digital media

38 Studios back in default

BLOOMBERG FILE PHOTO/TONY AVELAR
VIDEO GAME DEVELOPER 38 Studios is back in default on its $75 million loan deal with the R.I. Economic Development Corporation, according to Gov. Lincoln D. Chafee, for not providing enough notice when it laid off its nearly 400 workers this week.
Posted 5/25/12

PROVIDENCE – Gov. Lincoln D. Chafee said Friday afternoon that 38 Studios LLC, the embattled video game developer founded by former Boston Red Sox pitcher Curt Schilling, was back in default on its $75 million loan guarantee deal with the state.

During a press conference, Chafee said that while the company had worked its way out of default after it made a $1.1 million payment to the state a week ago (more than two weeks after it was due), the company had violated the terms of the loan agreement by not giving its employees or the government 30 days notice when it laid off the entire workforce earlier this week.

The default makes 38 Studios ineligible for up to $14 million in state film tax credits the company has applied for and has been trying to pre-sell to investors this spring.

Pressed by reporters about why the R.I. Economic Development Corporation, which he chairs, waived a requirement that third-party monitor IBM provide written reports to the state about 38 Studios, Chafee said EDC Executive Director Keith W. Stokes had made the change without telling him or the rest of the board. He said 38 Studios had asked for the reports to be made orally to prevent sensitive information from being seen or leaked while in state offices.

38 Studio’s problems came to light in the last two weeks, after the company missed the May 1 deadline for what amounts to a loan preparation fee to the state. Since then, Stokes, who had worked out the details of the deal at the behest of then-Gov. Donald L. Carcieri, has resigned from the EDC and Jennifer MacLean, the CEO of 38 Studios, has resigned after initially taking maternity leave.

In addition, CVS Caremark Corp. Executive Vice President Helena B. Foulkes has stepped down from her position as vice chairwoman of the EDC, a position that Chafee had appointed her to.

Chafee has also talked with board members Stephen Lane, the founder of medical device maker Ximedica and J.L. “Lynn” Singleton, the president of the Providence Performing Arts Center, but meither has agreed to leave yet. The governor asked for the resignation of George Nee, the president of the Rhode Island AFL-CIO, but he has refused to step down. He also has said he will not reappoint Dr. Timothy J. Babineau, president and CEO of Rhode Island Hospital and Hasbro Children’s Hospital, to the board, as well as Collette Vacations President and CEO Daniel J. Sullivan Jr., whose terms have expired.

Chafee said that the state will perform a forensic audit on 38 Studios, adding that he believed that the company’s books were secure, although he added that the state could not confirm how much of his own money that founder Schilling had currently invested in the company, nor whether he used proceeds from the loan guarantee bonds to repay his early investments in the company.

While no third-party investors have come forward since the revelation of the firm’s financial difficulties, Chafee said that he was still looking for outside capital, although he was pessimistic about the prospects of attracting anyone to invest at this point.

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