With no other bidders emerging for Midway Games, Warner Bros. has bought most of the company’s assets for $33 million, including the “Mortal Kombat” franchise as well as the company’s legacy arcade games, such as “Joust” and “Spy Hunter”.

The bankruptcy judge overseeing the sale apparently wasn’t swayed by Threshold Entertainment’s argument that film producer Larry Kasanoff was the driving creative force in the franchise. (The Chicago Tribune quotes the judge as saying the objections, as well as those of Vin Diesel-owned development studio Tigon Games were ‘resolved’.

A pair of development studios that Warner opted not to buy will be shuttered in just under two months if no bidders emerge for them. The Newcastle studio has worked on the “Wheelman” franchise, while the San Diego studio has created the “TNA” games. Warner did purchase rights to the “Wheelman” games, but not the development studio behind it.

Warner picked up some valuable assets at firesale prices in this deal. Expect another “Mortal Kombat”/DC crossover in the years to come and possibly some re-imaginings of classic titles. The company has been beefing up its video game division steadily over the past few years and has managed to assemble some talented teams. It should be interesting to see what they do with some of the licenses they now own.

The firesale at Midway Games may have hit a hurdle. Lawrence Kasanoff, through his company Threshold Entertainment, has sued Midway saying it owns intellectual property rights in the “Mortal Kombat” franchise, which is the video game publisher’s largest property.

he suit could affect Warner Bros.’ $33 million bid for select Midway assets (including “Mortal Kombat”), as rights to the franchise will need to be determined before a sale can take place. Threshold also wants to retain the film rights to the franchise.

The complaint, filed Wednesday in U.S. bankruptcy court, alleges the film adaptations of the game, rather than the game itself, gave the “Mortal Kombat” universe its mythology.

Launched in 1992, “Mortal Kombat” wasn’t the first fighter game the industry had seen, but it was the first to really capture the public’s attention. Not all of the attention was good, though, as parents groups and others objected to the game’s violent finishing moves. 

Nonetheless, it was deemed big enough to make a film adaptation in 1995.

Threshold alleges his contributions to the franchise were what made it into more than a run-of-the-mill video game.

"The 'Mortal Kombat' franchise, as it stands today, is far more a creation of Threshold and Kasanoff than of Midway," says the court filing. “ Midway's creative input was almost entirely limited to the videogames. On their own, the videogames provided only minimal back-story and mythology, and only flat, 'stock' characters. ... Kasanoff and Threshold were responsible for virtually all of the creative input that went into turning the videogame concept into a multimedia enterprise.”

Threshold produced two “Mortal Kombat” films (along with their soundtracks) in 1995 and 1997. It has also produced an animated series and owns the mortalkombat.com web site.

Warner’s bid for assets is scheduled to go before a bankruptcy judge in Delaware on July 1.

GamePolitics has a copy of the filing here for those interested in giving it a thorough read.

Warner Bros., which already had a solid presence in the video game world, is looking to expand its turf. The company today offered $33 million to buy several key components of Midway Games.

Midway, which filed for Chapter 11 bankruptcy protection in February, has been on the block for some time. What’s interesting is what Warner wants – and what it plans to leave on the curb.

The “Mortal Kombat” franchise, natch, is on the ‘gimme’ list, as are development studios in Chicago and Seattle. Warner’s also interested in Midway’s legacy games, including arcade standards “Gauntlet,” “Joust” and “Defender”.

But Warner has no interest in Midway’s license to create games based on the TNA wrestling franchise or its other studios in San Diego and Newcastle.

The two companies have a recent history together, having worked on last year’s “Mortal Kombat VS. DC Universe,” so Warner’s familiar with the Midway team and the strengths and weaknesses of the company, giving it an advantage should it acquire the assets.

But Warner’s bid is really the start of a longer process. Once it’s made formal before the bankruptcy judge, other companies will be able to submit counterbids for roughly 30 days. (Look for Ubisoft to give this serious consideration.)

From there, it’s an old-fashioned auction. The submitted offers will act as opening bids, but companies will be able to increase them. And a Midway spokesperson says he expects Warner to get some competition.

“We do expect other bidders to come in,” says Geoffrey Mogilner, director of corporate communications for Midway. “We’ve been talking with a number of parties throughout this process. There’s always the possibility they’ll come in for all portions [of the company].”

The court, the debtors, the owner and the executives have agreed: $30 million is a good sales price for Midway.

That's according to the final version of the Midway's "key employee incentive plan," which was approved at an April 6 bankruptcy court hearing. In its original form, the bonus schedule was called "outrageous" by a court trustee and "disingenuous" by a committee of creditors.

The approved plan, which contains some small changes to the revised version filed two weeks ago, sets a target sales price above which the 28 "key employees" (a mix of executives, developers, and others, but not CEO Matt Booty) get a bonus.

How much? They share a $600,000 bonus pool when an asset purchase agreement is "executed" (or signed) and another $1 million bonus pool when the sale closes (actually happens). In addition, the key employees get more if they sell Midway for more. Specifically, upon the sale's closing, they get $75,000 in extra bonuses for every $1 million above $30 million (So if the final sales price is $34 million, for example, the bonus pool is $1.9 million).

As previously promised by the company, that's significantly less than the $3.755 million bonus pool in the original version.

Given Midway's state and the dismal economy, $30 million seems like a decent price. Then again, just last summer, Midway stock was trading at almost $4, giving it a market cap of around $350 million range. That's quite a fall.

The plan has been approved by everyone involved: Owner, Mark Thomas, the courts, Midway management, and its many creditors. So it's safe to assume this is a price everyone involved thinks is gettable, but just high enough they want to make sure employees are incentivized to make it happen.

While there's no direct indication of how they reached that figure, it was, according to a previous court filing by Mark Thomas, the highest bid Midway has received so far. Perhaps coincidentally, but nonetheless notably, that's also the exact amount of Thomas' secured loan -- the one that he gets paid back before any other creditors receive cash.

Also of note in the approved version of the plan:

Of course, the key employees can also get a bonus ($1.6 million, but no more) for submitting and then getting approved a plan for reorganization or liquidation that "provides for payment in full of the lender's secured claims" -- in other words, gets Mark Thomas his $30 million. That seems extremely unlikely, however (anyone out there know a way to reorganize Midway so it stays in business and gets Mark Thomas his cash?), so a sale for $30 million or more is the most likely outcome if those 28 key employees want a bonus for their months of work at a bankrupt, bereft company.

"Wheelman" has had a long and not-so-smooth history, to say the least. It started production at Midway's Australia studio, only to moved to Newcastle in the UK, where it was then re-started a third time when the publisher decided to do all its development in Unreal Engine.

Then there's the film tie-in. Three years ago, I wrote an article in Variety about Midway's deal with Paramount's MTV Films label to simultaneously develop a "Wheelman" film. The plan back then was to release the game and film, both of which would star Vin Diesel, simultaneously in late 2007. MTV was going to produce the game's soundtrack, sell in-game advertising, and provide significant marketing support.

Three years, numerous delays, and one bankruptcy later, "Wheelman" is finally out. MTV has nothing to do with the project anymore and Midway has handed off publishing rights to Ubisoft in exchange for some badly needed cash.

After all that, perhaps it's no surprise that "Wheelman" feels, well, a couple of years too late. As I wrote in my review, "What might have seemed like competent copying a couple of years ago pales next to 2008's 'Burnout: Paradise' and 'Grand Theft Auto IV.' 'Wheelman' offers a few spectacular racing mechanics, but otherwise fails to meet the mark of those top-shelf inspirations."

Put even more simply, if you're going to so blatantly be influenced by rip off other games, you've got to be at least as good as them.    

That being said, some of the driving action is really fun. Bashing nearby cars with a flick of the right thumbstick; slowing down time to shoot everyone around you (the racing equivalent of bullet time); and even "airjacking" a nearby vehicle by jumping from roof to roof. It all works and it's all good fun, especially when the developers mix things up a bit by putting Diesel's character in a semi truck or sending the race into a narrow pedestrian walkway or through a building.

If the game were limited to its dozens of side missions in which players engage in various types of races to earn badges, it would at least be a consistent, smooth ride. Add in multi-player with all those features and it might have been great.

But perhaps because of the presence of a movie star with his name above the title -- when was the last time that happened in a video game? -- there's a confusing, half-assed, cliched story involving an undercover cop, gangs, and other "GTA" wanna-be material.

"The result of attempting both," I wrote in my review, "is extreme tonal conflict. It's difficult to take anything Milo says or does seriously when he's been jumping from roof to roof in cars speeding more than 100 miles per hour."

Full review: Wheelman

As promised, Midway has responded to the complaints of its creditors and bankruptcy trustee by revising its proposed "key employee incentive plan" so that it spends less and doesn't appear to be rewarding folks for work they've already done or should be doing.

Filed last night, here are the key changes:

The proposed revisions, along with other less exciting issues, will be discussed and potentially approved tomorrow at a court hearing in Delaware. Still no word on when, if ever, they''ll get to see the really good stuff, like making Sumner and Shari Redstone's testimony public.

The controversies never end at Midway.

The "Mortal Kombat" publisher, already in bankruptcy and attempting to sell assets and stave off creditors, received a beat down in court this week from the government-appointed trustee overseeing the proceedings and the committee of unsecured creditors (basically everyone to whom Midway owes money except majority owner Mark Thomas, who has a secured loan) over its plan to pay bonuses of up to $3.755 million as part of a "key employee incentive plan."

As previously reported, Midway proposed paying bonuses to 29 key employees, five of whom are believed to be officers (top executives), for completion of three key steps:

The objections of the U.S. trustee and the creditors' committee break down like this:

-The "Wheelman" sale happened before the bonus plan was submitted. As the unsecured creditors tartly put it: "The notion that a bonus program designed to reward employees for past accomplishments could be considered an 'incentive' is simply disingenuous."

-Selling "Mortal Kombat" or submitting/completing a reorganization plan are the main jobs of Midway employees now, not something special for which they should be incentivized. In addition, there's no guarantee they'll do a good job of either one. "The second and third milestones are based solely upon the occurrence of events without regard to when the events may take place, or to results obtained," wrote the U.S. trustee, adding,  "Senior management should not be paid incentive bonus payments... to perform duties required to be performed by their obligations under the Bankruptcy Code."

-There's no guarantee that employees won't leave for a competitor as soon as they receive their bonuses. Given that potential buyers might condition their purchase on key employees remaining, that's a major problem.

-Even if the bonuses were justified, the amount is "outrageous," as the trustee put it. "The Debtors seek authority to pay bonuses to a selected group of officers and managers which are four hundred percent greater than bonuses paid to the same group in 2008 when the Debtors were not before the Bankruptcy Court," she noted. "Given the current state of the general economy, coupled with historical data related to incentive bonuses paid by these Debtors, the Motion constitutes an outrageous request and is not justified by the facts and circumstances of the case."

The unsecured creditors' committee did some research of its own and found the proposed bonus amounts equally disturbing: "In a survey prepared by the Committee's financial advisor, FTI Consulting, of compensation plans proposed in some twenty comparable bankrupcty cases in recent years, the Proposed Plan is, by far, the richest compensation plan that has been proposed, despite the unusually poor conditions of the current economy."

Of course, it's worth remembering that everyone has incentives. The unsecured creditors, certainly, want Midway to spend as little as possible so that there will be more cash left to pay them back under a restructuring or sale. While some of their criticisms are damning, others aren't 100% fair. The "twenty comparable bankruptcy cases," for instance, don't include any other entertainment or software companies.

Nonetheless, Midway seems to have gotten the message, most likely from talks that occurred before these objections were filed on Friday. A spokesperson tells the Cut Scene that a revised version of the "key employee incentive plan" will be filed tomorrow. We'll find out if the creditors and trustee still have such harsh words come Wednesday, when a hearing is scheduled.

Update: Midway had revised its proposed plan. Details here.

On Thursday, Midway's mysterious owner Mark Thomas made his first declaration to the bankruptcy court.

As the Chicago Tribune and GamePolitics have noted, he put to rest allegations that Sumner Redstone was doing a favor for a buddy with what appears to be a sweetheart deal. Thomas, a 52 year-old Mass. resident who runs his own private equity firm, testified that he has never met or spoken to Sumner Redstone, or his daughter Shari who served as chairman for about a year and is heavily involved in the family business dealings. He apparently found out about the deal from two attorneys from a firm representing the elder Redstone whom he knew, and the deal was accomplished entirely through intermediaries.

Of course, that doesn't put to rest the apparently legitimate allegations that Thomas did get a sweetheart deal. For only $100,000 he got control of $70 million in Midway's debt, $30 million of which is secured and thus must be the first to paid back as the "Mortal Kombat" publisher sorts through what it owes to whom in bankruptcy court. It's telling that Thomas describes the purposes of the holding company he formed to buy Midway in the following order:

Notice that? The debt comes first. the company second. Clearly the benefit he might get from being paid back even a fraction of the $30 million secured debt (the odds of him seeing any of that unsecured debt are pretty low) was at least half the reason to do this transaction. And the fact that he lists it before the common stock of the company gives the clear impression that it was the #1 reason.

Also aiding that argument is the fact that Thomas, who has no experience in the video games business, first found out about the potential deal on November 14 and it closed on November 28. Two weeks is not enough time to perform due diligence on a company and assess its operations, its chances for success, the state of the market, and all the other things you do when you're buying a company.

But it is enough time to figure out whether spending $100,000 to get a $30 million secured loan is a good investment. Especially when you know that your purchase will trigger a bankruptcy that means that company has to start paying back its debts, with yours coming first. Ka-ching.

Sumner Redstone may not have known Mark Thomas, but his attorney Creighton Condon and Peter Lyons, an associate of Condon's, certainly seem to have set the guy up with a good deal.

But while he's pretty clearly a financial opportunist (not a crime), Thomas might just be the right guy for Midway given the dire financial situation in which it has been put by Sumner Redstone's financial machinations. A look at his resume shows he has been involved in enormous and very successful corporate restructurings, most notably the split of ITT Sheraton into three separate public companies. He also oversaw multi-billion dollar acquisitions of companies like Caesar's (the hotel/casino, not the pizza place), MSG (owner of Madison Square Garden, the Knicks and Rangers), and a New York TV station.

Now that it's selling off publishing rights and canceling projects, Midway doesn't really need executives with experience making games (no offense, Matt Booty). It needs someone who can get it out of bankruptcy with as much value as possible intact (and, gamers can hope, without destroying franchises we care about like "Mortal Kombat" and, ummm...). Mark Thomas seems like a solid candidate for that job. Whether he deserves a to profit as much as $29.9 million for his efforts... well, that's debatable.

Browsing through some of Midway's bankruptcy filings to see if there's any more interesting information in there besides today's revelation that the publisher is considering selling the "Mortal Kombat" franchise, I came upon some very specific data about how its top designer is compensated.

Ed Boon is the co-creator of "Mortal Kombat" and currently the lead designer for for the fighting franchise at Midway. Though he isn't mentioned by name in the bankruptcy filings, there is extensive discussion of a "key designer" who is "responsible for historically the Debtors’ most successful video game series." Later on it mentions that the series had a new release in the fourth quarter of 2008.

The series is obviously "Mortal Kombat" and the designer is Boon. In this filing, Midway is asking the bankruptcy court to approve continued payment of Boon's bonus plan in order to retain his services, which it claims is "critical to maximizing the value of one of the Debtors’ primary assets" (a.k.a. "Mortal Kombat").

Why? Well, he's in charge of making the "Mortal Kombat" games and also the guy who handles most interviews and publicity. If he were to leave, it would be yet another PR nightmare for Midway and would likely lessen the value of the franchise to a potential buyer.

So how much does Boon get for his work? Well for "performance of new release version of the Video Game in fourth quarter 2008 and first quarter 2009" -- in other words, sales of November release "Mortal Kombat vs DC Universe" in the five months when it will have achieved most of its sales -- the bonus is $900,000. In addition, Boon gets $105,000 for other revenue from the "MK" franchise (older games, movies, etc.) in those two quarters.

Of course we still don't know what Boon's annual salary is. But if you've ever wondered how much a successful game designer associated with one of the industry's top franchises earns in sales bonuses alone, now you know.

By contrast, the bonus pool available for 110 employees under the "design team bonus plan" Midway offers is $325,000 in the same period when Boon is making just over $1 million. So it pays to be the top guy and the public face.

(Oh, and yes, I almost wrote "kreator" in the headline. I managed to restrain myself.)

It's one or the other for the the bankrupt video game publisher, according to this blog for a service that follows bankruptcy filings.

A listing of conditions for corporate bonuses to 29 top executives (which, despite sounding a bit obscene given Midway's layoffs, are typical at companies that need to keep somebody competent in charge at a time when anybody in their right mind would want to flee) includes "execution of an asset purchase agreement for the sale of Midway’s Mortal Kombat franchise assets or (ii) submission by Midway of a plan of reorganization to continue as a going concern." The bonus is about $1.3 million. Then there's an additional bonus of nearly $2 million for eithier closing a sale or getting a reorganization plan confirmed by the courts.

The fact that these two possibilities are listed under the same potential bonuses makes it very clear: Midway can continue as as company or it can sell "Mortal Kombat." But it can't do both. Because what is Midway without "Mortal Kombat?" A name, a barely operational publisher (thus the need to sell "Wheelman" publishing rights to Ubisoft), and a bunch of IP nobody else would really want. "Mortal Kombat" is, essentially, the only asset with any real value left.

One can imagine plenty of publishers willing to buy "Mortal Kombat," but in this economic climate, one has to wonder how much money would be on the table. On the other hand, Midway is desperate. It's tough to imagine it turning down any decent offer. Especially given the extreme difficulties in putting together a plan to come back from bankruptcy and become a "going concern." If I was a Midway executive, I know which one of those options would be an easier way to get my bonus.

Also of note in the blog post is that executives got a $500,000 bonus for selling the "Wheelman" publishing rights to Ubisoft. As I wrote earlier, that deal includes an advance against royalties. Apparently the advance is $6 million.

The bonus for that $6 million deal is about $500,000. If we assume that Midway is using a consistent bonus-to-revenue ratio, it seems the company expecting to make about $40 million if it sells "Mortal Kombat."

Midway's decision to have Ubisoft publish "Wheelman" domestically and in most major foreign territories makes pretty clear that, unless and until it can get out of its bankruptcy mess, it's no longer a fully functioning publisher.

Not that it doesn't literally have the capability to sell "Wheelman." It does. It's still servicing the many games it has on the market. But Midway concluded, probably rationally, that it doesn't have the cash flow to properly support a major launch, or the cushion to take on all the risk in case the game is a major flop.

So it's safer to make a deal with Ubisoft, which I'm told is a standard publishing deal in which Midway pays Ubi an advance against royalties (a percentage of sales revenue). It's tough to know exactly how much Ubisoft is risking without knowing what the advance is and how much the French publisher will be spending on "Wheelman." But any differential is risk off Midway's back, probably a good thing given the hundreds of millions it currently owes creditors, thanks to years of losses and, most recently, Sumner Redstone's financial machinations.

Looking ahead, Midway's only announced game for the rest of this year is "This is Vegas." There's also a new "Mortal Kombat" game in development, though who knows when it'll come. If either of those games come out before Midway is either acquired or (unlikely but possible) reorganized itself into a stable company, it will almost certainly have to make a similar deal. Because right now it's simply can't function as a complete publisher, with the ability to take risks and launch AAA titles.

So what is it? An IP owner (it still owns the "Wheelman" franchise, in case solid sales warrant a sequel), a servicer of catalog titles, and, perhaps most importantly, a receptacle for Sumner Redstone's debt problems that's struggling not to be crushed under the burden.

(On a related note, Midway's investor website is now called the "reorganization home.)

Unlike lazy patriotic types like myself who didn't update our blogs over President's Day Weekend, GamePolitics did yeoman's work going through Midway's bankruptcy filing and found some interesting tidbits.

In particular, it listed every one of the severely troubled "Mortal Kombat" publisher's creditors and how much they're owed. Amongst the most interesting:

In addition, GamePolitics noted that some Midway creditors are asking whether the mysterious Mark Thomas got some kind of sweetheart deal when Sumner Redstone sold him the company for $100,000. At the time, it didn't seem like much of a deal given MIdway's massive debts. But as these creditors have noted, there are all sorts of mechanisms in place for Thomas to get paid back the $30 million "secured" debt he assumed and make a handsome 30,000% return on this investment. Not to mention the $40 million "unsecured" debt he holds, which would get paid back (if there's any money left over) along with all the rest of the debtors.

Quite a deal, And the debtors who filed that claim think it's Redstone's purposeful way to make out like a bandit. After all early last year Midway replaced a $15 million loan from Wells fargo with a line of credit for $90 million to National Amusements, Redstone's investment company, and quickly drew on all that cash. Which means the CBS/Viacom mogul now controlled a huge chunk of the debt. Then he sold control of the company to Thomas, a completely mysterious guy whom the debtors say is probably an associate of Redstone's (the Chicago Tribune has a piece about the guessing game as to his identity). Redstone got a big tax benefit from the deal which helped National Amusements' debt issues. Thomas got a secured loan from a company on its way to bankruptcy, meaning he's almost certain to get paid.

Pretty nice arrangement, if all is at is seems. Except for Midway's other debtors. And the remaining employees.

Well, it was inevitable.

Midway owes debtors $150 million that's due next one week from today and only $10.3 million in cash on hand as of Oct. 31 (a figure that has undoubtedly dwindled further), the only way it was going to avoid bankruptcy would be if its debtors decided to ease the terms of the loan of someone swooped in to buy the "Mortal Kombat" publisher and actually paid off the debts. Both would be, to be blunt, suckers' deals, since there's little reason to think Midway's position is going to improve substantially in the near future (unless "Wheelman" becomes the next "Call of Duty").

Bankruptcy means Midway can continue its business operations (which for now means releasing "Wheelman" next month, continuing development on the next TNA Wrestling and "Mortal Kombat" titles, and perhaps continuing with "This is Vegas," though I suspect that may get the axe), while the court helps sort out what Midway can do with its assets to pay off its debts. That will most certainly mean, eventually, a fire sale, since even if it doesn't have to pay its debt for the time being, it looks likely to keep losing money and soon run out of cash.

At that point, we'll likely see a fire sale either of the company as a whole or separate assets with any value, like the internal studios, the "Mortal Kombat" franchise, and the corporate title. Midway could be on its way to becoming the next Atari -- a name that never goes away, just gets slapped on different companies.

This bankruptcy, of course, was brought to you by Viacom and CBS mogul Sumner Redstone, who acquired Midway nearly five years ago, allowed poor management decisions to drive it into the ground, and then in December sold the company in a complex deal that helped him deal with tax problems but triggered debt obligations that the publisher had no chance of repaying. Midway employees (and ex-employees) I'm sure will be thrilled at today's news that Sumner Redstone's investment company National Amusements is close to solving all of its debt problems.

Update: Kotaku is reporting that Wheelman may have been sold to Ubisoft. Which would make a lot of sense given all of Midway's problems. Looking into it.

Midway's countdown to possible doom -- otherwise known as the 50 day deadline it had to pay back an impossible $150 million in debt -- is getting a one-month extension. Probably, anyway.

The struggling "Mortal Kombat" publisher, recently sold by Sumner Redstone to private investor Mark Thomas for a measly $100,000, has reached an agreement on $75 million worth of its debt to extend the deadline by which it must repay or renegotiate to Feb. 19, one month after the initial due date. The company also announced it is "in discussions" with the holders of the rest of its debt for a similar delay.

The question now is: Does Midway have something in the works for that it will accomplish, or is hoping to accomplish, during that month? Or is it just stalling for time? ("Wheelman" will be released on Feb. 16, but I don't exactly see that curing what ails Midway)

Today Midway laid off 25% of its remaining staff, or 180 employees, in a bid to cut costs as a massive $150 million debt payment looms in January. It has also closed its Austin, TX development studio.

For full details on how that huge payment was triggered (two words: Sumner Redstone) and how it may impact Midway, which doesn't have nearly that much cash on hand, check out my previous post on the topic here.

However I was able to confirm that today's bad news for many of Midway's employees isn't necessarily bad news for all its projects. First, the layoffs won't impact the development team that works on the "Mortal Kombat" fighting franchise. No surprise there, since "Mortal Kombat vs DC Universe" had a decent debut last month as the #3 Playstation 3 game and #8 Xbox 360 game, making it the lone bright spot for Midway as of late.

In addition, the 2010 and 2011 projects that were suspended today, which include two being made in Austin and one in Chicago, aren't necessarily dead. Midway is looking for partners to help fund those games, or perhaps buy the IP. That would be good for the publisher's bottom line, of course, but also possibly good news for gamers if those titles turn out to be any good.

Meanwhile, the only projects stil definitely in the works for 2009 are "Wheelman," which comes out in February, a TNA Wrestling sequel, and open world game "This is Vegas," though I have heard from sources that the latter is nowhere close to finished, so I wouldn't expect it before the second half of next year.

If Midway survives that long, anyway.

Sumner Redstone's sale of the struggling videogame publisher may have been good news for him (as good as new can be after you've lost $500 million-plus in equity) but it has made things even tougher for company management.

As diclosed in an SEC filing today (I had help understanding what it means), the change in control triggered a provision allowing holders of the "Mortal Kombat" publisher's debt notes to request payment of the principle. Given Midway's dire financial state, they're expected to so.

With only $10.3 million on hand as of Oct. 31, Midway won't be able to come up with that kind of money that fast, no matter how well "Mortal Kombat vs DC" sells (and it seems like it is selling pretty well). So the board of directors has engaged financial advisory firm Lazard to help it explore "strategic and financial alternatives" to its liquidity problems. If it can't find a new source of funding or re-negotiate its debt, looks like it will probably have to declare bankruptcy.

Mysterious private investor Mark Thomas, who bought Redstone's 87% stake, won't be any help. He will remain completely passive and won't take a seat on the board or get involvedin management.

Looks like we can expect some seroius changes at Midway by the end of January.

(I've also confirmed that beyond its $150 million in debt notes, Midway also has a $90 million credit facility with Redstone's holding company National Amusements that's still in place, along with a $40 million "factoring agreement" <basically more credit>. As part of the his convoluted purchase deal, Thomas is now participating in $70 million of that $90 million. Though it's largely irrelevant because even if Midway finds a solution to the $150 million of note, it doesn't look likely to pay back NAI or Thomas anytime soon.)

Now that Sumner Redstone has finally unloaded Midway Games, it seems like a good time to post one of my most prized possessions: a 2005 fax Redstone sent me pumping Midway stock.

As background, the billionnaire media mogul was always very aggressive in promoting Midway, especially in the year or two after he took control -- 2005 and 2006 -- when it looked like there was hope for its future. As one of the most powerful businessmen in the country, it was nigh impossible to get him on the phone for most stories. But when I or my colleagues were doing a piece about even the most jejune deal. See this story about a licensing deal with Warner Bros. to make a "Happy Feet" game, for instance.

Redstone also said in that very story, when asked whether his own Viacom would buy the publisher, ""If Viacom should choose to try buying Midway, it will have plenty of competition." I have a feeling today's $100,000 purchase is not the competition he had in mind.

So in June of 2005, I got a fax from Sumner, directly to me, sharing good news. But it's not a prized possession just because he wrote me. What I really love is the misspelling of not only my last name (perhaps understandable) but also my first name:

Some news reports, including mine at first, have reported that Midway's new owner Mark Thomas is taking on $70 million in debt. But in fact that's not the whole the story.

Midway owes $70 million to National Amusements (NAI), Sumner Redstone's investment vehicle (also a theatrical chain) through which he owned some of his stake in the "Mortal Kombat" publisher. But along with an 87% stake in Midway, Mark Thomas is also getting control of those loans. So if that debt ever gets paid back (not likely), it will go to him, not NAI.

Why is it unlikely? Well Midway has other, more pressing debts. Most notably, a $79 million convertible note due in April, as well as tens of million in long-term debt. That isn't off of Midway's books, as far as I know. So the real total is over $150 million. With very little cash on hand, red ink continuing to bleed and debt payments coming due, Thomas will still have to figure out how Midway is going to fix its books and stay in business.

(This post was edited after I re-examined some SEC docs as prompted by commenter Banker Bob)

As reader of this blog probably know already, Sumner Redstone (along with his various investment vehicles) has sold his 87% stake in Midway Games for $100,000. Over the years, the Viacom/CBS mogul has spent a good $500 million-plus accumulating that stake. Even in the annals of bad investments, that's gotta be near the top.

Of course, Midway's new majority owner doesn't just get the troubled company, which has consistently lost money over the last few years, for his $100,000. He also has to take on well over $100 million in debt (more on that in my next post). So essentially he's getting a struggling videogame publisher with very little cash on hand, no path to profitability, and a huge pile of debt to pay off. During Midway's last earnings call, senior executives admitted they had a severe liquidity problem. Though this acquisition solves some problems for Redstone (the Wall Street Journal story outlines how it the benefits to him tax-wise), it doesn't solve anything for Midway. The "Mortal Kombat" publisher still needs to raise cash to pay off its debt to National Amusements (Redstone's primary investment vehicle) by the spring, as well as find a way to get back into the black.

Who's the man taking on this very difficult task? The Journal identifies hiim as "investor Mark Thomas" and so far, I can't find out anything more about him. There are obviously a lot of guys named Mark Thomas in the world. One of my primary goals now is to figure out who he is and why he thinks hundreds of millions in debt and a struggling company is a worthwhile investment, even if it only cost $100,000.

For more on how Midway ended up in such dire straits, check out my "Midway: What Went Wrong?" story from a few weeks ago.

Update: The Wall Street Journal heard from Thomas' attorney, who described him as a "very private man" who bought Midway solely as an investment and doesn't plan to get involved in management.

My final word on the "controversy" (which consisted entirely of a few posts by me and several comments on this blog) over figuring out the fatalities and heroic brutalities in "Mortal Kombat vs DC"...

A friendly user on a Marvel message board has created incredibly useful printable guides to all the brutalities and fatalities in "MK vs DC" for both PS3 and 360, complete with separate pages depending whether you're on the left or right of your opponent. It's completely awesome and I'm going to fold it up and put it in my box along with the instruction book. In fact, I'll put it on top of the largely worthless instruction book.

Which begs the question: Why didn't Midway just include this not only handy, but necessary, guide along with its game? Or at least make all the information unlockable and easy to access in-game? They had to know we're all going to look it up on the Web and not spend hours trying every possible combination to unlock every fatality and "heroic brutality" and then memorize them. What possible purpose is served by forcing me to scour the Web for this information and then print it out myself?

It's no longer the arcade days where's it's cool to have a friend clue you in on how to pull off a fatality, or watch that awesome geek who plays the game for two hours on a single quarter do moves you never dreamed possible. The only consequence of hiding this information is to make me annoyed at Midway over what's otherwise a highly enjoyable game.

"Mortal Kombat vs DC Universe" is now officially my guilty pleasure. Not "guilty" because it's bad for you, but because I'm not really sue if it's how "good" of a game it is. It has its share or problems, as well as awesome features, but there's also something to be said when reviewing a game that it effectively provides short bursts of fun to anyone who think its cool to see Green Lantern conjuring a giant hammer to kick Jax's ass, or Superman and Sub-Zero battling to see who can freeze the other quicker.

But of course as a reviewer I have to recognize that not everyone gets a thrill out of seeing this kind of thing. Just like if I were a movie reviewer, I'd have to remember that Data's death in "Star Trek: Nemesis" won't have quite as much meaning for most people as it did for me (though I still maintain it's the most underrated "Trek" movie, but anyway...).

So, with all that in mind, I tried to convey in my review (which runs in tomorrow's Daily Variety) that "Mortal Kombat vs DC" is a solidly executed fighting game that's accessible to pretty much anyone. The kind of person who has been to Comic-Con, or wants to go, will get a much bigger kick out of all the awesome fighting moves they've never seen DC heroes pull before. People who don't think Wonder Woman lassoing Sonya Blade is all that exciting are more likely to be bothered by faults like underdetailed backgrounds, horrible voice acting, clunky menus, similar character designs (Why is Flash is just as jacked as Superman?), and the fact that new features like "Klose Kombat" rely more on luck than skill.

As I wrote in my review:

Forget depth, sophistication or anything remotely resembling logic: "Mortal Kombat vs. DC Universe" takes gamers back to the days of cheesy arcade fighting with bravado, style and an unironic sense of fun. Pitting warriors from the "Mortal Kombat" franchise against DC Comics heroes and villains is a high-concept idea that some will find ridiculous and others brilliant. But thanks to solid execution and extremely accessible, if somewhat unpolished, gameplay, it could be the holiday hit struggling publisher Midway desperately needs.

But here's a simpler way to put it: If the the title of the game defines Midway's goal, it succeeded in achieving that goal, if not quite with flying colors. It's not exactly the most ambitious goal artistically, but as I've been proving to myself with all the time I've spent playing it since I finished my review, there's nothing wrong with that.

(As indicated in the review excerpt, I also think "MK vs DC" could become a very popular Christmas present, given the T rating, the easily understandable title, and the simple gameplay. Midway could sure use the it.)

Full review: Mortal Kombat vs DC Universe

As Keith Boesky notes on his blog today, there are a lot of misleading headlines, and even some misleading reports, floating around the net about my "Midway: What went wrong?" story and post. To be direct: my sources are not saying Unreal Engine, and Epic Games, are the cause of its problems. Rather it's the decision by Midway to use UE3 for all its games, and subsequent problems adapting the code, which caused game delays and then cash flow problems.

There's an interesting little debate in the comments with my earlier post about whether it's a good or bad thing that's there's no indication in "MK vs DC" as to how to pull off a fatality or heroic brutality. After playing the game, trying everything I could think of to figure out what I was missing, and then just looking them up online, I have fallen down on the "mistake" side. Sure, back in the day it was kind of cool when someone in the arcade would tell you about the secret awesome fatality moves. But this is a game meant to be played at home. There's nobody to tell you and really no way to figure it out. Not only does the game not give you a hint, it doesn't even inform you that fatalaties and heroic brutalities exist. That's a real disservice to casual players who don't spend their time on blogs and message boards.

Those us is in the know can just find a list online (as I did here), of course. But that's the least satisfying way possible. I think in this day and age, "MK vs DC" should at the very least tell players that these moves exist and provide unlockable hints/info (I actually thought that if I finished an arcade ladder with a character, I would learn his or her fatality/brutality. That seems like a reasonable solution) I think this ties into the post I wrote two months ago about how hard it is to unlock all the songs in "Rock Band 2." I really think that when you pay $60, it shouldn't be unreasonably difficult to access most of the content in the game. It's annoying for everyone and particularly discouraging to casual players, who we're supposed to be inviting into gaming so the industry will grow.

A couple of other thoughts that occurred to me as I wrote my review, which will be posting soon:

-I understand it may be technologically prohibitive since "MK vs DC" was made with Unreal Engine 3, but it seems like a real shame that it's not available on Playstation 2. This is easily the most accessible, and broadly appealing, fighting game I've ever played. I feel like Midway could sell a lot of copies to casual players who don't own a next gen system yet.

-Poor Aquaman. He's the only major DC hero who's not in the game. Even Deathstroke is playable and honestly, how many people have heard of him? If the designers of Mortal Kombat, who managed to make a completely non-powered buffoon like the Joker an awesome character (in fact, he's my favorite), couldn't figure out what to do with Aquaman, then he really is lame. Although c'mon, am I the only who thinks it would be cool if you could summon a whale to fall on Jax's head?

So I'm basically done with everything I need for my review of "Mortal Kombat vs DC Universe." I finished the story mode (on the DC side, anyway, and checked out the MK side), did some arcade ladders, and overall had a ton of fun, way more than I expected.

Only thing left to do is try out some online kombat. So I do and as I inevitably lose match after match (reminding myself why I usually only play with friends on XBL), I realize people are pulling fatalities and "heroic brutalities" on me, but I have no idea how to do them. How could I miss that? So I peruse the game's "move list," everything in the "extras," the instruction book... nothing. How the hell are you supposed to know how to do these? Do you just try a million different combos until something works?

It's been a while since I played another "Mortal Kombat" game, and as I recall, back in the day (aka the '90s) people seemed to just know how to pull off fatalities and would tell each other. Which makes sense in an arcade, I suppose. But I'm at home, playing a T-rated game that's supposed to be accessible to the masses (and largely succeeds at being just that). And there's no indication of how I'm supposed to activate what should be one of the enjoyable details of the game. That strikes me as a problem. It seems like that's information that should be available, or at least unlockable.

Is it fair to knock the game in the review I"m planning to write tomorrow for this reason? Or am I just missing something and revealing that I'm ignorant, clueless, and possibly suffering from a low IQ?

(Yes, I could scour the Internet to find the combos, and I may do that now. But if the only way to learn finishing moves for "MK vs DC" is on message boards, something is screwy.)

I've got a story i the most recent weekly Variety that sprang out of a conversation I had with an editor where he noted how it's been widely reported what a drain Midway, and its debts to National Amusements, have been on Sumner Redstone's financial structure. What isn't as clear, he said, is "Why?" When Sumner Redstone moved to take control of Midway four years ago, the company seemed to have promise.

"Midway is clearly a second-tier producer, but it has the potential to be in the first tier, and that's what attracted me to the company," the Viacom and CBS chairman said at the time.

Clearly that promise didn't pan out. Calling Midway a "second-tier producer" today would be generous. Its market value is a pathetic $37 million, it wasn't able to recruit an experienced CEO to take the job after David Zucker was fired last winter, and its mounting debts mean it would be more expensive to buy than competitors like THQ (meaning an acquisition is very unlikely unless/until it goes through bankruptcy).

"Mortal Kombat vs. DC Universe" could sell well and the red ink could stem a bit, but Midway still has fundamental liquidity issues and no clear path to becoming a stable, profitable publisher. How did things go so very very wrong?

To find out, I spoke to several ex-employees. And while there were lots of little things, one issue popped up again and again: Midway's decision to license Unreal Engine and use it for ALL its games.

"The mistake we made was, instead of just taking the base Unreal 3 engine that 'Gears of War' was made on and building games off of that, we let our tech and product development guys try to really modify the engine to add all these diff things," one ex-employee told me. "It was a ton of new technology which they just weren’t capable of doing. It put all the games way behind schedule."

Late last week, Midway Games made a deal with National Amusements to essentially borrow up to $40 million by the end of this year by selling its accounts receivable at a discount. Back in March, it opened a credit line with National Amusements for up to $90 million. That's as much as $130 million in one year.

What's National Amusements? It's a chain of movie theaters, but it's also an investment vehicle for the Redstone family. Sumner Redstone, of course, owns about 90% of Midway's stock, either directly or indirectly. So basically, Sumner is borrowing from Sumner.

Last December the media mogul installed his daughter Shari as chairman to try and fix the beleagured company, which has consistently lost money since he took control of it in 2004 and lost a LOT of his equity value (there's a chart of its stock performance for the past five years above, courtesy of TheStreet.com).

Keep in mind that Midway is borrowing this new $40 million from NAI just to manufacture its fall slate of games ("TNA Impact," "Blitz II," and "Mortal Kombat vs. DC.") We're talking about a company so short on cash, and losing money so fast, it can't even afford to manufacture its own games. As of June 30, it had just $14.6 million in cash on hand and if it's borrowing this new money, you can safely assume that figure is down substantially in the current quarter, which ends September 30 (we'll probably get the official report in early November).

This is, quite obviously, not a sustainable business plan. Shari Redstone said in a statement last week that "Midway's lineup for this holiday season represents an important launchpad for the company to regain market leadership." And it's worth noting that Midway recently delayed "Wheelman" and "This is Vegas" into 2009. That's actually a good sign, since a truly desperate publisher would have released those games in sub-standard form just to get the quick money. But even if all five of those titles do well (unlikely, of course), Midway still has a long way to go to get back to earning consistent profits.

If that's the company's goal, though it's not really clear how they plan to get there. While Midway borrows money and cuts back on projects (such as the recently eliminated "Career Criminal" game developed with Tony Scott at the Austin studio), Shari Redstone hasn't made any moves of note since firing CEO David Zucker back in March. Matt Booty has been interim CEO for a pretty long time now.

Are they trying to sell the company? Does Shari have some bold new plan or partnership in the works that would include an infusion of talent and capital? She hasn't done any interviews since taking over, so unfortunately we don't really have any idea. But right now, all we can see is respected publisher struggling to stay afloat.

Last week Midway canceled a game at its Austin studio called "Career Criminal" that interim CEO Matt Booty described as "a large, ambitious open-world project." The publisher laid off 90 people working on the game after determining that, as Booty said in an e-mail to employees posted by Kotaku, "The resource needs, feature set, schedule and financial profile... were not converging towards a reasonable chance of success."

But there's more about "Career Criminal" that we didn't know and which I just learned today. As many gamers know, Midway has had a tendency recently of attaching Hollywood talent to its in a producer/creative consultant/guru sort of role. Look at John Woo and "Stranglehold" or Vin Diesel and the upcoming "Wheelman."

Tony Scott, who directed everything from "Top Gun" to "True Romance" to "Enemy of the State" and "Deja Vu," had a similar role for "Career Criminal." Midway, of course, never talked about this (and still has no comment when I asked a spokesperson) because it never officially announced the project.

Given Scott's record of making stylish action movies, it might have been a pretty cool game. Then again, "Stranglehold" was a fairly unique, stylish action game that just wasn't very well designed underneath its nifty Woo-esque cinematic veneer. We'll never know whether "Career Criminal" would have had the same problems or finally managed to successfully combine a filmmaker's signature style with high quality gameplay.

Of all the news, such as it was, coming out of Midway's "gamer day" (when the videogame press gets shown all the stuff that the publisher wants to feed to the media in one fell swoop so that everybody writes big stories at the same time), I was most surprised and excited by "Mortal Kombat vs. DC." Superman, Batman, Scorpion, Subzero, and (we can assume) all the other favorites kicking each others' asses sounds cool, even if there won't be fatalities.

This is, of course, Mortal Kombat's answer to Marvel. vs. Capcom, where Spider-Man and Captain America et al took on the "Street Figher" crew. But as a long-time comic book geek, these games make me more wistful than excited. Sure, seeing Batman try to take down Subzero could be cool. But what I REALLY want to see is Superman vs. the Hulk. Or Batman vs. Spider-Man. And so on and so on.

Fanboys have engaged in innumerable arguments about who which superhero characters would win in a fight. I am pretty sure that nobody has ever had a serious discussion about whether Batman could kick Scorpion's ass. Nobody really cares. Can anyone honestly tell me that a "DC vs. Marvel" fighting game wouldn't be millions of fanboys' wet dream and a guaranteed best seller?

Both comic publishers have various video game deals worked out that might make such a combination difficult, of course. But there have been several DC vs. Marvel comic books, so I've got to believe that with enough time and effort, they could make it happen. And I'm sure any sane videogame publisher would bid millions for the honor of putting out that surefire hit.

So, enjoy this teaser trailer for "DC vs. MK." But if you're like me, you'll watch it and wish for the ultimate super-hero game that needs to happen.

This one isn't exactly a surprise to those following Midway lately: CEO David Zucker was shown the door today after years of big losses and no revenue growth. (Read the whole story here.)

Sumner Redstone, who owns 87% of Midway, can't be happy with the returns he has seen since buying the company in 2004. His daughter Shari, who took over as chairman late last year in a little noticed corporate coup, didn't mince words in a statement announcing Zucker's departure. None of that "David has done a great job but has achieved his goals and wants to spend more time with his family" claptrap we usually get when someone gets fired. As far as press releases go, this is pretty much as harsh as statements go in my experience:

"Dynamic new leadership is needed to bring Midway to its full potential,” said Shari Redstone, Chair of the Board. “I believe that Midway has the resources and creative capability to once again be competitive with the best in the videogame business. The Board is confident that a new CEO will be selected who can fully utilize the opportunities presented by this next-generation console cycle to renew Midway’s position as a major player in the videogame industry.”

Here are some rough stats I calculated that show just how badly Midway has done for Redstone since he acquired it:

-Midway's net losses since 2004: about $300 million

-Revenue growth from 2004 through 2007: -3%

-Increase in net loss from 2004 through 2007: +399%

-Change in Midway stock value from the day Redstone took over through today: -79%

-Loss in equity value for Sumner Redstone: Over $500 million (this is a very conservative estimate given that Redstone's exact stock ownership has fluctuated over the years)

While the company has done OK with franchises like "Mortal Kombat" and "NBA Ballers," it has been plagued by delays and seen some significant disappointments, most recently "John Woo Presents Stranglehold" and "Unreal Tournament III."

Probably not what Sumner Redstone had in mind when he took control of Midway in April 2004 and said "Midway is clearly a second-tier producer, but it has the potential to be in the first tier, and that's what attracted me to the company. You're going to see an enormous infusion of talent in the very near future."

I should note, by the way, that in all my interviews with him, Zucker always seemed like a smart guy. I would suspect he has an interesting story to tell about what went wrong at Midway, though who knows if we'll ever heard it.

While Midway's board (basically, Sumner and Shari and those they approve of) search for a new CEO, the company has appointed senior VP of worldwide studios Matt Booty as interim CEO. Wondering about his gamer credentials? The photo on the right is the one he uses for his corporate bio on the Midway website.

Or maybe not. But it's pretty odd that Midway rescheduled its earnings report today... the same day it was supposed to report earnings. In fact, the re-sked happened at 6:40 PM, several hours after Midway had said it would release its financial performance for the crucial fourth quarter, aka the holidays.

Now it's possible that there was just a last minute screw-up and nothing more. But I'm a little suspicious, since in my several years of covering earnings for dozens of different public companies, I've never seen one just not report on the day they were supposed to and then announce, at 6:40 PM, that it's coming in three days. Which leads me to think that perhaps Midway's dealing with some really bad numbers from the holidays. Or maybe there's some big deal it wants to includew with its earnings report it's just concluding right now.

Whatever the reason, we'll find out on Thursday.

Looks like I'm not the only one who thinks that EA's bid for Take-Two signifies a period of consolidation coming to the videogame business. Take a look at the performance of several small and mid-sized publishers' stocks Monday, none of whom had any news of their own:

THQ: Up 10% to $9.65

Midway: Up 7% to $2.19

Atari: Up 13% to $1.61

Anybody want to take bets on how many of those companies, along with some European publishers like Eidos and maybe even Ubisoft, will still be independent a year from now?