MWY Midway Games

Midway Games Inc. (NYSE: MWY) today announced results of operations for the three month period ended September 30, 2008. The Company also provided revenue and earnings guidance for the fourth quarter and full year ending December 31, 2008. THIRD QUARTER RESULTS Net revenues for the 2008 third quarter were $51.4 million, compared to the 2007 third quarter net revenues of $36.7 million and in line with prior guidance of approximately $52 million. The 2008 third quarter net loss was $75.9 million, or a loss of $0.83 per basic and diluted share, compared with a 2007 third quarter net loss of $33.5 million, or a loss of $0.37 per basic and diluted share, and below the Company�s revised guidance of a loss of $0.70, primarily due to additional amortization and writedowns of capitalized product development costs. On a non-GAAP basis, excluding the impact of stock option expense and other non-cash items, the 2008 third quarter loss was $66.3 million or a loss of $0.72 per basic and diluted share, below the Company�s revised non-GAAP guidance of a loss of $0.60. For the 2007 third quarter, on a non-GAAP basis, the Company reported a loss of $28.0 million, or a loss of $0.31 per basic and diluted share. A reconciliation of non-GAAP results to GAAP results is provided at the end of this press release. �In the second and third quarters of 2008 we have focused on addressing several critical issues that were affecting the ability of our company to achieve success, and the third quarter results and associated non-cash charges reflect that effort,� said Matt Booty, president and CEO. �Our current focus is the upcoming launch of Mortal Kombat vs. DC Universe, which aligns our Company with the exceptional Warner Bros. brand of DC Comics. We expect that the fourth quarter will represent significant progress toward completion of these efforts, and that we will enter 2009 with a renewed focus on Midway�s key strengths.� OPERATING HIGHLIGHTS During the third quarter, Midway executed on several operational milestones, including the combination of its Southern California studios, the optimization of its Austin facility and cancellation of an associated unannounced game, and the entrance into a receivables factoring agreement to offset the costs related to manufacturing its fall game releases. These operational milestones, combined with the Company�s favorable exit from underperforming licenses early in the fourth quarter, are designed to ensure successful launches, minimize costs, and focus resources on Midway�s strongest licenses, core game franchises such as Mortal Kombat, TNA iMPACT! and Wheelman, as well as future licenses and new IP. Other recent operating highlights include: During the third quarter, Midway released three well-received games: TNA iMPACT! for Xbox 360, PS3, PS2, and Wii worldwide, and in North America Unreal Tournament III for Xbox 360 and Mortal Kombat: Kollection for the PS2. In August, Midway�s expansive line-up for this holiday season and beyond was received very positively at Games Convention 2008 in Leipzig, Germany, with more than 200,000 consumers and press in attendance. In October, Midway launched Blitz: The League II, with significant media support from the game�s cover athlete, Lawrence Taylor. On October 30, 2008, Midway announced that Matthew V. Booty was appointed by the Board of Directors as President and CEO of the company, and on November 5, 2008, Midway announced that Ryan G. O�Desky has been named CFO and Senior Vice President - Finance. �During the quarter we executed on a series of strategic and financial moves that reinforce our commitment to developing games that meet clear profitability and scheduling goals. While some of those steps negatively impacted earnings, they were necessary to ensure we are better positioned for long-term success,� noted Matt Booty, president and CEO. �More importantly, we launched three high quality games, and completed the final touches on our highly anticipated fourth quarter releases.� OUTLOOK During the fourth quarter, the Company has already released worldwide Blitz: The League II for PS3 and Xbox 360, Game Party 2 for the Wii, and Touchmaster II and Mechanic Master for Nintendo DS. Midway also announced that it expects its flagship game Mortal Kombat vs. DC Universe for Xbox 360 and PS3 to be available in stores on November 16th in North America and November 21st in Europe. For the fourth quarter ending December 31, 2008, Midway expects the following: Net revenues of approximately $105 million, with net loss of approximately $0.20 per basic and diluted share. On a non-GAAP basis, Midway expects a fourth quarter loss of approximately $0.07 per basic and diluted share, which excludes approximately $0.13 of stock option expense, non-cash convertible debt interest expense, and deferred income tax expense related to goodwill. For the full year ending December 31, 2008, Midway expects the following: Net revenues of approximately $210 million, with a net loss of approximately $1.78 per basic and diluted share. On a non-GAAP basis, Midway expects a full year loss of approximately $1.37 per basic and diluted share, which excludes approximately $0.41 of stock option expense, non-cash convertible debt interest expense, and deferred income tax expense related to goodwill. NON-GAAP FINANCIAL MEASURES Midway has included non-GAAP financial measures in its quarterly results and 2008 fourth quarter and full year outlook. Midway does not intend for the presentation of the non-GAAP financial measures to be isolated from, a substitute for, or superior to the information that has been presented in accordance with GAAP. In addition, information used in the non-GAAP financial measures may be presented differently from non-GAAP financial measures used by other companies. The non-GAAP financial measures used by Midway include non-GAAP basic and diluted loss per share. Midway considers the non-GAAP financial measures used herein, when used together with the corresponding GAAP measures, to be helpful in providing meaningful additional information regarding its performance by excluding specific items that may not be indicative of Midway�s core business or projected operating results. These non-GAAP financial measures exclude the following items: Stock Option Expense. Midway adopted SFAS No. 123R, �Share-Based Payment� beginning January 1, 2006, in which it began to recognize as an expense the fair value of its stock options. A non-GAAP measurement that excludes stock option expense identifies this component of compensation expense that does not require a cash outlay. Non-cash convertible debt interest expense. In accordance with GAAP, Midway is required to record discounts on its convertible senior notes as a result of decreases in the conversion prices of these notes. These amounts are amortized as interest expense through the first date on which the holders may redeem the notes. There is no cash outlay associated with this interest expense. A non-GAAP measurement that excludes the convertible debt non-cash interest expense allows for a more direct comparison to prior periods, and also distinguishes this interest expense from the remainder of the interest expense, which requires (or required) a cash outlay by Midway. Deferred tax expense related to goodwill. Midway recognizes deferred tax expense related to increases in the difference between the book basis and tax basis of goodwill. Goodwill is not amortized for book purposes but is amortized for tax purposes. This increase in the book to tax basis difference causes an increase in the related deferred tax liability balance that cannot be offset against deferred tax assets. Given the nature of this deferred tax expense, a non-GAAP measurement that excludes this expense is deemed appropriate. In the future, Midway may consider whether other significant items should be excluded when arriving at non-GAAP measures of financial performance. CONFERENCE CALL Midway Games Inc. is hosting a conference call and simultaneous webcast open to the general public at 4:30 P.M. EST today, Monday, November 10, 2008. The conference call number is (866) 271-0675 or (617) 213-8892 (international callers). The passcode for the call is 23581791. Please call ten minutes in advance to ensure that you are connected prior to the presentation. Interested parties may also access the live call on the Internet at www.investor.midway.com or at www.earnings.com. Please log-on fifteen minutes in advance to ensure that you are connected prior to the call's initiation. Following its completion, a replay of the call can be accessed until November 17 by dialing (888) 286-8010 or (617) 801-6888 (international callers). The passcode for the replay is 37635497. Additionally, a replay of the call will be available for twelve months on the Internet via www.investor.midway.com. ABOUT MIDWAY Midway Games Inc. (NYSE:MWY), headquartered in Chicago, Illinois, with offices throughout the world, is a leading developer and publisher of interactive entertainment software for major video game systems and personal computers. More information about Midway and its products can be found at www.midway.com. FORWARD-LOOKING STATEMENTS This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning future business conditions and the outlook for Midway Games Inc. (the "Company") based on currently available information that involves risks and uncertainties. The Company's actual results could differ materially from those anticipated in the forward-looking statements as a result of these risks and uncertainties, including, without limitation, the performance of the interactive entertainment industry, dependence on new product introductions and the ability to maintain the scheduling of such introductions, decisions by Sumner Redstone or his affiliates with respect to his ownership or trading of our common stock and other risks more fully described under "Item 1A. Business - Risk Factors" in the Company�s Annual Report on Form 10-K for the year ended December 31, 2007, and in any more recent filings made by the Company with the Securities and Exchange Commission. Each forward-looking statement, including, without limitation, financial guidance, speaks only as of the date on which it is made, and Midway undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances, except as required by law. � tables follow � MIDWAY GAMES INC. Consolidated Statements of Operations (In thousands, except per share amounts) (unaudited) � � � � � Three Months Ended Nine Months Ended September 30, September 30, 2008 � 2007 2008 � 2007 � � Net revenues $ 51,359 $ 36,747 $ 104,711 $ 79,618 � Cost of sales: Product costs and distribution 20,554 13,472 46,398 31,141 Royalties and product development 50,072 � 24,196 � 80,703 � 36,643 � Total cost of sales 70,626 � 37,668 � 127,101 � 67,784 � Gross profit (loss) (19,267 ) (921 ) (22,390 ) 11,834 � Research and development expense 9,244 6,245 22,055 20,250 Selling and marketing expense 15,282 14,173 33,894 29,174 Administrative expense 5,181 5,000 16,976 15,936 Other charges 11,661 � - � 11,661 � (783 ) Operating loss (60,385 ) (26,339 ) (106,726 ) (52,743 ) Interest income 81 498 340 2,075 Interest expense (13,256 ) (8,429 ) (35,494 ) (17,600 ) Other income (expense), net (2,129 ) 1,160 � (1,353 ) 2,003 � Loss before income taxes (75,689 ) (33,110 ) (143,233 ) (66,265 ) Provision for income taxes 256 � 417 � 1,509 � 1,381 � Net loss $ (75,945 ) $ (33,527 ) $(144,742 ) $ (67,646 ) � Loss per share of common stock: Basic and diluted $ (0.83 ) $ (0.37 ) $ (1.58 ) $ (0.74 ) � Weighted average number of shares outstanding: Basic and diluted 91,641 � 91,180 � 91,554 � 91,095 � � balance sheet follows � MIDWAY GAMES INC. Consolidated Balance Sheets (In thousands) � September 30, � December 31, 2008 2007 (unaudited) Assets Current assets: Cash and cash equivalents $ 10,353 $ 27,524 Restricted cash 231 - Receivables, net 21,644 44,527 Inventories 8,586 3,772 Capitalized product development costs 48,628 51,252 Prepaid expenses and other current assets 17,843 � 13,362 � Total current assets 107,285 140,437 Restricted cash 888 - Assets held for sale 2,793 - Capitalized product development costs 60 2,947 Property and equipment, net 10,937 19,298 Goodwill 41,109 41,307 Other assets 4,451 � 9,372 � Total assets $ 167,523 � $ 213,361 � � Liabilities and Stockholders' Equity (Deficit) Current liabilities: Accounts payable $ 22,360 $ 29,642 Accrued compensation and related benefits 6,512 6,134 Accrued royalties 21,213 12,769 Accrued selling and marketing 4,041 5,645 Deferred revenue 3,421 2,940 Current portion of long-term debt 59,975 - Convertible senior notes, less unamortized discount 55,794 - Other accrued liabilities 15,890 � 14,190 � Total current liabilities 189,206 71,320 � Convertible senior notes, less unamortized discount 50,639 82,198 Long-term debt 28,952 19,167 Deferred income taxes 11,700 10,715 Other noncurrent liabilities 536 880 � Stockholders' equity (deficit): Common stock 935 933 Additional paid-in capital 522,337 521,031 Accumulated deficit (625,215 ) (480,474 ) Accumulated translation adjustment (1,784 ) (2,629 ) Treasury stock (9,783 ) (9,780 ) Total stockholders' equity (deficit) (113,510 ) 29,081 � Total liabilities and stockholders' equity (deficit) $ 167,523 � $ 213,361 � � supplemental data follows � MIDWAY GAMES INC. Consolidated Non-GAAP Operating Results (In thousands, except per share amounts) (unaudited) � The following table reconciles Midway's net loss and basic and diluted loss per share as presented in its Consolidated Statements of Operations as prepared in accordance with Generally Accepted Accounting Principles ("GAAP") in the United States of America with its non-GAAP loss and non-GAAP basic and diluted loss per share. Midway's non-GAAP loss and non-GAAP basic and diluted loss per share exclude stock option expense, convertible debt non-cash interest expense, and deferred tax expense related to goodwill. � � Three Months Ended Nine Months Ended September 30, September 30, 2008 � 2007 2008 � 2007 � � Net loss $ (75,945 ) $(33,527 ) $(144,742 ) (67,646 ) � Stock option expense (1) 234 175 515 1,343 Convertible debt non-cash interest expense 9,104 4,999 24,235 8,004 Deferred tax expense related to goodwill 329 329 985 985 � � � � Non-GAAP loss $ (66,278 ) $(28,024 ) $ (119,007 ) $(57,314 ) � � Three Months Ended Nine Months Ended September 30, September 30, 2008 � 2007 2008 � 2007 � Basic and diluted loss per share of common stock (0.83 ) (0.37 ) $ (1.58 ) $ (0.74 ) � Stock option expense (1) 0.00 0.00 0.01 0.01 Convertible debt non-cash interest expense 0.10 0.06 0.26 0.09 Deferred tax expense related to goodwill 0.01 0.00 0.01 0.01 � � � � Non-GAAP basic and diluted loss per share of common stock $ (0.72 ) $ (0.31 ) $ (1.30 ) $ (0.63 ) � (1) Excludes stock option costs capitalized as product development costs. MIDWAY GAMES INC. Net Revenues by Platform (in thousands) � � Three Months Ended September 30, 2008 � 2007 � Sony PlayStation 3 $ 7,870 15.3 % $ - 0.0 % Microsoft Xbox 360 19,005 37.0 % 25,655 69.8 % Nintendo Wii 9,794 19.1 % 2,137 5.8 % Sony PlayStation 2 8,023 15.6 % 1,946 5.3 % Microsoft Xbox (38 ) (0.1 )% (55 ) (0.1 )% Nintendo Gamecube (1 ) 0.0 % 103 0.3 % Sony PlayStation Portable 579 1.1 % 1,239 3.4 % Nintendo Dual Screen 2,264 4.4 % 1,806 4.9 % Nintendo Game Boy Advance 4 0.0 % 164 0.4 % Personal Computer 1,310 2.6 % 3,729 10.1 % Royalties and other 2,549 � 5.0 % 23 � 0.1 % � Total $ 51,359 � 100.0 % $ 36,747 � 100.0 % � � Nine Months Ended September 30, 2008 2007 � Sony PlayStation 3 $ 23,997 22.9 % $ - 0.0 % Microsoft Xbox 360 25,201 24.1 % 33,544 42.1 % Nintendo Wii 29,288 28.0 % 10,128 12.7 % Sony PlayStation 2 10,532 10.1 % 8,971 11.3 % Microsoft Xbox (13 ) 0.0 % 730 0.9 % Nintendo Gamecube (9 ) 0.0 % 841 1.1 % Sony PlayStation Portable 2,153 2.0 % 2,779 3.5 % Nintendo Dual Screen 6,732 6.4 % 5,342 6.7 % Nintendo Game Boy Advance 26 0.0 % 1,403 1.8 % Personal Computer 1,362 1.3 % 13,865 17.4 % Royalties and other 5,442 � 5.2 % 2,015 � 2.5 % � Total $ 104,711 � 100.0 % $ 79,618 � 100.0 % MIDWAY GAMES INC. Net Revenues by Geography (in thousands) � � Three Months Ended September 30, 2008 � � 2007 � North America $ 36,146 70.4 % $ 18,814 51.2 % International 15,213 29.6 % 17,933 48.8 % � Total $ 51,359 100.0 % $ 36,747 100.0 % � � Nine Months Ended September 30, 2008 2007 � North America $ 58,606 56.0 % $ 48,792 61.3 % International 46,105 44.0 % 30,826 38.7 % � Total $ 104,711 100.0 % $ 79,618 100.0 %