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Midway Games

Posted On: 8/25/2000

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On the eve of the Amusement & Music Operators Association International Expo, it's appropriate to consider the current situation confronting the coin-operated games business. Illustrating that situation is Midway Games Inc.'s financial report for the fourth quarter and fiscal year ended June 30.

Fourth-quarter revenues were $24,724,000, down from $56,465,000 in the comparable prior-year period. The company reported a net loss of $30,735,000, or 82 cents per share, for the quarter. Results included unusual charges for items related to market conditions and realization of asset evaluations totaling $16,151,000, or 43 cents per share, on an after-tax basis. Unusual charges in the fourth quarter of fiscal 1999 totaled $10,694,000, or 28 cents per share.

For all of fiscal year 2000, Midway reported revenues of $333,865,000, compared with revenues of $351,795,000 in fiscal 1999. In fiscal 2000, Midway had a net loss of $12,041,000, or 32 cents per share. Without the unusual charges in the fourth quarter, the company would have recorded a profit of $4,110,000, or 11 cents per share, for the year.

Home video game revenues in the fourth quarter decreased to $8,179,000; revenues were reduced by $7,175,000 in the quarter by an unusual charge for retail price protection. Home video game revenues for the prior-year fourth quarter had totaled $19,218,000. The company previously had advised that the decline in home video game revenues primarily is related to the platform transition now taking place, from home video game consoles with 32- and 64-bit architectures such as Sony's "PlayStation" and Nintendo's "Nintendo 64" to a new generation of consoles with 128-bit architectures. Thus, demand for software for the "PlayStation" and "Nintendo 64" has softened, and retailers are selling frontline products at lower prices.

This turmoil in the home video game market, in turn, has compelled software publishers to reduce prices to the retail channel. And the overall impact on profitability of this platform transition has been compounded by the need to increase research and development expenditure to insure that top-quality product will be available in the next year to year and a half, as the new 128-bit consoles take hold.

Coin-operated video game revenues for the fiscal 2000 fourth quarter were $16,545,000, compared to $37,247,000 in the comparable prior-year period. For fiscal 2000, coin-operated video game revenues totaled $333,865,000 compared to $351,795,000 in fiscal 1999. It's interesting to note that the cost of sales for home video games in fiscal 1999 had been $102,458,000, which rose to $112,628,000 in fiscal 2000. The cost of sales for coin-operated video games had been $89,528,000 in fiscal 1999, which fell to $73,004,000 in the recent fiscal year ended June 30, 2000. Also noteworthy in assessing 2000 results is that Midway had enjoyed outstanding 1999 sales of its blockbuster "Hydro Thunder" boat racing simulator, which was a hard act to follow.

Midway has responded to the decline in revenues from coin-op video game sales by launching a new title, "C.A.R.T. Fury," in the fourth quarter, with full production slated for the first quarter of fiscal 2001. It also has restructured its coin-op business to operate more efficiently (see V/T, July), and has discontinued its manufacturing relationship with WMS Industries in favor of alternate arrangements with other contract manufacturers to produce coin-op equipment at lower cost.

Readers with long memories may perceive a similarity between the present video game market and the conditions that prevailed in the early 1980s. There had been a great die-off of 8-bit home video games (who now remembers Coleco?), and the coin-op segment had encountered a plateau that effectively ended the glory days of the video game revolution.

New technology was seen as the solution then, and is seen as the solution now. Midway unveiled a game system at this spring's Amusement Showcase International that permits tournaments to be conducted among widely-separated geographic locations, using low-cost dial-up Internet connections and a secure website. Called "Midway Tournament Network" (MTN), it reportedly has done very well in tests. Three "MTN" titles made their debut at ASI, and a total of seven should be available by the end of calendar year 2000."