38 Studios LLC, the video-game maker founded by former Boston Red Sox pitcher Curt Schilling, filed for bankruptcy after firing employees in Rhode Island, and officials said the company is the subject of a federal probe.
38 Studios, which had been operating with help from $75 million in state government bonds, filed for liquidation yesterday under Chapter 7 of the bankruptcy code, saying it owes creditors about $150.7 million. Its assets total $21.7 million, according to the filing in U.S. Bankruptcy Court in Wilmington, Delaware. Under Chapter 7, a court-appointed trustee liquidates the assets and distributes the proceeds to creditors.
Last year, Schilling moved 38 Studios from Massachusetts to Rhode Island after securing cash from the bonds through the state’s economic-development agency. The company received about $49.5 million, according to a fact sheet provided by the Rhode Island Economic Development Corp. The company owes the agency about $115.9 million, according to court papers.
“We’re going to do everything possible to maximize the return of our investment,” Rhode Island Governor Lincoln Chafee said yesterday at a news conference. “And the taxpayers of Rhode Island can have full confidence that if there’s a penny we can get, or a nickel or a dime, we’ll get it.”
38 Studios, based in Providence, spent the $49 million it received from the bonds, said Rosemary Booth Gallogly, the state director of revenue. The remaining proceeds are in debt-service reserve accounts, she said.
“The state police in Rhode Island, the Rhode Island Attorney General and the U.S. Attorney in Rhode Island are conducting an investigation into where the money went,” Colonel Steven O’Donnell, the state police superintendent, said yesterday in a phone interview.
Jim Martin, a spokesman for Rhode Island U.S. Attorney Peter Neronha, said Neronha has been in contact with the Federal Bureau of Investigation and state attorney general’s office regarding 38 Studios. Martin declined to confirm the existence of an investigation.
To help repay the bonds, 38 Studios pledged its video-game assets, patents, software and other property as collateral.
“After ongoing negotiations with the State of Rhode Island and potential investors and other interested parties, the company has been unable to find a solution to the current stalemate,” 38 Studios said in a statement. Affiliates 38 Studios Baltimore, Mercury Project and Precision Jobs also sought court protection.
Assured Guaranty Ltd. (AGO:US) insures the 38 Studios bonds, which are federally taxable and exempt from state taxes. Moody’s Investors Service rates the bonds A2, its sixth-highest grade. The bonds maturing in November 2015 traded at an average yield of about 4.8 percent May 23, up from 3 percent April 10, according to data compiled by Bloomberg.
38 Studios made a $1.1 million payment to bondholders on May 18, 17 days after it was due. The next payment of $2.6 million is due Nov. 1.
The company had hired best-selling fantasy writer R.A. Salvatore and graphic novelist Todd McFarlane to help design games. It released one role-playing game, Kingdoms of Amalur: Reckoning, through Electronic Arts Inc. (EA:US) and was working on another product, called Copernicus.
U.S. sales of game hardware and software dropped to $17 billion last year from $18.6 billion a year earlier, according to NPD Group Inc., an industry researcher based in Port Washington, New York.
The bankruptcy filing came after Chafee ruled out further direct financial aid for 38 Studios. Chafee, an independent who took office in January 2011, inherited the deal with Schilling’s company from former Governor Donald Carcieri, a Republican.
Chafee had been working to change eligibility requirements for film-production tax credits, which are available to video- game makers. 38 Studios is eligible for $2.1 million of the credits and had applied for more. Chafee today referred all questions about the federal investigation to state police.
The bankruptcy filing was “not a total surprise,” Christine Hunsinger, a spokeswoman for Chafee, said in a phone interview. “This is one of the options that had been discussed with the governor’s office,” she said.
The appointment of a Chapter 7 trustee should “serve as a comfort for any potential investors that may want to come in and purchase all or some of the existing assets,” Jonathan Savage, counsel to the Rhode Island Economic Development Corp., said yesterday at a news conference. Talks with investors “indicate that there could be significant value to the assets,” he said.
Schilling, 45, won three World Series championships during a 23-year career. His bloodstained sock from the 2004 postseason became a part of Boston history after he helped the Red Sox end an 86-year title drought. Schilling wore the number 38 on his jersey with the Red Sox.
A six-time All-Star, he retired in 2009 after missing the previous season following surgery on his pitching shoulder. He ended his career with a 216-146 record, a 3.46 earned run average and 3,116 strikeouts, the 15th-most in Major League Baseball history. Schilling also played for the Arizona Diamondbacks, Philadelphia Phillies, Houston Astros and Baltimore Orioles.
The case is In re 38 Studios LLC, 12-11743, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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