##### 



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 September 30, 2005
 Commission file number 001-12367
 MIDWAY GAMES INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    22-2906244(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)2704 W. Roscoe Street, Chicago, IL
    
    60618(Address of Principal Executive Offices)
    
    (Zip Code)
 (773) 961-2222
 þ o
 þ o
 o þ




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##### 



MIDWAY GAMES INC.
 INDEX
 PAGENO.Part I. Financial Information:Item 1.
    
    Financial Statements:Consolidated Balance Sheets  September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations  Three and Nine-Months Ended September 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows  Nine-Months Ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II. Other Information:Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6.
    
    Exhibits
    
    
    26Signature
    
    
    27
 2




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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)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    105,208
    
    
    $
    118,313Receivables, less allowances of $12,383 at September 30, 2005 and $8,836 at
December 31, 2004
    
    
    26,426
    
    
    
    15,724Inventories
    
    
    7,283
    
    
    
    6,893Capitalized product development costs
    
    
    38,695
    
    
    
    27,850Prepaid expenses and other current assets
    
    
    11,693
    
    
    
    6,570Total current assets
    
    
    189,305
    
    
    
    175,350Capitalized product development costs
    
    
    2,841
    
    
    
    809Property and equipment, net
    
    
    19,134
    
    
    
    15,470Goodwill
    
    
    44,311
    
    
    
    39,533Other assets
    
    
    12,333
    
    
    
    11,155Total assets
    
    $
    267,924
    
    
    $
    242,317Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    17,780
    
    
    $
    6,673Accrued compensation and related benefits
    
    
    2,261
    
    
    
    5,183Accrued royalties
    
    
    5,431
    
    
    
    3,493Accrued selling and marketing
    
    
    3,818
    
    
    
    3,525Current portion of long-term debt
    
    
    3,333
    
    
    
    3,333Other accrued liabilities
    
    
    12,652
    
    
    
    11,249Total current liabilities
    
    
    45,275
    
    
    
    33,456Convertible senior notes
    
    
    75,000
    
    
    
    Long-term debt
    
    
    7,778
    
    
    
    10,278Deferred income taxes
    
    
    7,777
    
    
    
    6,773Other noncurrent liabilities
    
    
    623
    
    
    
    340Redeemable convertible preferred stock, Series D, $0.01 par value, 4,750
shares authorized and designated, 30 shares issued and outstanding at
September 30, 2005, redeemable at $300 and 446 shares issued and outstanding
at December 31, 2004, redeemable at $4,460
    
    
    300
    
    
    
    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, 90,342,277 and
87,883,494 shares issued at September 30, 2005 and December 31, 2004
    
    
    903
    
    
    
    879Additional paid-in capital
    
    
    409,596
    
    
    
    392,177Accumulated deficit
    
    
    (265,284
    )
    
    
    (190,612
    )Accumulated translation adjustment
    
    
    (729
    )
    
    
    (1,420
    )Deferred compensation
    
    
    (3,643
    )
    
    
    (4,379
    )Treasury stock, at cost, 1,101,673 and 1,096,646 shares at September 30, 2005
and December 31, 2004
    
    
    (9,672
    )
    
    
    (9,628
    )Total stockholders equity
    
    
    131,171
    
    
    
    187,017Total liabilities and stockholders equity
    
    $
    267,924
    
    
    $
    242,317
  3




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three-Months Ended
    
    
    Nine-Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    29,527
    
    
    $
    16,951
    
    
    $
    80,268
    
    
    $
    84,368Cost of sales:Product costs and distribution
    
    
    11,470
    
    
    
    9,268
    
    
    
    30,440
    
    
    
    35,838Royalties and product development
    
    
    20,469
    
    
    
    7,098
    
    
    
    45,164
    
    
    
    26,718Total cost of sales
    
    
    31,939
    
    
    
    16,366
    
    
    
    75,604
    
    
    
    62,556Gross profit (loss)
    
    
    (2,412
    )
    
    
    585
    
    
    
    4,664
    
    
    
    21,812Research and development expense
    
    
    8,756
    
    
    
    6,071
    
    
    
    28,166
    
    
    
    19,658Selling and marketing expense
    
    
    12,538
    
    
    
    6,321
    
    
    
    35,597
    
    
    
    28,017Administrative expense
    
    
    4,475
    
    
    
    2,142
    
    
    
    13,124
    
    
    
    10,876Operating loss
    
    
    (28,181
    )
    
    
    (13,949
    )
    
    
    (72,223
    )
    
    
    (36,739
    )Interest income
    
    
    436
    
    
    
    407
    
    
    
    1,554
    
    
    
    762Interest expense
    
    
    (595
    )
    
    
    (338
    )
    
    
    (1,319
    )
    
    
    (910
    )Other income and (expense), net
    
    
    (292
    )
    
    
    299
    
    
    
    (1,731
    )
    
    
    297Loss before income taxes
    
    
    (28,632
    )
    
    
    (13,581
    )
    
    
    (73,719
    )
    
    
    (36,590
    )Provision for income taxes
    
    
    297
    
    
    
    329
    
    
    
    953
    
    
    
    985Net loss
    
    
    (28,929
    )
    
    
    (13,910
    )
    
    
    (74,672
    )
    
    
    (37,575
    )Preferred stock dividends:Distributed
    
    
    151
    
    
    
    441
    
    
    
    277
    
    
    
    1,820Imputed
    
    
    3
    
    
    
    1,771
    
    
    
    6
    
    
    
    2,914Loss applicable to common stock
    
    $
    (29,083
    )
    
    $
    (16,122
    )
    
    $
    (74,955
    )
    
    $
    (42,309
    )Basic and diluted loss per share of common stock
    
    $
    (0.33
    )
    
    $
    (0.20
    )
    
    $
    (0.87
    )
    
    $
    (0.62
    )Weighted average number of shares outstanding
    
    
    87,068
    
    
    
    81,276
    
    
    
    86,221
    
    
    
    68,142
  4




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##### 



MIDWAY GAMES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine-Months Ended September 30,2005
    
    
    2004Operating activities:Net loss
    
    $
    (74,672
    )
    
    $
    (37,575
    )Adjustments to reconcile net loss to net cash used in operating activities:Amortization of capitalized product development costs, including writedowns
    
    
    40,976
    
    
    
    20,338Depreciation and amortization
    
    
    5,394
    
    
    
    3,906Receivables provision
    
    
    16,746
    
    
    
    12,003Deferred income taxes
    
    
    1,004
    
    
    
    985Stock-based compensation expense
    
    
    1,658
    
    
    
    822Amortization of debt issuance costs
    
    
    206
    
    
    
    174Loss on disposal of property and equipment
    
    
    55
    
    
    
    2Changes in operating assets and liabilities:Receivables
    
    
    (27,436
    )
    
    
    (5,114
    )Inventories
    
    
    (506
    )
    
    
    (9,107
    )Capitalized product development costs
    
    
    (53,853
    )
    
    
    (34,301
    )Prepaid expenses and other current assets
    
    
    (5,141
    )
    
    
    (2,743
    )Accounts payable and accruals
    
    
    10,006
    
    
    
    9,255Other assets and liabilities
    
    
    1,370
    
    
    
    (8,947
    )Net cash used in operating activities
    
    
    (84,193
    )
    
    
    (50,302
    )Investing activities:Purchases of property and equipment
    
    
    (4,849
    )
    
    
    (1,659
    )Acquisitions, net of cash acquired
    
    
    (332
    )
    
    
    220Net cash used in investing activities
    
    
    (5,181
    )
    
    
    (1,439
    )Financing activities:Proceeds from issuance of convertible senior notes
    
    
    75,000
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    15,000Payment of long-term debt
    
    
    (2,500
    )
    
    
    (556
    )Payment of debt issuance costs
    
    
    (2,542
    )
    
    
    (789
    )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
    
    
    (205
    )
    
    
    (1,594
    )Cash received on exercise of common stock options
    
    
    7,596
    
    
    
    22,503Cash received on exercise of common stock warrants
    
    
    
    
    
    
    3,668Remittance of withholding taxes in lieu of stock issuance
    
    
    
    
    
    
    (3,924
    )Net cash provided by financing activities
    
    
    76,819
    
    
    
    125,030Effect of exchange rate changes on cash
    
    
    (550
    )
    
    
    30(Decrease) increase in cash and cash equivalents
    
    
    (13,105
    )
    
    
    73,319Cash and cash equivalents at beginning of period
    
    
    118,313
    
    
    
    41,682Cash and cash equivalents at end of period
    
    $
    105,208
    
    
    $
    115,001
  5




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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. Acquisition
   6




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##### 



Net tangible assets, including software
    
    $
    352,000Non-compete agreements
    
    
    323,000Goodwill
    
    
    4,891,000Total
    
    $
    5,566,000
      5. New Consolidated Subsidiary
   6. Inventories
  7




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##### 



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
    
    
    (1,748
    )Long-term capital lease obligation
    
    $
    530
 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
    
    
    Nine-Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Reported loss applicable to common stock
    
    $
    (29,083
    )
    
    $
    (16,122
    )
    
    $
    (74,955
    )
    
    $
    (42,309
    )Deduct stock-based compensation expense
included in reported loss applicable to
common stock (a)
    
    
    492
    
    
    
    264
    
    
    
    1,658
    
    
    
    822Add stock-based compensation expense
determined under the fair value based method
for all awards (a)
    
    
    (1,475
    )
    
    
    (1,978
    )
    
    
    (4,731
    )
    
    
    (7,207
    )Pro forma net loss applicable to common stock
    
    $
    (30,066
    )
    
    $
    (17,836
    )
    
    $
    (78,028
    )
    
    $
    (48,694
    )Basic and diluted loss per share:As reported
    
    $
    (0.33
    )
    
    $
    (0.20
    )
    
    $
    (0.87
    )
    
    $
    (0.62
    )Pro forma
    
    $
    (0.35
    )
    
    $
    (0.22
    )
    
    $
    (0.90
    )
    
    $
    (0.71
    )
 
 (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
 8




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##### 



10. Loss per Common Share
  September 30,2005
    
    
    2004Stock options
    
    
    6,379
    
    
    
    7,930Warrants
    
    
    679
    
    
    
    842Contingent shares
    
    
    1,021
    
    
    
    683Convertible senior notes
    
    
    4,225
    
    
    
    Redeemable convertible preferred stock, Series D
    
    
    75
    
    
    
    1,115Total common stock equivalents
    
    
    12,379
    
    
    
    10,570
  11. Capitalized Product Development Costs and Research and Development Costs
  Three-Months Ended
    
    
    Nine-Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Beginning balance
    
    $
    42,178
    
    
    $
    18,365
    
    
    $
    28,659
    
    
    $
    11,292Additions
    
    
    19,611
    
    
    
    12,363
    
    
    
    53,853
    
    
    
    34,301Amortization
    
    
    (13,693
    )
    
    
    (4,042
    )
    
    
    (32,372
    )
    
    
    (16,106
    )Writedowns
    
    
    (6,560
    )
    
    
    (1,431
    )
    
    
    (8,604
    )
    
    
    (4,232
    )Ending balance
    
    $
    41,536
    
    
    $
    25,255
    
    
    $
    41,536
    
    
    $
    25,255
  Three-Months Ended
    
    
    Nine-Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Gross research and development costs
    
    $
    28,367
    
    
    $
    18,434
    
    
    $
    82,019
    
    
    $
    53,959Research and development costs capitalized
    
    
    (19,611
    )
    
    
    (12,363
    )
    
    
    (53,853
    )
    
    
    (34,301
    )Research and development expense
    
    $
    8,756
    
    
    $
    6,071
    
    
    $
    28,166
    
    
    $
    19,658
 12. Income Taxes
   9




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##### 



13. Convertible Senior Notes
   
    
    Our controlling stockholder and his affiliates become the beneficial owner, directly or
indirectly, of 90% or more of the aggregate fair value of our outstanding capital stock. In
this event, the conversion rate will increase by 4.4177 shares per $1,000 principal amount
of the notes. This conversion rate increase is subject to future adjustment in accordance
with the provisions of the indenture governing the notes.
    
    On April 30, 2007, or in some circumstances, September 30, 2007, if the daily volume
weighted average price for the period that is 20 consecutive trading days prior to April
30, 2007, or in some circumstances, September 30, 2007, is less than $16.14, as adjusted
for capital changes. In this event, the conversion rate will increase at varying amounts.
However, after adjustment, the conversion rate cannot exceed 100 shares per $1,000
principal amount of the notes.
    
    We effect certain business combinations, asset sales or changes in ownership where the
consideration paid to the common stockholders includes securities (or other property) that
are neither traded on a U.S. national securities exchange nor quoted on the Nasdaq National
Market nor scheduled to be so traded or quoted immediately after such transaction. In these
events, the conversion rate will increase at varying amounts with a maximum increase of
5.63 shares per $1,000 principal amount of the notes.
    
    Issuance of additional rights to holders of our common stock, such as stock splits,
declaration of dividends and certain other distributions and capital changes.
   Earnings per Share,
 14. Preferred Stock
   10




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##### 



15. Common Stock
  16. Legal Proceedings
  17. Subsequent Events
    11




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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, Recent Trends and Uncertainties
  New
Platform Cycle  PS2 GameCube Xbox Game Boy Advance Xbox 360,
 Decreasing Revenues and Selling Prices  Mortal Kombat: Shaolin Monks, The
Suffering: Ties that Bind Midway Arcade Treasures 3 PS2, Xbox, GameCube Game Boy Advance
 (Decrease)
in third quarter 2005 videogame retail sales compared to third
quarter of 2004  North AmericaMonth
    
    Retail dollar sales decrease (%)
    
    Retail unit sales decrease (%)July
    
    
    (18
    %)
    
    
    (21
    %)August
    
    
    (8
    %)
    
    
    (12
    %)September
    
    
    (32
    %)
    
    
    (32
    %)Source: The NPD Group
  Increasing
Costs to Develop Videogames 
 12




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##### 



Handheld
Market
 Nintendo DS PlayStation Portable PSP PSP PSP
 PC Market
 Unreal Tournament Rise and Fall: Civilizations at War, Earth 2160,
 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, and The
Suffering: Ties that Bind, a title we released in September 2005.
    
    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 worked with us on the development of Mortal Kombat: Shaolin
Monks, a title we released in September 2005.
    
    Adelaide, South Australia-based Ratbag Holdings Pty Ltd. and its subsidiary companies
(Ratbag) in August 2005. Ratbag is working on an
unannounced Midway title.
    
    Newcastle, United Kingdom-based The Pitbull Syndicate Ltd. (Pitbull) in October 2005.
Pitbull worked with us on the development of L.A. RUSH, a title we released in October 2005.
 13




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##### 



Majority Stockholder
  Issuance of Convertible Senior Notes
  Results of Operations
 Three-Months Ended September 30, 2005 Compared with Three-Months Ended September 30, 2004
  Three-Months Ended September 30,2005
    
    
    2004Net revenues
    
    $
    29,527
    
    
    
    100.0
    %
    
    $
    16,951
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    11,470
    
    
    
    38.9
    %
    
    
    9,268
    
    
    
    54.6
    %Royalties and product development
    
    
    20,469
    
    
    
    69.3
    %
    
    
    7,098
    
    
    
    41.9
    %Total cost of sales
    
    
    31,939
    
    
    
    108.2
    %
    
    
    16,366
    
    
    
    96.5
    %Gross profit (loss)
    
    
    (2,412
    )
    
    
    (8.2
    )%
    
    
    585
    
    
    
    3.5
    %Research and development expense
    
    
    8,756
    
    
    
    29.6
    %
    
    
    6,071
    
    
    
    35.8
    %Selling and marketing expense
    
    
    12,538
    
    
    
    42.5
    %
    
    
    6,321
    
    
    
    37.3
    %Administrative expense
    
    
    4,475
    
    
    
    15.2
    %
    
    
    2,142
    
    
    
    12.7
    %Operating loss
    
    
    (28,181
    )
    
    
    (95.5
    )%
    
    
    (13,949
    )
    
    
    (82.3
    )%Interest income
    
    
    436
    
    
    
    1.5
    %
    
    
    407
    
    
    
    2.4
    %Interest expense
    
    
    (595
    )
    
    
    (2.0
    )%
    
    
    (338
    )
    
    
    (2.0
    )%Other income and (expense), net
    
    
    (292
    )
    
    
    (1.0
    )%
    
    
    299
    
    
    
    1.8
    %Loss before income taxes
    
    
    (28,632
    )
    
    
    (97.0
    )%
    
    
    (13,581
    )
    
    
    (80.1
    )%Provision for income taxes
    
    
    297
    
    
    
    1.0
    %
    
    
    329
    
    
    
    2.0
    %Net loss
    
    
    (28,929
    )
    
    
    (98.0
    )%
    
    
    (13,910
    )
    
    
    (82.1
    )%Preferred stock dividends:Distributed
    
    
    151
    
    
    
    0.5
    %
    
    
    441
    
    
    
    2.6
    %Imputed
    
    
    3
    
    
    
    0.0
    %
    
    
    1,771
    
    
    
    10.4
    %Loss applicable to common stock
    
    $
    (29,083
    )
    
    
    (98.5
    )%
    
    $
    (16,122
    )
    
    
    (95.1
    )%


14



---



##### 



Three-Months EndedSeptember 30,See
    
    
    
    
    
    
    
    
    
    Increase /
    
    Percentexplanation
    
    2005
    
    2004
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    29,527
    
    
    $
    16,951
    
    
    $
    12,576
    
    
    
    74.2
    %North American net revenues
    
    
    B
    
    
    
    24,507
    
    
    
    10,896
    
    
    
    13,611
    
    
    
    124.9
    %International net revenues
    
    
    C
    
    
    
    5,020
    
    
    
    6,055
    
    
    
    (1,035
    )
    
    
    (17.1
    )%Cost of Sales:Product cost and distribution
    
    
    D
    
    
    
    11,470
    
    
    
    9,268
    
    
    
    2,202
    
    
    
    23.8
    %Royalties and product development
    
    
    E
    
    
    
    20,469
    
    
    
    7,098
    
    
    
    13,371
    
    
    
    188.4
    %Research and development expense
    
    
    F
    
    
    
    8,756
    
    
    
    6,071
    
    
    
    2,685
    
    
    
    44.2
    %Selling and marketing expense
    
    
    G
    
    
    
    12,538
    
    
    
    6,321
    
    
    
    6,217
    
    
    
    98.4
    %Administrative expense
    
    
    H
    
    
    
    4,475
    
    
    
    2,142
    
    
    
    2,333
    
    
    
    108.9
    %Interest income
    
    
    I
    
    
    
    436
    
    
    
    407
    
    
    
    29
    
    
    
    7.1
    %Interest expense
    
    
    J
    
    
    
    (595
    )
    
    
    (338
    )
    
    
    (257
    )
    
    
    76.0
    %Other income and (expense), net
    
    
    K
    
    
    
    (292
    )
    
    
    299
    
    
    
    (591
    )
    
    
    (197.7
    )%Provision for income taxes
    
    
    L
    
    
    
    297
    
    
    
    329
    
    
    
    (32
    )
    
    
    (9.7
    )%
 A. Consolidated Net Revenues
  Three-Months Ended September 30,2005
    
    
    2004Net revenues by platformSony PlayStation 2 (PS2)
    
    $
    17,271
    
    
    
    58.5
    %
    
    $
    12,086
    
    
    
    71.3
    %Microsoft Xbox (XBX)
    
    
    10,982
    
    
    
    37.2
    %
    
    
    2,841
    
    
    
    16.8
    %Nintendo GameCube (NGC)
    
    
    216
    
    
    
    0.7
    %
    
    
    843
    
    
    
    5.0
    %Nintendo Game Boy Advance (GBA)
    
    
    137
    
    
    
    0.5
    %
    
    
    8
    
    
    
    0.0
    %Personal Computer (PC)
    
    
    109
    
    
    
    0.4
    %
    
    
    
    
    
    
    0.0
    %License and royalty
    
    
    663
    
    
    
    2.2
    %
    
    
    1,100
    
    
    
    6.5
    %Other
    
    
    149
    
    
    
    0.5
    %
    
    
    73
    
    
    
    0.4
    %Total net revenues
    
    $
    29,527
    
    
    
    100.0
    %
    
    $
    16,951
    
    
    
    100.0
    %Net revenues by territoryNorth America
    
    $
    24,507
    
    
    
    83.0
    %
    
    $
    10,896
    
    
    
    64.3
    %International
    
    
    5,020
    
    
    
    17.0
    %
    
    
    6,055
    
    
    
    35.7
    %Total net revenues
    
    $
    29,527
    
    
    
    100.0
    %
    
    $
    16,951
    
    
    
    100.0
    %
  Videogame title
    
    Platform
    
    TerritoryThree-Months Ended September 30, 2005Midway Arcade Treasures 3
    
    PS2, XBX
    
    North AmericaMortal Kombat: Shaolin Monks
    
    PS2, XBX
    
    North AmericaThe Suffering: Ties that Bind
    
    PS2, XBX, PC
    
    North AmericaMortal Kombat: Shaolin Monks
    
    PS2, XBX
    
    InternationalThree-Months Ended September 30, 2004Shadowhearts: Covenant
    
    PS2
    
    North AmericaPsi-Ops: The Mindgate Conspiracy
    
    PS2, XBX
    
    International
 Mortal Kombat
 B. North American Net Revenues
 Mortal Kombat: Shaolin
Monks, The Suffering: Ties that Bind Midway Arcade Treasures 3 Shadowhearts: Covenant NBA Ballers Midway Arcade Treasures
 15




---



##### 



C. International Net Revenues
 Mortal Kombat:
Shaolin Monks Mortal Kombat: Deception Mortal Kombat: Deadly Alliance. Psi-Ops: The Mindgate Conspiracy The Suffering Midway Arcade Treasures.
 D. and E. Cost of Sales
    Three-Months EndedSeptember 30,Description
    
    2005
    
    
    2004Amortization of capitalized product development costs
    
    $
    13,693,000
    
    
    $
    4,042,000Writedowns related to future releases
    
    
    6,560,000
    
    
    
    1,431,000Total
    
    $
    20,253,000
    
    
    $
    5,473,000
 NBA Ballers MLB Slugfest: Loaded
 F. Research and Development Expense
  Three-Months EndedSeptember 30,Description
    
    2005
    
    
    2004Gross research and development costs
    
    $
    28,367,000
    
    
    $
    18,434,000Research and development costs capitalized
    
    
    (19,611,000
    )
    
    
    (12,363,000
    )Research and development expense
    
    $
    8,756,000
    
    
    $
    6,071,000
  16




---



##### 



G. Selling and Marketing Expense
 L.A. RUSH Blitz: The League,
 H. Administrative Expense
  I. Interest Income
  J. Interest Expense
    K. Other Income and (Expense), net
  L. Provision for Income Taxes
  17




---



##### 



Nine-Months Ended September 30, 2005 Compared with Nine-Months Ended September 30, 2004
  Nine-Months Ended September 30,2005
    
    
    2004Net revenues
    
    $
    80,268
    
    
    
    100.0
    %
    
    $
    84,368
    
    
    
    100.0
    %Cost of sales:Product costs and distribution
    
    
    30,440
    
    
    
    37.9
    %
    
    
    35,838
    
    
    
    42.5
    %Royalties and product development
    
    
    45,164
    
    
    
    56.3
    %
    
    
    26,718
    
    
    
    31.6
    %Total cost of sales
    
    
    75,604
    
    
    
    94.2
    %
    
    
    62,556
    
    
    
    74.1
    %Gross profit
    
    
    4,664
    
    
    
    5.8
    %
    
    
    21,812
    
    
    
    25.9
    %Research and development expense
    
    
    28,166
    
    
    
    35.1
    %
    
    
    19,658
    
    
    
    23.3
    %Selling and marketing expense
    
    
    35,597
    
    
    
    44.3
    %
    
    
    28,017
    
    
    
    33.2
    %Administrative expense
    
    
    13,124
    
    
    
    16.4
    %
    
    
    10,876
    
    
    
    12.9
    %Operating loss
    
    
    (72,223
    )
    
    
    (90.0
    )%
    
    
    (36,739
    )
    
    
    (43.5
    )%Interest income
    
    
    1,554
    
    
    
    1.9
    %
    
    
    762
    
    
    
    0.9
    %Interest expense
    
    
    (1,319
    )
    
    
    (1.6
    )%
    
    
    (910
    )
    
    
    (1.1
    )%Other income and (expense), net
    
    
    (1,731
    )
    
    
    (2.1
    )%
    
    
    297
    
    
    
    0.3
    %Loss before income taxes
    
    
    (73,719
    )
    
    
    (91.8
    )%
    
    
    (36,590
    )
    
    
    (43.4
    )%Provision for income taxes
    
    
    953
    
    
    
    1.2
    %
    
    
    985
    
    
    
    1.1
    %Net loss
    
    
    (74,672
    )
    
    
    (93.0
    )%
    
    
    (37,575
    )
    
    
    (44.5
    )%Preferred stock dividends:Distributed
    
    
    277
    
    
    
    0.4
    %
    
    
    1,820
    
    
    
    2.2
    %Imputed
    
    
    6
    
    
    
    0.0
    %
    
    
    2,914
    
    
    
    3.4
    %Loss applicable to common stock
    
    $
    (74,955
    )
    
    
    (93.4
    )%
    
    $
    (42,309
    )
    
    
    (50.1
    )%
  Nine-Months EndedSeptember 30,See
    
    
    
    
    
    
    
    
    
    Increase /
    
    Percentexplanation
    
    2005
    
    2004
    
    (Decrease)
    
    ChangeConsolidated net revenues
    
    
    A
    
    
    $
    80,268
    
    
    $
    84,368
    
    
    $
    (4,100
    )
    
    
    (4.9
    )%North American net revenues
    
    
    B
    
    
    
    60,028
    
    
    
    69,377
    
    
    
    (9,349
    )
    
    
    (13.5
    )%International net revenues
    
    
    C
    
    
    
    20,240
    
    
    
    14,991
    
    
    
    5,249
    
    
    
    35.0
    %Cost of Sales:Product cost and distribution
    
    
    D
    
    
    
    30,440
    
    
    
    35,838
    
    
    
    (5,398
    )
    
    
    (15.1
    )%Royalties and product development
    
    
    E
    
    
    
    45,164
    
    
    
    26,718
    
    
    
    18,446
    
    
    
    69.0
    %Research and development expense
    
    
    F
    
    
    
    28,166
    
    
    
    19,658
    
    
    
    8,508
    
    
    
    43.3
    %Selling and marketing expense
    
    
    G
    
    
    
    35,597
    
    
    
    28,017
    
    
    
    7,580
    
    
    
    27.1
    %Administrative expense
    
    
    H
    
    
    
    13,124
    
    
    
    10,876
    
    
    
    2,248
    
    
    
    20.7
    %Interest income
    
    
    I
    
    
    
    1,554
    
    
    
    762
    
    
    
    792
    
    
    
    103.9
    %Interest expense
    
    
    J
    
    
    
    (1,319
    )
    
    
    (910
    )
    
    
    (409
    )
    
    
    44.9
    %Other income and (expense), net
    
    
    K
    
    
    
    (1,731
    )
    
    
    297
    
    
    
    (2,028
    )
    
    
    (682.8
    )%Provision for income taxes
    
    
    L
    
    
    
    953
    
    
    
    985
    
    
    
    (32
    )
    
    
    (3.2
    )%
 18




---



##### 



A. Consolidated Net Revenues
  Nine-Months Ended September 30,2005
    
    
    2004Net revenues by platformSony PlayStation 2 (PS2)
    
    $
    37,463
    
    
    
    46.7
    %
    
    $
    51,717
    
    
    
    61.3
    %Microsoft Xbox (XBX)
    
    
    31,723
    
    
    
    39.5
    %
    
    
    26,223
    
    
    
    31.1
    %Nintendo GameCube (NGC)
    
    
    3,033
    
    
    
    3.8
    %
    
    
    2,622
    
    
    
    3.1
    %Nintendo Game Boy Advance (GBA)
    
    
    608
    
    
    
    0.8
    %
    
    
    228
    
    
    
    0.3
    %Personal Computer (PC)
    
    
    2,262
    
    
    
    2.8
    %
    
    
    0
    
    
    
    0.0
    %License and royalty
    
    
    4,193
    
    
    
    5.2
    %
    
    
    3,166
    
    
    
    3.8
    %Other
    
    
    986
    
    
    
    1.2
    %
    
    
    412
    
    
    
    0.4
    %Total net revenues
    
    $
    80,268
    
    
    
    100.0
    %
    
    $
    84,368
    
    
    
    100.0
    %Net revenues by territoryNorth America
    
    $
    60,028
    
    
    
    74.8
    %
    
    $
    69,377
    
    
    
    82.2
    %International
    
    
    20,240
    
    
    
    25.2
    %
    
    
    14,991
    
    
    
    17.8
    %Total net revenues
    
    $
    80,268
    
    
    
    100.0
    %
    
    $
    84,368
    
    
    
    100.0
    %
  Videogame title
    
    Platform
    
    TerritoryNine-Months Ended September 30, 2005Area 51
    
    PS2, XBX, PC
    
    North AmericaMidway Arcade Treasures 3
    
    PS2, XBX
    
    North AmericaMortal Kombat: Deception
    
    NGC
    
    North AmericaMortal Kombat: Shaolin Monks
    
    PS2, XBX
    
    North AmericaNARC
    
    PS2, XBX
    
    North AmericaThe Suffering: Ties that Bind
    
    PS2, XBX, PC
    
    North AmericaUnreal Championship 2
    
    XBX
    
    North AmericaArea 51
    
    PS2, XBX, PC
    
    InternationalMaya the Bee
    
    GBA
    
    InternationalMortal Kombat: Shaolin Monks
    
    PS2, XBX
    
    InternationalNARC
    
    XBX
    
    InternationalShadowhearts: Covenant
    
    PS2
    
    InternationalUnreal Championship 2
    
    XBX
    
    InternationalNine-Months Ended September 30, 2004MLB Slugfest: Loaded
    
    PS2, XBX
    
    North AmericaNBA Ballers
    
    PS2, XBX
    
    North AmericaPsi-Ops: The Mindgate Conspiracy
    
    PS2, XBX
    
    North AmericaShadowhearts: Covenant
    
    PS2
    
    North AmericaThe Suffering
    
    PS2, XBX
    
    North AmericaMidway Arcade Treasures
    
    PS2, XBX
    
    InternationalPsi-Ops: The Mindgate Conspiracy
    
    PS2, XBX
    
    InternationalSpyHunter 2
    
    PS2, XBX
    
    InternationalThe Suffering
    
    PS2, XBX
    
    International
 NBA Ballers
 19




---



##### 



B. North American Net Revenues
 Mortal Kombat: Shaolin
Monks, Area 51 Unreal Championship 2, . NBA Ballers, The Suffering Psi-Ops: The Mindgate Conspiracy,
 C. International Net Revenues
 Area 51, Mortal Kombat:
Shaolin Monks Unreal Championship 2. The
Suffering, Psi-Ops: The Mindgate Conspiracy Midway Arcade Treasures,
 D. and E. Cost of Sales
    Nine-Months EndedSeptember 30,Description
    
    2005
    
    
    2004Amortization of capitalized product development costs
    
    $
    32,372,000
    
    
    $
    16,106,000Writedowns related to future releases
    
    
    8,604,000
    
    
    
    3,573,000Writedowns related to current releases
    
    
    
    
    
    
    384,000Writedowns related to cancelled games
    
    
    
    
    
    
    275,000Total
    
    $
    40,976,000
    
    
    $
    20,338,000
 NBA
Ballers
 F. Research and Development Expense
  Nine-Months EndedSeptember 30,Description
    
    2005
    
    
    2004Gross research and development costs
    
    $
    82,019,000
    
    
    $
    53,959,000Research and development costs capitalized
    
    
    (53,853,000
    )
    
    
    (34,301,000
    )Research and development expense
    
    $
    28,166,000
    
    
    $
    19,658,000
 20




---



##### 



G. Selling and Marketing Expense
 L.A. RUSH Blitz: The League. Mortal Kombat: Deception
 H. Administrative Expense
  I. Interest Income
  J. Interest Expense
  K. Other Income and (Expense), net
  L. Provision for Income Taxes
  21




---



##### 



Impact of Recently Issued Accounting Pronouncements
  Liquidity and Capital Resources
    Mortal Kombat: Deception
    22




---



##### 



Off Balance Sheet Arrangements and Contractual Obligations
   Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations(1)
    
    $
    11,111
    
    
    $
    3,333
    
    
    $
    6,667
    
    
    $
    1,111
    
    
    $
    Interest on long-term debt obligations(2)
    
    
    1,352
    
    
    
    647
    
    
    
    619
    
    
    
    86
    
    
    
    Convertible senior notes(3)
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    Interest on
convertible senior notes(4)
    
    
    16,125
    
    
    
    4,500
    
    
    
    9,000
    
    
    
    2,625
    
    
    
    Operating lease obligations(5)
    
    
    8,096
    
    
    
    3,179
    
    
    
    4,069
    
    
    
    848
    
    
    
    Purchase obligations(6)
    
    
    77,062
    
    
    
    45,397
    
    
    
    22,245
    
    
    
    9,420
    
    
    
    Other long-term liabilities(7)
    
    
    2,449
    
    
    
    1,919
    
    
    
    530
    
    
    
    
    
    
    
    Redeemable convertible preferred stock(8)
    
    
    300
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    Dividends to be distributed on redeemable convertible preferred stock(9)
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    191,499
    
    
    $
    59,279
    
    
    $
    43,130
    
    
    $
    89,090
    
    
    $
    
 
 (1)
    
    These obligations are reflected on our consolidated balance sheet at September 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 prime rate on September 30, 2005 (6.75%).
These obligations are not reflected on our consolidated balance sheet at September 30, 2005.(3)
    
    Assumes convertible senior notes are carried through the date the holders can first require redemption
of the notes, April 30, 2009. These obligations are reflected on our consolidated balance
sheet at September 30, 2005.(4)
    
    Assumes convertible senior notes are carried through the date the holders can first redeem the notes,
April 30, 2009. The debt bears interest at the fixed rate of 6.00% per annum. These
obligations are not reflected on our consolidated balance sheet at September 30, 2005.(5)
    
    These obligations are not reflected on our consolidated balance sheet at September 30, 2005.(6)
    
    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 September 30, 2005.(7)
    
    These items are reflected on our consolidated balance sheet at September 30, 2005 in current
and noncurrent liabilities, as appropriate.(8)
    
    In September 2005, we notified the sole remaining holder of our Series D preferred stock that
we were exercising our right to convert the remaining 30 shares into common stock, as allowed
under the preferred stock agreement. This conversion was completed in October 2005. The
entire $300,000 obligation is reflected on our consolidated balance sheet at September 30,
2005. 23




---



##### 



(9)
    
    This obligation relates to dividends owed on the 30 shares of Series D redeemable convertible
preferred stock that remained outstanding at September 30, 2005 until their conversion into
shares of our common stock in October 2005. Dividends were paid in registered shares of our
common stock on the date of conversion. This obligation is not reflected on our
consolidated balance sheet at September 30, 2005. Impact of Inflation
  Seasonality
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Item 4. Controls and Procedures
   24




---



##### 



Part II. Other Information
 Item 2. Unregistered Sales of Equity Security 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 Programs7/1/05 - 7/31/05
    
    
    1,940,100
    
    
    $
    12.37
    
    
    
    N/A
    
    
    
    N/A8/1/05 - 8/31/05
    
    
    1,646,800
    
    
    $
    14.54
    
    
    
    N/A
    
    
    
    N/A9/1/05 - 9/30/05
    
    
    1,477,300
    
    
    $
    14.85
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    5,064,200
    
    
    $
    13.80
    
    
    
    N/A
    
    
    
    N/A
 25




---



##### 



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
    
    Separation Agreement by and between the Registrant and Mark S. Beaumont, dated
as of July 28, 2005 and effective as of August 19, 2005, incorporated herein by
reference to the Registrants Current Report on Form 8-K filed on August 5,
2005.10.2
    
    Twelfth Amendment to Loan and Security Agreement between the Registrant and
Wells Fargo Foothill dated as of August 4, 2005.10.3
    
    Indenture, dated as of September 19, 2005, between the Registrant and Wells
Fargo Bank, National Association, incorporated herein by reference to the
Registrants Current Report on Form 8-K filed on September 19, 2005 (the
9/19/05 8-K).10.4
    
    Registration Rights Agreement, dated as of September 19, 2005 between the
Registrant and Banc of America Securities, LLC, as representative of the Initial
Purchasers, incorporated herein by reference to the 9/19/05 8-K.10.5
    
    Consent and Thirteenth Amendment to Loan and Security Agreement between the
Registrant and Wells Fargo Foothill dated as of September 19, 2005, incorporated
herein by reference to the 9/19/05 8-K.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.
 26




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##### 



Signature
  MIDWAY GAMES INC.By:
    
    /s/ Thomas E. PowellThomas E. PowellExecutive Vice President-Finance, Treasurerand Chief Financial Officer(Principal Financial Officer)
  27




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##### 



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
    
    Separation Agreement by and between the Registrant and Mark S. Beaumont, dated
as of July 28, 2005 and effective as of August 19, 2005, incorporated herein by
reference to the Registrants Current Report on Form 8-K filed on August 5,
2005.10.2
    
    Twelfth Amendment to Loan and Security Agreement between the Registrant and
Wells Fargo Foothill dated as of August 4, 2005.10.3
    
    Indenture, dated as of September 19, 2005, between the Registrant and Wells
Fargo Bank, National Association, incorporated herein by reference to the
Registrants Current Report on Form 8-K filed on September 19, 2005 (the
9/19/05 8-K).10.4
    
    Registration Rights Agreement, dated as of September 19, 2005 between the
Registrant and Banc of America Securities, LLC, as representative of the Initial
Purchasers, incorporated herein by reference to the 9/19/05 8-K.10.5
    
    Consent and Thirteenth Amendment to Loan and Security Agreement between the
Registrant and Wells Fargo Foothill dated as of September 19, 2005, incorporated
herein by reference to the 9/19/05 8-K.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.
 28