##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 Commission file number 001-12367
 MIDWAY GAMES INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    22-2906244
(I.R.S. Employer
Identification No.)2704 W. Roscoe Street, Chicago, IL
(Address of Principal Executive Offices)
    
    60618
(Zip Code)
 (773) 961-2222
 þ  ̈
 þ  ̈




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##### 



MIDWAY GAMES INC.
 INDEX
 PAGENO.Part I. Financial Information:Item 1.
    
    Financial Statements:Consolidated Balance Sheets  June 30, 2005 and December 31, 2004
    
    
    1Consolidated Statements of Operations Three and Six-Months Ended June 30, 2005 and 2004
    
    
    2Consolidated Statements of Cash Flows Six-Months Ended June 30, 2005 and 2004
    
    
    3Notes to Consolidated Financial Statements
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition andResults of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20Part II. Other Information:Item 1.
    
    Legal Proceedings
    
    
    21Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    22Item 6.
    
    Exhibits
    
    
    23Signature
    
    
    24




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##### 



Part I. Financial Information
 Item 1. Financial Statements
 MIDWAY GAMES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    59,221
    
    
    $
    118,313Receivables, less allowances of $10,698 at June 30, 2005 and $8,836 at
December 31, 2004
    
    
    13,169
    
    
    
    15,724Inventories
    
    
    5,495
    
    
    
    6,893Capitalized product development costs
    
    
    41,131
    
    
    
    27,850Prepaid expenses and other current assets
    
    
    5,693
    
    
    
    6,570Total current assets
    
    
    124,709
    
    
    
    175,350Capitalized product development costs
    
    
    1,047
    
    
    
    809Property and equipment, net
    
    
    19,279
    
    
    
    15,470Goodwill
    
    
    39,577
    
    
    
    39,533Other assets
    
    
    11,770
    
    
    
    11,155Total assets
    
    $
    196,382
    
    
    $
    242,317Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    8,814
    
    
    $
    6,673Accrued compensation and related benefits
    
    
    2,947
    
    
    
    5,183Accrued royalties
    
    
    2,186
    
    
    
    3,493Accrued selling and marketing
    
    
    2,742
    
    
    
    3,525Current portion of long-term debt
    
    
    3,333
    
    
    
    3,333Other accrued liabilities
    
    
    11,006
    
    
    
    11,249Total current liabilities
    
    
    31,028
    
    
    
    33,456Long-term debt
    
    
    8,611
    
    
    
    10,278Deferred income taxes
    
    
    7,429
    
    
    
    6,773Other noncurrent liabilities
    
    
    681
    
    
    
    340Redeemable convertible preferred stock, Series D, $0.01 par value, 4,750
shares authorized and designated, 446 shares issued and outstanding,
redeemable at $4,460
    
    
    4,456
    
    
    
    4,453Stockholders equity:Preferred stock, $0.01 par value, 4,995,250 shares authorized and undesignated.
    
    
    
    
    
    
    Common stock, $0.01 par value, 200,000,000 shares authorized, 88,131,812 and
87,883,494 shares issued at June 30, 2005 and December 31, 2004
    
    
    881
    
    
    
    879Additional paid-in capital
    
    
    393,365
    
    
    
    392,177Accumulated deficit
    
    
    (236,355
    )
    
    
    (190,612
    )Accumulated translation adjustment
    
    
    (873
    )
    
    
    (1,420
    )Deferred compensation
    
    
    (3,213
    )
    
    
    (4,379
    )Treasury stock, at cost, 1,096,646 shares
    
    
    (9,628
    )
    
    
    (9,628
    )Total stockholders equity
    
    
    144,177
    
    
    
    187,017Total liabilities and stockholders equity
    
    $
    196,382
    
    
    $
    242,317
  1




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three-Months Ended
    
    
    Six-Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    36,926
    
    
    $
    47,286
    
    
    $
    50,741
    
    
    $
    67,417Cost of sales:Product costs and distribution
    
    
    13,904
    
    
    
    17,395
    
    
    
    18,970
    
    
    
    26,570Royalties and product development
    
    
    21,165
    
    
    
    13,295
    
    
    
    24,695
    
    
    
    19,620Total cost of sales
    
    
    35,069
    
    
    
    30,690
    
    
    
    43,665
    
    
    
    46,190Gross profit
    
    
    1,857
    
    
    
    16,596
    
    
    
    7,076
    
    
    
    21,227Research and development expense
    
    
    10,444
    
    
    
    8,518
    
    
    
    19,410
    
    
    
    13,587Selling and marketing expense
    
    
    15,779
    
    
    
    12,618
    
    
    
    23,059
    
    
    
    21,696Administrative expense
    
    
    4,469
    
    
    
    4,425
    
    
    
    8,649
    
    
    
    8,734Operating loss
    
    
    (28,835
    )
    
    
    (8,965
    )
    
    
    (44,042
    )
    
    
    (22,790
    )Interest income
    
    
    490
    
    
    
    257
    
    
    
    1,118
    
    
    
    355Interest expense
    
    
    (371
    )
    
    
    (394
    )
    
    
    (724
    )
    
    
    (572
    )Other income and (expense), net
    
    
    (806
    )
    
    
    (64
    )
    
    
    (1,439
    )
    
    
    (2
    )Loss before income taxes
    
    
    (29,522
    )
    
    
    (9,166
    )
    
    
    (45,087
    )
    
    
    (23,009
    )Provision for income taxes
    
    
    328
    
    
    
    328
    
    
    
    656
    
    
    
    656Net loss
    
    
    (29,850
    )
    
    
    (9,494
    )
    
    
    (45,743
    )
    
    
    (23,665
    )Preferred stock dividends:Distributed
    
    
    63
    
    
    
    876
    
    
    
    126
    
    
    
    1,379Imputed
    
    
    1
    
    
    
    833
    
    
    
    3
    
    
    
    1,143Loss applicable to common stock
    
    $
    (29,914
    )
    
    $
    (11,203
    )
    
    $
    (45,872
    )
    
    $
    (26,187
    )Basic and diluted loss per share of common stock
    
    $
    (0.35
    )
    
    $
    (0.17
    )
    
    $
    (0.53
    )
    
    $
    (0.43
    )Weighted average number of shares outstanding
    
    
    85,941
    
    
    
    67,177
    
    
    
    85,792
    
    
    
    61,503
  2




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six-Months
Ended June 30,2005
    
    
    2004Operating activities:Net loss
    
    $
    (45,743
    )
    
    $
    (23,665
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    20,722
    
    
    
    14,865Depreciation and amortization
    
    
    3,470
    
    
    
    2,546Receivables provision
    
    
    9,750
    
    
    
    6,980Deferred income taxes
    
    
    656
    
    
    
    656Stock-based compensation expense
    
    
    1,166
    
    
    
    558Amortization of debt issuance costs
    
    
    127
    
    
    
    88Loss on disposal of property and equipment
    
    
    27
    
    
    
    7Changes in operating assets and liabilities:Receivables
    
    
    (7,330
    )
    
    
    (11,117
    )Inventories
    
    
    1,298
    
    
    
    374Capitalized product development costs
    
    
    (34,241
    )
    
    
    (21,938
    )Prepaid expenses and other current assets
    
    
    931
    
    
    
    1,456Accounts payable and accruals
    
    
    (3,717
    )
    
    
    9,572Other assets and liabilities
    
    
    (1,061
    )
    
    
    (1,240
    )Net cash used in operating activities
    
    
    (53,945
    )
    
    
    (20,858
    )Investing activities:Purchases of property and equipment
    
    
    (3,476
    )
    
    
    (1,140
    )Cash acquired from acquisition
    
    
    
    
    
    
    249Net cash used in investing activities
    
    
    (3,476
    )
    
    
    (891
    )Financing activities:Payment of long-term debt
    
    
    (1,667
    )
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    15,000Payment of debt issuance costs
    
    
    
    
    
    
    (775
    )Payments on capital lease obligation
    
    
    (530
    )
    
    
    Net proceeds from sale of common stock
    
    
    
    
    
    
    78,299Net proceeds from sale of Series D preferred stock
    
    
    
    
    
    
    12,423Cash dividends on preferred stock
    
    
    (127
    )
    
    
    (1,026
    )Cash received on exercise of common stock options
    
    
    1,077
    
    
    
    18,788Remittance of withholding taxes in lieu of stock issuance
    
    
    
    
    
    
    (1,824
    )Net cash (used in) provided by financing activities
    
    
    (1,247
    )
    
    
    120,885Effect of exchange rate changes on cash
    
    
    (424
    )
    
    
    16(Decrease) increase in cash and cash equivalents
    
    
    (59,092
    )
    
    
    99,152Cash and cash equivalents at beginning of period
    
    
    118,313
    
    
    
    41,682Cash and cash equivalents at end of period
    
    $
    59,221
    
    
    $
    140,834
  3




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##### 



MIDWAY GAMES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Financial Statements
  2. Reclassifications
  3. New Accounting Pronouncement
 Share-Based Payment,
  4




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##### 



4. Acquisitions
   5. New Consolidated Subsidiary
   6. Inventories
  7. Capital Lease
  2005
    
    $
    7002006
    
    
    1,3002007
    
    
    400Total capital lease obligation
    
    
    2,400Less: Imputed interest
    
    
    (122
    )Present value of capital lease obligation
    
    
    2,278Current capital lease obligation
    
    
    (1,607
    )Long-term capital lease obligation
    
    $
    671
 5




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##### 



8. Stock-Based Compensation
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure  an Amendment of
FASB No. 123 Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services
  Three-Months Ended
    
    
    Six-Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reported loss applicable to common stock
    
    $
    (29,914
    )
    
    $
    (11,203
    )
    
    $
    (45,872
    )
    
    $
    (26,187
    )Deduct stock-based compensation expense
included in reported loss applicable to
common stock (a)
    
    
    513
    
    
    
    488
    
    
    
    1,166
    
    
    
    558Add stock-based compensation expense
determined under the fair value based method
for all awards (a)
    
    
    (1,554
    )
    
    
    (3,894
    )
    
    
    (3,256
    )
    
    
    (5,230
    )Pro forma net loss applicable to common stock
    
    $
    (30,955
    )
    
    $
    (14,609
    )
    
    $
    (47,962
    )
    
    $
    (30,859
    )Basic and diluted loss per share:As reported
    
    $
    (0.35
    )
    
    $
    (0.17
    )
    
    $
    (0.53
    )
    
    $
    (0.43
    )Pro forma
    
    $
    (0.36
    )
    
    $
    (0.22
    )
    
    $
    (0.56
    )
    
    $
    (0.50
    )
 
 (a)
    
    These amounts reflect a $0 income tax effect. See Note 12 for details about our income
taxes. Share-Based Payment.
 9. Comprehensive Loss
 Reporting Comprehensive Income
 6




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##### 



10. Loss per Common Share
  June 30,2005
    
    
    2004Stock options
    
    
    7,376
    
    
    
    8,335Warrants
    
    
    679
    
    
    
    1,820Contingent shares
    
    
    843
    
    
    
    1,292Redeemable convertible preferred stock, Series D
    
    
    1,115
    
    
    
    10,522Total common stock equivalents
    
    
    10,013
    
    
    
    21,969
  11. Capitalized Product Development Costs and Research and Development
Costs
  Three-Months Ended
    
    
    Six-Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Beginning balance
    
    $
    43,688
    
    
    $
    16,771
    
    
    $
    28,659
    
    
    $
    11,292Additions
    
    
    16,232
    
    
    
    10,916
    
    
    
    34,241
    
    
    
    21,938Amortization, including writedowns
    
    
    (17,742
    )
    
    
    (9,322
    )
    
    
    (20,722
    )
    
    
    (14,865
    )Ending balance
    
    $
    42,178
    
    
    $
    18,365
    
    
    $
    42,178
    
    
    $
    18,365
  Three-Months Ended
    
    
    Six-Months EndedJune 30,
    
    

June 30,2005
    
    

2004
    
    

2005
    
    

2004Gross research and development costs
    
    $
    26,676
    
    
    $
    19,434
    
    
    $
    53,652
    
    
    $
    35,525Research and development costs capitalized
    
    
    (16,232
    )
    
    
    (10,916
    )
    
    
    (34,242
    )
    
    
    (21,938
    )Research and development expense
    
    $
    10,444
    
    
    $
    8,518
    
    
    $
    19,410
    
    
    $
    13,587
 12. Income Taxes
   7




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##### 



13. Common Stock
   14. Legal Proceedings
   15. Subsequent Events
   8




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 PlayStation 2 Xbox GameCube Game Boy Advance
 New Platform Cycle
 PlayStation 2 GameCube Xbox Game Boy Advance Xbox 360,
 Nintendo DS PlayStation Portable
 9




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##### 



PC Market
 Unreal Tournament Rise and Fall:
Civilizations at War ,
 Childrens Market
  Strategic Alliance
 L.A. RUSH
  Expansion of Resources
   
    
    Seattle, Washington-based Surreal Software Inc. (Surreal) in April 2004. Surreal
worked with us in the development of The Suffering, a title we released in March 2004.
    
    Austin, Texas-based Inevitable Entertainment Inc. (Inevitable) in October 2004.
Inevitable worked with us on the development of Area 51, a title we released in April 2005.
    
    Moorpark, California-based CWS Entertainment Ltd. d/b/a Paradox Development (Paradox)
in November 2004. Paradox is working with us on the development of Mortal Kombat: Shaolin
Monks, a title we plan to release later in 2005.
    
    Adelaide, South Australia-based Ratbag Holdings Pty Ltd.
(Ratbag) in August 2005. Ratbag is working on several
unannounced Midway products for both current- and next-generation
systems.
   10




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##### 



Majority Stockholder
  Results of Operations
 Three-Months Ended June 30, 2005 Compared with Three-Months Ended June 30, 2004
  Three-Months Ended June 30,2005
    
    
    2004Net revenues
    
    $
    36,926
    
    
    
    100.0
    %
    
    $
    47,286
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    13,904
    
    
    
    37.7
    %
    
    
    17,395
    
    
    
    36.8
    %Royalties and product development
    
    
    21,165
    
    
    
    57.3
    %
    
    
    13,295
    
    
    
    28.1
    %Total cost of sales
    
    
    35,069
    
    
    
    95.0
    %
    
    
    30,690
    
    
    
    64.9
    %Gross profit
    
    
    1,857
    
    
    
    5.0
    %
    
    
    16,596
    
    
    
    35.1
    %Research and development expense
    
    
    10,444
    
    
    
    28.3
    %
    
    
    8,518
    
    
    
    18.0
    %Selling and marketing expense
    
    
    15,779
    
    
    
    42.7
    %
    
    
    12,618
    
    
    
    26.7
    %Administrative expense
    
    
    4,469
    
    
    
    12.1
    %
    
    
    4,425
    
    
    
    9.4
    %Operating loss
    
    
    (28,835
    )
    
    
    (78.1
    )%
    
    
    (8,965
    )
    
    
    (19.0
    )%Interest income
    
    
    490
    
    
    
    1.3
    %
    
    
    257
    
    
    
    0.5
    %Interest expense
    
    
    (371
    )
    
    
    (1.0
    )%
    
    
    (394
    )
    
    
    (0.8
    )%Other income and (expense), net
    
    
    (806
    )
    
    
    (2.1
    )%
    
    
    (64
    )
    
    
    (0.1
    )%Loss before income taxes
    
    
    (29,522
    )
    
    
    (79.9
    )%
    
    
    (9,166
    )
    
    
    (19.4
    )%Provision for income taxes
    
    
    328
    
    
    
    0.9
    %
    
    
    328
    
    
    
    0.7
    %Net loss
    
    
    (29,850
    )
    
    
    (80.8
    )%
    
    
    (9,494
    )
    
    
    (20.1
    )%Preferred stock dividends:Distributed
    
    
    63
    
    
    
    0.2
    %
    
    
    876
    
    
    
    1.8
    %Imputed
    
    
    1
    
    
    
    0.0
    %
    
    
    833
    
    
    
    1.8
    %Loss applicable to common stock
    
    $
    (29,914
    )
    
    
    (81.0
    )%
    
    $
    (11,203
    )
    
    
    (23.7
    )%
 11




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##### 



Consolidated Net Revenues
  Three-Months Ended June 30,2005
    
    
    2004Net revenues by platformSony PlayStation 2 (PS2)
    
    $
    13,801
    
    
    
    37.4
    %
    
    $
    28,822
    
    
    
    61.0
    %Microsoft Xbox (XBX)
    
    
    18,087
    
    
    
    49.0
    %
    
    
    16,527
    
    
    
    34.9
    %Personal Computer (PC)
    
    
    2,153
    
    
    
    5.8
    %
    
    
    
    
    
    
    0.0
    %Nintendo GameCube (NGC)
    
    
    210
    
    
    
    0.6
    %
    
    
    348
    
    
    
    0.7
    %License and royalty
    
    
    1,746
    
    
    
    4.7
    %
    
    
    1,454
    
    
    
    3.1
    %Other
    
    
    929
    
    
    
    2.5
    %
    
    
    135
    
    
    
    0.3
    %Total net revenues
    
    $
    36,926
    
    
    
    100.0
    %
    
    $
    47,286
    
    
    
    100.0
    %Net revenues by territoryNorth America
    
    $
    24,798
    
    
    
    67.2
    %
    
    $
    42,255
    
    
    
    89.4
    %International
    
    
    12,128
    
    
    
    32.8
    %
    
    
    5,031
    
    
    
    10.6
    %Total net revenues
    
    $
    36,926
    
    
    
    100.0
    %
    
    $
    47,286
    
    
    
    100.0
    %
  Videogame title
    
    Platform
    
    
    TerritoryThree-Months Ended June 30, 2005Area 51
    
    PS2, XBX, PC
    
    North AmericaUnreal Championship 2
    
    XBX
    
    North AmericaArea 51
    
    PS2, XBX, PC
    
    InternationalNARC
    
    XBX
    
    InternationalUnreal Championship 2
    
    XBX
    
    InternationalThree-Months Ended June 30, 2004MLB Slugfest: Loaded
    
    PS2, XBX
    
    North AmericaNBA Ballers
    
    PS2, XBX
    
    North AmericaPsi-Ops: The Mindgate Conspiracy
    
    PS2, XBX
    
    North AmericaThe Suffering
    
    PS2, XBX
    
    International
 NBA Ballers
 North American Net Revenues
 Area 51,
Unreal Championship 2 NARC NBA Ballers, Psi-Ops: The Mindgate Conspiracy MLB Slugfest: Loaded
 12




---



##### 



International Net Revenues
 Area 51, Unreal
Championship 2 Mortal Kombat: Deception The Suffering Midway Arcade Treasures SpyHunter 2.
 Cost of Sales
   Three-Months EndedJune 30,Description
    
    2005
    
    
    2004Amortization of capitalized product development costs
    
    $
    15,698,000
    
    
    $
    9,322,000Writedowns related to a future release
    
    
    2,044,000
    
    
    
    Total
    
    $
    17,742,000
    
    
    $
    9,322,000
 Research and Development Expense
  Three-Months EndedJune 30,Description
    
    2005
    
    
    2004Gross research and development costs
    
    $
    26,676,000
    
    
    $
    19,434,000Research and development costs capitalized
    
    
    (16,232,000
    )
    
    
    (10,916,000
    )Research and development expense
    
    $
    10,444,000
    
    
    $
    8,518,000
  13




---



##### 



Selling and Marketing Expense
 Mortal Kombat: Deception NARC
 Interest Income
  Interest Expense
  Other Income and (Expense), net
  Income Taxes
  14




---



##### 



Six-Months Ended June 30, 2005 Compared with Six-Months Ended June 30, 2004
  Six-Months Ended June 30,2005
    
    
    2004Net revenues
    
    $
    50,741
    
    
    
    100.0
    %
    
    $
    67,417
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    18,970
    
    
    
    37.4
    %
    
    
    26,570
    
    
    
    39.4
    %Royalties and product development
    
    
    24,695
    
    
    
    48.7
    %
    
    
    19,620
    
    
    
    29.1
    %Total cost of sales
    
    
    43,665
    
    
    
    86.1
    %
    
    
    46,190
    
    
    
    68.5
    %Gross profit
    
    
    7,076
    
    
    
    13.9
    %
    
    
    21,227
    
    
    
    31.5
    %Research and development expense
    
    
    19,410
    
    
    
    38.3
    %
    
    
    13,587
    
    
    
    20.1
    %Selling and marketing expense
    
    
    23,059
    
    
    
    45.4
    %
    
    
    21,696
    
    
    
    32.2
    %Administrative expense
    
    
    8,649
    
    
    
    17.0
    %
    
    
    8,734
    
    
    
    13.0
    %Operating loss
    
    
    (44,042
    )
    
    
    (86.8
    )%
    
    
    (22,790
    )
    
    
    (33.8
    )%Interest income
    
    
    1,118
    
    
    
    2.2
    %
    
    
    355
    
    
    
    0.5
    %Interest expense
    
    
    (724
    )
    
    
    (1.4
    )%
    
    
    (572
    )
    
    
    (0.8
    )%Other income and (expense), net
    
    
    (1,439
    )
    
    
    (2.8
    )%
    
    
    (2
    )
    
    
    (0.0
    )%Loss before income taxes
    
    
    (45,087
    )
    
    
    (88.8
    )%
    
    
    (23,009
    )
    
    
    (34.1
    )%Provision for income taxes
    
    
    656
    
    
    
    1.3
    %
    
    
    656
    
    
    
    1.0
    %Net loss
    
    
    (45,743
    )
    
    
    (90.1
    )%
    
    
    (23,665
    )
    
    
    (35.1
    )%Preferred stock dividends:Distributed
    
    
    126
    
    
    
    0.3
    %
    
    
    1,379
    
    
    
    2.0
    %Imputed
    
    
    3
    
    
    
    0.0
    %
    
    
    1,143
    
    
    
    1.7
    %Loss applicable to common stock
    
    $
    (45,872
    )
    
    
    (90.4
    )%
    
    $
    (26,187
    )
    
    
    (38.8
    )%
 Consolidated Net Revenues
  Six-Months Ended June 30,2005
    
    
    2004Net revenues by platformSony PlayStation 2 (PS2)
    
    $
    20,192
    
    
    
    39.8
    %
    
    $
    39,631
    
    
    
    58.8
    %Microsoft Xbox (XBX)
    
    
    20,740
    
    
    
    40.9
    %
    
    
    23,382
    
    
    
    34.7
    %Nintendo GameCube (NGC)
    
    
    2,817
    
    
    
    5.6
    %
    
    
    1,779
    
    
    
    2.6
    %Personal Computer (PC)
    
    
    2,153
    
    
    
    4.2
    %
    
    
    0
    
    
    
    0.0
    %License and royalty
    
    
    3,531
    
    
    
    7.0
    %
    
    
    2,066
    
    
    
    3.1
    %Other
    
    
    1,308
    
    
    
    2.5
    %
    
    
    559
    
    
    
    0.8
    %Total net revenues
    
    $
    50,741
    
    
    
    100.0
    %
    
    $
    67,417
    
    
    
    100.0
    %Net revenues by territoryNorth America
    
    $
    35,521
    
    
    
    70.0
    %
    
    $
    58,481
    
    
    
    86.7
    %International
    
    
    15,220
    
    
    
    30.0
    %
    
    
    8,936
    
    
    
    13.3
    %Total net revenues
    
    $
    50,741
    
    
    
    100.0
    %
    
    $
    67,417
    
    
    
    100.0
    %
 15




---



##### 



Videogame title
    
    Platform
    
    
    TerritorySix-Months Ended June 30, 2005Area 51
    
    PS2, XBX, PC
    
    North AmericaMortal Kombat: Deception
    
    NGC
    
    North AmericaNARC
    
    PS2, XBX
    
    North AmericaUnreal Championship 2
    
    XBX
    
    North AmericaArea 51
    
    PS2, XBX, PC
    
    InternationalMaya the Bee
    
    GBA
    
    InternationalNARC
    
    XBX
    
    InternationalShadowhearts: Covenant
    
    PS2
    
    InternationalUnreal Championship 2
    
    XBX
    
    InternationalSix-Months Ended June 30, 2004MLB Slugfest: Loaded
    
    PS2, XBX
    
    North AmericaNBA Ballers
    
    PS2, XBX
    
    North AmericaPsi-Ops: The Mindgate Conspiracy
    
    PS2, XBX
    
    North AmericaThe Suffering
    
    PS2, XBX
    
    North AmericaMidway Arcade Treasures
    
    PS2, XBX
    
    InternationalSpyHunter 2
    
    PS2, XBX
    
    InternationalThe Suffering
    
    PS2, XBX
    
    International
 NBA Ballers
 North American Net Revenues
 Area 51, Unreal
Championship 2 NARC, . NBA
Ballers, The Suffering Psi-Ops: The Mindgate Conspiracy,
 International Net Revenues
 Area 51, Unreal
Championship 2 ShadowHearts: Covenant. The Suffering,
Midway Arcade Treasures SpyHunter 2,
 16




---



##### 



Cost of Sales
   Six-Months EndedJune 30,Description
    
    2005
    
    
    2004Amortization of capitalized product development costs
    
    $
    18,678,000
    
    
    $
    12,064,000Writedowns related to future releases
    
    
    2,044,000
    
    
    
    2,142,000Writedowns related to current releases
    
    
    
    
    
    
    384,000Writedowns related to cancelled games
    
    
    
    
    
    
    275,000Total
    
    $
    20,722,000
    
    
    $
    14,865,000
 Research and Development Expense
  Six-Months EndedJune 30,Description
    
    2005
    
    
    2004Gross research and development costs
    
    $
    53,652,000
    
    
    $
    35,525,000Research and development costs capitalized
    
    
    (34,242,000
    )
    
    
    (21,938,000
    )Research and development expense
    
    $
    19,410,000
    
    
    $
    13,587,000
  Selling and Marketing Expense
 Mortal Kombat:
Deception
 17




---



##### 



Interest Income
  Interest Expense
  Other Income and (Expense), net
  Income Taxes
  Liquidity and Capital Resources
    18




---



##### 



Off Balance Sheet Arrangements and Contractual Obligations
   Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    YearsLong-term
debt obligations(1)
    
    $
    11,944
    
    
    $
    3,333
    
    
    $
    6,667
    
    
    $
    1,944
    
    
    $
    Interest on
long-term debt obligations(2)
    
    
    1,408
    
    
    
    651
    
    
    
    677
    
    
    
    80
    
    
    
    Operating
lease obligations(3)
    
    
    7,471
    
    
    
    2,979
    
    
    
    3,996
    
    
    
    496
    
    
    
    Purchase
obligations(4)
    
    
    56,594
    
    
    
    30,129
    
    
    
    11,395
    
    
    
    15,070
    
    
    
    Other
long-term liabilities(5)
    
    
    2,449
    
    
    
    1,778
    
    
    
    671
    
    
    
    
    
    
    
    Redeemable
convertible preferred stock(6)
    
    
    4,460
    
    
    
    4,460
    
    
    
    
    
    
    
    
    
    
    
    Dividends to be distributed on
redeemable convertible preferred
stock(7)
    
    
    181
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    84,507
    
    
    $
    43,511
    
    
    $
    23,406
    
    
    $
    17,590
    
    
    $
    
 
 (1)
    
    These obligations are reflected on our consolidated balance
sheet at June 30, 2005 in current portion of long-term debt and
long-term debt, as appropriate.(2)
    
    Assumes debt is carried to full term. Debt bears interest at variable rates. The amounts
above assume future interest will be incurred at the rate in effect
on June 30, 2005 (6.25%). These obligations are not reflected on our consolidated balance
sheet at June 30, 2005.(3)
    
    These obligations are not reflected on our consolidated balance
sheet at June 30, 2005. 19




---



##### 



(4)
    
    Purchase obligations are agreements to purchase goods or services that are enforceable and
legally binding on us and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. The amounts in the table above include inventory items, marketing
commitments, and minimum payments due under various licensing agreements and third party developer agreements. The amounts disclosed above assume all
transactions are carried to contractual term and do not reflect cancellations within our
control. Such cancellations could result in amounts owed being less
than those reflected above. These obligations are not reflected on our consolidated balance
sheet at June 30, 2005.(5)
    
    These items are reflected on our consolidated balance sheet at June 30, 2005 in current and
noncurrent liabilities, as appropriate.(6)
    
    Assumes Series D redeemable convertible preferred stock remains outstanding until the
maturity date of March 15, 2006. We may elect to redeem all or part of the Series D preferred
stock in cash or by converting all or a part of the shares of Series D preferred stock into
common stock, under certain circumstances. In addition, the holders of the Series D preferred
stock may convert their shares into shares of common stock at any
time. $4,456,000 of this obligation is reflected on our consolidated
balance sheet at June 30, 2005.(7)
    
    Assumes Series D redeemable convertible preferred stock remains outstanding until the
maturity date of March 15, 2006. Dividends may be paid in cash or at our option in registered
shares of our common stock. These obligations are not reflected on
our consolidated balance sheet at June 30, 2005.
 Impact of Inflation
  Seasonality
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Item 4. Controls and Procedures
   20




---



##### 



Part II. Other Information
 Item 1. Legal Proceedings
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    ISSUER (AFFILIATE) PURCHASES OF EQUITY SECURITIES(d) Maximum Number (or(c) Total Number of Shares
    
    
    Approximate Dollar(a) Total Number
    
    
    (b) Average
    
    
    Purchased as Part of
    
    
    Value) of Shares that May Yetof Shares
    
    
    Price Paid
    
    
    Publicly Announced Plans or
    
    
    Be Purchased Under the PlansPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    or Programs4/1/05 - 4/30/05
    
    
    512,500
    
    
    $
    10.11
    
    
    
    N/A
    
    
    
    N/A5/1/05 - 5/31/05
    
    
    817,900
    
    
    $
    8.86
    
    
    
    N/A
    
    
    
    N/A6/1/05 - 6/30/05
    
    
    1,723,900
    
    
    $
    10.33
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    3,054,300
    
    
    $
    9.90
    
    
    
    N/A
    
    
    
    N/A
 21




---



##### 



Item 4. Submission of Matters to a Vote of Security Holders
  1)
    
    To elect seven directors to serve until our next annual meeting and until their
successors are duly elected and shall qualify;2)
    
    To ratify the 2005 Long-Term Incentive Plan, which permits the issuance of
stock options, restricted stock and other securities and cash awards; and3)
    
    To ratify the appointment of Ernst & Young LLP as independent auditors for the
fiscal year ending December 31, 2005.
  1)
    
    Our stockholders elected the seven nominated directors to serve until our next
annual meeting and until their successors are duly elected and shall qualify, as
follows:
 Nominee
    
    For
    
    
    WithheldKenneth D. Cron
    
    
    84,768,898
    
    
    
    250,666Shari E. Redstone
    
    
    83,810,779
    
    
    
    1,208,785William C. Bartholomay
    
    
    84,694,384
    
    
    
    325,180Peter C. Brown
    
    
    84,771,208
    
    
    
    248,356Joseph A. Califano, Jr.
    
    
    83,871,037
    
    
    
    1,148,527Ira S. Sheinfeld
    
    
    84,424,248
    
    
    
    595,316Robert N. Waxman
    
    
    84,767,973
    
    
    
    251,591
 2)
    
    Our stockholders ratified the 2005 Long-Term Incentive Plan, as follows:
 For:
    
    
    72,035,810Against:
    
    
    927,688Abstentions:
    
    
    49,694Broker Non-Votes:
    
    
    12,006,372
 3)
    
    Our stockholders ratified the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 2005, as follows:
 For:
    
    
    84,869,670Against:
    
    
    130,682Abstentions:
    
    
    19,212Broker Non-Votes:
    
    
    0
 22




---



##### 



Item 6. Exhibits
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant
dated October 25, 1996, incorporated herein by reference to the
Registrants Registration Statement on Form S-1, as amended, File
No. 333-11919, initially filed on September 13, 1996 and effective
October 29, 1996.3.2
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated February 25, 1998,
incorporated herein by reference to the Registrants Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20, 1998.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated August 5, 2003, incorporated
herein by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.3.4
    
    Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of Midway Games Inc. dated October 14,
2003, incorporated herein by reference to the Registrants Current
Report on Form 8-K filed on October 15, 2003 (the 10/15/03 8-K).3.5
    
    Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Registrant dated February 17, 2004,
incorporated herein by reference to the Registrants Registration
Statement on Form S-3, File No. 333-113077, initially filed on
February 25, 2004.3.6
    
    Amended and Restated By-laws of the Registrant, incorporated herein
by reference to the Registrants Registration Statement on Form
S-3, File No. 333-116334, filed on June 10, 2004.4.1
    
    Form of Certificate of Designations of Series A Preferred Stock
incorporated herein by reference to Exhibit A to the Third Amended
and Restated Rights Agreement filed as Exhibit 4.2 to the 10/15/03
8-K.10.1
    
    Eleventh Amendment to Loan and Security Agreement between the
Registrant and Wells Fargo Foothill dated as of April 26, 2005.10.2
    
    Form of Stock Option Agreement used currently by the Registrant for
employees under its 2005 Long-Term Incentive Plan.31
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 23




---



##### 



Signature
  MIDWAY GAMES INC.By:
    /s/ Thomas E. PowellThomas E. PowellExecutive Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)  24




---



##### 



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant
dated October 25, 1996, incorporated herein by reference to the
Registrants Registration Statement on Form S-1, as amended, File
No. 333-11919, initially filed on September 13, 1996 and effective
October 29, 1996.3.2
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated February 25, 1998,
incorporated herein by reference to the Registrants Registration
Statement on Form 8-A/A, Amendment No. 1, filed on April 20, 1998.3.3
    
    Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant dated August 5, 2003, incorporated
herein by reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 2003.3.4
    
    Certificate of Designations, Preferences and Rights of Series D
Convertible Preferred Stock of Midway Games Inc. dated October 14,
2003, incorporated herein by reference to the Registrants Current
Report on Form 8-K filed on October 15, 2003 (the 10/15/03 8-K).3.5
    
    Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of the Registrant dated February 17, 2004,
incorporated herein by reference to the Registrants Registration
Statement on Form S-3, File No. 333-113077, initially filed on
February 25, 2004.3.6
    
    Amended and Restated By-laws of the Registrant, incorporated herein
by reference to the Registrants Registration Statement on Form
S-3, File No. 333-116334, filed on June 10, 2004.4.1
    
    Form of Certificate of Designations of Series A Preferred Stock
incorporated herein by reference to Exhibit A to the Third Amended
and Restated Rights Agreement filed as Exhibit 4.2 to the 10/15/03
8-K.10.1
    
    Eleventh Amendment to Loan and Security Agreement between the
Registrant and Wells Fargo Foothill dated as of April 26, 2005.10.2
    
    Form of Stock Option Agreement used currently by the Registrant for
employees under its 2005 Long-Term Incentive Plan.31
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Rule 13a-14(a) under the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 25