"), a subsidiary of Time Warner Inc. The
acquisition has been accounted for by the purchase method of accounting and,
accordingly, the results of operations of Atari Games subsequent to the
acquisition date have been included in the statements of income of the Company.
Atari Games was engaged in the business of developing, manufacturing,
licensing, publishing and distributing coin-operated video games and home video
games.
The Company assimilated parts of the Atari Games business into the
Company's similar activities and exited certain foreign activities. This
included, among other things, closing the leased manufacturing plant,
transferring production of coin-operated video games to WMS's existing Chicago
plant and combining the sales, marketing and distribution of home video games
with the Company's home video game operations. A $4,500,000 liability for exit
activities was established, the major component of which was $2,500,000 of
employee severance costs. The assimilation and exit activities were completed
during fiscal 1997 and no adjustment to the exit liability was required.
The purchase price for Atari Games of $24,015,000 included a cash payment
in March 1996 of $2,000,000 and the balance of $22,015,000 in the form of
promissory notes. A promissory note for $14,152,000 was payable based upon cash
gross profits, as defined, from the sale of specified products of the acquired
business and was recorded, as earned, through the second quarter of fiscal
1997. Because $10,866,000 of this note was not recorded at June 30, 1996,
property and equipment
29
Midway Games Inc.
NOTES TO FINANCIAL STATEMENTS continued
of Atari Games was recorded at zero and the Company recorded negative
goodwill from the purchase. At the end of the second quarter of fiscal 1997,
the property and equipment of Atari Games was recorded and the excess costs
over the amount assigned to net assets acquired (goodwill) of $7,600,000 was
recorded and is being amortized over 20 years.
The unaudited pro forma combined statements of income data of the Company
for fiscal 1996 and 1995 included below was prepared as if Atari Games was
acquired as of July 1, 1995 and July 1, 1994, respectively, and assimilation
and exit activities occurred on that date. The summary does not purport to be
indicative of what would have occurred had the acquisition occurred as of the
dates indicated or of the results which may occur in the future.
[Download Table]
-------------------------------------------------------------------------------
(in thousands) 1996 1995
-------------------------------------------------------------------------------
Revenues $329,449 $235,369
===============================================================================
Net income $ 24,707 $ 16,661
===============================================================================
On April 29, 1994, a wholly-owned subsidiary of the Company, Midway Home
Entertainment Inc., acquired substantially all of the operating assets and
business of three commonly owned companies ("Tradewest"): Tradewest, Inc.,
Tradewest International, Inc. and The Leland Corporation. The assets acquired
are utilized in the Video Game Business of developing, publishing and
distributing home video games in various formats including game cartridges. The
acquisition has been accounted for by the purchase method of accounting.
During fiscal 1997, the final purchase price of $50,131,000 for Tradewest
was determined under the purchase agreement based on earnings of the acquired
business subsequent to the purchase date which resulted in excess cost over the
amount assigned to net assets acquired of $46,400,000. The balance due under
the purchase agreement of $14,400,000 is payable in June 1998 and payment has
been guaranteed by WMS. As of June 30, 1997 and 1996, excess costs over the
amount assigned to net assets acquired resulting from this acquisition was
$46,400,000 and $24,800,000, respectively.
NOTE 6: PROPERTY AND EQUIPMENT
[Download Table]
At June 30 net property and equipment were:
-------------------------------------------------------------------------------
(in thousands) 1997 1996
-------------------------------------------------------------------------------
Leasehold improvements $ 2,332 $ 458
Furniture, fixtures and engineering equipment 14,559 9,033
-------------------------------------------------------------------------------
16,891 9,491
Less accumulated depreciation (7,393) (3,564)
-------------------------------------------------------------------------------
Net property and equipment $ 9,498 $ 5,927
===============================================================================
NOTE 7: INCOME TAXES
The results of the Company have been included in the consolidated income tax
returns of WMS for all years presented; however income taxes have been recorded
based on a calculation of the income taxes that would have been incurred if the
Company operated as an independent combined entity. WMS and the Company entered
into a tax sharing agreement effective July 1, 1996 that requires a tax
calculation, accrual and payment by the Company as if the Company was filing a
separate tax return.
Significant components of the income tax provision on income before
extraordinary credit for the years ended June 30, 1997, 1996 and 1995 were:
[Download Table]
-------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
-------------------------------------------------------------------------------
Current:
Federal $26,010 $15,423 $10,685
State 4,091 2,791 2,183
-------------------------------------------------------------------------------
Total current 30,101 18,214 12,868
Deferred:
Federal (5,265) (2,156) 4,141
State (1,024) (522) 845
-------------------------------------------------------------------------------
Total deferred (6,289) (2,678) 4,986
-------------------------------------------------------------------------------
Provision for income taxes $23,812 $15,536 $17,854
===============================================================================
The income tax provision on income before extraordinary credit differs
from the amount computed using the statutory federal income tax rate for the
years ended June 30, 1997, 1996 and 1995 as follows:
[Download Table]
-------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 3.2 3.6 4.2
Foreign sales corporation benefits (1.0) (.6) (1.2)
Other, net .8 .1 --
-------------------------------------------------------------------------------
38.0% 38.1% 38.0%
===============================================================================
The income tax provision of $2,001,000 on the extraordinary credit is
comprised of the federal tax rate of 35% and a composite state tax rate of
4.66%, net of federal benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income taxes.
30
Midway Games Inc.
Significant components of the Company's deferred tax assets and liabilities
at June 30 were:
[Download Table]
-------------------------------------------------------------------------------
(in thousands) 1997 1996
-------------------------------------------------------------------------------
Deferred tax assets resulting from:
Inventory valuation $1,835 $ 656
Accrued items not currently deductible 2,230 3,131
Receivable allowance 2,025 408
Purchased assets cost basis difference - 1,853
Other 26 227
-------------------------------------------------------------------------------
Total deferred tax assets 6,116 6,275
-------------------------------------------------------------------------------
Deferred tax liabilities resulting from:
Tax over book depreciation 687 342
Revenues deferred in tax reporting - 5,672
Book over tax basis of domestic subsidiary 1,845 -
Purchase liability basis difference - 4,455
Other 842 -
-------------------------------------------------------------------------------
Total deferred tax liabilities 3,374 10,469
-------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $2,742 $(4,194)
===============================================================================
During fiscal 1997, 1996 and 1995 income taxes paid to WMS were
$28,236,000, $18,214,000 and $12,868,000, respectively.
NOTE 8: LINE OF CREDIT AND LONG-TERM DEBT
The Company established a line of credit for $50,000,000 and an additional
letter of credit line of $30,000,000. The revolving credit agreement is for a
one-year term to October 31, 1997 and contains usual bank line of credit terms.
Long-term debt at June 30, 1996 consisted of a promissory note related to
the acquisition of Atari Games of $7,863,000 which was due March 1998 with
interest at 6%. The promissory note was prepaid, at a discount, in April 1997,
as described in Note 14.
The amount of interest paid during fiscal 1997, 1996 and 1995 was
$2,740,000, $442,000 and $195,000, respectively.
NOTE 9: PREFERRED STOCK
The preferred stock is issuable in series, and the elective rights and
preferences and number of shares in each series are to be established by the
Board of Directors.
NOTE 10: STOCK OPTION PLAN
Under the stock option plan the Company may grant both incentive stock options
and nonqualified options on shares of common stock through the year 2006.
Options may be granted on 2,000,000 shares of common stock to employees and
under certain conditions to non-employee directors and consultants. The
Compensation and Stock Option Committee of the Board of Directors has the
authority to fix the terms and conditions upon which each option is granted,
but in no event shall the term exceed ten years or be granted at less than 100%
of the fair market value of the stock at the date of grant.
The Company accounts for stock options for purposes of determining net
income in accordance with APB Opinion No. 25. No compensation expense has been
recognized in conjunction with the stock option plan. SFAS No. 123 regarding
stock option plans permits the use of APB Opinion No. 25 but requires the
inclusion of certain pro forma disclosures in the footnotes.
Pro forma net income for fiscal 1997 adjusted for the expense provision of
SFAS No. 123 was $36,892,000 or $1.00 per share of common stock. No calculation
of fiscal 1996 pro forma net income under SFAS No. 123 is required since all
the options were granted in fiscal 1997.
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 1997: dividend yield of
0%; expected volatility of .50; risk free interest rate of 6.2% and expected
life of the option of 4 years.
During fiscal 1997 options for 1,810,000 shares were granted at an
exercise price of $20.00 per share with a weighted average pro forma fair
market value using the Black-Scholes assumptions noted above of $9.09 per
share. All of the granted options are outstanding at June 30, 1997 with a
weighted average remaining contractual life of 9.4 years. At June 30, 1997
options for 505,000 shares are exercisable at an exercise price of $20.00 per
share and 190,000 shares were available for future grants under the plan.
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, 1997, 64% of trade accounts receivable are from sale of
coin-operated video games to
31
Midway Games Inc.
NOTES TO FINANCIAL STATEMENTS continued
the Company's distributors located primarily throughout the United States
and Western Europe and, because of the number and geographic distribution,
concentration is limited. Foreign sales are typically made in U.S. dollars and
typically on the basis of a letter of credit. At times during the fiscal year
accounts receivable from certain major home video game customers represent a
significant amount of the accounts receivable then outstanding.
Cash equivalents of $44,627,000 and short-term investments of $10,000,000
at June 30, 1997, 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: LEASE 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, 1997 as follows:
[Download Table]
-------------------------------------------------------------------------------
(in thousands)
-------------------------------------------------------------------------------
1998 $ 1,770
1999 1,735
2000 1,686
2001 1,743
2002 1,590
Thereafter 4,354
-------------------------------------------------------------------------------
12,878
Less sublease income 5,533
-------------------------------------------------------------------------------
$ 7,345
===============================================================================
Rent expense for fiscal 1997, 1996 and 1995 was $1,459,000, $603,000, and
$307,000, respectively, and was offset by sublease income of $536,000 and
$134,000 for fiscal 1997 and 1996, respectively. Aggregate future gross lease
commitments of $11,408,000 were guaranteed, prior to the acquisition of Atari
Games from Warner, and continue to be guaranteed by Warner.
NOTE 13: EMPLOYEE RETIREMENT PLANS
The Company has two defined contribution employee retirement savings plans and
certain salaried employees participate in a WMS defined contribution plan.
These defined contribution plans cover certain hourly and salaried employees.
The Company's contribution to these plans are based on employee participation
with certain limitations. The Company or WMS may change any of the factors
which determine the Company's contribution to their respective plans.
Contributions to the defined contribution plans for fiscal 1997, 1996 and 1995
were $523,000, $302,000 and $202,000, respectively.
NOTE 14: QUARTERLY FINANCIAL INFORMATION (unaudited)
Summarized quarterly financial information for fiscal 1997 and 1996 are
as follows:
[Download Table]
-------------------------------------------------------------------------------
(in thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1996 1996 1997 1997
-------------------------------------------------------------------------------
FISCAL 1997 QUARTERS
Revenues $ 65,555 $125,519 $ 99,060 $ 98,092
Gross profit 34,380 55,203 35,657 41,579
Research and
development
expense 12,003 14,780 13,208 15,950
Income before
extraordinary
credit 6,077 15,107 6,415 11,252
Net income 6,077 15,107 6,415 14,296
Per share:
Income before
extraordinary
credit $ .18 $ .41 $ .17 $ .29
-------------------------------------------------------------------------------
Net income $ .18 $ .41 $ .17 $ .37
===============================================================================
Average number
of shares
outstanding 33,400 36,800 38,500 38,500
[Download Table]
-------------------------------------------------------------------------------
(in thousands, except Sept. 30, Dec. 31, Mar. 31, June 30,
per share amounts) 1995 1995 1996 1996
-------------------------------------------------------------------------------
FISCAL 1996 QUARTERS
Revenues $ 67,938 $ 89,162 $ 43,075 $ 45,248
Gross profit 27,316 40,615 19,559 17,877
Research and
development
expense 5,851 9,541 5,459 11,644
Net income 7,170 11,598 6,249 212
Net income
per share $ .21 $ .35 $ .19 $ .01
-------------------------------------------------------------------------------
Average number
of shares
outstanding 33,400 33,400 33,400 33,400
Net income for the quarter ended June 30, 1997 included an extraordinary
gain from the early extinguishment of debt, net of taxes, of $3,044,000, $.08
per share, related to the prepayment, at a discount, of the promissory notes
issued for the acquisition of Atari Games.
Revenues for the quarter ended March 31, 1996 included certain licensing
revenue of $10,000,000 that increased net income by $4,318,000, $.13 per share.
The June 30, 1996 quarter and all quarters thereafter included the
operations of Atari Games after its acquisition on March 29, 1996. Research and
development expense increased substantially beginning in the June 30, 1996
quarter in a large part due to inclusion of Atari Games.
32
Dates Referenced Herein and Documents Incorporated by Reference
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