38 Studios’ finances under scrutiny; RI taxpayers’ $75M at risk

New: Schilling’s 38 Studios defaults; EDC calls emergency meeting (May 15)

By Ted Nesi and Steve Nielsen

PROVIDENCE, R.I. (WPRI) – The situation at 38 Studios is raising alarm bells at the State House.

While details remain sketchy, reports began emerging late Monday that the governor’s staff has been meeting for days with the video game company, founded by former Red Sox ace Curt Schilling. Sources told WPRI.com red flags have been raised about its finances but they declined to provide details on the record.

“We’re concerned and just doing everything possible to ensure that 38 Studios stays part of the Rhode Island community,” Governor Chafee told WPRI.com on Monday night. “We’re working on different issues with them.” Asked whether he thinks 38 Studios can be stabilized, Chafee paused and said: “We’re working on it.”

The R.I. Economic Development Corporation gave 38 Studios a $75 million taxpayer-backed loan in 2010 with the strong backing of EDC Executive Director Keith Stokes and then-Governor Carcieri. In exchange the company moved its headquarters from Massachusetts to Providence in April 2011 and pledged to employ 450 here.

38 Studios had received $49.8 million in cash from the loan as of March 15, according to a disclosure notice the company sent to bondholders that was obtained by WPRI.com. Another $23.4 million was put into a Capital Reserve Fund and a Capitalized Interest Account, with the rest used to pay for floating the bonds.

It’s not the first time concerns have been raised about 38 Studios’ finances.

‘Substantial doubt’ about company

Last June, PricewaterhouseCoopers audited 38 Studios and issued a “going concern” opinion that expressed “substantial doubt” about whether the company would be able to stay solvent, the disclosure filing said.

38 Studios released its first game – “Kingdoms of Amalur: Reckoning” – in February to positive reviews and decent sales. But the taxpayer-backed loan is actually funding its other project – “Project Copernicus,” a massively multiplayer online game that was first targeted at a September release but has remained under wraps.

The questions about whether “Copernicus” remains on track – and whether Rhode Island’s investment is secure – grew in recent days after 38 Studios was removed from the list of companies scheduled to present at next month’s Electronic Entertainment Expo in Los Angeles, one of the gaming industry’s biggest events of the year. The EDC hired IBM in 2010 to provide ongoing third-party monitoring of 38 Studios’ progress.

A spokesman for 38 Studios was not immediately available for comment. EDC board member George Nee said he has heard there are problems but has not been briefed on them. EDC spokeswoman Judy Chong told WPRI.com: “I do not have information for you at this time.” Treasurer Raimondo’s office is not involved in the deal.

288 employees in Rhode Island

The disclosure notice said 38 Studios employed 379 full-time workers as of March 15, with 288 of them in Providence and the rest at its other studio in Maryland. The company also reported 34 full-time contractors and eight interns. The company listed 18 job openings on its website as of Monday evening.

“Together, these studios are developing an original fantasy story that takes place in a vast world over thousands of years,” the company told bondholders in the disclosure filing.

It’s unclear whether rank-and-file employees at the company are aware of its financial problems. The company has never held a ribbon-cutting ceremony at its new One Empire Plaza headquarters in Providence, though Mayor Angel Taveras visited the firm.

“It’s always been a volatile industry to be in,” Chafee, who opposed the deal as a candidate for governor, told WPRI.com. “That’s just the risk you take when you get into the business.”

Schilling is paid back

Wells Fargo and Barclays handled the $75 million bond transaction for the EDC and 38 Studios by selling three tranches of bonds on Nov. 2, 2010, to a group of investors that included insurance companies, asset managers, money managers and a community bank, according to the agency.

The $23.685 million first bond tranche matures in 2015 at a 6% interest rate; the $8.86 million second bond tranche matures in 2016 at a 6.75% interest rate; and the $42.455 million third bond tranche matures in 2020 at a 7.75% interest rate. Biannual interest payments are due on May 1 and Nov. 1 until the bonds are paid off.

In July 2010, the same month the EDC approved the loan guarantee, 38 Studios established a revolving line of credit secured by Schilling so it could borrow up to $4 million from him, according to the disclosure filing obtained by WPRI.com. Part of the taxpayer-guaranteed loan money was used to pay the line of credit back.

R.A. Salvatore, a fantasy writer who helped develop the games, is slated to receive $1.46 million from 38 Studios in October under the terms of a consulting agreement he signed with the company in 2007. He is also eligible to earn up to $5 million in royalties from sales of “Reckoning” and other 38 Studios products.

The General Assembly increased the size of the Job Creation Guaranty Program from $50 million to $125 million in early 2010 after Schilling approached the state. A WPRI 12 poll later that year showed 54% of Rhode Island voters opposed the $75 million loan guarantee to 38 Studios, with just 28% in favor of the deal.

Schilling, who is an ESPN analyst as well as 38 Studios’ chairman, founded the company in August 2006.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

An earlier version of this story said the 2010 line of credit was from Schilling; it was from a bank and secured by Schilling.

More 38 Studios coverage on WPRI.com:

This story has been updated and expanded.

55 thoughts on “38 Studios’ finances under scrutiny; RI taxpayers’ $75M at risk

  1. Ted, what does this mean? Is it has been transferred? If so what does that mean?

    Did they move the money out of state?

    I hate to say so but I said so. The EDC is a scam.

    “The Providence Journal reported the company had been transferred its entire $47.4 million cash payout from the loan as of mid-February. A bond payment was due on May 1, and its agreement with the EDC calls for other payments to be made, as well.”

  2. Sounds like the brains are in Maryland and the grunts are in Rhode Island. Another scam, if you people want to grow jobs lower taxes for all businesses instead of select businesses. Next elminate zoning to build quality housing stock and elminate the triple deckers. Last people who start businesses want an educated workforce, Rhode Island public schools sucks and do a job of educating the kids, except to work in some dump on Federal Hill waiting tables.

    • Ed you’re quite wrong. The Maryland office was an independent developer, Big Huge Games, that 38 acquired to get the property that became Amalur and the talented personnel working on it. 38 has always been headquartered in New England.

      The video game industry is highly volatile and risky. Whether or not I agree with RI giving 38 the loan, we should hope that the company is able to release its MMO. I imagine that their projections have declined since the disappointing subscriber numbers of EA’s Old Republic.

      • Alex I maybe wrong about the Maryland operation but the rest of what I stated is very accurate. This what is needed now! If you people want to grow jobs lower taxes for all businesses instead of select businesses. Next elminate zoning to build quality housing stock and elminate the triple deckers. Last people who start businesses want an educated workforce, Rhode Island public schools sucks and do a job of educating the kids, except to work in some dump on Federal Hill waiting tables.

  3. Curt Schilling should have to pay Rhode Island back every cent; this deal should never have happened and we all know it.

    • Curt Schilling would’ve been the world’s dumbest business man not to take this deal. MMO developers always operate in the red while developing the game. The average top quality video game takes 1.5 to 3 years to develop and about 20 million. The average triple A MMO takes 4 to 6 years and 75 – 100 million to develop.

      The fault here lies solely with the State of Rhode Island’s government. They did not do their due diligence in setting up this deal. They either didn’t research, or completely ignored, the risky nature of the video game industry, especially the MMO genre. For every success like World of Warcraft, there are twenty Star Trek Onlines.

      Also, putting a guarantee on 450 new jobs was laughable. The transient nature of the gaming industry’s employment really wouldn’t cater to that. At certain points in development they will need more story writers, later on the writing team will be paired down and the programming team will be built up. Later, testers will brought on, and as the game nears completion, the programming team will be paired down to essential personnel.

      This loan would’ve been jumped at by any gaming company CEO. People are only going off because it’s the cool thing to bash Curt Schilling. Be angry at the real jerks here and vote them out of office.

  4. Months ago many of us came to these pages to voice our outrage at what appeared to be a scandal in the making. A vociferous few calling for these crooks to be sent to jail when this ” deal” turned sour. Let’s see what becomes of this predicted failure. Carcieri is off somewhere counting the dough and grinning like a cheshire cat, while we the taxpayers who are on the verge of getting stuck with an enormous bill, can only shake our fists and repeat ” I told you so” If past is prologue, no one will go to jail and the citizens of RI will be screwed again by our elected officials who like cockroaches will scurry when the light of an investigation is shown in the hallways of the State Capitol !

  5. This money could have completely eliminated the unfunded pension liability in Central Falls (with $30 million to spare) or those in Bristol, Cumberland, Jamestown, Lincoln, Little Compton, Middletown, Tiverton, and Westerly combined.

    • Actually with the updated numbers, the money could have paid off Central Falls AND all of the following communities: Bristol, Cumberland, Jamestown, Lincoln, Little Compton, Middletown, Tiverton, and Westerly

  6. Did our taxpayers get to vote on this? A red sox player just screwed our state and yet again our govenment employees who decided on this risky plan should take a demotion, literally!!!

  7. Take the money from the retirement fund to pay off so tax payers are whole. Then don’t pay it back. Just “reform” the state workers pension again. Ms. Raimondo is probably already on this. Isn’t this how it’s done in RI?

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