[UPDATE] 38 Studios Pleads with R.I. Gov't for More Assistance

Former Boston Red Sox pitcher Curt Schilling, center, is followed by members of the media as he departs the Rhode Island Economic Development Corporation headquarters, in Providence, R.I. (AP Photo/Steven Senne)

PROVIDENCE, R.I. (AP) — Former Red Sox pitcher Curt Schilling asked Rhode Island for additional help to save his video game company Wednesday, prompting state leaders to consider whether the firm is viable enough to justify further investment.

Schilling briefed Gov. Lincoln Chafee and the state's Economic Development Corp. board in a closed-door session.

Following the meeting, Chafee would not say what Schilling is seeking from the state. The governor said the question before state economic development officials was, "How do we avoid throwing good money after bad?"

Schilling declined to answer questions, saying only: "My priority right now is to get back to my team."

Concerns about 38 Studios' financial health arose when it failed to make a scheduled $1.1 million payment to the Economic Development Corp. on May 1.

The business was lured from Massachusetts in 2010 after Rhode Island offered a $75 million loan guarantee that state officials said would help bring hundreds of jobs and millions in tax revenue.

No action was taken on 38 Studios' new request. The board's next scheduled meeting is Monday.

"We have a lot of work to do between now and then," Chafee said.

Chafee has vowed to do "everything possible" to assist the company, named after Schilling's number as a player, and keep the state from having to pay the company's debts.

The governor, an independent who serves as chairman of the Economic Development Corp. board, called the situation "very, very complicated."

"The difficulty that we face is protecting the taxpayers and looking ahead to the future (to determine) whether there's viability that's worth further investment," he said Wednesday.

House Speaker Gordon Fox said Tuesday he began hearing "inklings" about trouble at the company a few weeks ago, but didn't have complete information to gauge the company's health.

Under the terms of the loan guarantee agreement, 38 Studios promised to bring to Rhode Island a total of 450 jobs over three years. An outside monitor was to follow the company's progress.

The company released its much-anticipated first game, "Kingdoms of Amalur: Reckoning," to strong reviews in February.

Chafee and others criticized the loan guarantee at the time it was offered, saying it was putting taxpayer money at risk to help a company with no track record of success. During his run for governor, Chafee called it "one of the biggest risks I've ever seen."

Economic Development Corp. Executive Director Keith Stokes said at the time the board determined the loan agreement was a calculated risk well worth taking. Stokes said the board performed months of due diligence in analyzing the video game sector and 38 Studios and crafted a loan guarantee agreement that included strict performance benchmarks.

He said the agreement went "to great lengths to safeguard taxpayers and ensure economic performance."

A document outlining the agreement between the economic development agency and the company says 38 Studios was working in Massachusetts on developing a massively multiplayer online game dubbed "Copernicus."

The initial target market size for the game was estimated to be $3.2 billion in net revenue in North America and $1.6 billion in western Europe, the document said.

Rhode Island Gov. Lincoln Chafee, right, faces reporters following a closed-door session of the state's Economic Development Corp. board Wednesday, May 16, 2012, in Providence, R.I., as EDC legal counsel David Gilden looks on at left. (AP Photo/Steven Senne)

Still, the document acknowledges that the video game business is "highly speculative and inherently risky." It says the market for massively multiplayer online games is dominated by "World of Warcraft," but that some of its competitors have been "commercially successful" despite being unable to match the game's subscription figures.

Four months before economic development officials held a bond sale to raise money for 38 Studios, the company took out a revolving line of credit of $2.5 million to support its operations, the document said.

The credit line was to be capped at $4 million and was secured by Schilling, the memo said. The company anticipated that all or a portion of the bond proceeds would be used to pay down the outstanding amounts on the credit line.

Two months later, the company took out a 120-day credit line worth $3 million that was expected to be paid down with the bond proceeds, the document said.

Under legislation passed in 2010, the General Assembly created a program giving the economic development agency the authority to back up to $125 million in loans to businesses promising to create permanent, full-time jobs.

The loans would come from lending institutions, not the state, but Rhode Island would agree to repay the lender if a company defaulted.

The corporation issued bonds in 2010 and set aside the proceeds of the bond sale for 38 Studios to tap when the company met financial and other milestones, including relocating to Providence, creating jobs and finding a distributor for "Copernicus."

The Economic Development Corp. said the company has received nearly $50 million so far and created at least 250 full-time jobs with an average annual salary of at least $67,500.

The company is not scheduled to begin making payments on the interest on the bonds until November. It is not supposed to begin paying back the principal until November 2013.

While 38 Studios failed to make this year's $1.125 million payment to the Economic Development Corp. — essentially a service fee — it made last year's payment of nearly $555,000, the agency said.

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SOURCE: Associated Press (David Klepper & Erika Niedowski)

Associated Press writer Laura Crimaldi contributed to this report.