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Monday, several stories seizing on a blog post from Gawker Media’s Kotaku suggested struggling Midway Games (MWY) might be in the process of selling off its Mortal Kombat game franchise. Several of the articles (on the basis of part of the story, as well) also went so far as to attack the company for pursuing a key-personnel incentive plan at the same time the bankrupt company appears to be cutting back payouts to laid-off staff.

The stories paint a grim picture of the company’s practices and it’s easy to join the chorus of castigation. Unfortunately, headlines sometimes oversell their news story and news stories sometimes under-emphasize all of the facts. Here, however questionable some of what’s happening at Midway may (or may not ) be, review of the company’s bankruptcy filings, which are embedded or linked below, shows the situation is more complicated and far less definitive than many of the reports suggested.

First and most importantly, contrary to suggestion, the Incentive Plan (which provides for $3,775,000 to be set aside to pay incentives to up to 29 employees on the completion of three milestones) is not active. While endorsed by the company, it has not been approved and set in place. Money hasn’t been “set aside.” Midway provided the Bankruptcy Court with a copy of the plan as a proposal on February 23rd (see embedded file below) and requested creditors voice their objections (if any) by March 3rd. A hearing was tentatively scheduled for March 10th. At this point, there’s no guarantee creditors will agree to the plan as written (or at all), or that the Bankruptcy Court will approve its implementation.

Should the plan go through, that’s a different story. In that case, some of the venom spit Midway’s way may be more fitting, but even then there are looming questions. It could be argued, for instance, that the proposed plan does serve a legitimate purpose.

There is no question the company is in trouble. It owes hundreds of millions in debt to creditors and doesn’t have the cash to pay them back. It remains a real possibility that the company won’t survive bankruptcy. So, is there reason for staff to stay on the sinking ship if they can find a more secure opportunity? There may not be. The incentive plan, at least theoretically, could change that. It could be a useful retention tool to keep people around who have skills useful in either salvaging the company, or worst case scenario, salvaging its assets.

Another issue: the suggestion that the plan aims to pay management while staffers are getting stiffed isn’t proven. Evidence of changed payment plans for accrued PTO that’s shown in exhibits to Kotaku’s article, and also mentioned in an article a week ago on Joystick, only supports one half of that claim – it shows employees may be getting hosed on some of their benefits (the court has authorized many employee benefit payments (PDF file).

The other side of the argument, the evidence of self-dealing - that’s not so obvious. There are no disclosures in the court filings that show who would receive the payments under the plan. It’s possibly lopsided but the facts aren’t there to prove it. As written, anybody at the company could benefit.

(UPDATE: the company says, “The 29 employees do include some corporate officers, but there are other employees from all levels and all departments -including finance, IT, legal, marketing – from all over the place…These are all people whose workloads have increased since the bankruptcy, and this is to incentivize them." via Gamespot)

Ultimately, Midway’s a troubled company trying to navigate the rough waters of bankruptcy. Not everything it will do is going to be fair, clean, or smart. And sadly, many of its moves may even be the opposite. That said, the facts in the filings paint a different picture than some of what’s been printed.

So now Mortal Kombat… Asset Sale? No Sale? It’s another game of interpreting legalese. (see below for the court filing).

The same incentive plan proposal specifically calls out the company’s Mortal Kombat assets. The plan provides for $3,775,000 to be set aside to pay out to up to 29 employees for the completion of three milestones. Milestones two and three address the game franchise.

In milestone number two, $1,292,500 is allocated for either (i) the 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.

In milestone number three, $1,965,000 is set aside for whichever happens first (i) approval of a plan of reorganization or liquidation or (ii) closing of a sale of Midway’s Mortal Kombat franchise assets.

Both of the milestones are worded as contingencies (see the embedded PDF below, page 16 of 26). They don’t say the company is looking to sell its top franchise. Insead, they say essentially, “the plan is a way to give staff an incentive to salvage the assets if it turns out they can’t salvage the company.”

(Note: The first milestone calls for payment of $497,500 in bonuses if Midway reached a distribution/publication agreement for its Wheelman title that would earn the company $6m or more by March 1st . Midway struck an agreement with Ubisoft in mid February over this title but the financial payout (according to Midway) will vary based on when Midway delivers the game. The incentive is to push for rapid delivery.)

At this stage, it’s still early. The likelihood remains that Midway will try and recapitalize, convert debt to equity, and come out of bankruptcy as a new company (presumably privately held). Recent sales of its Mortal Kombat vs. DC Universe title, estimated now at around 2m units, will likely help that cause. Still, the fate of Midway remains with the court and creditors.

[Metue.com has sourced many of the legal documents relating to the case. Midway’s Filing Regarding the Incentive Plan is embedded below. For the original bankruptcy filing see here. For Midway’s petition to pay out benefits and the Court’s approval see here (PDF file) and here (PDF file)].

Source: Midway Games' Bankruptcy: More to the Story than Meets the Press