The troubled video game company founded by retired Red Sox pitcher Curt Schilling, 38 Studios LLC, filed for Chapter 7 bankruptcy Thursday, leaving behind more than 1,000 unpaid creditors as government officials confirmed they launched criminal investigations this week into the company’s failure.
Game is only just beginning.
The Delaware court filing signals that Schilling, who set out to build an ambitious multiplayer online role-playing game, has given up his search for additional capital from Rhode Island or outside investors to revive the six-year-old company. Chapter 7 is the section of the bankruptcy code that companies use when they are liquidating assets.
“It’s a decision by the management and the owners to essentially
throw in the towel,” said David Reier, a bankruptcy lawyer with Boston
law firm Posternak Blankstein & Lund.
In a brief statement, 38 Studios said it was “unable to find a solution to the current stalemate” after negotiating with the state, potential investors, and others.
The bankruptcy filing also confirms fears that Rhode Island taxpayers could be out tens of millions of dollars the state used to lure the company from Maynard, Mass., to Providence. The state guaranteed a $75 million loan to the company in exchange for 38 Studios’s promise to create 450 jobs in the Ocean State. The company laid off its entire staff — more than 400 full-time workers in Maryland and Rhode Island — two weeks ago.
The Rhode Island Economic Development Corp. appears to be the company’s largest creditor, according to the court filings. 38 Studios said it owed the agency $115.9 million, including interest and other payments over the life of the loan — though that’s partially offset by more than $23 million the state held back in reserve and any money recovered from the sale of 38 Studios’s remaining assets. The agency is likely to be among the first in line to be repaid from any of the company’s assets.
Governor Lincoln Chafee said Thursday at a press conference that the state already has had discussions with investors who might be interested in purchasing the remaining assets for tens of millions of dollars, which would help the state recoup at least part of its investment.
An attorney working for Chafee, Jonathan Savage, said, “There could be significant value to the assets.”
I was told earlier not.
Meanwhile, state and federal authorities launched several investigations into the company this week amid questions about 38 Studios’ attempts to obtain and sell millions of dollars in tax credits, its failure to pay hundreds of workers, and the disposition of tens of millions of dollars in government-backed loans. The head of the Rhode Island State Police said his agency launched a joint inquiry on Wednesday with the Rhode Island attorney general, the FBI, and the US attorney’s office....
Mike Breault, a former narrative designer for the company, said he and other workers have already filed complaints with the state to try to recover unpaid wages. The company reported in its bankruptcy filing that it owed workers more than $2 million in unpaid wages and vacation time.
“That is, as far as I know, our only hope of seeing any payment,” said Breault, who is searching for a new job.
Related: Epic Games will hire some 38 Studios employees
In addition, about a halfdozen employees could also be on the hook for an additional home mortgage because of the company’s demise....
Schilling, who owned 82.9 percent of the company, told The Providence Journal last month that he poured $38 million of his own money into 38 Studios and had guaranteed another $12 million in loans. “If this company fails, I will be financially devastated,” Schilling told the Providence paper.
Big Schill doesn't deserve that.
Related: Curt Schilling put up $5m in gold as collateral for loan
The bankruptcy filing shows he didn’t draw a salary, but 38 Studios paid for his health care policy and spent more than $39,000 for his business travel expenses in the past year.
Industry executives said they weren’t surprised by the bankruptcy filing because the company focused on expensive, elaborate online games, which are often delayed, scrapped, or fail to connect with customers.
Michael J. Cavaretta, a lawyer who represents local video game companies, said the deal that brought Schilling’s company to Rhode Island may have intensified its problems because it required 38 Studios to continue to add jobs, as it ran low on cash.
“Massively multiplayer online games are very, very difficult,” said Cavaretta, a partner at Morse, Barnes-Brown & Pendleton in Waltham. “Games like World of Warcraft and Lord of the Rings Online have pretty much tied up the category, and they’re extremely expensive to produce.”
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Related: Rhode Island Rip-Off
Rhode Island Reset
"38 Studios’ troubles could cool gaming tax breaks" by Todd Wallack | Globe Staff, June 03, 2012
Utah offered Walt Disney Co. more than $5 million to bring hundreds of video game jobs to the state. Louisiana is spending $29 million on a new digital media center that would provide space for game publisher Electronic Arts. And about 20 states — from Michigan to Maine — offer tax incentives to any video game companies that qualify.
How many cops, firefighters, and teachers are they laying off?
It turns out Rhode Island’s $75 million loan guarantee to entice former Red Sox ace Curt Schilling to move his video game company from Maynard to Providence was just an outsized example of efforts across the country to establish their own video game clusters. The field is particularly attractive because the industry is growing rapidly, the jobs carry high salaries, and the sector offers a dash of glamour.
“There’s a tremendous amount of competition for these jobs because
they are really great jobs,” said Timothy Loew, executive director of
the Massachusetts Digital Games Institute in Worcester, also known as
MassDiGI, the collaborative which was founded last year to support the
industry.
Massachusetts State Representative John Mahoney, the Worcester Democrat who has been leading the charge in the Legislature to create incentives for the video game industry in the state, has proposed expanding the controversial film tax incentive program to include video game companies — similar to the approach used in Rhode Island and many other states.
See: Massachusetts Lets Hollywood Roll Credits
Looks to me like you are the one getting rolled, taxpayers.
If approved, the legislation would allow video game companies to receive $1 from the state in tax credits for every $4 they spend making video games. Companies would then be free to sell the credits to other companies or back to the state to convert them to cash.
Is that a good use of tax dollars?
But while the program has helped Massachusetts attract dozens of major films and created hundreds of jobs, many economists and watchdogs have blasted it because of the size of the subsidies.
The Department of Revenue recently estimated the film tax program generates only about a 13 cents in tax revenue for every $1 given up.
That DOESN'T LOOK LIKE a GOOD DEAL to ME!
And over the past five years, it has cost more than $142,000 per full-time job for Massachusetts residents per year, the agency found. Critics say such programs are just as costly when applied to video games.
“It’s a big subsidy,” said Nick Kasprak, an analyst at the Tax Foundation, a nonprofit research group in Washington, D.C. “We’ve consistently found that the benefits are way overstated and they hardly ever [accomplish] what people say they will.”
Massachusetts officials have become increasingly concerned about the growth of tax deductions, credits, and exceptions. A special commission recently recommended the state reduce the number of exemptions and more carefully review the effectiveness of new ones.
“Taxpayers are already paying a tremendous amount for all these tax breaks,” said Representative Jay Kaufman, the Lexington Democrat who cochairs the Legislature’s Joint Committee on Revenue. “I’m very cautious about extending any new ones.”
Even without the incentives, Massachusetts already has a growing video game cluster....
The industry also has support from a swath of venture capitalists in the region and an array of college programs dedicated to training workers for the industry, including the Massachusetts Institute of Technology, Northeastern University, Worcester Polytechnic Institute, Becker College, and Bunker Hill Community College.
But industry advocates insist they need further support from government to help encourage graduates to stay in Massachusetts — particularly with fierce competition from other states.
“If we can’t get ahead of the curve and build our capacity to absorb all these students into the workforce, we are going to lose them to other states,” said Loew of MassDiGI, noting the state has steadily lost talented workers over the years, including successful entrepreneurs like Facebook founder Mark Zuckerberg. “We want to stay on the right side of history here. We want our fair share of these jobs.”
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