Thursday, August 23, 2012

Rhode Island deal with Schilling's 38 Studios focused mostly on hoped for job creation in state with 2nd highest unemployment

Rhode Island "has the country's second-highest unemployment rate."... "The government deal that guaranteed a $75 million loan for former baseball star Curt Schilling's video game company focused almost exclusively on how quickly the firm would bring jobs to Rhode Island and overlooked requirements for attracting outside investment or other steps that could have helped protect the public's money.

The state's agreement with 38 Studios in 2010 demanded job creation -- and virtually nothing else -- at a pace described as aggressive by both former employees and those familiar with the video game industry. And Schilling's firm hired even more quickly than the state required, draining its resources faster than if it had grown at a pace more typical of start-ups.

While Rhode Island was by far the company's biggest investor, officials did not demand a seat on its board or require that 38 Studios raise outside capital according to any timetable, although the firm's success hinged on its ability to bring in the tens of millions of dollars needed to finish its game....

"I think it's kind of stupid for anybody who isn't familiar with the industry to invest in it," said gaming industry analyst Michael Pachter, of the firm Wedbush Securities. "...Obviously they thought they were buying jobs."

Schilling's firm laid off its nearly 300 employees in Rhode Island in May and filed for bankruptcy protection in June. The state, which has the country's second-highest unemployment rate, is likely on the hook for more than $100 million, including the $75 million in bonds it floated as part of the deal, plus interest....

Known for his grit and gusto, Schilling became a Boston Red Sox hero in 2004, pitching on an injured ankle that stained his sock with blood in Game 6 of the American League Championship Series. The team went on to win the World Series.

He founded 38 Studios -- initially Green Monster Games -- in Massachusetts two years later, naming it for his jersey number. He reportedly met Rhode Island's governor at the time, Donald Carcieri, during a film fundraiser at Schilling's home in March 2010, and the loan guarantee deal that lured him to Rhode Island took shape quickly over the next few months....

The EDC built into the deal a $7,500 per-job penalty if 38 Studios fell short of its hiring requirements. The company brought on workers even faster than estimated, according to the EDC, and some at 38 Studios worried the growth was too fast for the company's good -- and ultimately not sustainable, given its difficulty attracting investment....

The firm got nearly $13 million from the state when the loan guarantee agreement was finalized in November 2010 and $9.4 million more in December when it announced a move date, according to the EDC.

It received $17.2 million in April 2011 after creating at least 80 jobs with a salary of at least $67,500. It was estimated the firm would hire another 45 employees by November 2011, but it reached that mark in April as well, the EDC said, allowing it to access $4.2 million more.

The company then got $1.6 million at the start of November 2011 for creating at least an additional 125 jobs. That mark had been expected at the end of January this year....

By the end of 2011, the firm had spent all the money due it under the agreement -- nearly $50 million, an audit conducted for the state by Braver PC found. The rest of the money was kept in reserve accounts....

Barry Gilbert, of Boston-based Strategy Analytics, prepared a report for the EDC in 2010 assessing the video game market and the potential benefits and risks of the deal. It noted that 38 Studios' focus on a single game, code-named "Copernicus," left "little wiggle room" and was analogous to an "all-in" hand.

Gilbert said he was surprised to learn the loan guarantee program had no caps.

That seemed to stem, Gilbert said, from desperation for economic development, paired with excitement over Schilling's involvement and a belief that "38 Studios was the guy that was going to carry the torch and bring them to the top of the mount.""

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