The slumping economy has yesterday forced video game-maker Midway Games Inc into seeking bankruptcy protection from creditors, the culmination of a chain of events that started when a private investor bought a majority stake in the Chicago-based company last year. That investor appears to be a major beneficiary of Midway's reorganisation.
Midway, the creator of the long-running "Mortal Kombat" franchise, filed Chapter 11 documents in US Bankruptcy Court in Delaware. The company listed assets of $167.5 million and debt of $281 million as of 30 September. Nine affiliates also sought protection. Operations outside of the US were unaffected. The company said it expects to conduct business as normal during the reorganization.
The road to bankruptcy began at the beginning of December, when media magnate Sumner Redstone sold his 87 per cent stake in Midway to Mark Thomas for $100,000 and $70 million in debt. The debt Thomas assumed puts him in an enviable position compared with other creditors. (See: Viacom promoter Sumner Redstone sells controlling stake in Midway Games to ease debt pressures)
The change in ownership triggered provisions in two series of Midway convertible bonds that allowed creditors to request full repayment. The company warned in early December that it couldn't cover those obligations if all of its bondholders asked for accelerated repayment. Midway's bondholders agreed to waivers on the repayment. But one of those extensions was set to expire Thursday and the other on 19 February.
The $70 million in debt that Thomas assumed consists of a $30 million secured claim and a $40 million unsecured loan, according to the bankruptcy documents and a filing that Midway made Thursday to the Securities and Exchange Commission. Thomas holds the lone secured claim, putting him in front of the company's unsecured creditors. Thomas' $40 million loan is listed as the third-largest unsecured claim, behind the two series of convertible bonds.
Midway's other unsecured creditors include New York-based Acquisition Holdings Subsidiary LLC, with a claim of $40 million; NBA Properties Inc., based in Newark, New Jersey, with a claim of $17.3 million; and Warner Bros. Interactive, with a claim of $6.6 million.
''We have been focused on realigning our operations and improving our execution, and this filing will relieve the immediate pressure from our creditors and provide us time for an orderly exploration of our strategic alternatives,'' CEO Matt Booty said in a statement.
The bankruptcy comes as the video-game industry grapples with the slumping economy and the success of Nintendo Co.'s Wii. Electronic Arts Inc. and THQ Inc. have announced job cuts and studio closings to reduce costs. Activision yesterday issued a profit outlook below analyst estimates after US consumer spending fell for six straight months through December. (See: Recession forces video games publisher Electronic Arts to cut 1,000 jobs)
Midway's shares closed down 36 per cent, at 16 cents. The New York Stock Exchange suspended the company's stock Thursday in light of the bankruptcy filing. Before that, the company was in danger of delisting because of its low closing price and market capitalisation.