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38 Studios sought investors up until its filing

Few creditors attend bankruptcy hearing

“We had conference calls through the night. . . . When we couldn’t get that done, it was . . . the last straw,” said William Thomas, 38 Studios president and uncle of Curt Schilling.AP/File

WILMINGTON, Del. — Former Red Sox pitcher Curt Schilling's failed Rhode Island video game company was in talks with potential investors until just hours before the company finally gave up and filed for bankruptcy last month, former executives testified at a bankruptcy hearing Tuesday afternoon.

William Thomas, the president of 38 Studios LLC, said one local investor was willing to put up $15 million — provided 38 Studios was able to secure another $5 million in tax credits from Rhode Island and meet other demands. But Rhode Island, which already had given the company a $75 million state-backed loan, balked at giving the company millions more, helping to scuttle the deal.


"We had conference calls through the night with this investor," said Thomas, who did not name the investor. "When we couldn't get that done, it was probably the last straw."

Thomas, Schilling's uncle through marriage, said 38 Studios' board of directors finally decided around noon on June 7 to file for bankruptcy, clearing the way to liquidate the company's assets. Schilling did not attend the hearing.

The proceeding, held in a federal courthouse here, was the first public opportunity for the bankruptcy trustee, Jeoffrey L. Burtch, and creditors to question 38 Studios executives about what happened to the company. The bankruptcy filing was made in Delaware, where the company incorporated.

Only a handful of creditors showed up, including Rhode Island officials and a Providence temporary staffing firm, Silverman McGovern Staffing, which estimated it was owed $80,000. Patricia M. Herron, the firm's managing partner, said it was worth spending the afternoon in Delaware to find out what happened.

"I can't just let $80,000 go," she said.

But most creditors — including Silverman McGovern — are expected to receive nothing through the bankruptcy proceedings because 38 Studios owes so much money. The company estimated it owed creditors more than $150 million, but had less than $22 million in assets.


Almost all of those assets are expected to go to the state of Rhode Island, which, as a secured creditor, is among the first to collect. Schilling's company reported that it owed Rhode Island about $116 million in principal, interest, and fees from a $75 million loan guarantee the state used to lure the company from Massachusetts to Providence.

38 Studios listed just one other secured creditor, NFS Leasing of Beverly, Mass., which is owed $1.1 million for computers and other equipment it leased.

38 Studios executives said the company foundered largely because it could not raise enough money to finish its marquee project, a multiplayer, role-playing game code-named Copernicus.

"We were running out of cash," Thomas said. "The deeper we got into it, we knew we needed to raise $30 million to $50 million" more to finish the game.

In its final months, the company intensified efforts to raise cash, sending eight staffers to meet with a potential partner in China in April. Company officials also met with a Korean game publisher in March and May. But those discussions dissolved after 38 Studios' financial troubles became public in May, Thomas said.

Thomas did not disclose the names of the potential investors.

Schilling's company also tried to raise money by selling software it developed to track users to another game developer, FireForge, of Irvine, Calif. FireForge signed a letter of intent to pay $3.7 million for the software, called Helios, but the deal fell apart.


The company also tried to secure millions more in tax credits. Thomas confirmed the company had already sold $11 million in tax credits it expected to receive, and tried to persuade state officials to allow 38 Studios to qualify for millions more. Under state law, Rhode Island offers production companies $1 for every $4 they spend making movies or video games; companies can then sell the credits to others who owe taxes.

To sweeten the deal for the additional tax credits, 38 Studios pledged to create an extra 100 jobs by 2016 – in addition to the 450 jobs it had already promised, according to public records obtained by the Globe.

By May, company executives turned up the pressure, according to the records.

At 1:20 a.m. on May 14, the company's lead director, Thomas Zaccagnino, gave the state a noon deadline to provide the company with tax credits and other assistance.

If the state could not meet the deadline, Zaccagnino warned that "management will be notifying employees that their employment has been terminated and the company will be moving forward with liquidation."

Now that the company has shut down, it is unclear how much its work on Copernicus is worth. Thomas said during the hearing that the game, which was scheduled to be released in June 2013, was roughly 75 percent finished.

"I see a major publisher or even a secondary publisher willing to pay" something for Copernicus, Thomas said. "But whether that number is $1 million, $5 million, or $15 million, I don't know."


R.A. Salvatore, the Leominster novelist who played a major role in crafting the fantasy world of the game, said he believes many game development companies will be interested in purchasing the remnants of Copernicus because millions have already been invested in the game and much of the work is done.

"I don't think anybody's going to buy it for a lot of money," Salvatore said, "but I do think there are people who'd buy it for a fire sale price."

The interest in Copernicus was renewed this week after a trailer appeared on YouTube. Company executives said at the bankruptcy hearing they were not sure who posted it.

Globe reporter Hiawatha Bray contributed to this report. Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.