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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, 2003

Commission file number 001-12367

MIDWAY GAMES INC.
(Exact Name of Registrant as Specified in Its Charter)

        Indicate by check X whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check X whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 55,912,196 shares of common stock, $0.01 par value, were outstanding at November 7, 2003, excluding 2,930,000 shares held as treasury shares.

MIDWAY GAMES INC.

INDEX

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Part I—Financial Information

Item 1—Financial Statements

MIDWAY GAMES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

See notes to condensed consolidated financial statements.

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MIDWAY GAMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See notes to condensed consolidated financial statements.

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MIDWAY GAMES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See notes to condensed consolidated financial statements.

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MIDWAY GAMES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Financial Statements

        The accompanying unaudited condensed consolidated financial statements of Midway Games Inc. (the "Company," "we" or "Midway") have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Due to the seasonality of our business, operating results for the three and nine-months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2002.

2.    Revenue Recognition

        We recognize revenue in accordance with the provisions of Statement of Position 97-2, Software Revenue Recognition. Accordingly, revenue is recognized when there is persuasive evidence that an arrangement exists, the software is delivered, the selling price is fixed and determinable and collectibility of the customer receivable is probable. We do not provide any significant customization of software or post contract support. If consumer demand for a product falls below expectations, we may grant price protection to spur further sales. Therefore, revenue is recorded net of an allowance for price protection, returns and discounts. This allowance is based upon management's evaluation of historical experience as well as current industry trends.

        Nonrefundable guaranteed intellectual property licenses are recognized as revenue when the license agreements are signed and we fulfill our obligations, if any, under the agreement. Unit royalties on sales that exceed the guarantee are recognized as revenues are earned.

3.    New Accounting Pronouncements

        In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. We adopted the provisions of SFAS No. 150 during the current period and accounted for the transactions described in Note 9 applying those provisions.

        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the entity's residual returns, or both. We adopted FIN 46 during the current period with no impact to our consolidated financial statements.

        In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee

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compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income and earnings per share and the entity's accounting policy decisions with respect to stock-based employee compensation. Certain disclosures are required for all companies, regardless of whether the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. We adopted the annual disclosure provisions of SFAS No. 148 during the year ended December 31, 2002 and the interim disclosure requirements during the three-months ended March 31, 2003 as disclosed in Note 5.

        In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—An Interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation clarifies the requirements for a guarantor's accounting for, and disclosures of, certain guarantees issued and outstanding. FIN 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee. FIN 45 is effective for guarantees entered into or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our consolidated financial statements.

        In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). We adopted the provisions of SFAS No. 146 effective January 1, 2003 as disclosed in Note 12.

4.    Inventories

        Inventories consist of finished goods at September 30, 2003 and December 31, 2002 and are valued at the lower of cost (determined by the first-in, first-out method) or market.

5.    Common Stock Options

        We account for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. We recognize compensation expense equal to the difference, if any, between the exercise price of the stock option and the fair value of the underlying stock at the date of grant. Accordingly, no compensation expense is recorded for options issued to employees or directors in fixed amounts and with fixed exercise prices at least equal to the fair market value of our common stock at the date of grant. We have reflected the provisions of SFAS No. 123, as amended by SFAS No. 148, through disclosure only. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123 and EITF consensus No. 96-18, Accounting for Equity Instruments with Variable Terms that are Issued for Consideration Other Than Employee Services under FASB Statement No. 123, Accounting for Stock-Based Compensation.

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        The following table illustrates the effect on the net loss applicable to common stock if we had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share amounts):

6.    Earnings Per Share

        The following securities exercisable for or convertible into shares of common stock were outstanding on September 30, 2003 and 2002 (in thousands):

        The calculation of loss per share for the three and nine-months ended September 30, 2003 and 2002 did not include the effect of either the stock options, warrants, contingent shares or convertible preferred stock because to do so would have been antidilutive. Accordingly, the average number of shares outstanding for the three and nine-months ended September 30, 2003 and 2002 were used in their respective calculations of earnings per share.

        Subsequent to September 30, 2003, we completed a private placement of 9,317,886 shares of our common stock. See Note 16 for further discussion. In accordance with a Stock Option Agreement dated May 6, 2003 between Midway Games Inc. and David Zucker, our President and Chief Executive Officer, Mr. Zucker received 300,968 stock options as a result of the private placement. The Stock Option Agreement awards Mr. Zucker additional options (up to an aggregate 2,250,000) when and if we issue shares of common stock prior to May 6, 2005. These amounts have not been reflected in the table above.

7.    Reclassification of Prior Year Balances

        Certain prior period balances have been reclassified to conform to current period presentation.

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8.    Capitalized Product Development Costs

        Our capitalized product development costs principally consist of software development costs for videogames that will be sold to consumers through retailers. We account for software development in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Software development costs incurred prior to the establishment of technological feasibility are expensed when incurred and are included in research and development expense. Once a software product has reached technological feasibility, then all subsequent software development costs are capitalized until that product is released for sale. Technological feasibility is evaluated on a product-by-product basis and can occur early in the development cycle or later depending on required technology to complete the product and the availability of such technology to us.

        We evaluate the recoverability of capitalized software development costs on a product-by-product basis. Capitalized software is amortized to expense based on the ratio of current sales to the total of current plus projected future sales for each game. This typically results in an amortization period of less than one year. The amortization of capitalized software development costs is recorded as cost of sales on the royalties and product development line item. Included in the amortization amounts are writedowns of capitalized costs associated with videogames for which we lowered our sales forecasts for games in development and cancelled development of previously unannounced games in accordance with SFAS No. 86. In addition, during the first quarter of 2003, we recorded an impairment charge for capitalized product development costs in the restructuring and other charges line item of our consolidated statement of operations. See Note 12.

        The following table reconciles the beginning and ending capitalized product development cost balances for the three and nine-months ended September 30, 2003 (in thousands):

9.    Redeemable Convertible Preferred Stock and Warrants

        In May 2003, we sold 3,500 shares of Series C redeemable convertible preferred stock and warrants to purchase 1,141,000 shares of our common stock for $35,000,000 in a private placement resulting in proceeds of $34,050,000, net of cash issuance cost. In conjunction with the sale of the Series C preferred stock, we redeemed the 1,312.5 shares of outstanding Series B redeemable convertible preferred stock at the stated value of $13,125,000.

        Subsequent to September 30, 2003, we entered into an agreement whereby the shares of the Series C redeemable convertible preferred stock, along with the associated warrants and an option to purchase additional Series C preferred shares, were exchanged for shares of Series D redeemable convertible preferred stock, along with associated warrants and an option to purchase additional Series D preferred shares. As a result of this exchange, the Series C preferred shares and related warrants were cancelled and are no longer outstanding. With the exception of the conversion and exercise prices, the Series D and related securities have terms similar to the terms the Series C and related securities had. See Note 16.

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        The 3,500 shares of Series C preferred stock had a stated value of $10,000 per share and provided for a dividend of 5.75% payable quarterly in cash. The Series C preferred stock had a mandatory redemption or conversion date of March 15, 2006 at the stated value of $10,000 per share plus any accrued and unpaid dividends. Shares of the initial Series C preferred stock were convertible into the Company's common stock at $4.60 per share of common stock at any time on or prior to maturity.

        The securities purchase agreement for the Series C preferred stock granted the initial purchasers an option to acquire 1,250 additional shares of Series C preferred stock at $10,000 per share. The option to purchase additional shares of Series C preferred stock was exercisable until May 2004. The additional shares of Series C preferred stock had the same provisions, including those relating to conversion and redemption, as the initial shares of Series C preferred stock except that the conversion price for the additional shares of Series C preferred stock was $5.05 per share of common stock.

        During the six-month period from September 15, 2005 to the March 15, 2006 maturity date, we had a right to require the holders of the remaining shares of Series C preferred stock to convert some or all of those shares into the Company's common stock. Such right would have been triggered only if the weighted average price of our common stock for thirty consecutive trading days immediately prior to our election to require conversion were at or above $7.48 with respect to any of the initial 3,500 shares of Series C preferred stock being converted and at or above $8.21 with respect to any of the additional 1,250 shares of Series C preferred stock being converted.

        We had the right to elect to redeem all or part of the Series C preferred stock in cash or by converting all or a part of the shares of Series C preferred stock into common stock at the arithmetic average of the weighted average price of our common stock on each trading day during the 120 trading days prior to the maturity date. The election to redeem or convert the shares of Series C preferred stock had to be made by us on or before the 125th trading day prior to the maturity date of March 15, 2006. If no election were made, we would have been deemed to have elected to convert the shares of Series C preferred stock. If we had elected to convert any shares of Series C preferred stock at maturity, then a minimum common share price would have been established equal to 50% of the closing bid price of the common stock on the 126th trading day before the maturity date. For each trading day during the 120 trading days preceding the maturity date that the average closing bid price of the common stock were less than the established minimum common share price, then we would have been required to use cash to redeem 1/120 of the shares of Series C preferred stock that we had elected to redeem using common stock.

        The holders of the outstanding shares of Series C preferred stock had the right to put to us their shares of Series C preferred stock at 125% of the stated value in the event of a change in control or up to 120% of the stated value upon the occurrence of a default under the certificate of designations for the Series C preferred stock. For these purposes, a change in control was any sale of all or substantially all of our assets or stock or any business combination such as a merger with another company if following such sale or other transaction, the holders of our common stock did not have sufficient voting power to elect a majority of the members of the board of directors of the purchaser or surviving entity. If we had announced a business transaction in which the holders of our common stock would receive cash in exchange for their shares of common stock, then we would have had the right to require that all, but not less than all, of the outstanding shares of Series C preferred stock be redeemed for 135% of the stated value if the cash transaction occurred prior to May 15, 2004, 130% of the stated value if the cash transaction occurred from May 15, 2004 through May 14, 2005 and 125% of the stated value if the cash transaction occurred from May 15, 2005 through May 15, 2006.

        Defaults under the certificate of designations for the Series C preferred stock included:

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the failure of any required registration statement to be declared effective on or prior to the expiration of sixty (60) days after the deadline set in the registration rights agreement between us and the initial purchasers;

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•

while any registration statement was required to be maintained effective under the terms of the registration rights agreement, if the effectiveness of the registration statement were to lapse for any reason or were otherwise unavailable to a holder of shares of Series C preferred stock for more than five (5) consecutive trading days beyond any applicable grace periods;



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if our common stock were to be suspended from trading or ceased to be listed on the NYSE or the NASDAQ National Market for a period of five (5) consecutive trading days or for more than ten (10) trading days in any 365-day period;



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if we were to give notice to our transfer agent or otherwise announce at any time our intention not to comply, as required, with a request for conversion of any shares of Series C preferred stock;



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if we were to fail to deliver the requisite shares of common stock to any holder upon conversion of shares of Series C preferred stock for a period of ten (10) business days;



•

if we were unable to issue shares of our common stock upon conversion of any shares of Series C preferred stock tendered for conversion after October 31, 2003 because our stockholders had not approved the issuance of these shares under the NYSE rules; or



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if we were to breach any representation, warranty, covenant or other term or condition of the purchase agreement with respect to the sale of the Series C preferred stock or any other document entered into in connection with that transaction except if the breach would not have a material adverse effect on us and could not be cured within at least five (5) business days after our receipt of notice from any holder of Series C preferred stock of the existence of the breach.

        The terms of the Series C preferred stock prohibited the payment of cash dividends on the Company's common stock without written consent of the holders of 80% of the outstanding shares of Series C preferred stock. If cash dividends were paid, the holders of Series C preferred stock would also receive dividends as if the shares of Series C preferred stock had been converted into our common stock. The warrants issued to the purchasers of Series C preferred stock in the May 2003 sale had three-year terms and could have been exercised to purchase 1,141,000 shares of the Company's common stock at an exercise price of $4.60 per share.

        The determination of the amount included in the September 30, 2003 condensed consolidated balance sheet for Series C redeemable convertible preferred stock is as follows (in thousands):

        The difference between the $35,000,000 redemption value and the initial $31,872,000 carrying amount of the shares of Series C preferred stock was being amortized through the balance sheet date as an imputed dividend on the Series C preferred stock until the maturity date of March 15, 2006 and charged to stockholders' equity.

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10.    Income Taxes

        We are required under applicable accounting interpretations to provide a valuation allowance for realization of deferred tax assets resulting from tax loss carryforwards. The valuation allowance decreases the deferred tax assets for tax carryforwards to the amount reasonably expected to be utilized within the carryforward period. The applicable accounting interpretations limit the amount expected to be utilized to sources of future taxable income that are more likely than not to be generated within the carryforward period. Deferred tax liabilities related to indefinite-lived assets, such as goodwill, cannot be determined to be more likely than not to generate taxable income within the carryforward period and are thus reported as the net deferred tax liability on the condensed consolidated balance sheet. We will be required to provide a valuation allowance in future periods should losses occur. To the extent an indefinite-lived deferred tax liability increases in future periods, expense will be recognized. The valuation allowance will be reversed into income in future periods if and when we return to profitability. This valuation allowance increased in the three and nine-months ended September 30, 2003 by $7,208,000 and $33,029,000 and in the three and nine-months ended September 30, 2002 by $4,503,000 and $11,436,000, respectively.

11.    Comprehensive Income

        SFAS No. 130, Reporting Comprehensive Income requires us to report foreign currency translation adjustments as a component of other comprehensive income or loss. Comprehensive loss amounted to $23,379,000 and $87,623,000 for the three and nine-months ended September 30, 2003 and $11,589,000 and $29,337,000 for the three and nine-months ended September 30, 2002, respectively.

12.    Restructuring

        We have implemented several restructuring plans over recent years.

Consolidation of California Product Development and Marketing Functions

        Late in 2002 we reviewed our year to date performance, our plan for 2003 and the corresponding proposed staffing levels. We determined that we would reduce costs and consolidate operations in order to generate improved results in future periods. In December 2002, we decided to reduce the amount of leased space used in our Milpitas, California facility and terminate a group of mostly product development employees in both our Milpitas and San Diego, California facilities. The results of this decision included the termination of 27 employees and resulted in a severance charge of $408,000. In addition, three games being developed by terminated employees had to be cancelled due to the reduction in resources available and our judgment about their prospects. Accordingly, all capitalized product development costs related to these games of $8,958,000 were written off in 2002.

        In February 2003, we decided to terminate additional employees. The announcement of this decision involved communicating the plan of termination to an additional 108 employees in Milpitas resulting in a charge of $2,057,000. The reduction in personnel associated with the Milpitas studio required us to reduce the scope of our product development efforts. Accordingly, three games in development at that time were cancelled due to the reduction in product development resources and our judgment about their prospects resulting in a charge of $4,696,000 in the three