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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, 2004

Commission file number 001-12367

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

Registrant's telephone number, including area code (773) 961-2222

        Indicate by check mark 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 mark 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: 85,715,066 shares of common stock, $0.01 par value, were outstanding at November 5, 2004, excluding 1,707,143 shares held as treasury shares.

MIDWAY GAMES INC.

INDEX

Part I—Financial Information

Item 1—Financial Statements

MIDWAY GAMES INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

See notes to consolidated financial statements.

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MIDWAY GAMES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See notes to consolidated financial statements.

2

MIDWAY GAMES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

3

MIDWAY GAMES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Financial Statements

        The accompanying unaudited consolidated financial statements of Midway Games Inc. (the "Company," "we", "us", "our" 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, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.

2.    Reclassification of Prior Period Balances

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

3.    New Accounting Pronouncements

        In March 2004, the Emerging Issues Task Force ("EITF") reached final consensuses on Issue 03-6, Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share ("EITF 03-6"). EITF 03-6 addresses a number of questions regarding the computation of earnings per share ("EPS") by companies that have issued securities other than common stock that entitle the holder to participate in undistributed earnings. This includes, but is not limited to, dividends of the company when, and if it declares dividends on its common stock. EITF 03-6 also provides guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-6 is effective for fiscal periods beginning after March 31, 2004 and is applied by restating previously reported EPS. Effective April 2004, we adopted the provisions of EITF 03-6 during the three-months ended June 30, 2004 with no impact on our basic and diluted loss per share for the three and nine-months ended September 30, 2004 and 2003. Under our current capital structure, EITF 03-6 will have the impact of reducing our basic and diluted EPS attributable to common stock in future periods when we have net income.

4.    Acquisition

        On April 5, 2004, we acquired privately-held Surreal Software Inc. ("Surreal") in an all-stock transaction. The acquisition of Surreal, the developer of The Suffering, strengthens our internal product development team and reinforces our ability to create high quality games. We acquired all of the outstanding capital stock of Surreal held by Surreal shareholders (the "Selling Shareholders") in exchange for 540,316 shares of our common shares with a value of $3,988,000. Of the 540,316 Midway common shares, 67,751 shares were immediately saleable and transferable. The remaining 472,565 shares are subject to restrictions which lapse as follows: 189,026 shares, on October 5, 2004; 94,513 shares, on April 5, 2005; 94,513 shares, on April 5, 2006; and the remaining 94,513 shares, on April 5, 2007. In addition to these 540,316 shares, a total of 137,199 restricted shares of our common stock,

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with a value of $1,013,000, were issued as retention incentives to 13 key Surreal employees, none of whom were Selling Shareholders and each of whom became our employees after the acquisition. Provided the employee remains employed by us, the restrictions on the stock will lapse: 54,879 restricted shares, on December 5, 2004; 27,440 restricted shares, on June 5, 2005; 27,440 restricted shares, on June 5, 2006; and the remaining 27,440 restricted shares, on March 5, 2007. The total value of $1,013,000 is being recognized as expense in accordance with this vesting schedule.

        The preliminary purchase price allocation, including $200,000 of direct costs associated with the acquisition, is as follows:

        This purchase price allocation is subject to adjustment, based on the final results of a third party valuation.

        The non-compete agreements are being amortized on a straight-line basis over three years. Amortization expense related to the non-compete agreements for the three and nine-months ended September 30, 2004 was $28,000 and $55,000, respectively. Goodwill, non-compete agreements and certain software recorded in connection with the acquisition of Surreal are not deductible for income tax purposes.

        The operations of Surreal are included in our statements of operations from April 5, 2004 to the end of the period. Pro forma consolidated statements of operations related to this acquisition are not shown, since they would not differ materially from reported results.

5.    Inventories

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

6.    Stock-Based Compensation

        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 on a straight-line basis over the vesting period. 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 Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB No. 123, 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

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No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

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

(a)

These amounts reflect a $0 income tax effect. See Note 11 for details about our income taxes.

7.    Comprehensive Loss

        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 $13,905,000 and $37,629,000 for the three and nine-months ended September 30, 2004 and $23,379,000 and $87,623,000 for the three and nine-months ended September 30, 2003, respectively. The accumulated translation adjustment is disclosed on the consolidated balance sheets.

8.    Loss per Common Share

        The following securities exercisable for or convertible into shares of common stock were outstanding on each of the following dates (in thousands):

(a)

At September 30, 2004, this amount represents restricted common stock shares totaling 682,682. At September 30, 2003, this amount represents 125,000 restricted common stock shares, 599,259 shares related to the potential conversion of deferred severance and 607,846 shares to be issued under the terms of a severance agreement.

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        The calculation of loss per share for the three and nine-months ended September 30, 2004 and 2003 did not include the effect of these securities because to do so would have been antidilutive. Accordingly, the average number of shares outstanding for the three and nine-months ended September 30, 2004 and 2003 were used in their respective calculations of basic and diluted loss per share of common stock.

        See also Note 18 for details about equity transactions completed after September 30, 2004.

9.    Capitalized Product Development Costs

        The following table reconciles the beginning and ending capitalized product development cost balances for the three and nine-months ended September 30, 2004 and 2003 (in thousands):

        During the nine-months ended September 30, 2003, we recorded impairment charges for capitalized product development costs in the restructuring and other charges line item of our consolidated statement of operations. See Note 14 for details about our restructuring activities.

10.    Credit Facility

        In March 2004, we entered into a loan and security agreement with Wells Fargo Foothill, Inc. for a credit facility of up to $30,000,000 under which we have a $15,000,000 term loan and a revolving line of credit of up to $15,000,000 (the "Credit Facility"). The Credit Facility was subsequently amended to, among other changes, lower the interest rates charged under the Credit Facility and revise certain reporting requirements under the Credit Facility.

        The term loan has a five year term and is to be repaid in equal monthly installments which started in August 2004 and end in February 2009. The term loan bears interest at our election of either the bank's base rate (4.75% at September 30, 2004) or the LIBOR rate (2.02% at September 30, 2004) plus 2.75%, but in no event less than 4.0%. These rates may be adjusted monthly based on our level of liquidity, as defined, but in no event greater than the bank's base rate plus 6.0% or the LIBOR rate plus 5.75%, as applicable. At September 30, 2004, the interest rate on the term loan was 4.75%.

        Availability under the revolving line of credit up to $15,000,000 is limited by the borrowing base, which is a function of eligible accounts receivable and collections as defined under the Credit Facility. The revolving line of credit has a five year term and bears interest at our election of either the bank's base rate (4.75% at September 30, 2004) or the LIBOR rate (2.02% at September 30, 2004) plus 2.75%, but in no event less than 4.0%. The interest rates under the revolving line of credit are adjusted

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annually based on our operating results under the test set forth in the Credit Facility, but in no event greater than the bank's base rate plus 1.0% or the LIBOR rate plus 3.75%, as applicable. At September 30, 2004, there were no amounts drawn on the revolving line of credit.

        In addition, the Credit Facility allows for the issuance of up to $5,000,000 in aggregate letters of credit. Any letters of credit outstanding reduce availability under the revolving line of credit. A $75,000 letter of credit was outstanding at September 30, 2004. A fee of 0.5% per annum multiplied by the unused portion of the revolving line of credit is due and payable on a monthly basis.

        Gross debt issuance costs through September 30, 2004 of $789,000 were capitalized and are being amortized by applying the effective interest method over the five year term of the Credit Facility. Amortization related to these costs is included in interest expense in the consolidated statements of operations.

        Substantially all of our assets are pledged as collateral under the Credit Facility. The Credit Facility requires, among other things, that we maintain minimum levels of cash and availability under the revolving line of credit. The Credit Facility also restricts our ability to make payments, including dividends and other distributions, on our capital stock except in shares of common stock and the scheduled quarterly dividends on our Series D preferred stock, restricts our ability to make acquisitions, except two acquisitions not exceeding $5,000,000 each, which acquisitions have been made. See Note 4 for details of an acquisition made during April 2004. See Note 18 for details of an acquisition made during October 2004. In addition, the Credit Facility restricts our ability to repurchase or redeem any shares of our capital stock, except we may redeem any remaining Series D preferred stock at maturity with shares of our common stock or in cash if after the redemption date we would have cash and borrowing availability under our line of credit of at least $25,000,000. The term loan can be prepaid at any time without premium or penalty. If the entire Credit Facility is terminated before the expiration of the five year term, the lender is entitled to receive prepayment penalties not to exceed $600,000.

11.    Income Taxes

        During the three and nine-months ended September 30, 2004 and 2003, we provided a full valuation allowance against our deferred tax assets. The valuation allowance decreases the deferred tax assets to the amount reasonably expected to be used. 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 therefore not offset against deferred tax assets on the consolidated balance sheets. We will be required to provide additional valuation allowances in future periods should tax losses occur. All or part of the valuation allowance may 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, 2004 by $8,022,000 and $23,459,000 and in the three and nine-months ended September 30, 2003 by $7,208,000 and $33,029,000, respectively. To the extent a deferred tax liability related to indefinite-lived assets increases in future periods, deferred tax expense will be recognized.

        At December 31, 2003, we had net operating loss carryforwards of $225,970,000 for federal income tax purposes which expire from 2019 to 2023, and net operating loss carryforwards of $81,759,000 for state income tax purposes which expire from 2009 to 2022. Our future ability to use our net operating

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loss carryforwards is subject to limitation due to stockholder ownership increases, as defined under Section 382 of the Internal Revenue Code, which included Sumner M. Redstone's acquisitions of our common stock.

12.    Preferred Stock

        In March 2004, one of the holders of our Series D preferred stock exercised its right to purchase 179 additional shares of Series D preferred stock at $10,000 per share. We received proceeds of $1,743,000, net of issuance costs.

        In April 2004, one of the holders of our Series D preferred stock exercised its right to purchase 446 additional shares of Series D preferred stock at $10,000 per share. We received proceeds of $4,450,000, net of issuance costs.

        In May 2004, one of the holders of our Series D preferred stock exercised its right to purchase 625 additional shares of Series D preferred stock at $10,000 per share. We received proceeds of $6,230,000, net of issuance costs.

        The additional shares of Series D preferred stock have similar provisions, including those relating to conversion and redemption, as the initial Series D preferred shares except that the conversion price is $4.00, subject to adjustment. The conversion price of the initial Series D preferred shares issued during fiscal 2003 was $3.65 per share.

        In June 2004, one of the holders of our Series D preferred stock converted 800 of the initial 3,500 shares of Series D preferred stock into 2,191,780 shares of common stock at the conversion price of $3.65 per share. An additional 21,091 shares of common stock were issued to the holder upon conversion to satisfy net accrued dividends that existed on the date of conversion. This conversion accelerated the recognition of $534,000 of imputed preferred stock dividends (i.e., non-cash dividends) that otherwise would have been recognized in later periods.

        In July 2004, holders of our Series D preferred stock converted the remaining 2,700 of the initial shares of Series D preferred stock into 7,397,260 shares of common stock at the conversion price of $3.65 per share and converted 804 of the additional 1,250 shares of Series D preferred stock into 2,010,000 shares of common stock at the conversion price of $4.00 per share. An additional 23,455 shares of common stock were issued to the holders upon conversion to satisfy net accrued dividends that existed on the dates of conversion. These conversions accelerated the recognition of $1,767,000 of imputed preferred stock dividends (i.e., non-cash dividends) that otherwise would have been recognized in later periods.

        In July and September 2004, holders of the 1,141,000 warrants to purchase shares of our common stock with an exercise price of $3.75 per share, exercised 978,000 of their warrants. This resulted in proceeds of $3,668,000 and the issuance of 978,000 shares of common stock.

13.    Common Stock

        In February 2004, we filed a shelf registration statement on Form S-3 with the SEC in connection with the possible offer and sale, from time to time on a delayed basis, of up to $100,000,000 aggregate amount of our common stock, preferred stock, warrants, rights, units and/or stock purchase contracts.

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In April 2004, we sold 11,350,000 shares of our common stock at $7.25 per share for aggregate proceeds of approximately $82,288,000, before placement fees and other offering expenses. The net proceeds of approximately $78,299,000 are being used for general corporate purposes including working capital, capital expenditures, research and development, marketing and distribution efforts, and if opportunities arise, for acquisitions or strategic alliances. We have withdrawn the balance of the securities from registration.

        In May 2004, provisions under the severance agreement with Neil D. Nicastro, our former chairman, chief executive officer and president, were triggered causing all 607,846 retirement shares to become issuable to Mr. Nicastro. As a result, 428,835 shares of Midway common stock, net of 179,011 shares elected by Mr. Nicastro to be withheld for payment of the statutory minimum withholdings taxes on Mr. Nicastro's taxable compensation that resulted from the retirement share issuance, were issued to Mr. Nicastro out of Midway's treasury shares. These retirement shares were fully vested and had no impact on our results of operations for the three and nine-months ended September 30, 2004.

        In August 2004, provisions under the severance agreement with Neil D. Nicastro were triggered causing 599,259 shares of our common stock to become issuable to Mr. Nicastro as payment of deferred severance. As a result, 422,777 shares of Midway common stock, net of 176,482 shares elected by Mr. Nicastro to be withheld for payment of the statutory minimum withholdings taxes on Mr. Nicastro's taxable compensation that resulted from the share issuance, were issued to Mr. Nicastro out of Midway's treasury shares. These shares issued as payment of deferred severance were fully vested and had no impact on our results of operations for the three and nine-months ended September 30, 2004.

        During the three and nine-months ended September 30, 2004, stock option exercises resulted in the issuance of an aggregate of approximately 533,707 and 3,913,911 shares of common stock, at average exercise prices of $7.02 and $5.77 per share, resulting in total proceeds of $3,747,000 and $22,589,000, respectively. Of the $22,589,000 amount, $22,503,000 was received by us prior to September 30, 2004 and $86,000 is reflected in receivables at September 30, 2004 in the consolidated balance sheet. There were no stock option exercises for the three and nine-months ended September 30, 2003.

14.    Restructuring

        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 our California product development and marketing 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. During the first quarter of 2003, we decided to terminate additional employees. 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 during fiscal 2003. During the second quarter of 2003, we decided that rather than just reducing the size of the Milpitas operation, it was advisable to consolidate almost all of its operations into existing facilities in San Diego and Chicago, Illinois. We recorded charges related