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38 Studios Bankruptcy: Executives Say Tax Credits Could have Saved Company

Wednesday, July 11, 2012

 

The President of Curt Schilling’s defunct video game company told a federal bankruptcy court that the company could have survived had the state signed off on tax credits, according to media reports filed from the bankruptcy hearing today in Wilmington, Del.

William Thomas, who also served as the Chief Operating Officer for 38 Studios, told the court that potential private investors backed away after the state refused to offer $5 million in tax credits several months ago. Schilling has long blamed Governor Chafee for scaring off investors when he said the state was just trying to keep the company “solvent” in May.

38 Studios had received initial certification for $14.3 million in tax credits, but the state balked after the company’s financial problems came to light. Even though the tax credits were never issued, Providence lawyer Michael Corso had already pledged the entire lot as collateral for an $8.5 million BankRI loan in January.

Corso’s name came up during the bankruptcy hearing when 38 Studios representatives were asked who he is and why he was wired $232,000 on March 30, just over two months before the company filed bankruptcy, according to Boston Globe reporter Todd Wallack.

Court documents show the company owes over $150 million to more than 1,000 creditors and has less than $22 million in assets. The state is the largest secured creditor at $115.9 million and Corso is the largest unsecured creditor at over $11 million.

According to WPRI, Thomas and Rick Wester, the company’s former Chief Financial Officer, indicated that a local investor was willing to loan the company $15 million as late as June if the state signed off on tax credits. It is unclear who that investor was, but Michael Sweeney, a Providence lawyer who headed up a group of five Rhode Islanders who loaned 38 Studios funds in 2009, told GoLocalProv he was not involved.

Thomas and Wester also acknowledged that the company's first game, “Kingdoms of Amalur: Reckoning," was not as successful as Schilling has said in the past. The game sold about 1.3 million copies and the company was expecting close to 2 million copies to be sold. Governor Chafee has characterized the game as a "flop," but Schilling always said that it outperformed expectations.

38 Studios received a $75 million loan guarantee from the state’s Economic Development Corporation (EDC) to come to Rhode Island in 2010. The controversial deal was made possible after the General Assembly jammed through legislation that allowed the EDC’s Job Creation Guaranty Program to expand from $50 million to $125 million.

The company filed for bankruptcy in June several weeks after laying off all of its employees in both its Providence and Baltimore offices. The company’s financial problems came to light after it defaulted on a $1.125 million payment due to the EDC on May 1.

 

Dan McGowan can be reached at [email protected].

 

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Comments:

NOT EVEN BATMAN, SUPERMAN OR wONDER WOMAN COULD HAVE SAVED THIS OJT BUSINESS

Comment #1 by louis rizzo on 2012 07 11

You never know, maybe, just maybe it could have been saved, we will never know.
The Gov didn't do anything to help at the 11th hour; I suspect he didn't want to be part of another loser. A guy like him has no experience in what it takes to turn around a company, so nothing gained with him.
All second guessing now.
Let's see if they can charge some of the insider guys that set up the deal to fail but pulled out a bundle for themselves, fat chance in little crocked RI.

Comment #2 by Gary Arnold on 2012 07 11

38 Studios piled up debt faster than Chafee's and Whitehouse's kids can down a six-pack.

Does anyone really believe that government tax credits could "save" this company? Whenever ever a company's management says their organization's very survival was dependent on a government program, it is clear that the company was not going to survive.

Comment #3 by Todd B on 2012 07 11

From everything that's been reported, it appears that, in fact, 38 Studios could have been saved (along with 300-400 jobs).
Gov. Chafee's public comments early on were puzzling (more so than normal) and it quickly became clear that he wasn't focused on doing everything possible to save this business.
Malfeasance does not seem to be an issue here although misfeasance is possible. Can't quarrel with the fact that almost 1.5 million units of the first production were sold. It looks as if Chafee & the State of RI were just looking for a reason to deny the tax credits that "38" originally qualified for. Looks as if someone has some "splainin to do."

Comment #4 by Harold Stassen on 2012 07 11

@Harold: Yes, 38 Studios sold 1.5M copies of its first game. Too bad their projections called for them to sell 2M copies.

Oh yeah and 38 Studios is a Delaware company (which is why the bankruptcy proceeding are in Delaware). The RI film tax credits are for RI companies, so 38 Studios may not have been legally eligible for them anyway.

Say what you will about Chafee, but he was right on this one.

Comment #5 by Todd B on 2012 07 11

@Todd B.
Recognize the corporation issue which state officials should have been aware of before promising the tax credits. Does anyone honestly believe "38" would have incorporated in DE if they knew it would negate the possibility of receiving the credits?

There have been several credible reports that private investors were in fact committed to providing a significant capital infusion, which may well have kept "38" on a cash basis going forward until the next game was ready for distribution. Point being, state EDC officials and the Governor seemed to be sending multiple mixed messages (the so-called "insufficient" check that really wasn't). Again, it seems officials were more intent on undermining the company's credibility than working towards a solution. That's my impression anyway.

Comment #6 by Harold Stassen on 2012 07 11

Given a choice between believing Chafee, or believing the company officials, I'll believe the officials. I don't really care what you Democrays think.

Comment #7 by Michael Trenn on 2012 07 11

Tax credits would have simply postponed the inevitable. Gov. Gump was right in doing what he did. This company was doomed from the start.

Comment #8 by Edward Smith on 2012 07 12




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