PROVIDENCE, R.I. (WPRI) - Curt Schilling's video-game company has to employ only 250 full-time workers in Rhode Island, not the 450 cited by state officials, to get most of the $75 million the government plans to borrow on its behalf, an analysis by Eyewitness News has found.
That's because Schilling's 38 Studios actually has two different agreements with the R.I. Economic Development Corporation – a payout agreement and a separate pact called a "full-time jobs covenant" – and their terms and conditions are not identical.
The payout agreement requires 38 Studios to employ 250 workers in the state by December 2011. At that point, the game company is eligible to receive $64 million of the loan money, which is 90 percent of the proceeds after fees, according to an EDC fact sheet, agency officials and a draft bond document obtained by Eyewitness News.
By comparison, the jobs covenant calls for 38 Studios to increase its employment in Rhode Island to 450 workers by October 2013 – nearly two years after the company is eligible to receive most of the loan money.
'Fast infusion of jobs'
EDC officials acknowledged that they are planning to let 38 Studios get nearly all the loan money when it is employing slightly more than half the 450 workers promised.
"There was a reason for doing that," Robert Stolzman, a lawyer for the EDC, said last week. "We wanted a fast infusion of jobs in Rhode Island." The number of unemployed Rhode Islanders was 67,500 in August and the jobless rate was 11.8 percent, the R.I. Department of Labor and Training said Friday.
The EDC's timeline for handing over the loan money was based on 38 Studios' business plan rather than its jobs promises, EDC spokeswoman Melissa Chambers said.
"The bottom line is, we matched the cash flow to the needs of the company," she said, adding: "When you make transactions, you match them to what the company is. They're moving here – they're moving 450 jobs to Rhode Island. This is the way the deal is structured."
EDC officials said last week they expect Barclays and Wells Fargo to finish the $75 million bond transaction by early next month. 38 Studios must pay the money back over 10 years, with the last payment due in November 2020.
38 Studios plans to use the taxpayer-guaranteed loan to fund the development of Project Copernicus, its "World of Warcraft"-style massive multiplayer online game. The company says it will reach 450 jobs once it hires customer service representatives and other employees to assist game subscribers.
Jobs covenant has penalty
The legal fine print is largely irrelevant since 38 Studios' business plan will not work unless it gets to 450 full-time workers, Chambers said. Each of those jobs must pay at least $67,500 a year plus benefits under state law.
The separate jobs covenant sets three employment targets for 38 Studios: 125 full-time jobs in Rhode Island by October 2011; 300 by October 2012; and 450 by October 2013. (Those dates may change based on when the transaction closes.)
The agreement between the EDC and 38 Studios calls for the company to pay the agency an annual penalty of $7,500 for every job it does not create that was mandated in the jobs covenant's schedule.
For example, if the company stopped adding jobs after reaching the 250 mark, it would owe a total penalty of $1.5 million in 2014 – for 200 missing jobs at $7,500 each.
That's equal to 2.3 percent of the $64 million in loan money 38 Studios will have received from the state two years earlier if it achieves the milestones set out by the EDC in the payout agreement.
Some won't leave Maryland
Of those milestones, 38 Studios can fulfill the first four – which cover $43.8 million of the loan money – by moving its headquarters to Rhode Island and employing 125 full-time workers here.
The company must sign a 10-year lease in order to receive the first $13 million in loan money, and its managers have narrowed their search for a new headquarters to several locations in the Providence metro area, Stolzman said.
38 Studios currently has 94 full-time employees in Maynard, Mass., and 81 more in Timonium, Md., the home base of Big Huge Games, which the company acquired last year, according to the draft bond document. 38 Studios' website listed 42 job openings as of Monday, with 27 in Massachusetts and 15 in Maryland.
Big Huge Games' employees are working on "Kingdoms of Amalur: Reckoning," a role-playing video game scheduled to be released by 38 Studios and Electronic Arts in September 2011. Some of them will stay in Maryland even after 38 Studios relocates the rest of its operations to Rhode Island, EDC officials said last week.
If it moves the rest of its 125 employees to Rhode Island, 38 Studios could leave up to 50 of its Maryland-based employees there and still meet the state's October 2011 jobs target without adding any additional workers.
After that, another 125 workers would need to be hired in Rhode Island or relocated here during the last three months of 2011 to reach the state's next goal, of 250 full-time employees by Dec. 31, 2011.
Most money disbursed by '12
The fifth payout milestone – for the next $4.1 million – is the first that depends on the success of Project Copernicus, which has been in development since 2006. The company must sign "a satisfactory distribution agreement" for Copernicus to get that money, the bond document states.
If the company signs a deal to release Copernicus and then adds 125 more jobs, it will get another $16.1 million, for a cumulative total of $64 million. That is supposed to happen by the end of 2011.
The remaining $11 million from the original $75 million loan will cover $4 million in costs and bankers' fees and a $7 million reserve account the EDC is setting up to offset some of the risk to taxpayers from the deal.
Outsider to keep tabs on game
The EDC will know whether 38 Studios is on track to release Project Copernicus in September 2012, as scheduled, because a third-party monitor will be tracking the company's progress on the agency's behalf, EDC Executive Director Keith Stokes said last week.
Stokes and Stolzman declined to identify what individual or company will do the monitoring, but they said it would be "a sophisticated, well-known consultant."
"If there's a hiccup, an oops [in Copernicus' development], then everybody sits down" and will discuss the best way to deal with it to protect taxpayers and keep 38 Studios on track, Stolzman said.
The EDC incorporated a similar model into the agreement it made to borrow a combined $35 million in 1996 and 2002 on behalf of Fidelity Investments to fund the firm's Smithfield facility, Stokes said.
TIMELINE: HOW 38 STUDIOS GETS $64 MILLION
Here is a timeline of when 38 Studios is scheduled to get the $71 million in loan proceeds that will be left after bankers' fees and other costs are paid, along with employment targets set by the state. (The dates are estimates that assume the transaction closes next month, and thus subject to change.)
- 2010 -
Oct. 1: 38 Studios gets $13 million if the transaction closes and a lease is signed. (Total paid out: $13 million)
Nov. 30: 38 Studios gets $9.4 million if it announces the date it will move to Rhode Island. (Total paid out: $22.4 million)
- 2011 -
Feb. 28: 38 Studios gets $17.2 million if it relocates and employs 80 full-time workers in Rhode Island. (Total paid out: $39.6 million)
Aug. 31: 38 Studios gets $4.2 million if it employs 125 full-time workers here. (Total paid out: $43.8 million)
Nov. 30: 38 Studios gets $4.1 million if it signs a distribution agreement for Project Copernicus. (Total paid out: $47.9 million)
Dec. 31: 38 Studios gets $3.1 million if it employs 250 full-time workers here. (Total paid out: $51 million) And if all the previous milestones have been met, 38 Studios gets another $13 million from the $20 million reserve fund the EDC is creating to protect taxpayers. (Total paid out: $64 million)
- 2012 -
Oct. 1: 38 Studios must employ 300 workers here. (Total paid out: $64 million)
- 2013 -
Oct. 1: 38 Studios must employ 450 workers here. (Total paid out: $64 million)
- 2020 -
Nov. 1: If 38 Studios finishes paying investors back for the $75 million loan, it gets the $7 million remaining in the EDC's reserve fund. (Total paid out: $71 million)
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