38 Studios’ finances under scrutiny; RI taxpayers’ $75M at riskMay 14th, 2012 at 7:57 pm by Ted Nesi under Nesi's Notes, On the Main Site
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.
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:
- RI taxpayers actually on the hook for $112.6M with 38 Studios (May 15)
- Robitaille: 38 Studios lesson is don’t pick winners and losers (May 15)
- 38 Studios debut ‘Reckoning’ sells 80,000 in March; out of top 10 (April 18)
- Schilling praises ‘pure motives’ of RI pols to Fox News’ Hannity (March 21)
- Schilling game backed by RI taxpayers is high-risk, high-reward (Aug. 3, 2010)
- Rhode Island EDC OK’d $75M Schilling deal without final rules (July 27, 2010)
This story has been updated and expanded.
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